10-Q 1 a5146607.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, 2006 -------------- 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the Registrant's common stock was 1,267,835 at May 11, 2006. ================================================================================ EMCLAIRE FINANCIAL CORP. INDEX TO QUARTERLY REPORT ON FORM 10-Q PART I - FINANCIAL INFORMATION ------------------------------
Item 1. Interim Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005......................................................................1 Consolidated Statements of Income for the three months ended March 31, 2006 and 2005......................................................................2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005......................................................................3 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2006 and 2005.................................................4 Notes to Consolidated Financial Statements................................................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................................8 Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................15 Item 4. Controls and Procedures..................................................................................15 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings........................................................................................16 Item 1A. Risk Factors.............................................................................................16 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................16 Item 3. Defaults upon Senior Securities..........................................................................16 Item 4. Submission of Matters to a Vote of Security Holders......................................................16 Item 5. Other Information........................................................................................16 Item 6. Exhibits.................................................................................................16 Signatures .........................................................................................................17
PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Interim Financial Statements ------------------------------------- Emclaire Financial Corp. and Subsidiary Consolidated Balance Sheets As of March 31, 2006 (Unaudited) and December 31, 2005 (Dollar amounts in thousands, except per share data)
March 31, December 31, 2006 2005 ----------- ------------ Assets ------ Cash and due from banks $ 6,565 $ 9,399 Interest-earning deposits with banks 3,003 968 ----------- ------------ Cash and cash equivalents 9,568 10,367 Securities available for sale, at fair value 54,881 56,289 Securities held to maturity; fair value of $14 and $14 14 15 Loans receivable, net of allowance for loan losses of $1,891 and $1,869 191,956 192,526 Federal bank stocks, at cost 1,578 1,773 Bank-owned life insurance 4,667 4,623 Accrued interest receivable 1,210 1,271 Premises and equipment, net 6,551 6,123 Goodwill 1,422 1,422 Prepaid expenses and other assets 1,252 1,108 ----------- ------------ Total Assets $ 273,099 $ 275,517 =========== ============ Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits: Noninterest-bearing $ 42,451 $ 44,044 Interest-bearing 189,922 186,459 ----------- ------------ Total deposits 232,373 230,503 Short-term borrowed funds - 4,500 Long-term borrowed funds 15,000 15,000 Accrued interest payable 628 607 Accrued expenses and other liabilities 1,419 1,292 ----------- ------------ Total Liabilities 249,420 251,902 ----------- ------------ Stockholders' Equity: Preferred stock, $1.00 par value, 3,000,000 shares authorized; none issued - - Common stock, $1.25 par value, 12,000,000 shares authorized; 1,395,852 shares issued; 1,267,835 shares outstanding 1,745 1,745 Additional paid-in capital 10,871 10,871 Treasury stock, at cost; 128,017 shares (2,653) (2,653) Retained earnings 13,921 13,678 Accumulated other comprehensive loss (205) (26) ----------- ------------ Total Stockholders' Equity 23,679 23,615 ----------- ------------ Total Liabilities and Stockholders' Equity $ 273,099 $ 275,517 =========== ============ See accompanying notes to consolidated financial statements.
1 Emclaire Financial Corp. and Subsidiary Consolidated Statements of Income For the three months ended March 31, 2006 and 2005 (Unaudited) (Dollar amounts in thousands, except per share data)
For the three months ended March 31, -------------------------- 2006 2005 ------------ ------------- Interest and dividend income: Loans receivable, including fees $ 3,152 $ 2,884 Securities Taxable 383 446 Exempt from federal income tax 173 173 Federal bank stocks 18 13 Deposits with banks 18 28 ------------ ------------- Total interest and dividend income 3,744 3,544 ------------ ------------- Interest expense: Deposits 1,314 1,199 Borrowed funds 168 155 ------------ ------------- Total interest expense 1,482 1,354 ------------ ------------- Net interest income 2,262 2,190 Provision for loan losses 31 60 ------------ ------------- Net interest income after provision for loan losses 2,231 2,130 ------------ ------------- Noninterest income: Fees and service charges 357 254 Commissions on financial services 101 99 Gains on securities 116 133 Gain on the sale of loans - 3 Earnings on bank-owned life insurance (BOLI) 50 50 Other 104 116 ------------ ------------- Total noninterest income 728 655 ------------ ------------- Noninterest expense: Compensation and employee benefits 1,307 1,224 Premises and equipment 381 373 Intangible amortization expense 3 10 Other 524 480 ------------ ------------- Total noninterest expense 2,215 2,087 ------------ ------------- Income before provision for income taxes 744 698 Provision for income taxes 159 131 ------------ ------------- Net income $ 585 $ 567 ============ ============= Basic earnings per share $ 0.46 $ 0.45 Average common shares outstanding 1,267,835 1,267,835 See accompanying notes to consolidated financial statements.
