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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For Quarter Ended: SEPTEMBER 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________
Commission File Number: 000-18464
EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1606091
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
612 MAIN STREET, EMLENTON, PA 16373
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(Address of principal executive offices)
(724) 867-2311
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares of issuer's common stock outstanding as of November 2,
2001:
COMMON STOCK, $1.25 PAR VALUE 1,332,835
----------------------------- ---------
(Class) (Outstanding)
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EMCLAIRE FINANCIAL CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2001 (Unaudited) and December 31, 2000..........1
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 (Unaudited).......2
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 2001 (Unaudited).....3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 (Unaudited)................4
Notes to Consolidated Financial Statements..........................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................14
Item 2. Changes in Securities..............................................14
Item 3. Defaults Upon Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 5. Other Information..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
Signatures.........................................................15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
As of September 30, 2001 (Unaudited) and December 31, 2000
(Dollar amounts in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2001 2000
(unaudited)
----------- -----------
ASSETS
Cash and due from banks $ 6,408 $ 6,679
Interest-earning deposits in banks 89 91
Federal funds sold 5,530 1,740
Securities available for sale 27,619 25,230
Securities held to maturity (fair value $75 and $213) 73 219
Loans receivable, net of allowance for loan losses of $1,454 and $1,460 158,425 150,332
Federal bank stocks, at cost 1,261 1,239
Accrued interest and dividends receivable 1,227 1,247
Premises and equipment 3,171 3,333
Intangible assets 1,806 2,013
Prepaid expenses and other assets 837 2,042
----------- -----------
Total assets $ 206,446 $ 194,165
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 184,122 $ 171,125
Borrowed funds -- 2,000
Accrued interest payable 507 505
Accrued expenses and other liabilities 658 490
----------- -----------
Total liabilities 185,287 174,120
----------- -----------
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; 1,332,835 shares outstanding 1,745 1,745
Additional paid-in capital 10,871 10,871
Treasury stock, at cost; 63,017 shares (971) (971)
Retained earnings 8,944 8,320
Accumulated other comprehensive income 570 80
----------- -----------
Total stockholders' equity 21,159 20,045
----------- -----------
Total liabilities and stockholders' equity $ 206,446 $ 194,165
=========== ===========
Common shares outstanding 1,332,835 1,332,835
Book value per share $ 15.88 $ 15.04
See accompanying notes to consolidated financial statements.
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
For the three and nine months ended September 30, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 3,172 $ 3,192 $ 9,496 $ 9,208
Securities:
Taxable 311 348 904 1,185
Exempt from Federal income tax 92 83 267 250
Dividends on Federal bank stocks 21 17 61 51
Deposits with banks and Federal funds sold 65 17 236 35
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 3,661 3,657 10,964 10,729
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 1,494 1,431 4,626 4,133
Borrowed funds -- 44 32 138
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,494 1,475 4,658 4,271
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,167 2,182 6,306 6,458
Provision for loan losses 36 61 118 158
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,131 2,121 6,188 6,300
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 237 266 697 632
Other 106 93 296 228
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 343 359 993 860
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Compensation and employee benefits 946 892 2,809 2,645
Premises and equipment, net 261 250 811 762
Intangible amortization expense 69 80 207 242
Other 491 486 1,491 1,526
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 1,767 1,708 5,318 5,175
---------- ---------- ---------- ----------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 707 772 1,863 1,985
Provision for income taxes 216 240 560 602
---------- ---------- ---------- ----------
NET INCOME $ 491 $ 532 $ 1,303 $ 1,383
========== ========== ========== ==========
Net income per share $ 0.37 $ 0.40 $ 0.98 $ 1.02
Dividends per share $ 0.17 $ 0.15 $ 0.51 $ 0.45
Average common shares outstanding 1,332,835 1,344,318 1,332,835 1,352,517
See accompanying notes to consolidated financial statements.
