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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 000-18464
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EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1606091
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(State or other jurisdiction of (IRS Employer
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 [X] 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 August 10, 2007.
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EMCLAIRE FINANCIAL CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 2007 and December 31, 2006..................................1
Consolidated Statements of Income for the three and six
months ended June 30, 2007 and 2006..................................2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2007 and 2006..................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three and six months ended June 30, 2007 and 2006.....4
Notes to Consolidated Financial Statements...........................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........20
Item 4. Controls and Procedures.............................................21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 1A. Risk Factors........................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........22
Item 3. Defaults upon Senior Securities.....................................22
Item 4. Submission of Matters to a Vote of Security Holders.................22
Item 5. Other Information...................................................22
Item 6. Exhibits............................................................22
Signatures...................................................................23
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements
-------------------------------------
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2007 (Unaudited) and December 31, 2006
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2007 2006
------------------------ ---------------------
Assets
------
Cash and due from banks $ 6,044 $ 7,540
Interest-earning deposits with banks 126 9,177
----------------------- ---------------------
Cash and cash equivalents 6,170 16,717
Securities available for sale, at fair value 52,712 51,774
Loans receivable, net of allowance for loan losses of $2,086 and $2,035 220,149 213,344
Federal bank stocks, at cost 2,393 2,217
Bank-owned life insurance 4,889 4,794
Accrued interest receivable 1,379 1,374
Premises and equipment, net 7,812 7,958
Goodwill 1,422 1,422
Deferred tax asset 756 533
Prepaid expenses and other assets 666 427
----------------------- ---------------------
Total Assets $ 298,348 $ 300,560
======================= =====================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 45,786 $ 44,045
Interest-bearing 194,182 200,447
----------------------- ---------------------
Total deposits 239,968 244,492
Short-term borrowed funds 1,700 -
Long-term borrowed funds 30,000 30,000
Accrued interest payable 721 825
Accrued expenses and other liabilities 1,969 1,326
----------------------- ---------------------
Total Liabilities 274,358 276,643
----------------------- ---------------------
Stockholders' Equity:
Preferred stock, $1.00 par value, 3,000,000 shares authorized;
none issued - -
Common stock, $1.25 par value, 12,000,000 shares authorized;
1,395,852 shares issued; 1,267,835 shares outstanding 1,745 1,745
Additional paid-in capital 10,872 10,871
Treasury stock, at cost; 128,017 shares (2,653) (2,653)
Retained earnings 14,892 14,370
Accumulated other comprehensive loss (866) (416)
----------------------- ---------------------
Total Stockholders' Equity 23,990 23,917
----------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 298,348 $ 300,560
======================= =====================
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three and six months ended June 30, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the six months ended
June 30, June 30,
----------------------------- ---------------------------
2007 2006 2007 2006
-------------- ------------ ------------- -------------
Interest and dividend income:
Loans receivable, including fees $ 3,788 $ 3,344 $ 7,392 $ 6,496
Securities:
Taxable 419 367 783 750
Exempt from federal income tax 172 174 345 348
Federal bank stocks 21 23 71 40
Deposits with banks 16 23 137 41
-------------- ------------ ------------- -------------
Total interest and dividend income 4,416 3,931 8,728 7,675
-------------- ------------ ------------- -------------
Interest expense:
Deposits 1,568 1,448 3,235 2,763
Borrowed funds 350 166 686 334
-------------- ------------ ------------- -------------
Total interest expense 1,918 1,614 3,921 3,097
-------------- ------------ ------------- -------------
Net interest income 2,498 2,317 4,807 4,578
Provision for loan losses 30 47 75 78
-------------- ------------ ------------- -------------
Net interest income after provision for loan losses 2,468 2,270 4,732 4,500
-------------- ------------ ------------- -------------
Noninterest income:
Fees and service charges 391 377 716 734
Commissions on financial services 81 114 243 215
Net gain on available for sale securities 118 126 176 242
Net gain on sales of loans 7 - 7 -
Earnings on bank-owned life insurance 54 41 108 91
Other 121 111 253 215
-------------- ------------ ------------- -------------
Total noninterest income 772 769 1,503 1,497
-------------- ------------ ------------- -------------
Noninterest expense:
Compensation and employee benefits 1,245 1,290 2,550 2,597
Premises and equipment 401 372 801 753
Intangible amortization expense - 3 - 5
Other 690 588 1,295 1,113
-------------- ------------ ------------- -------------
Total noninterest expense 2,336 2,253 4,646 4,468
-------------- ------------ ------------- -------------
Income before provision for income taxes 904 786 1,589 1,529
Provision for income taxes 197 184 331 342
-------------- ------------ ------------- -------------
Net income $ 707 $ 602 $ 1,258 $ 1,187
============== ============ ============= =============
Basic and diluted earnings per share $ 0.56 $ 0.47 $ 0.99 $ 0.94
Average common shares outstanding 1,267,835 1,267,835 1,267,835 1,267,835
Dilutive shares -
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands)
For the six months ended
June 30,
--------------------------------
2007 2006
--------------- ----------------
Cash flows from operating activities
Net income $ 1,258 $ 1,187
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 332 370
Provision for loan losses 75 78
Amortization of premiums and accretion of discounts, net 6 20
Amortization of intangible assets and mortgage servicing rights 8 8
Realized gain on sales of available for sale securities, net (176) (242)
Net gains on sales of loans (7) -
Stock compensation expense 1 -
Earnings on bank owned life insurance, net (95) (79)
(Increase) decrease in accrued interest receivable (5) 60
(Increase) decrease in prepaid expenses and other assets (237) 1
Increase (decrease) in accrued interest payable (104) 66
Increase (decrease) in accrued expenses and other liabilities 643 (185)
--------------- ----------------
Net cash provided by operating activities 1,699 1,284
--------------- ----------------
Cash flows from investing activities
Loan originations and principal collections, net (7,482) (17,518)
Proceeds from the sale of loans 605 -
Available for sale securities:
Sales 989 413
Maturities, repayments and calls 9,256 4,054
Purchases (11,693) (528)
Held to maturity securities:
Maturities, repayments and calls - 1
Purchases of federal bank stocks (176) (331)
Purchases of premises and equipment (186) (974)
--------------- ----------------
Net cash used in investing activities (8,687) (14,883)
--------------- ----------------
Cash flows from financing activities
Net increase (decrease) in deposits (4,524) 7,981
Net increase in overnight borrowed funds 1,700 1,700
Dividends paid on common stock (735) (685)
--------------- ----------------
Net cash provided by (used in) financing activities (3,559) 8,996
--------------- ----------------
Net decrease in cash and cash equivalents (10,547) (4,603)
Cash and cash equivalents at beginning of period 16,717 10,367
--------------- ----------------
Cash and cash equivalents at end of period $ 6,170 $ 5,764
=============== ================
Supplemental information:
Interest paid $ 4,025 $ 3,031
Income taxes paid 126 390
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the three and six months ended June 30, 2007 and 2006 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2007 2006 2007 2006
-------------- ------------- ------------- --------------
Balance at beginning of period $ 24,069 $ 23,679 $ 23,917 $ 23,615
Net income 707 602 1,258 1,187
Other comprehensive income (loss):
Change in net unrealized gains (losses) on available
for sale securities, net of taxes (341) (376) (335) (477)
Less reclassification adjustment for gains included
in net income, net of taxes (78) (83) (116) (160)
-------------- ------------- ------------- --------------
Other comprehensive loss (419) (459) (451) (637)
-------------- ------------- ------------- --------------
Total comprehensive income 288 143 807 550
Stock compensation expense 1 - 1 -
Dividends declared (368) (342) (735) (685)
-------------- ------------- ----------------------------
Balance at end of period $ 23,990 $ 23,480 $ 23,990 $ 23,480
============== ============= ============= ==============
Common cash dividend per share $ 0.29 $ 0.27 $ 0.58 $ 0.54
============== ============= ============= ==============
See accompanying notes to consolidated financial statements.
