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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 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.
Indicate by check mark whether the registrant is an accelerated filer (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 April 30, 2004.
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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
March 31, 2004 and December 31, 2003...................................1
Consolidated Income Statements for the three
months ended March 31, 2004 and 2003...................................2
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003...................................3
Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 2004 and 2003..............4
Notes to Consolidated Financial Statements.............................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............12
Item 4. Controls and Procedures...............................................12
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.....................................................13
Item 2. Changes in Securities and Use of Proceeds.............................13
Item 3. Defaults Upon Senior Securities.......................................13
Item 4. Submission of Matters to a Vote of Security Holders...................13
Item 5. Other Information.....................................................13
Item 6. Exhibits and Reports on Form 8-K......................................13
Signatures ................................................................14
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
- -------------------------------------
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of March 31, 2004 (Unaudited) and December 31, 2003
(Dollar amounts in thousands, except share data)
March 31, December 31,
2004 2003
------------ ------------
Assets
------
Cash and due from banks $ 6,124 $ 6,776
Interest-earning deposits in banks 4,113 927
------------ ------------
Cash and cash equivalents 10,237 7,703
Securities available for sale 51,640 49,145
Securities held to maturity; fair value of $17 and $17 17 17
Loans receivable, net of allowance for loan losses of
$1,827 and $1,777 186,650 190,482
Federal bank stocks, at cost 1,719 1,982
Bank-owned life insurance 4,324 4,272
Accrued interest receivable 1,313 1,270
Premises and equipment 5,247 5,223
Goodwill 1,422 1,422
Core deposit intangibles 46 54
Prepaid expenses and other assets 1,062 942
------------ ------------
Total assets $ 263,677 $ 262,512
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 37,744 $ 36,332
Interest bearing 185,820 180,778
------------ ------------
Total deposits 223,564 217,110
Borrowed funds 15,000 20,700
Accrued interest payable 490 477
Accrued expenses and other liabilities 1,419 1,570
------------ ------------
Total liabilities 240,473 239,857
------------ ------------
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 11,306 11,033
Accumulated other comprehensive income 1,935 1,659
------------ ------------
Total stockholders' equity 23,204 22,655
------------ ------------
Total liabilities and stockholders' equity $ 263,677 $ 262,512
============ ============
Common shares outstanding 1,267,835 1,267,835
Book value per share $ 18.30 $ 17.87
Tangible book value per share $ 17.14 $ 16.70
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Income Statements
For the three months ended March 31, 2004 and 2003 (Unaudited)
(Dollar amounts in thousands, except share data)
Three months ended
March 31,
-------------------------
2004 2003
------------ ------------
Interest and dividend income:
Loans receivable $ 2,983 $ 2,981
Securities:
Taxable 290 342
Exempt from federal income tax 174 193
Federal bank stocks 11 15
Deposits with banks and federal funds sold 5 13
------------ ------------
Total interest income 3,463 3,544
------------ ------------
Interest expense:
Deposits 1,090 1,110
Borrowed funds 161 107
------------ ------------
Total interest expense 1,251 1,217
------------ ------------
Net interest income 2,212 2,327
Provision for loan losses 55 75
------------ ------------
Net interest income after provision for loan losses 2,157 2,252
------------ ------------
Noninterest income:
Service fees 264 243
Gain on sale of securities available for sale 83 14
Gain (Loss) on sale of loans held for sale (2) -
Earnings on bank-owned life insurance 56 58
Other 79 68
------------ ------------
Total noninterest income 480 383
------------ ------------
Noninterest expense:
Compensation and employee benefits 1,086 1,093
Premises and equipment, net 302 289
Intangible amortization expense 8 36
Other 554 502
------------ ------------
Total noninterest expense 1,950 1,920
------------ ------------
Income before provision for income taxes 687 715
Provision for income taxes 122 175
------------ ------------
Net income $ 565 $ 540
============ ============
Basic Earnings per Share $ 0.45 $ 0.41
Weighted average common shares outstanding 1,267,835 1,332,835
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 (Unaudited)
(Dollar amounts in thousands)
For the Three Months
Ended March 31,
-------------------------
2004 2003
------------ ------------
Net income $ 565 $ 540
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization for premises and
equipment 125 98
Provision for loan losses 55 75
Amortization of premiums and accretion of
discounts, net 60 45
Gain (Loss) on sale of loans 2 -
Gain on sale of available for sale securities (83) (14)
Earnings on bank-owned life insurance, net (52) (55)
