-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AuwY6yC1Km2OsWl+aZYCGVBXx8WatALB3q87I6ewcnqxYXA+LWjfkIfPoX6Uu2Qj k38CHszybeRVRihdl/Fy6Q== 0001157523-07-008219.txt : 20070810 0001157523-07-008219.hdr.sgml : 20070810 20070810110544 ACCESSION NUMBER: 0001157523-07-008219 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070810 DATE AS OF CHANGE: 20070810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCLAIRE FINANCIAL CORP CENTRAL INDEX KEY: 0000858800 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251606091 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18464 FILM NUMBER: 071043482 BUSINESS ADDRESS: STREET 1: 612 MAIN ST CITY: EMLENTON STATE: PA ZIP: 16373 BUSINESS PHONE: 7248672311 MAIL ADDRESS: STREET 1: POST OFFICE BOX D STREET 2: 612 MAIN STREET CITY: EMLENTON STATE: PA ZIP: 16373 10-Q 1 a5469424.txt EMCLAIRE FINANCIAL CORP. 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007 ------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 000-18464 --------- EMCLAIRE FINANCIAL CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1606091 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer 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 [X] Accelerated filer [] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [] No [X] The number of shares outstanding of the Registrant's common stock was 1,267,835 at August 10, 2007. - -------------------------------------------------------------------------------- EMCLAIRE FINANCIAL CORP. INDEX TO QUARTERLY REPORT ON FORM 10-Q PART I - FINANCIAL INFORMATION Item 1. Interim Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006..................................1 Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006..................................2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006..................................3 Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2007 and 2006.....4 Notes to Consolidated Financial Statements...........................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk..........20 Item 4. Controls and Procedures.............................................21 PART II - OTHER INFORMATION Item 1. Legal Proceedings...................................................21 Item 1A. Risk Factors........................................................21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........22 Item 3. Defaults upon Senior Securities.....................................22 Item 4. Submission of Matters to a Vote of Security Holders.................22 Item 5. Other Information...................................................22 Item 6. Exhibits............................................................22 Signatures...................................................................23 PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Interim Financial Statements - ------------------------------------- Emclaire Financial Corp. and Subsidiary Consolidated Balance Sheets As of June 30, 2007 (Unaudited) and December 31, 2006 (Dollar amounts in thousands, except per share data)
June 30, December 31, 2007 2006 ------------------------ --------------------- Assets ------ Cash and due from banks $ 6,044 $ 7,540 Interest-earning deposits with banks 126 9,177 ----------------------- --------------------- Cash and cash equivalents 6,170 16,717 Securities available for sale, at fair value 52,712 51,774 Loans receivable, net of allowance for loan losses of $2,086 and $2,035 220,149 213,344 Federal bank stocks, at cost 2,393 2,217 Bank-owned life insurance 4,889 4,794 Accrued interest receivable 1,379 1,374 Premises and equipment, net 7,812 7,958 Goodwill 1,422 1,422 Deferred tax asset 756 533 Prepaid expenses and other assets 666 427 ----------------------- --------------------- Total Assets $ 298,348 $ 300,560 ======================= ===================== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits: Noninterest-bearing $ 45,786 $ 44,045 Interest-bearing 194,182 200,447 ----------------------- --------------------- Total deposits 239,968 244,492 Short-term borrowed funds 1,700 - Long-term borrowed funds 30,000 30,000 Accrued interest payable 721 825 Accrued expenses and other liabilities 1,969 1,326 ----------------------- --------------------- Total Liabilities 274,358 276,643 ----------------------- --------------------- Stockholders' Equity: Preferred stock, $1.00 par value, 3,000,000 shares authorized; none issued - - Common stock, $1.25 par value, 12,000,000 shares authorized; 1,395,852 shares issued; 1,267,835 shares outstanding 1,745 1,745 Additional paid-in capital 10,872 10,871 Treasury stock, at cost; 128,017 shares (2,653) (2,653) Retained earnings 14,892 14,370 Accumulated other comprehensive loss (866) (416) ----------------------- --------------------- Total Stockholders' Equity 23,990 23,917 ----------------------- --------------------- Total Liabilities and Stockholders' Equity $ 298,348 $ 300,560 ======================= =====================
See accompanying notes to consolidated financial statements. 1 Emclaire Financial Corp. and Subsidiary Consolidated Statements of Income For the three and six months ended June 30, 2007 and 2006 (Unaudited) (Dollar amounts in thousands, except per share data)
For the three months ended For the six months ended June 30, June 30, ----------------------------- --------------------------- 2007 2006 2007 2006 -------------- ------------ ------------- ------------- Interest and dividend income: Loans receivable, including fees $ 3,788 $ 3,344 $ 7,392 $ 6,496 Securities: Taxable 419 367 783 750 Exempt from federal income tax 172 174 345 348 Federal bank stocks 21 23 71 40 Deposits with banks 16 23 137 41 -------------- ------------ ------------- ------------- Total interest and dividend income 4,416 3,931 8,728 7,675 -------------- ------------ ------------- ------------- Interest expense: Deposits 1,568 1,448 3,235 2,763 Borrowed funds 350 166 686 334 -------------- ------------ ------------- ------------- Total interest expense 1,918 1,614 3,921 3,097 -------------- ------------ ------------- ------------- Net interest income 2,498 2,317 4,807 4,578 Provision for loan losses 30 47 75 78 -------------- ------------ ------------- ------------- Net interest income after provision for loan losses 2,468 2,270 4,732 4,500 -------------- ------------ ------------- ------------- Noninterest income: Fees and service charges 391 377 716 734 Commissions on financial services 81 114 243 215 Net gain on available for sale securities 118 126 176 242 Net gain on sales of loans 7 - 7 - Earnings on bank-owned life insurance 54 41 108 91 Other 121 111 253 215 -------------- ------------ ------------- ------------- Total noninterest income 772 769 1,503 1,497 -------------- ------------ ------------- ------------- Noninterest expense: Compensation and employee benefits 1,245 1,290 2,550 2,597 Premises and equipment 401 372 801 753 Intangible amortization expense - 3 - 5 Other 690 588 1,295 1,113 -------------- ------------ ------------- ------------- Total noninterest expense 2,336 2,253 4,646 4,468 -------------- ------------ ------------- ------------- Income before provision for income taxes 904 786 1,589 1,529 Provision for income taxes 197 184 331 342 -------------- ------------ ------------- ------------- Net income $ 707 $ 602 $ 1,258 $ 1,187 ============== ============ ============= ============= Basic and diluted earnings per share $ 0.56 $ 0.47 $ 0.99 $ 0.94 Average common shares outstanding 1,267,835 1,267,835 1,267,835 1,267,835 Dilutive shares -
See accompanying notes to consolidated financial statements. 2 Emclaire Financial Corp. and Subsidiary Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2007 and 2006 (Unaudited) (Dollar amounts in thousands)
