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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, 2005
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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 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 an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant's common stock was
1,267,835 at May 13, 2005.
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EMCLAIRE FINANCIAL CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004.................................1
Consolidated Statements of Income for the three
months ended March 31, 2005 and 2004.................................2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004.................................3
Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 2005 and 2004............4
Notes to Consolidated Financial Statements...........................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........14
Item 4. Controls and Procedures.............................................14
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings...................................................15
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds..........15
Item 3. Defaults upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................15
Item 6. Exhibits............................................................15
Signatures ................................................................16
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements
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Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of March 31, 2005 (Unaudited) and December 31, 2004
(Dollar amounts in thousands, except per share data)
March 31, December 31,
2005 2004
---------------- --------------
Assets
------
Cash and due from banks $6,802 $7,769
Interest-earning deposits in banks 3,169 6,855
---------------- --------------
Cash and cash equivalents 9,971 14,624
Securities available for sale 63,591 63,346
Securities held to maturity; fair value of $15 and $16 15 16
Loans held for sale 197 386
Loans receivable, net of allowance for loan losses of $1,850 and $1,810 183,546 179,575
Federal bank stocks 1,547 1,731
Bank-owned life insurance 4,494 4,448
Accrued interest receivable 1,333 1,203
Premises and equipment, net 5,345 5,366
Goodwill 1,422 1,422
Other intangibles 28 38
Prepaid expenses and other assets 1,945 1,225
---------------- --------------
Total Assets $273,434 $273,380
================ ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest bearing $41,087 $40,511
Interest bearing 192,150 192,363
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Total deposits 233,237 232,874
Borrowed funds 15,000 15,000
Accrued interest payable 579 577
Accrued expenses and other liabilities 1,452 1,313
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Total Liabilities 250,268 249,764
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Stockholders' Equity:
Preferred stock, $1.00 par value, 3,000,000 shares authorized;
none issued - -
Common stock, $1.25 par value, 12,000,000 shares authorized;
1,395,852 shares issued; 1,267,835 shares outstanding 1,745 1,745
Additional paid-in capital 10,871 10,871
Treasury stock, at cost; 128,017 shares (2,653) (2,653)
Retained earnings 12,649 12,398
Accumulated other comprehensive income 554 1,255
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Total Stockholders' Equity 23,166 23,616
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Total Liabilities and Stockholders' Equity $273,434 $273,380
================ ==============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three months ended March 31, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended
March 31,
------------------------------------
2005 2004
------------------ ---------------
Interest and dividend income:
Loans receivable, including fees $2,884 $2,983
Securities:
Taxable 446 290
Exempt from federal income tax 173 174
Federal bank stocks 13 11
Deposits with banks and federal funds sold 28 5
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Total interest and dividend income 3,544 3,463
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Interest expense:
Deposits 1,199 1,090
Borrowed funds 155 161
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Total interest expense 1,354 1,251
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Net interest income 2,190 2,212
Provision for loan losses 60 55
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Net interest income after provision for loan losses 2,130 2,157
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Noninterest income:
Fees and service charges 254 264
Commissions on financial services 99 -
Gains on securities 133 83
Gain (loss) on the sale of loans 3 (2)
Earnings on bank-owned life insurance 50 56
Other 116 79
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Total noninterest income 655 480
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Noninterest expense:
Compensation and employee benefits 1,224 1,086
Premises and equipment, net 326 302
Intangible amortization expense 10 8
Other 527 554
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Total noninterest expense 2,087 1,950
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Income before provision for income taxes 698 687
Provision for income taxes 131 122
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Net income $567 $565
================== ===============
Basic earnings per share $0.45 $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, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands)
For the three months ended
March 31,
------------------------------------
2005 2004
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Operating activities:
Net income $567 $565
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 141 125
Provision for loan losses 60 55
Amortization of premiums and accretion of discounts, net 39 60
(Gain) Loss on sale of loans (3) 2
Loans originated for sale (150) -
Proceeds from sales of loans held for sale 342 -
Gains on securities (133) (83)
Earnings on bank-owned life insurance, net (46) (52)
Amortization of intangible assets 12 10
Change in accrued interest receivable (130) (43)
Change in prepaid expenses and other assets (275) (264)
Change in accrued interest payable 2 13
Change in accrued expenses and other liabilities 139 (151)
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Net cash from operating activities 565 237
