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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, 2006
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Commission File Number: 000-18464
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EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1606091
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
612 Main Street, Emlenton, Pennsylvania 16373
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(Address of principal executive offices) (Zip Code)
(724) 867-2311
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(Registrant's telephone number)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant's common stock was
1,267,835 at May 11, 2006.
================================================================================
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, 2006 and December 31, 2005......................................................................1
Consolidated Statements of Income for the three
months ended March 31, 2006 and 2005......................................................................2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005......................................................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2006 and 2005.................................................4
Notes to Consolidated Financial Statements................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................15
Item 4. Controls and Procedures..................................................................................15
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings........................................................................................16
Item 1A. Risk Factors.............................................................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................16
Item 3. Defaults upon Senior Securities..........................................................................16
Item 4. Submission of Matters to a Vote of Security Holders......................................................16
Item 5. Other Information........................................................................................16
Item 6. Exhibits.................................................................................................16
Signatures .........................................................................................................17
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements
- -------------------------------------
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of March 31, 2006 (Unaudited) and December 31, 2005
(Dollar amounts in thousands, except per share data)
March 31, December 31,
2006 2005
----------- ------------
Assets
------
Cash and due from banks $ 6,565 $ 9,399
Interest-earning deposits with banks 3,003 968
----------- ------------
Cash and cash equivalents 9,568 10,367
Securities available for sale, at fair value 54,881 56,289
Securities held to maturity; fair value of $14 and $14 14 15
Loans receivable, net of allowance for loan losses of $1,891 and $1,869 191,956 192,526
Federal bank stocks, at cost 1,578 1,773
Bank-owned life insurance 4,667 4,623
Accrued interest receivable 1,210 1,271
Premises and equipment, net 6,551 6,123
Goodwill 1,422 1,422
Prepaid expenses and other assets 1,252 1,108
----------- ------------
Total Assets $ 273,099 $ 275,517
=========== ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 42,451 $ 44,044
Interest-bearing 189,922 186,459
----------- ------------
Total deposits 232,373 230,503
Short-term borrowed funds - 4,500
Long-term borrowed funds 15,000 15,000
Accrued interest payable 628 607
Accrued expenses and other liabilities 1,419 1,292
----------- ------------
Total Liabilities 249,420 251,902
----------- ------------
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 13,921 13,678
Accumulated other comprehensive loss (205) (26)
----------- ------------
Total Stockholders' Equity 23,679 23,615
----------- ------------
Total Liabilities and Stockholders' Equity $ 273,099 $ 275,517
=========== ============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three months ended March 31, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended
March 31,
--------------------------
2006 2005
------------ -------------
Interest and dividend income:
Loans receivable, including fees $ 3,152 $ 2,884
Securities
Taxable 383 446
Exempt from federal income tax 173 173
Federal bank stocks 18 13
Deposits with banks 18 28
------------ -------------
Total interest and dividend income 3,744 3,544
------------ -------------
Interest expense:
Deposits 1,314 1,199
Borrowed funds 168 155
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Total interest expense 1,482 1,354
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Net interest income 2,262 2,190
Provision for loan losses 31 60
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Net interest income after provision for loan losses 2,231 2,130
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Noninterest income:
Fees and service charges 357 254
Commissions on financial services 101 99
Gains on securities 116 133
Gain on the sale of loans - 3
Earnings on bank-owned life insurance (BOLI) 50 50
Other 104 116
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Total noninterest income 728 655
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Noninterest expense:
Compensation and employee benefits 1,307 1,224
Premises and equipment 381 373
Intangible amortization expense 3 10
Other 524 480
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Total noninterest expense 2,215 2,087
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Income before provision for income taxes 744 698
Provision for income taxes 159 131
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Net income $ 585 $ 567
============ =============
Basic earnings per share $ 0.46 $ 0.45
Average common shares outstanding 1,267,835 1,267,835
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands)
For the three months ended
March 31,
--------------------------
2006 2005
------------ -------------
Operating Activities:
Net income $ 585 $ 567
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 182 187
Provision for loan losses 31 60
Amortization of premiums and accretion of discounts, net 11 39
Gain on sale of loans - (3)
Loans originated for sale - (150)
Proceeds from sales of loans held for sale - 342
Gains on securities (116) (133)
Earnings on bank-owned life insurance, net (44) (46)
(Increase) decrease in accrued interest receivable 61 (130)
Increase in prepaid expenses and other assets (41) (321)
Increase in accrued interest payable 21 2
Increase in accrued expenses and other liabilities 127 139
------------ -------------
Net cash provided by operating activities 817 553
------------ -------------
Investing Activities:
Loan originations and principal collections, net 522 (4,125)
Available-for-sale securities:
Sales 202 219
Maturities, prepayments and calls 1,153 1,750
Purchases (107) (3,174)
Held-to-maturity securities:
Maturities, prepayments and calls 1 1
Redemption of Federal bank stocks 195 184
Purchases of premises and equipment (610) (120)
------------ -------------
Net cash provided by (used in) investing activities 1,356 (5,265)
------------ -------------
Financing Activities:
Net increase in deposits 1,870 363
Decrease in short-term borrowed funds (4,500) -
Dividends paid on common stock (342) (316)
------------ -------------
Net cash provided by (used in) financing activities (2,972) 47
------------ -------------
Net decrease in cash and cash equivalents (799) (4,665)
Cash and cash equivalents at beginning of period 10,367 14,624
------------ -------------
Cash and cash equivalents at end of period $ 9,568 $ 9,959
============ =============
Supplemental information:
Interest paid $ 1,461 $ 1,352
Income taxes paid 10 -
Supplemental noncash disclosures:
Transfers from loans to foreclosed real estate $ - $ 86
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the three months ended March 31, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended
March 31,
--------------------------------
2006 2005
--------------- -------------
Balance at beginning of period $ 23,615 $ 23,616
Net income 585 567
Change in net unrealized losses on available for sale
securities, net of taxes (103) (613)
Less reclassification adjustment for gains included
in net income, net of taxes (76) (88)
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Other comprehensive loss (179) (701)
--------------- -------------
Total comprehensive income (loss) 406 (134)
Dividends declared (342) (316)
--------------------------------
Balance at end of period $ 23,679 $ 23,166
=============== =============
Common cash dividend per share $ 0.27 $ 0.25
=============== =============
See accompanying notes to consolidated financial statements.
4
Emclaire Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
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.
0The 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, 2005, as contained in the Corporation's 2005
Annual Report to Stockholders.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses. The results of operations for interim quarterly or year to date
periods are not necessarily indicative of the results that may be
expected for the entire year or any other period. Certain amounts
previously reported may have been reclassified to conform to the
current year's financial statement presentation.
2. Basic Earnings per Common Share.
The Corporation maintains a simple capital structure with no common
stock equivalents. Basic earnings per common share is calculated using
net income divided by the weighted average number of common shares
outstanding during the period.
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, 2006 and 2005 amounted to $21,000 and $17,000,
respectively.
5
3. Employee Benefit Plans (continued).
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.
The components of the periodic pension cost are as follows:
For the three months ended
March 31,
--------------------------------------
(Dollar amounts in thousands) 2006 2005
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Service cost $ 52 $ 42
Interest cost 58 51
Expected return on plan assets (66) (61)
Transition asset (2) (2)
Prior service costs (8) (8)
Recognized net actuarial (gain) loss 9 9
--------------------- ----------------
Net periodic pension cost $ 43 $ 31
===================== ================
The expected rate of return on plan assets is 8.50% for the periods ended
March 31, 2006 and 2005. The Corporation previously disclosed in its financial
statements for the year ended December 31, 2005 that it expected to contribute
$135,000 to its pension plan in 2006. The Corporation presently expects to
contribute $202,000 to fund its pension plan in 2006.