Amortization of intangible assets 8 36
Change in accrued interest receivable (43) 55
Change in prepaid expenses and other assets (120) (334)
Change in accrued interest payable 13 (13)
Change in accrued expenses and other liabilities (151) 279
Other (49) (21)
------------ ------------
Net cash from operating activities 330 691
------------ ------------
Loan originations, net of principal collections 3,764 (173)
Purchases of securities available for sale (4,212) (13,023)
Redemption (Purchases) of Federal bank stocks 263 (227)
Repayments, maturities and calls of securities
available for sale 1,950 13,640
Principal repayments of securities held to maturity - 11
Proceeds from the sale of securities available for
sale 126 245
Purchases of premises and equipment (149) (403)
------------ ------------
Net cash from investing activities 1,742 70
------------ ------------
Net increase in deposits 6,454 6,825
Increase (Decrease) in overnight borrowed funds (5,700) -
Dividends paid on common stock (292) (280)
------------ ------------
Net cash from financing activities 462 6,545
------------ ------------
2,534 7,306
7,703 7,716
------------ ------------
$ 10,237 $ 15,022
============ ============
Interest paid $ 1,238 $ 1,230
Income taxes paid - 48
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
For the three months ended March 31, 2004 and 2003 (Unaudited)
(Dollar amounts in thousands)
Three Months Ended,
March 31,
2004 2003
------------ ------------
Balance at beginning of period $ 22,655 $ 22,680
Net income 565 540
Change in net unrealized gain on available
for sale securities, net of taxes 330 93
Less reclassification adjustment for gains
included
in net income, net of taxes (54) (9)
------------ ------------
Other comprehensive income 276 84
Total comprehensive income 841 624
Dividends paid (292) (280)
------------ ------------
Balance at end of period $ 23,204 $ 23,024
============ ============
Common cash dividend per share $ 0.23 $ 0.21
------------ ------------
See accompanying notes to consolidated financial statements.
4
Emclaire Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Emclaire Financial Corp. (the Corporation) is a Pennsylvania corporation
and bank holding company that provides a full range of retail and
commercial financial products and services to customers in western
Pennsylvania through its wholly owned subsidiary bank, the Farmers National
Bank of Emlenton (the Bank), a national banking association. The
consolidated financial statements contained herein include the accounts of
the Corporation and the Bank, which operate as one operating segment. All
inter-company amounts have been eliminated.
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 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,
2003, as contained in the Corporation's 2003 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 and deferred tax
assets. 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 Share
The Corporation maintains a simple capital structure with no potentially
dilutive instruments. Earnings per share computations are based on the
weighted average number of common shares outstanding of 1,267,835 and
1,332,835 shares for the three month periods ending March 31, 2004 and
2003, respectively.
3. Employee Benefit Plans
Defined Contribution Plan.
--------------------------
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 makes matching contributions as approved by the Board of
Directors. Matching contributions for the three months ended March 31, 2004
was $16,000.
Defined Benefit Plan.
--------------------
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 a December 31 measurement date for its plans.
5
3. Employee Benefit Plans (Continued)
Defined Benefit Plan (Continued)
--------------------------------
Information pertaining to the components of the periodic pension cost is as
follows:
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March 31, March 31,
(Dollar amounts in thousands) 2004 2003
- --------------------------------------------------------------------------------
Service cost $ 41 $ 37
Interest cost 46 41
Expected return on plan assets (53) (44)
Transition asset (2) (2)
Prior service costs (8) (8)
Recognized net actuarial (gain) loss 8 12
------------------------------
Net periodic pension cost $ 32 $ 36
------------------------------
The expected rate of return on plan assets 8.50% for the periods ended March 31,
2004 and December 31, 2003. The Corporation expects to contribute $209,292 to
its pension plan in 2004.
6
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
month period ended March 31, 2004 and should be read in conjunction with the
accompanying consolidated financial statements and notes presented on pages 1
through 6.
The Private Securities Litigation 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.
CHANGES IN FINANCIAL CONDITION
Total assets increased $1.2 million to $263.7 million at March 31, 2004 from
$262.5 million at December 31, 2003. This increase was primarily due to
increases in cash and cash equivalents and securities of $2.5 million and $2.5
million, respectively, partially offset by a decrease in loans receivable of
$3.8 million.
Cash and cash equivalents increased $2.5 million or 32.9% to $10.2 million at
March 31, 2004 from $7.7 million at December 31, 2003 primarily as a result of
the increase in deposits of $6.5 million and decrease of loans receivable of
$3.8 million, offset by the purchase of $2.5 million of securities and the
repayment of $5.7 million of overnight borrowings.
