UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1998
-------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from to
--------------------- ------------------------
Commission file Number: 000-18464
EMCLAIRE FINANCIAL CORP.
(Exact Name of small business issuer as specified in its charter)
PENNSYLVANIA 25-1606091
( State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
612 Main Street
Emlenton, PA 16373
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (724) 867-2311
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
As of August 10, 1998, there were 1,081,453 shares outstanding of the issuer's
common stock, par value $1.25 per share.
1
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Emclaire Financial Corp.
INDEX TO QUARTERLY REPORT OF FORM 10-QSB
<TABLE>
<CAPTION>
Part I Financial Information Page
<S> <C> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet, June 30, 1998 and
December 31, 1997 3
Consolidated Statement of Income
Three months ended June 30, 1998 and 1997 and
Six months ended June 30, 1998 and 1997 4
Consolidated Statement of Comprehensive Income
Three months ended June 30, 1998 and 1997 and
Six months ended June 30, 1998 and 1997 5
Consolidated Statement of Changes in
Stockholders' Equity 6
Consolidated Statement of Cash Flows
Six months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 -14
Part II Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Securities Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 20
</TABLE>
2
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EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited - dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,730 $ 4,975
Federal funds sold 2,900 --
Investment securities:
Available for sale 30,228 31,977
Held to maturity (estimated market value
of $4,327 and $6,053) 4,314 6,057
Loans 92,281 86,144
Less allowance for loan losses 905 874
-------- --------
Net loans
91,376 85,270
Premises and equipment 3,123 2,619
Accrued interest and other assets 2,939 3,058
-------- --------
TOTAL ASSETS $139,610 $133,956
======== ========
LIABILITIES
Deposits
Non-interest bearing demand $ 22,015 $ 19,765
Interest bearing demand 17,603 17,276
Savings 16,140 16,261
Money market 17,381 18,077
Time 49,945 46,276
-------- --------
Total deposits
123,084 117,655
Obligation under capital lease 41 63
Borrowed funds 2,000 2,200
Accrued interest and other liabilities 604 540
-------- --------
TOTAL LIABILITIES
125,729 120,458
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00, 3,000,000 shares
authorized; none issued -- --
Common stock, par value $1.25 per share;
12,000,000 shares authorized, 1,081,453 shares issued 1,352 1,352
Additional paid in capital 4,432
Retained earnings 7,873 7,492
Net unrealized gain on securities 224 222
-------- --------
TOTAL STOCKHOLDERS' EQUITY 13,881 13,498
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $139,610 $133,956
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
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EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited - dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $1,972 $1,699 $3,898 $3,245
Interest bearing deposits in other banks 1 1 1 1
Federal funds sold 53 14 65 32
Investment securities:
Taxable 484 585 997 1,205
Exempt from federal income tax 44 46 96 96
------ ------ ------ ------
Total interest income 2,554 2,345 5,057 4,579
------ ------ ------ ------
INTEREST EXPENSE
Deposits 974 890 1,932 1,788
Borrowed funds 31 7 60 10
Lease obligation 1 1 2 3
------ ------ ------ ------
Total interest expense 1,006 898 1,994 1,801
------ ------ ------ ------
NET INTEREST INCOME 1,548 1,447 3,063 2,778
Provision for loan losses 55 70 100 115
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,493 1,377 2,963 2,663
------ ------ ------ ------
OTHER OPERATING INCOME
Service fees on deposit accounts 134 122 256 206
Other 46 29 83 52
------ ------ ------ ------
Total other operating income 180 151 339 258
------ ------ ------ ------
OTHER OPERATING EXPENSE
Salaries and employee benefits 618 554 1,202 1,110
Occupancy, furniture and equipment 201 170 384 343
Other 418 371 792 711
------ ------ ------ ------
Total other operating expense 1,237 1,095 2,378 2,164
------ ------ ------ ------
Income before income taxes 436 433 924 757
Income taxes 134 133 283 228
------ ------ ------ ------
NET INCOME $ 302 $ 300 $ 641 $ 529
====== ====== ====== ======
EARNINGS PER SHARE $ 0.28 $ 0.28 $ 0.59 $ 0.49
DIVIDENDS PER SHARE 0.12 0.105 0.24 0.21
</TABLE>
See accompanying notes to the consolidated financial statements.
