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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 September 30, 2007
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
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 (IRS Employer Identification No.)
incorporation or organization)
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 November 9, 2007.
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EMCLAIRE FINANCIAL CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 2007 and December 31, 2006..................................................................1
Consolidated Statements of Income for the three and nine
months ended September 30, 2007 and 2006..................................................................2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2007 and 2006..................................................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three and nine months ended September 30, 2007 and 2006....................................4
Notes to Consolidated Financial Statements................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.........................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................21
Item 4. Controls and Procedures..................................................................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................22
Item 1A. Risk Factors.............................................................................................22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................23
Item 3. Defaults upon Senior Securities..........................................................................23
Item 4. Submission of Matters to a Vote of Security Holders......................................................23
Item 5. Other Information........................................................................................23
Item 6. Exhibits.................................................................................................23
Signatures .........................................................................................................24
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of September 30, 2007 (Unaudited) and December 31, 2006
(Dollar amounts in thousands, except per share data)
September 30, December 31,
2007 2006
--------------- ---------------
Assets
------
Cash and due from banks $ 6,290 $ 7,540
Interest-earning deposits with banks 117 9,177
--------------- ---------------
Cash and cash equivalents 6,407 16,717
Securities available for sale, at fair value 48,835 51,774
Loans receivable, net of allowance for loan
losses of $2,118 and $2,035 226,199 213,344
Federal bank stocks, at cost 2,608 2,217
Bank-owned life insurance 4,938 4,794
Accrued interest receivable 1,481 1,374
Premises and equipment, net 7,785 7,958
Goodwill 1,422 1,422
Deferred tax asset 539 533
Prepaid expenses and other assets 676 427
--------------- ---------------
Total Assets $ 300,890 $ 300,560
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 45,643 $ 44,045
Interest-bearing 190,505 200,447
--------------- ---------------
Total deposits 236,148 244,492
Short-term borrowed funds 7,600 -
Long-term borrowed funds 30,000 30,000
Accrued interest payable 732 825
Accrued expenses and other liabilities 1,650 1,326
--------------- ---------------
Total Liabilities 276,130 276,643
--------------- ---------------
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 10,887 10,871
Treasury stock, at cost; 128,017 shares (2,653) (2,653)
Retained earnings 15,278 14,370
Accumulated other comprehensive loss (497) (416)
--------------- ---------------
Total Stockholders' Equity 24,760 23,917
--------------- ---------------
Total Liabilities and Stockholders'
Equity $ 300,890 $ 300,560
=============== ===============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three and nine months ended September 30, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2007 2006 2007 2006
--------------- --------------- --------------- ---------------
Interest and dividend income:
Loans receivable, including fees $ 3,937 $ 3,670 $ 11,329 $ 10,166
Securities:
Taxable 388 352 1,171 1,103
Exempt from federal income tax 169 176 514 523
Federal bank stocks 35 28 106 68
Deposits with banks 6 14 143 55
--------------- --------------- --------------- ---------------
Total interest and dividend income 4,535 4,240 13,263 11,915
--------------- --------------- --------------- ---------------
Interest expense:
Deposits 1,578 1,530 4,813 4,293
Borrowed funds 361 324 1,047 658
--------------- --------------- --------------- ---------------
Total interest expense 1,939 1,854 5,860 4,951
--------------- --------------- --------------- ---------------
Net interest income 2,596 2,386 7,403 6,964
Provision for loan losses 45 90 120 168
--------------- --------------- --------------- ---------------
Net interest income after provision for loan
losses 2,551 2,296 7,283 6,796
--------------- --------------- --------------- ---------------
Noninterest income:
Fees and service charges 412 387 1,128 1,122
Commissions on financial services 83 101 325 316
Net gain on sale of available for sale
securities 18 134 194 376
Net gain on sales of loans 15 9 22 9
Earnings on bank-owned life insurance 55 53 163 144
Other 113 109 366 324
--------------- --------------- --------------- ---------------
Total noninterest income 696 793 2,198 2,291
--------------- --------------- --------------- ---------------
Noninterest expense:
Compensation and employee benefits 1,241 1,391 3,791 3,988
Premises and equipment 404 387 1,205 1,140
Intangible amortization expense - 2 - 7
Other 610 485 1,904 1,598
--------------- --------------- --------------- ---------------
Total noninterest expense 2,255 2,265 6,900 6,733
--------------- --------------- --------------- ---------------
Income before provision for income taxes 992 824 2,581 2,354
Provision for income taxes 238 132 569 474
--------------- --------------- --------------- ---------------
Net income $ 754 $ 692 $ 2,012 $ 1,880
=============== =============== =============== ===============
Basic and diluted earnings per share $ 0.59 $ 0.55 $ 1.59 $ 1.48
Average common shares outstanding 1,267,835 1,267,835 1,267,835 1,267,835
Dilutive shares - - - -
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2007 and 2006
(Unaudited)
(Dollar amounts in thousands)
For the nine months ended
September 30,
-----------------------------------
2007 2006
-----------------------------------
Cash flows from operating activities
Net income $ 2,012 $ 1,880
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 497 557
Provision for loan losses 120 168
Amortization of premiums and accretion of discounts, net 9 27