For the six months ended June 30, -------------------------------- 2007 2006 --------------- ---------------- Cash flows from operating activities Net income $ 1,258 $ 1,187 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 332 370 Provision for loan losses 75 78 Amortization of premiums and accretion of discounts, net 6 20 Amortization of intangible assets and mortgage servicing rights 8 8 Realized gain on sales of available for sale securities, net (176) (242) Net gains on sales of loans (7) - Stock compensation expense 1 - Earnings on bank owned life insurance, net (95) (79) (Increase) decrease in accrued interest receivable (5) 60 (Increase) decrease in prepaid expenses and other assets (237) 1 Increase (decrease) in accrued interest payable (104) 66 Increase (decrease) in accrued expenses and other liabilities 643 (185) --------------- ---------------- Net cash provided by operating activities 1,699 1,284 --------------- ---------------- Cash flows from investing activities Loan originations and principal collections, net (7,482) (17,518) Proceeds from the sale of loans 605 - Available for sale securities: Sales 989 413 Maturities, repayments and calls 9,256 4,054 Purchases (11,693) (528) Held to maturity securities: Maturities, repayments and calls - 1 Purchases of federal bank stocks (176) (331) Purchases of premises and equipment (186) (974) --------------- ---------------- Net cash used in investing activities (8,687) (14,883) --------------- ---------------- Cash flows from financing activities Net increase (decrease) in deposits (4,524) 7,981 Net increase in overnight borrowed funds 1,700 1,700 Dividends paid on common stock (735) (685) --------------- ---------------- Net cash provided by (used in) financing activities (3,559) 8,996 --------------- ---------------- Net decrease in cash and cash equivalents (10,547) (4,603) Cash and cash equivalents at beginning of period 16,717 10,367 --------------- ---------------- Cash and cash equivalents at end of period $ 6,170 $ 5,764 =============== ================ Supplemental information: Interest paid $ 4,025 $ 3,031 Income taxes paid 126 390
See accompanying notes to consolidated financial statements. 3 Emclaire Financial Corp. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity For the three and six months ended June 30, 2007 and 2006 (Unaudited) (Dollar amounts in thousands, except per share data)
For the three months ended For the six months ended June 30, June 30, ---------------------------- ---------------------------- 2007 2006 2007 2006 -------------- ------------- ------------- -------------- Balance at beginning of period $ 24,069 $ 23,679 $ 23,917 $ 23,615 Net income 707 602 1,258 1,187 Other comprehensive income (loss): Change in net unrealized gains (losses) on available for sale securities, net of taxes (341) (376) (335) (477) Less reclassification adjustment for gains included in net income, net of taxes (78) (83) (116) (160) -------------- ------------- ------------- -------------- Other comprehensive loss (419) (459) (451) (637) -------------- ------------- ------------- -------------- Total comprehensive income 288 143 807 550 Stock compensation expense 1 - 1 - Dividends declared (368) (342) (735) (685) -------------- ------------- ---------------------------- Balance at end of period $ 23,990 $ 23,480 $ 23,990 $ 23,480 ============== ============= ============= ============== Common cash dividend per share $ 0.29 $ 0.27 $ 0.58 $ 0.54 ============== ============= ============= ==============
See accompanying notes to consolidated financial statements. 4 Emclaire Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (Unaudited) 1. Nature of Operations and Basis of Presentation. Emclaire Financial Corp. (the "Corporation") is a Pennsylvania company organized as the holding company of Farmers National Bank of Emlenton (the "Bank"). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania. Its primary deposit products are checking, savings and certificate of deposit accounts and its primary lending products are residential and commercial mortgages, commercial business and consumer loans. The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All intercompany transactions and balances have been eliminated in preparing the consolidated financial statements. The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation's consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission's Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2006, as contained in the Corporation's 2006 Annual Report to Stockholders. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. The results of operations for interim quarterly or year to date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year's financial statement presentation. 2. Earnings per Common Share. Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation. Options on 83,000 shares of common stock were not included in computing diluted earnings per share because their effects were antidilutive. 5 3. Securities. The Corporation's securities as of the respective dates are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------ (Dollar amounts in thousands) Amortized Unrealized Unrealized Fair cost gains losses value - ------------------------------------------------------------------------------------------------------------------------ Available for sale: June 30, 2007: U.S. Government agencies and related entities $ 33,356 $ - $ (570) $32,786 Mortgage-backed securities 2,162 - (97) 2,065 Municipal securities 14,204 307 (1) 14,510 Corporate securities - - - - Equity securities 3,757 5 (411) 3,351 --------- ---------- ---------- ------- $ 53,479 $ 312 $ (1,079) $52,712 ========= ========== ========== ======= December 31, 2006: U.S. Government agencies and related entities $ 31,354 $ - $ (606) $30,748 Mortgage-backed securities 2,434 - (95) 2,339 Municipal securities 14,688 574 - 15,262 Corporate securities - - - - Equity securities 3,382 176 (132) 3,425 --------- ---------- ---------- ------- $ 51,858 $ 750 $ (833) $51,774 ========= ========== ========== ======= - ------------------------------------------------------------------------------------------------------------------------
4. Loans Receivable. The Corporation's loans receivable as of the respective dates are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------ (Dollar amounts in thousands) June 30, December 31, 2007 2006 - ------------------------------------------------------------------------------------------------------------------------ Mortgage loans on real estate: Residential first mortgages $ 64,497 $ 64,662 Home equity loans and lines of credit 48,252 47,330 Commercial 66,281 61,128 ------------- ------------- 179,030 173,120 Other loans: Commercial business 35,525 34,588 Consumer 7,680 7,671 ------------- ------------- 43,205 42,259 ------------- ------------- Total loans, gross 222,235 215,379 Less allowance for loan losses 2,086 2,035 ------------- ------------- Total loans, net $ 220,149 $ 213,344 ============= ============= - ------------------------------------------------------------------------------------------------------------------------
6 5. Deposits. The Corporation's deposits as of the respective dates are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------ (Dollar amounts in thousands) June 30, 2007 December 31, 2006 - ------------------------------------------------------------------------------------------------------------------------ Type of accounts Amount % Amount % - -------------------------------------------------------------------------------------------------- --------------------- Noninterest-bearing deposits $ 45,786 19.1% $ 44,045 18.0% Interest-bearing demand deposits 74,429 31.0% 70,951 29.0% Time deposits 119,753 49.9% 129,496 53.0% ------------ ---------- ---------- ---------- $ 239,968 100.0% $ 244,492 100.0% ============ ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------