4
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EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited - dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net Income $ 302 $ 300 $ 641 $ 529
Other Comprehensive income, net of tax
Unrealized gain (loss) on securities 9 183 2 (106)
----- ----- ----- -----
COMPREHENSIVE NET INCOME $ 311 $ 483 $ 643 $ 423
===== ===== ===== =====
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited - dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid in Retained Gain on
Stock Capital Earnings Securities Total
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 $ 1,352 4,432 7,492 222 13,498
Net income 641 641
Dividends declared
($.24 per share) (260) (260)
Net unrealized gain on securities 2 2
------- ------- ------- ------- -------
Balance June 30, 1998 $ 1,352 $ 4,432 $ 7,873 $ 224 $13,881
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 641 $ 529
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 303 299
Net amortization of investment security
discounts and premiums 71 109
Provision for loan losses 100 115
Decrease in accrued interest receivable 32 13
Increase in accrued interest payable 36 2
Other, net (44) (122)
-------- --------
Net cash provided by operating activities 1,139 945
-------- --------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Available for sale 2,000 3,000
Held to maturity 1,720 2,458
Proceeds from sales of investment securities:
Available for sale -- 1,990
Purchases of investment securities:
Available for sale (295) (1,051)
Net loan originations (6,215) (11,937)
Purchases of premises and equipment (641) (64)
Proceeds from sales of premises and equipment -- 10
-------- --------
Net cash used for investing activities (3,431) (5,594)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 5,429 (34)
Increase (decrease) in short-term borrowings (200) 2,075
Payments for obligation under capital lease (22) (20)
Cash dividends paid (260) (227)
-------- --------
Net cash provided by financing activities 4,947 1,794
-------- --------
Increase in cash and cash equivalents 2,655 (2,855)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,975 8,242
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,630 $ 5387
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
EMCLAIRE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
The accounting and financial reporting polices of Emclaire Financial Corp. and
its wholly-owned subsidiary The Farmers National Bank of Emlenton ("Bank" or
"Farmers"), conform to generally accepted accounting principles and to general
practice within the banking industry. In the opinion of management, the
accompanying unaudited consolidated financial statements of Emclaire Financial
Corp. ("Company" or "Emclaire") contain all adjustments, consisting of only
normal and recurring adjustments, necessary for the fair presentation of the
Company's financial position, results of operations and cash flows for the
periods presented. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
2. PROPOSED MERGER ACQUISITION
On April 7, 1998, the Company entered into an Agreement and Plan and of
Reorganization with Peoples Savings Financial Corporation ("Peoples") and its
wholly-owned subsidiary Peoples Savings Bank ("Peoples Savings") to acquire 100%
of the outstanding common shares of Peoples for $26 per share, payable in a
combination of cash and Emclaire common stock, in a transaction to be accounted
for as a purchase. Upon completion of the merger, the operations of Peoples
Savings will be consolidated with and become part of Farmers. The merger which
is subject to regulatory approval and the approval of the shareholders of both
the Company and Peoples is expected to be completed in the third quarter of
1998. At December 31, 1997, Peoples had total assets, total deposits and total
capital of $44.5 million, $35.1 million and $9.3 million, respectively. It is
expected this transaction will be completed prior to September 30, 1998.
3. EARNINGS PER SHARE
In December 1997, the Company adopted the Financial Accounting Standards Board
Statement No. 128 "Earnings per Share". This statement requires the presentation
of basic an diluted earnings per share. Basic earnings per share excludes the
dilutive effects of such items as stock options, warrants and convertible
securities, while diluted earnings per share reflects the dilutive effect of
these common stock equivalents. The Company maintains a simple capital
structure, thus resulting in no dilutive effects on earnings per share. For the
three and six month periods ending June 30, 1998 and 1997, the average number of
shares outstanding totaled 1,081,453, after giving effect to a five percent
stock dividend issued in December 1997.