Amortization of intangible assets and mortgage servicing
rights 12 5
Realized gain on sales of available for sale securities, net (194) (376)
Net gains on sales of loans (22) (9)
Stock compensation expense 16 -
Earnings on bank owned life insurance, net (144) (125)
Increase in accrued interest receivable (107) (201)
(Increase) decrease in prepaid expenses and other assets (225) 114
Increase (decrease) in accrued interest payable (93) 140
Increase (decrease) in accrued expenses and other
liabilities 324 (369)
-----------------------------------
Net cash provided by operating activities 2,205 1,811
-----------------------------------
Cash flows from investing activities
Loan originations and principal collections, net (14,575) (26,049)
Proceeds from the sale of loans 1,615 1,016
Available for sale securities:
Sales 1,275 814
Maturities, repayments and calls 13,869 4,714
Purchases (12,136) (1,753)
Held to maturity securities:
Maturities, repayments and calls - 15
Purchases of federal bank stocks (391) (562)
Purchases of premises and equipment (324) (1,396)
-----------------------------------
Net cash used in investing activities (10,667) (23,201)
-----------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits (8,345) 8,542
Net increase in overnight borrowed funds 7,600 11,000
Dividends paid on common stock (1,103) (1,027)
-----------------------------------
Net cash provided by (used in) financing activities (1,848) 18,515
-----------------------------------
Net decrease in cash and cash equivalents (10,310) (2,875)
Cash and cash equivalents at beginning of period 16,717 10,367
-----------------------------------
Cash and cash equivalents at end of period $ 6,407 $ 7,492
-----------------------------------
Supplemental information:
Interest paid $ 5,953 $ 4,811
Income taxes paid 366 501
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate - 20
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the three and nine months ended September 30, 2007 and
2006 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months For the nine months ended
ended
September 30, September 30,
------------------------- --------------------------
2007 2006 2007 2006
----------- ---------- ----------- -----------
Balance at beginning of period $ 23,990 $ 23,480 $ 23,917 $ 23,615
Net income 754 692 2,012 1,880
Other comprehensive income (loss):
Change in net unrealized gains (losses) on
available for sale securities, net of
taxes 381 529 47 51
Less reclassification adjustment for gains
included in net income, net of taxes (12) (88) (128) (248)
----------- ---------- ----------- -----------
Other comprehensive income (loss) 369 441 (81) (197)
----------- ---------- ----------- -----------
Total comprehensive income 1,123 1,133 1,931 1,683
Stock compensation expense 15 - 16 -
Dividends declared (368) (342) (1,103) (1,027)
----------- ---------- --------------------------
Balance at end of period $ 24,760 $ 24,271 $ 24,760 $ 24,271
=========== ========== =========== ===========
Cash dividend per common share $ 0.29 $ 0.27 $ 0.87 $ 0.81
=========== ========== =========== ===========
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 of Form 10-K
filed with the Securities and Exchange Commission.
The balance sheet at December 31, 2006 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
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. Earnings per Common Share.
Basic earnings per common share (EPS) excludes dilution and is computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if securities or contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Corporation. Options
on 83,000 shares of common stock were not included in computing diluted
earnings per share because their effects were not dilutive.
5
3. Securities.
The Corporation's securities as of the respective dates are summarized as
follows:
(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
----------------------------------------------------------------------------------------------------
Available for sale:
-------------------
September 30, 2007:
U.S. Government agencies and related
entities $ 28,857 $ - $ (189) $ 28,668
Mortgage-backed securities 2,047 - (77) 1,970
Municipal securities 14,205 495 - 14,700
Equity securities 3,933 2 (438) 3,497
-------------------------------------------------------
$ 49,042 $ 497 $ (704) $ 48,835
-------------------------------------------------------
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
Equity securities 3,382 176 (132) 3,425
-------------------------------------------------------
$ 51,858 $ 750 $ (833) $ 51,774
----------------------------------------------------------------------------------------------------
4. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
(Dollar amounts in thousands) September 30, December 31,
2007 2006
---------------------------------------------------------------------------
Mortgage loans on real estate:
Residential first mortgages $ 65,301 $ 64,662
Home equity loans and lines of credit 49,928 47,330
Commercial 67,626 61,128
-----------------------------------
182,855 173,120
Other loans:
Commercial business 36,022 34,588
Consumer 9,440 7,671
-----------------------------------
45,462 42,259
-----------------------------------
Total loans, gross 228,317 215,379
Less allowance for loan losses 2,118 2,035
-----------------------------------
$ 226,199 $ 213,344
Total loans, net -----------------------------------
---------------------------------------------------------------------------
6
5. Deposits.
The Corporation's deposits as of the respective dates are summarized as
follows:
(Dollar amounts in thousands) September 30, 2007 December 31, 2006
------------------------------------------------------------------------------
Type of accounts Amount % Amount %
------------------------------------------------------------------------------
Noninterest-bearing deposits $ 45,643 19.3% $ 44,045 18.0%
Interest-bearing demand deposits 72,675 30.8% 70,951 29.0%
Time deposits 117,830 49.9% 129,496 53.0%
-------------------------------------------
$ 236,148 100.0% $ 244,492 100.0%
-------------------------------------------
------------------------------------------------------------------------------
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 September 30, 2007, $85,000 will expire within
the next twelve months, $275,000 will automatically renew within the next
twelve months and $517,000 will automatically renew within thirteen to
twenty-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 September 30, 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. Eligible
employees 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 nine months ended
September 30, 2007 and 2006 amounted to $100,000 and $63,000, respectively.
