10-Q 1 a4888392.txt EMCLAIRE FINANCIAL CORP., 10-Q -------------------------------------------------------------------------------- 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 -------------- Commission File Number: 000-18464 --------- EMCLAIRE FINANCIAL CORP. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1606091 -------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 612 Main Street, Emlenton, Pennsylvania 16373 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (724) 867-2311 -------------------------------------------------------------------------------- (Registrant's telephone number) -------------------------------------------------------------------------------- (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. -------------------------------------------------------------------------------- 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 ------------------------------------- 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 ---------------- -------------- 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 ---------------- -------------- Total Liabilities 250,268 249,764 ---------------- -------------- 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 ---------------- -------------- Total Stockholders' Equity 23,166 23,616 ---------------- -------------- 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 ------------------ --------------- Total interest and dividend income 3,544 3,463 ------------------ --------------- Interest expense: Deposits 1,199 1,090 Borrowed funds 155 161 ------------------ --------------- Total interest expense 1,354 1,251 ------------------ --------------- Net interest income 2,190 2,212 Provision for loan losses 60 55 ------------------ --------------- Net interest income after provision for loan losses 2,130 2,157 ------------------ --------------- 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 ------------------ --------------- Total noninterest income 655 480 ------------------ --------------- Noninterest expense: Compensation and employee benefits 1,224 1,086 Premises and equipment, net 326 302 Intangible amortization expense 10 8 Other 527 554 ------------------ --------------- Total noninterest expense 2,087 1,950 ------------------ --------------- Income before provision for income taxes 698 687 Provision for income taxes 131 122 ------------------ --------------- 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 ----------------- ---------------- 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) ----------------- ---------------- Net cash from operating activities 565 237 ----------------- ---------------- 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) ----------------- ---------------- Net cash from investing activities (5,265) 1,835 ----------------- ---------------- Financing Activities: Net increase in deposits 363 6,454 Increase (Decrease) in overnight borrowed funds - (5,700) Dividends paid on common stock (316) (292) ----------------- ---------------- 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 -------------- ------------- 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) -------------- ------------- Other comprehensive income (loss) (701) 276 -------------- ------------- Total comprehensive income (loss) (134) 841 Dividends declared (316) (292) -------------- ------------- Balance at end of period $23,166 $23,204 ============== ============= 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: -------------------------------------------------------------------- (Dollar amounts in thousands) For the three months ended March 31, ------------------------ 2005 2004 -------------------------------------------------------------------- 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 ------------ ---------- Net periodic pension cost $31 $32 ============ ========== -------------------------------------------------------------------- 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: ---------------------------------------------------------------------- (Dollar Amounts In thousands) March 31, December 31, 2005 2004 ---------------------------------------------------------------------- Mortgage loans: Residential first mortgage $68,475 $69,310 Home equity 33,562 31,548 Commercial real estate 51,097 48,539 ------------ ------------ 153,134 149,397 Other loans: Commercial business 24,670 23,898 Consumer 7,592 8,090 ------------ ------------ 32,262 31,988 ------------ ------------ Total loans, gross 185,396 181,385 Less allowance for loan losses 1,850 1,810 ------------ ------------ Total loans, net $183,546 $179,575 ============ ============ ---------------------------------------------------------------------- 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 -------------------------------------------------------------------------- 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.
------------------------------------------------------------------------------------------------------------------------ (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