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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 000-18464
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EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1606091
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
612 Main Street, Emlenton, Pennsylvania 16373
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(Address of principal executive offices) (Zip Code)
(724) 867-2311
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(Registrant's telephone number)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Registrant's common stock was
1,267,835 at May 10, 2007.
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EMCLAIRE FINANCIAL CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
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Item 1. Interim Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 2007 and December 31, 2006......................................................................1
Consolidated Statements of Income for the three
months ended March 31, 2007 and 2006......................................................................2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006......................................................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2007 and 2006.................................................4
Notes to Consolidated Financial Statements................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................15
Item 4. Controls and Procedures..................................................................................16
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings........................................................................................16
Item 1A. Risk Factors.............................................................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................16
Item 3. Defaults upon Senior Securities..........................................................................16
Item 4. Submission of Matters to a Vote of Security Holders......................................................17
Item 5. Other Information........................................................................................17
Item 6. Exhibits.................................................................................................17
Signatures .........................................................................................................18
PART I - FINANCIAL INFORMATION
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Item 1. Interim Financial Statements
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Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of March 31, 2007 (Unaudited) and December 31, 2006
(Dollar amounts in thousands, except per share data)
March 31, December 31,
2007 2006
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Assets
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Cash and due from banks $ 5,737 $ 7,540
Interest-earning deposits with banks 5,338 9,177
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Cash and cash equivalents 11,075 16,717
Securities available for sale, at fair value 57,044 51,774
Loans receivable, net of allowance for loan losses of $2,078 and $2,035 212,933 213,344
Federal bank stocks, at cost 2,209 2,217
Bank-owned life insurance 4,841 4,794
Accrued interest receivable 1,476 1,374
Premises and equipment, net 7,891 7,958
Goodwill 1,422 1,422
Deferred tax asset 552 533
Prepaid expenses and other assets 612 427
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Total Assets $ 300,055 $ 300,560
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Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 43,966 $ 44,045
Interest-bearing 199,505 200,447
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Total deposits 243,471 244,492
Long-term borrowed funds 30,000 30,000
Accrued interest payable 754 825
Accrued expenses and other liabilities 1,761 1,326
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Total Liabilities 275,986 276,643
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Stockholders' Equity:
Preferred stock, $1.00 par value, 3,000,000 shares authorized;
none issued - -
Common stock, $1.25 par value, 12,000,000 shares authorized;
1,395,852 shares issued; 1,267,835 shares outstanding 1,745 1,745
Additional paid-in capital 10,871 10,871
Treasury stock, at cost; 128,017 shares (2,653) (2,653)
Retained earnings 14,553 14,370
Accumulated other comprehensive loss (447) (416)
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Total Stockholders' Equity 24,069 23,917
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Total Liabilities and Stockholders' Equity $ 300,055 $ 300,560
============= ============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three months ended March 31, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended
March 31,
---------------------------
2007 2006
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Interest and dividend income:
Loans receivable, including fees $ 3,604 $ 3,152
Securities:
Taxable 364 383
Exempt from federal income tax 173 173
Federal bank stocks 50 18
Deposits with banks 121 18
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Total interest and dividend income 4,312 3,744
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Interest expense:
Deposits 1,667 1,314
Borrowed funds 336 168
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Total interest expense 2,003 1,482
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Net interest income 2,309 2,262
Provision for loan losses 45 31
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Net interest income after provision for loan losses 2,264 2,231
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Noninterest income:
Fees and service charges 326 357
Commissions on financial services 162 101
Gains on securities 58 116
Earnings on bank-owned life insurance (BOLI) 53 50
Other 131 104
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Total noninterest income 730 728
