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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Emclaire Financial Corporation | NASDAQ:EMCF | NASDAQ | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 31.60 | 12.53 | 34.04 | 0 | 00:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One):
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☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2020
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☐ |
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
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EMCLAIRE FINANCIAL CORP |
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(Exact name of registrant as specified in its charter) |
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Pennsylvania |
25-1606091 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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612 Main Street, Emlenton, PA |
16373 |
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(Address of principal executive office) |
(Zip Code) |
Registrant’s telephone number: (844) 767-2311
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $1.25 per share |
EMCF |
NASDAQ Capital Market (NASDAQ) |
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(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).
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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 is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒.
As of June 30, 2020, the aggregate value of the 2,208,502 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 500,210 shares held by the directors and officers of the Registrant as a group, was approximately $44.2 million. This figure is based on the last sales price of $20.01 per share of the Registrant’s Common Stock on June 30, 2020. The number of outstanding shares of common stock as of March 19, 2021, was 2,721,212.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2021 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
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Item 1. |
K-3 |
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Item 1A. |
K-19 |
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Item 1B. |
K-19 |
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Item 2. |
K-19 |
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Item 3. |
K-19 |
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Item 4. |
K-19 |
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Item 5. |
K-20 |
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Item 6. |
K-20 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
K-20 |
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Item 7A. |
K-30 |
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Item 8. |
K-30 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
K-30 |
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Item 9A. |
K-30 |
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Item 9B. |
K-30 |
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Item 10. |
K-31 |
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Item 11. |
K-31 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
K-31 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
K-31 |
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Item 14. |
K-31 |
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Item 15. |
K-31 |
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K-33 |
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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.
General
Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and financial holding company that provides a full range of retail and commercial financial products and services to customers in western Pennsylvania and northwestern West Virginia through its wholly owned subsidiary bank, The Farmers National Bank of Emlenton (the Bank).
The Bank was organized in 1900 as a national banking association and is a financial intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens on residential and commercial properties, consumer loans, commercial business loans, marketable securities and interest-earning deposits. The Bank currently operates through a network of 20 retail branch offices in Venango, Allegheny, Butler, Clarion, Clearfield, Crawford, Elk, Jefferson and Mercer counties, Pennsylvania and Hancock county, West Virginia. The Corporation and the Bank are headquartered in Emlenton, Pennsylvania.
The Bank is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank’s chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (BHCA), and a financial holding company under the Gramm-Leach Bliley Act of 1999 (GLBA) and is subject to regulation and examination by the FRB.
At December 31, 2020, the Corporation had $1.0 billion in total assets, $91.5 million in stockholders’ equity, $800.3 million in net loans and $893.6 million in total deposits.
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.
Management believes the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the audited Consolidated Statements of Net Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page K-25 for years ended December 31, 2020 and 2019.
COVID-19 Pandemic
The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. Although the temporary closure of many businesses and shelter-in-place policies have eased, restrictions and social distancing continue to impact many of the Corporation's customers. While the full effects of the pandemic still remain unknown, the Corporation is committed to supporting its customers, employees and communities during this difficult time. The Corporation has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances. The pandemic could result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions, we may be required to recognize impairments on securities, goodwill or other significant estimates. The extent to which the pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Effective March 16, 2020, the Federal Reserve lowered the federal funds target rate to a range of between zero and 0.25%. This action followed a prior reduction of the federal funds target rate to a range of 1.00% to 1.25% effective on March 4, 2020. These actions were taken in an emergency response to stem the economic impact of the pandemic. The Federal Reserve has indicated that it expects to maintain the targeted federal funds rate at current levels until such time that the economic environment has stabilized for a period of time. The Corporation’s earnings and related cash flows are largely dependent upon net interest income, representing the difference between interest income received on interest-earnings assets, primarily loans and securities, and the interest paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. Since the Corporation’s balance sheet is asset sensitive, earnings are more adversely affected by falling rates since rate sensitive assets reprice more quickly than rate sensitive liabilities. Should the Federal Reserve take any further action regarding rates in relation to the pandemic, the Corporation’s margins could be compressed even further, perpetuating the negative effect on net income.
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 Paycheck Protection Program (PPP) 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.
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. 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-18.
Following the enactment of these provisions, in December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted to provide additional economic stimulus to individuals and businesses in response tor the extended economic distress caused by the pandemic. This included additional stimulus payments to individuals and their dependents, and 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 initial SBA program and closed 688 PPP loans totaling $54.9 million. As of February 28, 2021, 504 loans totaling $40.7 million were fully repaid, including 5 loan totaling $66,000 that were voluntarily repaid, rather than forgiven by the SBA. Two loans have aggregate unforgiven balances totaling $15,000. The Bank is also participating in the second round of the program and through February 28, 2021 has closed 149 loans totaling $15.9 million. There are an additional 93 loans totaling $4.6 million awaiting final processing and approval in the pipeline.
