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 September 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
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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 November 27, 1998, there were 1,395,852 shares outstanding of the issuer's
common stock, par value $1.25 per share.
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Emclaire Financial Corp.
INDEX TO QUARTERLY REPORT OF FORM 10-QSB
<TABLE>
<CAPTION>
<S> <C> <C>
Part I Financial Information Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet, September 30, 1998 and
December 31, 1997 3
Consolidated Statement of Income
Three months ended September 30, 1998 and 1997 and
Six months ended September 30, 1998 and 1997 4
Consolidated Statement of Comprehensive Income
Three months ended September 30, 1998 and 1997 and
Six months ended September 30, 1998 and 1997 5
Consolidated Statement of Changes in
Stockholders' Equity 6
Consolidated Statement of Cash Flows
Six months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 18
Part II Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Securities Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
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EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited - dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 7,813 $ 4,975
Federal funds sold 3,500 -
Time deposits with other financial institutions 100 -
Investment securities:
Available for sale 30,278 31,977
Held to maturity (estimated market value
of $3,486 and $6,053) 3,428 6,057
Loans 132,091 86,144
Less allowance for loan losses 1,291 874
--------------- ----------------
Net loans 130,800 85,270
Premises and equipment 3,680 2,619
Accrued interest and other assets 7,053 3,058
--------------- ----------------
TOTAL ASSETS $186,652 $ 133,956
=============== ================
LIABILITIES
Deposits
Non-interest bearing demand $ 22,925 $ 19,765
Interest bearing demand 20,480 17,276
Savings 22,128 16,261
Money market 20,370 18,077
Time 76,437 46,276
--------------- ----------------
Total deposits 162,340 117,655
Obligation under capital lease 30 63
Borrowed funds 2,001 2,200
Accrued interest and other liabilities 1,183 540
--------------- ----------------
TOTAL LIABILITIES 165,554 120,458
--------------- ----------------
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, 1,395,852 and 1,081,453 shares issued in 1998 and 1997 1,745 1,352
Additional paid in capital 10,871 4,432
Retained earnings 8,070 7,492
Net unrealized gain on securities 412 222
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 21,098 13,498
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $186,652 $ 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,291 $ 1,836 $ 6,189 $ 5,081
Interest bearing deposits in other banks - - 1 1
Federal funds sold 51 33 116 65
Investment securities:
Taxable 488 538 1,485 1,743
Exempt from federal income tax 48 44 144 140
----------------- ---------------- ---------------- ----------------
Total interest income 2,878 2,451 7,935 7,030
----------------- ---------------- ---------------- ----------------
INTEREST EXPENSE
Deposits
1,143 920 3,075 2,708
Borrowed funds 29 29 89 39
Lease obligation - 1 2 4
----------------- ---------------- ---------------- ----------------
Total interest expense 1,172 950 3,166 2,751
----------------- ---------------- ---------------- ----------------
NET INTEREST INCOME 1,706 1,501 4,769 4,279
Provision for loan losses 55 50 155 165
----------------- ---------------- ---------------- ----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,651 1,451 4,614 4,114
----------------- ---------------- ---------------- ----------------
OTHER OPERATING INCOME
Service fees on deposit accounts 145 131 401 337
Other 56 32 139 84
----------------- ---------------- ---------------- ----------------
Total other operating income 201 163 540 421
----------------- ---------------- ---------------- ----------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 603 577 1,805 1,687
Occupancy, furniture and equipment 241 165 625 508
Other 475 361 1,267 1,072
----------------- ---------------- ---------------- ----------------
Total other operating expense 1,319 1,103 3,697 3,267
----------------- ---------------- ---------------- ----------------
Income before income taxes 533 511 1,457 1,268
Income taxes 169 160 452 388
----------------- ---------------- ---------------- ----------------
NET INCOME $ 364 $ 351 $ 1,005 $ 880