4. Securities.
The Corporation's securities as of the respective dates are summarized
as follows:
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Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale:
- -------------------
March 31, 2006:
U.S. Government agencies and related entities $34,351 $ - $ (948) $33,403
Mortgage-backed securities 2,889 - (152) 2,737
Municipal securities 14,686 591 - 15,277
Corporate securities 1,250 1 (1) 1,250
Equity securities 2,016 350 (152) 2,214
-------- -------- --------- ----------
$55,192 $ 942 $(1,253) $54,881
======== ======== ========= ==========
December 31, 2005:
U.S. Government agencies and related entities $34,353 $ - $ (818) $33,535
Mortgage-backed securities 3,046 - (124) 2,922
Municipal securities 14,685 664 - 15,349
Corporate securities 2,249 4 (4) 2,249
Equity securities 1,995 383 (144) 2,234
-------- -------- --------- ----------
$56,328 $1,051 $(1,090) $56,289
======== ======== ========= ==========
Held to maturity:
- -----------------
March 31, 2006:
Mortgage-backed securities $ 14 $ - $ - $ 14
-------- -------- --------- ----------
$ 14 $ - $ - $ 14
======== ======== ========= ==========
December 31, 2005:
Mortgage-backed securities $ 15 $ - $ (1) $ 14
-------- -------- --------- ----------
$ 15 $ - $ (1) $ 14
======== ======== ========= ==========
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6
5. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
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March 31, December 31,
(Dollar amounts in thousands) 2006 2005
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Mortgage loans on real estate:
Residential first mortgages $ 65,788 $ 66,011
Home equity loans and lines of credit 39,828 39,933
Commercial real estate 51,756 52,990
--------------------- ------------------
157,372 158,934
Other loans:
Commercial business 28,678 27,732
Consumer 7,797 7,729
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36,475 35,461
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Total loans, gross 193,847 194,395
Less allowance for loan losses 1,891 1,869
--------------------- ------------------
Total loans, net $ 191,956 $ 192,526
===================== ==================
6. Deposits.
The Corporation's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) March 31, 2006 December 31, 2005
- --------------------------------------------------------------------------------------------------------------------------
Type of accounts Amount % Amount %
- ------------------------------------------------------------------------------------------------------- ------------------
Noninterest-bearing deposits $ 42,451 18.3% $ 44,044 19.1%
Interest-bearing demand deposits 72,063 31.0% 74,067 32.1%
Time deposits 117,859 50.7% 112,392 48.8%
---------- ------ --------- ------
$232,373 100.0% $230,503 100.0%
========== ====== ========= ======
7. Guarantees.
The Corporation does not issue any guarantees that would require
liability recognition or disclosure, other than its standby letters of
credit. Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a third
party. Of these letters of credit at March 31, 2006, $252,000
automatically renews within the next twelve months, $56,000 will expire
within the next twelve months and $20,000 will expire after twelve
through thirteen months. The Corporation, generally, holds collateral
and/or personal guarantees supporting these commitments. Management
believes that the proceeds obtained through a liquidation of collateral
and the enforcement of guarantees would be sufficient to cover the
potential amount of future payments required under the corresponding
guarantees. The credit risk involved in issuing letters of credit is
essentially the same as those that are involved in extending loan
facilities to customers. The current amount of the liability as of
March 31, 2006 for guarantees under standby letters of credit issued is
not material.
7
8. Effect of Recently Issued Accounting Standards.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - An Amendment of FASB Statement No. 140" ("SFAS
156"). SFAS 156 requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value,
if practicable. The statement permits, but does not require, the
subsequent measurement of servicing assets and servicing liabilities at
fair value. SFAS 156 is effective as of the beginning of an entity's
first fiscal year that begins after September 15, 2006, which for the
Corporation will be as of the beginning of fiscal 2007. The Corporation
does not believe that the adoption of SFAS 156 will have a significant
effect 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-month period ended March 31, 2006 and should be read in conjunction with
the Corporation's Annual Report or Form 10-K filed with the Securities and
Exchange Commission and with the accompanying consolidated financial statements
and notes presented on pages 1 through 8 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.