2 Emclaire Financial Corp. and Subsidiary Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2006 and 2005 (Unaudited) (Dollar amounts in thousands)
For the three months ended March 31, -------------------------- 2006 2005 ------------ ------------- Operating Activities: Net income $ 585 $ 567 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 182 187 Provision for loan losses 31 60 Amortization of premiums and accretion of discounts, net 11 39 Gain on sale of loans - (3) Loans originated for sale - (150) Proceeds from sales of loans held for sale - 342 Gains on securities (116) (133) Earnings on bank-owned life insurance, net (44) (46) (Increase) decrease in accrued interest receivable 61 (130) Increase in prepaid expenses and other assets (41) (321) Increase in accrued interest payable 21 2 Increase in accrued expenses and other liabilities 127 139 ------------ ------------- Net cash provided by operating activities 817 553 ------------ ------------- Investing Activities: Loan originations and principal collections, net 522 (4,125) Available-for-sale securities: Sales 202 219 Maturities, prepayments and calls 1,153 1,750 Purchases (107) (3,174) Held-to-maturity securities: Maturities, prepayments and calls 1 1 Redemption of Federal bank stocks 195 184 Purchases of premises and equipment (610) (120) ------------ ------------- Net cash provided by (used in) investing activities 1,356 (5,265) ------------ ------------- Financing Activities: Net increase in deposits 1,870 363 Decrease in short-term borrowed funds (4,500) - Dividends paid on common stock (342) (316) ------------ ------------- Net cash provided by (used in) financing activities (2,972) 47 ------------ ------------- Net decrease in cash and cash equivalents (799) (4,665) Cash and cash equivalents at beginning of period 10,367 14,624 ------------ ------------- Cash and cash equivalents at end of period $ 9,568 $ 9,959 ============ ============= Supplemental information: Interest paid $ 1,461 $ 1,352 Income taxes paid 10 - Supplemental noncash disclosures: Transfers from loans to foreclosed real estate $ - $ 86 See accompanying notes to consolidated financial statements.
3 Emclaire Financial Corp. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity For the three months ended March 31, 2006 and 2005 (Unaudited) (Dollar amounts in thousands, except per share data)
For the three months ended March 31, -------------------------------- 2006 2005 --------------- ------------- Balance at beginning of period $ 23,615 $ 23,616 Net income 585 567 Change in net unrealized losses on available for sale securities, net of taxes (103) (613) Less reclassification adjustment for gains included in net income, net of taxes (76) (88) --------------- ------------- Other comprehensive loss (179) (701) --------------- ------------- Total comprehensive income (loss) 406 (134) Dividends declared (342) (316) -------------------------------- Balance at end of period $ 23,679 $ 23,166 =============== ============= Common cash dividend per share $ 0.27 $ 0.25 =============== ============= See accompanying notes to consolidated financial statements.