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Noninterest expense:
Compensation and employee benefits 1,306 1,307
Premises and equipment 400 381
Intangible amortization expense - 3
Other 604 524
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Total noninterest expense 2,310 2,215
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Income before provision for income taxes 684 744
Provision for income taxes 133 159
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Net income $ 551 $ 585
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Basic earnings per share $ 0.43 $ 0.46
Average common shares outstanding 1,267,835 1,267,835
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands)
For the three months ended
March 31,
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2007 2006
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Cash flows from operating activities
Net income $ 551 $ 585
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 170 182
Provision for loan losses 45 31
Amortization of premiums and accretion of discounts, net (2) 11
Amortization of intangible assets and mortgage servicing rights 4 5
Realized gain on sale of available for sale securities, net (58) (116)
Earnings on bank owned life insurance, net (47) (44)
(Increase) decrease in accrued interest receivable (102) 61
Increase in prepaid expenses and other assets (191) (46)
Increase (decrease) in accrued interest payable (71) 21
Increase in accrued expenses and other liabilities 435 127
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Net cash provided by operating activities 734 817
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Cash flows from investing activities
Loan originations and principal collections, net 52 522
Proceeds from the sale of loans 312 -
Available for sale securities:
Sales 265 202
Maturities, repayments and calls 126 1,153
Purchases (5,647) (107)
Held to maturity securities:
Maturities, repayments and calls - 1
Redemption of federal bank stocks 8 195
Purchases of premises and equipment (103) (610)
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Net cash (used in) provided by investing activities (4,987) 1,356
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Cash flows from financing activities
Net increase (decrease) in deposits (1,021) 1,870
Net decrease in overnight borrowed funds - (4,500)
Dividends paid on common stock (368) (342)
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Net cash used in financing activities (1,389) (2,972)
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Net decrease in cash and cash equivalents (5,642) (799)
Cash and cash equivalents at beginning of period 16,717 10,367
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Cash and cash equivalents at end of period $ 11,075 $ 9,568
============== ==============
Supplemental information:
Interest paid $ 2,074 $ 1,461
Income taxes paid - 10
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the three months ended March 31, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended
March 31,
--------------------------
2007 2006
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Balance at beginning of period $ 23,917 $ 23,615
Net income 551 585
Other comprehensive income (loss):
Change in net unrealized gains (losses) on available
for sale securities, net of taxes 7 (103)
Less reclassification adjustment for gains included
in net income, net of taxes (38) (76)
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Other comprehensive loss (31) (179)
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Total comprehensive income 520 406
Dividends declared (368) (342)
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Balance at end of period $ 24,069 $ 23,679
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Common cash dividend per share $ 0.29 $ 0.27
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See accompanying notes to consolidated financial statements.
4
Emclaire Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. Nature of Operations and Basis of Presentation.
Emclaire Financial Corp. (the "Corporation") is a Pennsylvania company
organized as the holding company of Farmers National Bank of Emlenton
(the "Bank"). The Corporation provides a variety of financial services
to individuals and businesses through its offices in western
Pennsylvania. Its primary deposit products are checking, savings and
certificate of deposit accounts and its primary lending products are
residential and commercial mortgages, commercial business and consumer
loans.
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All intercompany
transactions and balances have been eliminated in preparing the
consolidated financial statements.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Corporation's consolidated financial position and results
of operations. Additionally, these consolidated financial statements
for the interim periods have been prepared in accordance with
instructions for the Securities and Exchange Commission's Form 10-Q and
therefore do not include all information or footnotes necessary for a
complete presentation of financial condition, results of operations and
cash flows in conformity with accounting principles generally accepted
in the United States of America. For further information, refer to the
audited consolidated financial statements and footnotes thereto for the
year ended December 31, 2006, as contained in the Corporation's 2006
Annual Report to Stockholders.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses. The results of operations for interim quarterly or year to date
periods are not necessarily indicative of the results that may be
expected for the entire year or any other period. Certain amounts
previously reported may have been reclassified to conform to the
current year's financial statement presentation.
2. Basic Earnings per Common Share.
The Corporation maintains a simple capital structure with no common
stock equivalents. Basic earnings per common share is calculated using
net income divided by the weighted average number of common shares
outstanding during the period.