4
Emclaire Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. Nature of Operations and Basis of Presentation.
Emclaire Financial Corp. (the "Corporation") is a Pennsylvania company
organized as the holding company of Farmers National Bank of Emlenton (the
"Bank"). The Corporation provides a variety of financial services to
individuals and businesses through its offices in western Pennsylvania.
Its primary deposit products are checking, savings and certificate of
deposit accounts and its primary lending products are residential and
commercial mortgages, commercial business and consumer loans.
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All intercompany
transactions and balances have been eliminated in preparing the
consolidated financial statements.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Corporation's consolidated financial position and results of
operations. Additionally, these consolidated financial statements for the
interim periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not
include all information or footnotes necessary for a complete presentation
of financial condition, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America. For further information, refer to the audited consolidated
financial statements and footnotes thereto for the year ended December 31,
2006, as contained in the Corporation's 2006 Annual Report to
Stockholders.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses. The results of
operations for interim quarterly or year to date periods are not
necessarily indicative of the results that may be expected for the entire
year or any other period. Certain amounts previously reported may have
been reclassified to conform to the current year's financial statement
presentation.
2. Earnings per Common Share.
Basic earnings per common share (EPS) excludes dilution and is computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if securities or contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Corporation. Options
on 83,000 shares of common stock were not included in computing diluted
earnings per share because their effects were antidilutive.
5
3. Securities.
The Corporation's securities as of the respective dates are summarized as
follows:
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
------------------------------------------------------------------------------------------------------------------------
Available for sale:
June 30, 2007:
U.S. Government agencies and related entities $ 33,356 $ - $ (570) $32,786
Mortgage-backed securities 2,162 - (97) 2,065
Municipal securities 14,204 307 (1) 14,510
Corporate securities - - - -
Equity securities 3,757 5 (411) 3,351
--------- ---------- ---------- -------
$ 53,479 $ 312 $ (1,079) $52,712
========= ========== ========== =======
December 31, 2006:
U.S. Government agencies and related entities $ 31,354 $ - $ (606) $30,748
Mortgage-backed securities 2,434 - (95) 2,339
Municipal securities 14,688 574 - 15,262
Corporate securities - - - -
Equity securities 3,382 176 (132) 3,425
--------- ---------- ---------- -------
$ 51,858 $ 750 $ (833) $51,774
========= ========== ========== =======
------------------------------------------------------------------------------------------------------------------------
4. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) June 30, December 31,
2007 2006
------------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate:
Residential first mortgages $ 64,497 $ 64,662
Home equity loans and lines of credit 48,252 47,330
Commercial 66,281 61,128
------------- -------------
179,030 173,120
Other loans:
Commercial business 35,525 34,588
Consumer 7,680 7,671
------------- -------------
43,205 42,259
------------- -------------
Total loans, gross 222,235 215,379
Less allowance for loan losses 2,086 2,035
------------- -------------
Total loans, net $ 220,149 $ 213,344
============= =============
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6
5. Deposits.
The Corporation's deposits as of the respective dates are summarized as
follows:
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) June 30, 2007 December 31, 2006
------------------------------------------------------------------------------------------------------------------------
Type of accounts Amount % Amount %
-------------------------------------------------------------------------------------------------- ---------------------
Noninterest-bearing deposits $ 45,786 19.1% $ 44,045 18.0%
Interest-bearing demand deposits 74,429 31.0% 70,951 29.0%
Time deposits 119,753 49.9% 129,496 53.0%
------------ ---------- ---------- ----------
$ 239,968 100.0% $ 244,492 100.0%
============ ========== ========== ==========
------------------------------------------------------------------------------------------------------------------------
6. Guarantees.
The Corporation does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Of these letters of credit at June 30, 2007, $105,000 will expire within
the next twelve months, $275,000 will automatically renew within the next
twelve months and $349,000 will automatically renew within thirteen to
twenty-eight 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 June 30, 2007 for guarantees under
standby letters of credit issued is not material.
7. Employee Benefit Plans.
The Corporation maintains a defined contribution 401(k) Plan. Eligible
employees participate by providing tax-deferred contributions up to 20% of
qualified compensation. Employee contributions are vested at all times.
The Corporation provides a matching contribution of up to 4% of the
participant's salary. Matching contributions for the six months ended June
30, 2007 and 2006 amounted to $67,000 and $42,000, respectively.
The Corporation provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all full-time employees
participate in the retirement plan on a non-contributing basis and are
fully vested after five years of service.
The Corporation uses December 31 as the measurement date for its plans.