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Investing Activities:
Loan originations and payments, net (4,125) 3,764
Available-for-sale securities:
Sales 219 126
Maturities, prepayments and calls 1,750 1,950
Purchases (3,174) (4,119)
Held-to-maturity securities:
Maturities, prepayments and calls 1 -
Redemption (Purchases) of Federal bank stocks 184 263
Purchases of premises and equipment (120) (149)
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Net cash from investing activities (5,265) 1,835
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Financing Activities:
Net increase in deposits 363 6,454
Increase (Decrease) in overnight borrowed funds - (5,700)
Dividends paid on common stock (316) (292)
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Net cash from financing activities 47 462
----------------- ----------------
Net (decrease) increase in cash equivalents (4,653) 2,534
Cash equivalents at beginning of period 14,624 7,703
----------------- ----------------
Cash equivalents at end of period $9,971 $10,237
================= ================
Supplemental information:
Interest paid $1,352 $1,238
Income taxes paid - -
Supplemental noncash disclosures:
Transfers from loans to repossessed assets $86 $-
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
For the three months ended March 31, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands)
For the three months ended
March 31,
-------------------------------
2005 2004
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Balance at beginning of period $23,616 $22,655
Net income 567 565
Change in net unrealized gain on available for sale
securities, net of taxes (613) 330
Less reclassification adjustment for gains included
in net income, net of taxes (88) (54)
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Other comprehensive income (loss) (701) 276
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Total comprehensive income (loss) (134) 841
Dividends declared (316) (292)
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Balance at end of period $23,166 $23,204
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Common cash dividend per share $0.25 $0.23
============== =============
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 mortgage, 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 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, 2004, as contained in the Corporation's
2004 Annual Report to Stockholders.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the
reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and deferred tax assets. The results of operations for
interim quarterly or year to date periods are not necessarily
indicative of the results that may be expected for the entire year or
any other period. Certain amounts previously reported may have been
reclassified to conform to the current year's financial statement
presentation.
2. Basic Earnings per 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. The Corporation's capital structure
contains no potentially dilutive securities.
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, 2005 and 2004 was
$17,000 and $16,000, 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.
Information pertaining to the components of the periodic pension cost
is as follows:
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(Dollar amounts in thousands) For the three months
ended
March 31,
------------------------
2005 2004
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Service cost $42 $41
Interest cost 51 46
Expected return on plan assets (61) (53)
Transition asset (2) (2)
Prior service costs (8) (8)
Recognized net actuarial (gain) loss 9 8
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Net periodic pension cost $31 $32
============ ==========
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The expected rate of return on plan assets is 8.50% for the periods
ended March 31, 2005 and 2004. The Corporation expects to contribute
$135,000 to its pension plan in 2005.
4. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
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(Dollar Amounts In thousands) March 31, December 31,
2005 2004
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Mortgage loans:
Residential first mortgage $68,475 $69,310
Home equity 33,562 31,548
Commercial real estate 51,097 48,539
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153,134 149,397
Other loans:
Commercial business 24,670 23,898
Consumer 7,592 8,090
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32,262 31,988
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Total loans, gross 185,396 181,385
Less allowance for loan losses 1,850 1,810
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Total loans, net $183,546 $179,575
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6
5. 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 written are conditional commitments
issued by the Corporation to guarantee the performance of a customer
to a third party. Of these letters of credit, $124,000 automatically
renew within the next twelve months, $32,000 will expire within the
next twelve months and $422,000 will expire within thirteen to
fifty-five months. The Corporation, generally, holds collateral and/or
personal guarantees supporting these commitments. Management believes
that the proceeds obtained through a liquidation of collateral and the
enforcement of guarantees would be sufficient to cover the potential
amount of future payment 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, 2005
for guarantees under standby letters of credit issued is not material.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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This section discusses the consolidated financial condition and results of
operations of Emclaire Financial Corp. (the Corporation) and its wholly owned
subsidiary bank, the Farmers National Bank of Emlenton (the Bank), for the three
month period ended March 31, 2005 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 6 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 increased $54,000 to $273.4 million at March 31, 2005 from $273.4
million at December 31, 2004. This increase was primarily due to increases in
loans receivable and prepaid expenses and other assets of $3.9 million and
$700,000, respectively. Partially offsetting this increase was a decrease in
cash and cash equivalents of $4.7 million.
