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EMCF > SEC Filings for EMCF > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for EMCLAIRE FINANCIAL CORP

Form 10-Q for EMCLAIRE FINANCIAL CORP


13-Nov-2012

Quarterly Report


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 and its wholly owned subsidiaries, the Bank and the Title Company, for the three and nine months ended September 30, 2012, compared to the same periods in 2011 and should be read in conjunction with the Corporation's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC and with the accompanying consolidated financial statements and notes presented on pages 1 through 21 of this Form 10-Q.

This Form 10-Q, including the financial statements and related notes, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as "may," "could," "should," "will," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" or words or phrases of similar meaning. We caution that the forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performances or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. Therefore, we caution you not to place undue reliance on our forward looking information and statements. Except as required by applicable law or regulation, we will not update the forward looking statements to reflect actual results or changes in factors affecting the forward looking statements.

CHANGES IN FINANCIAL CONDITION

Total assets increased $38.3 million or 7.8% to $530.2 million at September 30, 2012 from $491.9 million at December 31, 2011. This increase resulted primarily from increases in securities and loans receivable of $20.5 million and $18.9 million, respectively, which was funded by an increase in customer deposits of $37.0 million.

Total liabilities increased $36.9 million or 8.4% to $478.0 million at September 30, 2012 from $441.2 million at December 31, 2011, resulting primarily from the aforementioned $37.0 million increase in customer deposits which consisted of a $17.9 million or 21.1% increase in noninterest bearing deposits and a $19.1 million or 5.8% increase in interest bearing deposits.

Stockholders' equity increased $1.4 million or 2.8% to $52.2 million at September 30, 2012 from $50.7 million at December 31, 2011. Book value and tangible book value per common share was $24.07 and $21.23, respectively, at September 30, 2012, compared to $23.25 and $20.26, respectively, at December 31, 2011.

At September 30, 2012, the Bank was considered well capitalized under regulatory guidelines with a Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.46%, 14.72% and 15.97%, respectively, compared to 8.69%, 15.00% and 16.25%, respectively, at December 31, 2011.

RESULTS OF OPERATIONS

Comparison of Results for the Three Month Period Ended September 30, 2012 and 2011

General. Net income before preferred stock dividends and discount accretion decreased $380,000 or 36.2% to $669,000 for the three months ended September 30, 2012 from $1.0 million for the same period in 2011. This decrease was the result of a $1.3 million increase in the provision for loan losses, partially offset by increases in net interest income and noninterest income of $166,000 and $548,000, respectively, and decreases in noninterest expense and the provision for income taxes of $38,000 and $147,000, respectively.

Net interest income. Net interest income on a tax equivalent basis increased $169,000 or 4.1% to $4.3 million for the three months ended September 30, 2012 from $4.1 million for the same period in 2011. This increase can be attributed to a decrease in interest expense of $207,000, partially offset by a decrease in tax equivalent interest income of $38,000.

Interest income. Interest income on a tax equivalent basis decreased $38,000 to $5.5 million for the three months ended September 30, 2012 as compared to $5.6 million for the three months ended September 30, 2011. This decrease can be attributed to decreases in interest on securities and interest-earning deposits with banks of $83,000 and $23,000, respectively, partially offset by increases in interest earned on loans and federal bank stocks of $66,000 and $2,000.

Tax equivalent interest earned on securities decreased $83,000 or 7.5% to $1.0 million for the three months ended September 30, 2012 as compared to $1.1 million for the three months ended September 30, 2011. This decrease resulted from a decrease in the yield on securities of 72 basis points to 2.64% for the three months ended September 30, 2012, versus 3.36% for the same period in 2011, due primarily to calls of higher-yielding securities. This unfavorable yield variance accounted for a $264,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average securities increased $23.7 million or 18.2%, accounting for an $181,000 increase in interest income.