7
7. Employee Benefit Plans (continued).
The components of the periodic pension cost are as follows:
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) For the three months ended For the six months ended Year ended
June 30, June 30, December 31,
---------------------------- -------------------------- ---------------
2007 2006 2007 2006 2006
--------------------------------------------------------------- ------------- ------------ ------------- ---------------
Service cost $ 57 $ 52 $ 114 $ 104 $ 213
Interest cost 65 58 130 116 237
Expected return on plan assets (77) (66) (154) (132) (268)
Transition asset (2) (2) (4) (4) (8)
Prior service costs (8) (8) (16) (16) 32
Recognized net actuarial (gain) loss 7 15 14 24 -
Effect of Special Termination Benefits - - - - 274
-------------- ------------- ------------ ------------- ---------------
Net periodic pension cost $ 42 $ 49 $ 84 $ 92 $ 480
============== ============= ============ ============= ===============
------------------------------------------------------------------------------------------------------------------------
The expected rate of return on plan assets was 8.50% for the periods ended
June 30, 2007 and 2006. The Corporation previously disclosed in its
financial statements for the year ended December 31, 2006 that it expected
to contribute $250,000 to its pension plan in 2007. As of June 30, 2007,
there have been no contributions. The Corporation presently anticipates
contributing $250,000 to fund its pension plan in 2007.
8. Stock Compensation Plans.
In May 2007, the Corporation adopted the 2007 Stock Incentive Plan and
Trust. Under the Plan, the Corporation may grant options to its directors,
officers and employees for up to 177,496 shares of common stock. Incentive
stock options, non-incentive or compensatory stock options and share
awards may be granted under the Plan. The exercise price of each option
shall at least equal the market price of a share of common stock on the
date of grant and have a contractual term of ten years. Options shall vest
and become exercisable at the rate, to the extent and subject to such
limitations as may be specified by the Corporation. Effective January 1,
2007, the Corporation adopted SFAS No. 123(R), Share-Based Payment, which
requires that compensation cost related to share-based payment
transactions be recognized in the financial statements with measurement
based upon the fair value of the equity or liability instruments issued.
For the six-month period ended June 30, 2007, the Corporation recognized
$1,000 in compensation expense for stock options.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
---------------------------------------------------------------------------
Six months ended
June 30, 2007
---------------------------------------------------------------------------
Dividend yield 4.46%
Expected life 10 years
Expected volatility 14.09%
Risk-free interest rate 5.10%
---------------------------------------------------------------------------
The expected volatility is based on historical stock price fluctuations.
The risk-free interest rates for periods within the contractual life of
the awards are based on the U.S. Treasury yield curve in effect at the
time of the grant. The expected life is based on the maximum term of the
options. The dividend yield assumption is based on the Corporation's
history and expectation of dividend payouts.
8
8. Stock Compensation Plans (continued).
A summary of option activity under the Plan as of June 30, 2007, and
changes during the period then ended is presented below:
------------------------------------------------------------------------------------------------------------------------
Weighted-Average
Weighted-Average Aggregate Remaining Term
Options Exercise Price Intrinsic Value (in years)
------------------------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year - $ - -
Granted 83,000 26.00 10.0
Exercised - - -
Forfeited - - -
------------------- ----------------- ------------------- -----------------
Outstanding as of June 30, 2007 83,000 $ 26.00 $ - 10.0
=================== ================= =================== =================
Exercisable as of June 30, 2007 - $ - $ - -
=================== ================= =================== =================
------------------------------------------------------------------------------------------------------------------------
A summary of the status of the Corporation's nonvested shares as of June
30, 2007, and changes during the period then ended is presented below;
-----------------------------------------------------------------------------------------------------------
Weighted-Average
Options Grant-date Fair Value
-----------------------------------------------------------------------------------------------------------
Nonvested at the beginning of the year - $ -
Granted 83,000 3.39
Vested - -
Forfeited - -
------------------------ ------------------------
Nonvested as of June 30, 2007 83,000 $ 3.39
======================== ========================
-----------------------------------------------------------------------------------------------------------
As of June 30, 2007, there was $280,000 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted
under the Plan. That cost is expected to be recognized over a
weighted-average period of three years.
9. Effect of Recently Issued Accounting Standards.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a framework
for measuring fair value under generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or permit fair
value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. The Corporation is currently evaluating
the potential impact, if any, of the adoption of SFAS 157 on its
consolidated financial statements.
9
9. Effect of Recently Issued Accounting Standards (continued).
In September 2006, FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 06-4, Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements
(EITF 06-4). EITF 06-4 requires the recognition of a liability related to
the postretirement benefits covered by an endorsement split-dollar life
insurance arrangement. The consensus highlights that the employer (who is
also the policyholder) has a liability for the benefit it is providing to
its employee. As such, if the policyholder has agreed to maintain the
insurance policy in force for the employee's benefit during his or her
retirement, then the liability recognized during the employee's active
service period should be based on the future cost of insurance to be
incurred during the employee's retirement. Alternatively, if the policy
holder has agreed to provide the employee with a death benefit, then the
liability for the future death benefit should be recognized by following
the guidance in SFAS 106 or Accounting Principles Board (APB) Opinion No.
12, as appropriate. For transition, an entity can choose to apply the
guidance using either of the following approaches: (a) a
change in accounting principle through retrospective application to all
periods presented or (b) a change in accounting principle through a
cumulative-effect adjustment to the balance in retained earnings at the
beginning of the year of adoption. The EITF is effective in fiscal years
beginning after December 15, 2007, with early adoption permitted. The
Corporation is currently evaluating the impact that the implementation of
EITF 06-4 may have on its consolidated financial statements.
In September 2006, FASB's EITF issued EITF Issue No. 06-5 Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting
for Purchases of Life Insurance (EITF 06-5), The scope of EITF 06-5
consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of key persons.
