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, 2021
☐
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
25-1606091
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
612 Main Street, Emlenton, PA
16373
(Address of principal executive office)
(Zip Code)
Registrant’s telephone number: (844) 767-2311
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.25 per share
EMCF
NASDAQ Capital Market (NASDAQ)
(Title of Class)
(Trading Symbol)
(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).
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of
its financial control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registerd public
accounting firm that prepared or issued its audit report. ☐
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, 2021, the aggregate value of the 2,269,332 shares of Common Stock of the Registrant issued and outstanding on such date,
which excludes 451,880 shares held by the directors and officers of the Registrant as a group, was approximately $68.7 million. This figure
is based on the last sales price of $30.27 per share of the Registrant’s Common Stock on June 30, 2021. The number of outstanding shares
of common stock as of March 16, 2022, was 2,735,212.
DOCUMENTS INCORPORATED BY REFERENCE
None
K-2
EMCLAIRE FINANCIAL CORP
TABLE OF CONTENTS
PART I
Item 1.
Business
K-3
Item 1A.
Risk Factors
K-16
Item 1B.
Unresolved Staff Comments
K-16
Item 2.
Properties
K-16
Item 3.
Legal Proceedings
K-17
Item 4.
Mine Safety Disclosures
K-17
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
K-17
Item 6.
[Reserved]
K-17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
K-17
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
K-27
Item 8.
Financial Statements and Supplementary Data
K-27
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
K-27
Item 9A.
Controls and Procedures
K-27
Item 9B.
Other Information
K-27
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
K-27
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
K-28
Item 11.
Executive Compensation
K-32
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
K-35
Item 13.
Certain Relationships and Related Transactions, and Director Independence
K-36
Item 14.
Principal Accountant Fees and Services
K-37
PART IV
Item 15.
Exhibits and Financial Statement Schedules
K-38
SIGNATURES AND CERTIFICATIONS
K-40
K-3
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, the effects of the COVID-19 pandemic on the Corporation or the U.S. economy, 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 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 19 retail branch offices in Venango, Allegheny, Butler, Clarion, Clearfield, Crawford, Elk, Jefferson and Mercer
counties, Pennsylvania. 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 regulation and
examination by the FRB.
At December 31, 2021, the Corporation had $1.1 billion in total assets, $97.0 million in stockholders’ equity, $780.0 million in net loans
and $918.5 million in total deposits.
COVID-19 Pandemic
The outbreak of the novel coronavirus (COVID-19) has adversely impacted and continues to impact certain industries in which the
Corporation's clients operate and may have impaired their ability to fulfill their outstanding obligations due to continued financial distress.
The spread of COVID-19 has caused unprecedented uncertainty, volatility and disruption in the U.S. and global economy at large. The
Corporation's business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial
transactions. With the easing of restrictions during the latter part of 2020 and into 2021, and the availability and distribution of vaccines,
the U.S. economy has slowly begun to improve as consumer and business spending has rebounded in recent months. However, the lasting
effects are uncertain as government aid programs and stimulus packages taper, and the ultimate long-term impact of the business shutdowns
that occurred as a result of COVID-19 remains uncertain in many sectors of the economy, such as the travel, hospitality and entertainment
industries. This may cause business sectors that have had better recoveries not to be able to maintain those recoveries in the long
term. Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and
safeguards will continue to be effective.
To help address the impact of the COVID-19 pandemic on the economy and financial markets, the Board of Governors of the Federal
Reserve System lowered the federal funds target rate to a range of between zero and 0.25% during the first quarter of 2020. Throughout
2021, the Federal Reserve has continued to maintain the targeted federal funds rate at these levels because of the pandemic-related risks to
the economy. The Corporation's earnings and related cash flows are largely dependent upon net interest income, representing the difference
between interest income received on interest-earning assets, primarily loans and securities, and the interest paid on interest-bearing
liabilities, primarily customer deposits and borrowed funds. As a result of the significant decline in interest rates and prepayments on
higher yielding existing loans, the yield on the total loan portfolio has decreased. Additionally, with significant cash inflows realized from
a growth in deposits and the forgiveness of PPP loans, the current yields on funds reinvested into the purchase of securities are lower than
K-4
existing portfolio yields. However, the fees arising from the Paycheck Protection Program (PPP) loan program have mitigated some of
this decline during 2020 and 2021. As economic conditions have started to improve, the Federal Reserve has begun to shift its focus to
limiting the inflationary and other potentially adverse effects of the expiration of government aid programs and stimulus packages. Since
the Corporation's balance sheet is asset sensitive and rate sensitive assets reprice more quickly than rate sensitive liabilities, margin
compression may be somewhat mitigated during 2022 in the event that the Federal Reserve begins to raise rates.
The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions
caused by the pandemic. On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted
to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and
containment measures. On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical
leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic
consequences of the pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed
by the President of the United States. Among other measures, the CARES Act provided $349 billion for the PPP loans administered by
the Small Business Administration (SBA) to assist qualified small businesses with certain operational expenses, certain credits for
individuals and their dependents against their 2020 personal income tax and expanded eligibility for unemployment benefits. This
legislation was later amended on April 24, 2020, by the Paycheck Protection Program and Healthcare Enhancement Act (PPPHE Act)
which provided an additional $310 billion of funding for PPP loans. In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief
Deal was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress
caused by the pandemic. This included additional stimulus payments to individuals and their dependents, an extension of enhanced
unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for
PPP loans of $150,000 or less. The Bank was a lender for the SBA program and closed 1,109 PPP loans totaling $81.6 million. As of
March 1, 2022, 1,098 loans totaling $80.5 million were fully forgiven, five loan totaling $66,000 were voluntarily repaid, rather than
forgiven by the SBA, and two loans were partially forgiven and have aggregate unforgiven balances totaling $93,000.
Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by
the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt
restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March
1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31,
2020. This provision was extended, and expired on January 1, 2022 under the Consolidated Appropriations Act, 2021. The banking
regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the
borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is
considered to be short-term. The Corporation implemented a short-term modification program to provide relief to consumer and
commercial customers following the guidelines of these provisions. Most modifications fall into the 90 to 180-day range with deferred
principal and interest due and payable on the maturity date of the existing loans. Specific detail describing these modifications made in
relation to the CARES Act can be found in the TDR discussion in "Note 3 - Loans" to the Consolidated Financial Statements on page
F-20.
The Corporation responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees,
customers and shareholders by holding meetings virtually, restricting travel and attendance at external gatherings, expending remote-access
availability and limiting banking office lobby hours. Effective July, 6, 2021, remote-access employees transitioned back to the office and
banking offices resumed normal business hours. The Corporation continues to monitor events related to the pandemic and will take
necessary precautions to ensure the safety of its customers and employees.
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 34.6% of the total loan portfolio at
December 31, 2021. 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 9.6% of the total loan portfolio at December 31, 2021. 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 49.6% of the total loan portfolio at December 31,
2021. 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.
K-5
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 6.2% of the total loan portfolio at December 31, 2021.
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, 2021, the
Bank’s loans to one borrower limit based upon 15% of unimpaired capital was $13.9 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, 2021, the Bank’s largest single lending relationship had an exposure of
$17.0 million with outstanding loan balances of $13.3 million, which was permissible under the pilot program.
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:
2021
2020
Dollar
Dollar
(Dollar amounts in thousands)
Amount
%
Amount
%
Mortgage loans on real estate:
Residential mortgages
$
273,823
34.6% $
308,031
38.0%
Home equity loans and lines of credit
75,810
9.6%
87,088
10.8%
Commercial real estate
326,341
41.3%
285,625
35.3%
Total real estate loans
675,974
85.5%
680,744
84.1%
Other loans:
Commercial business
65,877
8.3%
89,139
11.0%
Consumer
48,552
6.2%
40,035
4.9%
Total other loans
114,429
14.5%
129,174
15.9%
Total loans receivable
790,403
100.0%
809,918
100.0%
Less:
Allowance for loan losses
10,393
9,580
Net loans receivable
$
780,010
$
800,338
The following table sets forth the final maturity of loans in the Corporation’s portfolio as of December 31, 2021. Demand loans having no
stated schedule of repayment and no stated maturity are reported as due within one year.
(Dollar amounts in thousands)
Due in one
year or less
Due from
one to five
years
Due from
five to fifteen
years
Due after
fifteen years
Total
Residential mortgages
$
353 $
5,411 $
91,278 $
176,781 $
273,823
Home equity loans and lines of credit
827
6,836
40,767
27,380
75,810
Commercial real estate
1,164
65,672
166,999
92,506
326,341
Commercial business
1,168
24,145
21,276
19,288
65,877
Consumer
303
28,333
6,401
13,515
48,552
$
3,815 $
130,397 $
326,721 $
329,470 $
790,403
K-6
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, 2021:
Fixed
Adjustable
(Dollar amounts in thousands)
rates
rates
Residential mortgages
$
266,176 $
7,294
Home equity loans and lines of credit
65,170
9,813
Commercial real estate
52,823
272,354
Commercial business
13,022
51,687
Consumer
47,127
1,122
$
444,318 $
342,270
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, 2021, the Corporation’s nonperforming assets were $3.3 million, or 0.32% of the Corporation’s total assets, compared
to $4.4 million, or 0.43% of the Corporation’s total assets, at December 31, 2020. Nonperforming assets at December 31, 2021 was
comprised entirely of nonperforming loans. Included in nonperforming loans at December 31, 2021 were five loans totaling $346,000
considered to be TDRs.
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 weaknesses 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, 2021, the Corporation’s classified and criticized
assets amounted to $38.2 million or 3.6% of total assets, with $8.9 million identified as special mention and $29.4 million classified as
substandard.
K-7
Included in classified and criticized assets at December 31, 2021, is a combination of relationships with an outstanding balance of $30.0
million, representing eight distinct relationships with extensions of credit supporting hotel operations. The debt obligations are primarily
secured with nationally franchised hotels along with related furniture, fixtures, and equipment. These hotels were initially adversely
impacted by state-wide travel restrictions in response to the COVID-19 pandemic and continue to be impacted by shifting consumer and
business behaviors. Current data supports improvement in occupancy levels which is resulting in an improvement in operating
performance. 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 these loans.
Also included in classified and criticized assets at December 31, 2021, is a relationship with an outstanding balance of $1.5 million,
consisting of two commercial mortgages and one commercial business loan which primarily refinanced third-party debt obligations and is
secured with residential rental investment properties. Excessive personal debt obligations have resulted in marginal financial performance
of the borrowers. The collateral properties securing the indebtedness services the related debt at a satisfactory level. Ultimately, due to the
estimated value of the collateral held, the Corporation does not currently expect to incur a loss on these loans.
The following table sets forth information regarding the Corporation’s nonperforming assets as of December 31:
(Dollar amounts in thousands)
2021
2020
Accruing loans 90+ days past due
$
685 $
579
Nonaccrual loans
2,654
3,523
Nonperforming loans
3,339
4,102
Repossessions
—
—
Real estate acquired through foreclosure
—
344
Total nonperforming assets
$
3,339 $
4,446
Nonperforming assets as a percentage of total assets
0.32%
0.43%
Nonaccrual loans as a percentage of gross loans
0.34%
0.43%
Nonperforming loans as a percentage of gross loans
0.42%
0.51%
Allowance for loan losses as a percentage of nonaccrual loans
391.60%
271.93%
Allowance for loan losses as a percentage of nonperforming loans
311.26%
233.54%
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, 2021 of $10.4 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)
2021
2020
Balance at beginning of period
$
9,580 $
6,556
Provision for loan losses
1,066
3,247
Charge-offs:
Residential mortgages
—
(27)
Home equity loans and lines of credit
(41)
(126)
Commercial real estate
(150)
(75)
Commercial business
—
(163)
Consumer loans
(178)
(82)
(369)
(473)
Recoveries:
Residential mortgages
—
6
Home equity loans and lines of credit
27
15
Commercial real estate
37
107
Commercial business
19
70
Consumer loans
33
52
116
250
Net charge-offs
(253)
(223)
Balance at end of period
$
10,393 $
9,580
Ratio of net charge-offs to average loans outstanding
0.03%
0.03%
Ratio of allowance to total loans at end of period
1.31%
1.18%
K-8
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)
2021
2020
Loan Categories:
Dollar
Amount
Percent of
total loans
Dollar
Amount
Percent of
total loans
Residential mortgages
$
2,335
34.6% $
2,774
38.0%
Home equity loans and lines of credit
525
9.6%
620
10.8%
Commercial real estate
6,253
41.3%
5,180
35.3%
Commercial business
904
8.3%
677
11.0%
Consumer loans
376
6.2%
329
4.9%
Total allowance for loan losses
$
10,393
100.0% $
9,580
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, corporate 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, 2021:
Due in 1 year or less Due from 1 to 5 years Due from 5 to 10 years
Due after 10 years
Total
(Dollar amounts in
thousands)
Fair
Value
Average
Yield
Fair
Value
Average
Yield
Fair
Value
Average
Yield
Fair
Value
Average
Yield
Fair
Value
Average
Yield
U.S. government sponsored
entities and agencies
$
—
—% $
—
—% $
2,983
1.67% $
5,176
1.50% $
8,159
1.56 %
U.S. agency mortgage-
backed securities:
residential
—
—%
—
—%
—
—%
12,035
2.60%
12,035
2.60 %
U.S. agency collateralized
mortgage obligations:
residential
—
—%
—
—%
863
1.43%
48,627
1.44%
49,490
1.44 %
State and political
subdivision
—
—%
3,148
3.07%
7,558
2.53%
81,856
2.45%
92,562
2.48 %
Corporate securities
—
—%
1,531
4.85%
22,493
4.48%
—
—%
24,024
4.50 %
Total available-for-sale
debt securities
$
—
—% $
4,679
3.65% $
33,897
3.72% $ 147,694
2.10% $ 186,270
2.43 %
1) Taxable equivalent adjustments have been made in calculating yields on state and political subdivision securities.
2) The yields are calculated using the amortized value.
The following table sets forth the fair value of the Corporation’s investment securities as of December 31:
(Dollar amounts in thousands)
2021
2020
U.S. government sponsored entities and agencies
$
8,159 $
3,007
U.S. agency mortgage-backed securities: residential
12,035
16,581
U.S. agency collateralized mortgage obligations: residential
49,490
15,911
State and political subdivision
92,562
55,577
Corporate securities
24,024
21,965
Equity securities
5
15
Total available-for-sale securities
$
186,275 $
113,056
For additional information regarding the Corporation’s investment portfolio see “Note 2 – Securities” to the Consolidated Financial
Statements on page F-15.
K-9
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)
2021
2020
Weighted
Weighted
Type of accounts
average rate Amount Percent
average rate Amount Percent
Non-interest bearing deposits
— $ 221,993
24.2%
— $ 193,752
21.7%
Interest bearing demand deposits
0.13% 545,846
59.4%
0.42% 511,928
57.3%
Time deposits
1.78% 150,657
16.4%
2.03% 187,947
21.0%
Total
0.37% $ 918,496
100.0%
0.67% $ 893,627
100.0%
At December 31, 2021 and 2020, the Corporation's uninsured deposits are estimated to be $374.4 million and $361.5 million, respectively.
The following table sets forth maturities of the Corporation’s time deposits of $100,000 or more at December 31, 2021 by time remaining
to maturity:
(Dollar amounts in thousands)
Amount
Three months or less
$
9,812
Over three months to six months
5,217
Over six months to twelve months
13,053
Over twelve months
56,511
$
84,593
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)
2021
2020
Ending balance
$
22,050
$
32,050
Average balance
29,801
39,896
Maximum balance
32,050
61,300
Average rate
2.26%
2.25%
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-24 and “Note
9 – Borrowed Funds” on page F-25 to the Consolidated Financial Statements.