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130 "Reporting Comprehensive Income". This
statement establishes standards for reporting the components of comprehensive
income by requiring all items that are to be recognized as under accounting
standards as components of comprehensive income be reported a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income, as well as, certain items
that are reported directly within separate components of stockholders' equity,
and thus bypass net income. Financial statements for earlier periods, provided
for comparative purposes, have been reclassified.
8
<PAGE>
The Company has opted to disclose comprehensive income in a separate financial
statement, in which the components of comprehensive income are presented net of
applicable income taxes. The following table sets forth the related tax effects
allocated to each element of comprehensive income for the three and six months
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
--------------------------------
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gain on securities:
Unrealized holding gain during the period $ 12 $ 3 $ 9
--------- -------- -------
Other comprehensive income $ 12 $ 3 $ 9
========= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
--------------------------------
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gain (loss) on securities:
Unrealized holding gain during the period $ 277 $ 94 $ 183
-------- --------- --------
Other comprehensive income $ 277 $ 94 $ 183
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gain on securities:
Unrealized holding gain during the period $ 4 $ 2 $ 2
--------- ---------- --------
Other comprehensive income $ 4 $ 2 $ 2
========= ========== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
------------------------------
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gain on securities:
Unrealized holding loss during the period $ (161) $ (55) $ (106)
-------------- ----------- ---------
Other comprehensive income $ (161) $ (55) $ (106)
============== =========== =========
</TABLE>
The components of accumulated other comprehensive income for the six months
ended June 30, 1998, consist of the items presented under the heading Net
Unrealized Gain on Securities as
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presented in the Consolidated Statement of Changes in Stockholders' Equity. For
the six months ended June 30, 1997, the net unrealized gain or loss on
securities had a beginning balance of $124, a net unrealized loss of $106, and
an ending balance of $18.
5. LOANS
Major classifications of loans are summarized as follows:
June 30, December 31,
1998 1997
--------- ------------
Commercial and industrial $11,378 11,147
Real estate mortgages
Residential 50,325 45,709
Commercial and other 16,625 15,188
Consumer 13,953 14,100
------- -------
92,281 86,144
Less allowance for loan losses 905 874
------- -------
$91,376 $85,270
======= =======
The Bank's primary business activity is with customers located within Venango,
Clarion, and Butler Counties. Commercial, residential, personal, and
agricultural loans are granted. Although the Bank has a diversified loan
portfolio at June 30, 1998 and December 31, 1997, loans outstanding to
individuals and businesses are dependent upon the local economic conditions
within the immediate trade area.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board adopted Financial
Accounting Standards Statement No. 133 "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes standards requiring
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the values of
derivatives would be accounted for based on whether the instrument qualifies for
hedge accounting. To qualify for hedge accounting treatment, the hedging
relationship must be highly effective in achieving the goal of offsetting
changes in either fair value or cash flows. This statement is effective for
fiscal years beginning after June 15, 1999. Management has not fully evaluated
the impact the adoption of Statement No. 133 may have on the financial condition
or the results of operations. However, it is not anticipated the adoption of
this statement will have a material impact.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain information presented in this discussion and analysis and other
statements concerning future performance, developments or events, and
expectations for growth and market forecasts are subject to a number of risks
and uncertainties, including interest rate fluctuations, changes in local or
national economic conditions, and government or regulatory actions which might
cause actual results to differ materially from stated expectations or estimates.
Comparison of the Three Months Ended June 30, 1998 and 1997
- -----------------------------------------------------------
Net Income - Net income for the three months ended June 30, 1998 totaled
$302,000 or $.28 per share, approximating the $300,000 or $.28 per share
recorded during the same period in 1997, adjusted for the five percent stock
dividend paid in December 1997. Net income remained stable due to increased
operating costs, specifically those associated with the opening of the de novo
branch office in the Clarion Mall in March 1998. These costs approximated the
increases in net interest income and other income which rose $101,000 or 7% and
$29,000 or 19%, respectively for the comparative three month periods ended June
30, 1998 and 1997.
