Emclaire Financial Corp
Annual Report 2019

Plain-text annual report

FNBE_AnnualReport 2019.pdf 1 3/6/2020 3:19:04 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 2 3/6/2020 3:19:05 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 3 3/6/2020 3:19:06 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 4 3/6/2020 3:19:06 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 5 3/6/2020 3:19:07 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 6 3/6/2020 3:19:07 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 7 3/6/2020 3:19:07 PM C M Y CM MY CY CMY K This page intentionally left blank EMCLAIRE FINANCIAL CORP 612 MAIN STREET EMLENTON, PENNSYLVANIA 16373 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO THE SHAREHOLDERS OF EMCLAIRE FINANCIAL CORP: Notice is hereby given that the Annual Meeting of Shareholders of Emclaire Financial Corp (the “Corporation”) will be held at 9:00 a.m., local time, on Wednesday, April 22, 2020, at the main office of the Farmers National Bank of Emlenton, 612 Main Street, Emlenton, Pennsylvania 16373, for the following purposes: 1. 2. 3. To elect four (4) directors to serve for three-year terms and until their successors are duly elected and qualified; To ratify the selection of Crowe LLP, Certified Public Accountants, as the Corporation’s independent registered public accounting firm for the fiscal year ending December 31, 2020; and To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. Only those shareholders of record at the close of business on March 2, 2020 will be entitled to notice of and to vote at the Annual Meeting. A copy of the Corporation’s Annual Report for the fiscal year ended December 31, 2019 is being mailed with this notice. To assure that your shares of common stock will be voted at the meeting, please indicate your voting instructions: (i) over the Internet at www.voteproxy.com, (ii) by telephone at 1-800-776-9437, or (iii) by completing and signing the enclosed proxy card and returning it promptly in the enclosed, postage prepaid, addressed envelope. No additional postage is required if mailed in the United States. The giving of a proxy will not affect your right to vote in person if you attend the meeting. By Order of the Board of Directors, William C. Marsh Chairman, President and Chief Executive Officer March 20, 2020 IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 22, 2020 The proxy materials for the Annual Meeting of Shareholders of Emclaire Financial Corp, including the Proxy Statement and the Corporation’s Annual Report for the fiscal year ended December 31, 2019, are available in the Financial Information section on our website at www.emclairefinancial.com. PROXY PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 2020 GENERAL Introduction, Date, Place and Time of Meeting This Proxy Statement is being furnished for the solicitation by the Board of Directors of Emclaire Financial Corp (the “Corporation”), a Pennsylvania business corporation and the bank holding company for the Farmers National Bank of Emlenton (the “Bank”), of proxies to be voted at the Annual Meeting of Shareholders of the Corporation to be held at the main office of the Bank, 612 Main Street, Emlenton, Pennsylvania 16373, on Wednesday, April 22, 2020, at 9:00 a.m. local time, or at any adjournment or postponement of the annual meeting. The main office of the Corporation is located at 612 Main Street, Emlenton, Pennsylvania 16373. The telephone number for the Corporation is (844) 767-2311. All inquiries should be directed to William C. Marsh, Chairman, President and Chief Executive Officer. This Proxy Statement and the enclosed form of proxy are first being sent to shareholders of the Corporation on or about March 20, 2020. This Proxy Statement and the Annual Report for the fiscal year ended December 31, 2019 are available in the Financial Information section on our website at www.emclairefinancial.com and www.sec.gov. How to Vote Shareholders may vote (i) via the Internet at www.voteproxy.com by following the instructions contained on that website, (ii) by telephone at 1-800-776-9437, (iii) by completing and signing the enclosed proxy card and returning it promptly in the enclosed, postage prepaid, addressed envelope, or (iv) appearing at the annual meeting and voting in person. Proxies properly executed and delivered by shareholders (via the Internet, telephone or by mail as described above) and timely received by us will be voted at the annual meeting in accordance with the instructions contained therein. If you authorize a proxy to vote your shares over the Internet or by telephone, you should not return a proxy by mail (unless you are revoking your previous proxy). Solicitation of Proxies The proxy solicited hereby, if properly voted via the Internet or telephone or signed and returned to us and not revoked prior to its use, will be voted in accordance with your instructions contained in the proxy. If no contrary instructions are given, each proxy signed and received will be voted in the manner recommended by the Board of Directors as follows: (i) FOR the nominees for director described herein; (ii) FOR the ratification of Crowe LLP, as the Corporation’s independent registered public accounting firm for the year ending December 31, 2020; and (iii) upon the transaction of such other business as may properly come before the meeting, in accordance with the best judgment of the persons appointed as proxies. Proxies solicited hereby may be exercised only at the annual meeting and any adjournment of the annual meeting and will not be used for any other meeting. Execution and return of the enclosed proxy will not affect a shareholder’s right to attend the annual meeting and vote in person. P-1 PROXY The cost of preparing, assembling, mailing and soliciting proxies will be borne by the Corporation. In addition to solicitations by mail, directors, officers and employees of the Corporation may solicit proxies personally or by telephone without additional compensation. In addition to the use of the mail, certain directors, officers and employees of the Corporation intend to solicit proxies personally, by telephone and by facsimile. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners of stock held of record by these persons, and, upon request, the Corporation will reimburse them for their reasonable forwarding expenses. Quorum The presence of shareholders, in person or by proxy, entitled to cast at least a majority of the votes which all shareholders are entitled to cast shall constitute a quorum at the annual meeting. Abstentions, broker non-votes, which are discussed below, and votes withheld from director nominees count as “shares present” at the meeting for purposes of determining a quorum. Voting At the close of business on March 2, 2020, the voting record date, the Corporation had outstanding 2,708,712 shares of common stock, $1.25 par value per share. Only shareholders of record, at the close of business on the voting record date, will be entitled to notice of and to vote at the annual meeting. Each issued and outstanding share of common stock owned on the record date will be entitled to one vote on each matter to be voted on at the annual meeting, in person or by proxy. Directors are elected by a plurality of the votes cast with a quorum present. The four nominees for director receiving the most votes of the common stock represented in person or by proxy at the annual meeting will be elected as directors. The affirmative vote of a majority of the total votes present in person or by proxy is required for approval of the proposal to ratify the appointment of the independent registered public accounting firm. With regard to the election of directors, you may vote in favor of or withhold authority to vote for one or more nominees for director. Votes that are withheld in connection with the election of one or more nominees for director will not be counted as votes cast for such individuals and accordingly will have no effect. An abstention may be specified on the proposal to ratify the appointment of Crowe LLP as our independent registered public accounting firm for 2020. Abstentions will have the same effect as a vote against this proposal. P-2 PROXY Under rules applicable to broker-dealers, the election of directors is considered to be a non-routine matter. Brokerage firms may not vote on non-routine matters in their discretion on behalf of their clients if such clients have not furnished voting instructions. A “broker non-vote” occurs when a broker’s customer does not provide the broker with voting instructions on non-routine matters for shares owned by the customer but held in the name of the broker. For such non- routine matters, the broker cannot vote on the proposal and reports the number of such shares as “non-votes.” Because the election of directors is not considered a routine matter, there potentially can be “broker non-votes” at the annual meeting. Any “broker non-votes” submitted by brokers or nominees in connection with the annual meeting will have no effect on the vote for the election of directors. Revocation of Proxies and Changing a Vote A shareholder who votes via the Internet (as described above) or telephone (as described above) or returns a proxy via mail may revoke it at any time before it is voted by: (i) delivering written notice of revocation to Jennifer A. Poulsen, Secretary, Emclaire Financial Corp, 612 Main Street, Post Office Box D, Emlenton, Pennsylvania 16373, telephone: (844) 767-2311; or (ii) voting in person at the annual meeting after giving written notice to the Secretary of the Corporation. Executing and returning a later-dated proxy, giving written notice of revocation to the Secretary of the Corporation or voting again via the Internet or telephone will revoke an earlier proxy. Only the latest dated proxy, ballot or Internet or telephone proxy submitted by a shareholder prior to the annual meeting will be counted. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 22, 2020 The proxy materials for the Annual Meeting of Shareholders of Emclaire Financial Corp, including the Proxy Statement and the Corporation’s Annual Report for the fiscal year ended December 31, 2019, are available in the Financial Information section on our website at www.emclairefinancial.com or www.sec.gov. P-3 PROXY PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION’S COMMON STOCK Persons and groups owning in excess of 5% of the common stock are required to file certain reports regarding such ownership pursuant to the Securities Exchange Act of 1934, as amended (the “1934 Act”). The following table sets forth, as of the voting record date, certain information as to the common stock beneficially owned by (i) persons or groups who own more than 5% of the common stock, (ii) the directors of the Corporation, (iii) certain executive officers of the Corporation included in the Summary Compensation Table (which we refer to as “named executive officers”), and (iv) all directors and executive officers of the Corporation as a group. Management knows of no person or group that owned more than 5% of the outstanding shares of common stock at the voting record date. Name Directors: Robert L. Hunter Henry H. Deible Robert W. Freeman William C. Marsh John B. Mason Nicholas D. Varischetti Milissa S. Bauer James M. Crooks Deanna K. McCarrier David L. Cox Mark A. Freemer Henry H. Deible II Named Executive Officers: Jennifer A. Poulsen Robert A. Vernick All directors and executive officers as a group (16 persons) ____________________________________ Amount and Nature of Beneficial Ownership(1) Percent of Outstanding Common Stock Beneficially Owned 92,243 (2) 74,120 (3) 58,852 (4) 51,489 (5) 40,042 35,143 34,010 (6) 29,029 (7) 21,455 19,830 (8) 18,100 384 3,542 (9) 2,153 (10) 483,202 (11) 3.41% 2.74% 2.17% 1.90% 1.48% 1.30% 1.26% 1.07% * * * * * * 17.84% * (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Represents less than 1% of the outstanding common stock. Based upon information provided by the respective beneficial owners and filings with the Securities and Exchange Commission (“SEC”) made pursuant to the 1934 Act. For purposes of this table, pursuant to rules promulgated under the 1934 Act, a person or entity is considered to beneficially own shares of common stock if they directly or indirectly have or share (1) voting power, which includes the power to vote or to direct the voting of the shares, or (2) investment power, which includes the power to dispose or direct the disposition of the shares. Unless otherwise indicated, a person or entity has sole voting power and sole investment power with respect to the indicated shares. Of the 92,243 shares beneficially owned by Mr. Hunter, 6,766 shares are owned individually by his spouse. Of the 74,120 shares beneficially owned by Mr. Deible, 34,254 shares are owned jointly with his spouse and 7,165 shares are held by an entity owned and controlled by Mr. Deible. Of the 58,852 shares beneficially owned by Mr. Freeman, 1,675 shares are owned individually by his spouse. Of the 51,489 shares beneficially owned by Mr. Marsh, 3,289 shares are held in the Corporation's 401(k) Plan. Of the 34,010 shares beneficially owned by Ms. Bauer, 6,778 shares are owned jointly with her spouse, 13,055 shares are owned individually by her spouse and 100 shares are owned individually by her son. Of the 29,029 shares beneficially owned by Mr. Crooks, 3,273 shares are owned jointly with his spouse and 635 shares are owned individually by his spouse. Of the 19,830 shares beneficially owned by Mr. Cox, 18,330 are owned jointly with his spouse and 500 shares are owned individually by his spouse. Of the 3,542 shares beneficially owned by Ms. Poulsen, 1,775 shares are held in the Corporation's 401(k) Plan. Of the 2,153 shares beneficially owned by Mr. Vernick, 1,642 shares are held in the Corporation's 401(k) Plan. Of the 483,202 shares beneficially owned by all directors and officers as a group, 9,066 shares are held in the Corporation's 401(k) Plan. P-4 PROXY SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Corporation’s common stock is registered pursuant to Section 12(b) of the 1934 Act. The officers and directors of the Corporation and beneficial owners of greater than 10% of the common stock are required to file reports on Forms 3, 4, and 5 with the SEC disclosing changes in beneficial ownership of the common stock. Based on the Corporation’s review of such ownership reports, to the Corporation’s knowledge, no executive officer, director, or 10% beneficial owner of the Corporation failed to file such ownership reports on a timely basis for the fiscal year ended December 31, 2019, except that Deanna K. McCarrier, a director, filed late three Form 4's with respect to the purchases of 320 shares of common stock in May 2019, 315 shares of common stock in May 2019 and 310 shares of common stock in June 2019. INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR, CONTINUING DIRECTORS AND EXECUTIVE OFFICERS Election of Directors The Corporation has a classified Board of Directors with staggered three-year terms of office. In a classified board, the directors are generally divided into separate classes of equal number. The terms of the separate classes expire in successive years. Thus, at each annual meeting of shareholders, successors to the class of directors whose term then expires are to be elected to hold office for a term of three years, so that the office of one class will expire each year. A majority of the members of our Board of Directors are independent based on an assessment of each member’s qualifications by the Board, taking into consideration the NASDAQ Stock Market’s requirements for independence. The Board of Directors has concluded that Directors Bauer, Cox, Crooks, Deible, Deible II, Freeman, Freemer, Hunter, Mason, McCarrier and Varischetti do not have any material relationships with the Corporation that would impair their independence. Each of such directors will be re-nominated for an additional term, subject to the fiduciary duties of the Board of Directors and any applicable eligibility requirements set forth in the Corporation’s or the Bank’s, as the case may be, articles of incorporation, bylaws, or nominating and corporate governance committee guidelines, or any applicable law, rule, regulation or listing standard. There are no other arrangements or understandings between the Corporation and any other person pursuant to which such person has been elected a director. Shareholders of the Corporation are not permitted to cumulate their votes for the election of directors. Unless otherwise directed, each proxy executed and returned by a shareholder will be voted for the election of the nominees for director listed below. If the person named as nominee should be unable or unwilling to stand for election at the time of the annual meeting, the proxies will vote for one or more replacement nominees recommended by the Board of Directors. At this time, the Board of Directors knows of no reason why the nominees listed below may not be able to serve as a director if elected. Any vacancy occurring on the Board of Directors of the Corporation for any reason may be filled by a majority of the directors then in office until the expiration of the term of office of the class of directors to which he or she was appointed. Ages are reflected as of December 31, 2019. P-5 PROXY Name Age James M. Crooks 67 Robert W. Freeman 62 Robert L. Hunter 78 Nominees for Director for Three-Year Term Expiring 2023 Principal Occupation for Past Five Years Director Since Bank/Corporation Owner, F.L. Crooks Clothing Company, Inc. As a business owner in the Corporation's market area as well as his many years of service as a director of the Corporation, Mr. Crooks is well qualified to serve as a director. Partner, Beaconfield Consulting Group, LLC. Based on Mr. Freeman's past employment experiences and financial and technological background, he is well qualified to serve as a director. Retired Chairman of: Hunter Truck Sales & Service, Inc.; Hunter Leasing, Inc.; Hunter Keystone Peterbilt, LLP; Hunter Erie Truck Sales LLP; Hunter Jersey Peterbilt, LLC; Hunter Services Inc. As a business owner in the Corporation's market area as well as his many years of service as a director of the Corporation, Mr. Hunter is well qualified to serve as a director. 2004/2004 2015/2015 1974/1989 John B. Mason 71 President, H. B. Beels & Son, Inc. As a former business owner in the Corporation's market area as well as his many years of service as a director of the Corporation, Mr. Mason is well qualified to serve as a director. 1985/1989 The Board of Directors recommends that you vote “FOR” for each of the nominees for director. P-6 PROXY Members of the Board of Directors Continuing in Office Directors Whose Terms Expire in 2021 Name Age Milissa S. Bauer 57 Henry H. Deible 65 Deanna K. McCarrier 56 Nicholas D. Varischetti 36 Principal Occupation for Past Five Years Director Since Bank/Corporation Executive Vice President of Kriebel Companies and President of Z Train Corporation. As a business executive in the Corporation's market area as well as extensive involvement with various business and civic organizations in the communities that the Corporation operates, Ms. Bauer is well qualified to serve as a director. Former President and Chief Executive Officer of Community First Bancorp, Inc., Owner of Northern Horizons, LLC and Owner/Partner of Forestland Investments, LLC and Sustainable Forestry Consultants, LLC. As a business executive in the Corporation's market area and with his extensive prior service in community banking, Mr. Deible provides the Board with valuable knowledge and experience and is well qualified to serve as a director. Owner, McCarrier, CPAs. Ms. McCarrier is a certified public accountant. As a business owner in the Corporation's market area involvement with various business and civic as well as organizations in the communities that the Corporation operates, Ms. McCarrier is well qualified to serve as a director. Attorney with Burns White and Partner in Varischetti Holdings, LP. Based on Mr. Varischetti's legal background, business ownership within the Corporation's market area and involvement with various business and civic organizations, he is well qualified to serve as a director. 2015/2015 2018/2018 2016/2016 2015/2015 P-7 PROXY Name Age David L. Cox 69 Henry H. Deible II 37 Mark A. Freemer 60 William C. Marsh 53 Directors Whose Terms Expire in 2022 Principal Occupation for Past Five Years Director Since Bank/Corporation Retired, former Chairman, President and Chief Executive Officer of the Bank and the Corporation. Mr. Cox's prior service as Chairman, President and Chief Executive Officer as well as his subsequent years of service as a director provide the Board with valuable knowledge and experience. Owner and President of Forestland Investments, LLC and Owner and Forester for Sustainable Forestry Consultants, LLC. As a business executive in the Corporation's market area as well as previous experience as a director of a community banking institution, Mr. Deible is well qualified to serve as a director. Chief Financial Officer for Varischetti Holdings, LP. Mr. Freemer is a certified public accountant. As a business executive in the Corporation's market area as well as his many years of service as a director of the Corporation and his public accounting experience, Mr. Freemer is well qualified to serve as a director. Chairman, President and Chief Executive Officer of the Bank and the Corporation. Mr. Marsh is a certified public accountant. Mr. Marsh's positions as Chairman, President and Chief Executive Officer, his extensive involvement with and background in the banking in business and civic involvement organizations in the communities that the Corporation operates, as well as his prior accounting background provide the Board valuable insight regarding the business and operations of the Corporation. industry and 1991/1991 2018/2018 2004/2004 2006/2006 P-8 PROXY Board Leadership Structure and Risk Oversight Board Leadership Structure. Since the Corporation was founded in 1989, the Corporation has employed a traditional board leadership model, with our Chief Executive Officer also serving as Chairman of our Board of Directors. We believe this traditional leadership structure benefits the Corporation. A combined Chairman and Chief Executive Officer role helps provide strong, unified leadership for our management team and Board of Directors. William C. Marsh has served as our Chairman and Chief Executive Officer since January 1, 2009. Prior to becoming Chairman and Chief Executive Officer, Mr. Marsh served as Executive Vice President and Chief Financial Officer of the Corporation beginning in 2006. Our Board of Directors is currently comprised of twelve directors of which eleven, or a majority, are independent directors. The board has three standing committees with separate chairs—the audit, executive and human resources committees. The audit committee and human resources committee are led by independent directors and our executive committee is comprised of a majority of independent directors. We do not have a lead independent director position. The Board has reviewed our Corporation’s current Board leadership structure in light of the composition of the Board, the Corporation’s size, the nature of the Corporation’s business, the regulatory framework under which the Corporation operates, the Corporation’s shareholder base, the Corporation’s peer group and other relevant factors, and has determined that a combined Chairman and Chief Executive Officer position, is currently the most appropriate Board leadership structure for our Corporation. The Board noted the following factors in reaching its determination: • The Board acts efficiently and effectively under its current structure, where the Chief Executive Officer also acts as Chairman. • A combined Chairman and Chief Executive Officer is in the best position to be aware of major issues facing the Corporation on a day-to-day and long-term basis, and is in the best position to identify key risks and developments facing the Corporation to be brought to the Board’s attention. • A combined Chairman and Chief Executive Officer position eliminates the potential for confusion and duplication of efforts, including among employees. • A combined Chairman and Chief Executive Officer position eliminates the potential for confusion as to who leads the Corporation, providing the Corporation with a single public “face” in dealing with shareholders, employees, regulators, analysts and other constituencies. Risk Oversight. The Board’s role in the Corporation’s risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the Corporation, including operational, financial, legal and regulatory, and strategic and reputational risks. The full Board (or the appropriate committee in the case of risks that are under the purview of a particular committee) receives these reports from the appropriate “risk owner” within the organization to enable it to understand our risk identification, risk management and risk mitigation strategies. When a committee receives the report, the Chairman of the relevant committee reports on the discussion to the full Board during the next Board meeting. This enables the Board and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships. P-9 PROXY Directors Attendance at Annual Meetings Although we do not have a formal policy regarding attendance by members of the Board of Directors at annual meetings of shareholders, all directors are expected to attend the Corporation’s annual meeting of shareholders. All twelve directors of the Corporation at the time attended the Corporation’s 2019 annual meeting of shareholders. Committees and Meetings of the Corporation and the Bank During 2019, the Board of Directors of the Corporation held nine regular meetings and three special meetings, and the Board of Directors of the Bank held 13 regular meetings and one special meeting. Each of the directors attended at least seventy-five percent (75%) of the combined total number of meetings of the Corporation’s Board of Directors and of the committees on which they serve. Membership on Certain Board Committees. The Board of Directors of the Corporation has established an audit committee, executive committee, human resources committee and a nominating and corporate governance committee. The human resources committee functions as the Corporation’s compensation committee. The following table sets forth the membership of such committees as of the date of this proxy statement. Directors Milissa S. Bauer David L. Cox James M. Crooks Henry H. Deible Henry H. Deible II Robert W. Freeman Mark A. Freemer Robert L. Hunter William C. Marsh John B. Mason Deanna C. McCarrier Nicholas D. Varischetti _________________________________ * ** Member Chairman Audit * Executive Human Resources Nominating and Corporate Governance * * ** * * * * * * * ** * * * * * * * ** * * * * ** * Audit Committee. The audit committee of the Board is composed of six members and operates under a written charter adopted by the Board of Directors. During 2019, the audit committee consisted of Directors Freemer (Chairman), Bauer, Crooks, Deible, Hunter, McCarrier and Varischetti. The Board of Directors has identified Mark A. Freemer as an audit committee financial expert. The audit committee met four times in 2019. The Board of Directors has determined that each committee member is “independent,” as defined by Corporation policy, SEC rules and the NASDAQ listing standards. P-10 PROXY The audit committee charter adopted by the Board sets forth the responsibilities, authority and specific duties of the audit committee. The full text of the audit committee charter is available on our website at www.emclairefinancial.com. Pursuant to the charter, the audit committee has the following responsibilities: • To monitor the preparation of quarterly and annual financial reports; • To review the adequacy of internal control systems and financial reporting procedures with management and independent auditors; and • To review the general scope of the annual audit and the fees charged by the independent auditors. Human Resources Committee. The human resources committee of the Board functions as the compensation committee and has the responsibility to evaluate the performance of and determine the compensation for the Chairman of the Board, President and Chief Executive Officer of the Corporation, to approve the compensation structure for senior management and the members of the Board of Directors, to review the Corporation’s salary administration program and to review and administer the Corporation’s bonus plans, including the management incentive program. The human resources committee, which is currently composed entirely of independent directors, administers the Corporation’s executive compensation program. In 2019, the members of the human resources committee consisted of Directors McCarrier (Chairman), Deible, Freeman, Freemer, Hunter, Mason and Varischetti. All of the members meet all of the independence requirements under the listing requirements of the NASDAQ Stock Market. The human resources committee is committed to high standards of corporate governance. The human resources committee’s charter reflects the foregoing responsibilities and commitment, and the human resources committee and the Board will periodically review and revise the charter, as appropriate. The full text of the human resources committee charter is available on our website at www.emclairefinancial.com. The human resources committee’s membership is determined by the Board. There were five meetings of the full human resources committee in 2019. The human resources committee has exercised exclusive authority over the compensation paid to the Corporation’s Chairman of the Board, President and Chief Executive Officer and reviews and approves salary increases and bonuses for the Corporation’s other executive officers as prepared and submitted to the human resources committee by the Chairman of the Board, President and Chief Executive Officer. Although the human resources committee does not delegate any of its authority for determining executive compensation, the human resources committee has the authority under its charter to engage the services of outside advisors, experts and others to assist the human resources committee. Nominating and Corporate Governance Committee. The Corporation has established a nominating and corporate governance committee to identify and recommend to the full Board of Directors the selection of qualified individuals to serve as Board members, recommend to the full Board director nominees for