The Corporation provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all full-time 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:
--------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) For the three months ended For the nine months ended Year ended
December
September 30, September 30, 31,
-------------------------- ------------------------- ----------
2007 2006 2007 2006 2006
--------------------------------------------------- ----------- ---------- ---------- ----------
Service cost $ 66 $ 56 $ 180 $ 160 $ 213
Interest cost 68 62 198 178 237
Expected return on plan assets (74) (69) (228) (201) (268)
Transition asset 4 (2) - (6) (8)
Prior service costs (8) (7) (24) (23) 32
Recognized net actuarial loss 10 23 24 47 -
Effect of Special Termination Benefits - - - - 274
----------- ----------- ---------- ---------- ----------
Net periodic pension cost $ 66 $ 63 $ 150 $ 155 $ 480
=========== =========== ========== ========== ==========
The expected rate of return on plan assets was 8.50% for the periods ended
September 30, 2007 and 2006. The Corporation contributed $360,000 to its
pension plan for the 2007 plan year during the quarter ended September 30,
2007.
8. Stock Compensation Plans.
In May 2007, the Corporation adopted the 2007 Stock Incentive Plan and
Trust. Under the Plan, the Corporation may grant options to its directors,
officers and employees for up to 177,496 shares of common stock. Incentive
stock options, non-incentive or compensatory stock options and share awards
may be granted under the Plan. The exercise price of each option shall at
least equal the market price of a share of common stock on the date of
grant and have a contractual term of ten years. Options shall vest and
become exercisable at the rate, to the extent and subject to such
limitations as may be specified by the Corporation. Effective January 1,
2007, the Corporation adopted SFAS No. 123(R), Share-Based Payment, which
requires that compensation cost related to share-based payment transactions
be recognized in the financial statements with measurement based upon the
fair value of the equity or liability instruments issued. For the three and
nine-month period ended September 30, 2007, the Corporation recognized
$15,000 and $16,000, respectively in compensation expense for stock
options.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
Nine months ended
September 30, 2007
-------------------------------------------------------
Dividend yield 4.46%
Expected life 10 years
Expected volatility 14.09%
Risk-free interest rate 5.10%
-------------------------------------------------------
The expected volatility is based on historical stock price fluctuations.
The risk-free interest rates for periods within the contractual life of the
awards are based on the U.S. Treasury yield curve in effect at the time of
the grant. The expected life is based on the maximum term of the options.
The dividend yield assumption is based on the Corporation's history and
expectation of dividend payouts.
8
8. Stock Compensation Plans (continued).
A summary of option activity under the Plan as of September 30, 2007, and
changes during the period then ended is presented below:
Weighted-
Aggregate Average
Weighted-Average Intrinsic Remaining Term
Options Exercise Price Value (in years)
------------------------------------------------- ---------------- ---------- ------------
Outstanding at the beginning of the year - $ - -
Granted 83,000 26.00 9.7
Exercised - - -
Forfeited - - -
------------------------------------------------- ---------------- ---------- ------------
Outstanding as of September 30, 2007 83,000 $ 26.00 $ - 9.7
================================================= ================ ========== ============
Exercisable as of September 30, 2007 - $ - $ - -
================================================= ================ ========== ============
A summary of the status of the Corporation's nonvested shares as of
September 30, 2007, and changes during the period then ended is presented
below;
Weighted-Average
Options Grant-date Fair
Value
-------------------------------------------------------
Nonvested at the
beginning of the year - $-
Granted 83,000 3.39
Vested - -
Forfeited - -
-------- --------------------
Nonvested as of
September 30, 2007 83,000 $3.39
======== ====================
As of September 30, 2007, there was $265,000 of total unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. That cost is expected to be recognized
over a weighted-average period of 2.7 years.
9. Effect of Recently Issued Accounting Standards.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
9
9. Effect of Recently Issued Accounting Standards (continued).
In September 2006, FASB's Emerging Issues Task Force (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 EITF is effective 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 implementation of EITF 06-5 had no 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
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 and nine months ended September 30, 2007 compared to the same periods in
2006 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.
10
CHANGES IN FINANCIAL CONDITION
Total assets increased $330,000 to $300.9 million at September 30, 2007 from
$300.6 million at December 31, 2006. This increase resulted from increases in
loans receivable, net of allowance for loan losses of $12.9 million or 6.0% to
$226.2 million at September 30, 2007 from $213.3 million at December 31, 2006
and federal bank stocks of $391,000 or 17.6% to $2.6 million at September 30,
2007 from $2.2 million at December 31, 2006. Partially offsetting this increase
were decreases in cash and cash equivalents of $10.3 million or 61.7% to $6.4
million at September 30, 2007 from $16.7 million at December 31, 2006 and
securities available for sale of $2.9 million or 5.7% to $48.8 million at
September 30, 2007 from $51.8 million at December 31, 2006, as these funds were
utilized in funding commercial real estate and business loans.