Interest earned on interest-earning deposit accounts decreased $23,000 or 57.5% to $17,000 for the three months ended September 30, 2012 from $40,000 for the same period in 2011. This decrease resulted from a decrease in the average yield on interest-earning deposit accounts of 34 basis points to 0.39% for the three months ended September 30, 2012, compared to 0.73% for the same period in the prior year, accounting for a $16,000 decrease in interest income. In addition to this unfavorable yield variance, the average balance of these assets decreased $4.8 million, accounting for a $7,000 decrease in interest income.

Tax equivalent interest earned on loans receivable increased $66,000 to $4.5 million for the three months ended September 30, 2012 as compared to $4.4 million for the three months ended September 30, 2011. This increase resulted as average loans increased $22.3 million or 7.2%, accounting for an increase of $306,000 in loan interest income. Partially offsetting this favorable volume variance, the average yield on loans receivable decreased 29 basis points to 5.33% for the three months ended September 30, 2012, versus 5.62% for the same period in 2011. This unfavorable yield variance accounted for a $240,000 decrease in interest income.

Interest expense. Interest expense decreased $207,000 or 14.3% to $1.2 million for the three months ended September 30, 2012 from $1.5 million for the same period in 2011. This decrease in interest expense can be attributed to a decrease in interest incurred on deposits and borrowed funds of $170,000 and $37,000, respectively.

Interest expense incurred on deposits decreased $170,000 or 14.4% to $1.0 million for the three months ended September 30, 2012 compared to $1.2 million for the same period in 2011. The average cost of interest-bearing deposits decreased 28 basis points to 1.13% for the three months ended September 30, 2012, compared to 1.41% for the same period in 2011 resulting in a $252,000 decrease in interest expense. This decrease in the cost of deposits was primarily due to deposits repricing during 2011 and the first nine months of 2012 in the overall low interest-rate environment. Partially offsetting this favorable rate variance, the average balance of interest-bearing deposits increased $24.3 million to $354.7 million for the three months ended September 30, 2012, compared to $330.5 million for the same period in 2011 causing an $82,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $37,000 or 13.5% to $238,000 for the three months ended September 30, 2012, compared to $275,000 for the same period in the prior year. The average balance of borrowed funds decreased $4.1 million or 17.1%, accounting for a $48,000 decrease in interest expense. Partially offsetting this favorable volume variance, the average cost of borrowed funds increased 21 basis points to 4.72% for the three months ended September 30, 2012, compared to 4.51% for the same period in 2011, causing a $11,000 increase in interest expense. Both the decrease in volume and increase in rate were primarily related to the Corporation's repayment of a $5.0 million credit line at a correspondent bank during the third quarter of 2011.

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 September 30,
                                                  2012                                        2011
                                  Average                      Yield /        Average                      Yield /
                                  Balance       Interest         Rate         Balance       Interest         Rate
Interest-earning assets:
Loans, taxable                   $ 311,238     $    4,222           5.40 %   $ 298,993     $    4,238           5.62 %
Loans, tax exempt                   21,333            236           4.40 %      11,261            154           5.43 %
Total loans receivable             332,571          4,458           5.33 %     310,254          4,392           5.62 %

Securities, taxable                117,783            617           2.08 %      93,922            643           2.72 %
Securities, tax exempt              36,620            407           4.42 %      36,740            464           5.01 %
Total securities                   154,403          1,024           2.64 %     130,662          1,107           3.36 %

Interest-earning deposits with
banks                               17,561             17           0.39 %      21,808             40           0.73 %
Federal bank stocks                  3,249             15           1.84 %       3,790             13           1.36 %
Total interest-earning other
assets                              20,810             32           0.61 %      25,598             53           0.82 %

Total interest-earning assets      507,784          5,514           4.32 %     466,514          5,552           4.72 %
Cash and due from banks              2,322                                       2,629
Other noninterest-earning
assets                              23,377                                      21,617

Total Assets                     $ 533,483                                   $ 490,760