CHANGES IN FINANCIAL CONDITION
Total assets decreased $2.4 million or 1.0% to $273.1 million at March 31, 2006
from $275.5 million at December 31, 2005. This decrease was primarily due to
decreases in cash and cash equivalents, securities and loans receivable of
$799,000, $1.4 million and $570,000, respectively. Partially offsetting this
decrease was an increase in premises and equipment of $428,000.
Cash and cash equivalents decreased $799,000 or 7.7% to $9.6 million at March
31, 2006 from $10.4 million at December 31, 2005. The decrease in cash and cash
equivalents was primarily due to funding loan originations as well as the
repayment of short-term borrowed funds.
Securities decreased $1.4 million or 2.5% to $54.9 million at March 31, 2006
from $56.3 million at December 31, 2005 as a result of security maturities and
sales of $1.2 million and an increase in unrealized losses on available for sale
securities of $272,000. The decrease in securities was primarily due to funding
loan originations as well as the repayment of short-term borrowed funds.
Loans receivable decreased $570,000 to $192.0 million at March 31, 2006 from
$192.5 million at December 31, 2005. Loan production gained momentum during the
first quarter of 2006 but was offset by several loan prepayments during the
quarter, particularly a substandard commercial mortgage of $1.3 million. This
downward trend is expected to reverse during the second quarter of 2006 based
upon our current loan pipeline of approximately $8.0 million in commercial
loans.
Short-term borrowed funds, consisting of overnight Federal Home Loan Bank
borrowings, decreased $4.5 million or 100% to $0 at March 31, 2006 from $4.5
million at December 31, 2005. The repayment of these overnight borrowings was
funded by excess cash, maturities of securities and growth in deposits.
8
Deposits increased $1.9 million or 1.0% to $232.4 million at March 31, 2006 from
$230.5 million at December 31, 2005 primarily as a result of an increase in time
deposits due to marketing campaigns set forth in the first quarter. Offsetting
this increase were decreases in noninterest-bearing and interest-bearing demand
deposits which has been experienced throughout our area as individuals are
searching for higher yielding investments such as certificates of deposit as
well as moving their monies from FDIC insured institutions to higher yielding
mutual funds and investing in the stock market.
Stockholders' equity increased $64,000 to $23.7 million at March 31, 2006 from
$23.6 million at December 31, 2005. This increase was the result of net income
of $585,000 offset by dividends declared of $342,000 and an increase in
accumulated other comprehensive loss of $179,000, net of taxes. The increase in
accumulated other comprehensive loss was the result of a decrease in the market
value of available for sale securities.
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended March 31, 2006 and 2005
General. Net income increased $18,000 or 3.2% to $585,000 for the three months
ended March 31, 2006 from $567,000 for the same period in 2005. This increase
was a result of increases in net interest income and noninterest income of
$72,000 and $73,000, respectively, and a decrease in the provision for loan
losses of $29,000, offset by increases in noninterest expenses and the provision
for income taxes of $128,000 and $28,000, respectively.
Net interest income. Net interest income on a tax equivalent basis increased
$71,000 or 3.1% to $2.4 million for the three months ended March 31, 2006 from
$2.3 million for the same period in 2005. This net increase can be attributed to
an increase in interest income of $199,000 offset by an increase in interest
expense of $128,000.
Interest income. Interest income on a tax equivalent basis increased $199,000 or
5.4% to $3.9 million for the three months ended March 31, 2006, compared to $3.7
million for the same period in the prior year. This increase can be attributed
to increases in interest earned on loans and federal bank stocks of $267,000 and
$5,000, respectively, offset by decreases in interest earned on securities and
interest-earning deposits with banks of $63,000 and $10,000, respectively.
The average balance of interest-earning cash equivalents decreased $4.3 million
or 55.7% to $3.4 million for the three months ended March 31, 2006, compared to
$7.7 million for the same period in the prior year. The decrease in the average
balance was primarily due to funding requirements for loan originations and
resulted in a $29,000 reduction in interest income. Offsetting this decrease in
volume was the increase in the yield on average interest-earning cash
equivalents of 213 basis points to 4.30% during the three months ended March 31,
2006, compared to 2.17% for the same period in the prior year. The increase in
yield, which was primarily due to increases in market rates, contributed an
additional $24,000 to interest income.