Total liabilities decreased $513,000 to $276.1 million at September 30, 2007
from $276.6 million at December 31, 2006, while total stockholders' equity
increased $843,000 to $24.8 million at September 30, 2007 from $23.9 million at
December 31, 2006. The decrease in total liabilities was primarily due to a
decrease in customer deposits of $8.3 million partially offset by increases in
short-term borrowed funds and accrued expenses and other liabilities of $7.6
million and $324,000, respectively.
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended September 30, 2007 and
2006
General. Net income increased $62,000 or 9.0% to $754,000 for the three months
ended September 30, 2007 from $692,000 for the same period in 2006. This
increase was a result of an increase in net interest income and decreases in the
provision for loan losses and non-interest expense of $210,000 $45,000, and
$10,000, respectively, partially offset by a decrease in noninterest income of
$97,000 and an increase in the provision for income taxes of $106,000.
Net interest income. Net interest income on a tax equivalent basis increased
$206,000 or 8.3% to $2.7 million for the three months ended September 30, 2007
from $2.5 million for the same period in 2006. This net increase can be
attributed to an increase in tax equivalent interest income of $290,000,
partially offset by a $84,000 increase in interest expense.
Interest income. Interest income on a tax equivalent basis increased $290,000 or
6.7% to $4.6 million for the three months ended September 30, 2007, compared to
$4.3 million for the same period in the prior year. This increase can be
attributed to increases in interest earned on loans, securities and federal bank
stocks of $265,000, $26,000 and $7,000, respectively, partially offset by a
decrease in interest earned on interest-earning deposits with banks of $8,000.
Tax equivalent interest earned on loans receivable increased $265,000 or 7.2% to
$4.0 million for the three months ended September 30, 2007, compared to $3.7
million for the same period in 2006. During that time, average loans increased
$8.3 million or 3.8%, accounting for $144,000 in additional loan interest
income. This increase can be primarily attributed to growth in the Corporation's
commercial loan portfolios. Additionally, the yield on loans increased 22 basis
points to 7.01% for the three months ended September 30, 2007, versus 6.79% for
the same period in 2006, contributing $120,000 in additional interest income.
The increase in the yield was primarily due to the increased origination of
higher rate commercial loans. Also contributing to the increase in the yield on
loans between the periods was the collection of $60,000 of interest due
associated with the payoff of a previously nonperforming commercial loan in
August 2007. In connection with the loan payoff, the Corporation received all
principal and interest due under the contractual terms of the loan agreement and
interest collected was recorded as loan interest income during the three months
ended September 30, 2007.
11
Tax equivalent interest earned on securities increased $26,000 or 4.3% to
$633,000 for the three months ended September 30, 2007, compared to $607,000 for
the same period in 2006. The average volume of securities decreased $1.9 million
or 3.6%, accounting for a $23,000 decrease in interest income. Offsetting this
volume decrease, the yield on securities increased 38 basis points to 5.03% for
the three months ended September 30, 2007, versus 4.65% for the same period in
2006, as a result of certain lower yielding securities maturing. This favorable
yield variance contributed an additional $48,000 to interest income.
Interest earned on interest-earning deposit accounts decreased $8,000 to $6,000
for the three months ended September 30, 2007 from $14,000 for the same period
in 2006. The average volume of these assets decreased $667,000 or 59.5%,
primarily as a result of funding loans and purchasing securities, decreasing
interest income by $9,000. Partially offsetting this decrease in volume, the
average yield on interest-earning deposit accounts increased 63 basis points to
5.58% for the three months ended September 30, 2007, compared to 4.95% for the
same period in the prior year, contributing $2,000 in additional interest
income. The increase in the average yield reflects the increases in short-term
interest rates. Interest earned on federal bank stocks increased $7,000 or 25.0%
to $35,000 for the three month period ended September 30, 2007 from $28,000 for
the same period in the prior year as a result of both higher volume and higher
yield.
Interest expense. Interest expense increased $84,000 or 4.5% to $1.9 million for
the three months ended September 30, 2007, compared to $1.8 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 $48,000 and
$36,000, respectively.
Interest expense incurred on deposits increased $48,000 or 3.1% to $1.6 million
for the three months ended September 30, 2007, compared to $1.5 million for the
same period in the prior year. This increase can be attributed to the cost of
interest-bearing deposits increasing 12 basis points to 3.26% for the three
months ended September 30, 2007, compared to 3.14% for the same period in 2006
contributing $57,000 in additional expense. Offsetting this rate increase, the
average volume of deposits decreased $1.1 million to $192.3 million for the
three months ended September 30, 2007, compared to $193.4 million for the same
period in 2006 causing a $9,000 decrease in interest expense. The increase in
the rate paid on deposits reflects the increases in short-term market interest
rates between the periods.