4 Emclaire Financial Corp. and Subsidiary Notes to Consolidated Financial Statements 1. Nature of Operations and Basis of Presentation. Emclaire Financial Corp. (the "Corporation") is a Pennsylvania company organized as the holding company of Farmers National Bank of Emlenton (the "Bank"). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania. Its primary deposit products are checking, savings and certificate of deposit accounts and its primary lending products are residential and commercial mortgages, commercial business and consumer loans. The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All intercompany transactions and balances have been eliminated in preparing the consolidated financial statements. 0The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation's consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission's Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2005, as contained in the Corporation's 2005 Annual Report to Stockholders. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. The results of operations for interim quarterly or year to date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year's financial statement presentation. 2. Basic Earnings per Common Share. The Corporation maintains a simple capital structure with no common stock equivalents. Basic earnings per common share is calculated using net income divided by the weighted average number of common shares outstanding during the period. 3. Employee Benefit Plans. Defined Contribution Plan. -------------------------- The Corporation maintains a defined contribution 401(k) Plan. Employees are eligible to participate by providing tax-deferred contributions up to 20% of qualified compensation. Employee contributions are vested at all times. The Corporation makes matching contributions as approved by the Board of Directors. Matching contributions for the three months ended March 31, 2006 and 2005 amounted to $21,000 and $17,000, respectively. 5 3. Employee Benefit Plans (continued). Defined Benefit Plan. --------------------- The Corporation provides pension benefits for eligible employees through a defined benefit pension plan. Substantially all employees participate in the retirement plan on a non-contributing basis and are fully vested after five years of service. The Corporation uses a December 31 measurement date for its plans. The components of the periodic pension cost are as follows:
For the three months ended March 31, -------------------------------------- (Dollar amounts in thousands) 2006 2005 ------------------------------------------------------------------------------------------------------- ---------------- Service cost $ 52 $ 42 Interest cost 58 51 Expected return on plan assets (66) (61) Transition asset (2) (2) Prior service costs (8) (8) Recognized net actuarial (gain) loss 9 9 --------------------- ---------------- Net periodic pension cost $ 43 $ 31 ===================== ================
The expected rate of return on plan assets is 8.50% for the periods ended March 31, 2006 and 2005. The Corporation previously disclosed in its financial statements for the year ended December 31, 2005 that it expected to contribute $135,000 to its pension plan in 2006. The Corporation presently expects to contribute $202,000 to fund its pension plan in 2006. 4. Securities. The Corporation's securities as of the respective dates are summarized as follows:
--------------------------------------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) cost gains losses value --------------------------------------------------------------------------------------------------------------------------- Available for sale: ------------------- March 31, 2006: U.S. Government agencies and related entities $34,351 $ - $ (948) $33,403 Mortgage-backed securities 2,889 - (152) 2,737 Municipal securities 14,686 591 - 15,277 Corporate securities 1,250 1 (1) 1,250 Equity securities 2,016 350 (152) 2,214 -------- -------- --------- ---------- $55,192 $ 942 $(1,253) $54,881 ======== ======== ========= ========== December 31, 2005: U.S. Government agencies and related entities $34,353 $ - $ (818) $33,535 Mortgage-backed securities 3,046 - (124) 2,922 Municipal securities 14,685 664 - 15,349 Corporate securities 2,249 4 (4) 2,249 Equity securities 1,995 383 (144) 2,234 -------- -------- --------- ---------- $56,328 $1,051 $(1,090) $56,289 ======== ======== ========= ========== Held to maturity: ----------------- March 31, 2006: Mortgage-backed securities $ 14 $ - $ - $ 14 -------- -------- --------- ---------- $ 14 $ - $ - $ 14 ======== ======== ========= ========== December 31, 2005: Mortgage-backed securities $ 15 $ - $ (1) $ 14 -------- -------- --------- ---------- $ 15 $ - $ (1) $ 14 ======== ======== ========= ========== ---------------------------------------------------------------------------------------------------------------------------
6 5. Loans Receivable. The Corporation's loans receivable as of the respective dates are summarized as follows:
------------------------------------------------------------------------------------------------------------------------ March 31, December 31, (Dollar amounts in thousands) 2006 2005 ------------------------------------------------------------------------------------------------------------------------ Mortgage loans on real estate: Residential first mortgages $ 65,788 $ 66,011 Home equity loans and lines of credit 39,828 39,933 Commercial real estate 51,756 52,990 --------------------- ------------------ 157,372 158,934 Other loans: Commercial business 28,678 27,732 Consumer 7,797 7,729 --------------------- ------------------ 36,475 35,461 --------------------- ------------------ Total loans, gross 193,847 194,395 Less allowance for loan losses 1,891 1,869 --------------------- ------------------ Total loans, net $ 191,956 $ 192,526 ===================== ==================