each annual meeting of shareholders, review existing corporate governance documents, establish corporate governance principles applicable to the Corporation and to govern the conduct of the Board and its members, and review nominations for director submitted by shareholders. During 2019, the members of this committee were Messrs. Hunter (Chairman), Cox, Deible, Freemer and Mason. Each of these persons is independent within the meaning of the rules of the NASDAQ Stock Market. The nominating and corporate governance committee operates pursuant to a written charter, which can be viewed on our website at www.emclairefinancial.com. The nominating and corporate governance committee met one time in connection with the nominations for the election of directors at the annual meeting. P-11 PROXY The nominating and corporate governance committee considers candidates for director suggested by its members and other directors, as well as management and shareholders. The nominating and corporate governance committee also may solicit prospective nominees. The committee will also consider whether to nominate any person nominated pursuant to the provision of our bylaws relating to shareholder nominations. The nominating and corporate governance committee has the authority and ability to retain a search firm to identify or evaluate potential nominees if it so desires. The charter of the nominating and corporate governance committee sets forth certain criteria the committee may consider when recommending individuals for nomination as director including: (a) ensuring that the Board of Directors, as a whole, is diverse and consists of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise (including expertise that could qualify a director as a “financial expert,” as that term is defined by the rules of the SEC), local or community ties and (b) minimum individual qualifications, including strength of character, mature judgment, familiarity with our business and industry, independence of thought and an ability to work collegially. The committee also may consider the extent to which the candidate would fill a present need on the Board of Directors. Once the nominating and corporate governance committee has identified a prospective nominee, the committee makes an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on whatever information is provided to the committee with the recommendation of the prospective candidate, as well as the committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. Section 10.1 of our bylaws governs shareholder nominations for election to the Board of Directors and requires all nominations for election to the Board of Directors by a shareholder to be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholders’ notice must be received by the Corporation no later than 60 days prior to the annual meeting called for the election of directors. Each written notice of a shareholder nomination must set forth certain information specified in the bylaws. Any nomination of any person not made in compliance with the procedures set forth in the bylaws shall be disregarded by the presiding officer of the meeting and any votes for such nominee shall be disregarded. Executive Officers Who are Not Directors Set forth below is information with respect to the principal occupations during at least the last five years for the current executive officers of the Corporation who do not serve as directors. All executive officers of the Corporation are elected annually by the Board of Directors and serve at the discretion of the Board. There are no arrangements or understandings between the executive officers and the Corporation and any person pursuant to which such persons have been selected officers. Ages are reflected as of December 31, 2019. Jennifer A. Poulsen, age 50. Ms. Poulsen is Secretary of the Corporation and Senior Vice President and Chief Operating Officer of the Bank. Ms. Poulsen was appointed Assistant Secretary in 2018 and has served in her role at the Bank since October 2011. P-12 PROXY Robert A. Vernick, age 53. Mr. Vernick is Senior Vice President and Chief Lending Officer of the Bank, a position he has held since July 2012. Amanda L. Engles, age 41. Ms. Engles is Treasurer and Chief Financial Officer of the Corporation and Senior Vice President and Chief Financial Officer of the Bank, positions she has held since July 2017. Ms. Engles previously served as Principal Accounting Officer and Secretary of the Corporation as well as Vice President and Controller of the Bank since October 2007. She previously served as Treasurer of the Corporation from October 2007 through August 2010. Eric J. Gantz, age 33. Mr. Gantz is Senior Vice President and Chief Credit Officer of the Bank, a position he has held since April 2019. Mr. Gantz previously served as Vice President and Senior Credit Officer from September 2018 through April 2019, Assistant Vice President and Senior Risk Analyst from September 2017 through September 2018 and Assistant Vice President and Senior Credit Analyst from August 2014 through September 2017. Summary Compensation Table EXECUTIVE COMPENSATION The following table sets forth a summary of certain information concerning the compensation awarded to or paid by the Corporation or its subsidiaries for services rendered in all capacities during the past two years to our principal executive officer as well as our two other highest compensated executive officers in 2019 (who we refer to as “named executive officers”). Name and Principal Position William C. Marsh, Chairman, Year Salary 2019 $ 375,687 $ 127,510 $ President and Chief Executive Officer 2018 357,797 123,600 74,354 $ 139,405 48,314 $ 625,864 44,956 665,758 Stock Awards (1) Non-equity Incentive Plan Compensation (2) All Other Compensation (3) Total Jennifer A. Poulsen, Senior Vice President, Secretary and Chief Operating Officer 2019 188,496 46,650 2018 179,520 46,350 24,871 46,630 11,675 271,692 11,181 283,681 Robert A. Vernick, Senior Vice President, Chief Lending Officer 2019 173,250 46,650 2018 168,100 15,450 22,859 43,663 12,176 254,935 11,489 238,702 ___________________________________ (1) Reflects the grant date fair value, computed in accordance with FASB ASC Topic 718, for stock awards granted in 2019 and 2018 pursuant to the 2014 Stock Incentive Plan adopted in 2014. For a description of the assumptions used for purposes of determining grant date fair value, see Note 14 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. (2) Amounts presented for a fiscal year were paid in the next year for performance pursuant to the Corporation's Incentive Compensation Plan. (3) Includes (i) director’s fees from the Corporation and the Bank totaling $30,000 for 2019 for Mr. Marsh and (ii) matching amounts and discretionary profit sharing contributions made under the Corporation’s 401(k) plan for all the named executive officers. Outside Compensation Consultants Periodically, the Corporation retains a compensation consulting firm to review its compensation structure. The Corporation retained McLagan Partners, Inc. in 2019 and 2018 to assist the human resources committee in setting compensation levels. The human resources committee considered the consultants to be independent and concluded that the consultants had no conflicts of interest with respect to the engagements. The consultants' reviewed the Corporation’s compensation practices and compared them with compensation practices of institutions similar in size and performance to the Corporation. The human resources committee considered the consultants' reviews of compensation levels in establishing the compensation amounts of the Corporation’s President and Chief Executive Officer and Board of Directors. P-13 PROXY Pension Plan The Bank previously maintained a defined benefit pension plan for all eligible employees which was frozen in 2013. An employee became vested in the plan after three years. Upon retirement at age 65, a terminated participant is entitled to receive a monthly benefit. Prior to a 2002 amendment to the plan, the benefit formula was 1.1% of average monthly compensation plus 0.4% of average monthly compensation in excess of $675 multiplied by years of service. In 2002, the plan was amended to change the benefit structure to a cash balance formula under which the benefit payable is the actuarial equivalent of the hypothetical account balance at normal retirement age. However, the benefits already accrued by the employees prior to the amendment were not reduced. In addition, the prior benefit formula continued through December 31, 2012, as a minimum benefit. The Bank amended the defined benefit pension plan to freeze the benefits under the plan effective as of April 30, 2013, with no additional benefits to accrue after such date. 401(k) Plan The Corporation maintains a defined contribution 401(k) plan. Employees are eligible to participate by providing tax-deferred contributions up to 20% of qualified compensation. Employee contributions are vested at all times. The Corporation provides a matching contribution of up to 4% of the participant’s salary. The Corporation may also make, at the sole discretion of its Board of Directors, a profit sharing contribution. Supplemental Retirement Agreements The Bank maintains Supplemental Executive Retirement Plan Agreements (the “SERPs”) with William C. Marsh, Chairman, President and Chief Executive Officer of the Corporation and the Bank, Jennifer A. Poulsen, Secretary of the Corporation and Senior Vice President and Chief Operating Officer of the Bank and Robert A. Vernick, Senior Vice President and Chief Lending Officer of the Bank as well as other officers. The SERPs are periodically amended to conform to the current salary levels of the officers. The SERPs are non-qualified defined benefit plans and are unfunded. The SERPs have no assets, and the benefits payable under the SERPs are not secured. The SERP participants are general creditors of the Bank in regards to their vested SERP benefits. The SERPs provide for retirement benefits upon reaching age 65, and the participants become vested in their benefits up until their normal retirement age. Upon attaining normal retirement age, Mr. Marsh, Ms. Poulsen and Mr. Vernick would be entitled to receive an annual payment of $110,000, $56,500 and $36,000, respectively, payable in equal monthly installments each year for a 20-year period under the SERPs, as amended. Each of the SERPs provide that in the event of a change in control of the Corporation or the Bank (as defined in the agreements), the executive will receive their supplemental retirement benefits in a lump sum payment if the change in control occurs before the executive’s employment is terminated and before the executive reaches normal retirement age. If a change in control had occurred on December 31, 2019, Mr. Marsh, Ms. Poulsen and Mr. Vernick would have been entitled to lump sum payments of $898,629, $392,481 and $265,966, respectively. Such payments could be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code, as amended. P-14 PROXY The SERPs prohibit the executives from competing against the Bank or soliciting customers or employees of the Bank for a period of three years following a termination of employment if such termination occurs prior to a change in control. If the executives are still employed at the time of a change in control, the SERPs impose non-compete and non- solicitation provisions on Ms. Poulsen and Mr. Vernick for a period of six months following the change in control. An existing employment agreement imposes non-compete and non-solicitation provisions on Mr. Marsh for a period of 12 months following a change in control. Employment and Change in Control Agreements The Corporation and the Bank maintain an employment agreement with William C. Marsh to serve as Chairman, President and Chief Executive Officer. The current term of the agreement expires on December 31, 2020 and will renew for successive one-year periods each January 1 unless notice to the contrary is provided at least 30 days prior to the renewal. The agreement also provides that if the executive is terminated by the Corporation or the Bank for other than cause, disability, retirement or the executive’s death or the executive terminates employment for good reason (as defined in the agreement) after a change in control of the Corporation or the Bank, then Mr. Marsh will be entitled to the payment of a lump sum cash severance amount equal to three times his average annual compensation (as defined in the agreement) during the five calendar years preceding the year of termination, the continuation of his insurance benefits for up to 36 months and a lump sum cash payment equal to the projected cost of providing certain other benefits for 36 months, provided that such payments will be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code as amended. The employment agreement imposes non-compete and non-solicitation provisions on Mr. Marsh for a period of 18 months if his employment is terminated prior to a change in control and for a period of 12 months if his employment is terminated concurrently with or following a change in control. The Corporation and the Bank maintain change in control agreements with Jennifer A. Poulsen and Robert A. Vernick. The change in control agreements currently expire on December 31, 2020, and the term will renew for successive one-year periods each January 1 unless notice to the contrary is provided at least 30 days prior to the renewal. If a change in control occurs during the term of the agreements at a time when there is less than one year remaining in the term, then the remaining term of the agreements will be automatically extended until the one-year anniversary of the completion of the change in control. The change in control agreements for Ms. Poulsen and Mr. Vernick provide that if the executive is terminated by the Corporation or the Bank (or any successor) within 24 months subsequent to a change in control of the Corporation or the Bank for other than cause, disability, retirement or the executive’s death or the executive terminates employment for good reason (as defined in the agreement) after a change in control of the Corporation or the Bank, then the executive will be entitled to the payment of a lump sum cash severance amount equal to two times the executive’s highest annual compensation (as defined in the agreement) during the year of termination or either of the two preceding calendar years, the continuation of the executive’s insurance benefits for up to 24 months and a lump sum cash payment equal to the projected cost of providing certain other benefits for 24 months, provided that such payments will be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code as amended. The Corporation and the Bank have entered into similar change in control agreements with other officers. P-15 PROXY Outstanding Equity Awards at Fiscal Year-End The following tables set forth, with respect to the executive officers named in the Summary Compensation Table, information with respect to the number of restricted stock awards held as of December 31, 2019. All awards were granted pursuant to the Corporation’s 2014 Stock Incentive Plan adopted in 2014 and approved by shareholders at the 2014 annual meeting. Name Number of Shares of Stock Not Vested Stock Awards Market Value of Shares of Stock Not Vested (1) William C. Marsh William C. Marsh William C. Marsh Jennifer A. Poulsen Jennifer A. Poulsen Jennifer A. Poulsen Robert A. Vernick Robert A. Vernick Robert A. Vernick __________________________________ (1) Based upon the fair market value of a share of common stock of the Corporation as of December 31, 2019. 4,000 $ 4,000 4,100 1,500 1,500 1,500 750 500 1,500 130,120 130,120 133,373 48,795 48,795 48,795 24,398 16,265 48,795 Vesting Date 12/08/2020 12/07/2021 12/06/2022 12/08/2020 12/07/2021 12/06/2022 12/08/2020 12/07/2021 12/06/2022 Certain Transactions Other than as set forth below, there have been no material transactions, proposed or consummated, between the Corporation and the Bank with any director or executive officer of the Corporation or the Bank, or any associate of the foregoing persons. The Bank, like many financial institutions, has followed a written policy of granting various types of loans to officers, directors, and employees and under such policy grants a discount of 100 basis points on loans extended to all employees, including executive officers. With the exception of such policy, all loans to executive officers and directors of the Corporation and the Bank have been made in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Bank, and do not involve more than the normal risk of collectibility nor present other unfavorable features. All such loans are approved by the Board of Directors. P-16 PROXY The following table presents a summary of loans in excess of $120,000 with preferential pricing (100 basis point discount) extended by the Bank to any of the Corporation’s directors, executive officers or immediate family members of such individuals. In addition, the Corporation had three directors and one executive officer whose loans totaled more than $120,000 at December 31, 2019, however in these instances the loans made with preferential pricing did not exceed $120,000. Highest Principal Balance Year During Made Year 2010 $ Balance 12/31/19 Principal Interest Rate 3,690 $ 6,888 Interest 4.63 % 141,138 $ 137,448 $ Amount Paid During Year Name and Position David L. Cox, Director Residential Mortgage Type Director Compensation During 2019, directors received $1,750 per month for their services as a director of the Bank and $750 for attendance at board meetings. The Chairmen of each committee received an additional $200 per month for their services as Committee Chairmen. No additional compensation is paid for service as a director of the Corporation. In addition, non-employee directors received $400 for each Bank committee meeting that they attended during 2019. The following table sets forth information concerning compensation paid or accrued by the Corporation and the Bank to each member of the Board of Directors with the exception of named executive officers reported within the Summary Compensation Table during the year ended December 31, 2019. Name Milissa S. Bauer David L. Cox James M. Crooks Henry H. Deible Henry H. Deible II Robert W. Freeman Mark A. Freemer Robert L. Hunter John B. Mason Deanna K. McCarrier Nicholas D. Varischetti ______________________________________ (1) Stock Fees Earned or Paid in Cash Awards (1) 39,200 $ $ 42,000 42,350 32,450 37,600 37,150 39,150 36,000 43,150 38,750 33,950 19,518 $ 19,518 19,518 19,518 19,518 19,518 19,518 19,518 19,518 19,518 19,518 All Other Compensation (2) Total - $ 26,000 - - - - - - - - - 58,718 87,518 61,868 51,968 57,118 56,668 58,668 55,518 62,668 58,268 53,468 Reflects the grant date fair value, computed in accordance with FASB ASC Topic 718, for stock awards granted in 2019 pursuant to the 2014 Stock Incentive Plan adopted in 2014. For a description of the assumptions used for purposes of determining grant date fair value, see Note 14 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. Directors Bauer, Cox, Crooks, Freeman, Freemer, Hunter, Mason, McCarrier and Varischetti have a total of 1,600 stock awards of which 500 vest on December 8, 2020, 500 vest on December 7, 2021 and 600 vest on December 6, 2022, respectively. Directors Deible and Deible II have a total of 1,100 stock awards of which 500 vest on December 7, 2021 and 600 vest on December 6, 2022. Reflects amounts distributed under the Corporation’s Supplemental Retirement Agreement for Director Cox. (2) P-17 PROXY REPORT OF THE AUDIT COMMITTEE In discharging its oversight responsibility, the audit committee has met and held discussions with management and Crowe LLP, the independent auditors for the Corporation. Management represented to the audit committee that all consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the audit committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. In addition, the audit committee has discussed with the independent auditors the auditors’ independence from management and the Corporation, and has received and discussed with the independent auditors the matters in the written disclosures required by the Independence Standards Board and as required under the Sarbanes-Oxley Act of 2002, including considering the permissibility of non-audit services with the auditors’ independence. The audit committee also obtained from the independent auditors a formal written statement describing all relationships between the Corporation and Crowe LLP that bear on the auditors’ independence consistent with the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence. The audit committee discussed with the independent auditors any relationships that may impact the firm’s objectivity and independence and satisfied itself as to the auditors’ independence. Based on these discussions and reviews, the audit committee recommended that the Board of Directors approve the inclusion of the Corporation’s audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019, for filing with the SEC. Respectfully submitted by the members of the audit committee of the Board of Directors: Mark A. Freemer, Chairman Milissa S. Bauer James M. Crooks Henry H. Deible Robert L. Hunter Deanna K. McCarrier Nicholas D. Varischetti P-18 PROXY RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The audit committee of the Board of Directors of the Corporation has appointed Crowe LLP, Certified Public Accountants, to perform the audit of the Corporation's consolidated financial statements for the year ending December 31, 2020, and has further directed that the selection of Crowe as the Corporation’s independent registered public accounting firm be submitted for ratification by the shareholders at the annual meeting. The Corporation has been advised by Crowe that neither the firm nor any of its associates has any relationship with the Corporation other than the usual relationship that exists between independent public accountants and clients. Crowe will have a representative at the annual meeting who will have an opportunity to make a statement, if he or she so desires, and who will be available to respond to appropriate questions. Vote Required; Effect Unless instructed to the contrary, it is intended that proxies will be voted for the ratification of the selection of Crowe, as the Corporation’s independent registered public accounting firm for the fiscal year ending December 31, 2020. Ratification of Crowe as the Corporation’s independent registered public accounting firm will require the affirmative vote of a majority of the shares of common stock present in person or by proxy at the annual meeting. Recommendation of the Board of Directors The Board of Directors recommends that shareholders vote "FOR" the ratification of the appointment by the audit committee of the Board of Directors of Crowe LLP as the Corporation's independent registered public accounting firm for the year ending December 31, 2020. It is understood that even if the selection of Crowe is ratified, the Board of Directors, in its discretion, may direct the appointment of a new independent registered public accounting firm at any time during the year if the Board of Directors determines that such a change would be in the best interest of the Corporation and its shareholders. P-19 PROXY RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM General The audit committee of the Board of Directors has appointed Crowe LLP as the independent registered public accounting firm to audit the Corporation’s financial statements for the year ending December 31, 2020. In evaluating whether to appoint Crowe to perform the audit of the Corporation’s financial statements for the year ending December 31, 2020, the audit committee considered the compatibility of the non-audit services provided to the Corporation by Crowe in 2019 described below on the independence of Crowe from the Corporation. In addition to performing customary audit services related to the audit of the Corporation’s financial statements, Crowe LLP will assist the Corporation with the preparation of its federal and state tax returns and will perform required retirement plan audits, charging the Corporation for such services at its customary hourly billing rates. The audit committee selects the Corporation’s independent registered public accounting firm and separately pre- approves all audit services to be provided by it to the Corporation. The audit committee also reviews and separately pre- approves all audit-related, tax and all other services rendered by our independent registered public accounting firm in accordance with the audit committee’s charter and policy on pre-approval of audit-related, tax and other services. In its review of these services and related fees and terms, the audit committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm. During 2019, each new engagement of the independent registered public accounting firm was approved in advance by the audit committee, and none of those engagements made use of the de minimus exception to pre-approval contained in the SEC’s rules. Auditor Fees The following table sets forth the aggregate fees paid by us to Crowe for professional services rendered in connection with the audit of the Corporation’s consolidated financial statements for 2019 and 2018, as well as the fees paid for audit-related services, tax services and all other services rendered by Crowe in 2019 and 2018. Audit fees (1) Audit-related fees (2) Tax fees Total 2019 2018 $ $ 122,000 $ 26,000 48,201 196,201 $ 165,000 40,500 32,381 237,881 _________________________________ (1) (2) The audit fees include only fees that are customary under generally accepted auditing standards and are the aggregate fees the Corporation incurred for professional services rendered for the audit of the Corporation’s annual financial statements for fiscal years 2019 and 2018 and the reviews of the financial statements included in the Corporation’s Quarterly Reports on Forms 10-Q for fiscal years 2019 and 2018. The audit-related fees include audits of the Corporation’s benefit plans for both years. In addition, 2018 audit-related fees include fees paid for services rendered associated with the Corporation's Registration Statement on Form S-4 filed in connection with the acquisition of Community First Bancorp, Inc. These audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Corporation’s financial statements. P-20 PROXY ANNUAL REPORT A copy of the Corporation’s Annual Report for its fiscal year ended December 31, 2019, is being mailed with this Proxy Statement and is available over the Internet at www.emclairefinancial.com. Such Annual Report is not to be treated as part of the proxy solicitation material or having been incorporated herein by reference. SHAREHOLDER PROPOSALS Any shareholder who, in accordance with and subject to the provisions of the proxy rules of the SEC, wishes to submit a proposal for inclusion in the Corporation’s proxy statement for its 2021 Annual Meeting of Shareholders to be held in April 2021 must deliver such proposal in writing to the Secretary of Emclaire Financial Corp at the principal executive offices of the Corporation at 612 Main Street, Post Office Box D, Emlenton, Pennsylvania 16373, no later than November 20, 2020. Under the Corporation’s current bylaws, business proposal nominations for directors other than those to be included in the Corporation’s proxy materials following the procedures described in Rule 14a-8 under the 1934 Act, may be made by shareholders entitled to vote at the meeting if notice is timely given and if the notice contains the information required by the bylaws. Nominations must be received no less than sixty (60) days prior to the annual meeting. In the event the Corporation receives notice of a shareholder proposal to take action at next year’s annual meeting of shareholders that is not submitted for inclusion in the Corporation’s proxy material, or is submitted for inclusion but is properly excluded from the proxy material, the persons named in the proxy sent by the Corporation to its shareholders intend to exercise their discretion to vote on the shareholder proposal in accordance with their best judgment. SHAREHOLDER COMMUNICATION WITH THE BOARD The Corporation does not have a formal procedure for shareholder communication with its Board of Directors. In general, officers are easily accessible by telephone or mail. Any matter intended for the Board, or for any individual member or members of the Board, should be directed to the President with a request to forward the same to the intended recipient. In the alternative, shareholders can send correspondence to the Board to the attention of the Board Chairman, William C. Marsh, or to the attention of the Chairman of the Audit Committee, Mark A. Freemer, in care of the Corporation at the Corporation’s address. All such communications will be forwarded unopened. OTHER MATTERS The Board of Directors does not know of any matters to be presented for consideration other than the matters described in the Notice of Meeting, but if any matters are properly presented, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their judgment. ADDITIONAL INFORMATION Upon written request, a copy of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 may be obtained, without charge from Jennifer A. Poulsen, Secretary, Emclaire Financial Corp, 612 Main Street, Post Office Box D, Emlenton, Pennsylvania 16373. In addition, the Corporation files reports with the SEC. Free copies can be obtained from the SEC website at www.sec.gov or on the Corporation’s website at www.emclairefinancial.com. P-21 PROXY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One): ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2019 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ___________ to ___________ Commission File Number: 000-18464 EMCLAIRE FINANCIAL CORP (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 25-1606091 (I.R.S. Employer Identification No.) 612 Main Street, Emlenton, PA (Address of principal executive office) Registrant’s telephone number: (844) 767-2311 Securities registered pursuant to Section 12(b) of the Act: 16373 (Zip Code) Common Stock, par value $1.25 per share (Title of Class) EMCF (Trading Symbol) NASDAQ Capital Market (NASDAQ) (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒NO ☐ . Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 month (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (do not check if a smaller reporting company). Accelerated filer ☐ Non-accelerated filer ☐ Large accelerated filer ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒. As of June 30, 2019, the aggregate value of the 2,242,764 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 455,948 shares held by the directors and officers of the Registrant as a group, was approximately $70.1 million. This figure is based on the last sales price of $31.26 per share of the Registrant’s Common Stock on June 30, 2019. The number of outstanding shares of common stock as of March 20, 2020, was 2,708,712. Smaller reporting company ☒ Emerging growth company ☐ Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE K-1 FORM 10-K EMCLAIRE FINANCIAL CORP TABLE OF CONTENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures K-3 K-18 K-18 K-18 K-18 K-18 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities K-19 PART II Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation PART III Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules SIGNATURES AND CERTIFICATIONS K-19 K-19 K-29 K-29 K-29 K-29 K-29 K-30 K-30 K-30 K-30 K-30 K-30 K-32 K-2 FORM 10-K Discussions of certain matters in this Form 10-K and other related year end documents may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and as such, may involve risks and uncertainties. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words or phrases such as “believe”, “plan”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “may increase”, “may fluctuate”, “may improve” and similar expressions of future or conditional verbs such as “will”, “should”, “would”, and “could”. These forward-looking statements relate to, among other things, expectations of the business environment in which Emclaire Financial Corp operates, projections of future performance, potential future credit experience, perceived opportunities in the market and statements regarding the Corporation’s mission and vision. The Corporation’s actual results, performance and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of factors. These factors include, but are not limited to, changes in interest rates, general economic conditions, the local economy, the demand for the Corporation’s products and services, accounting principles or guidelines, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, U.S. Treasury, and Federal Reserve, real estate markets, competition in the financial services industry, attracting and retaining key personnel, performance of new employees, regulatory actions, changes in and utilization of new technologies and other risks detailed in the Corporation’s reports filed with the Securities and Exchange Commission (SEC) from time to time. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. PART I Item 1. Business General Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and financial holding company that provides a full range of retail and commercial financial products and services to customers in western Pennsylvania and northwestern West Virginia through its wholly owned subsidiary bank, The Farmers National Bank of Emlenton (the Bank). The Bank was organized in 1900 as a national banking association and is a financial intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens on residential and commercial properties, consumer loans, commercial business loans, marketable securities and interest-earning deposits. The Bank currently operates through a network of 20 retail branch offices in Venango, Allegheny, Butler, Clarion, Clearfield, Crawford, Elk, Jefferson and Mercer counties, Pennsylvania and Hancock county, West Virginia. The Corporation and the Bank are headquartered in Emlenton, Pennsylvania. The Bank is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank’s chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (BHCA), and a financial holding company under the Gramm-Leach Bliley Act of 1999 (GLBA) and is subject to the regulation and examination by the FRB. On October 1, 2018, the Corporation completed the acquisition of Community First Bancorp, Inc. (CFB) and its subsidiary, Community First Bank, in accordance with the terms of the Agreement and Plan of Merger, dated as of May 25, 2018, in exchange for 419,173 shares of common stock valued at $15.6 million and $2.4 million in cash. The Corporation also issued 420,593 shares of preferred stock valued at $4.2 million in exchange for similar preferred stock of Community First Bank. The acquisition strengthened the Corporation's presence in existing markets and increased the Corporation's consolidated total assets, loans and deposits. At December 31, 2019, the Corporation had $915.3 million in total assets, $85.9 million in stockholders’ equity, $695.3 million in net loans and $787.1 million in total deposits. K-3 FORM 10-K Lending Activities General. The principal lending activities of the Corporation are the origination of residential mortgage, commercial mortgage, commercial business and consumer loans. The majority of the Corporation’s loans are originated in and secured by property within the Corporation’s primary market area. One-to-Four Family Mortgage Loans. The Corporation offers first mortgage loans secured by one-to-four family residences located mainly in the Corporation’s primary lending area. One-to-four family mortgage loans amounted to 41.8% of the total loan portfolio at December 31, 2019. Typically such residences are single-family owner occupied units. The Corporation is an approved, qualified lender for the Federal Home Loan Mortgage Corporation (FHLMC) and the FHLB. As a result, the Corporation may sell loans to and service loans for the FHLMC and FHLB in market conditions and circumstances where this is advantageous in managing interest rate risk. Home Equity Loans. The Corporation originates home equity loans secured by single-family residences. Home equity loans amounted to 13.9% of the total loan portfolio at December 31, 2019. These loans may be either a single advance fixed-rate loan with a term of up to 20 years or a variable rate revolving line of credit. These loans are made only on owner-occupied single-family residences. Commercial Business and Commercial Real Estate Loans. Commercial lending constitutes a significant portion of the Corporation’s lending activities. Commercial business and commercial real estate loans amounted to 42.2% of the total loan portfolio at December 31, 2019. Commercial real estate loans generally consist of loans granted for commercial purposes secured by commercial or other nonresidential real estate. Commercial loans consist of secured and unsecured loans for such items as capital assets, inventory, operations and other commercial purposes. Consumer Loans. Consumer loans generally consist of fixed-rate term loans for automobile purchases, home improvements not secured by real estate, capital and other personal expenditures. The Corporation also offers unsecured revolving personal lines of credit and overdraft protection. Consumer loans amounted to 2.1% of the total loan portfolio at December 31, 2019. Loans to One Borrower. National banks are subject to limits on the amount of credit that they can extend to one borrower. Under current law, loans to one borrower are limited to an amount equal to 15% of unimpaired capital and surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and surplus if the loan is secured by readily marketable collateral. At December 31, 2019, the Bank’s loans to one borrower limit based upon 15% of unimpaired capital was $12.1 million. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2019, the Bank’s largest single lending relationship had an outstanding balance of $8.3 million. Loan Portfolio. The following table sets forth the composition and percentage of the Corporation’s loans receivable in dollar amounts and in percentages of the portfolio as of December 31: (Dollar amounts in thousands) Mortgage loans on real estate: Residential mortgages Home equity loans and lines 2019 2018 2017 2016 2015 Dollar Amount % Dollar Amount % Dollar Amount % Dollar Amount % Dollar Amount % $ 293,170 41.8% $ 295,405 41.3% $ 221,823 38.1% $ 198,167 38.0% $ 139,305 32.0% of credit Commercial real estate 97,541 13.9% 103,752 14.5% 99,940 17.1% 229,951 32.7% 238,734 33.4% 193,068 33.1% 91,359 17.5% 166,994 32.1% 87,410 20.1% 129,691 29.8% Total real estate loans 620,662 88.4% 637,891 89.2% 514,831 88.3% 456,520 87.6% 356,406 81.9% Other loans: Commercial business Consumer 66,603 9.5% 14,639 2.1% 66,009 9.2% 11,272 1.6% 58,941 10.1% 9,589 1.6% 57,788 11.1% 6,672 1.3% 71,948 16.5% 6,742 1.6% Total other loans 81,242 11.6% 77,281 10.8% 68,530 11.7% 64,460 12.4% 78,690 18.1% Total loans receivable Less: 701,904 100.0% 715,172 100.0% 583,361 100.0% 520,980 100.0% 435,096 100.0% Allowance for loan losses 6,556 6,508 6,127 5,545 5,205 Net loans receivable $ 695,348 $ 708,664 $ 577,234 $ 515,435 $ 429,891 K-4 FORM 10-K The following table sets forth the final maturity of loans in the Corporation’s portfolio as of December 31, 2019. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year. Due in one year or less Due from one to five years Due from five to ten years (Dollar amounts in thousands) Residential mortgages Home equity loans and lines of credit Commercial real estate Commercial business Consumer $ 441 $ 749 826 2,935 230 3,741 $ 10,042 34,327 20,698 7,815 Due after ten years 258,756 $ 67,810 130,366 34,147 2,002 30,232 $ 18,940 64,432 8,823 4,592 Total 293,170 97,541 229,951 66,603 14,639 $ 5,181 $ 76,623 $ 127,019 $ 493,081 $ 701,904 The following table sets forth the dollar amount of the Corporation’s fixed and adjustable rate loans with maturities greater than one year as of December 31, 2019: (Dollar amounts in thousands) Residential mortgages Home equity loans and lines of credit Commercial real estate Commercial business Consumer $ Adjustable Fixed rates 280,567 $ 83,684 46,862 20,526 12,629 rates 12,162 13,108 182,263 43,142 1,780 $ 444,268 $ 252,455 Contractual maturities of loans do not reflect the actual term of the Corporation’s loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which give the Corporation the right to declare a loan immediately payable in the event, among other things, that the borrower sells the real property subject to the mortgage. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates substantially exceed rates on existing mortgages and conversely, decrease when rates on existing mortgages substantially exceed current market interest rates. Delinquencies and Classified Assets Delinquent Loans and Other Real Estate Acquired Through Foreclosure (OREO). Typically, a loan is considered past due and a late charge is assessed when the borrower has not made a payment within 15 days from the payment due date. When a borrower fails to make a required payment on a loan, the Corporation attempts to cure the deficiency by contacting the borrower. The initial contact with the borrower is made shortly after the 17th day following the due date for which a payment was not received. In most cases, delinquencies are cured promptly. If the delinquency exceeds 60 days, the Corporation works with the borrower to set up a satisfactory repayment schedule. Typically, loans are considered nonaccruing upon reaching 90 days delinquent unless the credit is well secured and in the process of collection, although the Corporation may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Corporation institutes foreclosure action on secured loans only if all other remedies have been exhausted. If an action to foreclose is instituted and the loan is not reinstated or paid in full, the property is sold at a judicial or trustee’s sale at which the Corporation may be the buyer. Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure less costs to sell, thereby establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less the cost to sell the property. Changes in the valuation allowance are included in the loss on foreclosed real estate. The Corporation generally attempts to sell its OREO properties as soon as practical upon receipt of clear title. As of December 31, 2019, the Corporation’s nonperforming assets were $3.2 million, or 0.34% of the Corporation’s total assets, compared to $3.7 million, or 0.42% of the Corporation’s total assets, at December 31, 2018. Nonperforming assets at December 31, 2019 included nonperforming loans and OREO of $2.9 million and $249,000, respectively. Included in nonaccrual loans at December 31, 2019 were five loans totaling $409,000 considered to be troubled debt restructurings (TDRs). K-5 FORM 10-K Classified Assets. Regulations applicable to insured institutions require the classification of problem assets as “substandard,” “doubtful,” or “loss” depending upon the existence of certain characteristics as discussed below. A category designated “special mention” must also be maintained for assets currently not requiring the above classifications but having potential weakness or risk characteristics that could result in future problems. An asset is classified as substandard if not adequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset is characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified as substandard and these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable. Assets classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted. The Corporation’s classification of assets policy requires the establishment of valuation allowances for loan losses in an amount deemed prudent by management. Valuation allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities. When the Corporation classifies a problem asset as a loss, the portion of the asset deemed uncollectible is charged off immediately. The Corporation regularly reviews the problem loans and other assets in its portfolio to determine whether any require classification in accordance with the Corporation’s policy and applicable regulations. As of December 31, 2019, the Corporation’s classified and criticized assets amounted to $17.0 million or 1.9% of total assets, with $5.6 million identified as special mention and $11.5 million classified as substandard. Included in classified and criticized assets at December 31, 2019 are three large loan relationships exhibiting credit deterioration that may impact the ability of the borrowers to comply with their present loan repayment terms on a timely basis. These relationships are located in western Pennsylvania throughout the greater Pittsburgh area. The first relationship, with an outstanding balance of $3.1 million at December 31, 2019, consists of two commercial mortgages which primarily refinanced third-party debt obligations. The debt obligations are secured by a hotel along with all related furniture, fixtures and equipment as well as two undeveloped parcels of land. The hotel is operational; however, cash flow was adversely impacted by elevated operating expenses. That said, results continue to evidence improvement in operating performance. The loans are well supported by guarantors who have significant net worth positions and the ability to support the operations of the hotel, as needed. At December 31, 2019, the loans were performing and classified as special mention. Ultimately, due to the estimated value of the collateral and the willingness and ability of the guarantors to support the loans, the Corporation does not currently expect to incur a loss on this loan. The second relationship, with an outstanding balance of $2.1 million at December 31, 2019, consists of one commercial mortgage which primarily refinanced third-party debt obligations and is primarily secured with all buildings and improvements of a university campus. The subject loan represents a portion of a participated credit facility led by a third-party financial institution. A decline in student enrollment has resulted in a corresponding decline in financial performance of the university. The university maintains satisfactory capital structure ratios and is undergoing efforts to increase enrollment and reduce operating expenditures. At December 31, 2019, the loan was performing and classified as special mention. Ultimately, due to the estimated value of the university campus and ancillary collateral, the Corporation does not currently expect to incur a loss on this loan. The third relationship, with an outstanding balance of $1.4 million at December 31, 2019, consists of one commercial mortgage which primarily refinanced third-party debt obligations and is primarily secured with all buildings and improvements of a technical college. The subject loan represents a portion of a participated credit facility led by a third-party financial institution. A decline in student enrollment has resulted in a corresponding decline in financial performance of the college. That said, results continue to evidence improvement in operating performance. At December 31, 2019, the loan was performing and classified as substandard. Ultimately, due to the estimated value of the college campus and ancillary collateral, the Corporation does not currently expect to incur a loss on this loan. K-6 FORM 10-K The following table sets forth information regarding the Corporation’s nonperforming assets as of December 31: (Dollar amounts in thousands) Nonperforming loans 2019 2018 2017 2016 2015 $ 2,907 $ 3,028 $ 3,693 $ 3,323 $ 3,069 Total as a percentage of gross loans 0.41 % 0.42 % 0.63 % 0.64 % 0.71 % Repossessions Real estate acquired through foreclosure Total as a percentage of total assets — 249 0.03 % 13 701 0.08 % — 492 0.07 % — 291 0.04 % — 160 0.03 % Total nonperforming assets $ 3,156 $ 3,742 $ 4,185 $ 3,614 $ 3,229 Total nonperforming assets as a percentage of total assets 0.34 % 0.42 % 0.56 % 0.52 % 0.54 % Allowance for loan losses as a percentage of nonperforming loans 225.52 % 214.93 % 165.91 % 166.87 % 169.60 % Allowance for Loan Losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectability of loans in the portfolio. The Corporation analyzes its loan portfolio at least quarterly for valuation purposes and to determine the adequacy of its allowance for loan losses. Based upon the factors discussed above, management believes that the Corporation’s allowance for loan losses as of December 31, 2019 of $6.6 million was adequate to cover probable incurred losses in the portfolio at such time. The following table sets forth an analysis of the allowance for losses on loans receivable for the years ended December 31: (Dollar amounts in thousands) Balance at beginning of period 2019 2018 2017 2016 2015 $ 6,508 $ 6,127 $ 5,545 $ 5,205 $ 5,224 Provision for loan losses 715 1,280 903 464 381 Charge-offs: Residential mortgages Home equity loans and lines of credit Commercial real estate Commercial business Consumer loans Recoveries: Residential mortgages Home equity loans and lines of credit Commercial real estate Commercial business Consumer loans (227 ) (61 ) (242 ) (250 ) (133 ) (913 ) (71) (155) (484) — (279) (989) (40) (114) (127) (14) (71) (366) (101 ) (118 ) (18 ) (11 ) (48 ) (296 ) 40 6 134 — 66 246 3 14 48 1 24 90 — 23 8 2 12 45 — 3 158 — 11 172 (79) (221) (35) (182) (50) (567) — 30 88 31 18 167 Net charge-offs (667 ) (899) (321) (124 ) (400) Balance at end of period $ 6,556 $ 6,508 $ 6,127 $ 5,545 $ 5,205 Ratio of net charge-offs to average loans outstanding 0.09 % 0.14% 0.06% 0.03 % 0.10% Ratio of allowance to total loans at end of period 0.93 % 0.91% 1.05% 1.06 % 1.20% K-7 FORM 10-K The following table provides a breakdown of the allowance for loan losses by major loan category for the years ended December 31: (Dollar amounts in thousands) 2019 2018 2017 2016 2015 Loan Categories: Dollar Amount Percent of total loans Dollar Amount Percent of total loans Dollar Amount Percent of total loans Dollar Amount Percent of total loans Dollar Amount Percent of total loans Residential mortgages Home equity loans and lines of credit Commercial real estate Commercial business Consumer loans 626 13.9 % $ 2,309 41.8 % $ 2,198 41.3 % $ 2,090 38.1 % $ 1,846 32.0 % $ 1,429 27.8 % 586 23.2 % 2,898 32.7 % 3,106 33.4 % 2,753 33.1 % 2,314 29.8 % 2,185 28.8 % 960 18.2 % 45 2.0 % 700 16.5 % 1.6 % 585 10.1 % 1.6 % 9.5 % 2.1 % 9.2 % 1.6 % 633 20.1 % 648 14.5 % 646 17.1 % 636 87 500 56 53 52 $ 6,556 100.0 % $ 6,508 100.0 % $ 6,127 100.0 % $ 5,545 100.0 % $ 5,205 100.0 % Investment Activities General. The Corporation maintains an investment portfolio of securities such as U.S. government agencies, mortgage-backed securities, collateralized mortgage obligations, municipal and equity securities. Investment decisions are made within policy guidelines as established by the Board of Directors. This policy is aimed at maintaining a diversified investment portfolio, which complements the overall asset/liability and liquidity objectives of the Corporation, while limiting the related credit risk to an acceptable level. The following table sets forth certain information regarding the fair value, weighted average yields and contractual maturities of the Corporation’s securities as of December 31, 2019: (Dollar amounts in thousands) U.S. government sponsored entities and agencies $ — U.S. agency mortgage-backed securities: Due in 1 year or less Due from 1 to 3 years $ 5,063 Due from 3 to 5 years $ 2,014 Due from 5 to 10 years $ — Due after 10 years $ — No scheduled maturity $ — Total $ 7,077 residential — — — 2,821 38,254 — 41,075 U.S. agency collateralized mortgage obligations: residential Corporate securities State and political subdivision Equity securities — — 265 — — — 849 — — — 2,196 — 3,221 9,153 4,695 — 29,616 2,169 19,791 — — — — 19 32,837 11,322 27,796 19 Estimated fair value $ 265 $ 5,912 $ 4,210 $ 19,890 $ 89,830 $ 19 $ 120,126 Weighted average yield (1) 2.43 % 1.67 % 2.73 % 3.74 % 2.73 % 0.00 % 2.84 % (1) Taxable equivalent adjustments have been made in calculating yields on state and political subdivision securities. K-8 FORM 10-K The following table sets forth the fair value of the Corporation’s investment securities as of December 31: (Dollar amounts in thousands) U.S. Treasury U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: residential U.S. agency collateralized mortgage obligations: residential Corporate securities State and political subdivision Equity securities 2019 2018 2017 $ — $ 7,077 41,075 32,837 27,796 11,322 19 $ 120,126 $ 4,445 $ 16,783 27,176 18,664 22,732 7,918 7 4,472 13,926 20,758 21,924 9,030 29,240 1,817 97,725 $ 101,167 For additional information regarding the Corporation’s investment portfolio see “Note 2 – Securities” to the consolidated financial statements on page F-14. Sources of Funds General. Deposits are the primary source of the Corporation’s funds for lending and investing activities. Secondary sources of funds are derived from loan repayments, investment maturities and borrowed funds. Loan repayments can be considered a relatively stable funding source, while deposit activity is greatly influenced by interest rates and general market conditions. The Corporation also has access to funds through other various sources. For additional information about the Corporation’s sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity” in Item 7. Deposits. The Corporation offers a wide variety of deposit account products to both consumer and commercial deposit customers, including time deposits, noninterest bearing and interest bearing demand deposit accounts, savings deposits and money market accounts. Deposit products are promoted in periodic newspaper, radio and other forms of advertisements, along with notices provided in customer account statements. The Corporation’s marketing strategy is based on its reputation as a community bank that provides quality products and personalized customer service. The Corporation sets interest rates on its interest bearing deposit products that are competitive with rates offered by other financial institutions in its market area. Management reviews interest rates on deposits weekly and considers a number of factors, including: (1) the Corporation’s internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Corporation’s liquidity position. The following table summarizes the Corporation’s deposits as of December 31: (Dollar amounts in thousands) 2019 2018 Type of accounts Non-interest bearing deposits Interest bearing demand deposits Time deposits Total Weighted average rate Amount Percent Weighted average rate Amount Percent — 18.9 % $ 148,842 53.4 % 0.76 % 420,515 2.17 % 217,767 27.7 % 1.01 % $ 787,124 100.0 % — 19.5 % $ 148,893 51.4 % 0.52 % 391,054 1.84 % 221,599 29.1 % 0.80 % $ 761,546 100.0 % The following table sets forth maturities of the Corporation’s time deposits of $100,000 or more at December 31, 2019 by time remaining to maturity: (Dollar amounts in thousands) Three months or less Over three months to six months Over six months to twelve months Over twelve months Amount 10,082 15,230 14,805 89,113 129,230 $ $ K-9 FORM 10-K Borrowings. Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support lending and investment activities. These borrowings include FHLB advances, federal funds, repurchase agreements, advances from the Federal Reserve Discount Window and lines of credit at the Bank and the Corporation with other correspondent banks. The following table summarizes information with respect to borrowings at or for the years ending December 31: (Dollar amounts in thousands) Ending balance Average balance Maximum balance Average rate $ 2019 28,550 36,508 60,050 2.73 % $ 2018 45,350 24,250 57,675 2.73 % For additional information regarding the Corporation’s deposit base and borrowed funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deposits and Borrowed Funds” in Item 7 and “Note 8 – Deposits” on page F-23 and “Note 9 – Borrowed Funds” on page F-24 to the consolidated financial statements. Subsidiary Activity The Corporation has one wholly owned subsidiary, the Bank. Emclaire Settlement Services, LLC, a former subsidiary of the Corporation ceased operations and was dissolved during 2019, provided real estate settlement services to the Bank and other customers. As of December 31, 2019, the Bank had no subsidiaries. Personnel At December 31, 2019, the Corporation had 162 full time equivalent employees, compared to 164 at December 31, 2018. There is no collective bargaining agreement between the Corporation and its employees, and the Corporation believes its relationship with its employees is satisfactory. Competition The Corporation competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers. Supervision and Regulation General. Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain provisions of certain laws that relate to the regulation of the Corporation and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. The Corporation. The Corporation is a registered bank holding company and subject to regulation and examination by the FRB under the BHCA. The Corporation is required to file periodic reports with the FRB and such additional information as the FRB may require. The Bank Holding Company rating system emphasizes risk management and evaluation of the potential impact of non-depository entities on safety and soundness. The FRB may require the Corporation to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Corporation must file written notice and obtain FRB approval prior to purchasing or redeeming its equity securities. The Corporation is required to obtain prior FRB approval for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior FRB approval is also required for the merger or consolidation of the Corporation and another bank holding company. The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, subject to the prior FRB approval, a bank holding company may engage in any, or acquire shares of companies engaged in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. K-10 FORM 10-K The BHCA also authorizes bank holding companies to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. In order to undertake these activities, a bank holding company must become a financial holding company by submitting to the appropriate FRB a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. The Corporation submitted a declaration of election to become a financial holding company with the FRB which became effective in March 2007. Federal legislation also directed federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries. Under FRB regulations, the Corporation is required to serve as a source of financial and managerial strength to the Bank and may not conduct operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both. The Corporation is also a bank holding company within the meaning of the Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the Pennsylvania Department of Banking and Securities. The Corporation’s securities are registered with the SEC under the Exchange Act. As such, the Corporation is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act. The public may obtain all forms and information filed with the SEC through its website http://www.sec.gov. In December 2013, federal regulators adopted final rules to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule and established July 21, 2015 as the end of the conformance period. The regulations contain prohibitions and restrictions on the ability of financial institutions, holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Recently promulgated Federal regulations exclude from the Volcker Rule restrictions community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5% or less of total consolidated assets. The Corporation qualifies for the exclusion from the Volcker Rule restrictions. The Bank. As a national banking association, the Bank is subject to primary supervision, examination and regulation by the OCC. The Bank is also subject to regulations of the FDIC as administrator of the Deposit Insurance Fund (DIF) and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank’s growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank’s deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that the Bank’s conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors. A national bank may have a financial subsidiary engaged in any activity authorized for national banks directly or certain permissible activities. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank itself. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance, issue annuities or engage in real estate development or investment or merchant banking. The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board that is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysis; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts and extended the period during which certain types of lawsuits can be brought against a company or its insiders. K-11 FORM 10-K 2010 Regulatory Reform. On July 21, 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law. The goals of the Dodd Frank Act included restoring public confidence in the financial system following the financial crisis, preventing another financial crisis and permitting regulators to identify shortfalls in the system before another financial crisis can occur. The Dodd Frank Act is also intended to promote a fundamental restructuring of federal banking regulation by taking a systemic view of regulation rather than focusing on regulation of individual financial institutions. Many of the provisions in the Dodd Frank Act require that regulatory agencies draft implementing regulations. Implementation of the Dodd Frank Act has had and will continue to have a broad impact on the financial services industry by introducing significant regulatory and compliance changes including, among other things: (i) changing the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated total assets less average tangible equity, eliminating the ceiling and increasing the size of the floor of the DIF and offsetting the impact of the increase in the minimum floor on institutions with less than $10 billion in assets; (ii) making permanent the $250,000 limit for federal deposit insurance and increasing the cash limit of Securities Investor Protection Corporation protection to $250,000; (iii) eliminating the requirement that the FDIC pay dividends from the DIF when the reserve ratio is between 1.35% and 1.50%, but continuing the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.50%; however, the FDIC is granted sole discretion in determining whether to suspend or limit the declaration or payment of dividends; (iv) repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; (v) implementing certain corporate governance revisions that apply to all public companies, including regulations that require publicly traded companies to give shareholders a non-binding advisory vote to approve executive compensation, commonly referred to as a “say-on-pay” vote and an advisory role on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions; new director independence requirements and considerations to be taken into account by compensation committees and their advisers relating to executive compensation; additional executive compensation disclosures; and a requirement that companies adopt a policy providing for the recovery of executive compensation in the event of a restatement of its financial statements, commonly referred to as a “clawback” policy; (vi) centralizing responsibility for consumer financial protection by creating a new independent federal agency, the Consumer Financial Protection Bureau (CFPB) responsible for implementing federal consumer protection laws to be applicable to all depository institutions; (vii) imposing new requirements for mortgage lending, including new minimum underwriting standards, limitations on prepayment penalties and imposition of new mandated disclosures to mortgage borrowers; (viii) imposing new limits on affiliate transactions and causing derivative transactions to be subject to lending limits and other restrictions including adoption of the “Volcker Rule” regulating transactions in derivative securities; (ix) limiting debit card interchange fees that financial institutions with $10 billion or more in assets are permitted to charge their customers; and (x) implementing regulations to incentivize and protect individuals, commonly referred to as whistleblowers to report violations of federal securities laws. Many aspects of the Dodd Frank Act continue to be subject to rulemaking and will take effect over several additional years, making it difficult to anticipate the overall financial impact on us or across the industry. The changes resulting from the Dodd Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. The legislation enacted in 2018 and summarized below may reduce some of the burdens associated with the implementation of the Dodd Frank Act, but the actual impact is impossible to predict with any certainty. 2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd Frank Act. While the Act maintains most of the regulatory structure established by the Dodd Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as the Bank. The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans. It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied to us or what specific impact the Act and the implementing rules and regulations will have on community banks. K-12 FORM 10-K Anti-Money Laundering. All financial institutions, including national banks, are subject to federal laws that are designed to prevent the use of the U.S. financial system to fund terrorist activities. Financial institutions operating in the United States must develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. The Bank has established policies and procedures to ensure compliance with these provisions. Privacy. Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide (i) initial notices to customers about their privacy policies, describing conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; (ii) annual notices of their privacy policies to current customers and (iii) a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Corporation’s privacy policies have been implemented in accordance with the law. Dividends and Other Transfers of Funds. Dividends from the Bank constitute the principal source of income to the Corporation. The Corporation is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. In addition, the Bank’s regulators have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Limitations on Transactions with Affiliates. Transactions between national banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a national bank includes any company or entity which controls the national bank or that is controlled by a company that controls the national bank. In a holding company context, the holding company of a national bank (such as the Corporation) and any companies which are controlled by such holding company are affiliates of the national bank. Generally, Section 23A limits the extent to which the national bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the national bank as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a national bank to an affiliate. In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal shareholders of the national bank and its affiliates. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% shareholder of a national bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the national bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to any director, executive officer or principal shareholder, or certain affiliated interests of either, over other employees of the national bank. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a national bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. The Bank currently is subject to Sections 22(g) and (h) of the Federal Reserve Act and at December 31, 2019, was in compliance with the above restrictions. Loans to One Borrower Limitations. With certain limited exceptions, the maximum amount that a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At December 31, 2019, the Bank’s loans-to-one-borrower limit was $12.1 million based upon the 15% of unimpaired capital and surplus measurement. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2019, the Bank’s largest single lending relationship had an outstanding balance of $8.3 million. Capital Standards. The Bank is required to comply with applicable capital adequacy standards established by the federal banking agencies. Beginning on January 1, 2015, the Bank became subject to a new comprehensive capital framework for U.S. banking organizations. In July 2013, the Federal Reserve Board, FDIC and OCC adopted a final rule that implements the Basel III changes to the international regulatory capital framework. The Basel III rules include requirements contemplated by the Dodd Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010. K-13 FORM 10-K Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the "CBLR") requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided by average total consolidated assets. In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (ii) have less that $10 billion in average total consolidated assets, (iii) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (iv) not be an advanced approaches banking organization. A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be "well capitalized" under the prompt corrective action rules. Unless a community bank qualifies for, and elects to comply with, the CBLR beginning on January 1, 2020, national banks are required to maintain the Basel III minimum levels of regulatory capital described below. The Basel III rules include risk-based and leverage capital ratio requirements that refine the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements are (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital consists of retained earnings and common stock instruments, subject to certain adjustments. The Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conversation buffer was fully phased in as of January 1, 2019 and results in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5% and (iii) a total risk-based capital ratio of 10.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount. The Basel III rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels do not meet certain thresholds. These revisions were effective January 1, 2015. The prompt corrective action rules were modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. Under the proposed prompt corrective action rules, insured depository institutions are required to meet the following capital levels in order to qualify as “well capitalized”: (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk- based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules). The Basel III rules set forth certain changes in the methods of calculating risk-weighted assets, which in turn affect the calculation of risk based ratios. Under the Basel III rules, higher or more sensitive risk weights are assigned to various categories of assets including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures of credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, Basel III rules include (i) alternate standards of credit worthiness consistent with the Dodd Frank Act; (ii) greater recognition of collateral guarantees and (iii) revised capital treatment for derivatives and repo-style transactions. In addition, the final rule includes certain exemptions to address concerns about the regulatory burden on community banks. Banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a permanent basis without any phase out. Community banks were required to make this election by their March 31, 2015 quarterly filings with the appropriate federal regulator to opt-out of the requirement to include most accumulated other comprehensive income (AOCI) components in the calculation of Common equity Tier 1 capital and in effect retain the AOCI treatment under the current capital rules. The Bank made in its March 31, 2015 quarterly filing a one-time permanent election to continue to exclude accumulated other comprehensive income from capital. If it would not have made this election, unrealized gains and losses would have been included in the calculation of its regulatory capital. The Basel III rules generally became effective beginning January 1, 2015; however, certain calculations under the Basel III rules have phase-in periods. In 2015, the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and the 2018 legislation summarized above increased that asset threshold to $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. K-14 FORM 10-K The following table sets forth certain information concerning regulatory capital ratios of the Bank as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer. (Dollar amounts in thousands) Total capital to risk-weighted assets: Actual For capital adequacy purposes To be well capitalized Tier 1 capital to risk-weighted assets: Actual For capital adequacy purposes To be well capitalized Common Equity Tier 1 capital to risk-weighted assets: Actual For capital adequacy purposes To be well capitalized Tier 1 capital to average assets: Actual For capital adequacy purposes To be well capitalized December 31, 2019 Amount Ratio December 31, 2018 Amount Ratio $ 80,418 13.74 % 46,836 8.00 % 58,544 10.00 % $ 76,344 12.93 % 47,252 8.00 % 59,065 10.00 % $ 73,862 12.62 % 35,127 6.00 % 46,836 8.00 % $ 69,836 11.82 % 35,439 6.00 % 47,252 8.00 % $ 73,862 12.62 % 26,345 4.50 % 38,054 6.50 % $ 69,836 11.82 % 26,579 4.50 % 38,393 6.50 % $ 73,862 8.17 % 36,146 4.00 % 45,182 5.00 % $ 69,836 7.95 % 35,126 4.00 % 43,908 5.00 % Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2019, the Bank exceeded the required ratios for classification as “well capitalized.” An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized – without the permission of the institution’s primary regulator. Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. K-15 FORM 10-K Insurance of Accounts. Deposit accounts are currently insured by the DIF generally up to a maximum of $250,000 per separately insured depositor. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against insured institutions. The Dodd Frank Act raised the minimum reserve ratio of the DIF from 1.15% to 1.35% and required the FDIC to offset the effect of this increase on insured institutions with assets of less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016 and exceeded 1.35% effective as of September 30, 2018. Small institutions receive credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The credits apply to reduce regular assessments by 2 basis points for quarters when the reserve ratio is at least 1.38%. Effective July 1, 2016, the FDIC adopted changes that eliminated its risk-based premium system. Under the new premium system, the FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is its average total assets reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, effective July 1, 2016, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios; its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates). The initial base assessment rate is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with assets of $10 billion or more are assessed using a scorecard method. In addition, all FDIC insured institutions were required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. The first Financing Corporation bonds matured in 2019. Under the Federal Deposit Insurance Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order or condition imposed by the FDIC. Interstate Banking and Branching. Banks have the ability, subject to certain state restrictions, to acquire, by acquisition or merger, branches outside its home state. In addition, federal legislation permits a bank headquartered in Pennsylvania to enter another state through de novo branching (as compared to an acquisition) if under the state law in the state which the proposed branch is to be located a state- chartered institution would be permitted to establish the branch. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets. Consumer Protection Laws and Regulations. The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with such laws and regulations. The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below. The Community Reinvestment Act (CRA) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate- income neighborhoods, in a manner consistent with safe and sound banking practices. CRA regulations (i) establish the definition of “Intermediate Small Bank” as an institution with total assets of $250 million to $1 billion, without regard to any holding company; and (ii) take into account abusive lending practices by a bank or its affiliates in determining a bank’s CRA rating. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last examination for CRA compliance, as of January 15, 2019, the Bank was rated “satisfactory.” K-16 FORM 10-K The Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act of 2003 (FACTA), requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with the FACTA, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer’s election to opt out would be applicable for at least five years. The Federal Trade Commission (FTC), the federal bank regulatory agencies and the National Credit Union Administration (NCUA) have issued regulations (the Red Flag Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs as part of the FACTA. The programs must provide for the identification, detection and response to patterns, practices or specific activities – known as red flags – that could indicate identity theft. These red flags may include unusual account activity, fraud alerts on a consumer report or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the institution or creditor, include appropriate staff training and provide oversight of any service providers. The Check Clearing for the 21st Century Act (Check 21) facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a “substitute check,” which is the legal equivalent of an original check. Check 21 does not require banks to create substitute checks or accept checks electronically; however, it does require banks to accept a legally equivalent substitute check in place of an original. The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act. The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things. The Fair Housing Act (FHA) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FHA, including some that are not specifically mentioned in the FHA itself. The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti- discrimination statutes. The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. Generally speaking, predatory lending involves at least one, and perhaps all three, of the following elements (i) making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”); (ii) inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); and (iii) engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower. FRB regulations aimed at curbing such lending significantly widened the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid. OCC guidelines require national banks and their operating subsidiaries to comply with certain standards when making or purchasing loans to avoid predatory or abusive residential mortgage lending practices. Failure to comply with the guidelines could be deemed an unsafe and unsound or unfair or deceptive practice, subjecting the bank to supervisory enforcement actions. K-17 FORM 10-K Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with the CRA, FACTA, TILA, FHA, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community. Federal Home Loan Bank System. The Bank is a member of the FHLB. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2019, the Bank was in compliance with the stock requirements. Federal Reserve System. The FRB requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking) and non-personal time deposits. At December 31, 2019, the Bank was in compliance with these requirements. Item 1A. Risk Factors Not required as the Corporation is a smaller reporting company. Item 1B. Unresolved Staff Comments None. Item 2. Properties The Corporation owns no real property but utilizes the main office of the Bank, which is owned by the Bank. The Corporation’s and the Bank’s executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent or other form of consideration for the use of this facility. The Bank owns and leases numerous other premises for use in conducting business activities. The Bank considers these facilities owned or occupied under lease to be adequate. For additional information regarding the Bank’s properties, see “Note 5 - Premises and Equipment” to the consolidated financial statements on page F-21. Item 3. Legal Proceedings Neither the Bank nor the Corporation is involved in any material legal proceedings. The Bank, from time to time, is party to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial position, results of operation, or liquidity of the Bank or the Corporation. Item 4. Mine Safety Disclosures Not applicable. K-18 FORM 10-K PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market, Holder and Dividend Information Emclaire Financial Corp common stock is traded on NASDAQ Capital Market (NASDAQ) under the symbol “EMCF”. The listed market makers for the Corporation’s common stock include: Boenning and Scattergood, Inc. 4 Tower Bridge 200 Barr Harbor Drive, Suite 300 West Conshohocken, PA 19428-2979 Telephone: (800) 883-1212 Janney Montgomery Scott LLC 1717 Arch Street Philadelphia, PA 19103 Telephone: (215) 665-6000 Raymond James & Associates, Inc. 550 West Washington Boulevard Suite 1050 Chicago, IL 60661 Telephone: (312) 869-3800 The Corporation has traditionally paid regular quarterly cash dividends. Future dividends will be determined by the Board of Directors after giving consideration to the Corporation’s financial condition, results of operations, tax status, industry standards, economic conditions, regulatory requirements and other factors. The following table sets forth the high and low sale and quarter-end closing market prices of our common stock for the last two years as reported by the Nasdaq Capital Market as well as cash dividends paid for the quarterly periods presented. 2019: Fourth quarter Third quarter Second quarter First quarter 2018: Fourth quarter Third quarter Second quarter First quarter High Market Price Low Cash Close Dividend $ $ 34.00 $ 37.00 34.50 32.35 29.92 $ 30.42 29.83 29.34 32.53 $ 32.90 34.50 30.80 36.70 $ 38.60 35.06 33.60 29.90 $ 34.07 31.05 29.72 30.34 $ 37.30 34.30 33.41 0.29 0.29 0.29 0.29 0.28 0.28 0.28 0.28 As of March 2, 2020, there were approximately 728 stockholders of record and 2,708,712 shares of common stock entitled to vote, receive dividends and considered outstanding for financial reporting purposes. The number of stockholders of record does not include the number of persons or entities who hold their stock in nominee or “street” name. Common stockholders may have dividends reinvested to purchase additional shares through the Corporation’s dividend reinvestment plan. Participants may also make optional cash purchases of common stock through this plan. To obtain a plan document and authorization card to participate in the plan, please call 888-509-4619. Purchases of Equity Securities The Corporation did not repurchase any of its equity securities in the year ended December 31, 2019. Item 6. Selected Financial Data Not required as the Corporation is a smaller reporting company. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis represents a review of the Corporation’s consolidated financial condition and results of operations for the years ended December 31, 2019 and 2018. This review should be read in conjunction with the consolidated financial statements beginning on page F-3. K-19 FORM 10-K Overview The Corporation reported consolidated net income available to common stockholders of $7.8 million, or $2.86 per diluted common share, for 2019, compared to $4.1 million, or $1.72 per diluted common share, for 2018. Net income available to common stockholders was impacted by the following: • Net interest income increased $2.5 million, or 9.7%, to $28.1 million for the year ended December 31, 2019 from $25.6 million for 2018. This increase primarily related to an increase in interest income of $5.2 million, or 16.7%, partially offset by an increase in interest expense of $2.7 million, or 50.0%. Driving the increase in interest income was a $78.9 million increase in the average balance of loans. The increase in interest expense was driven by increases in the Corporation's average balance of interest-bearing deposits and borrowed funds of $61.1 million and $12.3 million, respectively. The increases in the Corporation's interest-earning assets and interest-bearing liabilities includes the impact of the Community First Bancorp, Inc. (CFB) acquisition in October 2018, which added $111.6 million in loans and $106.1 million in deposits at the time of the acquisition. • Noninterest income increased $183,000, or 4.3%, to $4.4 million for the year ended December 31, 2019 from $4.2 million in 2018 due to increases in earnings on bank-owned life insurance, fees and service charges, gains on the sale of loans and gains on the sale of securities of $165,000, $126,000, $95,000 and $87,000, respectively, partially offset by a decrease in other noninterest income of $290,000. This decrease in other noninterest income was due to a $540,000 gain recorded in the fourth quarter of 2018 related to the retirement of 18,000 shares of CFB stock the Corporation owned at the time of the acquisition. • Noninterest expense decreased $1.5 million, or 6.5%, to $22.1 million for the year ended December 31, 2019 from $23.7 million for 2018. This decrease was primarily related to decreases in acquisition costs, FDIC insurance expense, intangible asset amortization expense and professional fees of $3.6 million, $260,000, $90,000 and $41,000, respectively. These decreases were partially offset by increases in compensation and employee benefits, other noninterest expense and premises and equipment expense of $1.4 million, $819,000 and $208,000, respectively. Changes in Financial Condition Total assets increased $16.4 million, or 1.8%, to $915.3 million at December 31, 2019 from $898.9 million at December 31, 2018. This increase primarily related to increases in securities, cash and cash equivalents and interest earning time deposits of $22.4 million, $4.0 million and $3.0 million, respectively, partially offset by a $13.3 million decrease in net loans receivable. Liabilities increased $10.6 million, or 1.3%, to $829.4 million at December 31, 2019 from $818.9 million at December 31, 2018 due to a $25.6 million increase in customer deposits partially offset by a $16.8 million decrease in borrowed funds. Cash and cash equivalents. Cash and cash equivalents increased $4.0 million, or 36.8%, to $15.0 million at December 31, 2019 from $11.0 million at December 31, 2018. This increase primarily resulted from an increase in customer deposits and a decrease in loans, partially offset by a decrease in borrowed funds. Interest earning time deposits. Interest earning time deposits increased $3.0 million, or 43.9%, to $9.7 million at December 31, 2019 from $6.7 million at December 31, 2018. This increase resulted from the purchase of certificates of deposits with other financial institutions totaling $5.5 million, partially offset by maturities totaling $2.5 million during the year. Securities. Securities increased $22.4 million, or 22.9%, to $120.1 million at December 31, 2019 from $97.7 million at December 31, 2018. This increase primarily resulted from investment security purchases totaling $76.1 million, partially offset by sales, maturities and repayments totaling $55.4 million during the year. Loans receivable. Net loans receivable decreased $13.3 million, or 1.9%, to $695.3 million at December 31, 2019 from $708.7 million at December 31, 2018. The decrease was driven by decreases in the Corporation’s commercial mortgage, home equity and residential mortgage portfolios of $8.8 million, $6.2 million and $2.2 million, respectively, partially offset by increases in the consumer and commercial business portfolios of $3.4 million and $594,000, respectively. Loans acquired from CFB totaled $111.6 million at the time of the acquisition in October 2018 and $83.3 million at December 31, 2019. K-20 FORM 10-K Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days past due and still accruing, repossessions and real estate owned. Nonperforming assets were $3.2 million, or 0.34% of total assets, at December 31, 2019 compared to $3.7 million, or 0.42% of total assets, at December 31, 2018. Nonperforming assets consisted of nonperforming loans and real estate owned of $2.9 million and $249,000, respectively, at December 31, 2019 and $3.0 million and $701,000, respectively, at December 31, 2018. At December 31, 2019, nonperforming loans consisted primarily of residential mortgage, home equity and commercial mortgage loans. Federal bank stocks. Federal bank stocks were comprised of FHLB stock and FRB stock of $4.0 million and $1.8 million, respectively, at December 31, 2019. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships between the Corporation and the federal banks. Bank-owned life insurance (BOLI). The Corporation maintains single premium life insurance policies on certain current and former officers and employees of the Bank. In addition to providing life insurance coverage, whereby the Bank as well as the officers and employees receive life insurance benefits, the appreciation of the cash surrender value of the BOLI will serve to offset and finance existing and future employee benefit costs. Increases in this account are typically associated with an increase in the cash surrender value of the policies, partially offset by certain administrative expenses. BOLI increased $406,000, or 2.7%, to $15.3 million at December 31, 2019 from $14.9 million at December 31, 2018. Premises and equipment. Premises and equipment increased $130,000 to $19.0 million at December 31, 2019 from $18.9 million at December 31, 2018. The overall increase in premises and equipment during the year was due to capital expenditures of $1.8 million, partially offset by depreciation and amortization of $1.4 million. Goodwill. Goodwill increased $12,000 to $19.5 million at December 31, 2019 from $19.4 million at December 31, 2018. During 2019, the Corporation finalized the accounting for the acquisition of CFB and recorded a small adjustment to the $9.2 million of goodwill. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed at December 31, 2019. Core deposit intangible. The core deposit intangible was $1.2 million at December 31, 2019, compared to $1.4 million at December 31, 2018. During 2018, the Corporation recorded a core deposit intangible of $1.2 million related to the CFB acquisition. The core deposit intangible also includes amounts associated with the assumption of deposits in the 2017 Northern Hancock Bank and Trust Co. (NHB) acquisition and the 2016 United American Savings Bank (UASB) acquisition. This asset represents the long-term value of the core deposits acquired. In each instance, the fair value was determined using a third-party valuation expert specializing in estimating fair values of core deposit intangibles. The fair value was derived using an industry standard present value methodology. All-in costs and runoff balances by year were discounted by comparable term FHLB advance rates, used as an alternative cost of funds measure. This intangible asset amortizes over a weighted average estimated life of the related deposits. The core deposit intangible asset is not estimated to have a significant residual value. The Corporation recorded $176,000 and $266,000 of intangible amortization in 2019 and 2018, respectively. Deposits. Total deposits increased $25.6 million, or 3.4%, to $787.1 million at December 31, 2019 from $761.5 million at December 31, 2018. Interest bearing deposits increased $25.6 million, or 4.2%. Deposits assumed from CFB totaled $106.1 million at the time of the acquisition in October 2018 and $65.8 million at December 31, 2019. Borrowed funds. Borrowed funds decreased $16.8 million, or 37.0%, to $28.6 million at December 31, 2019 from $45.4 million at December 31, 2018. Borrowed funds at December 31, 2019 consisted of short-term borrowings of $2.1 million and long-term borrowings of $26.5 million. Short-term borrowed funds at December 31, 2019 consisted of an outstanding balance of $2.1 million on a line of credit with a correspondent bank at 5.00%. Long-term borrowed funds consisted of five $5.0 million FHLB term advances totaling $25.0 million, maturing between 2020 and 2023 and having fixed interest rates between 1.97% and 2.85%. In addition, the Corporation had $1.5 million outstanding on a term advance with a correspondent bank at a fixed rate of 4.75%. Long-term advances are utilized primarily to fund loan growth and short-term advances are utilized primarily to compensate for the normal deposit fluctuations. Stockholders’ equity. Stockholders’ equity increased $5.9 million, or 7.3%, to $85.9 million at December 31, 2019 from $80.0 million at December 31, 2018. The increase was primarily due to net income of $8.0 million and an increase of $1.0 million in accumulated other comprehensive income, partially offset by common stock and preferred dividends paid of $3.1 million and $182,000, respectively. K-21 FORM 10-K Changes in Results of Operations The Corporation reported net income before preferred stock dividends of $8.0 million and $4.2 million in 2019 and 2018, respectively. The following “Average Balance Sheet and Yield/Rate Analysis” and “Analysis of Changes in Net Interest Income” tables should be utilized in conjunction with the discussion of the interest income and interest expense components of net interest income. Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented. (Dollar amounts in thousands) Interest-earning assets: Loans, taxable Loans, tax exempt Total loans receivable Securities, taxable Securities, tax exempt Total securities Interest-earning deposits with banks Federal bank stocks Total interest-earning cash equivalents Total interest-earning assets Cash and due from banks Other noninterest-earning assets Total Assets Interest-bearing liabilities: Interest-bearing demand deposits Time deposits Total interest-bearing deposits Borrowed funds, short-term Borrowed funds, long-term Total borrowed funds Total interest-bearing liabilities Noninterest-bearing demand deposits Funding and cost of funds Other noninterest-bearing liabilities Total Liabilities Stockholders' Equity Total Liabilities and Stockholders' Equity Year ended December 31, 2019 2018 Average Yield/ Balance Interest Rate Average Yield/ Balance Interest Rate 812 3.92 % $ 679,607 $ 31,824 4.68 % $ 601,188 $ 27,393 4.56 % 752 3.71 % 28,145 4.53 % 1,792 2.43 % 647 2.64 % 2,439 2.48 % 284 1.48 % 298 6.43 % 582 2.44 % 31,166 4.19 % 20,281 32,636 4.66 % 621,469 73,872 24,485 98,357 19,220 4,633 23,853 36,336 4.31 % 743,679 2,968 50,316 $ 796,963 20,736 700,343 87,544 16,995 104,539 31,905 5,858 37,763 842,645 3,333 62,572 $ 908,550 2,258 2.58 % 457 2.69 % 2,715 2.60 % 566 1.77 % 419 7.15 % 985 2.61 % $ 401,564 $ 223,222 624,786 4,663 31,845 36,508 661,294 149,744 811,038 13,761 824,799 83,751 $ 908,550 183 3.93 % 813 2.55 % 996 2.73 % 2,630 0.65 % $ 380,753 $ 4,457 2.00 % 182,931 7,087 1.13 % 563,684 5,660 18,590 24,250 8,083 1.22 % 587,934 133,936 8,083 1.00 % 721,870 10,889 732,759 64,204 $ 796,963 — — 1,901 0.50 % 2,823 1.54 % 4,724 0.84 % 209 3.70 % 453 2.43 % 662 2.73 % 5,386 0.92 % — — 5,386 0.75 % Net interest income $ 28,253 $ 25,780 Interest rate spread (difference between weighted average rate on interest-earning assets and interest- bearing liabilities) Net interest margin (net interest income as a percentage of average interest-earning assets) 3.09 % 3.27 % 3.35 % 3.47 % K-22 FORM 10-K Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis. (Dollar amounts in thousands) Interest income: Loans Securities Interest-earning deposits with banks Federal bank stocks Total interest-earning assets Interest expense: Interest-bearing deposits Borrowed funds, short-term Borrowed funds, long-term Total interest-bearing liabilities Net interest income 2019 Results Compared to 2018 Results Year ended December 31, 2019 versus 2018 Increase (Decrease) due to Rate Total Volume $ $ 3,656 $ 157 216 85 4,114 555 (39) 338 854 3,260 $ 835 $ 119 66 36 1,056 1,808 13 22 1,843 (787 ) $ 4,491 276 282 121 5,170 2,363 (26) 360 2,697 2,473 The Corporation reported net income available to common stockholders of $7.8 million and $4.1 million for 2019 and 2018, respectively. The $3.7 million, or 88.6%, increase in net income was attributed to increases in net interest income and noninterest income of $2.5 million and $183,000, respectively, and decreases in noninterest expense and the provision for loan losses of $1.5 million and $565,000, respectively, partially offset by increases in the provision for income taxes and preferred dividends of $1.0 million and $91,000, respectively. Returns on average equity and assets were 9.50% and 0.88%, respectively, for 2019, compared to 6.56% and 0.53%, respectively, for 2018. Net interest income. The primary source of the Corporation’s revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowed funds, used to fund the earning assets. Net interest income is impacted by the volume and composition of interest-earning assets and interest- bearing liabilities, and changes in the level of interest rates. Tax equivalent net interest income increased $2.5 million to $28.3 million for 2019, compared to $25.8 million for 2018. This increase in net interest income can be attributed to an increase in tax equivalent interest income of $5.2 million, partially offset by an increase in interest expense of $2.7 million. Interest income. Tax equivalent interest income increased $5.2 million, or 16.6%, to $36.3 million for 2019, compared to $31.2 million for 2018. This increase can be attributed to increases in interest earned on loans, deposits with banks and securities and dividends received on federal bank stocks of $4.5 million, $282,000, $276,000 and $121,000, respectively. Tax equivalent interest earned on loans receivable increased $4.5 million, or 16.0%, to $32.6 million for 2019, compared to $28.1 million for 2018. The average balance of loans increased $78.9 million, or 12.7%, generating $3.7 million of additional interest income on loans. In addition, the average yield on loans increased 13 basis points to 4.66% for 2019, versus 4.53% for 2018 causing an $835,000 increase in interest income. Interest earned on interest-earning deposits with banks increased $282,000, or 99.3%, to $566,000 for 2019, compared to $284,000 for 2018. The average balance of these accounts increased $12.7 million, or 66.0%, causing a $216,000 increase in interest income. In addition, the average yield on interest-earning deposits increased 29 basis points to 1.77% for 2019, versus 1.48% for 2018 causing a $66,000 increase in interest income. Tax equivalent interest earned on securities increased $276,000, or 11.3%, to $2.7 million for 2019, compared to $2.4 million for 2018. The average balance of securities increased $6.2 million, or 6.3%, generating $157,000 of additional income. The average yield on securities increased 12 basis points to 2.60% for 2019 versus 2.48% for 2018 causing a $119,000 increase in interest income. Interest earned on federal bank stocks increased $121,000, or 40.6%, to $419,000 for 2019, compared to $298,000 for 2018. The average balance of federal bank stocks increased $1.2 million, or 26.4%, resulting in $85,000 of additional income. Also, the average yield on federal bank stocks increased 72 basis points to 7.15% for 2019 versus 6.43% for 2018 causing a $36,000 increase in interest income. K-23 FORM 10-K Interest expense. Interest expense increased $2.7 million, or 50.1%, to $8.1 million for 2019, compared to $5.4 million for 2018. This increase can be attributed to increases in interest expense on interest-bearing deposits and borrowed funds of $2.4 million and $334,000, respectively. Interest expense on deposits increased $2.4 million, or 50.0%, to $7.1 million for 2019, compared to $4.7 million for 2018. The average rate on interest-bearing deposits increased by 29 basis points to 1.13% for 2019 versus 0.84% for 2018 causing a $1.8 million increase in interest expense. In addition, the average balance of interest-bearing deposits increased $61.1 million, or 10.8%, causing a $555,000 increase in interest expense. Interest expense on borrowed funds increased $334,000, or 50.5%, to $996,000 for 2019, compared to $662,000 for 2018. The average balance of borrowed funds increased $12.3 million, or 50.5%, to $36.5 million for 2019, compared to $24.3 million for 2018 causing a $299,000 decrease in interest expense. Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. Nonperforming loans decreased $121,000, or 4.0%, to $2.9 million at December 31, 2019 from $3.0 million at December 31, 2018. The decrease in nonperforming loans was primarily related to a decrease of $470,000 in loans past due more than 90 days and still accruing, partially offset by an increase of $350,000 in non-accrual loans. The increase in non-accrual loans was primarily from changes in the commercial real estate loan portfolio. The provision for loan losses decreased $565,000, or 44.1%, to $715,000 for 2019 from $1.3 million for 2018. The Corporation’s allowance for loan losses amounted to $6.6 million, or 0.93% of the Corporation’s total loan portfolio at December 31, 2019 compared to $6.5 million or 0.91% of total loans at December 31, 2018. The allowance for loan losses, as a percentage of nonperforming loans at December 31, 2019 and 2018, was 225.5% and 214.9%, respectively. The allocation of the allowance for loan losses related to residential mortgage loans and commercial business loans increased during the year primarily as a result of an increase in net charge-offs associated with these portfolios. The allocation related to consumer loans increased primarily as a result of growth in the loan portfolios, while the allocation related to commercial real estate loans and home equity loans decreased as a result of reductions in the amount of net charge-offs and portfolio balance decreases. At December 31, 2019, there was no provision for loan losses allocated to loans acquired from UASB, NHB or CFB. Noninterest income. Noninterest income includes revenue that is related to services rendered and activities conducted in the financial services industry, including fees on depository accounts, general transaction and service fees, title premiums, security and loan sale gains and losses, and earnings on BOLI. Noninterest income increased $183,000, or 4.4%, to $4.4 million in 2019 from $4.2 million in 2018. The increase in noninterest income is due to increases in earnings on BOLI, fees and service charges, gains on the sale of loans and gains on the sale of securities of $165,000, $126,000, $95,000 and $87,000, respectively, partially offset by a decrease in other income of $290,000. The decrease in other income was due to a $540,000 gain recorded in the fourth quarter of 2018 related to the retirement of 18,000 shares of CFB stock the Corporation owned at the time of the acquisition. Noninterest expense. Noninterest expense decreased $1.5 million, or 6.5%, to $22.1 million for 2019, compared to $23.7 million for 2018. This decrease was primarily related to decreases in acquisition costs, FDIC insurance expense, intangible asset amortization expense and professional fees of $3.6 million, $260,000, $90,000 and $41,000, respectively. These decreases were partially offset by increases in compensation and employee benefits, other noninterest expense and premises and equipment expense of $1.4 million, $819,000 and $208,000, respectively. Acquisition costs decreased $3.6 million in 2019. Acquisition costs of $3.6 million were incurred in 2018 related to the acquisition of CFB and included employee non-compete and severance costs, professional fees, system conversion costs, contract termination fees, legal fees, accounting and auditing fees and other costs of $1.5 million, $531,000, $481,000, $427,000, $330,000, $50,000 and $228,000, respectively. K-24 FORM 10-K FDIC insurance expense decreased $260,000, or 48.8%, to $273,000 for 2019, compared to $533,000 for 2018. This decrease was primarily related to $215,000 in Small Bank Assessment credits received by the Bank and utilized in the third and fourth quarters of 2019. Compensation and employee benefits expense increased $1.4 million, or 13.7%, to $11.7 million for 2019, compared to $10.3 million for 2018. This increase primarily related to normal wage and salary increases, increases in insurance and retirement benefits, as well as costs associated with the full-year operation of the three branch offices acquired from CFB in 2018. Other noninterest expense increased $819,000, or 17.0%, to $5.6 million for 2019, compared to $4.8 million for 2018. This increase primarily related to increases in processing and telecommunications expenses of $464,000 and $153,000, respectively, related to outsourcing core systems processing, as well as costs associated with the full-year operation of the acquired branch offices. Premises and equipment expense increased $208,000, or 6.6%, to $3.4 million for 2019, compared to $3.2 million for 2018. This increase primarily related to expenses associated with the full-year operation of the acquired branch offices. The provision for income taxes increased $1.0 million to $1.7 million for 2019, compared to $633,000 million for 2018 primarily due to the increase in net income available to common stockholders. Market Risk Management Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. The Corporation is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Corporation does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets. The primary objective of the Corporation’s asset liability management function is to maximize the Corporation’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Corporation’s operating environment, capital and liquidity requirements, balance sheet mix, performance objectives and overall business focus. One of the primary measures of the exposure of the Corporation’s earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of its interest-bearing liabilities. The Corporation’s Board of Directors has established a Finance Committee, consisting of five outside directors, the President and Chief Executive Officer (CEO), Treasurer and Chief Financial Officer (CFO) and Chief Operating Officer (COO), to monitor market risk, including primarily interest rate risk. This committee, which meets at least quarterly, generally establishes and monitors the investment, interest rate risk and asset liability management policies of the Corporation. In order to minimize the potential for adverse affects of material and prolonged changes in interest rates on the Corporation’s results of operations, the Corporation’s management team has implemented and continues to monitor asset liability management policies to better match the maturities and repricing terms of the Corporation’s interest-earning assets and interest-bearing liabilities. Such policies have consisted primarily of (i) originating adjustable-rate mortgage loans; (ii) originating short-term secured commercial loans with the rate on the loan tied to the prime rate or reset features in which the rate changes at determined intervals; (iii) emphasizing investment in shorter- term (expected duration of five years or less) investment securities; (iv) selling longer-term (30-year) fixed-rate residential mortgage loans in the secondary market; (v) maintaining a high level of liquid assets (including securities classified as available for sale) that can be readily reinvested in higher yielding investments should interest rates rise; (vi) emphasizing the retention of lower cost savings accounts and other core deposits; and (vii) lengthening liabilities and locking in lower borrowing rates with longer terms whenever possible. Interest Rate Sensitivity Gap Analysis The implementation of asset and liability initiatives and strategies and compliance with related policies, combined with other external factors such as demand for the Corporation’s products and economic and interest rate environments in general, has resulted in the Corporation maintaining a one-year cumulative interest rate sensitivity gap within internal policy limits of between a positive and negative 15% of total assets. The one-year interest rate sensitivity gap is identified as the difference between the Corporation’s interest-earning assets that are scheduled to mature or reprice within one year and its interest-bearing liabilities that are scheduled to mature or reprice within one year. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities, and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero, or more neutral, that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income. K-25 FORM 10-K Based on certain assumptions derived from the Corporation’s historical experience, at December 31, 2019, the Corporation’s interest- earning assets maturing or repricing within one year totaled $280.2 million while the Corporation’s interest-bearing liabilities maturing or repricing within one year totaled $193.6 million, providing an excess of interest-earning assets over interest-bearing liabilities of $86.6 million or 9.5% of total assets. At December 31, 2019, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 144.7%. The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2019 which are expected to mature, prepay or reprice in each of the future time periods presented: (Dollar amounts in thousands) Total interest-earning assets Six months or less Six months to one year One to three years Three to four years Over four years $ 188,771 $ 91,433 $ 254,854 $ 68,860 $ 238,772 Total $ 842,690 Total interest-bearing liabilities 101,559 92,013 290,598 75,817 105,344 665,331 Interest rate sensitivity gap $ 87,212 $ (580) $ (35,744 ) $ (6,957) $ 133,428 $ 177,359 Cumulative rate sensitivity gap $ 87,212 $ 86,632 $ 50,888 $ 43,931 $ 177,359 Ratio of gap during the period to total interest earning assets 10.35% (0.07%) (4.24 %) (0.83%) 15.83 % Ratio of cumulative gap to total interest earning assets 10.35% 10.28% 6.04 % 5.21% 21.05 % Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Interest Rate Sensitivity Simulation Analysis The Corporation also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Finance Committee of the Board of Directors believes that simulation modeling enables the Corporation to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates and different loan and security prepayment and deposit decay assumptions under various interest rate scenarios. As with gap analysis and earnings simulation modeling, assumptions about the timing and variability of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Corporation’s historical experience. The Corporation has established the following guidelines for assessing interest rate risk: Net interest income simulation. Given a 200 basis point immediate increase or decrease in market interest rates, net interest income may not change by more than 15% for a one-year period. Economic value of equity simulation. Economic value of equity is the present value of the Corporation’s existing assets less the present value of the Corporation’s existing liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, economic value of equity may not correspondingly decrease or increase by more than 20%. These guidelines take into consideration the current interest rate environment, the Corporation’s financial asset and financial liability product mix and characteristics and liquidity sources among other factors. Given the current rate environment, a drop in short-term market interest rates of 200 basis points immediately or over a one-year horizon would seem unlikely. This should be considered in evaluating modeling results outlined in the table below. K-26 FORM 10-K The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income for the years ended December 31, 2019 and 2018, respectively. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2019 remained constant. The impact of the market rate movements on net interest income was developed by simulating the effects of rates changing immediately for a one-year period from the December 31, 2019 levels for net interest income. 2019 Net interest income - increase (decrease) Increase Decrease +100 BP +200 BP -100 BP -200 BP 1.87% 2.06% (1.83 %) (5.28%) 2018 Net interest income - increase (decrease) 0.26% 0.30% (0.15 %) (3.98%) The expected increase in 2018 and 2019 net interest income in the rising rate scenarios shown in the table above resulted from the Corporation having an excess of immediately repricing interest-earning assets over immediately repricing interest-bearing liabilities. Impact of Inflation and Changing Prices The consolidated financial statements of the Corporation and related notes presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger degree than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels. Capital Resources Total stockholders’ equity increased $5.9 million, or 7.3%, to $85.9 million at December 31, 2019 from $80.0 million at December 31, 2018. Net income available to common stockholders of $7.8 million in 2019 represented a increase in earnings of $3.7 million, or 88.6%, compared to 2018. The Corporation’s capital to assets ratio increased to 9.4% at December 31, 2019 from 8.9% at December 31, 2018. While continuing to sustain a strong capital position, dividends on common stock increased to $3.1 million in 2019 from $2.7 million in 2018. In addition, stockholders have taken part in the Corporation’s dividend reinvestment plan introduced during 2003 with 38% of registered shareholder accounts active in the plan at December 31, 2019. Dividend reinvestment is achieved through the purchase of common shares on the secondary market. Capital adequacy is intended to enhance the Corporation’s ability to support growth while protecting the interest of stockholders and depositors and to ensure that capital ratios are in compliance with regulatory minimum requirements. Regulatory agencies have developed certain capital ratio requirements that are used to assist them in monitoring the safety and soundness of financial institutions. At December 31, 2019, the Bank was in excess of all regulatory capital requirements. See Note 10 on page F-25 to the Corporation’s consolidated financial statements attached hereto. Liquidity The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, and amortization and prepayments of outstanding loans and maturing securities. During 2019, the Corporation used its sources of funds primarily to purchase additional securities and increase interest-earning deposits. As of December 31, 2019, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $122.5 million, and standby letters of credit totaling $548,000, net of cash collateral maintained by the Bank. The Bank has established policies to monitor and manage liquidity levels to ensure the Bank’s ability to meet demands for customer withdrawals and the repayment of borrowings. At December 31, 2019, time deposits amounted to $217.8 million, or 27.7%, of the Corporation’s total consolidated deposits, including approximately $67.9 million scheduled to mature within the next year. Management believes that the Corporation has adequate resources to fund all of its commitments, that all of its commitments will be funded as required by related maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities. K-27 FORM 10-K Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation and the Bank have alternative sources of funds. These sources include a line of credit for the Corporation with a correspondent bank, the Bank’s line of credit and term borrowing capacity from the FHLB and, to a more limited extent, through the sale of loans. At December 31, 2019, the Bank’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issued to secure certain deposit accounts, was $252.0 million. The Corporation pays a regular quarterly cash dividend. The Corporation paid dividends of $0.29 and $0.28 per common share for each of the four quarters of 2019 and 2018, respectively. On February 21, 2020, the Corporation declared a quarterly dividend of $0.30 per common share payable on March 20, 2020 to shareholders of record on March 2, 2020. The determination of future dividends on the Corporation’s common stock will depend on conditions existing at that time with consideration given to the Corporation’s earnings, capital and liquidity needs, among other factors. Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business. Critical Accounting Policies The Corporation’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third- party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily though the use of internal cash flow modeling techniques. The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements beginning on page F-8. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies: Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods. Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. K-28 FORM 10-K Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At November 30, 2019, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information required by this item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. Item 8. Financial Statements and Supplementary Data Information required by this item is included beginning on page F-1. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). As of December 31, 2019, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. During the fourth quarter of fiscal year 2019, there has been no change made in the Corporation’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its valuation. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s Report on Internal Control Over Financial Reporting Management completed an assessment of the Corporation’s internal control over financial reporting as of December 31, 2019. This assessment was based on criteria for evaluating internal control over financial reporting established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2019. Item 9B. Other Information None. K-29 FORM 10-K PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated herein by reference to the sections captioned “Principal Beneficial Owners of the Corporation’s Common Stock”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Information With Respect to Nominees For Director, Continuing Director and Executive Officers” in the Corporation’s definitive proxy statement for the Corporation’s Annual Meeting of Stockholders to be held on April 22, 2020 (the Proxy Statement). The Corporation maintains a Code of Personal and Business Conduct and Ethics (the Code) that applies to all employees, including the CEO and the CFO. A copy of the Code has previously been filed with the SEC and is posted on our website at www.emclairefinancial.com. Any waiver of the Code with respect to the CEO and the CFO will be publicly disclosed in accordance with applicable regulations. Item 11. Executive Compensation The information required by this item is incorporated herein by reference to the section captioned “Executive Compensation” in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated herein by reference to the section captioned “Principal Beneficial Owners of the Corporation’s Common Stock” in the Proxy Statement. Equity Compensation Plan Information. The following table provides certain information as of December 31, 2019 with respect to shares of common stock that may be issued under our 2014 Stock Incentive Plan, which was approved by shareholders in April 2014. Equity compensation plans approved by security holders Plan Category Equity compensation plans not approved by security holders Number of securities to be issued upon exercise of outstanding options — — Total — $ Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in the first column) (1) 108,266 Weighted-average exercise price of outstanding options — $ — — — 108,266 (1) The 2014 Stock Incentive Plan provides for the grant of options to purchase up to 88,433 shares of common stock and for grants of up to 88,433 shares of restricted common stock of which no options and 68,600 shares of restricted stock have been granted at December 31, 2019. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated herein by reference to the sections captioned “Information With Respect to Nominees For Director, Continuing Directors and Executive Officers” and “Executive Compensation” in the Proxy Statement. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated herein by reference to the section captioned “Relationship With Independent Registered Public Accounting Firm” in the Proxy Statement. PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1)-(2) Financial Statements and Schedules: (i) The financial statements required in response to this item are incorporated by reference from Item 8 of this report. (b) Exhibits are either attached as part of this Report or incorporated herein by reference. K-30 FORM 10-K 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 11.1 14.0 20.0 21.0 Amended and Restated Articles of Incorporation of Emclaire Financial Corp (1) Bylaws of Emclaire Financial Corp (2) Specimen Common Stock Certificate of Emclaire Financial Corp (3) Description of Emclaire Common Stock Amended and Restated Employment Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and William C. Marsh, dated as of November 18, 2015 (4)* Amended and Restated Change in Control Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and Jennifer A. Roxbury, dated as of November 18, 2015* Amended and Restated Change in Control Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and Amanda L. Engles, dated as of November 15, 2017 (5)* Amended and Restated Change in Control Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and Robert A. Vernick dated November 18, 2015* Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and William C. Marsh, dated as of November 18, 2015 (4)* Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Jennifer A. Roxbury, dated as of November 18, 2015 (6)* Supplemental Executive Retirement Plan Agreement between the Farmers National Bank of Emlenton and Amanda L. Engles, dated as of November 15, 2017 (5)* Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Robert A. Vernick dated November 18, 2015* First Amendment dated as of February 8, 2019 to the Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and William C. Marsh, dated as of November 18, 2015 (6)* First Amendment dated as of February 8, 2019 to the Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Jennifer A Roxbury, dated as of November 18, 2015 (6)* First Amendment dated as of February 8, 2019 to the Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Amanda L. Engles, dated as of November 15, 2017 (6)* Group Term Carve-Out Plan between the Farmers National Bank of Emlenton and Officers and Employees (7)* Farmers National Bank Deferred Compensation Plan (8)* Emclaire Financial Corp 2014 Stock Incentive Plan (9)* Statement regarding computation of earnings per share (see Note 1 of the Notes to Consolidated Financial Statements in the Annual Report). Code of Personal and Business Conduct and Ethics. (10) Emclaire Financial Corp Dividend Reinvestment and Stock Purchase Plan. (11) Subsidiaries of the Registrant (see information contained herein under “Item 1. Description of Business - Subsidiary Activity”). Principal Executive Officer Section 302 Certification. Principal Financial Officer Section 302 Certification. Principal Executive Officer Section 906 Certification. Principal Financial Officer Section 906 Certification. 31.1 31.2 32.1 32.2 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definitions Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Compensatory plan or arrangement. Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated May 23, 2018. Incorporated by reference to the Registrant’s Registration Statement on Form SB-2, as amended, (File No. 333-11773) declared effective by the SEC on October 25, 1996. Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997. Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 18, 2015. Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 15, 2017. Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 8, 2019. Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002. Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 15, 2008. Incorporated by reference to the Registrant’s Definitive Proxy Statement dated March 24, 2016. Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001. K-31 FORM 10-K SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 20, 2020 EMCLAIRE FINANCIAL CORP By: /s/ William C. Marsh William C. Marsh Chairman, Chief Executive Officer, President and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ William C. Marsh William C. Marsh Chairman of the Board Chief Executive Officer President Director (Principal Executive Officer) Date: March 20, 2020 By: /s/ Milissa S. Bauer Milissa S. Bauer Director Date: March 20, 2020 By: /s/ James M. Crooks James M. Crooks Director Date: March 20, 2020 By: /s/ Henry H. Deible II Henry H. Deible II Director Date: March 20, 2020 By: /s/ Mark A. Freemer Mark A. Freemer Director Date: March 20, 2020 /s/ John B. Mason John B. Mason Director Date: March 20, 2020 By: /s/ Nicholas D. Varischetti Nicholas D. Varischetti Director Date: March 20, 2020 By: /s/ Amanda L. Engles Amanda L. Engles Treasurer and Chief Financial Officer (Principal Financial Officer) Date: March 20, 2020 By: /s/ David L. Cox David L. Cox Director Date: March 20, 2020 By: /s/ Henry H. Deible Henry H. Deible Director Date: March 20, 2020 By: /s/ Robert W. Freeman Robert W. Freeman Director Date: March 20, 2020 By: /s/ Robert L. Hunter Robert L. Hunter Director Date: March 20, 2020 By: /s/ Deanna K. McCarrier Deanna K. McCarrier Director Date: March 20, 2020 K-32 FORM 10-K Financial Statements Table of Contents Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Net Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements F-2 F-3 F-4 F-5 F-6 F-7 F-8 F-1 FINANCIALS F-2 FINANCIALS December 31, 2019 December 31, 2018 $ $ $ 3,750 $ 11,236 14,986 9,698 120,107 19 695,348 5,790 15,287 2,600 19,041 19,460 1,247 11,713 915,296 $ 148,842 $ 638,282 787,124 2,050 26,500 616 13,148 829,438 — 3,623 7,332 10,955 6,738 97,718 7 708,664 6,351 14,881 2,570 18,911 19,448 1,423 11,209 898,875 148,893 612,653 761,546 12,850 32,500 495 11,476 818,867 — 4,206 4,206 3,513 46,757 (2,114) 38,831 (5,335) 85,858 915,296 $ 3,501 46,401 (2,114) 34,371 (6,357) 80,008 898,875 Consolidated Balance Sheets (Dollar amounts in thousands, except share and per share data) Assets Cash and due from banks Interest earning deposits with banks Total cash and cash equivalents Interest earning time deposits Securities - available-for-sale Securities - equity investments Loans receivable, net of allowance for loan losses of $6,556 and $6,508 Federal bank stocks, at cost Bank-owned life insurance Accrued interest receivable Premises and equipment, net Goodwill Core deposit intangible, net Prepaid expenses and other assets Total Assets Liabilities and Stockholders' Equity Liabilities Deposits: Non-interest bearing Interest bearing Total deposits Short-term borrowed funds Long-term borrowed funds Accrued interest payable Accrued expenses and other liabilities Total Liabilities Commitments and Contingent Liabilities (Note 11) Stockholders' Equity Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 286,888 shares issued and outstanding; Series D, non- cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding Common stock, $1.25 par value, 12,000,000 shares authorized; 2,810,729 and 2,800,729 shares issued; 2,708,712 and 2,698,712 shares outstanding Additional paid-in capital Treasury stock, at cost; 102,017 shares Retained earnings Accumulated other comprehensive loss Total Stockholders' Equity Total Liabilities and Stockholders' Equity See accompanying notes to consolidated financial statements. $ F-3 FINANCIALS Year ended December 31, 2019 2018 $ 32,507 $ 28,028 2,258 395 419 566 36,145 7,087 183 813 8,083 28,062 715 27,347 2,157 78 114 566 1,476 4,391 11,738 3,373 176 928 273 — 5,634 22,122 9,616 1,662 7,954 182 7,772 $ 1,792 560 298 284 30,962 4,724 209 453 5,386 25,576 1,280 24,296 2,031 (9) 19 401 1,766 4,208 10,320 3,165 266 969 533 3,592 4,815 23,660 4,844 633 4,211 91 4,120 2.88 $ 2.86 $ 1.73 1.72 $ $ $ Consolidated Statements of Net Income (Dollar amounts in thousands, except share and per share data) Interest and dividend income Loans receivable, including fees Securities: Taxable Exempt from federal income tax Federal bank stocks Interest earning deposits with banks Total interest and dividend income Interest expense Deposits Short-term borrowed funds Long-term borrowed funds Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Fees and service charges Net gain (loss) on sales of available for sale securities Net gain on sales of loans Earnings on bank-owned life insurance Other Total noninterest income Noninterest expense Compensation and employee benefits Premises and equipment Intangible asset amortization Professional fees Federal deposit insurance Acquisition costs Other Total noninterest expense Income before provision for income taxes Provision for income taxes Net income Preferred stock dividends Net income available to common stockholders Earnings per common share Basic Diluted See accompanying notes to consolidated financial statements. F-4 FINANCIALS Consolidated Statements of Comprehensive Income (Dollar amounts in thousands) Net income Other comprehensive loss Unrealized gains/(losses) on securities: Unrealized holding gain (loss) arising during the period Reclassification adjustment for gains included in net income Other comprehensive loss on securities, before tax adjustment Tax effect Net of tax Defined benefit pension plans: Net loss arising during the period Reclassification adjustment for amortization of prior service benefit and net loss included in net periodic pension cost Other comprehensive loss on defined benefit plan, before tax adjustment Tax effect Net of tax Total other comprehensive income (loss) Comprehensive income See accompanying notes to consolidated financial statements. Year ended December 31, 2019 2018 $ 7,954 $ 4,211 1,861 (78) 1,783 (374) 1,409 (742) 252 (490) 103 (387) (833) 9 (824) 173 (651) (253) 252 (1) — (1) $ 1,022 8,976 $ (652) 3,559 F-5 FINANCIALS Consolidated Statements of Changes in Stockholders’ Equity (Dollar amounts in thousands, except share and per share data) Additional Paid-in Capital - Preferred Common Stock Additional Paid-in Capital - Common Preferred Stock Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Balance at January 1, 2018, as previously presented $ — $ — $ 2,966 $ 31,031 $ (2,114) $ 32,726 $ (5,518) $ 59,091 Cumulative effect of change in accounting principle for marketable equity securities, net of tax Balance at January 1, 2018, as adjusted Net income Other comprehensive loss Issuance of preferred stock (Series C - $ — — $ — — — — $ — — — 2,966 $ — — — 31,031 $ — — — (2,114) $ — — 187 32,913 $ 4,211 — (187) (5,705) $ — (652) 286,888 shares, Series D - 133,705 shares) 421 3,785 — — — — — — — — — (64) — — — — — — — — — 524 — 15,112 11 — (11) 269 — — — — (27) — — — — 421 $ — 3,785 $ — 3,501 $ — 46,401 $ — (2,114) $ (2,662) 34,371 $ — (6,357) $ (2,662 ) 80,008 — 59,091 4,211 (652 ) 4,206 (64 ) (27 ) 15,636 — 269 — — — — — — presented $ 421 $ 3,785 $ 3,501 $ 46,401 $ (2,114) $ 34,371 $ (6,357) $ 80,008 $ — 421 $ — — — 3,785 $ — — — 3,501 $ — — — 46,401 $ — — — (2,114) $ — — (181) 34,190 $ 7,954 — — — — — — (129) — — — — — (53) — — — — 12 — (12) 368 — — — — — (6,357) $ — 1,022 — — — — (181 ) 79,827 7,954 1,022 (129 ) (53 ) — 368 Balance at December 31, 2019 $ — 421 $ — 3,785 $ — 3,513 $ — 46,757 $ — (2,114) $ (3,131) 38,831 $ — (5,335) $ (3,131 ) 85,858 Cash dividends declared on preferred stock (Series C - $0.225 per share) Cash dividends declared on preferred stock (Series D - $0.20 per share) Issuance of common stock (419,173 shares) Issuance of common stock for restricted stock awards (8,400 shares) Stock compensation expense Cash dividends declared on common stock ($1.12 per share) Balance at December 31, 2018 $ Balance at January 1, 2019, as previously Cumulative effect of change in accounting principle for leases and security premiums, net of tax Balance at January 1, 2019, as adjusted Net income Other comprehensive income Cash dividends declared on preferred stock (Series C - $0.45 per share) Cash dividends declared on preferred stock (Series D - $0.40 per share) Issuance of common stock for restricted stock awards (10,000 shares) Stock compensation expense Cash dividends declared on common stock ($1.16 per share) See accompanying notes to consolidated financial statements. F-6 FINANCIALS Consolidated Statements of Cash Flows (Dollar amounts in thousands, except share and per share data) Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment Provision for loan losses Amortization/accretion of premiums, discounts and deferred costs and fees, net Amortization of operating lease right-of-use assets Amortization of intangible assets and mortgage servicing rights Realized (gain) loss on sales of debt securities, net Change in fair value of equity securities, including realized gain Net gain on sales of loans Net (gain) loss on foreclosed real estate Net loss on sale of premises and equipment Loans originated for sale Proceeds from the sale of loans originated for sale Write-down of foreclosed real estate Stock compensation expense Increase in bank-owned life insurance, net Proceeds from bank-owned life insurance claim Decrease in deferred taxes Increase in accrued interest receivable Increase in prepaid expenses and other assets Increase in accrued interest payable Increase (decrease) in accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities Loan originations and principal collections, net Proceeds from sales of loans held for sale previously classified as portfolio loans Available-for-sale securities: Sales Maturities, repayments and calls Purchases Net cash received for acquisition Net change in federal bank stocks Net change in interest earning time deposits Proceeds from the sale of bank premises and equipment Purchases of premises and equipment Proceeds from the sale of foreclosed real estate Net cash used in investing activities Cash flows from financing activities Net increase in deposits Proceeds from long-term debt Repayments on long-term debt Net change in short-term borrowings Dividends paid Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental information: Interest paid Income taxes paid Supplemental noncash disclosure: Transfers from loans to foreclosed real estate Initial recognition of operating lease right-of-use assets Initial recognition of operating lease liabilities Transfers from portfolio loans to loans held for sale Equity securities retired as a result of business combination See accompanying notes to consolidated financial statements. F-7 For the year ended December 31, 2019 2018 $ 7,954 $ 4,211 1,388 715 406 132 249 (78) (12) (114) (49) 279 (6,027) 6,178 37 368 (406) (160) 122 (30) (107) 121 (538) 10,428 10,791 967 36,370 19,007 (76,149) — 561 (2,960) 251 (1,809) 1,109 (11,862) 25,578 — (6,000) (10,800) (3,313) 5,465 4,031 10,955 14,986 $ 7,962 $ 1,410 645 1,642 1,858 1,004 — 1,172 1,280 63 — 321 9 (500) (19) 34 108 (5,329) 5,906 266 269 (340) — 234 (65) (1,187) 21 158 6,612 (24,474) 2,355 11,482 10,615 (19,145) 1,557 (1,499) (2,540) 155 (885) 395 (21,984) 754 15,000 (6,000) 9,150 (2,753) 16,151 779 10,176 10,955 5,304 830 904 — — 2,409 931 $ $ FINANCIALS Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation and Consolidation. The consolidated financial statements include the accounts of Emclaire Financial Corp (the Corporation) and its wholly owned subsidiaries, The Farmers National Bank of Emlenton (the Bank) and Emclaire Settlement Services, LLC (the Title Company). During 2019, the Title Company ceased operations and was dissolved. All significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations. The Corporation provides a variety of financial services to individuals and businesses through its offices in Pennsylvania and West Virginia. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans. Use of Estimates and Classifications. In preparing consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts previously reported may have been reclassified to conform to the current year financial statement presentation. Such reclassifications did not affect net income or stockholders’ equity. Significant Group Concentrations of Credit Risk. Most of the Corporation’s activities are with customers located within the Western Pennsylvania region of the country. Note 2 discusses the type of securities that the Corporation invests in. Note 3 discusses the types of lending the Corporation engages in. The Corporation does not have any significant concentrations to any one industry or customer. Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, cash items, interest-earning deposits with other financial institutions and federal funds sold and due from correspondent banks. Interest-earning deposits are generally short-term in nature and are carried at cost. Federal funds are generally sold or purchased for one day periods. Net cash flows are reported for loan and deposit transactions, short term borrowings and purchases and redemptions of federal bank stocks. Dividend Restrictions. Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to stockholders. Securities Available for Sale. Debt securities are classified as available for sale when they might be sold before maturity. Debt securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income from securities includes amortization of purchase premium or discount. Discounts on securities are accreted using the level yield method through the maturity date. Premiums are amortized using the level yield method through the first call date. In the absence of a call date, the premium is amortized through the maturity date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Management evaluates debt securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before the recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost through earnings. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Equity Securities. Equity securities are carried at fair value. The holding gains or losses are reported in net income. Loans Receivable. The Corporation grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans collateralized by real estate primarily located throughout Western Pennsylvania. The ability of the Corporation’s debtors to honor their contracts is dependent upon real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans or premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, and premiums and discounts are deferred and recognized in interest income as an adjustment of the related loan yield using the interest method. F-8 FINANCIALS Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies (continued) The accrual of interest on all classes of loans is typically discontinued at the time the loan is 90 days past due unless the credit is well secured and in the process of collection. At 120 days past due, all loans are considered nonaccrual. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified as impaired loans. All interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for a return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses. The allowance for loan losses is established for probable incurred credit losses through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are typically credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans in light of historic experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDR) and classified as impaired. Factors considered by management in determining impairment on all loan classes include demonstrated ability to repay, payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of small balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of collateral. For TDRs that subsequently default, the Corporation determines the amount of reserves in accordance with accounting policies for the allowance for loan losses. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the prior 12 quarters. Qualitative factors considered by management include national and local economic and business conditions, changes in the nature and volume of the loan portfolio, quality of loan review systems, and changes in trends, volume and severity of past due, nonaccrual and classified loans, and loss and recovery trends. The Corporation’s portfolio segments are as follows: Residential mortgages: Residential mortgage loans are loans to consumers utilized for the purchase, refinance or construction of a residence. Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments. Home equity loans and lines of credit: Home equity loans and lines of credit are credit facilities extended to homeowners who wish to utilize the equity in their property in order to borrow funds for almost any consumer purpose. Property values may fluctuate due to economic and other factors. F-9 FINANCIALS Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies (continued) Commercial real estate: Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to real estate markets such as geographic location and property type. Commercial business: Commercial credit is extended to business customers for use in normal operations to finance working capital needs, equipment purchases or other projects. The majority of these borrowers are customers doing business within our geographic region. These loans are generally underwritten individually and secured with the assets of the company and the personal guarantee of the business owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Consumer: Consumer loans are loans to an individual for non-business purposes such as automobile purchases or debt consolidation. These loans are originated based primarily on credit scores and debt-to-income ratios which may be adversely affected by economic or individual performance factors. Loans Held for Sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold. Federal Bank Stocks. The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and the Federal Reserve Bank of Cleveland (FRB). As a member of these federal banking systems, the Bank maintains an investment in the capital stock of the respective regional banks. These stocks are held at cost and classified as restricted stock. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships. These stocks are periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Bank-Owned Life Insurance (BOLI). The Bank purchased life insurance policies on certain key officers and employees. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Premises and Equipment. Land is carried at cost. Premises, furniture and equipment, and leasehold improvements are carried at cost less accumulated depreciation or amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets, which are twenty-five years to forty years for buildings and three to ten years for furniture and equipment. Amortization of leasehold improvements is computed using the straight-line method over the shorter of their estimated useful life or the expected term of the leases. Expected terms include lease option periods to the extent that the exercise of such option is reasonably assured. Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, assets are recorded at fair value. Goodwill and Intangible Assets. Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. Customer relationship intangible assets arise from the purchase of a customer list from another company or individual and then are amortized on a straight-line basis over two years. Goodwill is not amortized but is assessed at least annually for impairment. Any such impairment will be recognized in the period identified. The Corporation has selected November 30 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet. Servicing Assets. Servicing assets represent the allocated value of retained servicing rights on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the capitalized amount for a grouping. F-10 FINANCIALS Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies (continued) Other Real Estate Acquired Through Foreclosure (OREO). Real estate properties acquired through foreclosure are initially recorded at fair value less cost to sell when acquired, thereby establishing a new cost basis for the asset. These assets are subsequently accounted for at the lower of carrying amount or fair value less cost to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Revenue and expenses from operations of the properties, gains and losses on sales and additions to the valuation allowance are included in operating results. Real estate acquired through foreclosure is classified in prepaid expenses and other assets and totaled $249,000 and $701,000 at December 31, 2019 and 2018, respectively. Loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $545,000 and $811,000 at December 31, 2019 and 2018, respectively. Treasury Stock. Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the first-in, first-out basis. Income Taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense. Earnings Per Common Share (EPS). Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares issuable under stock options and restricted stock awards. Comprehensive Income. Comprehensive income includes net income and other comprehensive income. Other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available for sale and changes in the funded status of pension which are also recognized as separate components of equity. Operating Segments. Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial services operations are considered by management to be aggregated in one reportable operating segment. Retirement Plans. The Corporation maintains a noncontributory defined benefit plan covering eligible employees and officers. Effective January 1, 2009 the plan was closed to new participants. The Corporation provided the requisite notice to plan participants on March 12, 2013 of the determination to freeze the plan (curtailment). While the freeze was not effective until April 30, 2013, the Corporation determined that participants would not satisfy, within the provisions of the plan, 2013 eligibility requirements based on minimum hours worked for 2013. Therefore, employees ceased to earn benefits as of January 1, 2013. This amendment to the plan did not affect benefits earned by the participant prior to the date of the freeze. The Corporation also maintains a 401(k) plan, which covers substantially all employees, and a supplemental executive retirement plan for key executive officers. Stock Compensation Plans. Compensation expense is recognized for stock options and restricted stock awards issued based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the required service period, generally defined as the vesting period. It is the Corporation’s policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation. Transfers of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Off-Balance Sheet Financial Instruments. In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under line of credit lending arrangements and letters of credit. Such financial instruments are recorded in the financial statements when they are funded. F-11 FINANCIALS Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there currently are such matters that will have a material effect on the financial statements. Newly Issued Not Yet Effective Accounting Standards. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. However, on October 16, 2019, FASB announced a delay for the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. As the Corporation is a smaller reporting company, the delay would be applicable. Management has selected a software vendor and is currently working through the implementation process. The Corporation is reviewing available historical information in order to assess the expected credit losses and determine the impact the adoption of ASU 2016-13 will have on the financial statements. In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment". This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Corporation has goodwill from prior and current year business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Corporation's most recent annual impairment assessment determined that the Corporation's goodwill was not impaired. Although the Corporation cannot anticipate future goodwill impairment assessments, based on the most recent assessment it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact from these amendments to the Corporation's financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis. In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement". ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Disclosures for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurement will be removed. Additional disclosures will be required relating to (a) changes in unrealized gains/losses in OCI for Level 3 fair value measurements for assets held at the end of the reporting period, and (b) the process of calculating weighted average for significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption is permitted. The Corporation does not expect ASU 2018-13 to have a material impact on its financial statements and disclosures. In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans". ASU 2018-14 removes disclosures pertaining to (a) the amounts of AOCI expected to be recognized as pension costs over the next fiscal year, (b) the amount and timing of plan assets expected to be returned to the employer, and (c) the effect of one-percentage-point change in the assumed health care trends on (i) service and interest costs and (ii) post-retirement health care benefit obligation. A disclosure will be added requiring an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments in this update are effective retrospectively for annual periods and interim periods within those annual periods beginning after December 15, 2020. Early adoption is permitted. The Corporation does not expect ASU 2018-14 to have a material impact on its financial statements and disclosures. In December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes". ASU 2019- 12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation is currently evaluating the effect that this ASU will have on its financial statements and disclosures. F-12 FINANCIALS Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies (continued) Adoption of New Accounting Policies. In February 2016, the FASB issued ASU 2016-02 "Leases". This ASU required lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to prior accounting treatment. This ASU changed the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modified the classification criteria and the accounting for sales-type and direct financing leases. ASU 2016-02 was effective for annual periods beginning after December 15, 2018, and interim periods therein. In January 2018, the FASB issued ASU 2018-01, which allowed entities the option to apply the provisions of the new lease guidance at the effective date without adjusting the comparative periods presented. Adoption of this guidance as of January 1, 2019 resulted in the recording of initial lease right-of-use assets of $1.6 million and operating lease liabilities of $1.8 million. The Corporation recorded a cumulative adjustment to retained earnings for prior period of $171,000, net of deferred taxes of $45,000. See Note 5 - Premises, Equipment and Leases for more information on page F-21. In March 2017, the FASB issued ASU 2017-08, "Receivable - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 amended guidance on the amortizaton period of premiums on certain purchased callable debt securities to shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments were effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods therein. The adoption of this guidance on January 1, 2019 resulted in a cumulative adjustment to retained earnings of $10,000, net of deferred taxes of $3,000, for prior periods. At the time of adoption, the remaining securities subject to this guidance have a call date one month prior to maturity, therefore the impact to the statement of income in subsequent periods is immaterial. As of December 31, 2019, the Corporation held only one remaining callable security which has a maturity date of September 15, 2020. In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this Update are to better reflect the economic results of hedging in the financial statements along with simplification of certain hedge accounting requirements. Specifically, the entire change in the fair value of the hedging instrument is required to be presented in the same income statement line as and in the same period that the earnings effect of the hedged item is recognized. Therefore, hedge ineffectiveness will not be reported separately or in a different period. In addition, hedge effectiveness can be determined qualitatively in periods following inception. The amendments permitted an entity to measure the change in fair value of the hedged item on the basis of the benchmark rate component. They also permitted an entity to measure the hedged item in a partial- term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged. For a closed portfolio of prepayable financial assets, an entity is permitted to designate the amount that is not expected to be affected by prepayments or defaults as the hedged item. For public business entities, the new guidance was effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption was permitted. The Corporation currently does not have derivative or hedging instruments so this guidance had no impact on consolidated financial statements. F-13 FINANCIALS Notes to Consolidated Financial Statements 2. Securities Equity Securities. The Corporation held equity securities with fair values of $19,000 and $7,000 as of December 31, 2019 and 2018, respectively. Beginning January 1, 2018, with the adoption of ASU 2016-01, changes in the fair value of these securities are included in other income on the consolidated statements of net income as opposed to accumulated other comprehensive loss on the consolidated balance sheets. The Corporation recognized a gain of $12,000 and a loss of $10,000 on the equity securities held at December 31, 2019 and 2018, respectively. During 2018, the Corporation sold $1.3 million of equity securities with a realized net loss of $43,000. On October 1, 2018 the Corporation acquired Community First Bancorp, Inc. (CFB). At the time of the acquisition, the Corporation held 18,000 shares of CFB's common stock which were retired resulting in a realized gain of $690,000. Debt Securities - Available for Sale. The following table summarizes the Corporation’s securities as of December 31: (Dollar amounts in thousands) December 31, 2019: U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: residential U.S. agency collateralized mortgage obligations: residential State and political subdivisions Corporate debt securities Total securities available-for-sale December 31, 2018: U.S. Treasury U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: residential U.S. agency collateralized mortgage obligations: residential State and political subdivisions Corporate debt securities Total securities available-for-sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ $ $ $ 7,069 $ 40,868 33,001 27,848 11,459 120,245 $ 4,532 $ 17,052 27,666 19,440 22,943 8,006 99,639 $ 14 $ 291 71 217 93 686 $ — $ 30 — 34 13 9 86 $ (6 ) $ (84 ) (235 ) (269 ) (230 ) (824 ) $ 7,077 41,075 32,837 27,796 11,322 120,107 (87 ) $ (299 ) (490 ) (810 ) (224 ) (97 ) (2,007 ) $ 4,445 16,783 27,176 18,664 22,732 7,918 97,718 Securities with carrying values of $22.1 million and $20.6 million as of December 31, 2019 and 2018, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Gains on sales of available for sale debt securities for the years ended December 31 were as follows: Proceeds Gains Losses Tax provision related to gains (losses) $ 2019 2018 36,370 $ 135 (57) 16 11,482 17 (26) (2) F-14 FINANCIALS Notes to Consolidated Financial Statements 2. Securities (continued) The following table summarizes scheduled maturities of the Corporation’s debt securities as of December 31, 2019. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately. (Dollar amounts in thousands) Due in one year or less Due after one year through five years Due after five through ten years Due after ten years Mortgage-backed securities: residential Collateralized mortgage obligations: residential Total securities available-for-sale Available-for-sale Amortized Cost Fair Value $ $ 265 $ 10,072 13,883 22,155 40,868 33,001 120,245 $ 265 10,122 13,848 21,960 41,075 32,837 120,107 Information pertaining to securities with gross unrealized losses at December 31, 2019 and 2018 aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below: (Dollar amounts in thousands) Less than 12 Months Fair Value Unrealized Loss 12 Months or More Fair Value Unrealized Loss Total Fair Value Unrealized Loss December 31, 2019: U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: — — 2,032 (6 ) 2,032 residential 14,578 (76) 2,325 (8 ) 16,903 U.S. agency collateralized mortgage obligations: residential State and political subdivisions Corporate debt securities Total December 31, 2018: U.S. Treasury U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: 12,319 15,636 4,031 $ 46,564 $ (32) 11,621 — (269) (229) 499 (606) $ 16,477 $ (203 ) 23,940 — 15,636 4,530 (1 ) (218 ) $ 63,041 $ $ — $ 2,472 — $ 4,445 $ (30) 10,337 (87 ) $ 4,445 $ (269 ) 12,809 (87) (299) (6) (84) (235) (269) (230) (824) residential 19,483 (297) 7,693 (193 ) 27,176 (490) U.S. agency collateralized mortgage obligations: residential State and political subdivisions Corporate debt securities Total 1,443 7,061 962 $ 31,421 $ (5) 15,388 (67) 10,083 2,448 (38) (437) $ 50,394 $ (805 ) 16,831 (157 ) 17,144 3,410 (1,570 ) $ 81,815 $ (59 ) (810) (224) (97) (2,007) Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other- than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. F-15 FINANCIALS Notes to Consolidated Financial Statements 2. Securities (continued) There were 78 debt securities in an unrealized loss position as of December 31, 2019, of which 29 were in an unrealized loss position for more than 12 months. Of these 78 securities, 30 were collateralized mortgage obligations (issued by U.S. government sponsored entities), 23 were state and political subdivisions securities, 13 were mortgage-backed securities, 10 were corporate securities and 2 were U.S. government sponsored entities and agencies securities. The unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that is likely to result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of its amortized cost basis, the Corporation does not consider the debt securities with unrealized losses as of December 31, 2019 to be other-than-temporarily impaired. 3. Loans Receivable and Related Allowance for Loan Losses The following table summarizes the Corporation’s loans receivable as of December 31: (Dollar amounts in thousands) Mortgage loans on real estate: Residential first mortgages Home equity loans and lines of credit Commercial real estate Total real estate loans Other loans: Commercial business Consumer Total other loans Total loans, gross Less allowance for loan losses Total loans, net December 31, 2019 December 31, 2018 $ $ 293,170 $ 97,541 229,951 620,662 66,603 14,639 81,242 701,904 6,556 695,348 $ 295,405 103,752 238,734 637,891 66,009 11,272 77,281 715,172 6,508 708,664 Included in total loans above are net deferred costs of $2.6 million and $2.2 million at December 31, 2019 and 2018, respectively. An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans. Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Following is an analysis of the changes in the ALL for the years ended December 31: (Dollar amounts in thousands) Balance at the beginning of the year Provision for loan losses Charge-offs Recoveries Balance at the end of the year 2019 2018 $ $ 6,508 $ 715 (913) 246 6,556 $ 6,127 1,280 (989) 90 6,508 F-16 FINANCIALS Notes to Consolidated Financial Statements 3. Loans Receivable and Related Allowance for Loan Losses (continued) The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at December 31, 2019 and 2018: (Dollar amounts in thousands) December 31, 2019: Beginning Balance Charge-offs Recoveries Provision Ending Balance Ending ALL balance attributable to loans: Individually evaluated for impairment Acquired loans collectively evaluated for impairment Originated loans collectively evaluated for impairment Total Total loans: Individually evaluated for impairment Acquired loans collectively evaluated for impairment Originated loans collectively evaluated for impairment Total At December 31, 2018: Beginning Balance Charge-offs Recoveries Provision Ending Balance Ending ALL balance attributable to loans: Individually evaluated for impairment Acquired loans collectively evaluated for impairment Originated loans collectively evaluated for impairment Total Total loans: Individually evaluated for impairment Acquired loans collectively evaluated for impairment Originated loans collectively evaluated for impairment Total Home Equity Residential & Lines Mortgages of Credit Real Estate Business Commercial Commercial Consumer Total $ $ $ $ $ $ $ $ $ $ $ $ 2,198 $ (227) 40 298 2,309 $ 5 $ — 2,304 2,309 $ 648 $ (61 ) 6 33 626 $ — $ — 626 626 $ 3,106 $ (242) 134 (100) 2,898 $ — $ — 2,898 2,898 $ 500 $ (250) — 386 636 $ — $ — 636 636 $ 56 $ (133) 66 98 87 $ 6,508 (913) 246 715 6,556 — $ — 87 87 $ 5 — 6,551 6,556 358 $ 60,523 232,289 293,170 $ 4 $ 10,901 86,636 97,541 $ 81 $ 41,993 187,877 229,951 $ 40 $ 7,930 58,633 66,603 $ — $ 483 1,982 123,329 12,657 578,092 14,639 $ 701,904 2,090 $ (71) 3 176 2,198 $ 646 $ (155 ) 14 143 648 $ 12 $ — 2,186 2,198 $ — $ — 648 648 $ 2,753 $ (484) 48 789 3,106 $ — $ — 3,106 3,106 $ 585 $ — 1 (86) 500 $ — $ — 500 500 $ 53 $ (279) 24 258 56 $ 6,127 (989) 90 1,280 6,508 — $ — 56 56 $ 12 — 6,496 6,508 6 $ 389 $ 13,750 72,654 222,362 89,996 295,405 $ 103,752 $ 34 $ 56,690 182,010 238,734 $ 39 $ 12,974 52,996 66,009 $ — $ 468 3,306 159,374 7,966 555,330 11,272 $ 715,172 The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. At December 31, 2019 and 2018, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc (2018). F-17 FINANCIALS Notes to Consolidated Financial Statements 3. Loans Receivable and Related Allowance for Loan Losses (continued) The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31: (Dollar amounts in thousands) Impaired Loans with Specific Allowance As of December 31, 2019 Unpaid Principal Balance Recorded Investment Related Allowance For the year ended December 31, 2019 Interest Income Recognized in Period Cash Basis Interest Recognized in Period Average Recorded Investment Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total $ $ 72 $ 4 — — — 76 $ 72 $ 4 — — — 76 $ 5 $ — — — — 5 $ 72 $ 5 — — — 77 $ 3 $ — — — — 3 $ 3 — — — — 3 Impaired Loans with No Specific Allowance As of December 31, 2019 Unpaid Principal Balance Recorded Investment For the year ended December 31, 2019 Interest Income Recognized in Period Cash Basis Interest Recognized in Period Average Recorded Investment Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total (Dollar amounts in thousands) $ $ 398 $ — 81 40 — 519 $ 286 $ — 81 40 — 407 $ 301 $ — 1,019 79 — 1,399 $ 4 $ — 88 7 — 99 $ 4 — 35 2 — 41 Impaired Loans with Specific Allowance As of December 31, 2018 Unpaid Principal Balance Recorded Investment Related Allowance For the year ended December 31, 2018 Interest Income Recognized in Period Cash Basis Interest Recognized in Period Average Recorded Investment Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total $ $ 74 $ 6 — — — 80 $ 74 $ 6 — — — 80 $ 12 $ — — — — 12 $ 74 $ 7 — — — 81 $ 2 $ — — — — 2 $ 2 — — — — 2 Impaired Loans with No Specific Allowance As of December 31, 2018 Unpaid Principal Balance Recorded Investment For the year ended December 31, 2018 Interest Income Recognized in Period Cash Basis Interest Recognized in Period Average Recorded Investment Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total $ $ 427 $ — 34 39 — 500 $ 315 $ — 34 39 — 388 $ 334 $ — 768 248 — 1,350 $ 5 $ — 156 74 — 235 $ 5 — 73 74 — 152 F-18 FINANCIALS Notes to Consolidated Financial Statements 3. Loans Receivable and Related Allowance for Loan Losses (continued) Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material. Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation has no legal obligation to extend additional credit to borrowers with loans classified as TDRs. At December 31, 2019 and 2018, the Corporation had $409,000 and $394,000, respectively, of loans classified as TDRs, which are included in impaired loans above. At December 31, 2019 and 2018, the Corporation had $5,000 and $12,000, respectively, of the allowance for loan losses allocated to these specific loans. During the year ended December 31, 2019, the Corporation modified one commercial mortgage loans with a recorded investment of $67,000. In order to cure the delinquency on the loan, all interest and fees receivable were capitalized to the loan principal which was re-amortized through the original maturity date at the original interest rate on the loan. The modification did not have a material impact on the Corporation’s income statement during the period. At December 31, 2019, the Corporation did not have any allowance for loan losses allocated to this specific loan. During the year ended December 31, 2018, the Corporation did not modify any loans as TDRs. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the year ended December 31, 2019 and 2018, there were no loans classified as TDRs which defaulted within twelve months of their modification. Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status reviewed. Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit. These homogeneous loans are not rated unless identified as impaired. Management uses the following definitions for risk ratings: Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions. Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures. Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower. Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable. F-19 FINANCIALS Notes to Consolidated Financial Statements 3. Loans Receivable and Related Allowance for Loan Losses (continued) The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of December 31, 2019 and 2018: (Dollar amounts in thousands) December 31, 2019: Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total loans December 31, 2018: Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total loans Not Rated Pass Special Mention Substandard Doubtful Total $ 291,843 $ 97,087 — — 14,557 — $ — 216,744 64,636 — $ 403,487 $ 281,380 $ $ 293,919 $ 102,869 — — 11,157 — $ — 222,335 62,022 — $ 407,945 $ 284,357 $ — $ — 5,370 204 — 5,574 $ — $ — 5,942 542 — 6,484 $ 1,327 $ 454 7,837 1,763 82 11,463 $ 1,486 $ 883 10,457 3,445 115 16,386 $ — $ 293,170 97,541 — 229,951 — 66,603 — — 14,639 — $ 701,904 — $ 295,405 103,752 — 238,734 — 66,009 — — 11,272 — $ 715,172 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a required payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of December 31, 2019 and 2018: (Dollar amounts in thousands) December 31, 2019: Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total loans December 31, 2018: Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total loans Accruing Loans Not Past Due Performing Accruing 30-59 Days Past Due Nonperforming Accruing 60-89 Days Past Due Accruing 90+ Days Past Due Nonaccrual Total $ 288,462 $ 95,923 226,360 66,091 14,458 $ 691,294 $ $ 289,732 $ 101,920 232,865 65,538 10,961 $ 701,016 $ 2,405 $ 626 2,141 225 84 5,481 $ 3,586 $ 707 5,013 50 160 9,516 $ 1,039 $ 553 543 72 15 2,222 $ 747 $ 351 231 247 36 1,612 $ 309 $ 11 — — — 320 $ 485 $ 287 19 — — 791 $ 955 $ 293,170 97,541 428 229,951 907 66,603 215 14,639 82 2,587 $ 701,904 855 $ 295,405 103,752 487 238,734 606 66,009 174 11,272 115 2,237 $ 715,172 F-20 FINANCIALS Notes to Consolidated Financial Statements 3. Loans Receivable and Related Allowance for Loan Losses (continued) The following table presents the Corporation’s nonaccrual loans by aging category as of December 31, 2019 and 2018: (Dollar amounts in thousands) December 31, 2019: Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total loans December 31, 2018: Residential first mortgages Home equity and lines of credit Commercial real estate Commercial business Consumer Total loans 4. Federal Bank Stocks Not Past Due 30-59 Days Past Due 60-89 Days Past Due 90 Days + Past Due Total $ $ $ $ 245 $ 4 28 — — 277 $ 335 $ 6 111 — — 452 $ — $ — 309 — — 309 $ — $ — 265 — — 265 $ 72 $ — 31 175 — 278 $ 74 $ — — 39 — 113 $ 638 $ 424 539 40 82 1,723 $ 446 $ 481 230 135 115 1,407 $ 955 428 907 215 82 2,587 855 487 606 174 115 2,237 The Bank is a member of the FHLB and the FRB. As a member of these federal banking systems, the Bank maintains an investment in the capital stock of the respective regional banks, which are carried at cost. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships. The Bank’s investment in FHLB and FRB stocks was $4.0 million and $1.8 million, respectively, at December 31, 2019, and $5.0 million and $1.3 million, respectively, at December 31, 2018. 5. Premises, Equipment and Leases Premises and Equipment Premises and equipment at December 31 are summarized by major classification as follows: (Dollar amounts in thousands) Land Buildings and improvements Leasehold improvements Furniture, fixtures and equipment Software Construction in progress Total Less: accumulated depreciation and amortization Net premises and equipment 2019 2018 $ $ 5,269 $ 15,127 1,522 10,539 3,397 321 36,175 17,134 19,041 $ 5,129 15,008 1,519 9,157 3,347 576 34,736 15,825 18,911 Depreciation and amortization expense for the years ended December 31, 2019 and 2018 were $1.4 million and $1.2 million, respectively. F-21 FINANCIALS Notes to Consolidated Financial Statements 5. Premises, Equipment and Leases (continued) Leases Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2019, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before expiration. The weighted average remaining life of the lease term for these leases was 12.99 years as of December 31, 2019. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease terms as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was 3.49% as of December 31, 2019. The total operating lease costs were $194,000 for the year ended December 31, 2019. The right-of-use asset, included in other assets, and lease liability, included in other liabilities, were $1.5 million and $1.7 million, respectively, as of December 31, 2019. Rental expense for operating leases classified under ASC 840 was $208,000 for the year ended December 31, 2018. Total estimated rental commitments for the operating leases were as follows as of December 31, 2019: (Dollar amounts in thousands) Year ending December 31: 2020 2021 2022 2023 2024 Thereafter Total minimum lease payments Discount effect of cash flows Present value of lease liabilities 6. Goodwill and Intangible Assets $ $ 212 217 222 222 227 1,063 2,163 (456) 1,707 The following table summarizes the Corporation’s acquired goodwill and intangible assets as of December 31: (Dollar amounts in thousands) December 31, 2019 December 31, 2018 Goodwill Core deposit intangibles Total $ $ 19,460 $ 5,634 25,094 $ — $ 4,387 4,387 $ 19,448 $ 5,634 25,082 $ Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization — 4,211 4,211 Goodwill resulted from five acquisitions. During 2018, the Corporation recorded $9.2 million of goodwill related to the acquisition of CFB (see Note 20). Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test. No goodwill impairment charges were recorded in 2019 or 2018. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet. The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. The Corporation recorded intangible amortization expense totaling $176,000 and $266,000 in 2019 and 2018, respectively. F-22 FINANCIALS Notes to Consolidated Financial Statements 6. Goodwill and Intangible Assets (continued) The estimated amortization expense of the core deposit intangible for the years ending December 31 is as follows: (Dollar amounts in thousands) 2020 2021 2022 2023 2024 Thereafter Total Amortization Expense 164 154 149 149 149 482 1,247 $ $ 7. Related Party Balances and Transactions In the ordinary course of business, the Bank maintains loan and deposit relationships with employees, principal officers and directors and their affiliates. The Bank has granted loans to principal officers and directors and their affiliates amounting to $4.7 million and $5.3 million at December 31, 2019 and 2018, respectively. During 2019, there were no principal additions while total principal reductions associated with these loans were $562,000. Deposits from principal officers and directors and their affiliates held by the Bank at December 31, 2019 and 2018 totaled $3.1 million and $3.2 million, respectively. In addition, directors and their affiliates may provide certain professional and other services to the Corporation and the Bank in the ordinary course of business. The Corporation did not pay directors or their affiliates for any such services in 2019. During 2018, one director was paid an immaterial amount for consulting services. 8. Deposits The following table summarizes the Corporation’s deposits as of December 31: (Dollar amounts in thousands) 2019 2018 Type of accounts Non-interest bearing deposits Interest bearing demand deposits Time deposits Total Weighted average rate Amount Percent Weighted average rate Amount Percent — 18.9 % $ 148,842 53.4 % 0.76 % 420,515 27.7 % 2.17 % 217,767 1.01 % $ 787,124 100.0 % — 19.5 % $ 148,893 51.4 % 0.52 % 391,054 29.1 % 1.84 % 221,599 0.80 % $ 761,546 100.0 % Scheduled maturities of time deposits for the next five years and thereafter are as follows: (Dollar amounts in thousands) 2020 2021 2022 2023 2024 Thereafter Total Percent 30.3 % 25.2 % 7.9 % 17.9 % 15.8 % 2.9 % 100.0 % Amount $ 66,039 54,923 17,110 39,096 34,382 6,217 217,767 $ F-23 FINANCIALS Notes to Consolidated Financial Statements 8. Deposits (continued) The Corporation had a total of $67.9 million and $61.2 million in time deposits of $250,000 or more at December 31, 2019 and 2018, respectively. Scheduled maturities of time deposits of $250,000 or more at December 31, 2019 are as follows: (Dollar amounts in thousands) Three months or less Over three months to six months Over six months to twelve months Over twelve months Total 9. Borrowed Funds Amount 6,036 9,844 6,749 45,292 67,921 $ $ The following table summarizes the Corporation’s borrowed funds as of and for the year ended December 31: (Dollar amounts in thousands) Short-term borrowed funds Long-term borrowed funds Total 2019 2018 Average Average Average Average Balance Balance Rate $ 2,050 $ 4,663 3.93% $ 12,850 $ 5,660 3.70% 26,500 31,845 2.55% 32,500 18,590 2.43% $ 28,550 $ 36,508 Balance Balance Rate $ 45,350 $ 24,250 Short-term borrowed funds at December 31, 2019 consisted of $2.1 million outstanding on a $7.0 million unsecured line of credit with a correspondent bank with a rate of 5.00%, compared to $10.8 million in overnight advances with a rate of 2.62% and $2.1 million outstanding on a $7.0 million unsecured line of credit with a correspondent bank with a rate of 5.75% at December 31, 2018. Long-term borrowed funds at December 31, 2019 consisted of five $5.0 million FHLB term advances totaling $25.0 million, maturing between 2020 and 2023 and having fixed interest rates between 1.97% and 2.85%. This compares to six $5.0 million FHLB advances totaling $30.0 million at December 31, 2018. All borrowings from the FHLB are secured by a blanket lien of qualified collateral. Qualified collateral at December 31, 2019 totaled $407.4 million. In addition, the Corporation has a five year unsecured term advance with a correspondent bank. The term advance has a fixed rate of 4.75% and principal payments of $250,000 are due on the first day of each quarter until maturity. At December 31, 2019 and 2018, the outstanding balance on this term advance was $1.5 million and $2.5 million, respectively. Scheduled maturities of borrowed funds for the next five years are as follows: (Dollar amounts in thousands) 2020 2021 2022 2023 2024 Thereafter Total Amount $ 8,050 10,500 — 10,000 — — 28,550 $ The Bank maintains a credit arrangement with the FHLB as a source of additional liquidity. The total maximum borrowing capacity with the FHLB, excluding loans outstanding of $25.0 million and irrevocable standby letters of credit issued to secure certain deposit accounts of $130.4 million at December 31, 2019 was $252.0 million. In addition, the Corporation has $4.9 million of funds available on a line of credit through a correspondent bank. F-24 FINANCIALS Notes to Consolidated Financial Statements 10. Regulatory Matters Restrictions on Dividends, Loans and Advances The Bank is subject to a regulatory dividend restriction that generally limits the amount of dividends that can be paid by the Bank to the Corporation. Prior regulatory approval is required if the total of all dividends declared in any calendar year exceeds net profits (as defined in the regulations) for the year combined with net retained earnings (as defined) for the two preceding calendar years. In addition, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. As of December 31, 2019, $6.7 million of undistributed earnings of the Bank was available for distribution of dividends without prior regulatory approval. Loans or advances from the Bank to the Corporation are limited to 10% of the Bank’s capital stock and surplus on a secured basis. Funds available for loans or advances by the Bank to the Corporation amounted to approximately $6.0 million. As of December 31, 2019, the Corporation had no outstanding loans or advances from the Bank. During 2018, the Corporation paid off a $2.2 million commercial line of credit available at the Bank for the primary purpose of purchasing qualified equity investments. Minimum Regulatory Capital Requirements Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. In 2018, the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $1 billion to $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019. The capital conservation buffer for 2019 and subsequent periods is 2.50% and was 1.875% for 2018. Amounts recorded to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of December 31, 2019, the Bank meets all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2019 and 2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. F-25 FINANCIALS Notes to Consolidated Financial Statements 10. Regulatory Matters (continued) The following table sets forth certain information concerning the Bank’s regulatory capital as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer. (Dollar amounts in thousands) Total capital to risk-weighted assets: Actual For capital adequacy purposes To be well capitalized Tier 1 capital to risk-weighted assets: Actual For capital adequacy purposes To be well capitalized Common Equity Tier 1 capital to risk-weighted assets: Actual For capital adequacy purposes To be well capitalized Tier 1 capital to average assets: Actual For capital adequacy purposes To be well capitalized 11. Commitments and Legal Contingencies December 31, 2019 Amount Ratio December 31, 2018 Amount Ratio $ 80,418 13.74 % $ 76,344 12.93 % 47,252 8.00 % 46,836 8.00 % 59,065 10.00 % 58,544 10.00 % $ 73,862 12.62 % $ 69,836 11.82 % 35,439 6.00 % 35,127 6.00 % 47,252 8.00 % 46,836 8.00 % $ 73,862 12.62 % $ 69,836 11.82 % 26,579 4.50 % 26,345 4.50 % 38,393 6.50 % 38,054 6.50 % $ 73,862 8.17 % $ 69,836 7.95 % 35,126 4.00 % 36,146 4.00 % 43,908 5.00 % 45,182 5.00 % In the ordinary course of business, the Corporation has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Corporation is involved in certain claims and legal actions arising in the ordinary course of business. The outcome of these claims and actions are not presently determinable; however, in the opinion of the Corporation’s management, after consulting legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial statements. 12. Income Taxes The Corporation and the Bank file a consolidated federal income tax return. The provision for income taxes for the years ended December 31 is comprised of the following: (Dollar amounts in thousands) Current Deferred Total 2019 2018 $ $ 1,437 $ 225 1,662 $ 298 335 633 A reconciliation between the provision for income taxes and the amount computed by multiplying operating results before income taxes by the statutory federal income tax rate of 21% for the years ended December 31, 2019 and 2018 is as follows: (Dollar amounts in thousands) Provision at statutory tax rate Increase (decrease) resulting from: Tax free interest, net of disallowance Earnings on bank-owned life insurance Tax free gain on retirement of CMFP shares Other, net Provision 2019 % Pre-tax Income 2018 % Pre-tax Income Amount 21.0 % $ 1,017 21.0% Amount $ 2,019 (210) (85) — (62) 1,662 (2.2 %) (0.9 %) — (0.6 %) 17.3 % $ (234) (71) (145) 66 633 (4.8%) (1.5%) (3.0%) 1.4% 13.1% $ F-26 FINANCIALS Notes to Consolidated Financial Statements 12. Income Taxes (continued) The tax effects of temporary differences between the financial reporting basis and income tax basis of assets and liabilities that are included in the net deferred tax asset as of December 31 relate to the following: (Dollar amounts in thousands) Deferred tax assets: Allowance for loan losses Funded status of pension plan Lease liability Net unrealized loss on securities Deferred compensation Accrued incentive compensation Nonaccrual loan interest income Securities impairment Stock compensation Other Gross deferred tax assets Deferred tax liabilities: Accrued pension liability Depreciation Deferred loan fees and costs Lease right-of-use asset Intangible assets Business combination adjustments Other Gross deferred tax liabilities Net deferred tax asset 2019 2018 $ 1,365 $ 1,389 358 26 417 91 40 70 91 9 3,856 1,029 656 555 317 260 137 51 3,005 $ 851 $ 1,351 1,287 — 401 391 148 75 70 69 17 3,809 1,044 619 461 — 215 68 53 2,460 1,349 In accordance with relevant accounting guidance, the Corporation determined that it was not required to establish a valuation allowance for deferred tax assets since it is more likely than not that the deferred tax asset will be realized through future taxable income, future reversals of existing taxable temporary differences and tax strategies. The Corporation’s net deferred tax asset or liability is recorded in the consolidated financial statements as a component of other assets or other liabilities. At December 31, 2019 and December 31, 2018, the Corporation had no unrecognized tax benefits. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Corporation recognizes interest and penalties on unrecognized tax benefits in income taxes expense in its Consolidated Statements of Income. The Corporation and the Bank are subject to U.S. federal income tax, a capital-based franchise tax in the Commonwealth of Pennsylvania as well as a corporate income tax in West Virginia based on earnings derived from business activity in the state. The Corporation and the Bank are no longer subject to examination by taxing authorities for years before 2016. F-27 FINANCIALS Notes to Consolidated Financial Statements 13. Employee Benefit Plans Defined Benefit Plan The Corporation provides pension benefits for eligible employees through a defined benefit pension plan. Substantially all employees participate in the retirement plan on a non-contributing basis, and are fully vested after three years of service. Effective January 1, 2009, the plan was closed to new participants. The Corporation provided the requisite notice to plan participants on March 12, 2013 of the determination to freeze the plan (curtailment). While the freeze was not effective until April 30, 2013, management determined that participants would not satisfy, within the provisions of the plan, 2013 eligibility requirements based on minimum hours worked for 2013. Therefore, employees ceased to earn benefits as of January 1, 2013. This amendment to the plan did not affect benefits earned by the participant prior to the date of the freeze. The Corporation measures the funded status of the plan as of December 31. Information pertaining to changes in obligations and funded status of the defined benefit pension plan for the years ended December 31 is as follows: (Dollar amounts in thousands) Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Benefits paid Fair value of plan assets at end of year Change in benefit obligation: Benefit obligation at beginning of year Interest cost Actuarial (gain) loss Effect of change in assumptions Benefits paid Benefit obligation at end of year Funded status (plan assets less benefit obligation) Amounts recognized in accumulated other comprehensive loss consists of: Accumulated net actuarial loss Accumulated prior service benefit Amount recognized, end of year 2019 2018 9,482 $ 1,534 — (417) 10,599 10,628 443 (22) 1,672 (417) 12,304 (1,705) $ 6,616 $ — 6,616 $ 10,159 (479) 500 (698) 9,482 11,801 423 85 (983) (698) 10,628 (1,146) 6,126 — 6,126 $ $ $ $ F-28 FINANCIALS Notes to Consolidated Financial Statements 13. Employee Benefit Plans (continued) The following table presents the Corporation’s pension plan assets measured and recorded at estimated fair value on a recurring basis and their level within the estimated fair value hierarchy as described in Note 15: (Dollar amounts in thousands) Description December 31, 2019: Money markets Mutual funds - debt Mutual funds - equity Emclaire stock December 31, 2018: Money markets Mutual funds - debt Mutual funds - equity Emclaire stock (Level 1) Quoted Prices in Active Markets for Identical Assets (Level 2) Significant Other Observable Inputs (Level 3) Significant Unobservable Inputs Total $ $ $ $ 385 $ 4,322 4,981 911 10,599 $ 77 $ 4,183 4,373 849 9,482 $ 385 $ 4,322 4,981 911 10,599 $ 77 $ 4,183 4,373 849 9,482 $ — $ — — — — $ — $ — — — — $ — — — — — — — — — — There were no transfers between Level 1 and Level 2 during 2019. The accumulated benefit obligation for the defined benefit pension plan was $12.3 million and $10.6 million at December 31, 2019 and 2018, respectively. The components of the periodic pension costs and other amounts recognized in other comprehensive income for the years ended December 31 are as follows: (Dollar amounts in thousands) Interest cost Expected return on plan assets Amortization of prior service beneft and net loss Net periodic pension cost Amortization of prior service benefit and net loss Net loss Total recognized in other comprehensive loss Total recognized in net periodic benefit and other comprehensive loss 2019 2018 $ $ 443 $ (626) 252 69 (252) 742 490 559 $ 423 (672) 251 2 (251) 253 2 4 The estimated net loss and prior service benefit for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $269,000 as of December 31, 2019. Weighted-average actuarial assumptions for the years ended December 31 include the following: Discount rate for net periodic benefit cost Discount rate for benefit obligations Expected rate of return on plan assets 2019 2018 4.26 % 3.28 % 6.75 % 3.62 % 4.26 % 6.75 % F-29 FINANCIALS Notes to Consolidated Financial Statements 13. Employee Benefit Plans (continued) The Corporation’s pension plan asset allocation at December 31, 2019 and 2018, target allocation for 2020, and expected long- term rate of return by asset category are as follows: Asset Category Equity securities Debt securities Money markets Investment Strategy Target Allocation 2020 55% 37% 8% 100% Percentage of Plan Assets at Year End 2019 56% 41% 3% 100% 2018 55% 44% 1% 100% Weighted-Average Expected Long-Term Rate of Return 2019 5.02% 1.70% 0.03% 6.75% The intent of the pension plan is to provide a range of investment options for building a diversified asset allocation strategy that will provide the highest likelihood of meeting the aggregate actuarial projections. In selecting the options and asset allocation strategy, the Corporation has determined that the benefits of reduced portfolio risk are best achieved through diversification. The following asset classes or investment categories are utilized to meet the Pension plan’s objectives: Small company stock, International stock, Mid-cap stock, Large company stock, Diversified bond, Money Market/Stable Value and Cash. The pension plan does not prohibit any certain investments. The Corporation does currently not expect to make a contribution to its pension plan in 2020. Estimated future benefit payments are as follows: (Dollar amounts in thousands) For year ended December 31, 2020 2021 2022 2023 2024 2025-2029 Defined Contribution Plan $ Pension Benefits 450 451 491 492 500 2,715 The Corporation maintains a defined contribution 401(k) Plan. Employees are eligible to participate by providing tax-deferred contributions up to 20% of qualified compensation. Employee contributions are vested at all times. The Corporation provides a matching contribution of up to 4% of the participant’s salary. For the years ended 2019 and 2018, matching contributions were $266,000 and $235,000, respectively. The Corporation may also make, at the sole discretion of its Board of Directors, a profit sharing contribution. For the years ended 2019 and 2018, the Corporation made profit sharing contributions of $140,000 and $124,000, respectively. Supplemental Executive Retirement Plan The Corporation maintains a Supplemental Executive Retirement Plan (SERP) to provide certain additional retirement benefits to participating officers. The SERP is subject to certain vesting provisions and provides that the officers shall receive a supplemental retirement benefit if the officer’s employment is terminated after reaching the normal retirement age of 65, with benefits also payable upon death, disability, a change of control or a termination of employment prior to normal retirement age. As of December 31, 2019 and 2018, the Corporation’s SERP liability was $1.9 million and $1.8 million, respectively. For the years ended December 31, 2019 and 2018, the Corporation recognized expense of $224,000 and $156,000, respectively, related to the SERP. F-30 FINANCIALS Notes to Consolidated Financial Statements 14. Stock Compensation Plans In April 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 2014 Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock, of which 19,833 shares of restricted stock and 88,433 stock options remain available for issuance under the plan. Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plans. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of ten years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Compensation cost related to share-based payment transactions must be recognized in the financial statements with measurement based upon the fair value of the equity instruments issued. During 2019 and 2018, the Corporation granted restricted stock awards of 17,950 and 14,750 shares, respectively, with a face value of $558,000 and $456,000, respectively, based on the weighted-average grant date stock prices of $31.10 and $30.90, respectively. These restricted stock awards are 100% vested on the third anniversary of the date of grant, except in the event of death, disability or retirement. Nonvested restricted stock is not included in common shares outstanding on the consolidated balance sheets. It is the Corporation's policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation. There were no stock options granted during 2019 or 2018. For the year ended December 31, 2019 and 2018 the Corporation recognized $368,000 and $269,000, respectively, in stock compensation expense. A summary of the status of the Corporation’s nonvested restricted stock awards as of December 31, 2019, and changes during the period then ended is presented below: Nonvested at January 1, 2019 Granted Vested Forfeited Nonvested as of December 31, 2019 Weighted- Average Grant- date Fair Value 29.94 31.10 26.74 30.90 31.11 Shares 37,250 $ 17,950 (10,000) (750) 44,450 $ As of December 31, 2019, there was $951,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plans. That expense is expected to be recognized over the next three years. 15. Fair Values of Financial Instruments The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability's level is based on the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value. Level 1: Level 2: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to access at the measurement date. Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. F-31 FINANCIALS Notes to Consolidated Financial Statements 15. Fair Values of Financial Instruments (continued) Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year-end. Assets measured at fair value on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets: Debt securities available for sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt securities held by the Corporation. The Level 3 corporate debt securities valuations were supported by inputs such as the security issuer’s publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors. For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows: (Dollar amounts in thousands) Description December 31, 2019: Securities available-for-sale U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: residential U.S. agency collateralized mortgage obligations: residential State and political subdivision Corporate debt securities Total available-for-sale securities Equity securities December 31, 2018: Securities available-for-sale U.S. Treasury U.S. government sponsored entities and agencies U.S. agency mortgage-backed securities: residential U.S. agency collateralized mortgage obligations: residential State and political subdivisions Corporate debt securities Total available-for-sale securities Equity securities (Level 1) Quoted Prices in Active Markets for Identical Assets (Level 2) (Level 3) Significant Other Observable Inputs Significant Unobservable Inputs Total 7,077 $ 41,075 32,837 27,796 11,322 120,107 $ — $ — — — — — $ 7,077 $ 41,075 32,837 27,796 7,072 115,857 $ — — — — 4,250 4,250 19 $ 19 $ — $ — 4,445 $ 16,783 27,176 18,664 22,732 7,918 97,718 $ 4,445 $ — — — — — 4,445 $ — $ 16,783 27,176 18,664 22,732 4,418 89,773 $ — — — — — 3,500 3,500 7 $ 7 $ — $ — $ $ $ $ $ $ F-32 FINANCIALS Notes to Consolidated Financial Statements 15. Fair Values of Financial Instruments (continued) The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During 2019, certain corporate debt securities were purchased and placed into Level 3 because of a lack of observable market data. During 2018, the Corporation reclassified a restricted bank stock from the equity security portfolio to other assets and certain corporate securities from Level 3 to Level 2. Also during 2018, $25,000 in Level 3 equity securities were sold from the portfolio. The following table presents changes in Level 3 assets measured on a recurring basis for the years ended December 31, 2019 and 2018: (Dollar amounts in thousands) Balance at the beginning of the period Total gains or losses (realized/unrealized): Included in earnings Purchased into Level 3 Sold out of Level 3 Transfers in and/or out of Level 3 Balance at the end of the period 2019 2018 $ 3,500 $ 8,132 — 750 — — 4,250 $ 1 — (25) (4,608) 3,500 $ Assets measured at fair value on a non-recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets: Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of December 31, 2019 and 2018, the Corporation did not have any impaired loans carried at fair value measured using the fair value of collateral. There was no additional provision for loan losses recorded for impaired loans during 2019 or 2018. Other real estate owned (OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of December 31, 2019, OREO measured at fair value less costs to sell had a net carrying amount of $88,000, which consisted of the outstanding balance of $91,000 less write-downs of $3,000. As of December 31, 2018, OREO measured at fair value less costs to sell had a net carrying amount of $160,000, which consisted of the outstanding balance of $415,000 less write-downs of $255,000. Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied. F-33 FINANCIALS Notes to Consolidated Financial Statements 15. Fair Values of Financial Instruments (continued) For assets measured at fair value on a non-recurring basis at December 31, 2019 and 2018, the fair value measurements by level within the fair value hierarchy are as follows: (Dollar amounts in thousands) Description December 31, 2019: Other real estate owned Total December 31, 2018: Other real estate owned Total (Level 1) Quoted Prices in Active Markets for Identical Assets (Level 2) (Level 3) Significant Other Observable Inputs Significant Unobservable Inputs Total $ $ $ $ 88 $ 88 $ 160 $ 160 $ — $ — $ — $ — $ — $ — $ — $ — $ 88 88 160 160 The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis: (Dollar amounts in thousands) December 31, 2019: Other real estate owned $ 88 December 31, 2018: Other real estate owned $ 160 Valuation Techniques(s) Sales comparison approach Sales comparison approach Unobservable Input(s) Weighted Average Adjustment for differences between comparable sales 10% Adjustment for differences between comparable sales 10% Excluded from the tables above at December 31, 2019 and 2018 was an impaired residential mortgage loan totaling $67,000 and $61,000, respectively, and an impaired home equity loan totaling $4,000 and $6,000, respectively, which were classified as TDRs and measured using a discounted cash flow methodology. F-34 FINANCIALS Notes to Consolidated Financial Statements 15. Fair Values of Financial Instruments (continued) During the first quarter of 2018, the Corporation adopted ASU 2016-01 that requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet as of December 31: (Dollar amounts in thousands) Description December 31, 2019: Financial Assets: Cash and cash equivalents Interest earning time deposits Securities - available-for-sale Securities - equities Loans, net Federal bank stock Accrued interest receivable Total Financial Liabilities: Deposits Borrowed funds Accrued interest payable Total December 31, 2018: Financial Assets: Cash and cash equivalents Interest earning time deposits Securities - available-for-sale Securities - equities Loans, net Federal bank stock Accrued interest receivable Total Financial Liabilities: Deposits Borrowed funds Accrued interest payable Total Carrying Amount Fair Value Measurements using: Total Level 1 Level 2 Level 3 $ $ $ $ $ $ 14,986 $ 9,698 120,107 19 695,348 5,790 2,600 848,548 $ 14,986 $ 9,698 120,107 19 697,990 N/A 2,600 845,400 $ 14,986 $ — — 19 — N/A 78 15,083 $ — $ 9,698 115,857 — — N/A 419 125,974 $ — — 4,250 — 697,990 N/A 2,103 704,343 787,124 28,550 616 816,290 $ 793,999 29,133 616 823,748 $ 569,357 — 51 569,408 $ 224,642 29,133 565 254,340 $ — — — — 10,955 $ 6,738 97,718 7 708,664 6,351 2,570 833,003 $ 10,955 $ 6,738 97,718 7 702,747 N/A 2,570 820,735 $ 10,955 $ — 4,445 7 — N/A 63 15,470 $ — $ 6,738 89,773 — — N/A 351 96,862 $ — — 3,500 — 702,747 N/A 2,156 708,403 761,546 45,350 495 807,391 $ 767,009 44,869 495 812,373 $ 539,946 — 30 539,976 $ 227,063 44,869 465 272,397 $ — — — — This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. Off-Balance Sheet Financial Instruments The Corporation is party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and commercial letters of credit. Commitments to extend credit involve, to a varying degree, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The Corporation’s exposure to credit loss in the event of non-performance by the other party for commitments to extend credit is represented by the contractual amount of these commitments, less any collateral value obtained. The Corporation uses the same credit policies in making commitments as for on-balance sheet instruments. The Corporation’s distribution of commitments to extend credit approximates the distribution of loans receivable outstanding. F-35 FINANCIALS Notes to Consolidated Financial Statements 15. Fair Values of Financial Instruments (continued) The following table presents the notional amount of the Corporation’s off-balance sheet commitment financial instruments as of December 31: (Dollar amounts in thousands) 2019 2018 Commitments to make loans Unused lines of credit Total Variable Rate Fixed Rate Fixed Rate $ 1,646 $ 21,928 23,574 $ 10,840 $ 88,071 98,911 $ $ Variable Rate 7,450 81,261 88,711 684 $ 16,287 16,971 $ Commitments to make loans are generally made for periods of 30 days or less. Commitments to extend credit include agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit also include unfunded commitments under commercial and consumer lines of credit, revolving credit lines and overdraft protection agreements. These lines of credit may be collateralized and usually do not contain a specified maturity date and may be drawn upon to the total extent to which the Corporation is committed. Standby letters of credit are conditional commitments issued by the Corporation usually for commercial customers to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. Standby letters of credit, net of collateral maintained by the Bank, were $548,000 and $1.0 million at December 31, 2019 and 2018, respectively. The current amount of the liability as of December 31, 2019 and 2018 for guarantees under standby letters of credit issued is not material. 16. Emclaire Financial Corp – Condensed Financial Statements, Parent Corporation Only Following are condensed financial statements for the parent company as of and for the years ended December 31: Condensed Balance Sheets (Dollar amounts in thousands) Assets: Cash and cash equivalents Equity in net assets of subsidiaries Goodwill Other assets Total Assets Liabilities and Stockholders' Equity: Other short-term borrowed funds Long-term borrowed funds Accrued expenses and other liabilities Stockholders' equity Total Liabilities and Stockholders' Equity 2019 2018 $ $ $ $ 40 $ 84,065 5,190 171 89,466 $ 2,050 $ 1,500 58 85,858 89,466 $ 18 79,302 5,190 113 84,623 2,050 2,500 65 80,008 84,623 F-36 FINANCIALS Notes to Consolidated Financial Statements 16. Emclaire Financial Corp – Condensed Financial Statements, Parent Corporation Only (continued) Condensed Statements of Income (Dollar amounts in thousands) Income: Dividends from subsidiaries Investment income Net gains on equity securities Total income Expense: Interest expense Noninterest expense Total expense Income before income taxes and undistributed subsidiary income Undistributed equity in net income of subsidiary Net income before income taxes Income tax benefit Net income Comprehensive income Condensed Statements of Cash Flows (Dollar amounts in thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in net income of subsidiary Change in fair value of equity securities Other, net Net cash provided by operating activities Investing activities: Sales of investment securities Net cash provided by investing activities Financing activities: Net change in borrowings Dividends paid Net cash used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 2019 2018 $ $ $ 4,688 $ — — 4,688 205 634 839 3,849 3,922 7,771 183 7,954 $ 8,976 $ 3,316 10 510 3,836 272 539 811 3,025 1,125 4,150 61 4,211 3,559 2019 2018 $ 7,954 $ 4,211 (3,922) — 303 4,335 (1,125) (510) 1,323 3,899 — — 1,269 1,269 (1,000) (3,313) (4,313) 22 18 40 $ (2,450) (2,753) (5,203) (35) 53 18 $ F-37 FINANCIALS Notes to Consolidated Financial Statements 17. Other Noninterest Income and Expense Other noninterest income includes electronic banking fees of $1.4 million and $1.3 million for 2019 and 2018, respectively. The following summarizes the Corporation’s other noninterest expenses for the years ended December 31: (Dollar amounts in thousands) Customer bank card processing Subscriptions Telephone and data communications Pennsylvania shares and use taxes Correspondent bank and courier fees Travel, entertainment and conferences Internet banking and bill pay Item processing Printing and supplies Marketing and advertising Charitable contributions Regulatory examinations Bad checks and other losses Postage and freight Credit bureau and other loan expense Memberships and dues Other Total other noninterest expenses 18. Earnings Per Share 2019 2018 697 $ 607 567 482 411 390 347 310 278 264 240 204 199 169 132 112 225 5,634 $ 673 513 414 316 395 337 416 — 333 292 220 207 197 134 120 98 150 4,815 $ $ The factors used in the Corporation’s earnings per share computation follow: (Dollar amounts in thousands, except for per share amounts) Net income Less: Preferred stock dividends Net income available to common stockholders Average common shares outstanding Add: Dilutive effects of restricted stock awards Average shares and dilutive potential common shares Basic earnings per common share Diluted earnings per common share Restricted stock awards not considered in computing earnings per share because they were antidulitive For the year ended December 31, 2019 7,954 $ 182 7,772 $ 2,699,397 19,349 2,718,746 2.88 $ 2.86 $ 2018 4,211 91 4,120 2,377,277 18,400 2,395,677 1.73 1.72 — — $ $ $ $ F-38 FINANCIALS Notes to Consolidated Financial Statements 19. Accumulated Other Comprehensive Income (Loss) The following is changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax for the year ending December 31, 2019: (Dollar amounts in thousands) Unrealized Gains and Losses on Available-for- Sale Securities Defined Benefit Pension Items Totals Accumulated Other Comprehensive Income (Loss) at January 1, 2019 $ Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income (loss) Accumulated Other Comprehensive Income (Loss) at December 31, 2019 $ (1,517) $ 1,471 (62) 1,409 (108) $ (4,840) $ (586) 199 (387) (5,227) $ (6,357) 885 137 1,022 (5,335) The following is significant amounts reclassified out of each component of Accumulated Other Comprehensive Income (Loss) for the year ending December 31, 2019: (Dollar amount in thousands) Details about Accumulated Other Comprehensive Income Components Unrealized gains and losses on available-for-sale securities Tax effect Total security reclassifications for the period Amortization of defined benefit pension items Prior service costs Actuarial gains Total before tax Tax effect Amount Reclassified from Accumulated Other Comprehensive Income For the year ended December 31, 2019 Affected Line Item in the Statement Where Net Income is Presented $ (78) Net gain on sale of available-for-sale securities 16 Provision for income taxes (62) — Other noninterest income 252 Compensation and employee benefits 252 (53) Provision for income taxes Total defined benefit pension reclassifications for the period Total reclassifications for the period $ 199 137 Net of tax The following is changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax for the year ending December 31, 2018: (Dollar amounts in thousands) Unrealized Gains and Losses on Available-for- Sale Securities Defined Benefit Pension Items Totals Accumulated Other Comprehensive Income (Loss) at January 1, 2018 Cumulative effect of change in accounting principle for marketable equity securities, net of tax Accumulated Other Comprehensive Income (Loss) at January 1, 2018, as adjusted $ $ Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income (loss) (679) $ (4,839) $ (5,518) (187) — (187) (866) $ (4,839) $ (5,705) (658) 7 (651) (200) 199 (1) (858) 206 (652) Accumulated Other Comprehensive Income (Loss) at December 31, 2018 $ (1,517) $ (4,840) $ (6,357) F-39 FINANCIALS Notes to Consolidated Financial Statements 19. Accumulated Other Comprehensive Income (Loss) (continued) The following is significant amounts reclassified out of each component of Accumulated Other Comprehensive Income (Loss) for the year ending December 31, 2018: (Dollar amount in thousands) Details about Accumulated Other Comprehensive Income Components Unrealized gains and losses on available-for-sale securities Tax effect Total security reclassifications for the period Amortization of defined benefit pension items Prior service costs Actuarial gains Total before tax Tax effect Amount Reclassified from Accumulated Other Comprehensive Income For the year ended December 31, 2018 Affected Line Item in the Statement Where Net Income is Presented $ 9 Net loss on sale of available-for-sale securities (2) Provision for income taxes 7 — Other noninterest income 252 Compensation and employee benefits 252 (53) Provision for income taxes Total defined benefit pension reclassifications for the period Total reclassifications for the period $ 199 206 Net of tax 20. Mergers and Acquisitions Community First Bancorp, Inc. On October 1, 2018, the Corporation completed the acquisition of Community First Bancorp, Inc. (CFB) in accordance with the terms of the Agreement and Plan of Merger, dated as of May 25, 2018, in exchange for 419,173 shares of common stock valued at $15.6 million and $2.4 million in cash. In addition, the Corporation issued $4.2 million of preferred stock in exchange for 420,593 shares of similar preferred stock of Community First Bank, valued at $4.2 million. The acquisition strengthened the Corporation’s franchise within current market areas and increased the Corporation’s consolidated total assets, loans and deposits. The Corporation owned 18,000 shares of CFB common stock and recognized a $690,000 non-taxable gain on the retirement of the shares in connection with the acquisition. The assets and liabilities of CFB were recorded on the Corporation’s consolidated balance sheet at their estimated fair value as of October 1, 2018. Included in the purchase price was goodwill and a core deposit intangible of $9.2 million and $1.2 million, respectively. Goodwill is the excess of the purchase price over the fair value of the identifiable net assets acquired and is the result of expected operational synergies and other factors. This goodwill is not deductible for tax purposes. The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require. The core deposit intangible will be amortized over an estimated life of ten years using the straight line method. Core deposit intangible expense was $121,000 for 2019 and is projected for the succeeding five years beginning 2020 to be $121,000 per year with $453,000 in total for years after 2024. F-40 FINANCIALS Notes to Consolidated Financial Statements 20. Mergers and Acquisitions (continued) The following table summarizes the estimated fair value of the assets acquired, liabilities assumed and consideration transferred in connection with the acquisition: (Dollar amounts in thousands) Assets acquired: Cash and cash equivalents Securities available for sale Loans receivable Federal bank stocks Accrued interest receivable Premises and equipment Core deposit intangible Prepaid expenses and other assets Total assets acquired Liabilities assumed: Deposits Overnight borrowings Accrued interest payable Accrued expenses and other liabilities Total liabilities assumed Identifiable net assets acquired Consideration paid: Cash Preferred stock Previously owned common stock of CFB Common stock Total consideration Goodwill $ 3,986 — 111,555 190 288 1,321 1,208 3,341 121,889 106,149 1,200 61 449 107,859 14,030 2,429 4,206 931 15,636 23,202 $ (9,172) The fair value of loans was estimated using discounted contractual cash flows. The book balance of the loans at the time of the acquisition was $112.8 million before considering CFB’s allowance for loan losses, which was not carried over. The fair value disclosed above reflects a credit-related adjustment of $(1.7 million) and an adjustment for other factors of $441,000. Loans evidencing credit deterioration since origination (purchased credit impaired loans) included in loans receivable were immaterial. Costs related to the acquisition for the year ended December 31, 2018 totaled $3.6 million including employee non-compete and severance costs, professional fees, system conversion costs, contract termination fees, legal fees, accounting and auditing fees and other costs of $1.5 million, $531,000, $481,000, $427,000, $330,000, $50,000 and $228,000, respectively. F-41 FINANCIALS Notes to Consolidated Financial Statements 21. Revenue Recognition On January 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. Interest income, net securities gains (losses) and bank-owned life insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Corporation's revenue from contracts with customers is recognized within noninterest income. Service charges on deposits: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Electronic banking fees: The Corporation earns interchange and other ATM related fees from cardholder transactions conducted through the various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees are processed through noninterest income. Other fees, such as transaction surcharges and card replacement fees are withdrawn from the customer's account balance at the time of service. The following table presents the Corporation's sources of noninterest income for the year ended December 31: (Dollar amounts in thousands) Noninterest income In-scope of Topic 606: Service charges on deposits Maintenance fees Overdraft fees Other fees Electronic banking fees (1) Noninterest income (in-scope of Topic 606) Noninterest income (out-of-scope of Topic 606) Total noninterest income (1) included in other noninterest income on the consolidated statements of income 2019 2018 $ $ 190 $ 1,657 310 1,446 3,603 788 4,391 $ 160 1,587 285 1,344 3,376 832 4,208 F-42 FINANCIALS Back Cover Text_2019.pdf 1 3/6/2020 3:22:52 PM C M Y CM MY CY CMY K FNBE_AnnualReport 2019.pdf 1 3/6/2020 3:19:04 PM C M Y CM MY CY CMY K 

Continue reading text version or see original annual report in PDF format above