Interest expense incurred on borrowed funds increased $36,000 or 11.1% to
$361,000 for the three months ended September 30, 2007, compared to $325,000 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 $4.0
million or 14.1% to $32.1 million for the three months ended September 30, 2007,
compared to $28.1 million for the same period in the prior year contributing
$45,000 in additional expense. This volume increase was the result of $15.0
million of FHLB term borrowings placed in the second and third quarters of 2006
used primarily to fund loan growth. Partially offsetting this volume increase,
the cost of borrowed funds decreased 12 basis points to 4.46% for the three
months ended September 30, 2007, compared to 4.58% for the same period in 2006.
12
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 September 30,
----------------------------------------------------------------------------
2007 2006
----------------------------------- ---------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
----------------------------------------
Loans, taxable $ 218,421 $ 3,867 7.02% $ 209,615 $ 3,593 6.80%
Loans, tax exempt 6,255 102 6.46% 6,797 111 6.47%
----------- ---------- ----------- -----------
Total loans receivable 224,676 3,969 7.01% 216,412 3,704 6.79%
----------- ---------- ----------- -----------
Securities, taxable 35,401 388 4.35% 36,706 352 3.80%
Securities, tax exempt 14,543 245 6.68% 15,118 255 6.70%
----------- ---------- ----------- -----------
Total securities 49,944 633 5.03% 51,824 607 4.65%
----------- ---------- ----------- -----------
Interest-earning deposits with banks 454 6 5.58% 1,121 14 4.95%
Federal bank stocks 2,283 35 6.08% 2,201 28 5.05%
----------- ---------- ----------- -----------
Total interest-earning cash equivalents 2,737 41 6.00% 3,322 42 5.02%
----------- ---------- ----------- -----------
Total interest-earning assets 277,357 4,643 6.64% 271,558 4,353 6.36%
Cash and due from banks 5,770 6,711
Other noninterest-earning assets 14,774 13,740
----------- -----------
Total Assets $ 297,901 $ 292,009
=========== ===========
Interest-bearing liabilities:
----------------------------------------
Interest-bearing demand deposits $ 73,740 240 1.29% $ 73,362 224 1.21%
Time deposits 118,585 1,338 4.48% 120,047 1,306 4.32%
----------- ---------- ----------- -----------
Total interest-bearing deposits 192,325 1,578 3.26% 193,409 1,530 3.14%
----------- ---------- ----------- -----------
Borrowed funds, short-term 2,086 21 3.99% 2,479 34 5.44%
Borrowed funds, long-term 30,000 340 4.50% 25,645 291 4.50%
----------- ---------- ----------- -----------
Total borrowed funds 32,086 361 4.46% 28,124 325 4.58%
----------- ---------- ----------- -----------
Total interest-bearing liabilities 224,411 1,939 3.43% 221,533 1,855 3.32%
----------- ---------- ----------- -----------
Noninterest-bearing demand deposits 46,334 - - 44,674 - -
----------- ---------- ----------- -----------
Funding and cost of funds 270,745 1,939 2.84% 266,207 1,855 2.76%
Other noninterest-bearing liabilities 2,930 2,105
----------- -----------
Total Liabilities 273,675 268,312
Stockholders' Equity 24,226 23,697
----------- -----------
Total Liabilities and Stockholders'
Equity $ 297,901 $ 292,009
=========== ---------- =========== -----------
Net interest income $ 2,704 $ 2,498
========== ===========
Interest rate spread (difference between 3.21% 3.04%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.87% 3.65%
income as a percentage of average
interest-earning assets)
13
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.
(Dollar amounts in thousands) Three months ended September 30,
2007 versus 2006
Increase (Decrease) due to
-----------------------------------------
Volume Rate Total
----------------------------------------------------------------------------------------------------
Interest income:
Loans $ 144 $ 120 $ 264
Securities (23) 48 25
Interest-earning deposits with banks (9) 2 (7)
Federal bank stocks 1 6 7
-----------------------------------------
Total interest-earning assets 113 176 289
-----------------------------------------
Interest expense:
Deposits (9) 57 48
Borrowed funds 45 (9) 36
-----------------------------------------
Total interest-bearing liabilities 36 48 84
-----------------------------------------
Net interest income $ 77 $ 128 $ 205
=========================================
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 September 30, 2007 and 2006 is as follows:
(Dollar amounts in thousands) At or for the three months
ended
September 30,
-------------------------------
2007 2006
----------------------------------------------------------------------
Balance at the beginning of the period $ 2,086 $ 1,898
Provision for loan losses 45 90
Charge-offs (16) (7)
Recoveries 3 4
------------- ----------------
Balance at the end of the period $ 2,118 $ 1,985
============= ================
Non-performing loans $ 931 $ 1,653
Non-performing assets 1,015 1,739
Non-performing loans to total loans 0.41% 0.75%
Non-performing assets to total assets 0.34% 0.59%
Allowance for loan losses to total
loans 0.93% 0.90%
Allowance for loan losses to non-
performing loans 227.48% 120.08%
14
The provision for loan losses decreased $45,000 or 50.0% to $45,000 for the
three month period ended September 30, 2007 from $90,000 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 September 30, 2007.