================= ================ ================ ================
EARNINGS PER SHARE $ 0.31 $ 0.32 $ 0.90 $ 0.81
DIVIDENDS PER SHARE 0.12 0.11 0.36 0.32
</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 September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net Income $ 364 $ 351 $ 1,005 $ 880
Other comprehensive income, net of tax
Unrealized gain on securities 188 155 190 49
-------- -------- ----------- ----------
COMPREHENSIVE NET INCOME $ 552 $ 506 $ 1,195 $ 929
======== ======== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
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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 1,005 1,005
Dividends declared
($.36 per share) (389) (389)
Issuance of 314,399 shares of
common stock in merger
transaction (Note 2) 393 6,439 6,832
Net unrealized gain on securities 190 190
------------ --------------- -------------- -------------- ---------------
Balance September 30, 1998 $ 1,745 $ 10,871 $ 8,108 $ 412 $ 21,136
============ =============== ============== ============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
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EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,005 $ 880
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 498 449
Net amortization of investment security
discounts and premiums 109 158
Provision for loan losses 155 165
(Increase) decrease in accrued interest receivable (126) 60
Increase in accrued interest payable (136) (2)
Other, net (192) (156)
----------------- -----------------
Net cash provided by operating activities 1,313 1,554
----------------- -----------------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Available for sale 3,000 4,000
Held to maturity 2,596 3,707
Proceeds from sales of investment securities:
Available for sale - 1,990
Purchases of investment securities:
Available for sale (543) (1,503)
Net loan originations (10,187) (14,774)
Purchases of premises and equipment (1,034) (150)
Proceeds from sales of premises and equipment - 10
Net proceeds from merger acquisition (Note 2) 2,232 -
----------------- -----------------
Net cash used for investing activities (3,936) (6,720)
----------------- -----------------
FINANCING ACTIVITIES
Net increase in deposits 9,620 798
Decrease in short-term borrowings (200) -
Proceeds from borrowed funds - 2,000
Payments for obligation under capital lease (32) (30)
Cash dividends paid (427) (351)
----------------- -----------------
Net cash provided by financing activities 8,961 2,417
----------------- -----------------
Increase in cash and cash equivalents 6,338 (2,749)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,975 8,242
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,313 $ 5,493
================= =================
</TABLE>
See accompanying notes to the consolidated financial statements.
7
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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. MERGER ACQUISITION
At the close of business August 31, 1998, the Company completed the acquisition
of Peoples Savings Financial Corporation ("Peoples"), in a transaction accounted
for as a purchase. This transaction was consummated through the issuance of
314,399 shares of Emclaire common stock and a cash payment of $5,684,000, and
was valued at approximately $12.6 million. Under the terms of the Agreement and
Plan and of Reorganization dated April 7, 1998, and approved by shareholders of
both companies on August 27, 1998, Peoples' wholly-owned subsidiary Peoples
Savings Bank was merged into and became part of Farmers. The results of
operations for the three branch offices acquired in this transaction are
included in the accompanying financial statements since the date of acquisition
As a result of this transaction, total consolidated assets increased
approximately $42.1 million, including net fair value and identifiable
intangible asset adjustments of $917,000, and goodwill of $2.6 million. The fair
value adjustments and identifiable intangible assets are being amortized over 2
to 20 years. The resulting goodwill is being amortized over 25 years..
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 nine month periods ending September 30, 1998 and 1997, the average
number of shares outstanding totaled 1,183,974 and 1,081,453, and 1,116,002 and
1,081,453, respectively, 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
8
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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.