2
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2001 (Unaudited)
(Dollar amounts in thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK CAPITAL STOCK EARNINGS INCOME TOTAL
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000 $ 1,745 $ 10,871 $ (971) $ 8,320 $ 80 $ 20,045
Comprehensive income:
Net income -- -- -- 1,303 -- 1,303
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustments and taxes -- -- -- -- 490 490
-------- -------- -------- -------- -------- --------
Comprehensive income -- -- -- 1,303 490 1,793
--------
Dividends paid -- -- -- (679) -- (679)
-------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 2001 $ 1,745 $ 10,871 $ (971) $ 8,944 $ 570 $ 21,159
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,303 $ 1,383
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization for premises and equipment 452 438
Provision for loan losses 118 158
Amortization of premiums and accretion of discounts, net 7 40
Amortization of intangible assets 207 242
Decrease (increase) in accrued interest receivable 20 (95)
Decrease (increase) in prepaid expenses and other assets 1,205 (79)
Increase in accrued interest payable 2 77
Increase in accrued expenses and other liabilities 168 57
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,482 2,221
-------- --------
LENDING AND INVESTING ACTIVITIES:
Loan originations (47,014) (32,467)
Purchases of securities available for sale (7,464) (1,532)
Purchases of Federal bank stocks (22) --
Principal repayments of loans receivable 38,803 18,799
Repayments, maturities and calls of securities available for sale 5,554 6,472
Principal repayments of securities held to maturity 146 1,543
Other (286) (165)
-------- --------
NET CASH USED IN LENDING AND INVESTING ACTIVITIES (10,283) (7,350)
-------- --------
DEPOSIT AND FINANCING ACTIVITIES:
Net increase (decrease) in deposits 12,997 (344)
Net increase (decrease) in borrowed funds (2,000) 4,845
Dividends paid (679) (607)
Payments to acquire treasury stock -- (517)
-------- --------
NET CASH PROVIDED BY DEPOSIT AND FINANCING ACTIVITIES 10,318 3,377
-------- --------
Net increase (decrease) in cash equivalents 3,517 (1,752)
Cash equivalents at beginning of period 8,510 8,595
-------- --------
Cash equivalents at end of period $ 12,027 $ 6,843
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,656 $ 4,194
Income taxes paid 699 596
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 50 12
See accompanying notes to consolidated financial statements.
4
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
Emclaire Financial Corp. (the Corporation) is a Pennsylvania
corporation and bank holding company that provides a full range of
retail and commercial financial products and services to customers in
western Pennsylvania through its wholly owned subsidiary bank, the
Farmers National Bank of Emlenton (the Bank), a national banking
association. The consolidated financial statements contained herein
include the accounts of the Corporation and the Bank. All inter-company
transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Corporation's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-QSB 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, 2000, as contained in the 2000 Annual Report to
Stockholders.
The results of operations for the three and nine months ended September
30, 2001 are not necessarily indicative of the results that may be
expected for the entire year or any other period. Certain amounts
previously reported have been reclassified to conform with the current
year's reporting format.
2. LOANS RECEIVABLE
The Corporation's loans receivable as of the respective dates are
summarized as follows:
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SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
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MORTGAGE LOANS:
Residential $ 97,690 $ 92,429
Commercial real estate 25,799 24,661
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123,489 117,090
OTHER LOANS:
Consumer loans 14,603 14,618
Commercial business 21,787 20,084
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159,879 151,792
LESS:
Allowance for loan losses 1,454 1,460
--------- ---------
$ 158,425 $ 150,332
========= =========
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5
3. DEPOSITS
The Corporation's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------------- ----------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
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Noninterest-bearing deposits - $ 30,331 16.5% - $ 27,312 16.0%
Interest-bearing demand deposits 1.42% 64,744 35.2% 2.30% 60,451 35.3%
Time deposits 5.34% 89,047 48.4% 5.76% 83,362 48.7%
--------- ----- --------- -----
3.08% $ 184,122 100.0% 3.62% $ 171,125 100.0%
========= ===== ========= =====
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4. NET INCOME PER SHARE
The Corporation maintains a simple capital structure with no common
stock equivalents. As such earnings per share computations are based on
the weighted average number of common shares outstanding for the
respective reporting periods.
5. COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following for the three
and nine-month periods ended September 30:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -----------------
In thousands 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------
Net income $ 491 $ 532 $ 1,303 $ 1,383
Change in net unrealized gain on securities available
for sale, net of reclassification adjustments and taxes 281 117 490 34
----- ----- ------- -------
Comprehensive income $ 772 $ 649 $ 1,793 $ 1,417
===== ===== ======= =======
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6. FEDERAL BANK STOCKS
Federal bank stocks represent the Bank's investment in the Federal Home
Loan Bank of Pittsburgh (FHLB) and the Federal Reserve Bank of
Cleveland, at cost.
7. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 141 requires all business combinations to be accounted for
under the purchase method of accounting as use of the
pooling-of-interests method is henceforth prohibited. In addition, this
statement requires that negative goodwill that exists after the basis
of certain acquired assets is reduced to zero
6
should be recognized as an extraordinary gain. The provisions of this
statement apply to all business combinations initiated after June 30,
2001.
SFAS No. 142 prescribes that goodwill associated with a business
combination and intangible assets with an indefinite useful life should
no longer be amortized, but should be tested for impairment at least
annually. The Statement requires intangible assets that are separable
from goodwill and that have a useful life to be amortized over the
determinable useful life. The provisions of this statement will become
effective for the Corporation on January 1, 2002. Upon adoption of this
statement, goodwill and other intangible assets arising form
acquisitions completed before July 1, 2001 should be accounted for in
accordance with the provisions of this statement. Certain provisions of
this statement could require a reclassification of previously separate
intangible assets to goodwill and vice versa if the intangible assets
in question do not meet the new criteria for the classification as a
separately recognizable intangible.
The Corporation has ultimately not yet evaluated the impact of the
adoption of these statements on its financial condition or results of
operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
SFAS No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133," requires that derivative instruments be carried at
fair value in the statement of financial condition. The statements
continue to allow derivative instruments to be used to hedge various
risks and set forth specific criteria to be used to determine when
hedge accounting can be used. The statements also provide for
offsetting changes in fair value or cash flows of both the derivative
and the hedged asset or liability to be recognized in earnings in the
same period; however, any changes in fair value or cash flow that
represent the ineffective portion of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are
required to be recognized in earnings.
The provisions of this statement, as amended, were effective for the
Corporation for its quarterly and annual reporting periods beginning
January 1, 2001. The Corporation experienced no material impact to its
financial position, results of operations and cash flows as of the
effective date of this statement as the Corporation uses no such
instruments.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of SFAS No. 125." This statement revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of SFAS No. 125's provisions without
reconsideration. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This statement is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. Disclosures about securitization and
collateral accepted need not be reported for periods ending on or
before December 15, 2000, for which financial statements are presented
for comparative purposes.
This statement is to be applied prospectively with certain exceptions.
Other than those exceptions, earlier or retroactive application of its
accounting provisions is not permitted. The Corporation did not
experience any impact to its financial position, results of operations
and cash flows as of the effective date of this statement.
7
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 nine month periods ended September 30, 2001 and should be read in
conjunction with the accompanying consolidated financial statements and notes
presented on pages 1 through 7.
Discussions of certain matters in this Report on Form 10-QSB may constitute
forward-looking statements within the meaning of the Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could". These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Corporation operates, projections of future
performance, potential future credit experience, perceived opportunities in the
market, and statements regarding the Corporation's mission and vision. The
Corporation's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, the demand for the Corporation's products and services, accounting
principles or guidelines, legislative and regulatory changes, monetary and
fiscal policies of the US Government, US Treasury, and Federal Reserve, real
estate markets, competition in the financial services industry, attracting and
retaining key personnel, performance of new employees, regulatory actions,
changes in and utilization of new technologies, and other risks detailed in the
Corporation's reports filed with the Securities and Exchange Commission (SEC)
from time to time, including the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000. These factors should be considered in evaluating
the forward-looking statements, and undue reliance should not be placed on such
statements. 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
GENERAL. The Corporation's total assets increased by $12.3 million or 6.3% to
$206.4 million at September 30, 2001 from $194.2 million at December 31, 2000.
This net increase was primarily the result of increases in cash equivalents,
securities and loans receivable of $3.5 million, $2.2 million and $8.1 million,
respectively, partially offset by a decrease in all other assets of $1.6
million. The increase in total assets reflects a corresponding increase in total
liabilities and total stockholders' equity of $11.2 million or 6.4% and $1.1
million or 5.6%, respectively. The increase in total liabilities was primarily
the result of an increase in deposits of $13.0 million or 7.6% partially offset
by a decrease in borrowed funds of $2.0 million. The increase in stockholders'
equity was primarily the result of an increase in retained earnings and
accumulated other comprehensive income of $624,000 and $490,000, respectively.