Noninterest income. Noninterest income decreased $97,000 or 13.9% to $696,000
during the three months ended September 30, 2007, compared to $793,000 during
the same period in the prior year. This decrease can be attributed to decreases
in commissions earned on financial services and gains on securities of $18,000
and $116,000, respectively. Partially offsetting this decrease in noninterest
income were increases in fees and service charges, gains on the sale of loans,
earnings on bank-owned life insurance and other noninterest income of $25,000,
$6,000, $2,000 and $4,000, respectively.
Noninterest expense. Noninterest expense decreased $10,000 to $2.25 million
during the three months ended September 30, 2007, compared to $2.26 million
during the same period in the prior year. This decrease in noninterest expense
can be attributed to a decrease in compensation and employee benefits of
$150,000, partially offset by increases in premises and equipment and other
noninterest expenses of $17,000 and $125,000, respectively.
Compensation and employee benefits decreased $150,000 or 10.8% to $1.2 million
for the three months ended September 30, 2007, compared to $1.4 million for the
same period the prior year. This decease can be attributed primarily to cost
savings from staffing reductions associated with the 2006 reorganization,
partially offset by the costs associated with the staffing of one additional
branch facility opened in November 2006.
Premises and equipment increased $17,000 or 4.4% to $404,000 for the three
months ended September 30, 2007, compared to $387,000 for the same period in the
prior year. This increase can be attributed primarily to the operation of the
additional branch facility opened in November 2006.
Other noninterest expense increased $125,000 or 25.8% to $610,000 during the
three months ended September 30, 2007, compared to $485,000 for the same period
in the prior year. This increase can be attributed primarily to increases in
professional fees relating to Sarbanes-Oxley Section 404 compliance, data
processing center information technology initiatives and other operations and
compliance.
Provision for income taxes. The provision for income taxes increased $106,000 or
80.3% to $238,000 for the three months ended September 30, 2007, compared to
$132,000 for the same period in the prior year. This was due to an increase in
pre-tax earnings of $168,000 to $992,000 for the three months ended September
30, 2007, compared to $824,000 for the same period in the prior year and an
increase in the effective tax rate to 24.0% for the three months ended September
30, 2007, compared to 16.0% for the same period in 2006. The difference between
the statutory rate of 34% and the Corporation's effective tax rate is due to
tax-exempt income earned on certain tax-free loans and securities and bank-owned
life insurance.
Comparison of Results for the Nine Month Periods Ended September 30, 2007 and
2006
General. Net income increased $132,000 or 7.0% to $2.0 million for the nine
months ended September 30, 2007 from $1.9 million for the same period in 2006.
This increase was a result of an increase in net interest income of $487,000
partially offset by a decrease in noninterest income of $94,000 and an increase
in noninterest expense and the provision for income taxes of $167,000 and
$95,000, respectively.
Net interest income. Net interest income on a tax equivalent basis increased
$427,000 or 5.9% to $7.7 million for the nine months ended September 30, 2007
from $7.3 million for the same period in 2006. This net increase can be
attributed to an increase in tax equivalent interest income of $1.3 million,
partially offset by a $910,000 increase in interest expense.
15
Interest income. Interest income on a tax equivalent basis increased $1.3
million or 10.9% to $13.6 million for the nine months ended September 30, 2007,
compared to $12.3 million for the same period in the prior year. This increase
can be attributed to increases in interest earned on loans, securities, federal
bank stocks, and interest-earning deposits with banks of $1.2 million, $55,000,
$38,000 and $88,000, respectively.
Tax equivalent interest earned on loans receivable increased $1.2 million or
11.3% to $11.4 million for the nine months ended September 30, 2007, compared to
$10.3 million for the same period in 2006. During that time, average loans
increased $16.0 million or 7.9%, accounting for $826,000 in additional loan
interest income. This increase can be primarily attributed to growth in the
Corporation's commercial loan portfolios. Additionally, the yield on loans
increased 21 basis points to 6.95% for the nine months ended September 30, 2007,
versus 6.74% for the same period in 2006, contributing $330,000 in additional
interest income. Contributing to the increase in the yield on loans between the
periods was the collection of $120,000 of interest due associated with the
payoff of previously non-performing commercial loans in April and August 2007
that had been on non-accrual status. In connection with the loan payoffs, the
Corporation received all principal and interest due under the contractual terms
of the loan agreements and interest collected was recorded as loan interest
income during the nine months ended September 30, 2007.
Tax equivalent interest earned on securities increased $55,000 to $1.9 million
for the nine months ended September 30, 2007. The average yield on securities
increased 28 basis points to 4.92% for the nine months ended September 30, 2007,
versus 4.64% for the same period in 2006, as a result of certain lower yielding
securities maturing. This favorable yield variance contributed an additional
$106,000 to interest income. Partially offsetting this increase was a decrease
in the average volume of $1.4 million or 2.7%, primarily as a result of the
utilization of these funds for loan growth. This resulted in a $51,000 decline
in interest income.
Interest earned on interest-earning deposit accounts increased $88,000 to
$143,000 for the nine months ended September 30, 2007 from $55,000 for the same
period in 2006. The average volume of these assets increased $2.0 million,
primarily as a result of the investment of funds from maturing securities,
contributing $80,000 in additional interest income. Additionally, the average
yield on interest-earning deposit accounts increased 62 basis points to 5.26%
for the nine months ended September 30, 2007, compared to 4.64% for the same
period in the prior year, contributing $8,000 in additional interest income. The
increase in the average yield reflects the increases in short-term interest
rates. Interest earned on federal bank stocks increased $38,000 to $106,000 for
the nine month period ended September 30, 2007 from $68,000 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 of a special dividend on FHLB capital stock.