Cash and cash equivalents decreased $4.7 million or 31.8% to $9.9 million at
March 31, 2005 from $14.6 million at December 31, 2004 primarily as a result of
the increase in loans receivable of $3.9 million.
Loans held for sale decreased $189,000 or 49.0% to $197,000 at March 31, 2005
from $386,000 at December 31, 2004. During the first quarter 2005, the
Corporation sold $189,000 of its student loan portfolio resulting in a gain of
$3,000. The remaining balance of this portfolio, which is classified as loans
held for sale is $197,000 and is anticipated to be sold by June 30, 2005.
Loans receivable increased $3.9 million or 2.1% to $183.5 million at March 31,
2005 from $179.6 million at December 31, 2004. During the three months ended
March 31, 2005, the Corporation experienced increases in our commercial and home
equity loans. The increase in commercial mortgages and business loans was a
result of the growth in the commercial real estate market, lower interest rate
environment and the continued focus by management on commercial lending. The
increase in home equity loans was due primarily to a loan campaign put forth
during the quarter. This campaign will continue into the second quarter 2005.
7
Prepaid expenses and other assets increased $700,000 or 58.8% to $1.9 million at
March 31, 2005 from $1.2 million at December 31, 2004. Contributing to this
increase was the increase in prepaid expenses of $130,000 resulting from the
payment of our Pennsylvania shares taxes in March 2005, the recognition of a
receivable due from the Holding Company for income taxes of $170,000 and the
increase in deferred income taxes of $350,000 related to the adjustment for the
unrealized gain on available for sale securities.
Stockholders' equity decreased $450,000 or 1.9% to $23.2 million at March 31,
2005 from $23.6 million at December 31, 2004. This decrease was the result of a
decrease in accumulated other comprehensive income of $701,000 offset by an
increase in retained earnings of $251,000; comprised of net income of $567,000
offset by dividends declared of $316,000.
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended March 31, 2005 and 2004
General. Net income increased $2,000 to $567,000 for the three months ended
March 31, 2005 from $565,000 for the same period in 2004. This increase was a
result of an increase in noninterest income of $175,000 offset by decreases in
net interest income of $22,000 and increases in noninterest expense and the
provisions for loan losses and income taxes of $137,000, $5,000 and $9,000,
respectively.
Net interest income. Net interest income on a tax equivalent basis decreased
$15,000 or 1.0% to $2.30 million for the three months ended March 31, 2005 from
$2.32 million for the same period in 2004. This net decrease can be attributed
to an increase in interest expense of $103,000 offset by an increase in interest
income of $88,000.
Interest income. Interest income on a tax equivalent basis increased $88,000 or
2.5% to $3.7 million for the three months ended March 31, 2005, compared to $3.6
million for the same period in the prior year. This increase in interest income
can be attributed to an increase in the average total interest-earning assets of
$10.5 million offset by a 6 basis point decline in the interest rate on average
interest-earning assets to 5.85% during the three months ended March 31, 2005,
compared to 5.91% for the same period in the prior year.
The average balance of securities increased $15.4 million or 31.0% to $65.1
million for the three months ended March 31, 2005, compared to $49.7 million for
the same period in the prior year. The increase in volume contributed an
additional $165,000 to interest income. The increase in securities was a result
of investing deployable funds into US government agencies and mortgage-backed
securities.
The average balance of interest-earning cash equivalents increased $4.0 million
to $7.7 million for the three months ended March 31, 2005, compared to $3.7
million for the same period in the prior year. The increase in volume
contributed an additional $16,000 to interest income. The yield on average
interest-earning cash equivalents also increased 42 basis points to 2.17% during
the three months ended March 31, 2005, compared to 1.75% for the same period in
the prior year. The increase in yield contributed an additional $9,000 to
interest income.