CASH EQUIVALENTS. Cash on hand, interest-earning deposits and federal funds sold
represent cash equivalents and increased a combined $3.5 million or 41.3% to
$12.0 million at September 30, 2001 from $8.5 million at December 31, 2000. The
net increase between September 30, 2001 and December 31, 2000 can be attributed
primarily to the increase in the Corporation's deposits, partially offset by net
loan originations, security purchases and repayment of borrowed funds.
SECURITIES. The Corporation's securities portfolios increased by $2.2 million or
8.7% to $27.7 million at September 30, 2001 from $25.4 million at December 31,
2000. This net increase was primarily the result of purchases of securities of
$7.5 million, during the nine months ended September 30, 2001. Partially
offsetting the purchases of securities were sales and maturities of securities
of $5.6 million, during the nine months ended September 30, 2001.
8
LOANS RECEIVABLE. Net loans receivable increased $8.1 million or 5.3% to $158.4
million at September 30, 2001 from $150.3 million at December 31, 2000. This
increase was comprised of an increase in mortgage loans of $6.4 million or 5.5 %
and other loans of $1.7 million or 8.4%, during the nine months ended September
30, 2001. This overall increase in loans receivable can be attributed primarily
to higher customer demand for loans in the current lower interest rate
environment as well as the introduction of new commercial and consumer loan
products.
NON-PERFORMING ASSETS. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $888,000
or 0.43% and $846,000 or 0.44% of total assets at September 30, 2001 and
December 31, 2000, respectively.
DEPOSITS. Total deposits increased $13.0 million or 7.6% to $184.1 million at
September 30, 2001 from $171.1 million at December 31, 2000. This increase was
comprised of increases in noninterest bearing, interest bearing and time
deposits of $3.0 million, $4.3 million and $5.7 million, respectively. The
general increase in deposits during the period can be attributed primarily to:
(1) an overall movement of funds in the marketplace by customers from mutual
fund and stock investments into safer bank deposits as a result of recent
national economic instability, and (2) the Corporation's development and
promotion new depository products including money market accounts and special
certificate of deposit programs, among other initiatives.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $1.1 million or 5.6% to
$21.2 million at September 30, 2001 from $20.0 million at December 31, 2000.
This increase was principally the result of an increase in retained earnings of
$624,000 million, comprised of net income of $1.3 million offset by dividends
paid of $679,000, and an increase of accumulated other comprehensive income of
$490,000 as a result of unrealized gains on securities available for sale net of
tax.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 2001 AND 2000
GENERAL. The Corporation reported net income of $491,000 and $532,000 for the
three months ended September 30, 2001 and 2000, respectively. The $41,000 or
7.7% decrease in net income for the three months ended September 30, 2001, as
compared to the three months ended September 30, 2000, was attributable to
decreases in net interest income and noninterest income of $15,000 and $16,000,
respectively, and an increase in noninterest expense of $59,000. Partially
offsetting these unfavorable variances were decreases in the provisions for loan
losses and income taxes of $25,000 and $24,000, respectively.
During 2001, the Corporation and the nation have experienced a historically
dramatic drop in national market interest rates with the Federal funds discount
rate decreasing 300 basis points to 2.5% in September 2001 from 5.5% in January
2001. Over the same period, the national prime-lending rate has declined
similarly from 9.5% to 5.5%.
As outlined in detail below, this declining rate environment has resulted in a
significant repricing, reducing the yield of the Corporation's interest-earning
assets as new loan production and refinancing of existing loans during 2001 has
resulted in lower yielding loan assets. Given that the Corporation's time
deposit products don't afford a call feature, the cost of funds during the year
to date period, has not directly corresponded with the repricing of assets, but
such repricing of deposits is expected to approach that of interest-earning
assets, particularly as the current lower interest rate environment continues.
The Corporation has critically evaluated the pricing of interest-bearing demand
deposits (checking, savings and money market products) over the past several
quarters in light of the current rate environment and has adjusted pricing, as
circumstances proved beneficial. Specifically in regards to time deposits, the
Corporation expects to see a decrease in the cost of these funds as
approximately $21.0 million of these deposits are expected to mature and reprice
during the fourth quarter of 2001, and approximately $58.2 million are expected
to mature and reprice within the next year. The repricing of these time deposits
could result in a lower cost of funds and a more stabilized or higher interest
rate spread especially if the current lower rate environment persists.
