This section discusses the consolidated financial condition and results of
operations of Emclaire Financial Corp and its wholly owned subsidiary for the
three and six months ended June 30, 2022, compared to the same periods in 2021
and should be read in conjunction with the Corporation's Annual Report on Form
10-K for the year ended December 31, 2021, filed with the SEC and with the
accompanying consolidated financial statements and notes presented in this Form
10-Q.
FORWARD LOOKING STATEMENTS
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.
USE OF NON-GAAP FINANCIAL MEASURES
In addition to the results of operations presented in accordance with generally
accepted accounting principals (GAAP), management uses certain non-GAAP
financial measures, such as net interest income on a fully taxable equivalent
basis. Management believes these non-GAAP financial measures provide
information that is useful to investors in understanding the underlying
operational performance and business and performance trends as they facilitate
comparison with the performance of others in the financial services industry.
Although management believes that these non-GAAP financial measures enhance
investors' understanding of the Corporation's business and performance, these
non-GAAP financial measures should not be considered an alternative to GAAP.
Management believes the presentation of net interest income on a fully taxable
equivalent basis ensures comparability of net interest income arising from both
taxable and tax-exempt sources and is consistent with industry practice.
Interest income per the unaudited Consolidated Statements of Income is
reconciled to net interest income adjusted to a fully taxable equivalent basis
on pages 25 and 29 for the three and six months ended June 30, 2022 and 2021,
respectively.
CHANGES IN FINANCIAL CONDITION
Total assets decreased $9.8 million, or 0.9%, to $1.0 billion at June 30, 2022
from $1.1 billion at December 31, 2021. The decrease in assets was driven
primarily by a $35.1 million, or 18.9%, decrease in securities to $151.1 million
at June 30, 2022 from $186.3 million at December 31, 2021, primarily due to a
$25.1 million decrease in the market value of securities following an increase
in market interest rates. Partially offsetting the decrease in securities,
loans receivable increased $20.1 million, or 2.6%, to $800.2 million at June 30,
2022 from $780.0 million at December 31, 2021. During the six months ended June
30, 2022, the Corporation's loan production totaled $101.4 million in
commitments and resulted in new outstanding loan balances of $77.6 million at
June 30, 2022. Liabilities increased $7.0 million, or 0.7%, to $969.5 million
at June 30, 2022 from $962.5 million at December 31, 2021, due to a $19.1
million, or 2.1%, increase in customer deposits, partially offset by a $4.1
million, or 18.6%, reduction in borrowed funds.
Stockholders' equity decreased $16.8 million, or 17.3%, to $80.2 million at
June 30, 2022 from $97.0 million at December 31, 2021 , primarily due to a $25.0
million decrease in accumulated other comprehensive income as unrealized losses
in the Corporation's securities portfolio were impacted due to the recent rise
in market interest rates. Partially offsetting this reduction, retained
earnings increased $2.9 million as a result of $4.6 million of net income
available to common stockholders, less $1.7 million of common dividends paid.
The Corporation remains well capitalized and is positioned for continued growth
with total stockholders' equity at 7.6% of total assets. Book value per common
share was $27.78 at June 30, 2022 , compared to $33.91 at December 31, 2021 .
At June 30, 2022, the Bank was considered "well-capitalized" with a Tier 1
leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and
total risk-based capital ratio of 8.06%, 11.74%, 11.74% and 12.99%,
respectively. The Bank was also considered "well-capitalized" at December 31,
2021 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based
capital ratio and total risk-based capital ratio of 7.98%, 11.86%, 11.86% and
13.11%, respectively.
RESULTS OF OPERATIONS
Comparison of Results for the Three Months Ended June 30, 2022 and 2021
General. Net income available to common stockholders increased $296,000, or
16.1%, to $2.1 million for the three months ended June 30, 2022 from
$1.8 million for the same period in 2021. The increase resulted from an $881,000
increase in net interest income, partially offset by increases in the provision
for loan losses, noninterest expense and the provision for income taxes of
$125,000, $149,000 and $176,000, respectively, and a $128,000 decrease in
noninterest income.