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 nine months
ended September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 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 $ 285 $ 97 $ 188
------- -------- -------
Other comprehensive income $ 285 $ 97 $ 188
======= ======= =======
Three Months Ended September 30, 1997
-------------------------------------
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
Unrealized gain on securities:
Unrealized holding loss during the period $ 235 $ 80 $ 155
------- ------- -------
Other comprehensive income $ 235 $ 80 $ 155
======= ======= =======
Nine Months Ended September 30, 1998
------------------------------------
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
Unrealized gain on securities:
Unrealized holding gain during the period $ 288 $ 98 $ 190
-------- -------- -------
Other comprehensive income $ 288 $ 98 $ 190
======= ======== =======
Nine Months Ended September 30, 1997
------------------------------------
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
Unrealized gain on securities:
Unrealized holding gain during the period $ 74 $ 25 $ 49
-------- -------- -------
Other comprehensive income $ 74 $ 25 $ 49
======= ======= =======
</TABLE>
9
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The components of accumulated other comprehensive income for the nine months
ended September 30, 1998, consist of the items presented under the heading Net
Unrealized Gain on Securities as presented in the Consolidated Statement of
Changes in Stockholders' Equity. For the nine months ended September 30, 1997,
the net unrealized gain on securities had a beginning balance of $124, a net
unrealized gain of $49, and an ending balance of $173.
5. LOANS
Major classifications of loans are summarized as follows (in thousands):
September 30, December 31,
1998 1997
----------------- -----------------
Commercial and industrial $ 13,408 $ 11,147
Real estate mortgages
Residential 85,889 45,709
Commercial and other 17,879 15,188
Consumer 14,915 14,100
----------------- -----------------
132,091 86,144
Less allowance for loan losses 1,291 874
----------------- -----------------
$ 130,800 $ 85,270
================= =================
The Bank's primary business activity is with customers located within Venango,
Clarion, Butler, Elk, Clearfield and Jefferson Counties. Commercial,
residential, personal, and agricultural loans are granted. Although the Bank has
a diversified loan portfolio at September 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 September 30, 1998 and 1997
- ----------------------------------------------------------------
Net Income - Net income for the three months ended September 30, 1998 totaled
$364,000 or $.31 per share, approximating the $351,000 or $.32 per share
recorded during the same period in 1997, adjusted for the five percent stock
dividend paid in December 1997. Net income showed only a modest increase due to
increased operating costs, specifically, those associated with acquisition of
Peoples Savings Financial Corporation, the completion of the data center, the
upgrade of the main frame computer system, the transition to check imaging, and
the opening of the de novo branch office in the Clarion Mall. These costs
approximated the increases in net interest income and other income which rose
$205,000 or 14% and $38,000 or 23%, respectively for the comparative three month
periods ended September 30, 1998 and 1997.
The reported net income resulted in annualized returns on average assets and
average equity of .91% and 8.81% for the quarter ended September 30, 1998, as
compared to returns of 1.05% and 10.61% for the same period in 1997. Net income
for the third quarter of 1998 as compared to the second quarter of 1998,
represents an increase of $62,000 or 21%. This increase is attributable to the
increase in net interest income, resulting from the increased volume of earning
assets.
Interest Income - Interest income for the three months ended September 30, 1998
increased approximately $427,000 or 17% 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 $24.9 million from the same period in 1997 to $106.7
million. The acquisition of Peoples represented approximately $11.7 million of
the total average loan growth. The remainder of the increase is attributable
largely to the increase in residential mortgage loans. The tax equivalent yield
on the loan portfolio for the quarter decreased 42 basis points to 8.55% 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 third quarter of 1998 were $34.5 million
resulting in a tax-equivalent yield of 6.45% for the quarter, compared to $38.9
million and 6.18% during the same period in 1997. Due to continuing loan demand,
investment portfolio maturities generally are reinvested in the loan portfolio.
Despite the growth in the volume of average earning assets which increased $22.9
million for the third quarter of 1998 as compared to 1997, the tax equivalent
yield on earning assets fell to 7.91% during the third quarter of 1998, as
compared to 8.01% during the same period in 1997, due to the general decline in
interest rates. With the recent actions taken by the Federal Reserve Board in
lowering the discount rate, it is anticipated the yield on earning assets will
continue to decline for the foreseeable future.