9
NET INTEREST INCOME. Net interest income on a tax equivalent basis decreased
$10,000 to $2.21 million for the three months ended September 30, 2001, compared
to $2.22 million for the same period in the prior year. This increase can be
attributed to an increase in interest expense of $19,000, partially offset by an
increase in interest income of $9,000.
INTEREST INCOME. Interest income on a tax equivalent basis increased $9,000 to
$3.70 million for the three months ended September 30, 2001, compared to $3.69
million for the same period in the prior year. This net increase in interest
income can be attributed to an increase in average interest-earning assets of
$11.9 million or 6.6% to $193.3 million for the three months ended September 30,
2001, compared to $181.3 million for the same period in the prior year. The
increase in average interest-earning assets can be attributed to increases in
average loans receivable and interest-earning deposits (including Federal funds
sold) of $6.2 million or 4.1% and $6.4 million, respectively. Average loans
receivable increased to $156.8 million and average interest-earning deposits
increased to $7.5 million during the three months ended September 30, 2001,
compared to $150.6 million and $1.1 million, respectively, during the same
period in the prior year. Average securities decreased $714,000 or 2.5% to $27.7
million during the three months ended September 30, 2001, compared to $28.4
million during the same period last year. Partially offsetting the increase in
interest income due to the increase in volume of interest-earning assets was a
decrease in the yield of interest earning assets of 49 basis points to 7.66% for
the three months ended September 30, 2001, compared to 8.15% for the same period
in the prior year. The yield on loans, securities and interest-earning deposits
decreased to 8.09%, 6.42% and 3.45%, respectively, during the three months ended
September 30, 2001, compared to 8.48%, 6.60%, and 6.19%, respectively, for the
same period in the prior year.
INTEREST EXPENSE. Interest expense increased $19,000 or 1.3% to $1.49 million
for the three months ended September 30, 2001, compared to $1.48 million for the
same period in the prior year. This increase in interest expense can be
attributed to an increase in interest-bearing liabilities of $9.0 million or
6.3% to $152.6 million during the three months ended September 30, 2001,
compared to $143.5 million during the same period in the prior year. Comprising
this net increase in interest-bearing liabilities was an increase in average
deposits of $11.6 million or 8.2%, partially offset by a decrease in average
borrowed funds of $2.6 million related to the payoff of advances from the FHLB.
Offsetting the net increase in interest expense as a result of the increase in
volume was a decline in the interest rate on interest-bearing liabilities of 19
basis points to 3.92% during the three months ended September 30, 2001, compared
to 4.11% during the same period in the prior year.
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
potential losses inherent in the loan portfolio. In determining the appropriate
level of allowance for loan losses, management considers historical loss
experience, the present and prospective financial condition of borrowers,
current and prospective economic conditions (particularly as they relate to
markets where the Company 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.
The decrease in the Corporation's provision for loans losses between the
three-month periods ended September 30, 2001 and 2000 reflects the adequacy of
the Corporation's allowance for loan losses during the periods and as of
September 30, 2001.
NONINTEREST INCOME. Noninterest income, comprised primarily of fees on
depository accounts, general transactional income, certain loan transaction
costs and other miscellaneous income, remained relatively stable between the
three months ended September 30, 2001 and the same period in the prior year.
Noninterest income was $343,000 during the third quarter of this year as
transactional deposit and loan activity remained relatively consistent between
the two quarterly periods.
NONINTEREST EXPENSE. Noninterest expense, comprised of compensation and employee
benefits, premises and equipment, intangible amortization and other expenses,
increased $59,000 or 3.5% to $1.77 million during the three months ended
September 30, 2001, compared to $1.71 during the same period in the prior year.
10
Compensation and employee benefits expense increased $54,000 or 6.1% to $946,000
during the three months ended September 30, 2001, compared to $892,000 during
the same period in the prior year. This increase can be attributed primarily to
normal and expected salary and benefit cost increases between the two periods.
All other noninterest expenses combined remained relatively flat between the two
quarterly periods ended September 30, 2001 and 2000.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $24,000 or
10.0% to $216,000 for the three months ended September 30, 2001, compared to
$240,000 for the same period in the prior year. This decrease is a direct result
of the decrease in net income before taxes between the two periods.