The six issues are clarifications of previously issued guidance on FASB
Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal years
beginning after December 15, 2006. The implementation of EITF 06-5 had no
effect on the Corporation's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has
been elected will be recognized in earnings at each subsequent reporting
date. SFAS 159 is effective for the Corporation January 1, 2008. The
Corporation is evaluating the impact that the adoption of SFAS 159 will
have on its consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
This section discusses the consolidated financial condition and results of
operations of Emclaire Financial Corp. (the "Corporation") and its wholly owned
subsidiary bank, the Farmers National Bank of Emlenton (the "Bank"), for the
three and six months ended June 30, 2007 compared to the same periods in 2006
and should be read in conjunction with the Corporation's December 31, 2006
Annual Report of Form 10-K filed with the Securities and Exchange Commission and
with the accompanying consolidated financial statements and notes presented on
pages 1 through 9 of this Form 10-Q.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, the ability to control costs and expenses and general
economic conditions. The Corporation does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
10
CHANGES IN FINANCIAL CONDITION
Total assets decreased $2.2 million to $298.3 million at June 30, 2007 from
$300.6 million at December 31, 2006. This decrease resulted from a decrease in
cash and cash equivalents of $10.5 million or 63.1% to $6.2 million at June 30,
2007 from $16.7 million at December 31, 2006, as these funds were utilized in
funding commercial real estate and business loans. Partially offsetting this
decrease was an increase in loans receivable, net of allowance for loan losses
of $6.8 million or 3.2% to $220.1 million at June 30, 2007 from $213.3 million
at December 31, 2006.
Total liabilities decreased $2.3 million to $274.4 million at June 30, 2007 from
$276.6 million at December 31, 2006, while total stockholders' equity increased
$73,000 to $24.0 million at June 30, 2007 from $23.9 million at December 31,
2006. The decrease in total liabilities was primarily due to a decrease in
customer deposits of $4.5 million partially offset by increases in short-term
borrowed funds and accrued expenses and other liabilities of $1.7 million and
$644,000, respectively.
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended June 30, 2007 and 2006
General. Net income increased $105,000 or 17.4% to $707,000 for the three months
ended June 30, 2007 from $602,000 for the same period in 2006. This increase was
a result of increases in net interest income and non-interest income of $198,000
and $3,000, respectively, partially offset by increases in noninterest expense
and the provision for income taxes of $83,000 and $13,000, respectively.
Net interest income. Net interest income on a tax equivalent basis increased
$178,000 or 7.3% to $2.6 million for the three months ended June 30, 2007 from
$2.4 million for the same period in 2006. This net increase can be attributed to
an increase in tax equivalent interest income of $482,000, partially offset by a
$304,000 increase in interest expense.
Interest income. Interest income on a tax equivalent basis increased $482,000 or
11.9% to $4.5 million for the three months ended June 30, 2007, compared to $4.0
million for the same period in the prior year. This increase can be attributed
to increases in interest earned on loans and securities of $442,000 and $49,000,
respectively, partially offset by decreases in interest earned on
interest-earning deposits with banks and federal bank stocks of $7,000 and
$2,000, respectively.
Tax equivalent interest earned on loans receivable increased $442,000 or 13.1%
to $3.8 million for the three months ended June 30, 2007, compared to $3.4
million for the same period in 2006. During that time, average loans increased
$18.3 million or 9.1%, accounting for $315,000 in additional loan interest
income. This increase can be primarily attributed to growth in the Corporation's
commercial loan portfolios. Additionally, the yield on loans increased 25 basis
points to 6.98% for the three months ended June 30, 2007, versus 6.73% for the
same period in 2006, contributing $127,000 in additional interest income.
Contributing to the increase in the yield on loans between the quarterly periods
was the collection of $60,000 of interest due associated with the payoff of a
previously non-performing commercial loan in April 2007 that had been on
non-accrual status. In connection with the loan payoff, the Corporation received
all principal and interest due under the contractual terms of the loan agreement
and interest collected was recorded as loan interest income during the quarter
ended June 30, 2007.
Tax equivalent interest earned on securities increased $49,000 or 7.9% to
$668,000 for the three months ended June 30, 2007, compared to $619,000 for the
same period in 2006. The average volume of securities increased $1.2 million or
2.2%, accounting for $15,000 in additional interest income. Additionally, the
yield on securities increased 25 basis points to 4.92% for the three months
ended June 30, 2007, versus 4.67% for the same period in 2006, as a result of
certain lower yielding securities maturing. This favorable yield variance
contributed an additional $34,000 to interest income.
11
Interest earned on interest-earning deposit accounts decreased $7,000 to $16,000
for the three months ended June 30, 2007 from $23,000 for the same period in
2006. The average volume of these assets decreased $726,000 or 38.2%, primarily
as a result of funding loans and purchasing securities, decreasing interest
income by $10,000. Partially offsetting this decrease in volume, the average
yield on interest-earning deposit accounts increased 61 basis points to 5.47%
for the three months ended June 30, 2007, compared to 4.86% for the same period
in the prior year, contributing $3,000 in additional interest income. The
increase in the average yield reflects the recent increases in short-term
interest rates. Interest earned on federal bank stocks increased $2,000 or 8.7%
to $21,000 for the three month period ended June 30, 2007 from $23,000 for the
same period in the prior year as a result of a higher volume offset by a lower
yield.
Interest expense. Interest expense increased $304,000 or 18.8% to $1.9 million
for the three months ended June 30, 2007, compared to $1.6 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 $120,000 and
$184,000, respectively.
Interest expense incurred on deposits increased $120,000 or 8.3% to $1.6 million
for the three months ended June 30, 2007, compared to $1.4 million for the same
period in the prior year. This increase can be attributed to the cost of
interest-bearing deposits increasing 22 basis points to 3.24% for the three
months ended June 30, 2007, compared to 3.02% for the same period in 2006
contributing $108,000 in additional expense. Additionally, the average volume of
deposits increased $1.6 million to $194.0 million for the three months ended
June 30, 2007, compared to $192.4 million for the same period in 2006
contributing $12,000 in additional expense. The increase in the rate paid on
deposits reflects the increases in short-term market interest rates.
Interest expense incurred on borrowed funds increased $184,000 or 110.9% to
$350,000 for the three months ended June 30, 2007, compared to $166,000 for the
same period in the prior year. This increase in interest expense can be
attributed to the increase in the average balance of borrowed funds of $15.4
million or 93.8% to $31.8 million for the three months ended June 30, 2007,
compared to $16.4 million for the same period in the prior year contributing
$168,000 in additional expense. This volume increase was the result of $15.0
million of FHLB term borrowings placed in the second and third quarters of 2006
used primarily to fund loan growth.
12
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resulting average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses and interest income includes accretion of net deferred
loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis. The
information is based on average daily balances during the periods presented.