Securities increased $2.5 million or 5.1% to $51.7 million at March 31, 2004
from $49.2 million at December 31, 2003 as a result of investing deployable
funds in US government agencies and commercial paper. These types of investments
are considered safe and sound and complement the overall asset/liability and
liquidity objectives of the Corporation.
Loans receivable decreased $3.8 million or 2.0% to $186.7 million at March 31,
2004 from $190.5 million at December 31, 2003. During the three months ended
March 31, 2004, the refinancing activity experienced in 2003 has begun to slow
down as rates continue to remain low. Also contributing to the change in loan
volume was the pay-off of two short-term commercial loans financed in the fourth
quarter 2003. Management believes that lending activities will increase in the
second quarter based on the trends experienced in prior years and the outlook on
the economy as key economic data indicates growth.
Deposits increased $6.5 million or 3.0% to $223.6 million at March 31, 2004 from
$217.1 million at December 31, 2003. The increase in deposits during the period
can be attributed primarily to the introduction of a new step-up Certificate of
Deposit product in March 2004 and the marketing efforts put forth in our Clarion
market.
Borrowed funds decreased $5.7 million or 27.5% to $15.0 million at March 31,
2004 from $20.7 million at December 31, 2003 as a result of the decrease in FHLB
overnight borrowings of $5.7 million.
Stockholders' equity increased $549,000 or 2.4% to $23.2 million at March 31,
2004 from $22.7 million at December 31, 2003. This increase was the result of
increases in retained earnings of $273,000, comprised of net income of $565,000
offset by dividends paid of $292,000, and in accumulated other comprehensive
income of $276,000.
7
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended March 31, 2004 and 2003
General. Net income for the three months ended March 31, 2004 increased $25,000
or 4.6% to $565,000 from $540,000 for the three months ended March 31, 2003.
This increase was a result of decreases in the provision for loan losses and
income taxes of $20,000 and $53,000, respectively, and an increase in
noninterest income of $97,000. Offsetting these favorable variances was a
decrease in net interest income of $115,000 and an increase in noninterest
expenses of $30,000.
Net interest income. Net interest income on a tax equivalent basis decreased
$108,000 or 4.5% to $2.3 million for the three months ended March 31, 2004 from
$2.4 million for the same period in 2003. This net decrease can be attributed to
a decrease in interest income of $74,000 and an increase in interest expense of
$34,000.
Interest income. Interest income on a tax equivalent basis decreased $74,000 or
2.0% to $3.57 million for the three months ended March 31, 2004, compared to
$3.64 million for the same period in the prior year. This decrease in interest
income can be attributed to a 66 basis point decline in the interest rate on
average interest-earning assets to 5.91% during the three months ended March 31,
2004, compared to 6.57% for the same period in the prior year. The yield on
average loans and securities decreased to 6.40% and 4.34%, respectively, during
the three months ended March 31, 2004, compared to 7.11% and 5.30%,
respectively, for the same period in the prior year. Offsetting this decline in
yield on loans and securities was a slight increase in the yield on
interest-earning deposits to 1.75% for the three months ended March 31, 2004,
compared to 1.73% for the same period in the prior year. The decrease in
interest income due to rate was offset by an increase in the average balance of
interest-earning assets, as average loans receivable and securities increased to
$189.7 million and $49.7 million, respectively, during the three months ended
March 31, 2004, compared to $171.1 million and $47.1 million, respectively,
during the same period in the prior year. Offsetting the increase in average
loans receivable and securities was a decrease in the average balance of
interest-earning cash and cash equivalents to $3.7 million during the three
months ended March 31, 2004, compared to $6.6 million during the same period in
the prior year. Increases in average loans and securities between quarterly
periods were funded by deposit growth and borrowed funds. See comments in the
"Changes in Financial Condition" section above for discussion of security and
deposit growth factors.
Interest expense. Interest expense increased $34,000 or 2.8% to $1.25 million
for the three months ended March 31, 2004, compared to $1.22 million for the
same period in the prior year. This increase in interest expense can be
attributed to an increase in the average balance of interest-bearing
liabilities, as average interest-bearing deposits and borrowed funds increased
to $182.4 million and $17.0 million, respectively, during the three months ended
March 31, 2004, compared to $172.6 million and $10.0 million, respectively,
during the same period in the prior year. The increase in interest expense due
to volume was partially offset by an 18 basis point decline in the interest rate
on average interest-bearing liabilities to 2.52% during the three months ended
March 31, 2004, compared to 2.70% for the same period in the prior year. The
average cost of deposits decreased to 2.40% during the three months ended March
31, 2004, compared to 2.61% for the same period in the prior year.
8
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for 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 costs. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis.