Subsidiary Activity
The Corporation has one wholly owned subsidiary, the Bank. As of December 31, 2021, the Bank had no subsidiaries.
Personnel
At December 31, 2021, the Corporation had 148 full time equivalent employees, compared to 160 at December 31, 2020. There is no
collective bargaining agreement between the Corporation and its employees, and the Corporation believes its relationship with its
employees is satisfactory.
K-10
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.
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.
Regulations have been adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to
as the Volcker Rule. 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. 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 are excluded from the Volcker Rule restrictions. The
Corporation qualifies for the exclusion from the Volcker Rule restrictions.
K-11
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.
2010 Regulatory Reform. On July 21, 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act)
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.
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 maintained most of the regulatory structure established by the Dodd Frank Act, it amended 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 resulted in meaningful regulatory relief for community banks such as the Bank.
K-12
The Act, among other matters, expanded the definition of qualified mortgages which may be held by a financial institution and
simplified 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 expanded 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 included 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.
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, 2021, 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, 2021,
the Bank’s loans-to-one-borrower limit was $13.9 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, 2021, the Bank's lending limit under
the Pilot Program was $25.1 million. At December 31, 2021, the Bank’s largest single lending relationship had a total potential exposure of
$17.0 million which includes outstanding loan balances of $13.3 million.
K-13
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.
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 than $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. The Bank has not elected to be subject to the CBLR.
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. 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. 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 had 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
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)
December 31,
2021
December 31,
2020
Amount Ratio
Amount Ratio
Total capital to risk-weighted assets:
Actual
$ 92,495 13.11 %
$ 84,583 12.71%
For capital adequacy purposes
56,448 8.00 %
53,255 8.00%
To be well capitalized
70,559 10.00 %
66,569 10.00%
Tier 1 capital to risk-weighted assets:
Actual
$ 83,656 11.86 %
$ 76,246 11.45%
For capital adequacy purposes
42,336 6.00 %
39,941 6.00%
To be well capitalized
56,448 8.00 %
53,255 8.00%
Common Equity Tier 1 capital to risk-weighted assets:
Actual
$ 83,656 11.86 %
$ 76,246 11.45%
For capital adequacy purposes
31,752 4.50 %
29,956 4.50%
To be well capitalized
45,864 6.50 %
43,270 6.50%
Tier 1 capital to average assets:
Actual
$ 83,656 7.98 %
$ 76,246 7.58%
For capital adequacy purposes
41,926 4.00 %
40,213 4.00%
To be well capitalized
52,407 5.00 %
50,267 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, 2021, 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.
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.
K-15
Small institutions received credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15%
and 1.35%. The credits reduced regular assessments by 2 basis points for quarters when the reserve ratio is at least 1.38%. The FDIC
applied credits to the Bank's assessments due in 2019. In 2020, the FDIC announced that all credits have been remitted and the credit
program has ended.
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, 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 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 $330 million to $1.322 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 10, 2022, the Bank was rated “satisfactory.”
On December 14, 2021, the OCC issued a final rule to rescind its June 2020 CRA rule and replace it with a rule based on the rules adopted
jointly by the federal banking agencies in 1995, as amended. The final rule aligns the OCC's CRA rule with the rules of the Federal Reserve
and FDIC and thereby, according to the OCC, facilitates the ongoing interagency work to modernize the CRA framework and create
consistency for all insured depository institutions.
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.
K-16
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.
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 of Pittsburgh. 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, 2021, 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, 2021, 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.
K-17
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-22.
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.
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.
Janney Montgomery Scott LLC
Raymond James & Associates, Inc.
4 Tower Bridge
1717 Arch Street
550 West Washington Boulevard
200 Barr Harbor Drive, Suite 300
Philadelphia, PA 19103
Suite 1050
West Conshohocken, PA 19428-2979
Telephone: (215) 665-6000
Chicago, IL 60661
Telephone: (800) 883-1212
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.
Market Price
Cash
High
Low
Close
Dividend
2021:
Fourth quarter
$
30.00 $
26.03 $
28.90 $
0.30
Third quarter
30.39
26.02
26.72
0.30
Second quarter
30.55
26.50
30.27
0.30
First quarter
31.12
25.60
28.99
0.30
2020:
Fourth quarter
$
32.00 $
23.10 $
30.63 $
0.30
Third quarter
28.35
20.40
25.11
0.30
Second quarter
26.10
18.10
20.01
0.30
First quarter
33.50
20.92
23.47
0.30
As of March 1, 2022, there were approximately 710 stockholders of record and 2,735,212 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, 2021.
Item 6. [Reserved]
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, 2021 and 2020. This review should be read in conjunction with the consolidated financial statements
beginning on page F-6.
K-18
Overview
The Corporation reported consolidated net income available to common stockholders of $10.0 million, or $3.63 per diluted common share,
for 2021, an increase of $3.4 million, or 52.0%, compared to $6.6 million, or $2.41 per diluted common share, for 2020. Net income
available to common stockholders was impacted by the following:
•
Net interest income increased $2.4 million, or 8.2%, to $31.5 million for the year ended December 31, 2021 from $29.1 million
for 2020. This increase primarily related to a decrease in interest expense of $2.9 million, or 36.4%, while interest
income decreased $566,000, or 1.5%. Driving the decrease in interest expense was a 44 basis point decrease in the cost of
interest-bearing liabilities to 0.69% for 2021 from 1.13% for 2020.
•
Provision for loan losses decreased $2.2 million, or 67.2%, to $1.1 million for the year ended December 31, 2021 from $3.2
million for 2020. The higher provision for loan losses recorded in 2020 was due to growth in the residential and consumer loan
portolios, the addition of a specific pandemic qualitative allowance factor, increased risk ratings for loans which were granted
payment deferrals and an increase in criticized and classified loans. During 2021, the provision for loan losses decreased as
criticized and classified loans decreased and the specific pandemic allowance qualitative factor was reduced.
•
Noninterest income increased $227,000, or 5.2%, to $4.6 million for the year ended December 31, 2021 from $4.4 million for
2020 due to increases in other noninterest income, gains on the sale of loans and earnings on bank-owned life insurance of
$549,000, $149,000 and $34,000, respectively, partially offset by decreases in gains on the sale of securities and fees and service
charges of $442,000 and $63,000, respectively.
•
Noninterest expense increased $578,000, or 2.6%, to $22.6 million for the year ended December 31, 2021 from $22.0 million
for 2020. This increase was primarily related to increases in compensation and employee benefits, other noninterest expense,
professional fees, FDIC insurance expense and intangible asset amortization expense of $192,000, $188,000, $176,000, $41,000
and $21,000, respectively, partially offset by a decrease in premises and equipment expense of $40,000.
Changes in Financial Condition
Total assets increased $27.2 million, or 2.6%, to $1.1 billion at December 31, 2021 from $1.0 billion at December 31, 2020. The increase in
assets was driven primarily by a $73.2 million increase in securities, partially offset by decreases in cash and equivalents and net loans
receivable of $28.4 million and $20.3 million. The decrease in net loans receivable was driven by a $29.2 million reduction in PPP loans
to $1.2 million at December 31, 2021, from $30.4 million at December 31, 2020. Liabilities increased $21.7 million, or 2.3%, to $962.5
million at December 31, 2021 from $940.8 million at December 31, 2020 due to a $24.9 million increase in customer deposits, partially
offset by a $10.0 million reduction in borrowed funds.
Cash and cash equivalents. Cash and cash equivalents decreased $28.4 million, or 75.8%, to $9.1 million at December 31, 2021 from
$37.4 million at December 31, 2020. Excess cash balances resulting from deposit inflows and the repayment of loans were utilized to fund
security purchases and repay borrowed funds.
Interest earning time deposits. Interest earning time deposits decreased $3.2 million, or 56.6%, to $2.5 million at December 31, 2021 from
$5.7 million at December 31, 2020. This decrease resulted from maturities of certificates of deposits with other financial institutions
totaling $3.7 million, partially offset by purchases totaling $496,000 during the year.
Securities. Securities increased $73.2 million, or 64.8%, to $186.3 million at December 31, 2021 from $113.0 million at December 31,
2020. This increase primarily resulted from investment purchases of $105.1 million during the year, partially offset by security sales,
maturities and repayments totaling $28.5 million.
Loans receivable. Net loans receivable decreased $20.3 million, or 2.5%, to $780.0 million at December 31, 2021 from $800.3 million at
December 31, 2020. The decrease was driven by decreases in the Corporation’s residential mortgage, commercial business and home
equity portfolios of $34.2 million, $23.3 million and $11.3 million, respectively, partially offset by increases in the commercial mortgage
and consumer portfolios of $40.7 million and $8.5 million, respectively. Included in the decrease of the commercial business loan balances
for 2021 was $29.2 million of loans forgiven under the SBA's PPP lending program.
K-19
Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days past due and still accruing, repossessions and real
estate owned. Nonperforming assets were $3.3 million, or 0.32% of total assets, at December 31, 2021 compared to $4.4 million, or 0.43%
of total assets, at December 31, 2020. Nonperforming assets consisted of nonperforming loans of $3.3 million at December 31, 2021 and
nonperforming loans of $4.1 million and other real estate owned of $344,000 at December 31, 2020. At December 31, 2021, nonperforming
loans consisted primarily of commercial mortgage and residential mortgage loans.
Federal bank stocks. Federal bank stocks were comprised of FHLB stock and FRB stock of $3.9 million and $1.8 million, respectively,
at December 31, 2021. 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 $6.4 million, or 41.6%, to $21.9 million at December 31,
2021 from $15.5 million at December 31, 2020. The increase in BOLI during the year was primarily due to the purchase of $6.0 million
in additional policies.
Premises and equipment. Premises and equipment decreased $1.8 million to $16.4 million at December 31, 2021 from $18.2 million at
December 31, 2020. The overall decrease in premises and equipment during the year was due to depreciation and amortization of
$1.4 million and sales of $1.3 million, partially offset by purchases of $872,000. During 2021, the Corporation sold its Chester, West
Virginia office building following the closure of that branch in April. In addition, the Corporation sold its building located in the Southside
of Pittsburgh, Pennsylvania and entered into a lease to continue operating the branch in that location.
Goodwill. Goodwill remained unchanged at $19.5 million at December 31, 2021 and 2020. 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 during the year ended December 31, 2021.
Core deposit intangible. The core deposit intangible was $899,000 at December 31, 2021, compared to $1.1 million at December 31,
2020. The core deposit intangible includes amounts associated with the assumption of deposits in the 2018 Community First Bancorp, Inc.
(CFB) acquisition, 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 $185,000 and
$164,000 of intangible amortization in 2021 and 2020, respectively.
Deposits. Total deposits increased $24.9 million, or 2.8%, to $918.5 million at December 31, 2021 from $893.6 million at December 31,
2020. Non-interest bearing deposits increased $28.2 million, or 14.6%, and interest bearing demand deposits increased $33.4 million, or
6.6%. These increases were driven by increases in public funds and government stimulus deposits. The increase in demand deposits were
partially offset by a $37.3 million, or 19.8%, decrease in time deposits due to the maturity of certificates of deposit.
Borrowed funds. Borrowed funds decreased $10.0 million, or 31.2%, to $22.1 million at December 31, 2021 from $32.1 million at
December 31, 2020. Borrowed funds at December 31, 2021 consisted of short-term borrowings of $7.1 million and long-term borrowings
of $15.0 million. Short-term borrowed funds at December 31, 2021 consisted of an outstanding balance of $2.1 million on a line of credit
with a correspondent bank at rate of 4.25% and $5.0 million of FHLB overnight funds at a rate of 0.28%. Long-term borrowed funds
consisted of three $5.0 million FHLB term advances totaling $15.0 million, maturing between 2023 and 2025 and having fixed interest
rates between 1.65% and 2.79%. Long-term advances are utilized primarily to fund loan growth and short-term advances are utilized
primarily to compensate for normal deposit fluctuations.
Stockholders’ equity. Stockholders’ equity increased $5.5 million, or 6.0%, to $97.0 million at December 31, 2021 from $91.5 million at
December 31, 2020. The increase was primarily due to net income of $10.2 million, partially offset by a decrease of $1.7 million in
accumulated other comprehensive income and common stock and preferred dividends paid of $3.3 million and $196,000, respectively.
K-20
Changes in Results of Operations
The Corporation reported net income before preferred stock dividends of $10.2 million and $6.7 million in 2021 and 2020, 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)
For the year ended December 31,
2021
2020
Average
Balance Interest
Yield
/ Rate
Average
Balance Interest
Yield
/ Rate
Interest-earning assets:
Loans, taxable
$
782,030 $
32,241 4.12% $ 771,073 $
33,402 4.33%
Loans, tax exempt
15,770
596 3.78%
19,463
745 3.83%
Total loans receivable
797,800
32,837 4.12% 790,536
34,147 4.32%
Securities, taxable
108,464
2,435 2.24%
81,812
2,070 2.53%
Securities, tax exempt
52,957
1,156 2.18%
22,205
559 2.52%
Total securities
161,421
3,591 2.22% 104,017
2,629 2.53%
Interest-earning deposits with banks
40,619
91 0.22%
26,570
191 0.72%
Federal bank stocks
5,685
293 5.15%
6,040
371 6.14%
Total interest-earning cash equivalents
46,304
384 0.83%
32,610
562 1.72%
Total interest-earning assets
1,005,525
36,812 3.66% 927,163
37,338 4.03%
Cash and due from banks
3,452
3,507
Other noninterest-earning assets
60,484
61,123
Total Assets
$ 1,069,461
$ 991,793
Interest-bearing liabilities:
Interest-bearing demand deposits
$
542,740 $
1,127 0.21% $ 471,766 $
2,858 0.61%
Time deposits
171,113
3,323 1.94% 201,662
4,307 2.14%
Total interest-bearing deposits
713,853
4,450 0.62% 673,428
7,165 1.06%
Borrowed funds, short-term
2,143
89 4.13%
4,366
131 3.00%
Borrowed funds, long-term
27,658
585 2.12%
35,530
766 2.16%
Total borrowed funds
29,801
674 2.26%
39,896
897 2.25%
Total interest-bearing liabilities
743,654
5,124 0.69% 713,324
8,062 1.13%
Noninterest-bearing demand deposits
216,811
—
— 175,279
—
—
Funding and cost of funds
960,465
5,124 0.53% 888,603
8,062 0.91%
Other noninterest-bearing liabilities
15,676
14,473
Total Liabilities
976,141
903,076
Stockholders' Equity
93,320
88,717
Total Liabilities and Stockholders' Equity
$ 1,069,461
$ 991,793
Net interest income
$
31,688
$
29,276
Interest rate spread (difference between weighted
average rate on interest-earning assets and interest-
bearing liabilities)
2.97%
2.90%
Net interest margin (net interest income as a percentage
of average interest-earning assets)
3.15%
3.16%
K-21
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)
For the year ended December 31,
2021 versus 2020
Increase (Decrease) due to
Volume
Rate
Total
Interest income:
Loans
$
311 $
(1,621) $
(1,310)
Securities
1,308
(346)
962
Interest-earning deposits with banks
71
(171)
(100)
Federal bank stocks
(21)
(57)
(78)
Total interest-earning assets
1,669
(2,195)
(526)
Interest expense:
Interest-bearing deposits
408
(3,123)
(2,715)
Borrowed funds, short-term
(81)
39
(42)
Borrowed funds, long-term
(167)
(14)
(181)
Total interest-bearing liabilities
160
(3,098)
(2,938)
Net interest income
$
1,509 $
903 $
2,412
2021 Results Compared to 2020 Results
The Corporation reported net income available to common stockholders of $10.0 million and $6.6 million for 2021 and 2020, respectively.