Interest-bearing liabilities:
Interest-bearing demand
deposits                         $ 217,864     $      125           0.23 %   $ 178,786     $      114           0.25 %
Time deposits                      136,882            883           2.57 %     151,707          1,064           2.78 %
Total interest-bearing
deposits                           354,746          1,008           1.13 %     330,493          1,178           1.41 %

Borrowed funds, short-term              43              -           0.00 %       4,168             39           3.71 %
Borrowed funds, long-term           20,000            238           4.73 %      20,000            236           4.68 %
Total borrowed funds                20,043            238           4.72 %      24,168            275           4.51 %

Total interest-bearing
liabilities                        374,789          1,246           1.32 %     354,661          1,453           1.63 %

Noninterest-bearing demand
deposits                           101,304              -              -        85,219              -              -

Funding and cost of funds          476,093          1,246           1.04 %     439,880          1,453           1.31 %

Other noninterest-bearing
liabilities                          5,004                                       3,533

Total Liabilities                  481,097                                     443,413
Stockholders' Equity                52,386                                      47,347

Total Liabilities and
Stockholders' Equity             $ 533,483                                   $ 490,760

Net interest income                            $    4,268                                  $    4,099

Interest rate spread
(difference between weighted
average rate on
interest-earning assets and
interest-bearing liabilities)                                       3.00 %                                      3.09 %

Net interest margin (net
interest income as a
percentage of average
interest-earning assets)                                            3.34 %                                      3.49 %

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 volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) 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 September 30,
                                                   2012 versus 2011
                                              Increase (Decrease) due to

                                        Volume            Rate            Total
Interest income:
Loans                                  $     306       $      (240 )     $    66
Securities                                   181              (264 )         (83 )
Interest-earning deposits with banks          (7 )             (16 )         (23 )
Federal bank stocks                           (2 )               4             2

Total interest-earning assets                478              (516 )         (38 )

Interest expense:
Interest-bearing deposits                     82              (252 )        (170 )
Borrowed funds                               (48 )              11           (37 )

Total interest-bearing liabilities            34              (241 )        (207 )

Net interest income                    $     444       $      (275 )     $   169

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 probable incurred losses 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 collectability of the loan portfolio.

Information pertaining to the allowance for loan losses and non-performing assets for the quarter ended September 30, 2012 and 2011 is as follows:

(Dollar amounts in thousands)                                    At or for the three months ended
                                                                           September 30,
                                                                   2012                     2011
Balance at the beginning of the period                       $          3,715         $          3,562
Provision for loan losses                                               1,359                       80
Charge-offs                                                               (59 )                   (126 )
Recoveries                                                                  8                        9
Balance at the end of the period                             $          5,023         $          3,525

Non-performing loans                                         $          7,353         $          5,269
Non-performing assets                                                   7,656                    5,624
Non-performing loans to total loans                                      2.19 %                   1.70 %
Non-performing assets to total assets                                    1.44 %                   1.14 %
Allowance for loan losses to total loans                                 1.49 %                   1.14 %
Allowance for loan losses to non-performing loans                       68.31 %                  66.90 %

Nonperforming loans increased $2.1 million to $7.4 million at September 30, 2012 from $5.3 million at September 30, 2011. The increase in nonperforming loans was primarily due to a $3.4 million commercial real estate relationship identified as impaired and placed on nonaccrual status during the quarter ended September 30, 2012 based on information received during the quarter on current cash flow considerations, weakened financial condition of the principals and guarantors and recent appraisal information. Partially offsetting this addition was the successful resolution and payoff of a $450,000 nonperforming residential mortgage loan during the first quarter of 2012, an upgrade of a $222,000 commercial relationship to accruing status and additional principal reductions resulting from other credit workouts and repayments. During the three months ended September 30, 2012, nonperforming loans increased by $3.4 million to $7.4 million from $3.9 million at June 30, 2012.