6. Deposits. The Corporation's deposits as of the respective dates are summarized as follows:
-------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) March 31, 2006 December 31, 2005 -------------------------------------------------------------------------------------------------------------------------- Type of accounts Amount % Amount % ------------------------------------------------------------------------------------------------------- ------------------ Noninterest-bearing deposits $ 42,451 18.3% $ 44,044 19.1% Interest-bearing demand deposits 72,063 31.0% 74,067 32.1% Time deposits 117,859 50.7% 112,392 48.8% ---------- ------ --------- ------ $232,373 100.0% $230,503 100.0% ========== ====== ========= ======
7. Guarantees. The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Of these letters of credit at March 31, 2006, $252,000 automatically renews within the next twelve months, $56,000 will expire within the next twelve months and $20,000 will expire after twelve through thirteen months. The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The current amount of the liability as of March 31, 2006 for guarantees under standby letters of credit issued is not material. 7 8. Effect of Recently Issued Accounting Standards. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - An Amendment of FASB Statement No. 140" ("SFAS 156"). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006, which for the Corporation will be as of the beginning of fiscal 2007. The Corporation does not believe that the adoption of SFAS 156 will have a significant effect on its consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations ------------- This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp. (the "Corporation") and its wholly owned subsidiary bank, the Farmers National Bank of Emlenton (the "Bank"), for the three-month period ended March 31, 2006 and should be read in conjunction with the Corporation's Annual Report or Form 10-K filed with the Securities and Exchange Commission and with the accompanying consolidated financial statements and notes presented on pages 1 through 8 of this Form 10-Q. The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses and general economic conditions. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. CHANGES IN FINANCIAL CONDITION Total assets decreased $2.4 million or 1.0% to $273.1 million at March 31, 2006 from $275.5 million at December 31, 2005. This decrease was primarily due to decreases in cash and cash equivalents, securities and loans receivable of $799,000, $1.4 million and $570,000, respectively. Partially offsetting this decrease was an increase in premises and equipment of $428,000. Cash and cash equivalents decreased $799,000 or 7.7% to $9.6 million at March 31, 2006 from $10.4 million at December 31, 2005. The decrease in cash and cash equivalents was primarily due to funding loan originations as well as the repayment of short-term borrowed funds. Securities decreased $1.4 million or 2.5% to $54.9 million at March 31, 2006 from $56.3 million at December 31, 2005 as a result of security maturities and sales of $1.2 million and an increase in unrealized losses on available for sale securities of $272,000. The decrease in securities was primarily due to funding loan originations as well as the repayment of short-term borrowed funds. Loans receivable decreased $570,000 to $192.0 million at March 31, 2006 from $192.5 million at December 31, 2005. Loan production gained momentum during the first quarter of 2006 but was offset by several loan prepayments during the quarter, particularly a substandard commercial mortgage of $1.3 million. This downward trend is expected to reverse during the second quarter of 2006 based upon our current loan pipeline of approximately $8.0 million in commercial loans. Short-term borrowed funds, consisting of overnight Federal Home Loan Bank borrowings, decreased $4.5 million or 100% to $0 at March 31, 2006 from $4.5 million at December 31, 2005. The repayment of these overnight borrowings was funded by excess cash, maturities of securities and growth in deposits. 8 Deposits increased $1.9 million or 1.0% to $232.4 million at March 31, 2006 from $230.5 million at December 31, 2005 primarily as a result of an increase in time deposits due to marketing campaigns set forth in the first quarter. Offsetting this increase were decreases in noninterest-bearing and interest-bearing demand deposits which has been experienced throughout our area as individuals are searching for higher yielding investments such as certificates of deposit as well as moving their monies from FDIC insured institutions to higher yielding mutual funds and investing in the stock market. Stockholders' equity increased $64,000 to $23.7 million at March 31, 2006 from $23.6 million at December 31, 2005. This increase was the result of net income of $585,000 offset by dividends declared of $342,000 and an increase in accumulated other comprehensive loss of $179,000, net of taxes. The increase in accumulated other comprehensive loss was the result of a decrease in the market value of available for sale securities. RESULTS OF OPERATIONS Comparison of Results for the Three Month Periods Ended March 31, 2006 and 2005 General. Net