The $3.4 million, or 52.0%, increase resulted primarily from increases in net interest income and noninterest income of $2.4 million and
$227,000, respectively, and a $2.2 million decrease in the provision for loan losses, partially offset by increases in noninterest expense and
the provision for income taxes of $578,000 and $779,000, respectively. Returns on average equity and assets were 10.90% and 0.95%,
respectively, for 2021, compared to 7.61% and 0.68%, respectively, for 2020.
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 $2.4 million to $31.7 million for
2021, compared to $29.3 million for 2020. This increase in net interest income can be attributed to a decrease in interest expense of
$2.9 million, partially offset by a decrease in tax equivalent interest income of $526,000.
Interest income. Tax equivalent interest income decreased $526,000, or 1.4%, to $36.8 million for 2021, compared to $37.3 million for
2020. This decrease can be attributed to decreases in interest earned on loans, deposits with banks and dividends received on federal bank
stocks of $1.3 million, $100,000 and $78,000, respectively, partially offset by an increase in interest earned on securities of $962,000.
Tax equivalent interest earned on loans receivable decreased $1.3 million, or 3.8%, to $32.8 million for 2021, compared to $34.1 million
for 2020. The average yield on loans decreased 20 basis points to 4.12% for 2021, versus 4.32% for 2020 causing an $1.6 million decrease
in interest income. Partially offseting this decrease, the average balance of loans increased $7.3 million generating $311,000 of additional
interest income on loans. Included in interest earned on loans for the year ended December 31, 2021, is $2.6 million of interest and fees
earned on the SBA's PPP lending program compared to $1.6 million for 2020.
Tax equivalent interest earned on securities increased $962,000, or 36.6%, to $3.6 million for 2021, compared to $2.6 million for 2020. The
average balance of securities increased $57.4 million resulting in a $1.3 million increase in interest income. Partially offsetting this
increase, the average yield on securities decreased 31 basis points to 2.22% for 2021 versus 2.53% for 2020 causing a $346,000 decrease
in interest income.
Interest earned on interest-earning deposits with banks decreased $100,000, or 52.4%, to $91,000 for 2021, compared to $191,000 for
2020. The average yield on interest-earning deposits decreased 50 basis points to 0.22% for 2021, versus 0.72% for 2020 causing a
$171,000 decrease in interest income. Partially offsetting this decrease, the average balance of these accounts increased $14.0 million, or
52.9%, causing a $71,000 increase in interest income.
Interest earned on federal bank stocks decreased $78,000, or 21.0%, to $293,000 for 2021, compared to $371,000 for 2020. The average
yield on federal bank stocks decreased 99 basis points to 5.15% for 2021 versus 6.14% for 2020 causing a $57,000 decrease in interest
income. Additionally, the average balance of federal bank stocks decreased $355,000, or 5.9%, resulting in an additional $21,000 decrease
in interest income.
K-22
Interest expense. Interest expense decreased $2.9 million, or 36.4% to $5.1 million for 2021, compared to $8.1 million for 2020. This
decrease can be attributed to decreases in interest expense on interest-bearing deposits and borrowed funds of $2.7 million and $223,000,
repsectively.
Interest expense on deposits decreased $2.7 million, or 37.9%, to $4.5 million for 2021, compared to $7.2 million for 2020. The average
rate on interest-bearing deposits decreased by 44 basis points to 0.62% for 2021 versus 1.06% for 2020 causing a $3.1 million decrease in
interest expense. Partially offsetting this decrease, the average balance of interest-bearing deposits increased $40.4 million, or 6.0%,
causing a $408,000 increase in interest expense.
Interest expense on borrowed funds decreased $223,000, or 24.9%, to $674,000 for 2021, compared to $897,000 for 2020. The average
balance of borrowed funds decreased $10.1 million, or 25.3%, to $29.8 million for 2021, compared to $39.9 million for 2020 causing a
$248,000 decrease in interest expense. Partially offsetting this decrease, the average rate on borrowed funds increased 1 basis point to
2.26% for 2021 versus 2.25% for 2020 causing a $25,000 increase in interest expense.
The following table reconciles interest income on the Consolidated Statements of Net Income to net interest income adjusted to a fully
taxable equivalent basis for the years ended December 31:
(Dollar amounts in thousands)
2021
2020
Interest income per Consolidated Statements of Net Income
$
36,581 $
37,147
Adjustment to fully taxable equivalent basis
231
191
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
36,812
37,338
Interest expense
5,124
8,062
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
31,688 $
29,276
Use of Non-GAAP Financial Measures. In addition to the results of operations presented in accordance with generally accepted
accounting principals (GAAP), management uses certain non-GAAP financial measures, such as net interest income on a fully taxable
equivalent basis. Management believes these non-GAAP financial measures provide information that is useful to investors in
understanding the underlying operations, performance and business trends as they facilitate comparison with the performance of others in
the financial services industry. Although management believes that these non-GAAP financial measures enhance investors' understanding
of the Corporation's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
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 $763,000, or 18.6%, to $3.3 million at December 31, 2021 from $4.1 million at December 31, 2020. The
decrease in nonperforming loans was primarily related to a decrease in non-accrual loans in the residential mortgage and commercial real
estate portfolios of $809,000 and $363,000, respectively.
The provision for loan losses decreased $2.2 million to $1.1 million for 2021 from $3.2 million for 2020. The Corporation’s allowance for
loan losses amounted to $10.4 million, or 1.31% of the Corporation’s total loan portfolio at December 31, 2021 compared to $9.6 million
or 1.18% of total loans at December 31, 2020. The higher provision for loan losses recorded in 2020 was due to growth in the residential
and consumer loan porfolios, the addition of a specifice pandemic qualitative allowance factor, increased risk ratings for loans which were
granted payment deferrals and an increase in criticized and classified loans. During 2021, the provision for loan losses decreased as
criticized and classified loans decreased and the specific pandemic allowance qualitative factor was reduced. The allowance for loan losses,
as a percentage of nonperforming loans at December 31, 2021 and 2020, was 311.3% and 233.5%, respectively. The allocation of the
allowance for loan losses related to commercial real estate, commercial business and consumers loans increased during the year primarily
as a result of growth in the balances. Some uncertainty remains regarding future levels of criticized and classified loans, nonperforming
loans and charge-offs, but some deterioration is may occur as a result of the pandemic. The Corporation will continue to closely monitor
changes in the loan portfolio and adjust the provision expense accordingly. At December 31, 2021, there was no provision for loan losses
allocated to loans acquired from UASB, NHB or CFB because the unaccreted purchase discount still exceeded the calculated allowance.
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, security and loan sale gains and losses, and
earnings on BOLI. Noninterest income increased $227,000, or 5.2%, to $4.6 million for 2021, compared to $4.4 million for 2020. The
increase in noninterest income is due to increases in other income, gains on the sale of loans and earnings on bank-owned life insurance of
$549,000, $149,000 and $34,000, respectively, partially offset by decreases in gains on the sale of securities and fees and service charges
of $442,000 and $63,000, respectively. The increase in other income was primarily related to a non-recurring $337,000 write down in the
value of a bank-owned property recognized during 2020 and an increase in interchange fee income in 2021 resulting from easing pandemic
restrictions leading to an increase in consumer spending. During 2021, the Corporation sold $14.2 million of residential mortgage loans to
the FHLB and realized a net gain of $390,000, compared to sales of $5.2 million and a net gain of $241,000 recognized during 2020. During
K-23
2021, the Corporation sold a total of $9.1 million of primarily low-yielding mortgage-backed securities and realized a net gain of
$245,000. The sale proceeds were utilized to repay $10.0 million in FHLB term advances. During 2020, the Corporation sold a total of
$43.9 million of low-yielding mortgage-backed and collateralized mortgage obligation securities and realized a net gain of $687,000. The
sale proceeds were utilized to repay $15.0 million in FHLB term advances and purchase higher yielding municipal and corporate securities.
Noninterest expense. Noninterest expense increased $578,000, or 2.6%, to $22.6 million for 2021, compared to $22.0 million for
2020. This increase was primarily attributable to increases in compensation and benefits expense, other noninterest expense, professional
fees, FDIC insurance expense and intangible amortization expense of $192,000, $188,000, $176,000, $41,000 and $21,000, respectively,
partially offset by a $40,000 decrease in premises and equipment e
xpense.
Compensation and employee benefits expense increased $192,000, or 1.7%, to $11.3 million for 2021, compared to $11.1 million for
2020. This increase primarily related to a $306,000 increase management incentive plan expense due to favorable results during 2021,
partially offset by a decrease in salary expense and commission expense of $100,000 and $100,000, respectively.
Other noninterest expense increased $188,000, or 3.1%, to $6.2 million for 2021, compared to $6.0 million for 2020. For additional
information regarding other noninterest expense see "Note 17 - Other Noninterest Income and Expense" to the Consolidated Financial
Statements on page F-39.
Professional fee expense increased $176,000, or 20.9%, to $1.0 million for 2021, compared to $841,000 for 2020. This increase is primarily
related to consulting fees related to IT and succession planning projects completed during 2021.
FDIC insurance expense increased $41,000, or 7.6%, to $579,000 for 2021, compared to $538,000 for 2020. This increase was primarily
related to an increase in the assessment base, partially offset by a reduction in the assesment rate due to decreases in non-performing assets
and increases in capital ratios during 2021.
Premises and equipment expense decreased $40,000, or 1.2%, at $3.3 million for 2021 and 2020. This decrease primarily related to
reductions in building repairs and maintenance expense and building depreciation expense of $26,000 and $20,000, respectively due to the
sale of two Bank properties.
The provision for income taxes increased $779,000, or 54.3%, to $2.2 million for 2021, compared to $1.4 million for 2020 primarily due
to the increase in net income available to common stockholders. The Corporation's effective tax rate was 17.9% for 2021, compared to
17.5% for 2020.
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 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 typically maintaining a one-year cumulative interest rate sensitivity gap within internal policy limits of between a positive and
K-24
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 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.
Based on certain assumptions derived from the Corporation’s historical experience, at December 31, 2021, the Corporation’s interest-
earning assets maturing or repricing within one year totaled $345.6 million while the Corporation’s interest-bearing liabilities maturing or
repricing within one year totaled $128.8 million, providing an excess of interest-earning assets over interest-bearing liabilities of $216.8
million or 22.04% of total assets. At December 31, 2021, the percentage of the Corporation’s assets to liabilities maturing or repricing
within one year was 268.8%.
The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31,
2021 which are expected to mature, prepay or reprice in each of the future time periods presented:
(Dollar amounts in thousands)
Six
months or
less
Six
months to
one year
One to
three
years
Three to
four years
Over four
years
Total
Total interest-earning assets
$ 248,917 $ 96,714 $ 234,869
82,473 $ 321,027 $ 984,000
Total interest-bearing liabilities
67,937
60,845 243,433
80,208 264,080 716,503
Interest rate sensitivity gap
$ 180,980 $ 35,869 $
(8,564) $
2,265 $ 56,947 $ 267,497
Cumulative rate sensitivity gap
$ 180,980 $ 216,849 $ 208,285
$ 210,550 $ 267,497
Ratio of gap during the period to total interest earning
assets
18.39%
3.65%
(0.87%)
0.23%
5.79%
Ratio of cumulative gap to total interest earning assets
18.39%
22.04%
21.17%
21.40%
27.18%
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 8% 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%.
K-25
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.
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, 2021 and 2020, respectively. This analysis was done assuming that the interest-
earning asset and interest-bearing liability levels at December 31, 2021 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,
2021 levels for net interest income.
Increase
Decrease
+100 BP
+200 BP
-100 BP
-200 BP
2021 Net interest income - increase (decrease)
2.69%
4.13%
(6.68%)
(10.68%)
2020 Net interest income - increase (decrease)
3.53%
5.84%
(2.77%)
(1.87%)
The expected increase in 2020 and 2021 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 $5.5 million, or 6.0%, to $97.0 million at December 31, 2021 from $91.5 million at December 31,
2020. Net income available to common stockholders of $10.0 million in 2021 represented an increase in earnings of $3.4 million, or 52.0%,
compared to 2020. The Corporation’s capital to assets ratio increased to 9.2% at December 31, 2021 from 8.9% at December 31, 2020.
While continuing to sustain a strong capital position, dividends on common stock were $3.3 million in 2021 and 2020. In addition,
stockholders have taken part in the Corporation’s dividend reinvestment plan introduced during 2003 with 40% of registered shareholder
accounts active in the plan at December 31, 2021. 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, 2021, the Bank was in excess of all regulatory capital requirements. See "Note 10 - Regulatory Matters" to the consolidated
financial statements on page F-26.
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 2021, the Corporation used its sources of
funds primarily to purchase securities and retire outstanding debt. As of December 31, 2021, the Corporation had outstanding loan
commitments, including undisbursed loans and amounts available under credit lines, totaling $124.6 million, and standby letters of credit
totaling $444,000, 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, 2021, time deposits amounted to $150.7 million, or 16.4%, of the Corporation’s total consolidated deposits, including
approximately $48.0 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.
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
K-26
and term borrowing capacity from the FHLB and, to a more limited extent, through the sale of loans. At December 31, 2021, 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 $249.3 million.
The Corporation pays a regular quarterly cash dividend. The Corporation paid dividends of $0.30 per common share for each of the four
quarters of 2021 and 2020, respectively. On February 16, 2022, the Corporation declared a quarterly dividend of $0.31 per common share
payable on March 18, 2022 to shareholders of record on March 1, 2022. 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 - Summary of Significant Accounting
Policies" to the Consolidated Financial Statements beginning on page F-11. 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.
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. As part of the Corporation's qualitative assessment of goodwill impairment, management considered the triggering event of the
COVID-19 pandemic and determined that significant change in the general economic environment and financial markets, including the
Corporation's market capitalization, represented an interim impairment indicator requiring continued evaluation. Because of the economic
uncertainty surrounding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of
goodwill as of November 30. Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired
as of November 30, 2021. 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. See "Note 1 - Summary of Significant Accounting Policies" on page F-11 for the Corporation's accounting policy on goodwill
and see "Note 6 - Goodwill and Intangible Assets" on page F-23 in the Consolidated Financial Statements for a detailed discussion of the
factors considered by management in the assessment.
K-27
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
In March 2021, the audit committee of the Board of Directors appointed BKD, LLP, Certified Public Accountants, as the independent
registered public acconting firm to audit the Corporation's financial statements for the year ending December 31, 2021. In addition to
performing customary audit services related to the audit of the Corporation's financial statements, BKD will perform required retirement
plan audits.
Crowe LLP performed an audit of the Corporation’s consolidated financial statements for the year ended December 31, 2020. Crowe’s
report did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the year ended December 31, 2020, there were no (i) disagreements between the Corporation and Crowe on
any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not
resolved to its satisfaction, would have caused Crowe to make reference to the subject matter of such disagreements in connection with its
report, or (ii) “reportable events,” as described in Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended. During the year ended December 31, 2020 and through the
engagement of BKD as the Corporation’s independent registered public accounting firm, neither the Corporation nor anyone on its behalf
had consulted BKD with respect to any accounting or auditing issues involving the Corporation.