5
3. Securities.
The Corporation's securities as of the respective dates are summarized
as follows:
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(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
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Available for sale:
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March 31, 2007:
U.S. Government agencies and related entities $31,355 $ - $ (428) $30,927
Mortgage-backed securities 2,304 - (92) 2,212
Municipal securities 14,689 540 - 15,229
Corporate securities 5,222 - - 5,222
Equity securities 3,606 97 (249) 3,454
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$57,176 $ 637 $ (769) $57,044
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December 31, 2006:
U.S. Government agencies and related entities $31,354 $ - $ (606) $30,748
Mortgage-backed securities 2,434 - (95) 2,339
Municipal securities 14,688 574 - 15,262
Corporate securities - - - -
Equity securities 3,382 176 (132) 3,425
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$51,858 $ 750 $ (833) $51,774
========= ========== ========== ========
4. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
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(Dollar amounts in thousands) March 31, December 31,
2007 2006
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Mortgage loans on real estate:
Residential first mortgages $ 64,589 $ 64,662
Home equity loans and lines of credit 46,225 47,330
Commercial real estate 62,888 61,128
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173,702 173,120
Other loans:
Commercial business 33,756 34,588
Consumer 7,553 7,671
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41,309 42,259
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Total loans, gross 215,011 215,379
Less allowance for loan losses 2,078 2,035
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Total loans, net $ 212,933 $ 213,344
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6
5. Deposits.
The Corporation's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) March 31, 2007 December 31, 2006
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Type of accounts Amount % Amount %
-------------------------------------------------------------------------------------------------- ---------------------
Noninterest-bearing deposits $ 43,966 18.1% $ 44,045 18.0%
Interest-bearing demand deposits 72,905 29.9% 70,951 29.0%
Time deposits 126,600 52.0% 129,496 53.0%
----------- ------- ---------- --------
$ 243,471 100.0% $ 244,492 100.0%
=========== ======= ========== ========
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6. Guarantees.
The Corporation does not issue any guarantees that would require
liability recognition or disclosure, other than its standby letters of
credit. Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a third
party. Of these letters of credit at March 31, 2007, $75,000 will
expire within the next twelve months, $233,000 will automatically renew
within the next twelve months and $415,000 will automatically renew
within thirteen to fifty-five months. The Corporation, generally, holds
collateral and/or personal guarantees supporting these commitments.
Management believes that the proceeds obtained through a liquidation of
collateral and the enforcement of guarantees would be sufficient to
cover the potential amount of future payments required under the
corresponding guarantees. The credit risk involved in issuing letters
of credit is essentially the same as those that are involved in
extending loan facilities to customers. The current amount of the
liability as of March 31, 2007 for guarantees under standby letters of
credit issued is not material.
7. Employee Benefit Plans.
The Corporation maintains a defined contribution 401(k) Plan. Employees
are eligible to participate by providing tax-deferred contributions up
to 20% of qualified compensation. Employee contributions are vested at
all times. The Corporation provides a matching contribution of up to 4%
of the participant's salary. Matching contributions for the three
months ended March 31, 2007 and 2006 amounted to $33,000 and $21,000,
respectively.
The Corporation provides pension benefits for eligible employees
through a defined benefit pension plan. Substantially all employees
participate in the retirement plan on a non-contributing basis and are
fully vested after five years of service.
The Corporation uses December 31 as the measurement date for its plans.
7
7. Employee Benefit Plans (continued).
The components of the periodic pension cost are as follows:
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(Dollar amounts in thousands) For the three months ended
March 31,
--------------------------------
2007 2006
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Service cost $ 57 $ 52
Interest cost 65 58
Expected return on plan assets (77) (66)
Transition asset (2) (2)
Prior service costs (8) (8)
Recognized net actuarial (gain) loss 7 9
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Net periodic pension cost $ 42 $ 43
=============== ================
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The expected rate of return on plan assets was 8.50% for the periods
ended March 31, 2007 and 2006. The Corporation previously disclosed in
its financial statements for the year ended December 31, 2006 that it
expected to contribute $250,000 to its pension plan in 2007. As of
March 31, 2007, there have been no contributions. The Corporation
presently anticipates contributing $250,000 to fund its pension plan in
2007.
8. Effect of Recently Issued Accounting Standards.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes. The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's
financial statements in accordance with SFAS 109, Accounting for Income
Taxes. Specifically, the pronouncement prescribes a recognition
threshold and a measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a tax return. The interpretation also provides guidance on the
related derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition of uncertain
tax positions. The interpretation is effective for fiscal years
beginning after December 15, 2006. The Corporation adopted FASB
Interpretation No. 48 as of January 1, 2007. The adoption had no effect
on the Corporation's financial statements. The Corporation is subject
to U.S. federal income tax as well as income tax of the state of
Pennsylvania. The Corporation is no longer subject to examination by
taxing authorities for years before 2002. The Corporation does not
expect the total amount of unrecognized tax benefits to significantly
increase in the next twelve months. The Corporation recognizes interest
and/or penalties related to income tax matters in income tax expense.