The Corporation has responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by enacting the following measures:
| • | The 2020 Annual Shareholder Meeting was held virtually, as will the 2021 meeting. | |
| • | Non-essential travel and large external gatherings were restricted and mandatory quarantine periods and testing were instituted for anyone that has known exposure to COVID. | |
| • | Remote-access availability was expanded to enable, where possible, work at home or alternate locations, in order to segregate employees in operational areas to mitigate possible spread of illness to an entire department. | |
| • | At times when widespread COVID cases do not require complete lobby closures, limited lobby hours are available to the public for walk-in transactions. Appointments can be made as necessary to complete paperwork or complex transactions. | |
| • | Drive-thru services remain open where available, and the use of ATMs and on-line banking is encouraged. | |
| • | Social distancing policies were implemented and customers and employees are required to wear masks. |
Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact the ongoing economic disruption will have on the Corporation. While this impact cannot be predicted or measured, there will be a definite impact on income. It is anticipated that the provision for loan loss expense will remain elevated in expectation of a deterioration in a portion of the loan portfolio. As a result of the significant decline in interest rates, the Corporation has and will continue to experience a decline in net income and resulting net interest margin, however, there will be a benefit from the fees arising from the PPP loan program. Also, it is expected that noninterest income will continue to be reduced as customers may use fewer fee-based services due to continuing COVID-19 mitigation efforts, such as stay-at-home orders. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.
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 38.0% of the total loan portfolio at December 31, 2020. 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 10.8% of the total loan portfolio at December 31, 2020. 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 46.3% of the total loan portfolio at December 31, 2020. Commercial real estate loans generally consist of loans granted for commercial purposes secured by commercial or other nonresidential real estate. Commercial loans consist of secured and unsecured loans for such items as capital assets, inventory, operations and other commercial purposes.
Consumer Loans. Consumer loans generally consist of fixed-rate term loans for automobile purchases, home improvements not secured by real estate, capital and other personal expenditures. The Corporation also offers unsecured revolving personal lines of credit and overdraft protection. Consumer loans amounted to 4.9% of the total loan portfolio at December 31, 2020.
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, 2020, the Bank’s loans to one borrower limit based upon 15% of unimpaired capital was $12.7 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, 2020, the Bank’s largest single lending relationship had an outstanding balance of $17.1 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:
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2020 |
2019 |
2018 |
2017 |
2016 |
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Dollar |
Dollar |
Dollar |
Dollar |
Dollar |
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(Dollar amounts in thousands) |
Amount |
% |
Amount |
% |
Amount |
% |
Amount |
% |
Amount |
% | ||||||||||||||||||||||||||||||
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Mortgage loans on real estate: |
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Residential mortgages |
$ | 308,031 | 38.0 | % | $ | 293,170 | 41.8 | % | $ | 295,405 | 41.3 | % | $ | 221,823 | 38.1 | % | $ | 198,167 | 38.0 | % | ||||||||||||||||||||
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Home equity loans and lines of credit |
87,088 | 10.8 | % | 97,541 | 13.9 | % | 103,752 | 14.5 | % | 99,940 | 17.1 | % | 91,359 | 17.5 | % | |||||||||||||||||||||||||
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Commercial real estate |
285,625 | 35.3 | % | 229,951 | 32.7 | % | 238,734 | 33.4 | % | 193,068 | 33.1 | % | 166,994 | 32.1 | % | |||||||||||||||||||||||||
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Total real estate loans |
680,744 | 84.1 | % | 620,662 | 88.4 | % | 637,891 | 89.2 | % | 514,831 | 88.3 | % | 456,520 | 87.6 | % | |||||||||||||||||||||||||
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Other loans: |
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Commercial business |
89,139 | 11.0 | % | 66,603 | 9.5 | % | 66,009 | 9.2 | % | 58,941 | 10.1 | % | 57,788 | 11.1 | % | |||||||||||||||||||||||||
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Consumer |
40,035 | 4.9 | % | 14,639 | 2.1 | % | 11,272 | 1.6 | % | 9,589 | 1.6 | % | 6,672 | 1.3 | % | |||||||||||||||||||||||||
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Total other loans |
129,174 | 15.9 | % | 81,242 | 11.6 | % | 77,281 | 10.8 | % | 68,530 | 11.7 | % | 64,460 | 12.4 | % | |||||||||||||||||||||||||
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Total loans receivable |
809,918 | 100.0 | % | 701,904 | 100.0 | % | 715,172 | 100.0 | % | 583,361 | 100.0 | % | 520,980 | 100.0 | % | |||||||||||||||||||||||||
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Less: |
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Allowance for loan losses |
9,580 | 6,556 | 6,508 | 6,127 | 5,545 | |||||||||||||||||||||||||||||||||||
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Net loans receivable |
$ | 800,338 | $ | 695,348 | $ | 708,664 | $ | 577,234 | $ | 515,435 | ||||||||||||||||||||||||||||||
The following table sets forth the final maturity of loans in the Corporation’s portfolio as of December 31, 2020. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year.