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, 2021, 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 2021, 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, 2021. 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, 2021. Our
independent registered public accounting firm has not expressed an opinion on our internal control over financial reporting for the year
ended December 31, 2021.
Item 9B. Other Information
Not Applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
K-28
PART III
Item 10. Directors, Executive Officers and Corporate Governance
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.
In connection with the acquisition of CFB in 2018, the Corporation agreed to appoint two former directors of CFB, Henry H. Deible and
Hentry H. Deible II, to the Board of Directors of the Corporation and the Bank in the class of directors whose terms expired at the respective
2021 and 2019 annual meetings of shareholders and also agreed to re-nominate them 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. Ages are reflected as of December 31, 2021.
Directors Whose Terms Expire in 2022
Principal Occupation
Director Since
Name
Age
for Past Five Years
Bank/Corporation
David L. Cox
71 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.
1991/1991
Henry H. Deible II
39
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.
2018/2018
Mark A. Freemer
62
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.
2004/2004
William C. Marsh
55 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 industry and involvement in business and
civic 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.
2006/2006
K-29
Directors Whose Terms Expire in 2023
Principal Occupation
Director Since
Name
Age
for Past Five Years
Bank/Corporation
James M. Crooks
69
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.
2004/2004
Robert W. Freeman
64
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.
2015/2015
Steven J. Hunter
52
Managing Director of TM Capital Corp. He previously served as Managing
Director of Greene Holcomb Fisher and Morgan Keegan. Based on Mr. Hunter's
past employment experiences and extensive background in finance and
investment banking, he is well qualified to serve as a director.
2021/2021
John B. Mason
73
Retired, former 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
Directors Whose Terms Expire in 2024
Principal Occupation
Director Since
Name
Age
for Past Five Years
Bank/Corporation
Milissa S. Bauer
59
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.
2015/2015
Henry H. Deible
67
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.
2018/2018
Deanna K. McCarrier
58
Owner, McCarrier, CPAs. Ms. McCarrier is a certified public accountant. As a
business owner in the Corporation's market area as well as involvement with
various business and civic organizations in the communities that the Corporation
operates, Ms. McCarrier is well qualified to serve as a director.
2016/2016
Nicholas D. Varischetti
38
Attorney with Burns White and Partner in Varischetti Holdings, LP and
Allegheny Strategy Partners. 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
K-30
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.
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 2021 annual meeting of shareholders.
Committees and Meetings of the Corporation and the Bank
During 2021, the Board of Directors of the Corporation held eight regular meetings and seven special meetings, and the Board of Directors
of the Bank held 13 regular meetings. 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 annual report.
Nominating
Human
and Corporate
Directors
Audit
Executive
Resources
Governance
Milissa S. Bauer
**
*
David L. Cox
*
*
James M. Crooks
*
Henry H. Deible
*
*
*
Henry H. Deible II
Robert W. Freeman
*
*
Mark A. Freemer
*
*
*
**
Steven J. Hunter
*
*
William C. Marsh
**
John B. Mason
*
*
*
Deanna C. McCarrier
*
*
**
Nicholas D. Varischetti
*
*
*
* Member
** Chairman
K-31
Audit Committee. The audit committee of the Board is composed of seven members and operates under a written charter adopted by the
Board of Directors. During 2021, the audit committee consisted of Directors Bauer (Chairman), Crooks, Deible, Freemer, Hunter,
McCarrier and Varischetti. The Board of Directors has identified Milissa S. Bauer as an audit committee financial expert. The audit
committee met four times in 2021. The Board of Directors has determined that each committee member is “independent,” as defined by
Corporation policy, SEC rules and the NASDAQ listing standards.
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 2021, 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 four meetings of the full human resources
committee in 2021.
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 2021, the members of this committee were Directors Mark Freemer
(Chairman), Cox, Deible, Mason and Varischetti. 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
nomination for the election of directors.
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.
K-32
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, 2021.
Jennifer A. Poulsen, age 52. 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.
Amanda L. Engles, age 43. 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.
Robert A. Vernick, age 55. Mr. Vernick is Senior Vice President and Chief Lending Officer of the Bank, a position he has held since July
2012.
Eric J. Gantz, age 35. 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.
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, 2021, except that Nicholas
D. Varischetti, a director, filed late two Form 4's with respect to the purchase of 500 shares of common stock in June 2020 and 360 shares
of common stock in June 2020.
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
Summary Compensation Table. 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 2021 (who we refer to as “named executive officers”).
Non-equity
All
Stock
Incentive Plan
Other
Name and Principal Position
Year
Salary
Awards (1) Compensation (2) Compensation (3)
Total
William C. Marsh, Chairman,
2021
$ 417,857
$ 144,800
$ 125,522
$ 24,136
$ 712,315
President and Chief Executive Officer
2020
417,857
122,400
48,939
19,757
608,954
Jennifer A. Poulsen, Senior Vice President,
2021
194,151
28,960
38,881
13,970
275,962
Secretary and Chief Operating Officer
2020
194,151
12,240
15,159
11,774
233,324
Amanda L. Engles, Senior Vice President,
2021
179,928
28,960
36,033
13,145
258,066
Treasurer and Chief Financial Officer
2020
160,650
18,360
12,544
10,494
202,048
(1) Reflects the grant date fair value, computed in accordance with FASB ASC Topic 718, for stock awards granted in 2021 and 2020 pursuant to the Stock
Incentive Plans adopted in 2014 and 2021. For a description of the assumptions used for purposes of determining grant date fair value, see Note 14 to
the Financial Statements.
(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 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 2021 and 2020 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
K-33
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.
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, which vests after three years. 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 Amanda L. Engles, Treaurer and Chief Financial
Officer of the Corporation and Senior Vice President and Chief Financial 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 Ms. Engles would be entitled to receive an annual payment of $110,000,
$56,500 and $45,000, 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,
2021, Mr. Marsh, Ms. Poulsen and Ms. Engles would have been entitled to lump sum payments of $988,098, $431,558 and $58,404,
respectively. Such payments could be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code,
as amended.
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 Ms. Engles 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, 2024 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 Amanda L. Engles. The change in
control agreements currently expire on December 31, 2023, 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 Ms. Engles 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 (determined on an
K-34
annual basis) 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.
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, 2021. All awards
were granted pursuant to the Corporation’s 2014 or 2021 Stock Incentive Plans.
Stock Awards
Name
Number of Shares
of Stock Not
Vested
Market Value of
Shares of Stock
Not Vested (1)
Vesting Date
William C. Marsh
4,100
$ 118,490
12/06/2022
William C. Marsh
5,000
144,500
12/11/2023
William C. Marsh
5,000
144,500
12/10/2024
Jennifer A. Poulsen
1,500
43,350
12/06/2022
Jennifer A. Poulsen
500
14,450
12/11/2023
Jennifer A. Poulsen
1,000
28,900
12/10/2024
Amanda L. Engles
1,500
43,350
12/06/2022
Amanda L. Engles
750
21,675
12/11/2023
Amanda L. Engles
1,000
28,900
12/10/2024
(1) Based upon the fair market value of a share of common stock of the Corporation as of December 31, 2021.
Group Term Carve-Out Plan. The Bank has a Group Term Carve-Out Plan (the "Carve-Out Plan"), pursuant to which the Bank owns a
life insurance policy on each participant's life and will provide a portion of the death proceeds to the participant's beneficiary following the
participant's death. Mr. Marsh, Ms. Poulsen, Ms. Engles and various other officers of the Bank participate in the Carve-Out Plan. The
Bank owns the life insurance policies and pays the premiums on the policies. If a participant dies while employed by the Bank and prior
to a change in control, the participant's beneficiary will be entitled to a benefit equal to 2.5 times the deceased participant's annual base
salary at the date of death, but not in excess of a maximum benefit equal to the net death proceeds, which is the total death benefit less the
cash value of the endorsed policies. If Mr. Marsh, Ms. Poulsen and Ms. Engles had died at December 31, 2021, their beneficiaries would
have received a death benefit of $941,561, $435,377 and $399,820, respectively.
A participant's continued participation in the Carve-Out Plan is at the Bank's discretion; provided, however, if the participant is employed
by the Bank on the date of a change in control, then the participant shall continue participation in the plan until the earlier of (i) the
participant's waiver of his or her rights in the plan, or (ii) the participant's death. If a participant dies after a change in control, the
participant's beneficiary shall be entitle to a benefit equal to 1.5 times the deceased participant's annual base salary at the earlier of (a) the
date of death or (b) the date the participant's employment was terminated.
The payments and benefits pursuant to the Carve-Out Plan could be limited if they are deemed "parachute payments" under Section 280G
of the Internal Revenue Code, as amended.
Director Compensation. During 2021, 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 2021.
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, 2021.
Fees Earned
Stock
All Other
Name
or Paid in Cash
Awards (1)
Compensation (2)
Total
Milissa S. Bauer
$
44,550 $
21,720 $
— $
66,270
David L. Cox
44,950
21,720
26,000
92,670
James M. Crooks
44,550
21,720
—
66,270
Henry H. Deible
35,800
21,720
12,000
69,520
Henry H. Deible II
40,600
21,720
—
62,320
Robert W. Freeman
39,750
21,720
—
61,470
Mark A. Freemer
41,350
21,720
—
63,070
Steven J. Hunter
36,950
21,720
—
58,670
John B. Mason
45,000
21,720
—
66,720
Deanna K. McCarrier
40,950
21,720
—
62,670
Nicholas D. Varischetti
37,000
21,720
—
58,720
(1) Reflects the grant date fair value, computed in accordance with FASB ASC Topic 718, for stock awards granted in 2021 pursuant to
the 2021 Stock Incentive Plan adopted in 2021. For a description of the assumptions used for purposes of determining grant date fair
K-35
value, see Note 14 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Each director except Mr. Hunter has a total of 2,100 stock awards of which 600 vest on December 6, 2022, 750 vest on December 11,
2023 and 750 vest of December 10, 2024. Mr. Hunter has 750 stock awards which vest on December 10, 2024.
(2) Reflects amounts distributed under the Corporation’s Supplemental Retirement Agreement for Directors Cox and Deible.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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 March 1, 2022, 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
Amount and
Nature of
Beneficial
Ownership(1)
Percent of
Outstanding
Common Stock
Beneficially Owned
Directors:
Henry H. Deible
74,620(2)
2.73%
Nicholas D. Varischetti
68,154
2.49%
Robert W. Freeman
65,271(3)
2.39%
William C. Marsh
63,372(4)
2.32%
John B. Mason
41,042
1.50%
Milissa S. Bauer
38,747(5)
1.42%
James M. Crooks
30,029(6)
1.10%
Mark A. Freemer
24,500
*
Deanna K. McCarrier
23,708
*
David L. Cox
20,830(7)
*
Henry H. Deible II
884
*
Steven J. Hunter
200
*
Named Executive Officers:
Jennifer A. Poulsen
7,605(8)
*
Amanda L. Engles
4,641(9)
*
All directors and executive officers as a group (16 persons)
469,292(10)
17.16%
*
Represents less than 1% of the outstanding common stock.
(1)
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.
(2)
Of the 74,620 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.
(3)
Of the 65,271 shares beneficially owned by Mr. Freeman, 1,833 shares are owned individually by his spouse.
(4)
Of the 63,115 shares beneficially owned by Mr. Marsh, 4,972 shares are held in the Corporation's 401(k) Plan.
(5)
Of the 38,747 shares beneficially owned by Ms. Bauer, 6,306 shares are owned jointly with her spouse, 14,123 shares are owned
individually by her spouse and 100 shares are owned individually by her son.
(6)
Of the 30,029 shares beneficially owned by Mr. Crooks, 3,273 shares are owned jointly with his spouse and 635 shares are owned
individually by his spouse.
(7)
Of the 20,830 shares beneficially owned by Mr. Cox, 19,330 are owned jointly with his spouse and 500 shares are owned
individually by his spouse.
(8)
Of the 7,570 shares beneficially owned by Ms. Poulsen, 2,615 shares are held in the Corporation's 401(k) Plan.
(9)
Of the 4,559 shares beneficially owned by Ms. Engles, 3,141 shares are held in the Corporation's 401(k) Plan.
(10)
Of the 468,776 shares beneficially owned by all directors and officers as a group, 13,948 shares are held in the Corporation's 401(k)
Plan.
K-36
Equity Compensation Plan Information. The following table provides certain information as of December 31, 2021 with respect to
shares of common stock that may be issued under our 2014 and 2021 Stock Incentive Plans, which were approved by shareholders in April
2014 and April 2021, respectively.
Plan Category
Number of
securities to be
issued upon
exercise of
outstanding options
Weighted-average
exercise price of
outstanding options
Number of
securities
remaining
available for
issuance under
equity
compensation
plans (excluding
securities
reflected in the
first column) (1)
Equity compensation plans approved by security holders
—
$
—
281,057
Equity compensation plans not approved by security holders
—
—
—
Total
—
$
—
281,057
(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 88,400 shares of restricted stock have been granted at December 31,
2021. The 2021 Stock Incentive Plan provides for the grant of restricted common stock and options for up to 204,091 shares of common
stock of which no options and 11,950 shares of restricted stock have been granted at December 31, 2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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.
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 two directors and one executive officer whose loans totaled more than $120,000 at December 31, 2021, however in these
instances the loans made with preferential pricing did not exceed $120,000.
Year
Highest Principal
Balance
Balance
Amount Paid During
Year
Interest
Name and Position
Type
Made
During Year
12/31/21 Principal
Interest
Rate
David L. Cox,
Director
Residential Mortgage 2010
$133,284
$0
$133,284
$1,324
2.88%
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.
K-37
Item 14. Principal Accountant Fees and Services
General. The audit committee of the Board of Directors has appointed BKD, LLP, Certified Public Accountants, Fort Wayne, Indiana
(PCAOB Firm ID: 686) as the independent registered public accounting firm to audit the Corporation’s financial statements for the year
ending December 31, 2021. In addition to performing customary audit services related to the audit of the Corporation’s financial statements,
BKD will perform required retirement plan audits. Crowe LLP audited the Corporation's financial statements for the year ending December
31, 2020.
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.
Auditor Fees. The following table sets forth the aggregate fees paid by us for professional services rendered in connection with the audit
of the Corporation’s consolidated financial statements for 2021 and 2020, as well as the fees paid for audit-related services, tax services
and all other services rendered in 2021 and 2020. All auditor fees paid in relation to 2020 were paid to Crowe, LLP. Audit fees paid in
relation to 2021 were paid to BKD, LLP. Audit-related fees for 2021 were partially paid to BKD, LLP and partially paid to Crowe LLP. All
tax fees related to 2021 were paid to Crowe LLP.
2021
2020
Audit fees (1)
$
115,350 $
159,500
Audit-related fees (2)
30,069
26,000
Tax fees
33,057
24,763
Total
$
178,476 $
210,263
(1) 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
2021 and 2020, and the reviews of the financial statements included in the Corporation’s Quarterly Reports on Forms 10-Q for fiscal
years 2021 and 2020.
(2) The audit-related fees include audits of the Corporation’s benefit plans for both years. In addition, 2021 audit-related fees include fees
paid for services rendered associated with the Corporation's Form S-8 filing. 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.
Report of the Audit Committee. In discharging its oversight responsibility, the audit committee has met and held discussions with
management and BKD, 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 BKD 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, 2021, for
filing with the SEC.
Respectfully submitted by the members of the audit committee of the Board of Directors:
Milissa S. Bauer, Chairman
James M. Crooks
Henry H. Deible
Mark A. Freemer
Steven J. Hunter
Deanna K. McCarrier
Nicholas D. Varischetti
K-38
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.