COMPARISON OF RESULTS FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2001 AND 2000
GENERAL. The Corporation reported net income of $1.30 million and $1.38 million
for the nine months ended September 30, 2001 and 2000, respectively. The $80,000
or 5.8% decrease in net income for the nine months ended September 30, 2001, as
compared to the nine months ended September 30, 2000, was attributable to a
decrease in net interest income of $152,000, and an increase in noninterest
expense of $143,000. Partially offsetting these unfavorable variances was an
increase in noninterest income of $133,000 and decreases in the provisions for
loan losses and income taxes of $40,000 and $42,000, respectively.
NET INTEREST INCOME. Net interest income on a tax equivalent basis decreased
$144,000 to $6.4 million for the nine months ended September 30, 2001, compared
to $6.6 million for the same period in the prior year. This decrease can be
attributed to an increase in interest expense of $387,000, partially offset by
an increase in interest income of $243,000.
INTEREST INCOME. Interest income on a tax equivalent basis increased $243,000 or
2.2% to $11.1 million for the nine months ended September 30, 2001, compared to
$10.8 million for the same period in the prior year. This net increase in
interest income can be attributed to an increase in average interest-earning
assets of $9.1 million or 5.0% to $189.3 million for the nine months ended
September 30, 2001, compared to $180.2 million for the same period in the prior
year. The increase in average interest-earning assets can be attributed to
increases in average loans receivable and interest-earning deposits (including
Federal funds sold) of $6.8 million or 4.7% and $6.5 million, respectively.
Average loans receivable increased to $153.8 million and average
interest-earning deposits increased to $7.3 million during the nine months ended
September 30, 2001, compared to $147.0 million and $819,000, respectively,
during the same period in the prior year. Average securities decreased $4.2
million or 13.6% to $26.9 million during the nine months ended September 30,
2001, compared to $31.1 million during the same period last year. Partially
offsetting the increase in interest income due to the increase in volume of
interest-earning assets was a decrease in the yield of interest earning assets
of 21 basis points to 7.81% for the nine months ended September 30, 2001,
compared to 8.02% for the same period in the prior year. The yield on loans,
securities and interest-earning deposits decreased to 8.23%, 6.39% and 4.32%,
respectively, during the nine months ended September 30, 2001, compared to
8.35%, 6.62%, and 8.30%, respectively, for the same period in the prior year.
INTEREST EXPENSE. Interest expense increased $387,000 or 9.1% to $4.7 million
for the nine months ended September 30, 2001, compared to $4.3 million for the
same period in the prior year. This increase in interest expense can be
attributed to an increase in interest-bearing liabilities of $6.9 million or
4.8% to $150.3 million during the nine months ended September 30, 2001, compared
to $143.4 million during the same period in the prior year. Comprising this net
increase in interest-bearing liabilities was an increase in average deposits of
$9.2 million or 6.5%, partially offset by a decrease in average borrowed funds
of $2.3 million. Contributing to the net increase in interest expense, as a
result of the increase in volume of interest-bearing liabilities for the year to
date period, was an increase in the interest rate on interest-bearing
liabilities of 16 basis points to 4.13% during the nine months ended September
30, 2001, compared to 3.97% during the same period in the prior year.
PROVISION FOR LOAN LOSSES. The $40,000 or 25.3% decrease in the Corporation's
provision for loans losses between the nine-month periods ended September 30,
2001 and 2000 reflects the adequacy of the Corporation's allowance for loan
losses during the periods and as of September 30, 2001.
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NONINTEREST INCOME. Noninterest income increased $133,000 or 15.5% to $993,000
for the nine months ended September 30, 2001, compared to $860,000 for the same
period in the prior year due primarily to the steady increase in deposit
accounts and related transaction fees during the first nine months this year.
NONINTEREST EXPENSE. Noninterest expense, comprised of compensation and employee
benefits, premises and equipment, intangible amortization and other expenses,
increased $143,000 or 2.8% to $5.3 million during the nine months ended
September 30, 2001, compared to $5.2 during the same period in the prior year.
Compensation and employee benefits expense increased $164,000 or 6.2% to $2.8
million during the nine months ended September 30, 2001, compared to $2.6
million during the same period in the prior year. This increase can be
attributed primarily to normal and expected salary and benefit cost increases
between the two periods.
All other noninterest expenses combined remained relatively flat between the two
year to date periods ended September 30, 2001 and 2000.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $42,000 or
7.0% to $560,000 for the nine months ended September 30, 2001, compared to
$602,000 for the same period in the prior year. This decrease is a direct result
of the decrease in net income before taxes between the two periods.