As of September 30, 2012, the Corporation's classified and criticized assets amounted to $13.5 million or 2.5% of total assets, with $9.0 million classified as substandard, $4.4 million identified as special mention and $92,000 classified as doubtful. This compares to classified and criticized assets of $12.0 million or 2.4% of total assets, with $8.0 million classified as substandard and $3.9 million identified as special mention at September 30, 2011. The increase in criticized and classified assets was primarily the result of the aforementioned $3.4 million commercial real estate credit which was downgraded to special mention during the quarter ended June 30, 2012 and further downgraded to substandard during the quarter ended September 30, 2012, partially offset by credit workouts and principal payments.

The provision for loan losses increased $1.3 million to $1.4 million for the three month period ended September 30, 2012 from $80,000 for the same period in the prior year primarily as $1.4 million in specific reserves was allocated to the aforementioned $3.4 million commercial credit relationship. The specific reserve was based on an appraisal report of the fair value of the real property at September 30, 2012, adjusted for estimated liquidation costs. The valuation may be impacted by future strategies employed by management to resolve this problem credit situation. The Corporation's historic loss factors have been favorably impacted due to low levels of net charge-offs during recent periods, offsetting the impact of loan growth on the provision for loan losses.

Noninterest income. Noninterest income increased $548,000 or 66.4% to $1.4 million during the three months ended September 30, 2012, compared to $825,000 during the same period in the prior year. This increase was primarily due to increases in gains on the sale of securities and commissions on financial services of $390,000 and $66,000, respectively. During the third quarter of 2012, the Corporation recognized $390,000 in gains related to the sale of $5.4 million of mortgage-backed securities. The increase in commissions on financial services resulted from expansion in the financial service division to three representatives during the quarter ended September 30, 2012 from one representative during the quarter ended September 30, 2011.

Noninterest expense. Noninterest expense decreased $38,000 or 1.1% at $3.4 million during the three months ended September 30, 2012 and 2011. This decrease in noninterest expense can be attributed to decreases in compensation and benefits expense, professional fees, intangible amortization, FDIC insurance and premises and equipment expense of $59,000, $57,000, $24,000, $24,000 and $21,000, respectively, partially offset by an increase in other noninterest expense of $147,000.

Compensation and employee benefits expense decreased $59,000 or 3.4% at $1.7 million for the three months ended September 30, 2012 and 2011. This decrease can be primarily attributed to a $265,000 reduction in employee incentive expense partially offset by normal salary and wage increases and increased employee benefit costs.

Professional fees decreased $57,000 or 29.7% to $135,000 for the three months ended September 30, 2012 from $192,000 for the same period in the prior year. This decrease can be primarily attributed to a $59,000 decrease in legal fees mainly related to declines in foreclosure and loan workout activity.

As a result of a branch purchase completed in the third quarter of 2009, the Corporation recognized $86,000 of core deposit intangible amortization expense during the third quarter of 2012, compared to $110,000 for the same period in the prior year. Further discussion related to goodwill and intangible assets related to the branch office purchase can be found in the "Notes to Consolidated Financial Statements" beginning on page 5.

FDIC insurance decreased $24,000 or 20.7% to $92,000 for the three months ended September 30, 2012, compared to $116,000 for the same period in the prior year. This was the result of 2011 legislative changes that adjusted the assessment base, which reduced the assessment rate for the Bank and favorably impacted premium expense.

Premises and equipment expense decreased $21,000 or 4.0% to $509,000 for the three months ended September 30, 2012, compared to $530,000 for the same period in the prior year. This decrease can be primarily attributed to a decrease of $40,000 in depreciation expense.

Other noninterest expense increased $147,000 or 20.7% to $857,000 for the three months ended September 30, 2012, compared to $710,000 for the same period in the prior year. This unfavorable variance can be attributed primarily to increased costs associated with debit card processing and a debit card reward program launched in the first quarter of 2012.