- ------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended March 31,
2004 2003
------------------------------- ------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $182,159 $2,899 6.40% $166,929 $2,937 7.14%
Loans, tax exempt 7,522 118 6.32% 4,137 63 6.13%
---------- ---------- --------- ---------- ---------- --------
189,681 3,017 6.40% 171,066 3,000 7.11%
---------- ---------- --------- ---------- ---------- --------
Securities, taxable 34,015 290 3.43% 30,356 342 4.57%
Securities, tax exempt 15,652 246 6.32% 16,760 273 6.62%
---------- ---------- --------- ---------- ---------- --------
49,667 536 4.34% 47,116 615 5.30%
---------- ---------- --------- ---------- ---------- --------
Interest-earning cash equivalents 1,778 5 1.13% 5,076 13 1.04%
Federal bank stocks 1,909 11 2.32% 1,487 15 4.09%
---------- ---------- --------- ---------- ---------- --------
3,687 16 1.75% 6,563 28 1.73%
---------- ---------- --------- ---------- ---------- --------
Total interest-earning assets 243,035 3,569 5.91% 224,745 3,643 6.57%
Cash and due from banks 6,349 5,347
Other noninterest-earning assets 11,408 9,854
---------- ----------
Total assets $260,792 $239,946
========== ==========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $76,507 $114 0.60% $73,386 $157 0.87%
Time deposits 105,911 976 3.71% 99,238 953 3.89%
---------- ---------- --------- ---------- ---------- --------
182,418 1,090 2.40% 172,624 1,110 2.61%
---------- ---------- --------- ---------- ---------- --------
Borrowed funds, term 15,000 156 4.18% 10,000 107 4.34%
Borrowed funds, overnight 2,017 5 1.00% 32 - 0.00%
---------- ---------- --------- ---------- ---------- --------
17,017 161 3.81% 10,032 107 4.33%
---------- ---------- --------- ---------- ---------- --------
Total interest-bearing liabilities 199,435 1,251 2.52% 182,656 1,217 2.70%
Noninterest-bearing demand deposits 36,327 - - 32,940 -
---------- ---------- --------- ---------- ---------- --------
Funding and cost of funds 235,762 1,251 2.13% 215,596 1,217 2.29%
Other noninterest-bearing
liabilities 1,977 1,416
---------- ----------
Total liabilities 237,739 217,012
Stockholders' equity 23,053 22,934
---------- ----------
Total liabilities and stockholders'
equity $260,792 $239,946
========== ---------- ========== ----------
Net interest income $2,318 $2,426
========== ==========
Interest rate spread (difference 3.38% 3.87%
between weighted average rate on ========= ========
interest-earning assets and interest-
bearing liabilities)
Net interest margin (net interest 3.84% 4.38%
income as a percentage of average ========= ========
interest-earning assets)
9
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.
- --------------------------------------------------------------------------------
(In thousands) Three months ended March 31,
2004 versus 2003
Increase (decrease) due to
-------------------------------------
Volume Rate Total
- --------------------------------------------------------------------------------
Interest income:
Loans $310 $(293) $17
Securities 32 (111) (79)
Interest-earning cash equivalents (9) 1 (8)
Federal bank stocks 4 (8) (4)
-------- -------- ---------
Total interest-earning assets 337 (411) (74)
-------- -------- ---------
Interest expense:
Deposits 61 (81) (20)
Borrowed funds 67 (13) 54
-------- -------- ---------
Total interest-bearing liabilities 128 (94) 34
-------- -------- ---------
Net interest income $209 $(317) $(108)
======== ======== =========
- --------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
probable losses inherent in the loan portfolio. In determining the appropriate
level of allowance for loan losses, 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.
The provision for loan losses decreased $20,000 or 27.0% to $55,000 for the
three month period ending March 31, 2004 from $75,000 for the same period in the
prior year. The provision also decreased $50,000 or 47.6% from the fourth
quarter 2003 expense of $105,000. Although the loan volume decreased slightly in
the first quarter 2004, the actual allowance level reflected an increase of
$50,000 to $1.83 million at March 31, 2004 from $1.78 million at December 31,
2003. This was a result of lower first quarter charged-off loans combined with
management's belief that a provision was necessary due to economic trends,
regulatory considerations and other factors. Nonperforming loans also decreased
$248,000 or 18.7% to $1.1 million at March 31, 2004 from $1.3 million at
December 31, 2003. This was a result of the change in the status of two
commercial mortgages from nonperforming to performing.