The reported net income resulted in annualized returns on average assets and
average equity of .87% and 8.72% for the quarter ended June 30, 1998, as
compared to returns of .94% and 9.46% for the same period in 1997. Net income
for the second quarter of 1998 as compared to the first quarter of 1998,
represents a decrease of $37,000 or 11%. This decline is attributable to the
operating expenses of the newest branch office opened in March 1998, as
discussed in the Other Operating Expense section of this report.
Interest Income - Interest income for the three months ended June 30, 1998
increased approximately $209,000 or 9% from the same period in 1997, due to the
increase in the loan portfolio. The average balance of the loan portfolio for
the quarter ended increased $13.5 million from the same period in 1997 to $90.5
million, due largely to the increase in residential mortgage loans. The tax
equivalent yield on the loan portfolio for the quarter decreased 3 basis points
to 8.84% from the same period in 1997, due to the impact of the ongoing
refinancing of mortgage loans, particularly residential mortgages.
Average investment securities for the second quarter of 1998 were $34.6 million
resulting in a tax-equivalent yield of 6.39% for the quarter, compared to $41.5
million and 6.34% during the same period in 1997. Due to ongoing loan demand,
investment portfolio maturities generally continue to be reinvested in the loan
portfolio.
As a result of the growth in the volume of earning assets, combined with funding
loan growth with securities maturities, the tax equivalent yield on earning
assets rose to 8.08% during the second quarter of 1998, as compared to 7.96%
during the same period in 1997.
Interest expense - Interest expense increased $108,000 or 9% during the second
quarter of 1998, as compared to the same period in 1997. The average volume of
interest bearing liabilities during the quarter increased $6.0 million or 6%
during the comparative periods, while the overall rate paid on these liabilities
rose from 3.75% to 3.95%. This higher cost of funds is related to
11
<PAGE>
continuing competition for deposit customers, combined with the use of Federal
Home Loan Bank advances as an alternative source of funds.
Despite the generally low interest rate environment, the ongoing competition for
deposit customers by traditional and non-traditional financial services
providers, continues to affect the overall cost of funds.
Net Interest Income - As a result of the increase in the volume of earning
assets which more than offset the increase in interest expense, net interest
income rose $101,000 or 7% for the quarter ended June 30, 1998, as compared to
the same period in 1997. The net tax equivalent yield on earning assets for the
quarter was 4.95%, equaling the yield earned during the same period in 1997.
Provision for Loan Losses - Based upon management's ongoing assessment of the
quality of the loan portfolio, and considering the growth experienced during the
quarter, the provision for loan losses for the second quarter of 1998 totaled
$55,000, as compared to $70,000 provided during the same period in 1997.
Other operating income - Other operating income increased $29,000 or 19% for the
second quarter of 1998, due principally to the impact of fees generated from new
or enhanced products and services introduced during the second and third
quarters of 1997, combined with the increase in the number of deposit accounts.
During the second quarter of 1997, convenience fees levied on non-Farmers
customers who use an ATM sponsored by Farmers National Bank were initiated.
While during the third quarter of 1997, the Bank introduced its MasterMoney(TM)
debit card. These changes resulted in new or additional fee income totaling
$19,000 during the second quarter of 1998, as compared to the same period in
1997. The remaining increase in fee income is attributed to the increase in the
number of deposit accounts.
Other Operating Expense - During the second quarter of 1998, total other
operating expenses increased $142,000 or 13% to $1.2 million from the same
period in 1997. The rise in other operating expenses is due, principally to the
added costs of operating the branch office facility opened in March 1998,
combined with increases in recurring expenses for such things as salaries and
employee benefits, equipment service contracts and ATM network fees.
The operation of the Clarion Mall office resulted in approximately $59,000 of
additional operating expenses during the second quarter of 1998. These costs are
considered to be recurring, and can be expected to be subject to periodic
increases for such items as salary and benefit adjustments, office rent
escalation and other costs normally subject to inflationary or pricing
increases. While the results of operations for this office are in line with
projections, overall deposit and loan growth to date have fallen short of the
projected results.