Offsetting the increase in average interest-earning assets was a decrease in the
average balance of loans receivable of $8.9 million or 4.7% to $180.8 million
for the three months ended March 31, 2005, compared to $189.7 million for the
same period in the prior year. In the first quarter 2005 the Corporation has
experienced an increase in loan demand. See "Changes in Financial Condition"
section above for current year information. Offsetting the decrease due to
volume was an increase in the average yield of loans receivable to 6.55% during
the three months ended March 31, 2005, compared to 6.40% during the same period
in the prior year.
8
Interest expense. Interest expense increased $103,000 or 8.2% to $1.4 million
for the three months ended March 31, 2005, compared to $1.3 million for the same
period in the prior year. This increase in interest expense can be attributed to
an increase in the average balance of interest-bearing liabilities, as average
interest-bearing deposits increased to $192.2 million during the three months
ended March 31, 2005, compared to $182.4 million during the same period in the
prior year. Offsetting this increase in interest-bearing liabilities was a
decrease in the average balance of borrowed funds to $15.0 million during the
three months ended March 31, 2005, compared to $17.0 million during the same
period in the prior year. The interest rate on average interest-bearing
liabilities was 2.65% and 2.52% for the three months ended March 31, 2005 and
2004, respectively. The average cost of deposits was 2.53% and 2.40% for the
three months ended March 31, 2005 and 2004, respectively.
9
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resulting average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses and interest income includes accretion of net deferred
loan costs. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis.
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(Dollar amounts in thousands) Three months ended March 31,
2005 2004
---------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $173,551 $2,805 6.55% $182,159 $2,899 6.40%
Loans, tax exempt 7,234 115 6.44% 7,522 118 6.32%
------------- -------- ----------- ---------
Total Loans Receivable 180,785 2,919 6.55% 189,681 3,017 6.40%
------------- -------- ----------- ---------
Securities, taxable 49,541 446 3.65% 34,015 290 3.43%
Securities, tax exempt 15,527 251 6.54% 15,652 246 6.32%
------------- -------- ----------- ---------
Total Securities 65,068 697 4.34% 49,667 536 4.34%
------------- -------- ----------- ---------
Interest earning cash equivalents 6,066 28 1.87% 1,778 5 1.13%
Federal bank stocks 1,602 13 3.29% 1,909 11 2.32%
------------- -------- ----------- ---------
Total Interest Earning Cash Equivalents 7,668 41 2.17% 3,687 16 1.75%
------------- -------- ----------- ---------
Total interest-earning assets 253,521 3,657 5.85% 243,035 3,569 5.91%
Cash and due from banks 7,544 6,349
Other noninterest-earning assets 13,830 11,408
------------- -----------
Total Assets $274,895 $260,792
============= ===========
Interest-bearing liabilities:
- -----------------------------
Interest bearing demand deposits $80,873 $146 0.73% $76,507 $114 0.60%
Time deposits 111,373 1,053 3.83% 105,911 976 3.71%
------------- -------- ----------- ---------
Total Interest Bearing Deposits 192,246 1,199 2.53% 182,418 1,090 2.40%
------------- -------- ----------- ---------
Borrowed funds, term 15,000 155 4.19% 15,000 156 4.18%
Borrowed funds, overnight - - 0.00% 2,017 5 1.00%
------------- -------- ----------- ---------
Total Borrowed Funds 15,000 155 4.19% 17,017 161 3.81%
------------- -------- ----------- ---------
Total interest-bearing liabilities 207,246 1,354 2.65% 199,435 1,251 2.52%
Noninterest bearing demand deposits 41,182 - - 36,327 -
------------- -------- ----------- ---------
Funding and cost of funds 248,428 1,354 2.21% 235,762 1,251 2.13%
Other noninterest bearing liabilities 2,375 1,977
------------- -----------
Total Liabilities 250,803 237,739
Stockholders' Equity 24,092 23,053
------------- -----------
Total Liabilities and Stockholders' Equity $274,895 $260,792
============= -------- =========== ---------
Net interest income $2,303 $2,318
======== =========
Interest rate spread (difference between 3.20% 3.39%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.68% 3.84%
income as a percentage of average
interest-earning assets)
- ------------------------------------------------------------------------------------------------------------------------