Interest expense. Interest expense increased $910,000 or 18.4% to $5.9 million
for the nine months ended September 30, 2007, compared to $5.0 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
$520,000 and $390,000, respectively.
Interest expense incurred on deposits increased $520,000 or 12.1% to $4.8
million for the nine months ended September 30, 2007, compared to $4.3 million
for the same period in the prior year. This increase can be attributed to the
cost of interest-bearing deposits increasing 29 basis points to 3.29% for the
nine months ended September 30, 2007, compared to 3.00% for the same period in
2006 contributing $429,000 in additional expense. The increase in the rate paid
on deposits reflects the increases in short-term interest rates. The average
volume of deposits increased $4.0 million or 2.1% to $195.3 million for the nine
months ended September 30, 2007, compared to $191.3 million for the same period
in 2006 contributing $91,000 in additional expense.
16
Interest expense incurred on borrowed funds increased $390,000 or 59.3% to $1.0
million for the nine months ended September 30, 2007, compared to $658,000 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 $11.1
million to $31.3 million for the nine months ended September 30, 2007, compared
to $20.2 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 $371,000 in additional expense. Such
borrowings were primarily used to fund loan growth. Additionally, the cost of
borrowed funds increased 12 basis points to 4.48% for the nine months ended
September 30, 2007 from 4.36% for the same period in 2006 contributing an
additional $19,000 in interest expense.
17
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) Nine months ended September 30,
--------------------------------------------------------------------------------------
2007 2006
---------------------------------------- ---------------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
------------------------
Loans, taxable $ 213,477 $ 11,116 6.96% $ 196,972 $ 9,938 6.75%
Loans, tax exempt 6,364 308 6.46% 6,835 330 6.46%
----------- ----------- --------- -------------- --------------- ----------
Total loans receivable 219,841 11,424 6.95% 203,807 10,268 6.74%
----------- ----------- --------- -------------- --------------- ----------
Securities, taxable 37,241 1,171 4.20% 38,332 1,103 3.85%
Securities, tax exempt 14,877 745 6.70% 15,235 758 6.65%
----------- ----------- --------- -------------- --------------- ----------
Total securities 52,118 1,916 4.92% 53,567 1,861 4.64%
----------- ----------- --------- -------------- --------------- ----------
Interest-earning deposits with
banks 3,633 143 5.26% 1,585 55 4.64%
Federal bank stocks 2,271 106 6.24% 1,850 68 4.91%
----------- ----------- --------- -------------- --------------- ----------
Total interest-earning cash
equivalents 5,904 249 5.64% 3,435 123 4.79%
----------- ----------- --------- -------------- --------------- ----------
Total interest-earning assets 277,863 13,589 6.54% 260,809 12,252 6.28%
Cash and due from banks 5,865 6,908
Other noninterest-earning
assets 14,659 13,295
----------- --------------
Total assets $ 298,387 $ 281,012
=========== ==============
Interest-bearing liabilities:
-----------------------------
Interest-bearing demand deposits $ 72,925 697 1.28% $ 73,103 545 1.00%
Time deposits 122,372 4,116 4.50% 118,220 3,748 4.24%
----------- ----------- --------- -------------- --------------- ----------
Total interest-bearing deposits 195,297 4,813 3.29% 191,323 4,293 3.00%
----------- ----------- --------- -------------- --------------- ----------
Borrowed funds, long-term 30,000 995 4.43% 18,663 600 4.30%
Borrowed funds, short-term 1,297 52 5.36% 1,528 58 5.07%
----------- ----------- --------- -------------- --------------- ----------
Total borrowed funds 31,297 1,047 4.47% 20,191 658 4.36%
----------- ----------- --------- -------------- --------------- ----------
Total interest-bearing
liabilities 226,594 5,860 3.46% 211,514 4,951 3.13%
Noninterest-bearing demand
deposits 44,939 - - 43,604 - -
----------- ----------- --------- -------------- --------------- ----------
Funding and cost of funds 271,533 5,860 2.89% 255,118 4,951 2.59%
Other noninterest-bearing
liabilities 2,785 2,271
----------- --------------
Total liabilities 274,318 257,389
Stockholders' equity 24,069 23,623
----------- --------------
Total liabilities and
stockholders' equity $ 298,387 $ 281,012
=========== ----------- ============== ---------------
Net interest income $ 7,729 $ 7,301
=========== ===============
Interest rate spread (difference between 3.08% 3.15%
========= ==========
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.72% 3.74%
========= ==========
income as a percentage of average
interest-earning assets)
18
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.