The Corporation did not have any amounts accrued for interest and
penalties at January 1, 2007.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles (GAAP), and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that
require or permit fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning
after November 15, 2007, and for interim periods within those fiscal
years. The Corporation is currently evaluating the potential impact, if
any, of the adoption of SFAS 157 on its consolidated financial
statements.
8
8. Effect of Recently Issued Accounting Standards (continued).
In September 2006, FASB's EITF issued EITF Issue No. 06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split Dollar Life Insurance Arrangements (EITF 06-4). EITF
06-4 requires the recognition of a liability related to the
postretirement benefits covered by an endorsement split-dollar life
insurance arrangement. The consensus highlights that the employer (who
is also the policyholder) has a liability for the benefit it is
providing to its employee. As such, if the policyholder has agreed to
maintain the insurance policy in force for the employee's benefit
during his or her retirement, then the liability recognized during the
employee's active service period should be based on the future cost of
insurance to be incurred during the employee's retirement.
Alternatively, if the policy holder has agreed to provide the employee
with a death benefit, then the liability for the future death benefit
should be recognized by following the guidance in SFAS 106 or
Accounting Principles Board (APB) Opinion No. 12, as appropriate. For
transition, an entity can choose to apply the guidance using either of
the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in
accounting principle through a cumulative-effect adjustment to the
balance in retained earnings at the beginning of the year of adoption.
The disclosures are required in fiscal years beginning after December
15, 2007, with early adoption permitted. The Corporation is currently
evaluating the impact that the implementation of EITF 06-4 may have on
its consolidated financial statements.
In September 2006, FASB's EITF issued EITF Issue No. 06-5 Accounting
for Purchases of Life Insurance - Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance (EITF 06-5), The scope of
EITF 06-5 consists of six separate issues relating to accounting for
life insurance policies purchased by entities protecting against the
loss of key persons. The six issues are clarifications of previously
issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is
effective for fiscal years beginning after December 15, 2006. The
Corporation is currently evaluating the impact that the implementation
of EITF 06-5 may have on its consolidated financial statements.
In October 2006, the FASB issued FSP No. 123(R)-5, Amendment of FASB
Staff Position FAS 123(R)-1 (FSP 123(R)-5). FSP 123(R)-5 amends FSP
123(R)-1 for equity instruments that were originally issued as employee
compensation and then modified, with such modification made solely to
reflect an equity restructuring that occurs when the holders are no
longer employees. FSP 123(R)-5 is effective for the Corporation January
1, 2007. The adoption of FSP 123(R)-5 did not have a significant effect
on the Corporation's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at
fair value. Unrealized gains and losses on items for which the fair
value option has been elected will be recognized in earnings at each
subsequent reporting date. SFAS 159 is effective for the Corporation
January 1, 2008. The Corporation is evaluating the impact that the
adoption of SFAS 159 will have on its consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
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This section discusses the consolidated financial condition and results of
operations of Emclaire Financial Corp. (the "Corporation") and its wholly owned
subsidiary bank, the Farmers National Bank of Emlenton (the "Bank"), for the
three months ended March 31, 2007 and should be read in conjunction with the
Corporation's December 31, 2006 Annual Report of Form 10-K filed with the
Securities and Exchange Commission and with the accompanying consolidated
financial statements and notes presented on pages 1 through 9 of this Form 10-Q.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, the ability to control costs and expenses and general
economic conditions. The Corporation does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
9
CHANGES IN FINANCIAL CONDITION
Total assets decreased $505,000 to $300.1 million at March 31, 2007 from $300.6
million at December 31, 2006. This decrease resulted from a decrease in cash and
cash equivalents of $5.6 million or 33.8% to $11.1 million at March 31, 2007
from $16.7 million at December 31, 2006, as these funds were utilized in funding
security purchases. Partially offsetting this decrease was an increase in
securities available for sale of $5.3 million or 10.2% to $57.0 million at March
31, 2007 from $51.8 million at December 31, 2006 due to security purchases of
$5.6 million.
