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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.
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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.
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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.
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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
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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)
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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
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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.
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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.
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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.
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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
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