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Net interest income. Tax equivalent net interest income increased $885,000, or
12.2%, to $8.2 million for the three months ended June 30, 2022 from
$7.3 million for the three months ended June 30, 2021. This increase was
attributed to a decrease in interest expense of $464,000 and an increase in tax
equivalent interest income of $421,000.
Interest income. Tax equivalent interest income increased $421,000, or 4.9%, to
$9.1 million for the three months ended June 30, 2022 from $8.7 million for the
same period in 2021. This increase was attributed to increases in interest
earned on loans and securities of $317,000 and $133,000, respectively, partially
offset by decreases in interest on interest-earning deposits and dividends on
federal bank stocks of $26,000 and $3,000, respectively.
Tax equivalent interest earned on loans receivable increased $317,000, or 4.1%,
to $8.0 million for the three months ended June 30, 2022 compared to
$7.7 million for the same period in 2021. The increase resulted from a 12 basis
point increase in the average yield on loans to 3.99% for the three months ended
June 30, 2022, versus 3.87% for the same period in 2021. This favorable yield
variance accounted for a $242,000 increase in interest income. Additionally,
average loan volume increased by $2.6 million, accounting for a $75,000 increase
in interest income. Included in interest earned on loans for the three months
ended June 30, 2022, is $20,000 of interest and fees earned on the SBA's PPP
lending program, compared to $361,000 for the same period in 2021.
Tax equivalent interest earned on securities increased $133,000, or 15.0%, to
$1.0 million for the three months ended June 30, 2022 compared to $888,000 for
the same period in 2021. The increase resulted from a 27 basis point increase in
the average yield on securities to 2.57% for the three months ended June 30,
2022, versus 2.30% for the same period in 2021. This favorable yield variance
accounted for a $107,000 increase in interest income. Additionally, average
securities volume increased by $4.4 million, accounting for a $26,000 increase
in interest income.
Interest earned on deposits with banks decreased $26,000, or 78.8%, to $7,000
for the three months ended June 30, 2022 compared to $33,000 for the same period
in 2021. This decrease was due to a $52.3 million decrease in average
interest-earning cash balances which accounted for a $34,000 decreased in
interest income. Partially offsetting this unfavorable variance, the average
yield on these balances increased 7 basis points to 0.28% for the three months
ended June 30, 2022, versus 0.21% for the same period in 2021, accounting for an
$8,000 increase in interest income.
Interest expense. Interest expense decreased $464,000, or 33.3%, to $931,000 for
the three months ended June 30, 2022 from $1.4 million for the same period in
2021. This decrease in interest expense can be attributed to decreases in
interest incurred on deposits and borrowed funds of $387,000 and $77,000,
respectively.
Interest expense incurred on deposits decreased $387,000, or 31.9%, to $827,000
for the three months ended June 30, 2022 compared to $1.2 million for the same
period in 2021. The average cost of interest-bearing deposits decreased 20 basis
points to 0.47% for the three months ended June 30, 2022, versus 0.67% for the
same period in 2021, accounting for an $353,000 decrease in interest expense.
This decrease in cost was driven primarily due to the expiration of
special rates on money market accounts and maturity of CD specials which were
offered in 2019 and general rate decreases as a result of current economic
conditions. Additionally, the average balance of interest-bearing deposits
decreased $21.0 million, or 2.9%, to $701.3 million for the three months ended
June 30, 2022, compared to $722.3 million for the same period in 2021 resulting
in a $34,000 decrease in interest expense.
Interest expense incurred on borrowed funds decreased $77,000, or 42.5%, to
$104,000 for the three months ended June 30, 2022, compared to $181,000 for the
same period in 2021. The decrease was primarily the result of a $10.2 million,
or 31.7%, decrease in the average balance of borrowed funds to $21.9 million for
the three months ended June 30, 2022, compared to $32.1 million for the same
period in 2021,resulting in a $53,000 decrease in interest expense.
Additionally, the average cost of borrowed funds decreased 35 basis points to
1.91% for the three months ended June 30, 2022, compared to 2.26% for the same
period in 2021 resulting in a $24,000 decrease in interest expense.
The following table reconciles interest income in the Consolidated Statements of
Income to net interest income adjusted to a fully taxable equivalent basis for
the three months ended June 30:
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