Noninterest income. Noninterest income increased $97,000 or 25.3% to $480,000
during the three months ended March 31, 2004, compared to $383,000 during the
same period in the prior year. This increase can be attributed to the increase
in customer service fees, gains on the sale of marketable equity securities and
other noninterest income of $21,000, $69,000 and $11,000, respectively. The
increase in customer service fees was a result of the increase in the overdraft
fees and also the increase in the number of accounts. Offsetting this favorable
variance was a decrease in the gains on loans sold and earnings on bank-owned
life insurance of $2,000 and $2,000, respectively.
10
Noninterest expense. Noninterest expense increased $30,000 or 1.6% to $1.95
million during the three months ended March 31, 2004, compared to $1.92 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in premises and equipment expense and other
noninterest expense of $13,000 and $52,000, respectively. This unfavorable
variance was offset by decreases in compensation and employee benefits and
intangible amortization expense of $7,000 and $28,000, respectively.
Compensation and employee benefits expense decreased $7,000 to $1.086 million
during the three months ended March 31, 2004, compared to $1.093 million for the
same period in the prior year. This decrease can be attributed to the reduction
of full-time equivalents between the two periods.
Premises and equipment expense increased $13,000 or 4.5% to $302,000 during the
three months ended March 31, 2004, compared to $289,000 for the same period in
the prior year. This increase can be primarily attributed to increased building
and equipment depreciation expenses of $6,000 and $18,000, respectively.
Contributing to the increases in depreciation expenses between the two periods
was the completion of the construction on the main office building during the
fourth quarter of 2003 and the addition of a new mainframe and imaging system in
January 2004. Partially offsetting this increase between the two periods was the
decrease in office rent of $16,000, as a direct result of the closing of our
Clarion Mall office in March 2003.
Intangible amortization expense decreased $28,000 or 77.8% to $8,000 during the
three months ended March 31, 2004, compared to $36,000 for the same period in
the prior year. This variance was a result of the cessation of amortization
expense on three branches previously acquired which were fully amortized in the
fourth quarter of 2003.
Other noninterest expense increased $52,000 or 10.4% to $554,000 during the
three months ended March 31, 2004, compared to $502,000 for the same period in
the prior year. This increase can be attributed primarily to increases in
telephone and communication expenses, software depreciation and insurance
expenses. Partially offsetting this unfavorable variance were decreases in
Pennsylvania shares taxes, postage and marketing expenses between the two
periods.
Provision for income taxes. The provision for income taxes decreased $53,000 or
30.3% to $122,000 for the three months ended March 31, 2004, compared to
$175,000 for the same period in the prior year. Contributing to this favorable
variance was of the decrease in the Corporation's effective tax rate resulting
from the investment in bank-owned life insurance and increased investments in
tax-free municipal securities and loans, as well as historic tax credits
attributable to the remodeling of the Corporation's headquarters. Also
contributing was a decrease in the Corporation's pre-tax earnings base between
the first quarter 2004 and 2003.
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, 2004, the Corporation used its sources of funds primarily
to purchase securities and payoff overnight borrowings from the FHLB. As of such
date, the Corporation had outstanding loan commitments, including undisbursed
loans and amounts available under credit lines, totaling $16.3 million, and
standby letters of credit totaling $602,000.
At March 31, 2004, time deposits amounted to $111.4 million or 49.8% of the
Corporation's total consolidated deposits, including approximately $30.8
million, which were 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.
11
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, 2004, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $93.4 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.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Market risk for the Corporation is comprised primarily from interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning assets
and paying 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
are depended 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.
At March 31, 2004, the Corporation's interest-earning assets maturing or
repricing within one year totaled $99.3 million while the Corporation's
interest-bearing liabilities maturing or repricing within one-year totaled
$105.3 million, providing an excess of interest-bearing liabilities over
interest-earning assets of $6.0 million or a negative 2.3% of total assets. At
March 31, 2004, the percentage of the Corporation's assets to liabilities
maturing or repricing within one year was 94.3%.
Market risk information will be presented in more detail in the 2004 Annual
Report.
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 Principal Financial and Accounting 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).
As of the quarter ended March 31, 2004, 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 the Corporation's Principal Financial and Accounting 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 Principal Financial and Accounting 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.
13
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 2. Changes in 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
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Principal Financial and
Accounting Officer
Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 PFO Certification Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
The Corporation filed a Form 8-K dated March 25, 2004 to announce fourth
quarter 2003 earnings.
The Corporation filed a Form 8-K dated May 14, 2004 to announce first
quarter 2004 earnings.
14
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.
Date: May 14, 2004 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: May 14, 2004 By: /s/ Shelly L. Rhoades
--------------------------------------------
Assistant Controller
(Principal Financial and Accounting Officer)
15