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Interest expense - Interest expense increased $222,000 or 23% during the third
quarter of 1998, as compared to the same period in 1997. The average volume of
interest bearing liabilities during the quarter increased $18.4 million or 19%
during the comparative periods. Approximately $11.6 million of this increase is
attributable to the acquisition of Peoples. During the comparative quarters the
overall rate paid on these liabilities rose from 3.83% to 3.98%. This higher
cost of funds is due to a combination of factors, including the higher cost of
funds of the deposit liabilities assumed in the merger, due to the concentration
in higher yielding certificates of deposit, combined with the continuing efforts
to use retail deposits to fund loan growth. The use of a Federal Home Loan Bank
advance as an alternative source of funds, has also contributed to the increased
cost 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 interest income due to the
increased volume of earning assets which more than offset the increase in
interest expense, net interest income rose $205,000 or 14% for the quarter ended
September 30, 1998, as compared to the same period in 1997. The net tax
equivalent yield on earning assets for the quarter was 4.73%, a 22 basis point
decline from the 4.95% 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 $50,000 provided during the same period in 1997. In
addition, the allowance for loan losses increased $349,000 as a result of the
acquisition of Peoples.
Other operating income - Other operating income increased $36,000 or 22% for the
third 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 and third quarters of 1997, convenience fees levied on
non-Farmers customers who use an ATM sponsored by Farmers National Bank were
initiated, along with the introduction of the MasterMoney(TM) debit card. These
changes resulted in new or additional fee income totaling $15,000 during the
third 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, principally overdraft charges.
Other Operating Expense - During the third quarter of 1998, total other
operating expenses increased $214,000 or 19% to $1.3 million from the same
period in 1997. The rise in other operating expenses is due to a combination of
recurring and non-recurring expenditures. Recurring expenditures included the
costs of operating a de novo branch office facility opened in March 1998, costs
associated with the operation of the data center, increases in recurring
expenses for such things as salaries and employee benefits, equipment service
contracts and ATM network fees; and operating costs for the three branch offices
acquired in the merger, which impacted all aspects of operating expenses.
Non-recurring costs were recorded related to the promotion and implementation of
the check imaging system, and for transition costs related to the merger.
12
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The operation of the Clarion Mall office resulted in approximately $68,000 of
additional operating expenses during the third 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 remain short of the
projected results.
As a result of the expansion of the branch office network, salary and employee
benefit costs increased $26,000 or 5% to $603,000 for the third quarter of 1998
as compared to $577,000 during the same period in 1997. The de novo office and
former Peoples' offices resulted in a net increase in employee related costs of
approximately $32,000. This more than offset the $30,000 reduction in the profit
sharing accrual during the comparative quarters. In addition, periodic salary
adjustments and scheduled employee health insurance premiums account for the
balance of the increase.
Occupancy and equipment costs increased $74,000 or 45% during the third quarter
of 1998, as compared to the same period in 1997. The additional branch offices
and data center accounted for $40,000 of the increase. Periodic costs associated
with equipment service contracts accounted for $15,000 of the increase. These
costs relate principally to maintenance agreements on the Bank's data and
document processing equipment. During the third quarter of 1998, main frame
computer equipment was upgraded, and a check imaging program was implemented.
Depreciation expense related those aspects of these projects that are completed
and operational amounted to approximately $9,000 for the quarter. During the
third quarter, a project to enhance the wide area network was initiated. This
will entail adding the three branches acquired in the merger to the network and
expanding the processing capacity of the entire network. The capital outlay for
this project is expected to approximate $100,000.
Other operating expense increased $114,000 or 32% during the third quarter of
1998, as compared to the same period in 1997 and totaled $475,000. Non recurring
costs incurred during the latest quarter included $16,000 related to the
promotion of the check imaging service, and $10,000 in transition expenses
related to the merger, and approximately $6,000 in line charges related to the
wide area network project. Additional non-recurring expenses related to these
projects are expected to be incurred during the fourth quarter, and are expected
to total approximately $18,000. Recurring costs increased during the comparative
quarter due to items such as: increased ATM and debit card processing fees which
increased $14,000 or 59% to $36,000; printing and supplies increased $28,000 to
$61,000 due to costs associated with opening the expanded branch network, and
the conversion to check imaging. During the third quarter, management changed
long distance telephone providers to reduce the cost of telephone voice
communications. This change which became effective during the fourth quarter
should reduce the voice communications costs at existing offices by
approximately 20%. This savings should help to offset the costs associated with
the branch offices added as a result of the merger. As a result of the
acquisition of Peoples, amortization costs related to identifiable intangible
assets and goodwill increased approximately $15,000 during the quarter. The
amortization costs related to the acquisition of Peoples are expected to amount
to approximately $180,000 annually.