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended June 30,
---------------------------------------------------------------------
2007 2006
------------------------------------- -------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans, taxable $ 213,162 $ 3,718 7.00% $ 194,339 $ 3,267 6.74%
Loans, tax exempt 6,325 102 6.49% 6,851 111 6.47%
------------- ------------ --------- ---------
Total loans receivable 219,487 3,820 6.98% 201,190 3,378 6.73%
------------- ------------ --------- ---------
Securities, taxable 39,587 419 4.25% 38,004 367 3.87%
Securities, tax exempt 14,871 249 6.71% 15,209 252 6.65%
------------- ------------ --------- ---------
Total securities 54,458 668 4.92% 53,213 619 4.67%
------------- ------------ --------- ---------
Interest-earning deposits with banks 1,174 16 5.47% 1,900 23 4.86%
Federal bank stocks 2,321 21 3.68% 1,707 23 5.40%
------------- ------------ --------- ---------
Total interest-earning cash equivalents 3,495 37 4.28% 3,607 46 5.12%
------------- ------------ --------- ---------
Total interest-earning assets 277,440 4,525 6.54% 258,010 4,043 6.29%
Cash and due from banks 5,668 6,889
Other noninterest-earning assets 14,668 13,330
------------- ---------
Total Assets $ 297,776 $ 278,229
============= =========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 72,859 224 1.23% $ 72,554 175 0.97%
Time deposits 121,095 1,344 4.45% 119,814 1,273 4.26%
------------- ------------ --------- ---------
Total interest-bearing deposits 193,954 1,568 3.24% 192,368 1,448 3.02%
------------- ------------ --------- ---------
Borrowed funds, short-term 1,791 25 5.60% 1,126 15 5.34%
Borrowed funds, long-term 30,000 325 4.35% 15,278 151 3.96%
------------- ------------ --------- ---------
Total borrowed funds 31,791 350 4.42% 16,404 166 4.06%
------------- ------------ --------- ---------
Total interest-bearing liabilities 225,745 1,918 3.41% 208,772 1,614 3.10%
------------- ------------ --------- ---------
Noninterest-bearing demand deposits 45,088 - - 43,779 - -
------------- ------------ --------- ---------
Funding and cost of funds 270,833 1,918 2.84% 252,551 1,614 2.56%
Other noninterest-bearing liabilities 2,851 2,116
------------- ---------
Total Liabilities 273,684 254,667
Stockholders' Equity 24,092 23,562
------------- ---------
Total Liabilities and Stockholders' Equity $ 297,776 $ 278,229
============= ------------ ========= ---------
Net interest income $ 2,607 $ 2,429
============ =========
Interest rate spread (difference between 3.13% 3.18%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.77% 3.78%
income as a percentage of average
interest-earning assets)
------------------------------------------------------------------------------------------------------------------------
13
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
--------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended June 30,
2007 versus 2006
Increase (Decrease) due to
--------------------------------------------
Volume Rate Total
--------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 315 $ 127 $ 442
Securities 15 34 49
Interest-earning deposits with banks (10) 3 (7)
Federal bank stocks 7 (9) (2)
-------------- -------------- --------------
Total interest-earning assets 327 155 482
-------------- -------------- --------------
Interest expense:
Deposits 12 108 120
Borrowed funds 168 16 184
-------------- -------------- --------------
Total interest-bearing liabilities 180 124 304
-------------- -------------- --------------
Net interest income $ 147 $ 31 $ 178
============== ============== ==============
--------------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
maintain a level of total allowance for loan losses that management believes, to
the best of its knowledge, covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. Management considers
historical loss experience, the present and prospective financial condition of
borrowers, current conditions (particularly as they relate to markets where the
Corporation originates loans), the status of non-performing assets, the
estimated underlying value of the collateral and other factors related to the
collectibility of the loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the quarters ended June 30, 2007 and 2006 is as follows:
----------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) At or for the three months ended
June 30,
-----------------------------------
2007 2006
----------------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 2,078 $ 1,893
Provision for loan losses 30 47
Charge-offs (32) (61)
Recoveries 10 11
----------------- -----------------
Balance at the end of the period $ 2,086 $ 1,890
================= =================
Non-performing loans $ 1,176 $ 1,546
Non-performing assets 1,176 1,632
Non-performing loans to total loans 0.53% 0.73%
Non-performing assets to total assets 0.39% 0.57%
Allowance for loan losses to total loans 0.94% 0.89%
Allowance for loan losses to non-performing loans 177.36% 122.25%
----------------------------------------------------------------------------------------------------------
14
The provision for loan losses decreased $17,000 or 36.2% to $30,000 for the
three month period ended June 30, 2007 from $47,000 for the same period in the
prior year. Management's evaluation of the loan portfolio, including the
changing composition of the portfolio as well as economic trends, regulatory
considerations and other factors contributed to the recognition of $30,000 in
the provision for loan losses during the three months ended June 30, 2007.
Noninterest income. Noninterest income increased $3,000 to $772,000 during the
three months ended June 30, 2007, compared to $769,000 during the same period in
the prior year. This increase can be attributed to increases in fees and service
charges, gains on the sale of loans, earnings on bank-owned life insurance and
other noninterest income of $14,000, $7,000, $13,000 and $10,000, respectively.
Offsetting this increase in noninterest income were decreases in commissions
earned on financial services and gains on securities of $33,000 and $8,000,
respectively.
Noninterest expense. Noninterest expense increased $83,000 or 3.7% to $2.3
million during the three months ended June 30, 2007, compared to $2.2 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in premises and equipment and other noninterest
expenses of $29,000 and $102,000, respectively.
Premises and equipment increased $29,000 or 7.8% to $401,000 for the three
months ended June 30, 2007, compared to $372,000 for the same period in the
prior year. This increase can be attributed primarily to the operation of one
additional branch facility opened in November 2006.
Other noninterest expense increased $102,000 or 17.4% to $690,000 during the
three months ended June 30, 2007, compared to $588,000 for the same period in
the prior year. This increase can be attributed primarily to increases in
professional fees relating to Sarbanes-Oxley Section 404 compliance, data
processing center information technology initiatives and other operations and
compliance consulting needed as a result of the 2006 reorganization.
Provision for income taxes. The provision for income taxes increased $13,000 or
7.1% to $197,000 for the three months ended June 30, 2007, compared to $184,000
for the same period in the prior year due primarily to higher pre-tax earnings.
This was partially offset by the decrease in the effective tax rate to 21.8% for
the three months ended June 30, 2007, compared to 23.4% for the same period in
2006. The difference between the statutory rate of 34% and the Corporation's
effective tax rate is due to tax-exempt income earned on certain tax-free loans
and securities and bank-owned life insurance.