3.1
Amended and Restated Articles of Incorporation of Emclaire Financial Corp (1)
3.2
Bylaws of Emclaire Financial Corp (2)
4.1
Specimen Common Stock Certificate of Emclaire Financial Corp (3)
4.2
Description of Emclaire Common Stock (13)
10.1
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)*
10.2
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 (12)*
10.3
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)*
10.4
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 (12)*
10.5
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)*
10.6
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)*
10.7
Supplemental Executive Retirement Plan Agreement between the Farmers National Bank of Emlenton and
Amanda L. Engles, dated as of November 15, 2017 (5)*
10.8
Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and
Robert A. Vernick dated November 18, 2015 (12)*
10.9
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)*
10.10
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)*
10.11
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)*
10.12
Group Term Carve-Out Plan between the Farmers National Bank of Emlenton and Officers and Employees
(7)*
10.13
Emclaire Financial Corp 2014 Stock Incentive Plan (8)*
10.14
Emclaire Financial Corp 2021 Stock Incentive Plan (9)*
11.1
Statement regarding computation of earnings per share (see Note 1 of the Notes to Consolidated Financial
Statements in the Annual Report).
14.0
Code of Personal and Business Conduct and Ethics. (10)
20.0
Emclaire Financial Corp Dividend Reinvestment and Stock Purchase Plan. (11)
21.0
Subsidiaries of the Registrant (see information contained herein under “Item 1. Description of Business -
Subsidiary Activity”).
23.1
Consent of Crowe LLP
23.2
Consent of BKD, LLP
31.1
Principal Executive Officer Section 302 Certification.
31.2
Principal Financial Officer Section 302 Certification.
32.1
Principal Executive Officer Section 906 Certification.
32.2
Principal Financial Officer Section 906 Certification.
101.INS
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its
XBRL tags are embedded within the Inline XBRL document)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
K-39
*
Compensatory plan or arrangement.
(1)
Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated May 23, 2018.
(2)
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.
(3)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB40 for the year ended December 31, 1997.
(4)
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 18, 2015.
(5)
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 15, 2017.
(6)
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 8, 2019.
(7)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2002.
(8)
Incorporated by reference to the Registrant’s Definitive Proxy Statement dated March 24, 2014.
(9)
Incorporated by reference to the Registrant's Definitive Proxy Statement dated March 19, 2021.
(10)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
(11)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSBfor the year ended December 31, 2001.
(12)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018.
(13)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2019.
K-40
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.
EMCLAIRE FINANCIAL CORP
Dated: March 16, 2022
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
By:
/s/ Amanda L. Engles
William C. Marsh
Amanda L. Engles
Chairman of the Board
Treasurer and Chief Financial Officer
Chief Executive Officer
(Principal Financial Officer)
President
Date: March 16, 2022
Director
(Principal Executive Officer)
Date: March 16, 2022
By:
/s/ Milissa S. Bauer
By:
/s/ David L. Cox
Milissa S. Bauer
David L. Cox
Director
Director
Date: March 16, 2022
Date: March 16, 2022
By:
/s/ James M. Crooks
By:
/s/ Henry H. Deible
James M. Crooks
Henry H. Deible
Director
Director
Date: March 16, 2022
Date: March 16, 2022
By:
/s/ Henry H. Deible II
By:
/s/ Robert W. Freeman
Henry H. Deible II
Robert W. Freeman
Director
Director
Date: March 16, 2022
Date: March 16, 2022
By:
/s/ Mark A. Freemer
By:
/s/ Steven J. Hunter
Mark A. Freemer
Steven J. Hunter
Director
Director
Date: March 16, 2022
Date: March 16, 2022
/s/ John B. Mason
By:
/s/ Deanna K. McCarrier
John B. Mason
Deanna K. McCarrier
Director
Director
Date: March 16, 2022
Date: March 16, 2022
By:
/s/ Nicholas D. Varischetti
Nicholas D. Varischetti
Director
Date: March 16, 2022
F-1
Financial Statements
Table of Contents
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-6
Consolidated Statements of Net Income
F-7
Consolidated Statements of Comprehensive Income
F-8
Consolidated Statements of Changes in Stockholders’ Equity
F-9
Consolidated Statements of Cash Flows
F-10
Notes to Consolidated Financial Statements
F-11
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
Emclaire Financial Corp
Emlenton, Pennsylvania
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Emclaire Financial Corp (Corporation)
as of December 31, 2021, the related consolidated statement of net income, comprehensive income,
changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively
referred to as the financial statements). In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the Corporation as of December 31,
2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is
to express an opinion on the Corporation’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Corporation in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
F-2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the
financial statements that was communicated or required to be communicated to the Audit Committee and
that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Note 3 to the financial statements, the Corporation’s allowance for loan losses (ALL) was
$10.39 million at December 31, 2021. The Corporation also describes in Note 1 of the financial
statements the Allowance for Loan Losses accounting policy around this estimate. The allowance for loan
losses is evaluated on a regular basis by management and is based on management’s periodic review of
the collectability of the loans in light of historical experiences, 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, and prevailing economic conditions. The allowance consists of specific and general
components. The specific component relates to loans that are classified as impaired and an allowance is
established when the discounted cash flows (or collateral value) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified loans and is based on historical
loss experience adjusted for qualitative factors.
We identified the valuation of the ALL as a critical audit matter. Auditing the ALL involved significant
judgement and complex review as there is a high degree of subjectivity in evaluating management’s
estimate, such as evaluating management's assessment of economic conditions and other environmental
factors, evaluating the adequacy of specific allowances associated with impaired loans and assessing the
appropriateness of loan grades.
Our audit procedures related to the estimated allowance for loan losses included:
x
Testing of completeness and accuracy of the underlying data utilized in the ALL as well as the
completeness and accuracy of the information and reports utilized in the ALL.
x
Testing the clerical and computational accuracy of the formulas within the Corporation’s ALL
calculation.
x
Evaluating credit quality indicators such as trends in delinquencies, nonaccruals, charge-offs, and
loan grades.
x
Testing of the loan review function and the accuracy of loan grades determined.
x
Evaluating the qualitative factor adjustments to historical loss by performing the following:
o
Evaluating the reliability and relevancy of data used as a basis for the adjustments relating to
qualitative factors
o
Evaluating the reasonableness of management's judgments related to the qualitative and
quantitative assessment of the data used in the determination of qualitative factors and the
resulting allocation to the allowance
o
Analytically reviewed the collectively evaluated for impairment component year over year
o
Evaluating the reasonableness of the qualitative factor allowance allocation derived by
management
F-3
o
Recalculating the dollar amount of the reserve derived from the qualitative factor assessment
o
Agreeing the allowance allocation from the qualitative factor analysis to the overall
allowance calculation
We have served as the Corporation’s auditor since 2021.
Fort Wayne, Indiana
March 16, 2022
F-4
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors
Emclaire Financial Corp
Emlenton, Pennsylvania
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Emclaire Financial Corp (the Corporation) as of December
31, 2020, and the related consolidated statements of net income, comprehensive income, changes in stockholders’ equity,
and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December
31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion
on the Corporation’s financial statements based on our audit. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audit provided a reasonable basis for our opinion.
Crowe LLP
We served as the Company's auditor from 2010 through March 19, 2021.
Oak Brook, Illinois
March 19, 2021
F-6
Consolidated Balance Sheets
(Dollar amounts in thousands, except share and per share data)
December 31,
2021
December 31,
2020
Assets
Cash and due from banks
$
3,505 $
3,526
Interest earning deposits with banks
5,575
33,913
Total cash and cash equivalents
9,080
37,439
Interest earning time deposits
2,484
5,718
Securities - available-for-sale
186,270
113,041
Securities - equity investments
5
15
Loans held for sale
469
75
Loans receivable, net of allowance for loan losses of $10,393 and $9,580
780,010
800,338
Federal bank stocks, at cost
5,715
5,635
Bank-owned life insurance
21,902
15,468
Accrued interest receivable
3,731
3,786
Premises and equipment, net
16,444
18,202
Goodwill
19,460
19,460
Core deposit intangible, net
899
1,083
Prepaid expenses and other assets
13,039
12,063
Total Assets
$
1,059,508 $
1,032,323
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing
$
221,993 $
193,752
Interest bearing
696,503
699,875
Total deposits
918,496
893,627
Short-term borrowed funds
7,050
2,050
Long-term borrowed funds
15,000
30,000
Accrued interest payable
338
474
Accrued expenses and other liabilities
21,665
14,692
Total Liabilities
962,549
940,843
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
4,206
4,206
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,837,229 and 2,823,229 shares
issued; 2,735,212 and 2,721,212 shares outstanding
3,547
3,529
Additional paid-in capital
47,645
47,200
Treasury stock, at cost; 102,017 shares
(2,114)
(2,114)
Retained earnings
48,852
42,143
Accumulated other comprehensive loss
(5,177)
(3,484)
Total Stockholders' Equity
96,959
91,480
Total Liabilities and Stockholders' Equity
$
1,059,508 $
1,032,323
See accompanying notes to consolidated financial statements.
F-7
Consolidated Statements of Net Income
(Dollar amounts in thousands, except share and per share data)
Year ended December 31,
2021
2020
Interest and dividend income
Loans receivable, including fees
$
32,743 $
34,029
Securities:
Taxable
2,435
2,070
Exempt from federal income tax
1,019
486
Federal bank stocks
293
371
Interest earning deposits with banks
91
191
Total interest and dividend income
36,581
37,147
Interest expense
Deposits
4,450
7,165
Short-term borrowed funds
89
131
Long-term borrowed funds
585
766
Total interest expense
5,124
8,062
Net interest income
31,457
29,085
Provision for loan losses
1,066
3,247
Net interest income after provision for loan losses
30,391
25,838
Noninterest income
Fees and service charges
1,435
1,498
Net gain on sales of available for sale securities
245
687
Net gain on sales of loans
390
241
Earnings on bank-owned life insurance
435
401
Other
2,085
1,536
Total noninterest income
4,590
4,363
Noninterest expense
Compensation and employee benefits
11,340
11,148
Premises and equipment
3,260
3,300
Intangible asset amortization
185
164
Professional fees
1,017
841
Federal deposit insurance
579
538
Other
6,215
6,027
Total noninterest expense
22,596
22,018
Income before provision for income taxes
12,385
8,183
Provision for income taxes
2,214
1,435
Net income
10,171
6,748
Preferred stock dividends
196
186
Net income available to common stockholders
$
9,975 $
6,562
Earnings per common share
Basic
$
3.66 $
2.42
Diluted
$
3.63 $
2.41
See accompanying notes to consolidated financial statements.
F-8
Consolidated Statements of Comprehensive Income
(Dollar amounts in thousands)
Year ended December 31,
2021
2020
Net income
$
10,171 $
6,748
Other comprehensive income
Unrealized gains on securities available-for-sale:
Unrealized holding gain (loss) arising during the period
(2,699)
3,634
Reclassification adjustment for gains included in net income
(245)
(687)
Net period change
(2,944)
2,947
Tax effect
618
(619)
Net of tax
(2,326)
2,328
Defined benefit pension plans:
Unrealized holding gain (loss) arising during the period
509
(871)
Reclassification adjustment for losses included in net income
292
268
Net period change
801
(603)
Tax effect
(168)
126
Net of tax
633
(477)
Total other comprehensive income (loss)
(1,693)
1,851
Comprehensive income
$
8,478 $
8,599
See accompanying notes to consolidated financial statements.
F-9
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in thousands, except share and per share data)
Preferred
Stock
Additional
Paid-in
Capital -
Preferred
Common
Stock
Additional
Paid-in
Capital -
Common
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
Balance at
January 1, 2020 $
421 $
3,785 $
3,513 $
46,757 $
(2,114) $
38,831 $
(5,335 ) $
85,858
Net income
—
—
—
—
—
6,748
—
6,748
Other
comprehensive
income
—
—
—
—
—
—
1,851
1,851
Cash dividends
declared on
preferred stock
—
—
—
—
—
(186)
—
(186)
Issuance of common
stock for restricted
stock awards
(12,500 shares)
—
—
16
(16)
—
—
—
—
Stock compensation
expense
—
—
—
459
—
—
—
459
Cash dividends
declared on
common stock
($1.20 per share)
—
—
—
—
—
(3,250)
—
(3,250)
Balance at
December 31,
2020
$
421 $
3,785 $
3,529 $
47,200 $
(2,114) $
42,143 $
(3,484 ) $
91,480
Balance at
January 1, 2021 $
421 $
3,785 $
3,529 $
47,200 $
(2,114) $
42,143 $
(3,484 ) $
91,480
Net income
—
—
—
—
—
10,171
—
10,171
Other
comprehensive
loss
—
—
—
—
—
—
(1,693 )
(1,693)
Cash dividends
declared on
preferred stock
—
—
—
—
—
(196)
—
(196)
Issuance of common
stock for restricted
stock awards
(14,000 shares)
—
—
18
(18)
—
—
—
—
Stock compensation
expense
—
—
—
463
—
—
—
463
Cash dividends
declared on
common stock
($1.20 per share)
—
—
—
—
—
(3,266)
—
(3,266)
Balance at
December 31,
2021
$
421 $
3,785 $
3,547 $
47,645 $
(2,114) $
48,852 $
(5,177 ) $
96,959
See accompanying notes to consolidated financial statements.
F-10
Consolidated Statements of Cash Flows
(Dollar amounts in thousands, except share and per share data)
For the year ended
December 31,
2021
2020
Cash flows from operating activities
Net income
$
10,171 $
6,748
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
1,361
1,406
Provision for loan losses
1,066
3,247
Amortization/accretion of premiums, discounts and deferred costs and fees, net
(367)
(213)
Amortization of operating lease right-of-use assets
181
136
Amortization of intangible assets and mortgage servicing rights
280
261
Realized gain on sales of debt securities, net
(245)
(687)
Change in fair value of equity securities
10
4
Net gain on sales of loans
(390)
(241)
Net (gain) loss on foreclosed real estate
(49)
3
Net (gain) loss on sale of premises and equipment
(28)
277
Loans originated for sale
(12,566)
(213)
Proceeds from the sale of loans originated for sale
12,492
144
Write-down of foreclosed real estate
—
56
Stock compensation expense
463
459
Increase in bank-owned life insurance
(435)
(401)
Increase in deferred taxes
(65)
(603)
Decrease (increase) in accrued interest receivable
55
(1,186)
Increase in prepaid expenses and other assets
(591)
(590)
Decrease in accrued interest payable
(136)
(142)
Increase in accrued expenses and other liabilities
7,282
1,066
Net cash provided by operating activities
18,489
9,531
Cash flows from investing activities
Loan originations and principal collections, net
17,325
(113,305)
Proceeds from sales of loans held for sale previously classified as portfolio loans
2,800
5,260
Available-for-sale securities:
Sales
9,127
43,906
Maturities, repayments and calls
19,597
23,238
Purchases
(105,100)
(56,777)
Purchase of bank-owned life insurance
(6,000)
—
Purchase of federal bank stocks
(1,221)
(3,190)
Redemption of federal bank stocks
1,141
3,345
Net change in interest earning time deposits
3,234
3,980
Proceeds from surrender of bank-owned life insurance
—
220
Proceeds from the sale of bank premises and equipment
1,297
397
Purchases of premises and equipment
(872)
(1,155)
Proceeds from the sale of foreclosed real estate
417
436
Net cash used in investing activities
(58,255)
(93,645)
Cash flows from financing activities
Net increase in deposits
24,869
106,503
Proceeds from long-term debt
—
20,000
Repayments on long-term debt
(15,000)
(16,500)
Net change in short-term borrowings
5,000
—
Dividends paid
(3,462)
(3,436)
Net cash provided by financing activities
11,407
106,567
Net increase (decrease) in cash and cash equivalents
(28,359)
22,453
Cash and cash equivalents at beginning of period
37,439
14,986
Cash and cash equivalents at end of period
$
9,080 $
37,439
Supplemental information:
Interest paid
$
5,260 $
8,204
Income taxes paid
2,500
1,350
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate
24
590
Transfers from portfolio loans to loans held for sale
2,728
5,025
Syndicated National Credits settling in subsequent period
7,475
—
Addition to operating lease right-of-use assets
325
—
See accompanying notes to consolidated financial statements.