Salary and employee benefit costs increased $63,000 or 11%, due principally to
an accrual for a profit sharing payments totaling $30,000 recorded during the
second quarter of 1998, that was not recorded during the same period in 1997. In
addition, scheduled employee health insurance premiums have increased
approximately 14% for 1998, resulting in a $10,000 increase for the three month
period in 1998 as compared to 1997. The remaining increase is largely
attributable to employee costs associated with the Clarion Mall office.
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<PAGE>
Occupancy and equipment costs increased $30,000 or 18% during the second quarter
of 1998, as compared to the same period in 1997. Periodic costs associated with
equipment service contracts accounted for $10,000 of the increase. These costs
relate principally to maintenance agreements on the Bank's data and document
processing equipment. As discussed in the "Financial Condition" section of this
report, much of this equipment is scheduled to be upgraded or replaced, which
may help to control in the short-term the related maintenance costs. The
remaining increase is largely attributable to occupancy costs associated with
the Clarion Mall office. When the data center becomes operational during the
third quarter of 1998, overhead costs related to the building and furniture,
excluding upgrades to the Bank's data processing and check processing equipment,
are estimated to be approximately $75,000 the first full year of operation.
Refer to the "Financial Condition" section of this report for additional
discussion of the data center facility.
Other operating expense increased $50,000 or 14% during the second quarter of
1998, as compared to the same period in 1997, due to increased ATM and debit
card processing fees which increased $13,000 or 56% to $37,000 for the second
quarter of 1998. Printing and supplies increased $6,000 or 17% to $40,000 due to
costs associated with opening the Clarion Mall branch office. Telephone costs
increased $10,000 or 40%, due to a combination of the additional office location
and rate increases for data communications lines used in the wide area computer
network. During the third quarter of 1998, management will be reviewing data
communications configuration and costs, in order to improve the overall
operation of the wide area network and control future operating costs. While any
change in the communications configuration may result in a moderate increase in
monthly operating costs, the improvement in the operation of the network will
allow for direct uploading of new customer loan and deposit information helping
to control future personnel costs, by reducing the time devoted to inputting new
account information.
Income Taxes - The provision for income taxes of $134,000 for the three months
ended June 30, 1998, approximated the $133,000 recorded during the same period
of 1997. Income taxes as a percentage of pre-tax earnings was 30.7% for the
comparative three month periods.
Comparison of the Six Months Ended June 30, 1998 and 1997
Net Income - Net income for the six months ended June 30, 1998 totaled $641,000
or $.59 per share, as compared to $529,000 or $.49 per share for the same period
in 1997, an increase of $112,000 or 21%.
Net Interest Income - Net interest income increased $285,000 or 10% during the
first half of 1998, as compared to the same period in 1997. As discussed in the
"Comparison of the Three Months Ended June 30, 1998 and 1997" section of this
report, the increase in loan volume has been principally responsible for the
increase in net interest income. For the six months ended June 30, 1998 the net
tax equivalent yield on earning assets was 4.93%, as compared to 4.81% for the
same period in 1997.
Provision for Loan Losses - The provision for loan losses for the first six
months of 1998 totaled $100,000, as compared to $115,000 recorded during the
same period in 1997. The decrease in the provision is representative of the
moderation experienced in loan growth as discussed in the "Financial Condition"
section of this report.
13
<PAGE>
Other Operating Income - Other operating income of $339,000 represents an
increase of $81,000 or 31% for the comparative year-to-date periods. The
increase is largely attributed to fee adjustments or implementations during the
second and third quarters of 1997, for such things as ATM convenience charges,
debit card fees, and adjusted return check and overdraft charges.
Other Operating Expense - For the first six months of 1998 other operating
expenses totaled $2.4 million as compared to $2.2 million for the same period in
1997, an increase of $214,000 or 10%. Operating costs for the Clarion Mall
office accounted for approximately $70,000 of the total increase. The remaining
increase can be attributed to increases in normal recurring costs, such as
salaries and employee benefits, ATM and debit card operating costs, telephone,
and printing and supplies, as discussed in the previous section of this report.