6. Guarantees. The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Of these letters of credit at June 30, 2007, $105,000 will expire within the next twelve months, $275,000 will automatically renew within the next twelve months and $349,000 will automatically renew within thirteen to twenty-eight months. The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The current amount of the liability as of June 30, 2007 for guarantees under standby letters of credit issued is not material. 7. Employee Benefit Plans. The Corporation maintains a defined contribution 401(k) Plan. Eligible employees participate by providing tax-deferred contributions up to 20% of qualified compensation. Employee contributions are vested at all times. The Corporation provides a matching contribution of up to 4% of the participant's salary. Matching contributions for the six months ended June 30, 2007 and 2006 amounted to $67,000 and $42,000, respectively. The Corporation provides pension benefits for eligible employees through a defined benefit pension plan. Substantially all full-time employees participate in the retirement plan on a non-contributing basis and are fully vested after five years of service. The Corporation uses December 31 as the measurement date for its plans. 7 7. Employee Benefit Plans (continued). The components of the periodic pension cost are as follows:
- ------------------------------------------------------------------------------------------------------------------------ (Dollar amounts in thousands) For the three months ended For the six months ended Year ended June 30, June 30, December 31, ---------------------------- -------------------------- --------------- 2007 2006 2007 2006 2006 - --------------------------------------------------------------- ------------- ------------ ------------- --------------- Service cost $ 57 $ 52 $ 114 $ 104 $ 213 Interest cost 65 58 130 116 237 Expected return on plan assets (77) (66) (154) (132) (268) Transition asset (2) (2) (4) (4) (8) Prior service costs (8) (8) (16) (16) 32 Recognized net actuarial (gain) loss 7 15 14 24 - Effect of Special Termination Benefits - - - - 274 -------------- ------------- ------------ ------------- --------------- Net periodic pension cost $ 42 $ 49 $ 84 $ 92 $ 480 ============== ============= ============ ============= =============== - ------------------------------------------------------------------------------------------------------------------------
The expected rate of return on plan assets was 8.50% for the periods ended June 30, 2007 and 2006. The Corporation previously disclosed in its financial statements for the year ended December 31, 2006 that it expected to contribute $250,000 to its pension plan in 2007. As of June 30, 2007, there have been no contributions. The Corporation presently anticipates contributing $250,000 to fund its pension plan in 2007. 8. Stock Compensation Plans. In May 2007, the Corporation adopted the 2007 Stock Incentive Plan and Trust. Under the Plan, the Corporation may grant options to its directors, officers and employees for up to 177,496 shares of common stock. Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plan. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of ten years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Effective January 1, 2007, the Corporation adopted SFAS No. 123(R), Share-Based Payment, which requires that compensation cost related to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the six-month period ended June 30, 2007, the Corporation recognized $1,000 in compensation expense for stock options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
--------------------------------------------------------------------------- Six months ended June 30, 2007 --------------------------------------------------------------------------- Dividend yield 4.46% Expected life 10 years Expected volatility 14.09% Risk-free interest rate 5.10% ---------------------------------------------------------------------------
The expected volatility is based on historical stock price fluctuations. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on the maximum term of the options. The dividend yield assumption is based on the Corporation's history and expectation of dividend payouts. 8 8. Stock Compensation Plans (continued). A summary of option activity under the Plan as of June 30, 2007, and changes during the period then ended is presented below:
- ------------------------------------------------------------------------------------------------------------------------ Weighted-Average Weighted-Average Aggregate Remaining Term Options Exercise Price Intrinsic Value (in years) - ------------------------------------------------------------------------------------------------------------------------ Outstanding at the beginning of the year - $ - - Granted 83,000 26.00 10.0 Exercised - - - Forfeited - - - ------------------- ----------------- ------------------- ----------------- Outstanding as of June 30, 2007 83,000 $ 26.00 $ - 10.0 =================== ================= =================== ================= Exercisable as of June 30, 2007 - $ - $ - - =================== ================= =================== ================= - ------------------------------------------------------------------------------------------------------------------------
A summary of the status of the Corporation's nonvested shares as of June 30, 2007, and changes during the period then ended is presented below;
----------------------------------------------------------------------------------------------------------- Weighted-Average Options Grant-date Fair Value ----------------------------------------------------------------------------------------------------------- Nonvested at the beginning of the year - $ - Granted 83,000 3.39 Vested - - Forfeited - - ------------------------ ------------------------ Nonvested as of June 30, 2007 83,000 $ 3.39 ======================== ======================== -----------------------------------------------------------------------------------------------------------
As of June 30, 2007, there was $280,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of three years. 9. Effect of Recently Issued Accounting Standards. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Corporation is currently evaluating the potential impact, if any, of the adoption of SFAS 157 on its consolidated financial statements. 9 9. Effect of Recently Issued Accounting Standards (continued). In September 2006, FASB's Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee's benefit during his or her retirement, then the liability recognized during the employee's active service period should be based on the future cost of insurance to be incurred during the employee's retirement. Alternatively, if the policy holder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The EITF is effective in fiscal years beginning after December 15, 2007, with early adoption permitted. The Corporation is currently evaluating the impact that the implementation of EITF 06-4 may have on its consolidated financial statements. In September 2006, FASB's EITF issued EITF Issue No. 06-5 Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-5), The scope of EITF 06-5 consists of six separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of key persons. The six issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The implementation of EITF 06-5 had no effect on the Corporation's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for the Corporation January 1, 2008. The Corporation is evaluating the impact that the adoption of SFAS 159 will have on its consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp. (the "Corporation") and its wholly owned subsidiary bank, the Farmers National Bank of Emlenton (the "Bank"), for the three and six months ended June 30, 2007 compared to the same periods in 2006 and should be read in conjunction with the Corporation's December 31, 2006 Annual Report of Form 10-K filed with the Securities and Exchange Commission and with the accompanying consolidated financial statements and notes presented on pages 1 through 9 of this Form 10-Q. The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses and general economic conditions. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. 10 CHANGES IN FINANCIAL CONDITION Total assets decreased $2.2 million to $298.3 million at June 30, 2007 from $300.6 million at December 31, 2006. This decrease resulted from a decrease in cash and cash equivalents of $10.5 million or 63.1% to $6.2 million at June 30, 2007 from $16.7 million at December 31, 2006, as these funds were utilized in funding commercial real estate and business loans. Partially offsetting this decrease was an increase in loans receivable, net of allowance for loan losses of $6.8 million or 3.2% to $220.1 million at June 30, 2007 from $213.3 million at December 31, 2006. Total liabilities decreased $2.3 million to $274.4 million at June 30, 2007 from $276.6 million at December 31, 2006, while total stockholders' equity increased $73,000 to $24.0 million at June 30, 2007 from $23.9 million at December 31, 2006. The decrease in total liabilities was primarily due to a decrease in customer deposits of $4.5 million partially offset by increases in short-term borrowed funds and accrued expenses and other liabilities of $1.7 million and $644,000, respectively. RESULTS OF OPERATIONS Comparison of Results for the Three Month Periods Ended June 30, 2007 and 2006 General. Net income increased $105,000 or 17.4% to $707,000 for the three months ended June 30, 2007 from $602,000 for the same period in 2006. This increase was a result of increases in net interest income and non-interest income of $198,000 and $3,000, respectively, partially offset by increases in noninterest expense and the provision for income taxes of $83,000 and $13,000, respectively. Net interest income. Net interest income on a tax equivalent basis increased $178,000 or 7.3% to $2.6 million for the three months ended June 30, 2007 from $2.4 million for the same period in 2006. This net increase can be attributed to an increase in tax equivalent interest income of $482,000, partially offset by a $304,000 increase in interest expense. Interest income. Interest income on a tax equivalent basis increased $482,000 or 11.9% to $4.5 million for the three months ended June 30, 2007, compared to $4.0 million for the same period in the prior year. This increase can be attributed to increases in interest earned on loans and securities of $442,000 and $49,000, respectively, partially offset by decreases in interest earned on interest-earning deposits with banks and federal bank stocks of $7,000 and $2,000, respectively. Tax equivalent interest earned on loans receivable increased $442,000 or 13.1% to $3.8 million for the three months ended June 30, 2007, compared to $3.4 million for the same period in 2006. During that time, average loans increased $18.3 million or 9.1%, accounting for $315,000 in additional loan interest income. This increase can be primarily attributed to growth in the Corporation's commercial loan portfolios. Additionally, the yield on loans increased 25 basis points to 6.98% for the three months ended June 30, 2007, versus 6.73% for the same period in 2006, contributing $127,000 in additional interest income. Contributing to the increase in the yield on loans between the quarterly periods was the collection of $60,000 of interest due associated with the payoff of a previously non-performing commercial loan in April 2007 that had been on non-accrual status. In connection with the loan payoff, the Corporation received all principal and interest due under the contractual terms of the loan agreement and interest collected was recorded as loan interest income during the quarter ended June 30, 2007. Tax equivalent interest earned on securities increased $49,000 or 7.9% to $668,000 for the three months ended June 30, 2007, compared to $619,000 for the same period in 2006. The average volume of securities increased $1.2 million or 2.2%, accounting for $15,000 in additional interest income. Additionally, the yield on securities increased 25 basis points to 4.92% for the three months ended June 30, 2007, versus 4.67% for the same period in 2006, as a result of certain lower yielding securities maturing. This favorable yield variance contributed an additional $34,000 to interest income. 11 Interest earned on interest-earning deposit accounts decreased $7,000 to $16,000 for the three months ended June 30, 2007 from $23,000 for the same period in 2006. The average volume of these assets decreased $726,000 or 38.2%, primarily as a result of funding loans and purchasing securities, decreasing interest income by $10,000. Partially offsetting this decrease in volume, the average yield on interest-earning deposit accounts increased 61 basis points to 5.47% for the three months ended June 30, 2007, compared to 4.86% for the same period in the prior year, contributing $3,000 in additional interest income. The increase in the average yield reflects the recent increases in short-term interest rates. Interest earned on federal bank stocks increased $2,000 or 8.7% to $21,000 for the three month period ended June 30, 2007 from $23,000 for the same period in the prior year as a result of a higher volume offset by a lower yield. Interest expense. Interest expense increased $304,000 or 18.8% to $1.9 million for the three months ended June 30, 2007, compared to $1.6 million for the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits and borrowed funds of $120,000 and $184,000, respectively. Interest expense incurred on deposits increased $120,000 or 8.3% to $1.6 million for the three months ended June 30, 2007, compared to $1.4 million for the same period in the prior year. This increase can be attributed to the cost of interest-bearing deposits increasing 22 basis points to 3.24% for the three months ended June 30, 2007, compared to 3.02% for the same period in 2006 contributing $108,000 in additional expense. Additionally, the average volume of deposits increased $1.6 million to $194.0 million for the three months ended June 30, 2007, compared to $192.4 million for the same period in 2006 contributing $12,000 in additional expense. The increase in the rate paid on deposits reflects the increases in short-term market interest rates. Interest expense incurred on borrowed funds increased $184,000 or 110.9% to $350,000 for the three months ended June 30, 2007, compared to $166,000 for the same period in the prior year. This increase in interest expense can be attributed to the increase in the average balance of borrowed funds of $15.4 million or 93.8% to $31.8 million for the three months ended June 30, 2007, compared to $16.4 million for the same period in the prior year contributing $168,000 in additional expense. This volume increase was the result of $15.0 million of FHLB term borrowings placed in the second and third quarters of 2006 used primarily to fund loan growth. 12 Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include non-accrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.