F-11
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 subsidiary, The Farmers National Bank of Emlenton (the Bank). 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 Western
Pennsylvania. 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. The Corporation bases estimates on historical experience and other assumptions
believed to be reasonable under the current circumstances. These estimates may change as new events occur and as additional information
surrounding the continued impact of the pandemic become available. The operations and business results of the Corporation could be materially
adversely effected. Significant estimates as disclosed in Note 1, including the allowance for loan losses, valuation of financial instruments and the
carrying of goodwill may be materially adversely impacted by national and local events designed to mitigate the pandemic.
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 and short-term borrowings.
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-12
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.
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.
F-13
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies (continued)
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. Goodwill is not amortized but is assessed at least annually for impairment, and more
frequently if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying amount. An initial
qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value
is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair
value of each reporting unit is calculated and compared to the recorded book value. If the calculated fair value of the reporting unit exceeds its
carrying value, goodwill is not considered impaired. In the event of an impairment, any such charges are recognized as a deduction from earnings
in the period identified in an amount equal to the difference. The Corporation performs an annual assessment as of November 30 each
year. 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. At December 31, 2021 and 2020, the outstanding balance of loans serviced
for other totaled $32.0 million and $26.8 million, respectively, and are not included in the accompanying consolidated balance sheet. At December
31, 2021 and 2020, the mortgage servicing rights associated with these outstanding balances were $212,000 and $165,000, respectively, and are
included with other assets in the consolidated balance sheet. In addition, for the years ended December 31, 2021 and 2020, the Corporation
recognized $79,000 and $80,000, respectively, for the servicing of these loans and is recorded in other noninterest income.
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. There was no real estate acquired
through foreclosure at December 31, 2021, compared to $344,000 at December 31, 2020. Loans secured by residential real estate properties for
which formal foreclosure proceedings are in process totaled $457,000 and $1.3 million at December 31, 2021 and 2020, 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.
F-14
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies (continued)
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 (loss). 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). 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.
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 was originally effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption
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.
F-15
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies (continued)
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform". ASU 2020-04 contains optional guidance to ease the potential
burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the London
Interbank Offered Rate (LIBOR) likely being discontinued as a benchmark rate. The standard is elective and provides optional expedients and
exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate that may
be discontinued. This ASU became effective upon issuance and generally can be applied through December 31, 2022. The Corporation has
identified thirteen purchased participation loans totaling $47.6 million in outstanding balances, two purchased National Syndicated Credits totaling
$7.5 million in outstanding balances and one tax-exempt commercial business loan with an outstanding balance of $513,000 tied to the LIBOR
reference rate. The Corporation has not yet made any contract modifications related to the outstanding loans, however, does not expect any changes
to have a material impact on financial statements or disclosures.
Adoption of New Accounting Policies. 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 was 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. The adoption of this ASU did not have a material impact on the Corporation's 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. 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 adoption of this ASU did not have a material impact on the Corporation's financial statements and disclosures.
2.
Securities
Equity Securities. The Corporation held equity securities with fair values of $5,000 and $15,000 as of December 31, 2021 and
2020, respectively. Changes in the fair value of these securities are included in other income on the consolidated statements of net income. The
Corporation recognized losses of $10,000 and $4,000 on the equity securities held at December 31, 2021 and 2020, respectively.
Debt Securities - Available for Sale. The following table summarizes the Corporation’s securities as of December 31:
(Dollar amounts in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
December 31, 2021:
U.S. government sponsored entities and agencies
$
8,142 $
52 $
(35) $
8,159
U.S. agency mortgage-backed securities: residential
12,049
116
(130)
12,035
U.S. agency collateralized mortgage obligations: residential
50,202
92
(804)
49,490
State and political subdivisions
92,307
1,099
(844)
92,562
Corporate debt securities
23,705
424
(105)
24,024
Total securities available-for-sale
$
186,405 $
1,783 $
(1,918) $
186,270
December 31, 2020:
U.S. government sponsored entities and agencies
$
3,036 $
11 $
(40) $
3,007
U.S. agency mortgage-backed securities: residential
16,151
436
(6)
16,581
U.S. agency collateralized mortgage obligations: residential
15,658
263
(10)
15,911
State and political subdivisions
53,834
1,781
(38)
55,577
Corporate debt securities
21,553
434
(22)
21,965
Total securities available-for-sale
$
110,232 $
2,925 $
(116) $
113,041
Securities with carrying values of $51.0 million and $36.0 million as of December 31, 2021 and 2020, respectively, were pledged to secure
public deposits and for other purposes required or permitted by law.
F-16
Notes to Consolidated Financial Statements
2.
Securities (continued)
Gains on sales of available for sale debt securities for the years ended December 31 were as follows:
2021
2020
Proceeds
$
9,127 $
43,906
Gains
265
699
Losses
(20)
(12)
Tax provision related to gains (losses)
52
144
The following table summarizes scheduled maturities of the Corporation’s debt securities as of December 31, 2021. 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)
Available-for-sale
Amortized
Cost
Fair Value
Due in one year or less
$
— $
—
Due after one year through five years
4,607
4,679
Due after five years through ten years
32,691
33,034
Due after ten years
86,856
87,032
Mortgage-backed securities: residential
12,049
12,035
Collateralized mortgage obligations: residential
50,202
49,490
Total securities available-for-sale
$
186,405 $
186,270
Information pertaining to securities with gross unrealized losses at December 31, 2021 and 2020 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
12 Months or More
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
December 31, 2021:
U.S. government sponsored entities and agencies
$
4,568 $
(35 ) $
— $
— $
4,568 $
(35)
U.S. agency mortgage-backed securities: residential
7,254
(130 )
—
—
7,254
(130)
U.S. agency collateralized mortgage obligations:
residential
39,964
(801 )
1,584
(3)
41,548
(804)
State and political subdivisions
39,872
(814 )
1,442
(30)
41,314
(844)
Corporate debt securities
6,104
(105 )
—
—
6,104
(105)
Total
$
97,762 $
(1,885 ) $
3,026 $
(33) $ 100,788 $
(1,918)
December 31, 2020:
U.S. government sponsored entities and agencies
$
1,996 $
(40 ) $
— $
— $
1,996 $
(40)
U.S. agency mortgage-backed securities: residential
1,547
(6 )
—
—
1,547
(6)
U.S. agency collateralized mortgage obligations:
residential
1,515
(4 )
4,845
(6)
6,360
(10)
State and political subdivisions
1,705
(11 )
1,641
(27)
3,346
(38)
Corporate debt securities
2,509
(10 )
988
(12)
3,497
(22)
Total
$
9,272 $
(71 ) $
7,474 $
(45) $
16,746 $
(116)
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-17
Notes to Consolidated Financial Statements
2.
Securities (continued)
There were 126 debt securities in an unrealized loss position as of December 31, 2021, of which 4 were in an unrealized loss position for
more than 12 months. Of these 126 securities, 71 were state and political subdivisions securities, 28 were collateralized mortgage obligations
(issued by U.S. government sponsored entities), 17 were corporate securities, 7 were mortgage-backed securities and 3 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, 2021 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)
December 31,
2021
December 31,
2020
Mortgage loans on real estate:
Residential first mortgages
$
273,823 $
308,031
Home equity loans and lines of credit
75,810
87,088
Commercial real estate
326,341
285,625
Total real estate loans
675,974
680,744
Other loans:
Commercial business
65,877
89,139
Consumer
48,552
40,035
Total other loans
114,429
129,174
Total loans, gross
790,403
809,918
Less allowance for loan losses
10,393
9,580
Total loans, net
$
780,010 $
800,338
Included in total loans above are net deferred costs of $3.3 million and $2.5 million at December 31, 2021 and 2020, respectively. In
addition, included in commercial loans are $1.2 million and $30.4 million of Paycheck Protection Program (PPP) loans at December 31, 2021 and
2020, respectively, that are guaranteed by the Small Business Administration (SBA). The Corporation received $1.6 million and $2.1 million of
fees related to the origination of these loans during 2021 and 2020, respectively, of which $1.3 million was recognized in 2020, $2.4 million was
recognized in 2021 and $41,000 is expected to be recognized in 2022 upon forgiveness by the SBA.
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. While
the Corporation has historically experienced strong trends in asset quality, as a result of the ongoing COVID-19 pandemic, management has
recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to current
economic conditions.
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)
2021
2020
Balance at the beginning of the year
$
9,580 $
6,556
Provision for loan losses
1,066
3,247
Charge-offs
(369)
(473)
Recoveries
116
250
Balance at the end of the year
$
10,393 $
9,580
F-18
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, 2021 and 2020:
Home
Equity
Residential & Lines Commercial Commercial
(Dollar amounts in thousands)
Mortgages of Credit Real Estate
Business
Consumer
Total
At December 31, 2021:
Beginning Balance
$
2,774 $
620 $
5,180 $
677 $
329 $
9,580
Charge-offs
—
(41)
(150)
—
(178)
(369)
Recoveries
—
27
37
19
33
116
Provision (Credit)
(439)
(81)
1,186
208
192
1,066
Ending Balance
$
2,335 $
525 $
6,253 $
904 $
376 $
10,393
Ending ALL balance attributable to loans:
Individually evaluated for impairment
$
1 $
— $
88 $
196 $
— $
285
Acquired loans collectively evaluated for impairment
—
—
—
—
—
—
Originated loans collectively evaluated for impairment
2,334
525
6,165
708
376
10,108
Total
$
2,335 $
525 $
6,253 $
904 $
376 $
10,393
Total loans:
Individually evaluated for impairment
$
294 $
4 $
1,225 $
363 $
— $
1,886
Acquired loans collectively evaluated for impairment
29,573
6,370
21,471
2,055
538
60,007
Originated loans collectively evaluated for impairment
243,956
69,436
303,645
63,459
48,014 728,510
Total
$
273,823 $
75,810 $
326,341 $
65,877 $
48,552 $ 790,403
At December 31, 2020:
Beginning Balance
$
2,309 $
626 $
2,898 $
636 $
87 $
6,556
Charge-offs
(27)
(126)
(75)
(163)
(82)
(473)
Recoveries
6
15
107
70
52
250
Provision
486
105
2,250
134
272
3,247
Ending Balance
$
2,774 $
620 $
5,180 $
677 $
329 $
9,580
Ending ALL balance attributable to loans:
Individually evaluated for impairment
$
— $
— $
40 $
20 $
— $
60
Acquired loans collectively evaluated for impairment
—
—
—
—
—
—
Originated loans collectively evaluated for impairment
2,774
620
5,140
657
329
9,520
Total
$
2,774 $
620 $
5,180 $
677 $
329 $
9,580
Total loans:
Individually evaluated for impairment
$
329 $
3 $
1,639 $
143 $
— $
2,114
Acquired loans collectively evaluated for impairment
44,209
8,491
30,913
5,131
1,017
89,761
Originated loans collectively evaluated for impairment
263,493
78,594
253,073
83,865
39,018 718,043
Total
$
308,031 $
87,088 $
285,625 $
89,139 $
40,035 $ 809,918
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, 2021 and 2020, 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) because the unaccreted purchase discount still
exceeded the calculated allowance.
F-19
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, 2021
For the year ended December 31, 2021
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
in Period
Cash Basis
Interest
Recognized
in Period
Residential first mortgages
$
68 $
68 $
1 $
28 $
3 $
3
Home equity and lines of credit
—
—
—
—
—
—
Commercial real estate
559
559
88
387
30
30
Commercial business
250
250
196
79
8
8
Consumer
—
—
—
—
—
—
Total
$
877 $
877 $
285 $
494 $
41 $
41
Impaired Loans with No Specific Allowance
As of December 31, 2021
For the year ended December 31, 2021
Unpaid
Principal
Balance
Recorded
Investment
Average
Recorded
Investment
Interest
Income
Recognized
in Period
Cash Basis
Interest
Recognized
in Period
Residential first mortgages
$
338 $
226 $
284 $
3 $
3
Home equity and lines of credit
4
4
4
—
—
Commercial real estate
666
666
990
71
71
Commercial business
113
113
96
5
5
Consumer
—
—
—
—
—
Total
$
1,121 $
1,009 $
1,374 $
79 $
79
(Dollar amounts in thousands)
Impaired Loans with Specific Allowance
As of December 31, 2020
For the year ended December 31, 2020
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
in Period
Cash Basis
Interest
Recognized
in Period
Residential first mortgages
$
— $
— $
— $
43 $
— $
—
Home equity and lines of credit
—
—
—
2
—
—
Commercial real estate
380
380
40
106
17
11
Commercial business
78
78
20
53
5
4
Consumer
—
—
—
—
—
—
Total
$
458 $
458 $
60 $
204 $
22 $
15
Impaired Loans with No Specific Allowance
As of December 31, 2020
For the year ended December 31, 2020
Unpaid
Principal
Balance
Recorded
Investment
Average
Recorded
Investment
Interest
Income
Recognized
in Period
Cash Basis
Interest
Recognized
in Period
Residential first mortgages
$
440 $
329 $
300 $
7 $
7
Home equity and lines of credit
3
3
2
—
—
Commercial real estate
1,259
1,259
1,167
76
66
Commercial business
65
65
80
10
6
Consumer
—
—
—
—
—
Total
$
1,767 $
1,656 $
1,549 $
93 $
79
F-20
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, 2021 and 2020, the Corporation had $346,000 and $396,000, respectively, of loans classified as TDRs, which are included
in impaired loans above. At December 31, 2021 and 2020, the Corporation had $6,000 and $6,000, respectively, of the allowance for loan losses
allocated to these specific loans.
The Corporation did not have any loans modified to TDR status for the year ending December 31, 2021. During the year ended December
31, 2020, the Corporation modified one commercial term loan with a recorded investment of $64,000. In order to cure the delinquency on the loan,
the maturity date was extended by 32 months and the loan payments were reamortized over the extended period. At December 31, 2021 and
2020, there was $6,000 of allowance for loan losses allocated to this loan. The modification did not have a material impact on the Corporation's
income statement during the period.
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, 2021 and 2020, there were no loans classified as TDRs which defaulted within twelve months of their modification.
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), during 2020 the Corporation had granted
modifications on 410 loans with an aggregate balance of $110.4 million, representing 13.6% of gross outstanding loan balances. Of these loans,
31 loans with an aggregate balance of $32.1 million remained on deferral at December 31, 2020. As of December 31, 2021, one loan with a balance
of $3.9 million remained on deferral. In each respective period, the remainder of the loans which had been on deferral either resumed normal
repayment or were repaid in full. The characteristics of these modifications are considered short-term and do not result in a reclassification of these
loans to TDR status.