Total liabilities decreased $657,000 to $276.0 million at March 31, 2007 from
$276.6 million at December 31, 2006, while total stockholders' equity increased
$152,000 to $24.1 million at March 31, 2007 from $23.9 million at December 31,
2006. The decrease in total liabilities was primarily due to a decrease in
customer deposits of $1.0 million partially offset by an increase in accrued
expenses and other liabilities of $435,000.
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended March 31, 2007 and 2006
General. Net income decreased $34,000 or 5.8% to $551,000 for the three months
ended March 31, 2007 from $585,000 for the same period in 2006. This decrease
was a result of increases in noninterest expense and the provision for loan
losses of $95,000 and $14,000, respectively, offset by increases in net interest
income and noninterest income of $47,000 and $2,000, respectively, and a
decrease in the provision for income tax of $26,000.
Net interest income. Net interest income on a tax equivalent basis increased
$45,000 or 1.9% to $2.4 million for the three months ended March 31, 2007. This
net increase can be attributed to an increase in tax equivalent interest income
of $566,000, partially offset by a $521,000 increase in interest expense.
Interest income. Interest income on a tax equivalent basis increased $566,000 or
14.7% to $4.4 million for the three months ended March 31, 2007, compared to
$3.9 million for the same period in the prior year. This increase can be
attributed to increases in interest earned on loans, federal bank stocks, and
interest-earning deposits with banks of $450,000, $32,000 and $103,000,
respectively, offset by a decrease in interest earned on securities of $19,000.
Tax equivalent interest earned on loans receivable increased $450,000 or 14.1%
to $3.6 million for the three months ended March 31, 2007, compared to $3.2
million for the same period in 2006. During that time, average loans increased
$21.7 million or 11.2%, accounting for $364,000 in additional loan interest
income. Additionally, the yield on loans increased 18 basis points to 6.85% for
the three months ended March 31, 2007, versus 6.67% for the same period in 2006,
contributing $86,000 in additional interest income.
Tax equivalent interest earned on securities decreased $19,000 or 3.0% to
$615,000 for the three months ended March 31, 2007, compared to $634,000 for the
same period in 2006. The average volume of securities decreased $3.7 million or
6.7%, primarily as a result of the utilization of these funds for loan growth.
This resulted in a $44,000 decline in interest income. Partially offsetting the
decline was an increase in the average yield on securities of 19 basis points to
4.80% for the three months ended March 31, 2007, versus 4.61% for the same
period in 2006, as a result of certain lower yielding securities maturing. This
favorable yield variance contributed an additional $25,000 to interest income.
Interest earned on interest-earning deposit accounts increased $103,000 to
$121,000 for the three months ended March 31, 2007 from $18,000 for the same
period in 2006. The average volume of these assets increased $7.6 million
primarily as a result of the investment of funds from maturing securities
contributing $97,000 in additional interest income. Additionally, the average
yield on interest-earning deposit accounts increased 109 basis points to 5.23%
for the three months ended March 31, 2007, compared to 4.14% for the same period
in the prior year, contributing $6,000 in additional interest income. The
increase in the average yield reflects the recent increases in short-term
interest rates. Interest earned on federal bank stocks increased $32,000 to
$50,000 for the three month period ended March 31, 2007 from $18,000 for the
same period in the prior year as a result of a higher volume and a higher yield.
The higher yield resulted from the recognition during the first quarter of a
fourth quarter 2006 special dividend on FHLB capital stock.
10
Interest expense. Interest expense increased $521,000 or 35.2% to $2.0 million
for the three months ended March 31, 2007, compared to $1.5 million for the same
period in the prior year. This increase in interest expense can be attributed to
increases in interest incurred on deposits and borrowed funds of $353,000 and
$168,000, respectively.