10
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 March 31,
2005 versus 2004
Increase (Decrease) due to
-----------------------------
Volume Rate Total
- ----------------------------------------------------------------------
Interest income:
Loans $(143) $45 $(98)
Securities 165 (4) 161
Interest-earning cash equivalents 18 5 23
Federal bank stocks (2) 4 2
----------- -------- --------
Total interest-earning assets 38 50 88
----------- -------- --------
Interest expense:
Deposits 60 49 109
Borrowed funds (20) 14 (6)
----------- -------- --------
Total interest-bearing liabilities 40 63 103
----------- -------- --------
Net interest income $(2) $(13) $(15)
=========== ======== ========
Provision for loan losses. The Corporation records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
probable losses inherent in the loan portfolio. In determining the appropriate
level of allowance for loan losses, management considers historical loss
experience, the present and prospective financial condition of borrowers,
current conditions (particularly as they relate to markets where the Corporation
originates loans), the status of non-performing assets, the estimated underlying
value of the collateral and other factors related to the collectibility of the
loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the first quarter of 2005 and 2004 is as follows:
- ----------------------------------------------------------------------
(Dollar amounts in thousands) For the three months ended
March 31,
-------------------
2005 2004
- ----------------------------------------------------------------------
Balance at the beginning of the period $1,810 $1,777
Provision for Loan Losses 60 55
Charge-Offs (38) (30)
Recoveries 18 25
--------- --------
Balance at the end of the period $1,850 $1,827
========= ========
Non-performing loans $707 $1,081
Non-performing assets 795 1,081
Non-performing loans to total loans 0.38% 0.58%
Non-performing assets to total assets 0.29% 0.41%
Allowance for loan losses to total loans 1.00% 0.97%
Allowance for loan losses to non-performing loans 261.67% 169.01%
- ----------------------------------------------------------------------
11
The provision for loan losses increased $5,000 or 9.1% to $60,000 for the three
month period ending March 31, 2005 from $55,000 for the same period in the prior
year. Management's evaluation of the loan portfolio, including economic trends,
regulatory considerations, the increase in charged-off loans and other factors
contributed to the recognition of $60,000 in the provision for loan losses
during the three months ended March 31, 2005.
Noninterest income. Noninterest income increased $175,000 or 36.5% to $655,000
during the three months ended March 31, 2005, compared to $480,000 during the
same period in the prior year. This increase can be attributed to the increase
in commissions earned on financial services, gains on securities and on the sale
of loans and other noninterest income of $99,000, $50,000, $5,000 and $37,000,
respectively. This increase was offset by decreases in customer fees and service
charges and earnings on bank-owned life insurance of $10,000 and $6,000,
respectively.
In July 2004 the Corporation entered into an agreement with Blue Vase
Securities, LLC to provide investment advisory services to our customers, and
operates as Farmers Financial Services. Blue Vase Securities, LLC is a
nation-wide, full-service, independent broker/dealer that offers various
services such as investments, insurances, wealth management, advisory services,
estate and retirement planning and account consolidation. This partnership has
enabled the Corporation to provide our customers with financial solutions that
extend outside the Bank's ordinary deposit products and services. The
Corporation earns commissions from providing this service and recognized $99,000
during the first quarter 2005.
The increase in the gain on sale of loans of $5,000 was the result of the sale
of a portion of our student loan portfolio in January 2005. The remaining
portion of our student loan portfolio is anticipated to be sold by June 30,
2005.
Noninterest expense. Noninterest expense increased $137,000 or 7.0% to $2.1
million during the three months ended March 31, 2005, compared to $2.0 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 intangible amortization expense $138,000, $24,000 and $3,000,
respectively. This increase was offset by a decrease in other noninterest
expense of $28,000.