(Dollar amounts in thousands) Nine months ended September 30,
2007 versus 2006
Increase (Decrease) due to
---------------------------------------
Volume Rate Total
--------------------------------------------------------------------------------
Interest income:
Loans $ 826 $ 330 $ 1,156
Securities (51) 106 55
Interest-earning deposits with banks 80 8 88
Federal bank stocks 17 21 38
------------ ----------- -------------
Total interest-earning assets 872 465 1,337
------------ ----------- -------------
Interest expense:
Deposits 91 429 520
Borrowed funds 371 18 389
------------ ----------- -------------
Total interest-bearing liabilities 462 447 909
------------ ----------- -------------
Net interest income $ 410 $ 18 $ 428
============ =========== =============
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 nine months ended September 30, 2007 and 2006 is as follows:
(Dollar amounts in thousands) At or for the nine months At or for the
ended year ended
September 30, December 31,
-------------------------- -----------------
2007 2006 2006
------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 2,035 $ 1,869 $ 1,869
Provision for loan losses 120 168 358
Charge-offs (63) (74) (221)
Recoveries 26 22 29
----------- ----------- -----------------
Balance at the end of the period $ 2,118 $ 1,985 $ 2,035
=========== =========== =================
Non-performing loans $ 931 $ 1,653 $ 1,841
Non-performing assets 1,015 1,739 1,939
Non-performing loans to total loans 0.41% 0.75% 0.85%
Non-performing assets to total assets 0.34% 0.59% 0.65%
Allowance for loan losses to total loans 0.93% 0.90% 0.94%
Allowance for loan losses to non-performing loans 227.48% 120.08% 110.54%
------------------------------------------------------------------------------------------------
19
The provision for loan losses decreased $48,000 or 28.6% to $120,000 for the
nine month period ended September 30, 2007 from $168,000 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 $120,000 in
the provision for loan losses during the nine months ended September 30, 2007.
Noninterest income. Noninterest income decreased $94,000 or 4.1% to $2.2 million
for the nine months ended September 30, 2007, compared to $2.3 million during
the same period in the prior year. This decrease can be attributed to decreases
in gains on the sale of securities of $182,000. Offsetting this decrease was
increases on fees and service charges, commissions earned on financial services,
gains on the sale of loans, earnings on bank-owned life insurance and other
noninterest income of $6,000, $9,000, $13,000, $19,000 and $42,000,
respectively.
Noninterest expense. Noninterest expense increased $167,000 or 2.5% to $6.9
million during the nine months ended September 30, 2007, compared to $6.7
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 $65,000 and $306,000, respectively, partially offset by
a decrease in compensation and benefits of $197,000.
Premises and equipment increased $65,000 or 5.7% to $1.2 million for the nine
months ended September 30, 2007, compared to $1.1 million 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 $306,000 or 19.2% to $1.9 million during the
nine months ended September 30, 2007, compared to $1.6 million for the same
period in the prior year. This increase can be attributed primarily to increases
in professional fees relating to Sarbanes-Oxley Section 404 compliance, data
processing center information technology initiatives and other operations and
compliance.
Compensation and benefits decreased $197,000 or 4.9% to $3.8 million for the
nine months ended September 30, 2007, compared to $4.0 million for the same
period the prior year. This decrease can be attributed primarily to cost savings
from staffing reductions associated with the 2006 reorganization, partially
offset by the costs associated with the staffing of one additional branch
facility opened in November 2006.
Effective January 1, 2007, the Federal Deposit Insurance Corporation (FDIC)
created a new risk framework of four risk categories and established assessment
rates to coincide with each category. Assessment rates for Risk Category I
institutions, which includes the Bank, range from 5 to 7 basis points. The FDIC
also approved a one-time assessment prior to that date. The Bank believes that
the one-time credit will more than offset the new FDIC assessment cost for 2007
and anticipates that the credit will be depleted in the second quarter of 2008.
Accordingly, the Bank will begin to recognize the FDIC assessment cost at that
time.
Provision for income taxes. The provision for income taxes increased $95,000 or
20.0% to $569,000 for the nine months ended September 30, 2007, compared to
$474,000 for the same period in the prior year. This was due to an increase in
pre-tax earnings of $227,000 to $2.6 million for the nine months ended September
30, 2007, compared to $2.4 million for the same period in the prior year and the
increase in the effective tax rate to 22.0% for the nine months ended September
30, 2007, compared to 20.1% for the same period in 2006. 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 nine months
ended September 30, 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 $27.8 million, and standby letters of
credit totaling $877,000.
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At September 30, 2007, time deposits amounted to $117.8 million or 49.9% of the
Corporation's total consolidated deposits, including approximately $67.5 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 September 30, 2007, the Corporation's borrowing capacity
with the FHLB, net of funds borrowed, was $108.7 million.
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.
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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.
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 September 30,
2007, the Corporation's interest-earning assets maturing or repricing within one
year totaled $77.7 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $103.6 million, providing an
excess of interest-bearing liabilities over interest-earning assets of $25.9
million or a negative 8.7% of total assets. At September 30, 2007, the
percentage of the Corporation's assets to liabilities maturing or repricing
within one year was 75.0%.
For more information, see "Market Risk ManaFgement" 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 September 30, 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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
23
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: November 9, 2007 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: November 9, 2007 By: /s/ William C. Marsh
---------------------------------------------
William C. Marsh
Chief Financial Officer and Treasurer
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