Interest expense incurred on deposits increased $353,000 or 26.9% to $1.7
million for the three months ended March 31, 2007, compared to $1.3 million for
the same period in the prior year. This increase was principally rate driven as
the cost of interest-bearing deposits increased 60 basis points to 3.54% for the
three months ended March 31, 2007, compared to 2.94% for the same period in 2006
contributing $269,000 in additional expense. The average volume of deposits
increased $11.6 million or 6.1% to $199.7 million for the three months ended
March 31, 2007, compared to $188.2 million for the same period in 2006
contributing $84,000 in additional expense.
Interest expense incurred on borrowed funds increased $168,000 or 100.0% to
$336,000 for the three months ended March 31, 2007, compared to $168,000 for the
same period in the prior year. This increase in interest expense can be
attributed to the increase in the average balance of borrowed funds of $14.1
million to $30.0 million for the three months ended March 31, 2007, compared to
$15.9 million for the same period in the prior year. This volume increase was
the result of $15.0 million of FHLB term borrowings placed in the second and
third quarters of 2006 contributing $157,000 in additional expense. Such
borrowings were primarily used to fund loan growth.
11
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resulting average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses and interest income includes accretion of net deferred
loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis. The
information is based on average daily balances during the periods presented.
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended March 31,
-----------------------------------------------------
2007 2006
-------------------------- --------------------------
Yield Yield
Average / Average /
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
------------------------
Loans, taxable $208,776 $3,532 6.86% $186,737 $3,077 6.68%
Loans, tax exempt 6,495 104 6.49% 6,858 109 6.45%
--------- ------- --------- -------
Total loans receivable 215,271 3,636 6.85% 193,595 3,186 6.67%
--------- ------- --------- -------
Securities, taxable 36,758 364 4.02% 40,332 383 3.85%
Securities, tax exempt 15,224 251 6.68% 15,384 251 6.61%
--------- ------- --------- -------
Total securities 51,982 615 4.80% 55,716 634 4.61%
--------- ------- --------- -------
Interest-earning deposits with banks 9,375 121 5.23% 1,763 18 4.14%
Federal bank stocks 2,209 50 9.18% 1,635 18 4.46%
--------- ------- --------- -------
Total interest-earning cash equivalents 11,584 171 5.99% 3,398 36 4.30%
--------- ------- --------- -------
Total interest-earning assets 278,837 4,422 6.43% 252,709 3,856 6.19%
Cash and due from banks 6,163 7,110
Other noninterest-earning assets 14,535 12,821
--------- ---------
Total Assets $299,535 $272,640
========= =========
Interest-bearing liabilities:
-----------------------------
Interest-bearing demand deposits $ 72,176 233 1.31% $ 73,404 146 0.81%
Time deposits 127,533 1,434 4.56% 114,755 1,168 4.13%
--------- ------- --------- -------
Total interest-bearing deposits 199,709 1,667 3.39% 188,159 1,314 2.83%
--------- ------- --------- -------
Borrowed funds, short-term - - 0.00% 941 9 3.88%
Borrowed funds, long-term 30,000 336 4.54% 15,000 159 4.30%
--------- ------- --------- -------
Total borrowed funds 30,000 336 4.54% 15,941 168 4.27%
--------- ------- --------- -------
Total interest-bearing liabilities 229,709 2,003 3.54% 204,100 1,482 2.94%
--------- ------- --------- -------
Noninterest-bearing demand deposits 43,368 - - 42,316 - -
--------- ------- --------- -------
Funding and cost of funds 273,077 2,003 2.97% 246,416 1,482 2.44%
Other noninterest-bearing liabilities 2,572 2,613
--------- ---------
Total Liabilities 275,649 249,029
Stockholders' Equity 23,886 23,611
--------- ---------
Total Liabilities and Stockholders' Equity $299,535 $272,640
========= ------- ========= -------
Net interest income $2,419 $2,374
======= =======
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 2.89% 3.24%
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.52% 3.81%
------------------------------------------------------------------------------------------------------------------------
12
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
2007 versus 2006
Increase (Decrease) due to
--------------------------------------
(Dollar amounts in thousands) Volume Rate Total
------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 364 $ 86 $ 450
Securities (44) 25 (19)
Interest-earning deposits with banks 97 6 103
Federal bank stocks 8 24 32
------------- ----------- ------------
Total interest-earning assets 425 141 566
------------- ----------- ------------
Interest expense:
Deposits 84 269 353
Borrowed funds 157 11 168
------------- ----------- ------------
Total interest-bearing liabilities 241 280 521
------------- ----------- ------------
Net interest income $ 184 $ (139) $ 45
============= =========== ============
------------------------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
maintain a level of total allowance for loan losses that management believes, to