Comparison of Results for the Six Month Periods Ended June 30, 2007 and 2006
General. Net income increased $71,000 or 5.9% to $1.3 million for the six months
ended June 30, 2007 from $1.2 million for the same period in 2006. This increase
was a result of increases in net interest income and non-interest income of
$232,000 and $6,000, respectively and a decrease in the provision for income
taxes of $11,000, partially offset by an increase in noninterest expense of
$178,000.
Net interest income. Net interest income on a tax equivalent basis increased
$224,000 or 4.7% to $5.0 million for the six months ended June 30, 2007 from
$4.8 million for the same period in 2006. This net increase can be attributed to
an increase in tax equivalent interest income of $1.0 million, partially offset
by an $824,000 increase in interest expense.
Interest income. Interest income on a tax equivalent basis increased $1.0
million or 13.3% to $8.9 million for the six months ended June 30, 2007,
compared to $7.9 million for the same period in the prior year. This increase
can be attributed to increases in interest earned on loans, securities, federal
bank stocks, and interest-earning deposits with banks of $892,000, $29,000,
$31,000 and $96,000, respectively.
15
Tax equivalent interest earned on loans receivable increased $892,000 or 13.6%
to $7.5 million for the six months ended June 30, 2007, compared to $6.6 million
for the same period in 2006. During that time, average loans increased $20.0
million or 10.1%, accounting for $680,000 in additional loan interest income.
This increase can be primarily attributed to growth in the Corporation's
commercial loan portfolios. Additionally, the yield on loans increased 22 basis
points to 6.92% for the six months ended June 30, 2007, versus 6.70% for the
same period in 2006, contributing $212,000 in additional interest income.
Contributing to the increase in the yield on loans between the periods was the
collection of $60,000 of interest due associated with the payoff of a previously
non-performing commercial loan in April 2007 that had been on non-accrual
status. In connection with the loan payoff, the Corporation received all
principal and interest due under the contractual terms of the loan agreement and
interest collected was recorded as loan interest income during the six months
ended June 30, 2007.
Tax equivalent interest earned on securities increased $29,000 to $1.3 million
for the six months ended June 30, 2007. The average yield on securities
increased 22 basis points to 4.86% for the six months ended June 30, 2007,
versus 4.64% for the same period in 2006, as a result of certain lower yielding
securities maturing. This favorable yield variance contributed an additional
$58,000 to interest income. Partially offsetting this increase was a decrease in
the average volume of $1.2 million or 2.3%, primarily as a result of the
utilization of these funds for loan growth. This resulted in a $29,000 decline
in interest income.
Interest earned on interest-earning deposit accounts increased $96,000 to
$137,000 for the six months ended June 30, 2007 from $41,000 for the same period
in 2006. The average volume of these assets increased $3.4 million, primarily as
a result of the investment of funds from maturing securities, contributing
$88,000 in additional interest income. Additionally, the average yield on
interest-earning deposit accounts increased 75 basis points to 5.27% for the six
months ended June 30, 2007, compared to 4.52% for the same period in the prior
year, contributing $8,000 in additional interest income. The increase in the
average yield reflects the recent increases in short-term interest rates.
Interest earned on federal bank stocks increased $31,000 to $71,000 for the six
month period ended June 30, 2007 from $40,000 for the same period in the prior
year as a result of a higher volume and a higher yield. The higher yield
resulted from the recognition of a special dividend on FHLB capital stock.
Interest expense. Interest expense increased $824,000 or 26.6% to $3.9 million
for the six months ended June 30, 2007, compared to $3.1 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 $472,000 and
$352,000, respectively.
Interest expense incurred on deposits increased $472,000 or 17.16% to $3.2
million for the six months ended June 30, 2007, compared to $2.8 million for the
same period in the prior year. This increase can be attributed to the cost of
interest-bearing deposits increasing 38 basis points to 3.31% for the six months
ended June 30, 2007, compared to 2.93% for the same period in 2006 contributing
$375,000 in additional expense. The increase in the rate paid on deposits
reflects the increases in short-term interest rates. The average volume of
deposits increased $6.5 million or 3.4% to $196.8 million for the six months
ended June 30, 2007, compared to $190.3 million for the same period in 2006
contributing $97,000 in additional expense.
Interest expense incurred on borrowed funds increased $352,000 or 105.4% to
$686,000 for the six months ended June 30, 2007, compared to $334,000 for the
same period in the prior year. This increase in interest expense can be
attributed to the increase in the average balance of borrowed funds of $14.7
million to $30.9 million for the six months ended June 30, 2007, compared to
$16.2 million for the same period in the prior year. This volume increase was
the result of $15.0 million of FHLB term borrowings placed in the second and
third quarters of 2006 contributing $325,000 in additional expense. Such
borrowings were primarily used to fund loan growth.
16
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resulting average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses and interest income includes accretion of net deferred
loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis. The
information is based on average daily balances during the periods presented.