The average balance of securities decreased $9.4 million or 14.4% to $55.7
million for the three months ended March 31, 2006, compared to $65.1 million for
the same period in the prior year. The decrease in volume resulted in a $105,000
reduction in interest income. The decrease in the average balance of securities
was primarily due to funding requirements for loan originations. Offsetting this
decrease in volume was the increase in the yield on average securities of 27
basis points to 4.61% during the three months ended March 31, 2006, compared to
4.34% for the same period in the prior year.
The average balance of loans receivable increased $12.8 million or 7.1% to
$193.6 million for the three months ended March 31, 2006, compared to $180.8
million for the same period in the prior year primarily due to increases in
commercial mortgage loans, business loans and home equity loans as loan
production increased throughout 2005 and the first quarter 2006. The yield on
average loans receivable increased 12 basis points to 6.67% during the three
months ended March 31, 2006, compared to 6.55% for the same period in the prior
year. The increase in the average yield was primarily due to the origination of
loans with higher yields relative to portfolio loans as a result of the recent
increase in interest rates. The increase in volume and yield contributed an
additional $210,000 and $57,000, respectively, to interest income.
9
Interest expense. Interest expense increased $128,000 or 9.5% to $1.5 million
for the three months ended March 31, 2006, compared to $1.4 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 $115,000 and
$13,000, respectively.
Interest expense incurred on deposits increased $115,000 or 9.6% to $1.3 million
for the three months ended March 31, 2006, compared to $1.2 million for the same
period in the prior year. This increase in interest expense can be attributed to
the increase in the average rate of interest-bearing deposits of 30 basis points
to 2.83% at March 31, 2006 from 2.53% for the same period in the prior year.
This increase in yield resulted in an additional $141,000 of interest expense
between the three month period ended March 31, 2006 and 2005. Offsetting the
increase in yield was the decrease in the average balance of interest-bearing
deposits of $4.1 million or 2.1% to $188.2 million at March 31, 2006, compared
to $192.2 million for the same period in the prior year. The decrease in
interest-bearing deposits can be attributed to the movement of customer deposits
into mutual funds as well as investing in the stock market as they attempt to
obtain higher yields on their monies.
Interest expense incurred on borrowed funds increased $13,000 or 8.4% to
$168,000 for the three months ended March 31, 2006, compared to $155,000 for the
same period in the prior year. This increase in interest expense can be
attributed to the increase in the average balance of short-term borrowed funds
of $941,000 or 100% to $941,000 for the three months ended March 31, 2006,
compared to $0 for the same period in the prior year which resulted in an
additional $10,000 in interest expense. The average rate on the average balance
of borrowed funds increased 8 basis points to 4.27% for the three months ended
March 31, 2006 from 4.19% for the same period in the prior year and resulted in
an additional $3,000 in interest expense.
10
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 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.