- ------------------------------------------------------------------------------------------------------------------------ (Dollar amounts in thousands) Three months ended June 30, --------------------------------------------------------------------- 2007 2006 ------------------------------------- ------------------------------- Average Yield / Average Yield / Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Loans, taxable $ 213,162 $ 3,718 7.00% $ 194,339 $ 3,267 6.74% Loans, tax exempt 6,325 102 6.49% 6,851 111 6.47% ------------- ------------ --------- --------- Total loans receivable 219,487 3,820 6.98% 201,190 3,378 6.73% ------------- ------------ --------- --------- Securities, taxable 39,587 419 4.25% 38,004 367 3.87% Securities, tax exempt 14,871 249 6.71% 15,209 252 6.65% ------------- ------------ --------- --------- Total securities 54,458 668 4.92% 53,213 619 4.67% ------------- ------------ --------- --------- Interest-earning deposits with banks 1,174 16 5.47% 1,900 23 4.86% Federal bank stocks 2,321 21 3.68% 1,707 23 5.40% ------------- ------------ --------- --------- Total interest-earning cash equivalents 3,495 37 4.28% 3,607 46 5.12% ------------- ------------ --------- --------- Total interest-earning assets 277,440 4,525 6.54% 258,010 4,043 6.29% Cash and due from banks 5,668 6,889 Other noninterest-earning assets 14,668 13,330 ------------- --------- Total Assets $ 297,776 $ 278,229 ============= ========= Interest-bearing liabilities: Interest-bearing demand deposits $ 72,859 224 1.23% $ 72,554 175 0.97% Time deposits 121,095 1,344 4.45% 119,814 1,273 4.26% ------------- ------------ --------- --------- Total interest-bearing deposits 193,954 1,568 3.24% 192,368 1,448 3.02% ------------- ------------ --------- --------- Borrowed funds, short-term 1,791 25 5.60% 1,126 15 5.34% Borrowed funds, long-term 30,000 325 4.35% 15,278 151 3.96% ------------- ------------ --------- --------- Total borrowed funds 31,791 350 4.42% 16,404 166 4.06% ------------- ------------ --------- --------- Total interest-bearing liabilities 225,745 1,918 3.41% 208,772 1,614 3.10% ------------- ------------ --------- --------- Noninterest-bearing demand deposits 45,088 - - 43,779 - - ------------- ------------ --------- --------- Funding and cost of funds 270,833 1,918 2.84% 252,551 1,614 2.56% Other noninterest-bearing liabilities 2,851 2,116 ------------- --------- Total Liabilities 273,684 254,667 Stockholders' Equity 24,092 23,562 ------------- --------- Total Liabilities and Stockholders' Equity $ 297,776 $ 278,229 ============= ------------ ========= --------- Net interest income $ 2,607 $ 2,429 ============ ========= Interest rate spread (difference between 3.13% 3.18% weighted average rate on interest-earning assets and interest-bearing liabilities) Net interest margin (net interest 3.77% 3.78% income as a percentage of average interest-earning assets) - ------------------------------------------------------------------------------------------------------------------------
13 Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation's interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
-------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Three months ended June 30, 2007 versus 2006 Increase (Decrease) due to -------------------------------------------- Volume Rate Total -------------------------------------------------------------------------------------------------------------- Interest income: Loans $ 315 $ 127 $ 442 Securities 15 34 49 Interest-earning deposits with banks (10) 3 (7) Federal bank stocks 7 (9) (2) -------------- -------------- -------------- Total interest-earning assets 327 155 482 -------------- -------------- -------------- Interest expense: Deposits 12 108 120 Borrowed funds 168 16 184 -------------- -------------- -------------- Total interest-bearing liabilities 180 124 304 -------------- -------------- -------------- Net interest income $ 147 $ 31 $ 178 ============== ============== ============== --------------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectibility of the loan portfolio. Information pertaining to the allowance for loan losses and non-performing assets for the quarters ended June 30, 2007 and 2006 is as follows:
---------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) At or for the three months ended June 30, ----------------------------------- 2007 2006 ---------------------------------------------------------------------------------------------------------- Balance at the beginning of the period $ 2,078 $ 1,893 Provision for loan losses 30 47 Charge-offs (32) (61) Recoveries 10 11 ----------------- ----------------- Balance at the end of the period $ 2,086 $ 1,890 ================= ================= Non-performing loans $ 1,176 $ 1,546 Non-performing assets 1,176 1,632 Non-performing loans to total loans 0.53% 0.73% Non-performing assets to total assets 0.39% 0.57% Allowance for loan losses to total loans 0.94% 0.89% Allowance for loan losses to non-performing loans 177.36% 122.25% ----------------------------------------------------------------------------------------------------------
14 The provision for loan losses decreased $17,000 or 36.2% to $30,000 for the three month period ended June 30, 2007 from $47,000 for the same period in the prior year. Management's evaluation of the loan portfolio, including the changing composition of the portfolio as well as economic trends, regulatory considerations and other factors contributed to the recognition of $30,000 in the provision for loan losses during the three months ended June 30, 2007. Noninterest income. Noninterest income increased $3,000 to $772,000 during the three months ended June 30, 2007, compared to $769,000 during the same period in the prior year. This increase can be attributed to increases in fees and service charges, gains on the sale of loans, earnings on bank-owned life insurance and other noninterest income of $14,000, $7,000, $13,000 and $10,000, respectively. Offsetting this increase in noninterest income were decreases in commissions earned on financial services and gains on securities of $33,000 and $8,000, respectively. Noninterest expense. Noninterest expense increased $83,000 or 3.7% to $2.3 million during the three months ended June 30, 2007, compared to $2.2 million during the same period in the prior year. This increase in noninterest expense can be attributed to increases in premises and equipment and other noninterest expenses of $29,000 and $102,000, respectively. Premises and equipment increased $29,000 or 7.8% to $401,000 for the three months ended June 30, 2007, compared to $372,000 for the same period in the prior year. This increase can be attributed primarily to the operation of one additional branch facility opened in November 2006. Other