income increased $18,000 or 3.2% to $585,000 for the three months ended March 31, 2006 from $567,000 for the same period in 2005. This increase was a result of increases in net interest income and noninterest income of $72,000 and $73,000, respectively, and a decrease in the provision for loan losses of $29,000, offset by increases in noninterest expenses and the provision for income taxes of $128,000 and $28,000, respectively. Net interest income. Net interest income on a tax equivalent basis increased $71,000 or 3.1% to $2.4 million for the three months ended March 31, 2006 from $2.3 million for the same period in 2005. This net increase can be attributed to an increase in interest income of $199,000 offset by an increase in interest expense of $128,000. Interest income. Interest income on a tax equivalent basis increased $199,000 or 5.4% to $3.9 million for the three months ended March 31, 2006, compared to $3.7 million for the same period in the prior year. This increase can be attributed to increases in interest earned on loans and federal bank stocks of $267,000 and $5,000, respectively, offset by decreases in interest earned on securities and interest-earning deposits with banks of $63,000 and $10,000, respectively. The average balance of interest-earning cash equivalents decreased $4.3 million or 55.7% to $3.4 million for the three months ended March 31, 2006, compared to $7.7 million for the same period in the prior year. The decrease in the average balance was primarily due to funding requirements for loan originations and resulted in a $29,000 reduction in interest income. Offsetting this decrease in volume was the increase in the yield on average interest-earning cash equivalents of 213 basis points to 4.30% during the three months ended March 31, 2006, compared to 2.17% for the same period in the prior year. The increase in yield, which was primarily due to increases in market rates, contributed an additional $24,000 to interest income. The average balance of securities decreased $9.4 million or 14.4% to $55.7 million for the three months ended March 31, 2006, compared to $65.1 million for the same period in the prior year. The decrease in volume resulted in a $105,000 reduction in interest income. The decrease in the average balance of securities was primarily due to funding requirements for loan originations. Offsetting this decrease in volume was the increase in the yield on average securities of 27 basis points to 4.61% during the three months ended March 31, 2006, compared to 4.34% for the same period in the prior year. The average balance of loans receivable increased $12.8 million or 7.1% to $193.6 million for the three months ended March 31, 2006, compared to $180.8 million for the same period in the prior year primarily due to increases in commercial mortgage loans, business loans and home equity loans as loan production increased throughout 2005 and the first quarter 2006. The yield on average loans receivable increased 12 basis points to 6.67% during the three months ended March 31, 2006, compared to 6.55% for the same period in the prior year. The increase in the average yield was primarily due to the origination of loans with higher yields relative to portfolio loans as a result of the recent increase in interest rates. The increase in volume and yield contributed an additional $210,000 and $57,000, respectively, to interest income. 9 Interest expense. Interest expense increased $128,000 or 9.5% to $1.5 million for the three months ended March 31, 2006, compared to $1.4 million for the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits and borrowed funds of $115,000 and $13,000, respectively. Interest expense incurred on deposits increased $115,000 or 9.6% to $1.3 million for the three months ended March 31, 2006, compared to $1.2 million for the same period in the prior year. This increase in interest expense can be attributed to the increase in the average rate of interest-bearing deposits of 30 basis points to 2.83% at March 31, 2006 from 2.53% for the same period in the prior year. This increase in yield resulted in an additional $141,000 of interest expense between the three month period ended March 31, 2006 and 2005. Offsetting the increase in yield was the decrease in the average balance of interest-bearing deposits of $4.1 million or 2.1% to $188.2 million at March 31, 2006, compared to $192.2 million for the same period in the prior year. The decrease in interest-bearing deposits can be attributed to the movement of customer deposits into mutual funds as well as investing in the stock market as they attempt to obtain higher yields on their monies. Interest expense incurred on borrowed funds increased $13,000 or 8.4% to $168,000 for the three months ended March 31, 2006, compared to $155,000 for the same period in the prior year. This increase in interest expense can be attributed to the increase in the average balance of short-term borrowed funds of $941,000 or 100% to $941,000 for the three months ended March 31, 2006, compared to $0 for the same period in the prior year which resulted in an additional $10,000 in interest expense. The average rate on the average balance of borrowed funds increased 8 basis points to 4.27% for the three months ended March 31, 2006 from 4.19% for the same period in the prior year and resulted in an additional $3,000 in interest expense. 10 Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include non-accrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan costs. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis.