Income Taxes - The provision for income taxes for the first six months of 1998
totaled $283,000, as compared to $228,000 during the same period in 1997. The
increase is attributed to the increase in pre-tax income. For the six months
ended June 30, 1998, income tax expense represented 31% of pre-tax income, as
compared to 30% for the same period in 1997.
Financial Condition
- -------------------
At June 30, 1998, the Company reported total consolidated assets of $139.6
million, an increase of $5.6 million or 4% from December 31, 1997. This increase
in total assets resulted from an increase in total deposits which rose 5% to
$123.1 million from $117.7 million at December 31, 1997.
The increase in deposits resulted from the demand deposit, NOW, savings and time
deposit segments of the portfolio which increased $2.3 million, $1.3 million and
$2.2 million respectively. These increases offset declines in money market
accounts. As previously discussed, competition for deposit customers continues.
The Company continues to focus on its personal customer service, while providing
deposit services at minimal or no fees, and offering competitive interest rates
to maintain or improve its share of the deposit market.
Total loans increased $6.1 million or 7% to $92.3 million during the first six
months of 1998. This increase represents a decline from the $11.9 million
increase during the first six months of 1997. The increase is attributed to
continuing customer loan demand, particularly demand for residential mortgage
loans, which increased $1.3 million from December 31, 1997. Commercial and other
real estate loans increased $1.2 during the same period. The three offices
opened or acquired in 1996 continue to account for the majority of the loan
growth providing $4.4 million or 72% of the growth experienced during the first
half of 1998.
While loan growth continues to be strong, the decline in the comparative six
month periods indicates a moderate lessening in loan demand. Should this trend
continue, it is likely that total interest income over the next two quarters, in
comparison to the same periods in 1997, will continue to level off.
In August 1997, construction commenced on the Bank's data processing center.
Construction was completed during the second quarter of 1998, and the facility
is scheduled to become operational during the third quarter. Construction costs
amounted to approximately $1 million. In addition, furniture and equipment costs
totaled approximately $175,000. During the second
14
<PAGE>
quarter of 1998, management completed a review of the Bank's data processing
capabilities and determined it necessary to upgrade its main frame computer. In
addition to upgrading the computer system, a check imaging system will also be
implemented. Check imaging allows for the storage of digital images of checks
and other documents, which can then be readily retrieved from a computer
workstation. The implementation of this system should reduce the number of times
a document needs to be handled, reduce or control postage costs, and improve the
effectiveness of customer service research. The combined capital outlay for the
computer upgrade and check imaging system is expected to total approximately
$500,000.
Stockholders' equity of $13.9 million at June 30, 1998, represented a $383,000
or 3% increase from December 31, 1997, due principally from $381,000 of net
retained income for the year to date. At June 30, 1998, the Bank had Tier 1
risk-based, total risk-based and leverage capital ratios of 13.7%, 14.7% and
8.9%, respectively. Each of these ratios exceeds the minimum ratios mandated by
law and banking regulations.
The planned acquisition of Peoples will increase total assets, total loans and
total deposits approximately $45 million, $32 million and $35 million,
respectively. Total stockholders' equity will increase approximately $7 million,
through the issuance of additional common shares in the merger.
Liquidity
- ---------
Operating activities, particularly net income of $641,000, depreciation and
amortization of $303,000, and the provision for loan losses of $100,000,
provided cash totaling $1.1 million which was used to fund investing activities
during the first six months of 1998.
As a result of the continuing loan demand previously discussed, financing
activities used approximately $3.4 million in funds during the first half of
1998, as compared to $5.6 million used during the same period in 1997. Net loan
originations used $6.2 million and was partially funded by net investment
maturities which totaled approximately $3.4 million. By comparison, during the
first three months of 1997, net loan originations totaled $11.9 million, which
was partially funded by net investment maturities and sales totaling $6.4
million. In addition, approximately $641,000 was used during the first six
months of 1998 for the purchase premises and equipment. These funds were used
principally toward the construction and furnishing of the data center facility.