Compensation and employee benefits expense increased $138,000 or 12.7% to $1.2
million during the three months ended March 31, 2005, compared to $1.1 million
for the same period in the prior year. Normal annual salary and wage
adjustments, increased health insurance costs, higher director's fees and
commissions paid to our financial services representative were the major
components of this increase. Also contributing to the increase was the addition
of a new compliance officer and a new credit analyst in November 2004.
Premises and equipment expense increased $24,000 or 8.0% to $326,000 during the
three months ended March 31, 2005, compared to $302,000 for the same period in
the prior year. This increase can be primarily attributed to increased building
and equipment depreciation expenses, repairs and maintenance and other building
and equipment expenses.
Other noninterest expense decreased $27,000 or 5.1% to $527,000 during the three
months ended March 31, 2005, compared to $554,000 for the same period in the
prior year. This decrease can be attributed primarily to decreases in telephone
and communication expenses, printing and office supplies, and postage. Partially
offsetting this favorable variance were increases in professional fees, travel
and entertainment expenses, Pennsylvania shares taxes and software depreciation
between the two periods. Note the following:
o Telephone and communication expenses decreased as a result of
Management resolving contract issues related to two telephone vendors
during 2004.
o Postage decreased as a result of a new automail system placed in
service in the fourth quarter 2004 which allows us to take advantage of
discounted mail rates on our first class postage.
o Travel and entertainment expenses increased as a result of the
increased efforts in our Corporate Banking area and travel associated
with training throughout the organization.
12
Provision for income taxes. The provision for income taxes increased $9,000 or
7.4% to $131,000 for the three months ended March 31, 2005, compared to $122,000
for the same period in the prior year. Contributing to this unfavorable variance
was the increase in the Corporation's pre-tax earnings base between the first
quarter of 2005 and 2004. The Corporation's effective tax rate was 18.8% in 2005
compared to 17.8% in 2004. The difference between the statutory rate of 34% and
the Corporation's effective tax rate is due to tax-exempt income earned on
loans, securities and bank-owned life insurance.
LIQUIDITY
The Corporation's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and amortization and
prepayments of outstanding loans and maturing securities. During the three
months ended March 31, 2005, the Corporation used its sources of funds primarily
to fund loan originations. As of such date, the Corporation had outstanding loan
commitments, including undisbursed loans and amounts available under credit
lines, totaling $15.0 million, and standby letters of credit totaling $578,000.
At March 31, 2005, time deposits amounted to $111.7 million or 47.9% of the
Corporation's total consolidated deposits, including approximately $40.9
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, 2005, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $106.4 million.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely impact its liquidity or
its ability to meet funding needs in the ordinary course of business.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Market risk for the Corporation is comprised primarily from interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning assets
and paying liabilities are at the Bank, virtually all of the interest rate risk
and liquidity risk lies at the Bank level. The Bank is not subject to currency
exchange risk or commodity price risk, and has no trading portfolio, and
therefore, is not subject to any trading risk. In addition, the Bank does not
participate in hedging transactions such as interest rate swaps and caps.
Changes in interest rates will impact both income and expense recorded and also
the market value of long-term interest-earning assets. Interest rate risk and
liquidity risk management is performed at the Bank level. Although the Bank has
a diversified loan portfolio, loans outstanding to individuals and businesses
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.
At March 31, 2005, the Corporation's interest-earning assets maturing or
repricing within one year (assuming immediate repricing for core deposits)
totaled $75.6 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $121.3 million, providing an
excess of interest-bearing liabilities over interest-earning assets of $45.7
million or a negative 16.7% of total assets. At March 31, 2005, the percentage
of the Corporation's assets to liabilities maturing or repricing within one year
was 62.3%.
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, 2004.
Item 4. Controls and Procedures
- --------------------------------
The Corporation maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Corporation's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Corporation's management, including its
Chief Executive Officer and Principal Financial and Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e).
As of the quarter ended March 31, 2005, 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.
14
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
- ---------------------------
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
Item 2. Unregistered Sale of Equity in Securities and Use of Proceeds.
- -----------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
(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 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
15
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 13, 2005 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: May 13, 2005 By: /s/ Shelly L. Rhoades
--------------------------------------------
Treasurer
(Principal Financial and Accounting Officer)
16