13
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Income Taxes - The provision for income taxes of $169,000 for the three months
ended September 30, 1998, approximated the $160,000 recorded during the same
period of 1997. Income taxes as a percentage of pre-tax earnings was
approximately 31% for the comparative three month periods.
Comparison of the Nine Months Ended September 30, 1998 and 1997
- ---------------------------------------------------------------
Net Income - Net income for the nine months ended September 30, 1998 totaled
$1.0 million or $.90 per share, as compared to $880,000 or $.81 per share for
the same period in 1997, an increase of $125,000 or 14%.
Net Interest Income - Net interest income increased $490,000 or 11% during the
first nine months of 1998, as compared to the same period in 1997. As discussed
in the "Comparison of the Three Months Ended September 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 nine months ended
September 30, 1998 the net tax equivalent yield on earning assets was 4.85%,
equaling the yield for the same period in 1997.
Provision for Loan Losses - The provision for loan losses for the first six
months of 1998 totaled $155,000, as compared to $165,000 recorded during the
same period in 1997. As discussed in the quarter to quarter comparison, the
allowance for loan losses increased an additional $349,000 as a result of the
acquisition of Peoples.
Other Operating Income - Other operating income of $538,000 represents an
increase of $117,000 or 28% for the comparative year-to-date periods. The
increase is largely attributed to the impact of ATM convenience charges and
debit card fees, combined with the increase in overdraft charges as a result of
the increased number of accounts, as discussed in the quarter-to-quarter
comparison.
Other Operating Expense - For the first nine months of 1998 other operating
expenses totaled $3.7 million as compared to $3.3 million for the same period in
1997, an increase of $428,000 or 13%. Total operating costs for the Clarion Mall
and merged offices accounted for approximately $230,000 of the total increase.
Non-recurring charges related to check imaging promotion, merger transition
costs and computer network upgrades totaled $32,000. The remaining increase can
be attributed to increases in normal recurring costs such as, ATM and debit card
operating costs which increased $35,000, telephone, and printing and supplies
which increased $6,000 and $27,000 (net of costs related to the branch
operations and non-recurring previously discussed). Software amortization costs
increased $11,000 due to the computer and check imaging applications.
Correspondent and check clearing fees increased $11,000 due largely the
increased volume, while losses on customer accounts increased $16,000, due to a
loss incurred in the in the first quarter of 1998.
Income Taxes - The provision for income taxes for the first nine months of 1998
totaled $452,000, as compared to $338,000 during the same period in 1997. The
increase is attributed to the increase in pre-tax income. For the nine months
ended September 30, 1998, income tax expense represented 31% of pre-tax income,
as compared to 30% for the same period in 1997.
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Financial Condition
- -------------------
As previously discussed, the Company completed the acquisition of Peoples
Savings Financial Corporation as to the close of business August 31, 1998. As a
result of this transaction, total consolidated assets increased approximately
$42.1 million, including net fair value and identifiable intangible asset
adjustments of $917,000; and goodwill adjustments of $2.6 million. Total
liabilities and shareholders' equity increased $35.2 million and $6.9 million,
respectively.
At September 30, 1998, the Company reported total consolidated assets of $186.7
million, an increase of $52.7 million or 39.3% from December 31, 1997. Excluding
the effects of acquisition, Total assets increased $10.6 million, or 7.9 % from
operations. This increase in total assets since December 31, 1997, resulted from
an increase in total deposits which rose $9.7 million or 8.3%, exclusive of the
impact of the merger. Considering the effects of the acquisition, total deposits
rose $44.7 million, or 38.0%.