------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
-------------------------------------------------------------------------
2007 2006
---------------------------------- --------------------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
------------------------
Loans, taxable $ 210,977 $ 7,250 6.93% $ 190,559 $ 6,344 6.71%
Loans, tax exempt 6,419 206 6.48% 6,854 220 6.46%
------------ ---------- ---------- ---------- ------------ --------------
Total loans receivable 217,396 7,456 6.92% 197,413 6,564 6.70%
------------ ---------- ---------- ---------- ------------ --------------
Securities, taxable 38,176 783 4.14% 39,161 750 3.86%
Securities, tax exempt 15,046 500 6.70% 15,296 504 6.65%
------------ ---------- ---------- ---------- ------------ --------------
Total securities 53,222 1,283 4.86% 54,457 1,254 4.64%
------------ ---------- ---------- ---------- ------------ --------------
Interest-earning deposits with banks 5,247 137 5.27% 1,828 41 4.52%
Federal bank stocks 2,265 71 6.32% 1,671 40 4.83%
------------ ---------- ---------- ---------- ------------ --------------
Total interest-earning cash equivalents 7,512 208 5.58% 3,499 81 4.67%
------------ ---------- ---------- ---------- ------------ --------------
Total interest-earning assets 278,130 8,947 6.49% 255,369 7,899 6.24%
Cash and due from banks 5,913 6,997
Other noninterest-earning assets 14,601 13,073
------------ ----------
Total assets $ 298,644 $ 8,947 6.04% $ 275,439 $ 7,899 5.78%
============ ==========
Interest-bearing liabilities:
-----------------------------
Interest-bearing demand deposits $ 72,513 457 1.27% $ 72,974 321 0.89%
Time deposits 124,291 2,778 4.51% 117,300 2,442 4.20%
------------ ---------- ---------- ---------- ------------ --------------
Total interest-bearing deposits 196,804 3,235 3.31% 190,274 2,763 2.93%
------------ ---------- ---------- ---------- ------------ --------------
Borrowed funds, long-term 30,000 661 4.44% 15,138 310 4.13%
Borrowed funds, short-term 908 25 5.55% 1,033 24 4.69%
------------ ---------- ---------- ---------- ------------ --------------
Total borrowed funds 30,908 686 4.48% 16,171 334 4.17%
------------ ---------- ---------- ---------- ------------ --------------
Total interest-bearing liabilities 227,712 3,921 3.47% 206,445 3,097 3.03%
Noninterest-bearing demand deposits 44,230 - - 43,050 - -
------------ ---------- ---------- ---------- ------------ --------------
Funding and cost of funds 271,942 3,921 2.91% 249,495 3,097 2.50%
Other noninterest-bearing liabilities 2,712 2,357
------------ ----------
Total liabilities 274,654 251,852
Stockholders' equity 23,990 23,587
------------ ----------
Total liabilities and stockholders' equity $ 298,644 $ 3,921 2.91% $ 275,439 $ 3,097 2.50%
============ ---------- ========== ------------
Net interest income $ 5,026 $ 4,802
========== ============
Interest rate spread (difference between 3.01% 3.21%
========== ==============
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.64% 3.79%
========== ==============
income as a percentage of average
interest-earning assets)
------------------------------------------------------------------------------------------------------------------------
17
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.
------------------------------------------------------------------------------------------------------------
Six months ended June 30,
2007 versus 2006
Increase (Decrease) due to
----------------------------------------------------
(Dollar amounts in thousands) Volume Rate Total
----------------------------------------------------
Interest income:
Loans $ 680 $ 212 $ 892
Securities (29) 58 29
Interest-earning deposits with banks 88 8 96
Federal bank stocks 17 14 31
------------------- --------------- ---------------
Total interest-earning assets 756 292 1,048
------------------- --------------- ---------------
Interest expense:
Deposits 97 375 472
Borrowed funds 325 27 352
------------------- --------------- ---------------
Total interest-bearing liabilities 422 402 824
------------------- --------------- ---------------
Net interest income $ 334 $ (110) $ 224
=================== =============== ===============
------------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
maintain a level of total allowance for loan losses that management believes, to
the best of its knowledge, covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. Management considers
historical loss experience, the present and prospective financial condition of
borrowers, current conditions (particularly as they relate to markets where the
Corporation originates loans), the status of non-performing assets, the
estimated underlying value of the collateral and other factors related to the
collectibility of the loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the six months ended June 30, 2007 and 2006 is as follows:
---------------------------------------------------------------------------------------------------------------
At or for the
At or for the six months ended year ended
June 30, December 31,
-------------------------------- ---------------------
(Dollar amounts in thousands) 2007 2006 2006
---------------------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 2,035 $ 1,869 $ 1,869
Provision for loan losses 75 78 358
Charge-offs (47) (74) (221)
Recoveries 23 17 29
---------------- --------------- ---------------------
Balance at the end of the period $ 2,086 $ 1,890 $ 2,035
================ =============== =====================
Non-performing loans $ 1,176 $ 1,546 $ 1,841
Non-performing assets 1,176 1,632 1,939
Non-performing loans to total loans 0.53% 0.73% 0.85%
Non-performing assets to total assets 0.39% 0.57% 0.65%
Allowance for loan losses to total loans 0.94% 0.89% 0.94%
Allowance for loan losses to non-performing loans 177.36% 122.25% 110.54%
---------------------------------------------------------------------------------------------------------------
18
The provision for loan losses decreased $3,000 or 3.9% to $75,000 for the six
month period ended June 30, 2007 from $78,000 for the same period in the prior
year. Management's evaluation of the loan portfolio, including the changing
composition of the portfolio as well as economic trends, regulatory
considerations and other factors contributed to the recognition of $75,000 in
the provision for loan losses during the six months ended June 30, 2007.
Noninterest income. Noninterest income increased $6,000 to $1.5 million for the
six months ended June 30, 2007. This increase can be attributed to increases in
commissions earned on financial services, gains on the sale of loans, earnings
on bank-owned life insurance and other noninterest income of $28,000, $7,000,
$17,000 and $38,000, respectively. Offsetting this increase in noninterest
income were decreases in fees and service charges and gains on securities of
$18,000 and $66,000, respectively.
Noninterest expense. Noninterest expense increased $178,000 or 4.0% to $4.6
million during the six months ended June 30, 2007, compared to $4.5 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in premises and equipment and other noninterest
expenses of $48,000 and $182,000, respectively, partially offset by a decrease
in compensation and benefits of $47,000.
Premises and equipment increased $48,000 or 6.4% to $801,000 for the six months
ended June 30, 2007, compared to $753,000 for the same period in the prior year.
This increase can be attributed primarily to the operation of one additional
branch facility opened in November 2006.
Other noninterest expense increased $182,000 or 16.4% to $1.3 million during the
six months ended June 30, 2007, compared to $1.1 million for the same period in
the prior year. This increase can be attributed primarily to increases in
professional fees relating to Sarbanes-Oxley Section 404 compliance, data
processing center information technology initiatives and other operations and
compliance consulting needed as a result of the 2006 reorganization.
Effective January 1, 2007, the Federal Deposit Insurance Corporation (FDIC)
created a new risk framework of four risk categories and established assessment
rates to coincide with each category. Assessment rates for Risk Category I
institutions, which includes the Bank, range from 5 to 7 basis points. The FDIC
also approved a one-time assessment prior to that date. The Bank believes that
the one-time credit will more than offset the new FDIC assessment cost for 2007
and anticipates that the credit will be depleted in the second quarter of 2008.
Accordingly, the Bank will begin to recognize the FDIC assessment cost at that
time.