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 nine months
ended September 30, 2001 the Corporation used its sources of funds primarily to
fund of loan commitments and, to a lesser extent, purchase securities. As of
such date, the Corporation had outstanding loan commitments totaling $3.5
million, unused lines of credit totaling $8.9 million and $1.6 million of
undisbursed loans in process.
At September 30, 2001, time deposits amounted to $89.0 million or 48.4% of the
Corporation's total consolidated deposits, including approximately $58.2
million, which were 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 line of credit and term borrowing capacity from the FHLB and, to a limited
and rare extent, the sale of loans. At September 30, 2001, the Corporation's
short-term revolving line of credit facility borrowing availability was
approximately $10 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.
RISK FACTORS
The following discusses certain factors that may affect the Corporation's
financial condition and results of operations and should be considered in
evaluating the Corporation.
ABILITY OF THE CORPORATION TO EXECUTE ITS BUSINESS STRATEGY. The financial
performance and profitability of the Corporation will depend, in large part, on
its ability to favorably execute its business strategy in converting from a
relatively traditional savings and loan association to a community based
financial services firm. This evolution entails risks in, among other areas,
technology implementation, market segmentation, brand identification, banking
12
operations, and capital and human resource investments. Accordingly, there can
be no assurance that the Corporation will be successful in its business
strategy.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION. The Corporation's operations
are located in western Pennsylvania and are concentrated in Venango, Clarion and
Butler Counties, Pennsylvania. Although management has diversified the
Corporation's loan portfolio into other Pennsylvania counties, and to a very
limited extent into other states, the vast majority of the Corporation's credits
remain concentrated in the three primary counties. As a result of this
geographic concentration, the Corporation's results depend largely upon economic
and real estate market conditions in these areas. A deterioration in economic or
real estate market conditions in the Corporation's primary market areas could
have a material adverse impact on the quality of the Corporation's loan
portfolio, the demand for its products and services, and its financial condition
and results of operations.
INTEREST RATES. By nature, all financial institutions are impacted by changing
interest rates, due to the impact of such upon:
o the demand for new loans
o prepayment speeds experienced on various asset classes,
particularly mortgage backed securities and residential loans
o credit profiles of existing borrowers
o rates received on loans and securities
o rates paid on deposits and borrowings
As presented under "Item 2. Management's Discussion And Analysis Of Financial
Condition And The Results Of Operations", the Corporation is financially exposed
to parallel shifts in general market interest rates, changes in the relative
pricing of the term structure of general market interest rates, and relative
credit spreads. Therefore, significant fluctuations in interest rates may
present an adverse effect upon the Corporation's financial condition and results
of operations.
GOVERNMENT REGULATION AND MONETARY POLICY. The financial services industry is
subject to extensive federal and state supervision and regulation. Significant
new laws, changes in existing laws, or repeals of present laws could cause the
Corporation's financial results to materially differ from past results. Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for the Corporation, and a
material change in these conditions could present an adverse impact on the
Corporation's financial condition and results of operations.
COMPETITION. The financial services business in the Corporation's market areas
is highly competitive, and is becoming more so due to technological advances
(particularly Internet based financial services delivery), changes in the
regulatory environment, and the enormous consolidation which has occurred among
financial services providers. Many of the Corporation's competitors are much
larger in total assets and market capitalization, enjoy greater liquidity in
their equity securities, have greater access to capital and funding, and offer a
broader array of financial products and services. In light of this environment,
there can be no assurance that the Corporation will be able to compete
effectively. The results of the Corporation may materially differ in future
periods depending upon the nature or level of competition.
CREDIT QUALITY. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors, and related parties may
fail to perform in accordance with the terms of their loans. The Corporation has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for loan losses, that
management believes are appropriate to control this risk by assessing the
likelihood of non performance, tracking loan performance, and diversifying the
credit portfolio. Such policies and procedures may not, however, prevent
unexpected losses that could have a material adverse effect on the Corporation's
financial condition or results of operations. Unexpected losses may arise from a
wide variety of specific or systemic factors, many of which are beyond the
Corporation's ability to predict, influence, and control.
OTHER RISKS. From time to time, the Corporation details other risks with respect
to its business and financial results in its filings with the SEC.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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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.
Date: November 9, 2001 By: /s/ David L. Cox
------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: November 9, 2001 By: /s/ William C. Marsh
------------------------------------
William C. Marsh
Treasurer/Secretary
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