the best of its knowledge, covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. Management considers
historical loss experience, the present and prospective financial condition of
borrowers, current conditions (particularly as they relate to markets where the
Corporation originates loans), the status of non-performing assets, the
estimated underlying value of the collateral and other factors related to the
collectibility of the loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the quarters ended March 31, 2007 and 2006 is as follows:
------------------------------------------------------------------------------------------------------------------
For the three months ended:
March 31,
-----------------------------
(Dollar amounts in thousands) 2007 2006
------------------------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 2,035 $ 1,869
Provision for loan losses 45 31
Charge-offs (15) (15)
Recoveries 13 6
-------------- --------------
Balance at the end of the period $ 2,078 $ 1,891
============== ==============
Non-performing loans $ 1,980 $ 1,256
Non-performing assets 1,980 1,352
Non-performing loans to total loans 0.92% 0.65%
Non-performing assets to total assets 0.66% 0.50%
Allowance for loan losses to total loans 0.97% 0.98%
Allowance for loan losses to non-performing loans 104.95% 150.56%
------------------------------------------------------------------------------------------------------------------
13
The provision for loan losses increased $14,000 or 45.2% to $45,000 for the
three month period ended March 31, 2007 from $31,000 for the same period in the
prior year. Management's evaluation of the loan portfolio, including the
changing composition of the portfolio as well as economic trends, regulatory
considerations and other factors contributed to the recognition of $45,000 in
the provision for loan losses during the three months ended March 31, 2007.
Noninterest income. Noninterest income increased $2,000 to $730,000 during the
three months ended March 31, 2007, compared to $728,000 during the same period
in the prior year. This decrease can be attributed to decreases in customer fees
and service charges and gains on the sale of securities of $31,000 and $58,000,
respectively. Offsetting this decrease in noninterest income were increases in
commissions earned on financial services, earnings on bank-owned life insurance
and other noninterest income of $61,000, $3,000 and $27,000, respectively.
Noninterest expense. Noninterest expense increased $95,000 or 4.3% to $2.3
million during the three months ended March 31, 2007, compared to $2.2 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in premises and equipment and other noninterest
expenses of $19,000 and $80,000, respectively.
Premises and equipment increased $19,000 or 5.0% to $400,000 for the three
months ended March 31, 2007, compared to $381,000 for the same period in the
prior year. This increase can be attributed primarily to the operation of one
additional branch facility opened in November 2006.
Other noninterest expense increased $80,000 or 15.4% to $604,000 during the
three months ended March 31, 2007, compared to $524,000 for the same period in
the prior year. This increase can be attributed primarily to increases in
professional fees relating to operations and compliance consulting needed as a
result of the 2006 reorganization.
Provision for income taxes. The provision for income taxes decreased $26,000 or
16.4% to $133,000 for the three months ended March 31, 2007, compared to
$159,000 for the same period in the prior year due primarily to the decrease in
the effective tax rate to 19.4% in 2007 from 21.4% in 2006 in addition to lower
pre-tax earnings. The difference between the statutory rate of 34% and the
Corporation's effective tax rate is due to tax-exempt income earned on loans,
securities and bank-owned life insurance.
LIQUIDITY
The Corporation's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and amortization and
prepayments of outstanding loans and maturing securities. During the three
months ended March 31, 2007, the Corporation used its sources of funds primarily
to fund loan originations and security purchases. As of such date, the
Corporation had outstanding loan commitments, including undisbursed loans and
amounts available under credit lines, totaling $23.9 million, and standby
letters of credit totaling $723,000.
At March 31, 2007, time deposits amounted to $126.6 million or 52.0% of the
Corporation's total consolidated deposits, including approximately $60.7 million
of which are scheduled to mature within the next year. Management of the
Corporation believes that it has adequate resources to fund all of its
commitments, that all of its commitments will be funded as required by related
maturity dates and that, based upon past experience and current pricing
policies, it can adjust the rates of time deposits to retain a substantial
portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and
maturities of securities, the Corporation has alternative sources of funds such
as a term borrowing capacity from the FHLB and, to a limited and rare extent,
the sale of loans. At March 31, 2007, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $107.0 million.