In addition to the funds used for investing activities, financing activities
through the six months ended June 30, 1998 provided approximately $4.9 million,
due principally to the net increase in deposits of $5.4 million. During the same
period of 1997, financing activities provided approximately $1.8 million of
funds due to a $2.0 million increase in deposits.
Aside from liquidity available from customer deposits or through sales and
maturities of the investment portfolio, the Company has alternative sources of
funds such as lines of credit available with a correspondent bank. At June 30,
1998, two short-term credit facilities were available through the Federal Home
Loan Bank, including a revolving line of credit of approximately $4.6 million,
and a second revolving facility with a maximum borrowing of $10 million.
15
<PAGE>
The planned acquisition of Peoples will be completed through a combination of
the issuance of Emclaire common stock and the payment of cash to holders of
Peoples common stock. It is estimated the cash portion required to complete the
purchase will total approximately $5.6 million. The Company anticipates these
funds will be provided through a short-term loan from another financial
institution. Subsequent repayment of this credit facility will be made from
either permanent financing, or from cash derived from the sale of a portion of
Peoples Savings investment portfolio.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely affect its liquidity or
its ability to meet funding needs in the ordinary course of business.
Risk Elements
- -------------
At June 30, 1998, non-performing loans, including those past due ninety days or
more, and loans on nonaccrual status totaled approximately $722,000. Of these
non-performing loans, $537,000 are considered to be impaired for financial
reporting purposes. These impaired loans consist of four commercial and
commercial real estate loans to a single borrower, secured by real estate. The
borrower continues to operate under Chapter 11 bankruptcy protection. As part of
management's ongoing assessment of the loan portfolio, $40,000 of the allowance
for loan losses at June 30, 1998, has been allocated for these loans. In April
1998, the borrower completed the sale of a parcel of real estate securing this
account. As a result of the sale, the Company received approximately $148,000
which was applied against the principal balance. Management believes the Company
is adequately secured by the underlying collateral.
The following table presents the components of non-performing loans and other
non-performing assets as the five most recent quarters ended:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------------------------
June 30, March 31, December 31, September 30, June 30,
-------- --------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Non-performing loans
Loans past due 90 days or more $ 55 $ 132 $ 171 $ 134 $ 61
Non-accrual loans 667 828 820 856 967
------ ------ ------ ------ ------
Total non-performing loans 722 960 991 990 1,028
Other non-performing assets
Repossessed assets -- -- -- -- --
Real estate acquired through
foreclosure -- -- -- -- --
------ ------ ------ ------ ------
Total other non-performing assets -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing assets $ 722 $ 960 $ 991 $ 990 $1,028
====== ====== ====== ====== ======
Non-performing loans as a percentage
of total loans .78% 1.08% 1.15% 1.19% 1.28%
Non-performing assets to assets .52 .71 .74 .75 .79
</TABLE>
16
<PAGE>
Year 2000
- ---------
Management continues to work toward attaining Year 2000 ("Y2K") compliance.
Prior to entering into agreements to purchase the computer and check imaging
equipment discussed previously, vendors provided representations that the
equipment and software were Y2K compliant. In addition, management intends to
test computer hardware for compliance prior to it being installed.
During the second quarter of 1998, the Bank hosted a Y2K awareness seminar for
customers and local businesses. This seminar presented an overview of the issues
related to the century date change, along with outlining steps small to medium
sized businesses can take to limit their exposure to the inherent risks.
In addition to the ongoing assessment and testing of equipment, software and
vendors discussed in the 1997 Annual Report, the Company has implemented a
program to assess the Y2K risk that might be presented by significant commercial
customers. Self-assessment questionnaires were provided to these customers
during the second quarter. A review and assessment of the responses should be
completed during the third quarter. Customers who are identified as posing a
significant Y2K risk, will be subject to periodic review and risk assessment
similar to the Company's periodic loan quality review.