------------------------------------------------------------------------------------------------------------------------ Three months ended March 31, ----------------------------------------------- 2006 2005 ----------------------- ----------------------- Yield Yield Average / Average / (Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: ------------------------ Loans, taxable $186,737 $3,077 6.68% $173,551 $2,805 6.55% Loans, tax exempt 6,858 109 6.45% 7,234 114 6.42% --------- ------- --------- ------- Total loans receivable 193,595 3,186 6.67% 180,785 2,919 6.55% --------- ------- --------- ------- Securities, taxable 40,332 383 3.85% 49,541 446 3.65% Securities, tax exempt 15,384 251 6.61% 15,527 251 6.54% --------- ------- --------- ------- Total securities 55,716 634 4.61% 65,068 697 4.34% --------- ------- --------- ------- Interest-earning deposits with banks 1,763 18 4.14% 6,066 28 1.87% Federal bank stocks 1,635 18 4.46% 1,602 13 3.29% --------- ------- --------- ------- Total interest-earning cash equivalents 3,398 36 4.30% 7,668 41 2.17% --------- ------- --------- ------- Total interest-earning assets 252,709 3,856 6.19% 253,521 3,657 5.85% Cash and due from banks 7,110 7,544 Other noninterest-earning assets 12,821 13,830 --------- --------- Total Assets $272,640 $274,895 ========= ========= Interest-bearing liabilities: ----------------------------- Interest-bearing demand deposits $73,404 $ 146 0.81% $ 80,873 $146 0.73% Time deposits 114,755 1,168 4.13% 111,373 1,053 3.83% --------- ------- --------- ------- Total interest-bearing deposits 188,159 1,314 2.83% 192,246 1,199 2.53% --------- ------- --------- ------- Borrowed funds, short-term 941 9 3.88% - - 0.00% Borrowed funds, long-term 15,000 159 4.30% 15,000 155 4.19% --------- ------- --------- ------- Total borrowed funds 15,941 168 4.27% 15,000 155 4.19% --------- ------- --------- ------- Total interest-bearing liabilities 204,100 1,482 2.94% 207,246 1,354 2.65% --------- ------- --------- ------- Noninterest-bearing demand deposits 42,316 - - 41,182 - - --------- ------- --------- ------- Funding and cost of funds 246,416 1,482 2.44% 248,428 1,354 2.21% Other noninterest-bearing liabilities 2,613 2,375 --------- --------- Total Liabilities 249,029 250,803 Stockholders' Equity 23,611 24,092 --------- --------- Total Liabilities and Stockholders' Equity $272,640 $274,895 ========= ------- ========= ------- Net interest income $2,374 $2,303 ======= ======= Interest rate spread (difference between 3.24% 3.20% weighted average rate on interest-earning assets and interest-bearing liabilities) Net interest margin (net interest 3.81% 3.68% income as a percentage of average interest-earning assets)
11 Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation's interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
-------------------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2006 versus 2005 Increase (Decrease) due to ------------------------------- (Dollar amounts in thousands) Volume Rate Total -------------------------------------------------------------------------------------------------------------------------- Interest income: Loans $ 210 $ 57 $ 267 Securities (105) 42 (63) Interest-earning deposits with banks (29) 19 (10) Federal bank stocks - 5 5 ----------- --------- --------- Total interest-earning assets 76 123 199 ----------- --------- --------- Interest expense: Deposits (26) 141 115 Borrowed funds 10 3 13 ----------- --------- --------- Total interest-bearing liabilities (16) 144 128 ----------- --------- --------- Net interest income $ 92 $ (21) $71 =========== ========= =========
Provision for loan losses. The Corporation records provisions for loan losses to bring the total allowance for loan losses to a level deemed adequate to cover probable losses inherent in the loan portfolio. In determining the appropriate level of the allowance for loan losses, management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectibility of the loan portfolio. Information pertaining to the allowance for loan losses and non-performing assets for the quarters ended March 31, 2006 and 2005 is as follows:
------------------------------------------------------------------------------------------------------------------------ At or for the three months ended March 31, ----------------------------------- (Dollar amounts in thousands) 2006 2005 ------------------------------------------------------------------------------------------------------------------------ Balance at the beginning of the period $ 1,869 $ 1,810 Provision for loan losses 31 60 Charge-offs (15) (38) Recoveries 6 18 --------------- -------------- Balance at the end of the period $1,891 $1,850 =============== ============== Non-performing loans $ 1,256 $ 707 Non-performing assets 1,352 795 Non-performing loans to total loans 0.65% 0.38% Non-performing assets to total assets 0.50% 0.29% Allowance for loan losses to total loans 0.98% 1.00% Allowance for loan losses to non-performing loans 150.56% 261.67% ------------------------------------------------------------------------------------------------------------------------