Compensation and benefits decreased $47,000 or 1.8% to $2.6 million for the six
months ended June 30, 2007. This decrease can be attributed primarily to cost
savings from staffing reductions associated with the 2006 reorganization.
Provision for income taxes. The provision for income taxes decreased $11,000 or
3.2% to $331,000 for the six months ended June 30, 2007, compared to $342,000
for the same period in the prior year due primarily to the decrease in the
effective tax rate to 20.8% for the six months ended June 30, 2007, compared to
22.4% for the same period in 2006. Partially offsetting this favorable variance
was higher pre-tax earnings. The difference between the statutory rate of 34%
and the Corporation's effective tax rate is due to tax-exempt income earned on
loans, securities and bank-owned life insurance.
LIQUIDITY
The Corporation's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and amortization and
prepayments of outstanding loans and maturing securities. During the six months
ended June 30, 2007, the Corporation used its sources of funds primarily to fund
loan originations and security purchases. As of such date, the Corporation had
outstanding loan commitments, including undisbursed loans and amounts available
under credit lines, totaling $26.2 million, and standby letters of credit
totaling $729,000.
19
At June 30, 2007, time deposits amounted to $119.8 million or 49.9% of the
Corporation's total consolidated deposits, including approximately $64.3 million
of which are scheduled to mature within the next year. Management of the
Corporation believes that it has adequate resources to fund all of its
commitments, that all of its commitments will be funded as required by related
maturity dates and that, based upon past experience and current pricing
policies, it can adjust the rates of time deposits to retain a substantial
portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and
maturities of securities, the Corporation has alternative sources of funds such
as a term borrowing capacity from the FHLB and, to a limited and rare extent,
the sale of loans. At June 30, 2007, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $107.0 million.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely impact its liquidity or
its ability to meet funding needs in the ordinary course of business.
CRITICAL ACCOUNTING POLICIES
Management views critical accounting policies to be those which are highly
dependent on subjective or complex judgments, estimates and assumptions and
where changes in those estimates and assumptions could have a significant impact
on the financial statements. Management currently views the determination of the
allowance for loan losses as a critical accounting policy.
The allowance for loan losses provides for an estimate of probable losses in the
loan portfolio. In determining the appropriate level of the allowance for loan
loss, the loan portfolio is separated into risk-rated and homogeneous pools.
Migration analysis/historical loss rates, adjusted for relevant trends, have
been applied to these pools. Qualitative adjustments are then applied to the
portfolio to allow for quality of lending policies and procedures, national and
local economic and business conditions, changes in the nature and volume of the
portfolio, experience, ability and depth of lending management, changes in the
trends, volumes and severity of past due, non-accrual and classified loans and
loss and recovery trends, quality of the Corporation's loan review system,
concentrations of credit, and external factors. The methodology used to
determine the adequacy of the Corporation's allowance for loan losses is
comprehensive and meets regulatory and accounting industry standards for
assessing the allowance, however, it is still an estimate. Loan losses are
charged against the allowance while recoveries of amounts previously charged-off
are credited to the allowance. Loan loss provisions are charged against current
earnings based on management's periodic evaluation and review of the factors
indicated above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Market risk for the Corporation consists primarily of interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning assets
and interest-bearing liabilities are at the Bank, virtually all of the interest
rate risk and liquidity risk lies at the Bank level. The Bank is not subject to
currency exchange risk or commodity price risk, and has no trading portfolio,
and therefore, is not subject to any trading risk. In addition, the Bank does
not participate in hedging transactions such as interest rate swaps and caps.
Changes in interest rates will impact both income and expense recorded and also
the market value of long-term interest-earning assets. Interest rate risk and
liquidity risk management is performed at the Bank level. Although the Bank has
a diversified loan portfolio, loans outstanding to individuals and businesses
depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation's asset/liability management
committee is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability committee is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates.
20
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 June 30, 2007,
the Corporation's interest-earning assets maturing or repricing within one year
totaled $76.9 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $96.1 million, providing an excess
of interest-bearing liabilities over interest-earning assets of $19.2 million or
a negative 6.5% of total assets. At June 30, 2007, the percentage of the
Corporation's assets to liabilities maturing or repricing within one year was
80.0%.
For more information, see "Market Risk Management" in Exhibit 13 to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
--------------------------------
The Corporation maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Corporation's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Corporation's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure based closely on the definition
of "disclosure controls and procedures" in Rule 13a-15(e).
There has been no change made in the Corporation's internal control over
financial reporting during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
As of the quarter ended June 30, 2007, the Corporation carried out an
evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of the Corporation's disclosure controls and procedures. Based on the
foregoing, the Corporation's Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures
were effective. There have been no significant changes in the Corporation's
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date the Corporation completed its
evaluation.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
--------------------------
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
Item 1A. Risk Factors
----------------------
There have been no material changes in the Corporation's risk factors from those
previously disclosed in the 2006 Form 10-K.
21
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
------------------------------------------------------------
(a) The annual meeting of stockholders of the Corporation was held April 25,
2007. Of 1,267,835 common shares eligible to vote, 1,011,469 or 79.8% were
voted in person or by proxy.
(b) The following Class B directors were elected for a three year term
expiring in 2010:
Name Shares For Shares Withheld
---- ---------- ---------------
J. Michael King 898,229 113,240
David L. Cox 986,640 24,828
Mark A. Freemer 892,581 118,887
In addition to the above listed individuals, the following persons
continue to serve as directors: Ronald L. Ashbaugh, James M. Crooks,
George W. Freeman, Robert L. Hunter, William C. Marsh, John B. Mason and
Brian C. McCarrier.
The recommendation of the Board of Directors to ratify the appointment of
Beard Miller Company LLP as the Corporation's independent auditors, as
described in the proxy statement for the annual meeting was approved with
1,001,933 shares in favor, 1,472 shares against and 8,064 shares
abstained.
The recommendation of the Board of Directors to approve the 2007 Stock
Incentive Plan and Trust as described in the proxy statement for the
annual meeting was approved with 687,422 shares in favor, 160,221 shares
against and 8,630 shares abstained.
Item 5. Other Information
--------------------------
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
-----------------
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350
22
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: August 10, 2007 By: /s/ David L. Cox
------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: August 10, 2007 By: /s/ William C. Marsh
------------------------------------------
William C. Marsh
Chief Financial Officer and Treasurer
23