During the second quarter, the Company drafted a contingency plan outlining
actions to be considered at various points in time for critical operational
functions which fail to achieve Y2K compliance by specific dates. For items or
vendors that are not compliant and have not achieved significant progress toward
compliance by October 1, 1998, the Company will begin to implement applicable
sections of the contingency plan to either replace the product or vendor, or
implement an alternative procedure to mitigate the affected area.
All software programs used by the Company are purchased directly from vendors,
and are not modified internally by the Company. This eliminates the need for the
direct hiring of programmers to rewrite or modify computer software.
Management believes that substantially all date reliant equipment and software
will be tested and, if needed, upgraded or replaced by December 31, 1998. In
addition, assessments of significant vendors, service providers and customers
will also be completed. Despite the best efforts of management to address this
issue, the vast number of external entities that have direct and indirect
business relationships with the Company, such as customers, vendors, payment
system providers and other financial institutions, makes it impossible to assure
that a failure to achieve compliance by one or more of these entities would not
have a material adverse impact on the operations of the Company.
It is not believed the efforts made by the Company to achieve Y2K compliance
will have a material impact on the financial condition or results of operations
of the Company. The expected outlay of funds directly related to the Y2K project
is not expected to exceed $50,000, over the life of the project. While the
outlay of funds is not considered to be material, the employee time devoted to
the project has been and will continue to be significant.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(None)
Item 2. Changes in Securities
(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 was held May 20, 1998. Of 1,081,453
shares eligible to vote, 942,579 or 87.2% were voted in person or by proxy.
b) The following Class A directors were elected for a three year term expiring
in 2001:
Shares Shares
Name in Favor Withheld
---- -------- --------
David L. Cox 873,468 69,111
Rodney C. Heeter 868,827 73,752
J. Michael King 872,040 70,539
In addition to the above listed individuals, the following persons continue to
serve as directors:
Ronald L. Ashbaugh Bernadette H. Crooks
George W. Freeman Robert L. Hunter
Brain C. McCarrier John B. Mason
Elizabeth C. Smith
c) The recommendation by the Board of Directors to ratify the
appointment of S. R. Snodgrass, A.C., as the Company's independent auditors, as
described in the Proxy Statement for the Annual Meeting, was approved with
941,529 shares in favor, 1,050 shares against.
Item 5. Other Information
(None)
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule (in electronic filing only)
(b) Reports on Form 8-K
On April 13, 1998, the Company filed Form 8-K disclosing it
had entered into an Agreement and Plan of Reorganization to
acquire all of the outstanding stock of Peoples Savings
Financial Corporation.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Emclaire Financial Corp.
(Registrant)
Date: August 13, 1998 By: /s/ David L. Cox
--------------- ----------------------------------
David L. Cox
President and CEO
Date: August 13, 1998 By: /s/ John J. Boczar
--------------- ----------------------------------
John J. Boczar, CPA
Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,730
<INT-BEARING-DEPOSITS> 16
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,228
<INVESTMENTS-CARRYING> 4,314
<INVESTMENTS-MARKET> 4,327
<LOANS> 92,281
<ALLOWANCE> 905
<TOTAL-ASSETS> 139,610
<DEPOSITS> 123,084
<SHORT-TERM> 0
<LIABILITIES-OTHER> 604
<LONG-TERM> 2,041
0
0
<COMMON> 1,352
<OTHER-SE> 12,305
<TOTAL-LIABILITIES-AND-EQUITY> 13,881
<INTEREST-LOAN> 3,898
<INTEREST-INVEST> 1,093
<INTEREST-OTHER> 66
<INTEREST-TOTAL> 5,057
<INTEREST-DEPOSIT> 1,932
<INTEREST-EXPENSE> 1,994
<INTEREST-INCOME-NET> 3,063
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,378
<INCOME-PRETAX> 924
<INCOME-PRE-EXTRAORDINARY> 924
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 641
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 7.94
<LOANS-NON> 667
<LOANS-PAST> 55
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 874
<CHARGE-OFFS> 83
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 905
<ALLOWANCE-DOMESTIC> 378
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 527
</TABLE>