14
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely impact its liquidity or
its ability to meet funding needs in the ordinary course of business.
CRITICAL ACCOUNTING POLICIES
Management views critical accounting policies to be those which are highly
dependent on subjective or complex judgments, estimates and assumptions and
where changes in those estimates and assumptions could have a significant impact
on the financial statements. Management currently views the determination of the
allowance for loan losses as a critical accounting policy.
The allowance for loan losses provides for an estimate of probable losses in the
loan portfolio. In determining the appropriate level of the allowance for loan
loss, the loan portfolio is separated into risk-rated and homogeneous pools.
Migration analysis/historical loss rates, adjusted for relevant trends, have
been applied to these pools. Qualitative adjustments are then applied to the
portfolio to allow for quality of lending policies and procedures, national and
local economic and business conditions, changes in the nature and volume of the
portfolio, experience, ability and depth of lending management, changes in the
trends, volumes and severity of past due, non-accrual and classified loans and
loss and recovery trends, quality of the Corporation's loan review system,
concentrations of credit, and external factors. The methodology used to
determine the adequacy of the Corporation's allowance for loan losses is
comprehensive and meets regulatory and accounting industry standards for
assessing the allowance, however, it is still an estimate. Loan losses are
charged against the allowance while recoveries of amounts previously charged-off
are credited to the allowance. Loan loss provisions are charged against current
earnings based on management's periodic evaluation and review of the factors
indicated above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Market risk for the Corporation consists primarily of interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning assets
and interest-bearing liabilities are at the Bank, virtually all of the interest
rate risk and liquidity risk lies at the Bank level. The Bank is not subject to
currency exchange risk or commodity price risk, and has no trading portfolio,
and therefore, is not subject to any trading risk. In addition, the Bank does
not participate in hedging transactions such as interest rate swaps and caps.
Changes in interest rates will impact both income and expense recorded and also
the market value of long-term interest-earning assets. Interest rate risk and
liquidity risk management is performed at the Bank level. Although the Bank has
a diversified loan portfolio, loans outstanding to individuals and businesses
depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation's asset/liability management
committee is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability committee is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of the Bank's rate sensitive assets and rate sensitive
liabilities. These differences, or interest rate repricing "gap", provide an
indication of the extent that the Corporation's net interest income is affected
by future changes in interest rates. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income. Conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The closer to zero that gap is maintained, generally, the lesser the impact of
market interest rate changes on net interest income.
15
Based on certain assumptions provided by a federal regulatory agency, which
management believes most accurately represents the sensitivity of the
Corporation's assets and liabilities to interest rate changes, at March 31,
2007, the Corporation's interest-earning assets maturing or repricing within one
year totaled $83.0 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $90.8 million, providing an excess
of interest-bearing liabilities over interest-earning assets of $7.8 million or
a negative 2.6% of total assets. At March 31, 2007, the percentage of the
Corporation's assets to liabilities maturing or repricing within one year was
91.4%.
For more information, see "Market Risk Management" in Exhibit 13 to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
-------------------------------
The Corporation maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Corporation's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the Corporation's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e).
There has been no change made in the Corporation's internal control over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
As of the quarter ended March 31, 2007, the Corporation carried out an
evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Corporation's disclosure controls and procedures. Based on the foregoing,
the Corporation's Chief Executive Officer and Chief Financial Officer concluded
that the Corporation's disclosure controls and procedures were effective. There
have been no significant changes in the Corporation's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Corporation completed its evaluation.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
--------------------------
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
Item 1A. Risk Factors
----------------------
There have been no material changes in the Corporation's risk factors from those
previously disclosed in the 2006 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
16
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
Item 5. Other Information
--------------------------
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
-----------------
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350
17
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Date: May 10, 2007 By: /s/ David L. Cox
-----------------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: May 10, 2007 By: /s/ William C. Marsh
-----------------------------------------------------
William C. Marsh
Executive Vice President,
Chief Financial Officer and Treasurer
18