Provision for income taxes. The provision for income taxes decreased $147,000 or 68.7% to $67,000 for the three months ended September 30, 2012 compared to $214,000 for the same period in the prior year, as the Corporation's effective tax rate decreased to 9.1% for the third quarter of 2012 from 22.0% from the same quarter in the prior year due to a decrease in taxable income, primarily from increased provision for loan losses during the quarter. The difference between the statutory rate of 34% and the Corporation's effective tax rate of 9.1% for the quarter ended September 30, 2012, was due to tax-exempt income earned on certain tax-free loans and securities and bank-owned life insurance.

Comparison of Results for the Nine Month Period Ended September 30, 2012 and 2011

General. Net income before preferred stock dividends and discount accretion increased $283,000 or 10.6% to $3.0 million for the nine months ended September 30, 2012 from $2.7 million for the same period in 2011. This increase was the result of increases in net interest income and noninterest income of $537,000 and $1.0 million, respectively, and a decrease in noninterest expense of $201,000. Partially offsetting these favorable items, the provision for loan losses and the provision for income taxes increased $1.3 million and $224,000, respectively.

Net interest income. Net interest income on a tax equivalent basis increased $546,000 or 4.6% to $12.5 million for the nine months ended September 30, 2012 from $12.0 million for the same period in 2011. This increase can be attributed to a decrease in interest expense of $697,000, partially offset by a decrease in tax equivalent interest income of $151,000.

Interest income. Interest income on a tax equivalent basis decreased $151,000 to $16.3 million for the nine months ended September 30, 2012 as compared to $16.5 million for the nine months ended September 30, 2011. This decrease can be attributed to decreases in interest on securities and interest-earning deposits with banks of $154,000 and $73,000, respectively, partially offset by increases in interest earned on loans and federal bank stocks of $69,000 and $7,000.

Tax equivalent interest earned on securities decreased $154,000 or 4.9% to $3.0 million for the nine months ended September 30, 2012, compared to $3.2 million for the nine months ended September 30, 2011. This decrease resulted from a decrease in the yield on securities of 51 basis points to 2.83% for the nine months ended September 30, 2012, versus 3.34% for the same period in 2011, due primarily to calls of higher-yielding securities. This unfavorable yield variance accounted for a $510,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average securities increased $15.3 million or 12.1%, accounting for a $356,000 increase in interest income.

Interest earned on interest-earning deposit accounts decreased $73,000 or 51.8% to $68,000 for the nine months ended September 30, 2012 from $141,000 for the same period in 2011. This decrease resulted from a decrease in the average yield on interest-earning deposit accounts of 35 basis points to 0.35% for the nine months ended September 30, 2012, compared to 0.70% for the same period in the prior year, accounting for a $69,000 decrease in interest income. In addition, the average balance of these assets decreased $794,000, primarily as excess cash was deployed into higher yielding securities and loans, accounting for a $4,000 decrease in interest income.

Tax equivalent interest earned on loans receivable increased $69,000 to $13.2 million for the nine months ended September 30, 2012 as compared to $13.1 million for the nine months ended September 30, 2011. This increase resulted as average loans increased $18.9 million or 6.1%, accounting for an increase of $783,000 in loan interest income. Partially offsetting this favorable volume variance, the average yield on loans receivable decreased 30 basis points to 5.40% for the nine months ended September 30, 2012, versus 5.70% for the same period in 2011. This unfavorable yield variance accounted for a $714,000 decrease in interest income.

Interest expense. Interest expense decreased $697,000 or 15.5% to $3.8 million for the nine months ended September 30, 2012 from $4.5 million for the same period in 2011. This decrease in interest expense can be attributed to a decrease in interest incurred on deposits and borrowed funds of $456,000 and $241,000, respectively.

Interest expense incurred on deposits decreased $456,000 or 12.8% to $3.1 million for the nine months ended September 30, 2012 compared to $3.6 million for the same period in 2011. The average cost of interest-bearing deposits decreased 25 basis points to 1.18% for the nine months ended September 30, 2012, . . .

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