- ------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
-----------------------------------------------
2006 2005
----------------------- -----------------------
Yield Yield
Average / Average /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $186,737 $3,077 6.68% $173,551 $2,805 6.55%
Loans, tax exempt 6,858 109 6.45% 7,234 114 6.42%
--------- ------- --------- -------
Total loans receivable 193,595 3,186 6.67% 180,785 2,919 6.55%
--------- ------- --------- -------
Securities, taxable 40,332 383 3.85% 49,541 446 3.65%
Securities, tax exempt 15,384 251 6.61% 15,527 251 6.54%
--------- ------- --------- -------
Total securities 55,716 634 4.61% 65,068 697 4.34%
--------- ------- --------- -------
Interest-earning deposits with banks 1,763 18 4.14% 6,066 28 1.87%
Federal bank stocks 1,635 18 4.46% 1,602 13 3.29%
--------- ------- --------- -------
Total interest-earning cash equivalents 3,398 36 4.30% 7,668 41 2.17%
--------- ------- --------- -------
Total interest-earning assets 252,709 3,856 6.19% 253,521 3,657 5.85%
Cash and due from banks 7,110 7,544
Other noninterest-earning assets 12,821 13,830
--------- ---------
Total Assets $272,640 $274,895
========= =========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $73,404 $ 146 0.81% $ 80,873 $146 0.73%
Time deposits 114,755 1,168 4.13% 111,373 1,053 3.83%
--------- ------- --------- -------
Total interest-bearing deposits 188,159 1,314 2.83% 192,246 1,199 2.53%
--------- ------- --------- -------
Borrowed funds, short-term 941 9 3.88% - - 0.00%
Borrowed funds, long-term 15,000 159 4.30% 15,000 155 4.19%
--------- ------- --------- -------
Total borrowed funds 15,941 168 4.27% 15,000 155 4.19%
--------- ------- --------- -------
Total interest-bearing liabilities 204,100 1,482 2.94% 207,246 1,354 2.65%
--------- ------- --------- -------
Noninterest-bearing demand deposits 42,316 - - 41,182 - -
--------- ------- --------- -------
Funding and cost of funds 246,416 1,482 2.44% 248,428 1,354 2.21%
Other noninterest-bearing liabilities 2,613 2,375
--------- ---------
Total Liabilities 249,029 250,803
Stockholders' Equity 23,611 24,092
--------- ---------
Total Liabilities and Stockholders' Equity $272,640 $274,895
========= ------- ========= -------
Net interest income $2,374 $2,303
======= =======
Interest rate spread (difference between 3.24% 3.20%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.81% 3.68%
income as a percentage of average
interest-earning assets)
11
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
- --------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
2006 versus 2005
Increase (Decrease) due to
-------------------------------
(Dollar amounts in thousands) Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 210 $ 57 $ 267
Securities (105) 42 (63)
Interest-earning deposits with banks (29) 19 (10)
Federal bank stocks - 5 5
----------- --------- ---------
Total interest-earning assets 76 123 199
----------- --------- ---------
Interest expense:
Deposits (26) 141 115
Borrowed funds 10 3 13
----------- --------- ---------
Total interest-bearing liabilities (16) 144 128
----------- --------- ---------
Net interest income $ 92 $ (21) $71
=========== ========= =========
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 the 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.
Information pertaining to the allowance for loan losses and non-performing
assets for the quarters ended March 31, 2006 and 2005 is as follows:
- ------------------------------------------------------------------------------------------------------------------------
At or for the three months ended
March 31,
-----------------------------------
(Dollar amounts in thousands) 2006 2005
- ------------------------------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,869 $ 1,810
Provision for loan losses 31 60
Charge-offs (15) (38)
Recoveries 6 18
--------------- --------------
Balance at the end of the period $1,891 $1,850
=============== ==============
Non-performing loans $ 1,256 $ 707
Non-performing assets 1,352 795
Non-performing loans to total loans 0.65% 0.38%
Non-performing assets to total assets 0.50% 0.29%
Allowance for loan losses to total loans 0.98% 1.00%
Allowance for loan losses to non-performing loans 150.56% 261.67%
- ------------------------------------------------------------------------------------------------------------------------
12
The provision for loan losses decreased $29,000 or 48.3% to $31,000 for the
three month period ended March 31, 2006 from $60,000 for the same period in the
prior year. Management's evaluation of the loan portfolio, including economic
trends, regulatory considerations and other factors contributed to the
recognition of $31,000 in the provision for loan losses during the three months
ended March 31, 2006.
Noninterest income. Noninterest income increased $73,000 or 11.2% to $728,000
during the three months ended March 31, 2006, compared to $655,000 during the
same period in the prior year. This increase can be attributed to increases in
customer fees and service charges and commissions earned on financial services
of $103,000 and $2,000, respectively. Offsetting this increase in noninterest
income were decreases in the gains on the sale of securities and loans and other
noninterest income of $17,000, $3,000 and $12,000, respectively.
The increase in customer fees and service charges of $103,000 or 40.6% was
primarily a result of the new overdraft privilege program, which was implemented
in April 2005.