12 The provision for loan losses decreased $29,000 or 48.3% to $31,000 for the three month period ended March 31, 2006 from $60,000 for the same period in the prior year. Management's evaluation of the loan portfolio, including economic trends, regulatory considerations and other factors contributed to the recognition of $31,000 in the provision for loan losses during the three months ended March 31, 2006. Noninterest income. Noninterest income increased $73,000 or 11.2% to $728,000 during the three months ended March 31, 2006, compared to $655,000 during the same period in the prior year. This increase can be attributed to increases in customer fees and service charges and commissions earned on financial services of $103,000 and $2,000, respectively. Offsetting this increase in noninterest income were decreases in the gains on the sale of securities and loans and other noninterest income of $17,000, $3,000 and $12,000, respectively. The increase in customer fees and service charges of $103,000 or 40.6% was primarily a result of the new overdraft privilege program, which was implemented in April 2005. Noninterest expense. Noninterest expense increased $128,000 or 6.1% to $2.2 million during the three months ended March 31, 2006, compared to $2.1 million during the same period in the prior year. This increase in noninterest expense can be attributed to increases in compensation and employee benefits, premises and equipment and other noninterest expenses of $83,000, $8,000 and $44,000, respectively. Offsetting this increase in noninterest expense was a decrease in intangible amortization of $7,000. Compensation and employee benefits expense increased $83,000 or 6.8% to $1.3 million during the three months ended March 31, 2006, compared to $1.2 million for the same period in the prior year. Normal annual salary and wage adjustments, the increase in full-time equivalents, increased employee retirement costs, additional wages paid to temporary employees, higher director's fees and commissions paid to a financial services representative were the major components of this increase. Premises and equipment expense increased $8,000 or 2.1% to $381,000 during the three months ended March 31, 2006, compared to $373,000 for the same period in the prior year. The increase was primarily due to increased occupancy costs related to our new drive-thru facility in Brookville, as well as land purchased for a new branch location. Other noninterest expense increased $44,000 or 9.2% to $524,000 during the three months ended March 31, 2006, compared to $480,000 for the same period in the prior year. This increase can be attributed primarily to increases in professional fees, printing and office supplies, postage and other expenses. Partially offsetting these increases were decreases in telephone and communication expenses and Pennsylvania shares tax expense between the two periods. Provision for income taxes. The provision for income taxes increased $28,000 or 21.4% to $159,000 for the three months ended March 31, 2006, compared to $131,000 for the same period in the prior year due primarily to an increase in the Corporation's pre-tax earnings base between the first quarter of 2006 and 2005. Also contributing to the increase was the increase in the effective tax rate to 21.4% in 2006 from 18.8% in 2005 due to the expiration of tax credits generated in previous years. The difference between the statutory rate of 34% and the Corporation's effective tax rate is due to tax-exempt income earned on loans, securities and bank-owned life insurance. 13 LIQUIDITY The Corporation's primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB and amortization and prepayments of outstanding loans and maturing securities. During the three months ended March 31, 2006, the Corporation used its sources of funds primarily to fund loan originations and for the repayment of short-term borrowed funds. As of such date, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $26.7 million, and standby letters of credit totaling $581,000. At March 31, 2006, time deposits amounted to $117.9 million or 50.7% of the Corporation's total consolidated deposits, including approximately $47.0 million which are scheduled to mature within the next year. Management of the Corporation believes that it has adequate resources to fund all of its commitments, that all of its commitments will be funded as required by related maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities. Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation has alternative sources of funds such as a term borrowing capacity from the FHLB and, to a limited and rare extent, the sale of loans. At March 31, 2006, the Corporation's borrowing capacity with the FHLB, net of funds borrowed, was $114.7 million. Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business. CRITICAL ACCOUNTING POLICIES Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses as a critical accounting policy. The allowance for loan losses provides for an estimate of probable losses in the loan portfolio. In determining the appropriate level of the allowance for loan loss, the loan portfolio is separated into risk-rated and homogeneous pools. Migration analysis/historical loss rates, adjusted for relevant trends, have been applied to these pools. Qualitative adjustments are then applied to the portfolio to allow for quality of lending policies and procedures, national and local economic and business conditions, changes in the nature and volume of the portfolio, experience, ability and depth of lending management, changes in the trends, volumes and severity of past due, non-accrual and classified loans and loss and recovery trends, quality of the Corporation's loan review system, concentrations of credit, and external factors. The methodology used to determine the adequacy of the Corporation's allowance for loan losses is comprehensive and meets regulatory and accounting industry standards for assessing the allowance, however it is still an estimate. Loan losses are charged against the allowance while recoveries of amounts previously charged-off are credited to the allowance. Loan loss provisions are charged against current earnings based on management's periodic evaluation and review of the factors indicated above. 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------- Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and paying liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area. One of the primary functions of the Corporation's asset/liability management committee is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability committee is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates. Interest rate sensitivity is the result of differences in the amounts and repricing dates of the bank's rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing "gap", provide an indication of the extent that the Corporation's net interest income is affected by future changes in interest rates. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income. Based on certain assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation's assets and liabilities to interest rate changes, at March 31, 2006, the Corporation's interest-earning assets maturing or repricing within one year totaled $61.7 million while the Corporation's interest-bearing liabilities maturing or repricing within one-year totaled $82.6 million, providing an excess of interest-bearing liabilities over interest-earning assets of $20.9 million or a negative 7.7% of total assets. At March 31, 2006, the percentage of the Corporation's assets to liabilities maturing or repricing within one year was 74.7%. For more information, see "Market Risk Management" in Exhibit 13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2005. Item 4. Controls and Procedures -------------------------------- The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Corporation's management, including its Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). 15 As of the quarter ended March 31, 2006, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on the foregoing, the Corporation's Chief Executive Officer and Principal Financial and Accounting Officer concluded that the Corporation's disclosure controls and procedures were effective. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation. PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings -------------------------- The Corporation is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially effect the Corporation's consolidated financial position or results of operations. Item 1A. Risk Factors ---------------------- There have been no material changes from risk factors as previously disclosed in the 2005 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds -------------------------------------------------------------------- None. Item 3. Defaults Upon Senior Securities ---------------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ None. Item 5. Other Information -------------------------- (a) Not applicable. (b) Not applicable. Item 6. Exhibits ----------------- Exhibit 10 Form of Change of Control Agreement with Executive Officers Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer Exhibit 31.2 Rule 13a-14(a) Certification of Principal Financial and Accounting Officer Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350 Exhibit 32.2 PFO Certification Pursuant to 18 U.S.C. Section 1350 16 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY Date: May 11, 2006 By: /s/ David L. Cox -------------------------------------------- David L. Cox Chairman of the Board, President and Chief Executive Officer Date: May 11, 2006 By: /s/ Shelly L. Rhoades -------------------------------------------- Treasurer (Principal Financial and Accounting Officer) 17