noninterest expense increased $102,000 or 17.4% to $690,000 during the three months ended June 30, 2007, compared to $588,000 for the same period in the prior year. This increase can be attributed primarily to increases in professional fees relating to Sarbanes-Oxley Section 404 compliance, data processing center information technology initiatives and other operations and compliance consulting needed as a result of the 2006 reorganization. Provision for income taxes. The provision for income taxes increased $13,000 or 7.1% to $197,000 for the three months ended June 30, 2007, compared to $184,000 for the same period in the prior year due primarily to higher pre-tax earnings. This was partially offset by the decrease in the effective tax rate to 21.8% for the three months ended June 30, 2007, compared to 23.4% for the same period in 2006. The difference between the statutory rate of 34% and the Corporation's effective tax rate is due to tax-exempt income earned on certain tax-free loans and securities and bank-owned life insurance. Comparison of Results for the Six Month Periods Ended June 30, 2007 and 2006 General. Net income increased $71,000 or 5.9% to $1.3 million for the six months ended June 30, 2007 from $1.2 million for the same period in 2006. This increase was a result of increases in net interest income and non-interest income of $232,000 and $6,000, respectively and a decrease in the provision for income taxes of $11,000, partially offset by an increase in noninterest expense of $178,000. Net interest income. Net interest income on a tax equivalent basis increased $224,000 or 4.7% to $5.0 million for the six months ended June 30, 2007 from $4.8 million for the same period in 2006. This net increase can be attributed to an increase in tax equivalent interest income of $1.0 million, partially offset by an $824,000 increase in interest expense. Interest income. Interest income on a tax equivalent basis increased $1.0 million or 13.3% to $8.9 million for the six months ended June 30, 2007, compared to $7.9 million for the same period in the prior year. This increase can be attributed to increases in interest earned on loans, securities, federal bank stocks, and interest-earning deposits with banks of $892,000, $29,000, $31,000 and $96,000, respectively. 15 Tax equivalent interest earned on loans receivable increased $892,000 or 13.6% to $7.5 million for the six months ended June 30, 2007, compared to $6.6 million for the same period in 2006. During that time, average loans increased $20.0 million or 10.1%, accounting for $680,000 in additional loan interest income. This increase can be primarily attributed to growth in the Corporation's commercial loan portfolios. Additionally, the yield on loans increased 22 basis points to 6.92% for the six months ended June 30, 2007, versus 6.70% for the same period in 2006, contributing $212,000 in additional interest income. Contributing to the increase in the yield on loans between the periods was the collection of $60,000 of interest due associated with the payoff of a previously non-performing commercial loan in April 2007 that had been on non-accrual status. In connection with the loan payoff, the Corporation received all principal and interest due under the contractual terms of the loan agreement and interest collected was recorded as loan interest income during the six months ended June 30, 2007. Tax equivalent interest earned on securities increased $29,000 to $1.3 million for the six months ended June 30, 2007. The average yield on securities increased 22 basis points to 4.86% for the six months ended June 30, 2007, versus 4.64% for the same period in 2006, as a result of certain lower yielding securities maturing. This favorable yield variance contributed an additional $58,000 to interest income. Partially offsetting this increase was a decrease in the average volume of $1.2 million or 2.3%, primarily as a result of the utilization of these funds for loan growth. This resulted in a $29,000 decline in interest income. Interest earned on interest-earning deposit accounts increased $96,000 to $137,000 for the six months ended June 30, 2007 from $41,000 for the same period in 2006. The average volume of these assets increased $3.4 million, primarily as a result of the investment of funds from maturing securities, contributing $88,000 in additional interest income. Additionally, the average yield on interest-earning deposit accounts increased 75 basis points to 5.27% for the six months ended June 30, 2007, compared to 4.52% for the same period in the prior year, contributing $8,000 in additional interest income. The increase in the average yield reflects the recent increases in short-term interest rates. Interest earned on federal bank stocks increased $31,000 to $71,000 for the six month period ended June 30, 2007 from $40,000 for the same period in the prior year as a result of a higher volume and a higher yield. The higher yield resulted from the recognition of a special dividend on FHLB capital stock. Interest expense. Interest expense increased $824,000 or 26.6% to $3.9 million for the six months ended June 30, 2007, compared to $3.1 million for the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits and borrowed funds of $472,000 and $352,000, respectively. Interest expense incurred on deposits increased $472,000 or 17.16% to $3.2 million for the six months ended June 30, 2007, compared to $2.8 million for the same period in the prior year. This increase can be attributed to the cost of interest-bearing deposits increasing 38 basis points to 3.31% for the six months ended June 30, 2007, compared to 2.93% for the same period in 2006 contributing $375,000 in additional expense. The increase in the rate paid on deposits reflects the increases in short-term interest rates. The average volume of deposits increased $6.5 million or 3.4% to $196.8 million for the six months ended June 30, 2007, compared to $190.3 million for the same period in 2006 contributing $97,000 in additional expense. Interest expense incurred on borrowed funds increased $352,000 or 105.4% to $686,000 for the six months ended June 30, 2007, compared to $334,000 for the same period in the prior year. This increase in interest expense can be attributed to the increase in the average balance of borrowed funds of $14.7 million to $30.9 million for the six months ended June 30, 2007, compared to $16.2 million for the same period in the prior year. This volume increase was the result of $15.0 million of FHLB term borrowings placed in the second and third quarters of 2006 contributing $325,000 in additional expense. Such borrowings were primarily used to fund loan growth. 16 Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include non-accrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.