Noninterest expense. Noninterest expense increased $128,000 or 6.1% to $2.2
million during the three months ended March 31, 2006, compared to $2.1 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in compensation and employee benefits, premises
and equipment and other noninterest expenses of $83,000, $8,000 and $44,000,
respectively. Offsetting this increase in noninterest expense was a decrease in
intangible amortization of $7,000.
Compensation and employee benefits expense increased $83,000 or 6.8% to $1.3
million during the three months ended March 31, 2006, compared to $1.2 million
for the same period in the prior year. Normal annual salary and wage
adjustments, the increase in full-time equivalents, increased employee
retirement costs, additional wages paid to temporary employees, higher
director's fees and commissions paid to a financial services representative were
the major components of this increase.
Premises and equipment expense increased $8,000 or 2.1% to $381,000 during the
three months ended March 31, 2006, compared to $373,000 for the same period in
the prior year. The increase was primarily due to increased occupancy costs
related to our new drive-thru facility in Brookville, as well as land purchased
for a new branch location.
Other noninterest expense increased $44,000 or 9.2% to $524,000 during the three
months ended March 31, 2006, compared to $480,000 for the same period in the
prior year. This increase can be attributed primarily to increases in
professional fees, printing and office supplies, postage and other expenses.
Partially offsetting these increases were decreases in telephone and
communication expenses and Pennsylvania shares tax expense between the two
periods.
Provision for income taxes. The provision for income taxes increased $28,000 or
21.4% to $159,000 for the three months ended March 31, 2006, compared to
$131,000 for the same period in the prior year due primarily to an increase in
the Corporation's pre-tax earnings base between the first quarter of 2006 and
2005. Also contributing to the increase was the increase in the effective tax
rate to 21.4% in 2006 from 18.8% in 2005 due to the expiration of tax credits
generated in previous years. 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.
13
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, 2006, the Corporation used its sources of funds primarily
to fund loan originations and for the repayment of short-term borrowed funds. As
of such date, the Corporation had outstanding loan commitments, including
undisbursed loans and amounts available under credit lines, totaling $26.7
million, and standby letters of credit totaling $581,000.
At March 31, 2006, time deposits amounted to $117.9 million or 50.7% of the
Corporation's total consolidated deposits, including approximately $47.0 million
which are scheduled to mature within the next year. Management of the
Corporation believes that it has adequate resources to fund all of its
commitments, that all of its commitments will be funded as required by related
maturity dates and that, based upon past experience and current pricing
policies, it can adjust the rates of time deposits to retain a substantial
portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and
maturities of securities, the Corporation has alternative sources of funds such
as a term borrowing capacity from the FHLB and, to a limited and rare extent,
the sale of loans. At March 31, 2006, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $114.7 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.
14
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 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
depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation's asset/liability management
committee is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability committee is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of the bank's rate sensitive assets and rate sensitive
liabilities. These differences, or interest rate repricing "gap", provide an
indication of the extent that the Corporation's net interest income is affected
by future changes in interest rates. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income. Conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The closer to zero that gap is maintained, generally, the lesser the impact of
market interest rate changes on net interest income.
Based on certain assumptions provided by a federal regulatory agency, which
management believes most accurately represents the sensitivity of the
Corporation's assets and liabilities to interest rate changes, at March 31,
2006, the Corporation's interest-earning assets maturing or repricing within one
year totaled $61.7 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $82.6 million, providing an excess
of interest-bearing liabilities over interest-earning assets of $20.9 million or
a negative 7.7% of total assets. At March 31, 2006, the percentage of the
Corporation's assets to liabilities maturing or repricing within one year was
74.7%.
For more information, see "Market Risk Management" in Exhibit 13 to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2005.
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).
15
As of the quarter ended March 31, 2006, 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 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.
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 from risk factors as previously disclosed in
the 2005 Form 10-K.
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 10 Form of Change of Control Agreement with Executive Officers
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
16
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Date: May 11, 2006 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: May 11, 2006 By: /s/ Shelly L. Rhoades
--------------------------------------------
Treasurer
(Principal Financial and Accounting Officer)
17