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 is 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-21
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, 2021 and 2020:
(Dollar amounts in thousands)
Not Rated
Pass
Special
Mention Substandard
Doubtful
Total
December 31, 2021:
Residential first mortgages
$
272,722 $
— $
— $
1,101 $
— $
273,823
Home equity and lines of credit
75,408
—
—
402
—
75,810
Commercial real estate
—
295,891
7,494
22,956
—
326,341
Commercial business
—
59,628
1,356
4,893
—
65,877
Consumer
48,538
—
—
14
—
48,552
Total loans
$
396,668 $
355,519 $
8,850 $
29,366 $
— $
790,403
December 31, 2020:
Residential first mortgages
$
306,237 $
— $
— $
1,794 $
— $
308,031
Home equity and lines of credit
86,867
—
—
221
—
87,088
Commercial real estate
—
249,357
19,669
16,599
—
285,625
Commercial business
—
83,059
2,054
4,026
—
89,139
Consumer
39,987
—
—
48
—
40,035
Total loans
$
433,091 $
332,416 $
21,723 $
22,688 $
— $
809,918
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. As of December 31, 2020 and 2021, the Corporation had made short-term modifications such
as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers. Under the CARES Act, borrowers
that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is
implemented. As such, the modifications made under the CARES Act are not included in the Corporation's past due or nonaccrual loans as of
December 31, 2021 and 2020. 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, 2021 and 2020:
(Dollar amounts in thousands)
Performing
Nonperforming
Accruing
Loans Not
Past Due
Accruing
30-59 Days
Past Due
Accruing
60-89 Days
Past Due
Accruing
90+ Days
Past Due Nonaccrual
Total
December 31, 2021:
Residential first mortgages
$
270,221 $
1,913 $
588 $
291 $
810 $
273,823
Home equity and lines of credit
74,853
230
325
160
242
75,810
Commercial real estate
325,018
73
—
—
1,250
326,341
Commercial business
65,305
—
—
234
338
65,877
Consumer
48,344
117
77
—
14
48,552
Total loans
$
783,741 $
2,333 $
990 $
685 $
2,654 $
790,403
December 31, 2020:
Residential first mortgages
$
304,161 $
1,836 $
239 $
176 $
1,619 $
308,031
Home equity and lines of credit
86,093
446
328
146
75
87,088
Commercial real estate
283,373
580
41
18
1,613
285,625
Commercial business
88,614
72
46
239
168
89,139
Consumer
39,917
28
42
—
48
40,035
Total loans
$
802,158 $
2,962 $
696 $
579 $
3,523 $
809,918
F-22
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, 2021 and 2020:
(Dollar amounts in thousands)
Not Past
Due
30-59 Days
Past Due
60-89 Days
Past Due
90 Days +
Past Due
Total
December 31, 2021:
Residential first mortgages
$
196 $
— $
69 $
545 $
810
Home equity and lines of credit
4
—
—
238
242
Commercial real estate
1,052
10
—
188
1,250
Commercial business
338
—
—
—
338
Consumer
—
—
—
14
14
Total loans
$
1,590 $
10 $
69 $
985 $
2,654
December 31, 2020:
Residential first mortgages
$
220 $
70 $
— $
1,329 $
1,619
Home equity and lines of credit
4
—
—
71
75
Commercial real estate
1,016
—
24
573
1,613
Commercial business
168
—
—
—
168
Consumer
—
—
—
48
48
Total loans
$
1,408 $
70 $
24 $
2,021 $
3,523
4.
Federal Bank Stocks
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 $3.9 million and $1.8 million, respectively, at December 31, 2021, and $3.8 million and $1.8 million, respectively, at December 31,
2020.
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)
2021
2020
Land
$
4,893 $
5,290
Buildings and improvements
14,361
15,228
Leasehold improvements
1,692
1,541
Furniture, fixtures and equipment
11,196
10,749
Software
3,474
3,440
Construction in progress
61
2
Total
35,677
36,250
Less: accumulated depreciation and amortization
19,233
18,048
Net premises and equipment
$
16,444 $
18,202
Depreciation and amortization expense for the years ended December 31, 2021 and 2020 were $1.4 million and $1.4 million, respectively.
F-23
Notes to Consolidated Financial Statements
5.
Premises, Equipment and Leases (continued)
Leases
As of December 31, 2021, the Corporation leases real estate for seven offices under various operating lease agreements. The lease
agreements have maturity dates ranging from June 2024 to December 2056, including all extension periods. 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 10.99 years
as of December 31, 2021 compared to 12.45 years as of December 31, 2020.
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 was 3.21% as of December 31, 2021 compared to
3.51% as of December 31, 2020.
The total operating lease costs were $231,000 and $192,000, respectively, for the years ended December 31, 2021 and 2020. 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, 2021, and $1.4 million and $1.6 million, respectively, as of December 31, 2020.
Total estimated rental commitments for the operating leases were as follows as of December 31, 2021:
(Dollar amounts in thousands)
Year ending December 31:
2022
$
296
2023
296
2024
271
2025
227
2026
144
Thereafter
792
Total minimum lease payments
2,026
Discount effect of cash flows
(363 )
Present value of lease liabilities
$
1,663
6.
Goodwill and Intangible Assets
The following table summarizes the Corporation’s acquired goodwill and intangible assets as of December 31:
(Dollar amounts in thousands)
December 31, 2021
December 31, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Goodwill
$
19,460 $
— $
19,460 $
—
Core deposit intangibles
5,634
4,735
5,634
4,551
Total
$
25,094 $
4,735 $
25,094 $
4,551
The goodwill on the Corporation's financial statements resulted from five prior acquisitions. 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 subject to impairment tests on an annual basis and more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As part of the Corporation's qualitative
assessment of goodwill impairment, management has continued the periodic monitoring of goodwill for possible impairment which began with the
onset of the COVID-19 pandemic, concluding no impairment. Because of the continued economic uncertainty surrounding the pandemic, the
Corporation engaged an independent third party to perform the annual, November 30, impairment testing, including the Step 0 and Step 1,
qualitative and quantitative analyses to determine the fair value of the Corporation. Based on the analysis performed, the fair value of the
Corporation's equity was $111.0 million, which exceeded the recorded book value of $92.3 million as of November 30, 2021. Management
concluded that the Corporation's goodwill was not impaired as of November 30, 2021. Although no goodwill impairment was noted, there can be
no assurances that future goodwill impairment will not occur. No goodwill impairment charges were recorded in 2021 or 2020.
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 $185,000 and
$164,000 in 2021 and 2020, respectively.
F-24
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)
Amortization
Expense
2022
$
152
2023
136
2024
136
2025
136
2026
127
Thereafter
212
Total
$
899
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 $4.8 million and $5.5 million at
December 31, 2021 and 2020, respectively. During 2021, there were $187,000 of principal additions while total principal reductions associated
with these loans were $902,000. Deposits from principal officers and directors and their affiliates held by the Bank at December 31, 2021 and
2020 totaled $3.0 million and $3.1 million, respectively.
8.
Deposits
The following table summarizes the Corporation’s deposits as of December 31:
(Dollar amounts in thousands)
2021
2020
Weighted
Weighted
Type of accounts
average rate
Amount
Percent
average rate
Amount
Percent
Non-interest bearing deposits
— $ 221,993
24.2%
— $ 193,752
21.7%
Interest bearing demand deposits
0.13%
545,846
59.4%
0.42%
511,928
57.3%
Time deposits
1.78%
150,657
16.4%
2.03%
187,947
21.0%
Total
0.37% $ 918,496
100.0%
0.67% $ 893,627
100.0%
Scheduled maturities of time deposits for the next five years and thereafter are as follows:
(Dollar amounts in thousands)
Amount
Percent
2022
$
48,038
31.9 %
2023
49,739
33.0 %
2024
36,735
24.4 %
2025
6,629
4.4 %
2026
6,029
4.0 %
Thereafter
3,487
2.3 %
Total
$
150,657
100.0 %
F-25
Notes to Consolidated Financial Statements
8.
Deposits (continued)
The Corporation had a total of $42.2 million and $58.7 million in time deposits of $250,000 or more at December 31, 2021 and
2020, respectively. Scheduled maturities of time deposits of $250,000 or more at December 31, 2021 are as follows:
(Dollar amounts in thousands)
Amount
Three months or less
$
6,468
Over three months to six months
1,182
Over six months to twelve months
7,029
Over twelve months
27,527
Total
$
42,206
9.
Borrowed Funds
The following table summarizes the Corporation’s borrowed funds as of and for the year ended December 31:
(Dollar amounts in thousands)
2021
2020
Average Average
Average Average
Balance
Balance
Rate
Balance
Balance
Rate
Short-term borrowed funds
$
7,050 $
2,143 4.13% $
2,050 $
4,366 3.00%
Long-term borrowed funds
15,000
27,658 2.12%
30,000
35,530 2.16%
Total
$ 22,050 $ 29,801
$ 32,050 $ 39,896
Short-term borrowed funds at December 31, 2021 consisted of $5.0 million in overnight advances with a rate of 0.28% and $2.1 million
outstanding on a $4.5 million unsecured line of credit with a correspondent bank with a rate of 4.25%, compared to $2.1 million outstanding on a
$4.5 million unsecured line of credit with a correspondent bank with a rate of 4.25% at December 31, 2020.
Long-term borrowed funds at December 31, 2021 consisted of three $5.0 million FHLB term advances totaling $15.0 million, maturing
between 2023 and 2025 and having fixed interest rates between 1.65% and 2.79%. This compares to six $5.0 million FHLB advances totaling $30.0
million at December 31, 2020. All borrowings from the FHLB are secured by a blanket lien of qualified collateral. Qualified collateral at
December 31, 2021 totaled $407.8 million.
Scheduled maturities of borrowed funds for the next five years are as follows:
(Dollar amounts in thousands)
Amount
2022
$
7,050
2023
5,000
2024
—
2025
10,000
2026
—
Thereafter
—
Total
$
22,050
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 $20.0 million and irrevocable standby letters of credit issued to secure certain deposit accounts of
$138.5 million at December 31, 2021 was $249.3 million. In addition, the Corporation has $2.4 million of funds available on a line of credit through
a correspondent bank.
F-26
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, 2021, $13.5 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, 2021 and 2020, the
Corporation had no outstanding loans or advances from the Bank.
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.
The Small Bank Holding Company threshold for consolidated assets is $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 and subsequent periods. Amounts recorded
to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of December 31, 2021, 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 2021 and 2020, 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-27
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)
December 31, 2021
December 31, 2020
Amount Ratio
Amount Ratio
Total capital to risk-weighted assets:
Actual
$
92,495 13.11 %
$
84,583 12.71%
For capital adequacy purposes
56,448 8.00 %
53,255 8.00%
To be well capitalized
70,559 10.00 %
66,569 10.00%
Tier 1 capital to risk-weighted assets:
Actual
$
83,656 11.86 %
$
76,246 11.45%
For capital adequacy purposes
42,336 6.00 %
39,941 6.00%
To be well capitalized
56,448 8.00 %
53,255 8.00%
Common Equity Tier 1 capital to risk-weighted assets:
Actual
$
83,656 11.86 %
$
76,246 11.45%
For capital adequacy purposes
31,752 4.50 %
29,956 4.50%
To be well capitalized
45,864 6.50 %
43,270 6.50%
Tier 1 capital to average assets:
Actual
$
83,656 7.98 %
$
76,246 7.58%
For capital adequacy purposes
41,926 4.00 %
40,213 4.00%
To be well capitalized
52,407 5.00 %
50,267 5.00%
11.
Commitments and Legal Contingencies
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)
2021
2020
Current
$
2,439 $
1,916
Deferred
(225)
(481)
Total
$
2,214 $
1,435
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, 2021 and 2020 is as follows:
(Dollar amounts in thousands)
2021
2020
% Pre-tax
% Pre-tax
Amount
Income
Amount
Income
Provision at statutory tax rate
$
2,601
21.0% $
1,718
21.0%
Increase (decrease) resulting from:
Tax free interest, net of disallowance
(304)
(2.5%)
(219)
(2.7%)
Earnings on bank-owned life insurance
(91)
(0.7%)
(84)
(1.0%)
Other, net
8
0.1%
20
0.2%
Provision
$
2,214
17.9% $
1,435
17.5%
F-28
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)
2021
2020
Deferred tax assets:
Allowance for loan losses
$
2,182 $
2,005
Funded status of pension plan
1,348
1,516
Deferred compensation
476
444
Lease liability
349
326
Accrued incentive compensation
146
60
Stock compensation
111
105
Securities impairment
70
70
Nonaccrual loan interest income
36
48
Net unrealized loss on securities
28
—
Other
6
15
Gross deferred tax assets
4,752
4,589
Deferred tax liabilities:
Accrued pension liability
1,055
1,036
Deferred loan fees and costs
684
519
Depreciation
571
772
Intangible assets
350
305
Lease right-of-use asset
319
289
Business combination adjustments
159
188
Net unrealized gains on securities
—
593
Other
96
47
Gross deferred tax liabilities
3,234
3,749
Net deferred tax asset
$
1,518 $
840
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, 2021 and December 31, 2020, 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 2018.
F-29
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)
2021
2020
Change in plan assets:
Fair value of plan assets at beginning of year
$
11,316 $
10,599
Actual return on plan assets
913
1,156
Employer contribution
—
—
Benefits paid
(441)
(439)
Fair value of plan assets at end of year
11,788
11,316
Change in benefit obligation:
Benefit obligation at beginning of year
13,588
12,304
Interest cost
338
395
Actuarial loss
(22)
(29)
Effect of change in assumptions
(294)
1,357
Benefits paid
(441)
(439)
Benefit obligation at end of year
13,169
13,588
Funded status (plan assets less benefit obligation)
$
(1,381) $
(2,272)
Amounts recognized in accumulated other comprehensive loss consists of:
Accumulated net actuarial loss
$
6,418 $
7,220
Accumulated prior service benefit
—
—
Amount recognized, end of year
$
6,418 $
7,220
F-30
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)
(Level 1)
(Level 2)
(Level 3)
Quoted Prices in
Significant
Significant
Active Markets
Other
Unobservable
for Identical
Observable
Inputs
Description
Total
Assets
Inputs
December 31, 2021:
Money markets
$
148 $
148 $
— $
—
Mutual funds - debt
4,133
4,133
—
—
Mutual funds - equity
6,698
6,698
—
—
Emclaire stock
809
809
—
—
$
11,788 $
11,788 $
— $
—
December 31, 2020:
Money markets
$
143 $
143 $
— $
—
Mutual funds - debt
4,518
4,518
—
—
Mutual funds - equity
5,798
5,798
—
—
Emclaire stock
857
857
—
—
$
11,316 $
11,316 $
— $
—
There were no transfers between Level 1 and Level 2 during 2021.
The accumulated benefit obligation for the defined benefit pension plan was $13.2 million and $13.6 million at December 31, 2021 and
2020, 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)
2021
2020
Interest cost
$
338 $
395
Expected return on plan assets
(720)
(699)
Amortization of prior service beneft and net loss
292
268
Net periodic pension cost
(90)
(36)
Amortization of prior service benefit and net loss
(292)
(268)
Net (gain) loss
(509)
871
Total recognized in other comprehensive (income) loss
(801)
603
Total recognized in net periodic benefit and other comprehensive (income) loss
$
(891) $
567
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 $255,000 as of December 31, 2021.
Weighted-average actuarial assumptions for the years ended December 31 include the following:
2021
2020
Discount rate for net periodic benefit cost
2.54%
3.28%
Discount rate for benefit obligations
2.85%
2.54%
Expected rate of return on plan assets
6.50%
6.75%
F-31
Notes to Consolidated Financial Statements
13.