- ------------------------------------------------------------------------------------------------------------------------ Six months ended June 30, ------------------------------------------------------------------------- 2007 2006 ---------------------------------- -------------------------------------- Average Yield / Average Yield / (Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: - ------------------------ Loans, taxable $ 210,977 $ 7,250 6.93% $ 190,559 $ 6,344 6.71% Loans, tax exempt 6,419 206 6.48% 6,854 220 6.46% ------------ ---------- ---------- ---------- ------------ -------------- Total loans receivable 217,396 7,456 6.92% 197,413 6,564 6.70% ------------ ---------- ---------- ---------- ------------ -------------- Securities, taxable 38,176 783 4.14% 39,161 750 3.86% Securities, tax exempt 15,046 500 6.70% 15,296 504 6.65% ------------ ---------- ---------- ---------- ------------ -------------- Total securities 53,222 1,283 4.86% 54,457 1,254 4.64% ------------ ---------- ---------- ---------- ------------ -------------- Interest-earning deposits with banks 5,247 137 5.27% 1,828 41 4.52% Federal bank stocks 2,265 71 6.32% 1,671 40 4.83% ------------ ---------- ---------- ---------- ------------ -------------- Total interest-earning cash equivalents 7,512 208 5.58% 3,499 81 4.67% ------------ ---------- ---------- ---------- ------------ -------------- Total interest-earning assets 278,130 8,947 6.49% 255,369 7,899 6.24% Cash and due from banks 5,913 6,997 Other noninterest-earning assets 14,601 13,073 ------------ ---------- Total assets $ 298,644 $ 8,947 6.04% $ 275,439 $ 7,899 5.78% ============ ========== Interest-bearing liabilities: - ----------------------------- Interest-bearing demand deposits $ 72,513 457 1.27% $ 72,974 321 0.89% Time deposits 124,291 2,778 4.51% 117,300 2,442 4.20% ------------ ---------- ---------- ---------- ------------ -------------- Total interest-bearing deposits 196,804 3,235 3.31% 190,274 2,763 2.93% ------------ ---------- ---------- ---------- ------------ -------------- Borrowed funds, long-term 30,000 661 4.44% 15,138 310 4.13% Borrowed funds, short-term 908 25 5.55% 1,033 24 4.69% ------------ ---------- ---------- ---------- ------------ -------------- Total borrowed funds 30,908 686 4.48% 16,171 334 4.17% ------------ ---------- ---------- ---------- ------------ -------------- Total interest-bearing liabilities 227,712 3,921 3.47% 206,445 3,097 3.03% Noninterest-bearing demand deposits 44,230 - - 43,050 - - ------------ ---------- ---------- ---------- ------------ -------------- Funding and cost of funds 271,942 3,921 2.91% 249,495 3,097 2.50% Other noninterest-bearing liabilities 2,712 2,357 ------------ ---------- Total liabilities 274,654 251,852 Stockholders' equity 23,990 23,587 ------------ ---------- Total liabilities and stockholders' equity $ 298,644 $ 3,921 2.91% $ 275,439 $ 3,097 2.50% ============ ---------- ========== ------------ Net interest income $ 5,026 $ 4,802 ========== ============ Interest rate spread (difference between 3.01% 3.21% ========== ============== weighted average rate on interest-earning assets and interest-bearing liabilities) Net interest margin (net interest 3.64% 3.79% ========== ============== income as a percentage of average interest-earning assets) - ------------------------------------------------------------------------------------------------------------------------
17 Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation's interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
------------------------------------------------------------------------------------------------------------ Six months ended June 30, 2007 versus 2006 Increase (Decrease) due to ---------------------------------------------------- (Dollar amounts in thousands) Volume Rate Total ---------------------------------------------------- Interest income: Loans $ 680 $ 212 $ 892 Securities (29) 58 29 Interest-earning deposits with banks 88 8 96 Federal bank stocks 17 14 31 ------------------- --------------- --------------- Total interest-earning assets 756 292 1,048 ------------------- --------------- --------------- Interest expense: Deposits 97 375 472 Borrowed funds 325 27 352 ------------------- --------------- --------------- Total interest-bearing liabilities 422 402 824 ------------------- --------------- --------------- Net interest income $ 334 $ (110) $ 224 =================== =============== =============== ------------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectibility of the loan portfolio. Information pertaining to the allowance for loan losses and non-performing assets for the six months ended June 30, 2007 and 2006 is as follows:
--------------------------------------------------------------------------------------------------------------- At or for the At or for the six months ended year ended June 30, December 31, -------------------------------- --------------------- (Dollar amounts in thousands) 2007 2006 2006 --------------------------------------------------------------------------------------------------------------- Balance at the beginning of the period $ 2,035 $ 1,869 $ 1,869 Provision for loan losses 75 78 358 Charge-offs (47) (74) (221) Recoveries 23 17 29 ---------------- --------------- --------------------- Balance at the end of the period $ 2,086 $ 1,890 $ 2,035 ================ =============== ===================== Non-performing loans $ 1,176 $ 1,546 $ 1,841 Non-performing assets 1,176 1,632 1,939 Non-performing loans to total loans 0.53% 0.73% 0.85% Non-performing assets to total assets 0.39% 0.57% 0.65% Allowance for loan losses to total loans 0.94% 0.89% 0.94% Allowance for loan losses to non-performing loans 177.36% 122.25% 110.54% ---------------------------------------------------------------------------------------------------------------
18 The provision for loan losses decreased $3,000 or 3.9% to $75,000 for the six month period ended June 30, 2007 from $78,000 for the same period in the prior year. Management's evaluation of the loan portfolio, including the changing composition of the portfolio as well as economic trends, regulatory considerations and other factors contributed to the recognition of $75,000 in the provision for loan losses during the six months ended June 30, 2007. Noninterest income. Noninterest income increased $6,000 to $1.5 million for the six months ended June 30, 2007. This increase can be attributed to increases in commissions earned on financial services, gains on the sale of loans, earnings on bank-owned life insurance and other noninterest income of $28,000, $7,000, $17,000 and $38,000, respectively. Offsetting this increase in noninterest income were decreases in fees and service charges and gains on securities of $18,000 and $66,000, respectively. Noninterest expense. Noninterest expense increased $178,000 or 4.0% to $4.6 million during the six months ended June 30, 2007, compared to $4.5 million during the same period in the prior year. This increase in noninterest expense can be attributed to increases in premises and equipment and other noninterest expenses of $48,000 and $182,000, respectively, partially offset by a decrease in compensation and benefits of $47,000. Premises and equipment increased $48,000 or 6.4% to $801,000 for the six months ended June 30, 2007, compared to $753,000 for the same period in the prior year. This increase can be attributed primarily to the operation of one additional branch facility opened in November 2006. Other noninterest expense increased $182,000 or 16.4% to $1.3 million during the six months ended June 30, 2007, compared to $1.1 million for the same period in the prior year. This increase can be attributed primarily to increases in professional fees relating to Sarbanes-Oxley Section 404 compliance, data processing center information technology initiatives and other operations and compliance consulting needed as a result of the 2006 reorganization. Effective January 1, 2007, the Federal Deposit Insurance Corporation (FDIC) created a new risk framework of four risk categories and established assessment rates to coincide with each category. Assessment rates for Risk Category I institutions, which includes the Bank, range from 5 to 7 basis points. The FDIC also approved a one-time assessment prior to that date. The Bank believes that the one-time credit will more than offset the new FDIC assessment cost for 2007 and anticipates that the credit will be depleted in the second quarter of 2008. Accordingly, the Bank will begin to recognize the FDIC assessment cost at that time. Compensation and benefits decreased $47,000 or 1.8% to $2.6 million for the six months ended June 30, 2007. This decrease can be attributed primarily to cost savings from staffing reductions associated with the 2006 reorganization. Provision for income taxes. The provision for income taxes decreased $11,000 or 3.2% to $331,000 for the six months ended June 30, 2007, compared to $342,000 for the same period in the prior year due primarily to the decrease in the effective tax rate to 20.8% for the six months ended June 30, 2007, compared to 22.4% for the same period in 2006. Partially offsetting this favorable variance was higher pre-tax earnings. The difference between the statutory rate of 34% and the Corporation's effective tax rate is due to tax-exempt income earned on loans, securities and bank-owned life insurance. LIQUIDITY The Corporation's primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB and amortization and prepayments of outstanding loans and maturing securities. During the six months ended June 30, 2007, the Corporation used its sources of funds primarily to fund loan originations and security purchases. As of such date, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $26.2 million, and standby letters of credit totaling $729,000. 