Total loans, excluding those acquired in the merger, increased $10.7 million or
12.5%. At September 30, 1998 the loan portfolio totaled $132.1 million, an
increase of $45.9 million, or 53.3% during the first nine months of 1998. The
increase in the loan portfolio from operations represents a decline of $4.0
million from the $14.7 million increase during the first nine 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.
During the third quarter of 1998, management commenced a project to improve the
Bank's data processing capabilities by upgrading the main frame computer and
core application software. In addition to upgrading the computer system, a check
imaging system was also implemented. The combined capital outlay for the
computer upgrade and check imaging system is expected to total approximately
$525,000. This project is expected to be fully completed during the fourth
quarter of 1998. In addition to the computer system upgrade, approximately
$105,000 has been earmarked for changes to the wide area computer network,
including the addition of the merger offices to the network. This project is
also expected to be completed by year end.
Stockholders' equity of $21.1 million at September 30, 1998, represented a $7.6
million or 56.3% increase from December 31, 1997, due principally from the $6.8
million resulting from the issuance of 314,399 common shares to complete the
merger. At September 30, 1998, the Company had Tier 1 risk-based, total
risk-based and leverage capital ratios of 15.3%, 16.5% and 7.4%, respectively.
Each of these ratios exceeds the minimum ratios mandated by law and banking
regulations.
Liquidity
- ---------
Operating activities, particularly net income of $1,005,000, depreciation and
amortization of $498,000, and the provision for loan losses of $155,000,
provided cash totaling $1.3 million which was used to fund investing activities
during the first nine months of 1998.
15
<PAGE>
As a result of the continuing loan demand previously discussed, financing
activities used approximately $3.9 million in funds during the nine months ended
September 30, 1998, as compared to $6.7 million used during the same period in
1997. Net loan originations, exclusive of the loans obtained in the merger, used
$10.2 million and was partially funded by net investment maturities which
totaled approximately $5.1 million. By comparison, during the first nine months
of 1997, net loan originations totaled $14.8 million, which was partially funded
by net investment maturities and sales totaling $8.2 million. In addition,
approximately $1 million was used during the first nine months of 1998 for the
purchase premises and equipment. These funds were used principally toward the
construction and furnishing of the data center facility, and the acquisition of
computer and check imaging equipment. The acquisition of Peoples Savings
Financial Corporation resulted in a net source of cash as the cash received in
the merger, principally interest bearing deposits with other financial
institutions exceeded the cash portion of the merger consideration.
Financing activities through the nine months ended September 30, 1998 provided
approximately $8.9 million, due principally to the net increase in deposits of
$9.6 million, exclusive of the deposit liabilities assumed in the acquisition of
Peoples. During the same period of 1997, financing activities provided
approximately $2.4 million of funds due to an increase in borrowed funds of $2
million and a $798,000 net 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 September
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.
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 September 30, 1998, non-performing loans, including those past due ninety
days or more, and loans on nonaccrual status totaled approximately $1,145,000.
Non-performing loans totaling $441,000 were acquired in the acquisition of
Peoples, of which $291,000 are nonaccrual. These loans are generally secured by
residential real estate and collection is actively being pursued. As of
September 30, 1998, Management does not believe any of these loans presents any
significant risk of loss.
Of the non-performing loans, $531,000 are considered to be impaired for
financial reporting purposes. These impaired loans consist of four commercial
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
September 30, 1998, has been allocated for these loans. During the third quarter
of 1998, the borrower provided a $6,000 payment which was applied against the
principal balance. Management believes the Company is adequately secured by the
underlying collateral.
16
<PAGE>
Other real estate owned consists of four parcels of residential real estate
acquired in the merger. Since September 30, 1998, one parcel has been sold,
while two others are under agreements to sell. If these transactions are
completed, it is expected no loss will result from the disposition of these
properties.