Employee Benefit Plans (continued)
The Corporation’s pension plan asset allocation at December 31, 2021 and 2020, target allocation for 2022, and expected long-term rate of
return by asset category are as follows:
Asset Category
Target
Allocation
Percentage of Plan Assets at Year End
Weighted-Average
Expected Long-Term
Rate of Return
2022
2021
2020
2021
Equity securities
55%
64%
59%
5.02%
Debt securities
41%
35%
40%
1.48%
Money markets
4%
1%
1%
0.01%
100%
100%
100%
6.50%
Investment Strategy
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 currently does not expect to make a contribution to its pension plan in 2022.
Estimated future benefit payments are as follows:
(Dollar amounts in thousands)
Pension
For year ended December 31,
Benefits
2022
$
499
2023
508
2024
519
2025
570
2026
560
2027-2031
2,887
Defined Contribution 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. For the years ended 2021 and 2020, matching contributions were $259,000 and $260,000, respectively. The
Corporation may also make, at the sole discretion of its Board of Directors, a profit sharing contribution. For the years ended 2021 and 2020, the
Corporation made profit sharing contributions of $204,000 and $143,000, 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, 2021 and 2020, the Corporation’s SERP liability
was $2.1 million and $2.0 million, respectively. For the years ended December 31, 2021 and 2020, the Corporation recognized expense of $256,000
and $205,000, respectively, related to the SERP.
F-32
Notes to Consolidated Financial Statements
14.
Stock Compensation Plans
In February 2021, the Corporation adoped the 2021 Stock Incentive Plan (the 2021 Plan), which is shareholder approved and permits the
grant of restricted stock awards and options to its directors, officers and employees for up to 204,091 shares of common stock. As of December
31, 2021, 192,591 shares remain available for issuance under the 2021 Plan.
In addition, in February 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
33 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 2021 and 2020, the Corporation granted restricted stock awards of 18,250 and 16,000 shares, respectively, with a face value of
$529,000 and $392,000, respectively, based on the weighted-average grant date stock prices of $28.96 and $24.48, 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 2021 or 2020. For the year ended December 31, 2021 and 2020 the Corporation recognized $463,000 and $459,000, respectively,
in stock compensation expense.
A summary of the status of the Corporation’s nonvested restricted stock awards as of December 31, 2021, and changes during the period
then ended is presented below:
Shares
Weighted-
Average Grant-
date Fair Value
Nonvested at January 1, 2021
47,950 $
28.83
Granted
18,250
28.96
Vested
(14,000)
30.90
Forfeited
—
—
Nonvested as of December 31, 2021
52,200 $
28.32
As of December 31, 2021, there was $950,000 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:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to
access at the measurement date.
Level 2:
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-33
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)
(Level 1)
(Level 2)
(Level 3)
Description
Total
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31, 2021:
Securities available-for-sale
U.S. government sponsored entities and agencies
$
8,159 $
— $
8,159 $
—
U.S. agency mortgage-backed securities: residential
12,035
—
12,035
—
U.S. agency collateralized mortgage obligations: residential
49,490
—
49,490
—
State and political subdivision
92,562
—
92,562
—
Corporate debt securities
24,024
—
20,439
3,585
Total available-for-sale securities
$
186,270 $
— $
182,685 $
3,585
Equity securities
$
5 $
5 $
— $
—
December 31, 2020:
Securities available-for-sale
U.S. government sponsored entities and agencies
$
3,007 $
— $
3,007 $
—
U.S. agency mortgage-backed securities: residential
16,581
—
16,581
—
U.S. agency collateralized mortgage obligations: residential
15,911
—
15,911
—
State and political subdivisions
55,577
—
55,577
—
Corporate debt securities
21,965
—
19,959
2,006
Total available-for-sale securities
$
113,041 $
— $
111,035 $
2,006
Equity securities
$
15 $
15 $
— $
—
F-34
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 2021, certain corporate debt securities were
purchased and later transferred into Level 3 because of a lack of observable market data. During 2020, certain corporate debt securities were
tranferred out of Level 3 because of the availability of market pricing. The following table presents changes in Level 3 assets measured on a
recurring basis for the years ended December 31, 2021 and 2020:
(Dollar amounts in thousands)
2021
2020
Balance at the beginning of the period
$
2,006 $
4,022
Total gains or losses (realized/unrealized):
Included in other comprehensive income
21
234
Transfers in and/or out of Level 3
1,558
(2,250)
Balance at the end of the period
$
3,585 $
2,006
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, 2021, the Corporation had five impaired commercial real estate loans
carried at a fair value of $470,000, which consisted of the outstanding balance of the outstanding balance of $558,000 less a specific reserve of
$88,000. In addition, the Corporation had one commercial business loan carried at a fair value of $54,000, which consisted of the outstanding
balance of $247,000 less a specific reserve of $193,000. As of December 31, 2020, the Corporation had two impaired commercial real estate loans
carried at a fair value of $340,000, which consisted of the outstanding balance of the outstanding balance of $380,000 less a specific reserve of
$40,000. In addition, the Corporation had three commercial business loans carried at a fair value of $58,000, which consisted of the outstanding
balance of the outstanding balance of $78,000 less a specific reserve of $20,000. During the years ended December 31, 2021 and 2020, there was
additional provision for loan losses of $267,000 and $81,000, respectively, recorded for impaired loans.
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, 2021, the Corporation did not hold any OREO properties. As of December 31, 2020, OREO measured at fair value
less costs to sell had a net carrying amount of $9,000, which consisted of the outstanding balance of $18,000 less write-downs of $9,000.
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-35
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, 2021 and 2020, the fair value measurements by level within the
fair value hierarchy are as follows:
(Dollar amounts in thousands)
(Level 1)
(Level 2)
(Level 3)
Description
Total
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31, 2021:
Impaired commercial business loan
$
54 $
— $
— $
54
Impaired commercial real estate loans
470
—
—
470
Total
$
524 $
— $
— $
524
December 31, 2020:
Impaired commercial business loans
$
58 $
— $
— $
58
Impaired commercial real estate loans
340
—
—
340
Other real estate owned
9
—
—
9
Total
$
407 $
— $
— $
407
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)
Valuation
Unobservable
Weighted
Techniques(s)
Input(s)
Average
December 31, 2021:
Impaired commercial business
loan
$
54 Sales comparison approach Adjustment for differences between comparable sales
10%
Impaired commercial real estate
loans
470 Sales comparison approach Adjustment for differences between comparable sales
10%
December 31, 2020:
Impaired commercial business
loans
$
58 Sales comparison approach Adjustment for differences between comparable sales
10%
Impaired commercial real estate
loans
340 Sales comparison approach Adjustment for differences between comparable sales
10%
Other real estate owned
9 Sales comparison approach Adjustment for differences between comparable sales
10%
Excluded from the tables above at December 31, 2021 was one unsecured commercial business loan totaling $3,000 and one impaired
residential mortgage loan totaling $69,000 which was classified as a TDR and measured using a discounted cash flow methodology. As of
December 31, 2020 there were two unsecured commercial business loans totaling $14,000 excluded from the tables.
F-36
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)
Carrying
Fair Value Measurements using:
Description
Amount
Total
Level 1
Level 2
Level 3
December 31, 2021:
Financial Assets:
Cash and cash equivalents
$
9,080 $
9,080 $
9,080 $
— $
—
Interest earning time deposits
2,484
2,484
—
2,484
—
Securities - available-for-sale
186,270
186,270
—
182,685
3,585
Securities - equities
5
5
5
—
—
Loans held for sale
469
469
—
469
—
Loans, net
780,010
780,086
—
—
780,086
Federal bank stock
5,715
N/A
N/A
N/A
N/A
Accrued interest receivable
3,731
3,731
35
817
2,879
Financial Liabilities:
Deposits
918,496
921,811
767,840
153,971
—
Borrowed funds
22,050
22,121
—
22,121
—
Accrued interest payable
338
338
5
333
—
December 31, 2020:
Financial Assets:
Cash and cash equivalents
$
37,439 $
37,439 $
37,439 $
— $
—
Interest earning time deposits
5,718
5,718
—
5,718
—
Securities - available-for-sale
113,041
113,041
—
111,035
2,006
Securities - equities
15
15
15
—
—
Loans held for sale
75
75
—
75
—
Loans, net
800,338
807,170
—
—
807,170
Federal bank stock
5,635
N/A
N/A
N/A
N/A
Accrued interest receivable
3,786
3,786
52
513
3,221
Financial Liabilities:
Deposits
893,627
899,446
705,680
193,766
—
Borrowed funds
32,050
33,256
—
33,256
—
Accrued interest payable
474
474
19
455
—
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-37
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)
2021
2020
Fixed Rate Variable Rate
Fixed Rate Variable Rate
Commitments to make loans
$
7,370 $
18,914 $
3,749 $
3,737
Unused lines of credit
21,072
77,261
20,229
87,478
Total
$
28,442 $
96,175 $
23,978 $
91,215
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 $444,000 and $493,000 at December 31, 2021 and 2020, respectively. The current amount of
the liability as of December 31, 2021 and 2020 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)
2021
2020
Assets:
Cash and cash equivalents
$
72 $
114
Equity in net assets of subsidiaries
93,649
88,132
Goodwill
5,190
5,190
Other assets
141
134
Total Assets
$
99,052 $
93,570
Liabilities and Stockholders' Equity:
Other Short-term borrowed funds
$
2,050 $
2,050
Accrued expenses and other liabilities
43
40
Stockholders' equity
96,959
91,480
Total Liabilities and Stockholders' Equity
$
99,052 $
93,570
F-38
Notes to Consolidated Financial Statements
16.
Emclaire Financial Corp – Condensed Financial Statements, Parent Corporation Only (continued)
Condensed Statements of Income
(Dollar amounts in thousands)
2021
2020
Income:
Dividends from subsidiaries
$
3,612 $
5,186
Expense:
Interest expense
88
118
Noninterest expense
736
710
Total expense
824
828
Income before income taxes and undistributed subsidiary income
2,788
4,358
Undistributed equity in net income of subsidiary
7,210
2,216
Net income before income taxes
9,998
6,574
Income tax benefit
173
174
Net income
$
10,171 $
6,748
Comprehensive income
$
8,478 $
8,599
Condensed Statements of Cash Flows
(Dollar amounts in thousands)
2021
2020
Operating activities:
Net income
$
10,171 $
6,748
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed equity in net income of subsidiary
(7,210)
(2,216)
Other, net
459
478
Net cash provided by operating activities
3,420
5,010
Financing activities:
Net change in borrowings
—
(1,500)
Dividends paid
(3,462)
(3,436)
Net cash used in financing activities
(3,462)
(4,936)
Increase (decrease) in cash and cash equivalents
(42)
74
Cash and cash equivalents at beginning of period
114
40
Cash and cash equivalents at end of period
$
72 $
114
F-39
Notes to Consolidated Financial Statements
17.
Other Noninterest Income and Expense
Other noninterest income includes electronic banking fees of $1.7 million and $1.5 million for 2021 and 2020, respectively.
The following summarizes the Corporation’s other noninterest expenses for the years ended December 31:
(Dollar amounts in thousands)
2021
2020
Subscriptions
$
841 $
752
Customer bank card processing
751
700
Item processing
665
669
Telephone and data communications
586
572
Pennsylvania shares and use taxes
489
474
Correspondent bank and courier fees
414
402
Internet banking and bill pay
388
357
Charitable contributions
290
185
Credit bureau and other loan expense
246
246
Marketing and advertising
234
240
FHLB prepayment penalties
210
238
Regulatory examinations
204
186
Printing and supplies
201
219
Travel, entertainment and conferences
177
167
Postage and freight
143
148
Memberships and dues
111
99
Bad checks and other losses
27
193
Other
238
180
Total other noninterest expenses
$
6,215 $
6,027
18.
Earnings Per Share
The factors used in the Corporation’s earnings per share computation follow:
(Dollar amounts in thousands, except for per share amounts)
For the year ended
December 31,
2021
2020
Net income
$
10,171
$
6,748
Less: Preferred stock dividends
196
186
Net income available to common stockholders
$
9,975
$
6,562
Average common shares outstanding
2,722,133
2,709,532
Add: Dilutive effects of restricted stock awards
26,420
17,815
Average shares and dilutive potential common shares
2,748,553
2,727,347
Basic earnings per common share
$
3.66
$
2.42
Diluted earnings per common share
$
3.63
$
2.41
F-40
Notes to Consolidated Financial Statements
19.
Accumulated Other Comprehensive Income (Loss)
The following are changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax for the year ending December 31,
2021:
(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, 2021
$
2,220 $
(5,704) $
(3,484)
Other comprehensive income (loss) before reclassification
(2,132)
402
(1,730)
Amounts reclassified from accumulated other comprehensive income
(loss)
(194)
231
37
Net current period other comprehensive income (loss)
(2,326)
633
(1,693)
Accumulated Other Comprehensive Income (Loss) at December 31, 2021
$
(106) $
(5,071) $
(5,177)
The following are significant amounts reclassified out of each component of Accumulated Other Comprehensive Income (Loss) for the
year ending December 31, 2021:
(Dollar amount in thousands)
Amount Reclassified
from Accumulated Other
Comprehensive Income
Details about Accumulated Other
For the year ended
Affected Line Item in the Statement
Comprehensive (Income) Loss Components
December 31, 2021
Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities $
(245)
Net gain on sale of available-for-sale securities
Tax effect
52
Provision for income taxes
Total security reclassifications for the period
(194)
Amortization of defined benefit pension items
Prior service costs
—
Other noninterest income
Actuarial losses
292
Compensation and employee benefits
Total before tax
292
Tax effect
(61)
Provision for income taxes
Total defined benefit pension reclassifications for
the period
231
Total reclassifications for the period
$
37
Net of tax
The following are changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax for the year ending December 31,
2020:
(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, 2020
$
(108) $
(5,227) $
(5,335)
Other comprehensive income (loss) before reclassification
2,871
(689)
2,182
Amounts reclassified from accumulated other comprehensive income (loss)
(543)
212
(331)
Net current period other comprehensive income (loss)
2,328
(477)
1,851
Accumulated Other Comprehensive Income (Loss) at December 31, 2020
$
2,220 $
(5,704) $
(3,484)
F-41
Notes to Consolidated Financial Statements
19.
Accumulated Other Comprehensive Income (Loss) (continued)
The following are significant amounts reclassified out of each component of Accumulated Other Comprehensive Income (Loss) for the
year ending December 31, 2020:
(Dollar amount in thousands)
Amount Reclassified
from Accumulated Other
Comprehensive Income
Details about Accumulated Other
For the year ended
Affected Line Item in the Statement
Comprehensive (Income) Loss Components
December 31, 2020
Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities $
(687)
Net gain on sale of available-for-sale securities
Tax effect
144
Provision for income taxes
Total security reclassifications for the period
(543)
Amortization of defined benefit pension items
Prior service costs
—
Other noninterest income
Actuarial gains
268
Compensation and employee benefits
Total before tax
268
Tax effect
(56)
Provision for income taxes
Total defined benefit pension reclassifications for
the period
212
Total reclassifications for the period
$
(331)
Net of tax
20.
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 as 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)
2021
2020
Noninterest income
In-scope of Topic 606:
Service charges on deposits
Maintenance fees
$
180 $
203
Overdraft fees
998
1,044
Other fees
257
251
Electronic banking fees (1)
1,689
1,497
Noninterest income (in-scope of Topic 606)
3,124
2,995
Noninterest income (out-of-scope of Topic 606)
1,466
1,368
Total noninterest income
$
4,590 $
4,363
(1) included in other noninterest income on the Consolidated Statements of Net Income