19 At June 30, 2007, time deposits amounted to $119.8 million or 49.9% of the Corporation's total consolidated deposits, including approximately $64.3 million of which are scheduled to mature within the next year. Management of the Corporation believes that it has adequate resources to fund all of its commitments, that all of its commitments will be funded as required by related maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities. Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation has alternative sources of funds such as a term borrowing capacity from the FHLB and, to a limited and rare extent, the sale of loans. At June 30, 2007, the Corporation's borrowing capacity with the FHLB, net of funds borrowed, was $107.0 million. Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business. CRITICAL ACCOUNTING POLICIES Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses as a critical accounting policy. The allowance for loan losses provides for an estimate of probable losses in the loan portfolio. In determining the appropriate level of the allowance for loan loss, the loan portfolio is separated into risk-rated and homogeneous pools. Migration analysis/historical loss rates, adjusted for relevant trends, have been applied to these pools. Qualitative adjustments are then applied to the portfolio to allow for quality of lending policies and procedures, national and local economic and business conditions, changes in the nature and volume of the portfolio, experience, ability and depth of lending management, changes in the trends, volumes and severity of past due, non-accrual and classified loans and loss and recovery trends, quality of the Corporation's loan review system, concentrations of credit, and external factors. The methodology used to determine the adequacy of the Corporation's allowance for loan losses is comprehensive and meets regulatory and accounting industry standards for assessing the allowance, however, it is still an estimate. Loan losses are charged against the allowance while recoveries of amounts previously charged-off are credited to the allowance. Loan loss provisions are charged against current earnings based on management's periodic evaluation and review of the factors indicated above. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and interest-bearing liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area. One of the primary functions of the Corporation's asset/liability management committee is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability committee is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates. 20 Interest rate sensitivity is the result of differences in the amounts and repricing dates of the Bank's rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing "gap", provide an indication of the extent that the Corporation's net interest income is affected by future changes in interest rates. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income. Based on certain assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation's assets and liabilities to interest rate changes, at June 30, 2007, the Corporation's interest-earning assets maturing or repricing within one year totaled $76.9 million while the Corporation's interest-bearing liabilities maturing or repricing within one-year totaled $96.1 million, providing an excess of interest-bearing liabilities over interest-earning assets of $19.2 million or a negative 6.5% of total assets. At June 30, 2007, the percentage of the Corporation's assets to liabilities maturing or repricing within one year was 80.0%. For more information, see "Market Risk Management" in Exhibit 13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2006. Item 4. Controls and Procedures - -------------------------------- The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Corporation's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). There has been no change made in the Corporation's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. As of the quarter ended June 30, 2007, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on the foregoing, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation. PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings - -------------------------- The Corporation is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially effect the Corporation's consolidated financial position or results of operations. Item 1A. Risk Factors - ---------------------- There have been no material changes in the Corporation's risk factors from those previously disclosed in the 2006 Form 10-K. 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - -------------------------------------------------------------------- None. Item 3. Defaults Upon Senior Securities - ---------------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ (a) The annual meeting of stockholders of the Corporation was held April 25, 2007. Of 1,267,835 common shares eligible to vote, 1,011,469 or 79.8% were voted in person or by proxy. (b) The following Class B directors were elected for a three year term expiring in 2010: Name Shares For Shares Withheld ---- ---------- --------------- J. Michael King 898,229 113,240 David L. Cox 986,640 24,828 Mark A. Freemer 892,581 118,887 In addition to the above listed individuals, the following persons continue to serve as directors: Ronald L. Ashbaugh, James M. Crooks, George W. Freeman, Robert L. Hunter, William C. Marsh, John B. Mason and Brian C. McCarrier. The recommendation of the Board of Directors to ratify the appointment of Beard Miller Company LLP as the Corporation's independent auditors, as described in the proxy statement for the annual meeting was approved with 1,001,933 shares in favor, 1,472 shares against and 8,064 shares abstained. The recommendation of the Board of Directors to approve the 2007 Stock Incentive Plan and Trust as described in the proxy statement for the annual meeting was approved with 687,422 shares in favor, 160,221 shares against and 8,630 shares abstained. Item 5. Other Information - -------------------------- (a) Not applicable. (b) Not applicable. Item 6. Exhibits - ----------------- Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350 Exhibit 32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350 22 Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY Date: August 10, 2007 By: /s/ David L. Cox ------------------------------------ David L. Cox Chairman of the Board, President and Chief Executive Officer Date: August 10, 2007 By: /s/ William C. Marsh ------------------------------------------ William C. Marsh Chief Financial Officer and Treasurer 23 EX-31.1 2 a5469424ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)) I, David L. Cox, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this Form 10-Q of Emclaire Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2007 By: /s/ David L. Cox ------------------------------------ David L. Cox Chairman of the Board, President and Chief Executive Officer 24 EX-31.2 3 a5469424ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)) I, William C. Marsh, Chief Financial Officer and Treasurer, certify that: 1. I have reviewed this Form 10-Q of Emclaire Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2007 By: /s/ William C. Marsh ------------------------------------------ William C. Marsh Chief Financial Officer and Treasurer 25 EX-32.1 4 a5469424ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Emclaire Financial Corp. (the Corporation) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date here (the Report), I, David L. Cox, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and result of operations of the Corporation. /s/ David L. Cox - ----------------- David L. Cox Chairman of the Board, President and Chief Executive Officer August 10, 2007 EX-32.2 5 a5469424ex32_2.txt EXHIBIT 32.2 Exhibit 32.2 CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Emclaire Financial Corp. (the Corporation) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date here (the Report), I, William C. Marsh, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and result of operations of the Corporation. /s/ William C. Marsh - --------------------- William C. Marsh Chief Financial Officer and Treasurer August 10, 2007 -----END PRIVACY-ENHANCED MESSAGE-----