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
------------------------------------------ -----------------------------
September 30, June 30, March 31, December 31, September 30,
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Non-performing loans
Loans past due 90 days or more $ 204 $ 55 $ 132 $ 171 $ 134
Nonaccrual loans 941 667 828 820 856
---- ---- ---- ---- ----
Total non-performing loans 1,145 722 960 991 990
Other non-performing assets
Repossessed assets - - - - -
Real estate acquired through
foreclosure 337 - - - -
---- ---- ---- ---- ----
Total other non-performing assets 337 - - - -
---- ---- ---- ---- ----
Total non-performing assets $ 1,482 $ 722 $ 960 $ 991 $ 990
======= ====== ====== ====== ======
Non-performing loans as a percentage
of total loans .87% .78% 1.08% 1.15% 1.19%
Non-performing assets to assets .79 .52 .71 .74 .75
</TABLE>
Year 2000
- ---------
The following discussion of the implications of the Year 2000 ("Y2K") compliance
issue for the Company contains numerous forward-looking statements based on
inherently uncertain information. The cost of the project and the date on which
the Company plans to complete various aspects of the project are based on
management's best estimates, which were derived utilizing a number of
assumptions of future events including the continued availability of internal
and external resources, third party modifications and other factors.
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 tested
computer hardware for compliance prior to it being installed.
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 was
completed during the third quarter. This process will be applied to new
17
<PAGE>
commercial customers, and will be periodically updated for existing customers as
the century date change approaches.
During the third quarter, the Company began drafting its Y2K test program to
allow for the documented testing of its mission critical software applications.
This program will be coordinated with the existing 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. It is expected
that testing of the mission critical applications will be substantially
completed by January 31, 1998.
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 March 31, 1999. In
addition, assessments of significant vendors, service providers and customers
have 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, liquidity 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.
18
<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 special meeting of stockholders was held August 27, 1998, to consider
and vote on the proposal to approve the Agreement and Plan of Reorganization,
dated April 7, 1998 by and between Emclaire Financial Corp. and The Farmers
National Bank of Emlenton, and Peoples Savings Financial Corporation and Peoples
Savings Bank. Of the 1,081,453 shares eligible to vote, 898,798 or 83.1% were
voted in person or by proxy. Of the total shares voted, 898,451 were cast in
favor of the proposal, no shares were cast against the proposal, and 347 shares
abstained.
Item 5. Other Information
(None)
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 September 1, 1998, the Company filed Form 8-K disclosing it
had completed the acquisition of all of the outstanding stock
of Peoples Savings Financial Corporation, under the terms of
the Agreement and Plan of Reorganization dated April 7, 1998.
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: November 30, 1998 By: /s/ David L. Cox
----------------- -----------------------------------
David L. Cox
President and CEO
Date: November 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,813
<INT-BEARING-DEPOSITS> 2,499
<FED-FUNDS-SOLD> 3,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,278
<INVESTMENTS-CARRYING> 3,428
<INVESTMENTS-MARKET> 3,486
<LOANS> 132,091
<ALLOWANCE> 1,291
<TOTAL-ASSETS> 186,652
<DEPOSITS> 162,340
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,183
<LONG-TERM> 2,031
0
0
<COMMON> 1,745
<OTHER-SE> 19,165
<TOTAL-LIABILITIES-AND-EQUITY> 139,610
<INTEREST-LOAN> 6,189
<INTEREST-INVEST> 1,629
<INTEREST-OTHER> 117
<INTEREST-TOTAL> 7,935
<INTEREST-DEPOSIT> 3,075
<INTEREST-EXPENSE> 3,166
<INTEREST-INCOME-NET> 4,769
<LOAN-LOSSES> 155
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,697
<INCOME-PRETAX> 1,457
<INCOME-PRE-EXTRAORDINARY> 1,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 4.76
<LOANS-NON> 941
<LOANS-PAST> 204
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 874
<CHARGE-OFFS> 101
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1,291
<ALLOWANCE-DOMESTIC> 539
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 752
</TABLE>