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(Dollar amounts in thousands) |
Due in one year or less |
Due from one to five years |
Due from five to ten years |
Due after ten years |
Total |
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Residential mortgages |
$ | 663 | $ | 4,793 | $ | 32,333 | $ | 270,242 | $ | 308,031 | ||||||||||
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Home equity loans and lines of credit |
463 | 8,439 | 17,731 | 60,455 | 87,088 | |||||||||||||||
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Commercial real estate |
3,977 | 42,868 | 98,066 | 140,714 | 285,625 | |||||||||||||||
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Commercial business |
2,048 | 48,507 | 13,550 | 25,034 | 89,139 | |||||||||||||||
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Consumer |
270 | 8,446 | 11,351 | 19,968 | 40,035 | |||||||||||||||
| $ | 7,421 | $ | 113,053 | $ | 173,031 | $ | 516,413 | $ | 809,918 | |||||||||||
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, 2020:
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Fixed |
Adjustable |
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(Dollar amounts in thousands) |
rates |
rates |
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Residential mortgages |
$ | 297,012 | $ | 10,356 | ||||
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Home equity loans and lines of credit |
75,678 | 10,947 | ||||||
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Commercial real estate |
66,933 | 214,715 | ||||||
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Commercial business |
54,346 | 32,745 | ||||||
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Consumer |
38,259 | 1,506 | ||||||
| $ | 532,228 | $ | 270,269 | |||||
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, 2020, the Corporation’s nonperforming assets were $4.4 million, or 0.43% of the Corporation’s total assets, compared to $3.2 million, or 0.34% of the Corporation’s total assets, at December 31, 2019. Nonperforming assets at December 31, 2020 included nonperforming loans and OREO of $4.1 million and $344,000, respectively. Included in nonaccrual loans at December 31, 2020 were five loans totaling $396,000 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, 2020, the Corporation’s classified and criticized assets amounted to $44.4 million or 4.3% of total assets, with $21.7 million identified as special mention and $22.7 million classified as substandard.
Included in classified and criticized assets at December 31, 2020, is a combination of relationships with an outstanding balance of $30.1 million at December 31, 2020, 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 adversely impacted by state-wide travel restrictions in response to the COVID-19 pandemic and 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.
Additionally, there are two other large loan relationships exhibiting credit deterioration that may impact the ability of the borrowers to comply with their present loan repayment terms on a timely basis.
The first relationship, with an outstanding balance of $2.0 million at December 31, 2020, consists of one commercial mortgage which primarily refinanced third-party debt obligations and is primarily secured with all buildings and improvements of a university campus. The subject loan represents a portion of a participated credit facility led by a third-party financial institution. A decline in student enrollment has resulted in a corresponding decline in financial performance of the university. The university maintains satisfactory capital structure ratios and is undergoing efforts to increase enrollment and reduce operating expenditures. At December 31, 2020, the loan was performing and classified as substandard. Ultimately, due to the estimated value of the university campus and ancillary collateral, the Corporation does not currently expect to incur a loss on this loan.
The second relationship, with an outstanding balance of $1.6 million at December 31, 2020, consists 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) |
2020 |
2019 |
2018 |
2017 |
2016 |
|||||||||||||||
|
Nonperforming loans |
$ | 4,102 | $ | 2,907 | $ | 3,028 | $ | 3,693 | $ | 3,323 | ||||||||||
|
Total as a percentage of gross loans |
0.51 | % | 0.41 | % | 0.42 | % | 0.63 | % | 0.64 | % | ||||||||||
|
Repossessions |
— | — | 13 | — | — | |||||||||||||||
|
Real estate acquired through foreclosure |
344 | 249 | 701 | 492 | 291 | |||||||||||||||
|
Total as a percentage of total assets |
0.03 | % | 0.03 | % | 0.08 | % | 0.07 | % | 0.04 | % | ||||||||||
|
Total nonperforming assets |
$ | 4,446 | $ | 3,156 | $ | 3,742 | $ | 4,185 | $ | 3,614 | ||||||||||
|
Total nonperforming assets as a percentage of total assets |
0.43 | % | 0.34 | % | 0.42 | % | 0.56 | % | 0.52 | % | ||||||||||
|
Allowance for loan losses as a percentage of nonperforming loans |
233.54 | % | 225.52 | % | 214.93 | % | 165.91 | % | 166.87 | % | ||||||||||
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, 2020 of $9.6 million was adequate to cover probable incurred losses in the portfolio at such time.
The following table sets forth an analysis of the allowance for losses on loans receivable for the years ended December 31:
|
(Dollar amounts in thousands) |
2020 |
2019 |
2018 |
2017 |
2016 |
|||||||||||||||
|
Balance at beginning of period |
$ | 6,556 | $ | 6,508 | $ | 6,127 | $ | 5,545 | $ | 5,205 | ||||||||||
|
Provision for loan losses |
3,247 | 715 | 1,280 | 903 | 464 | |||||||||||||||
|
Charge-offs: |
||||||||||||||||||||
|
Residential mortgages |
(27 | ) | (227 | ) | (71 | ) | (40 | ) | (101 | ) | ||||||||||
|
Home equity loans and lines of credit |
(126 | ) | (61 | ) | (155 | ) | (114 | ) | (118 | ) | ||||||||||
|
Commercial real estate |
(75 | ) | (242 | ) | (484 | ) | (127 | ) | (18 | ) | ||||||||||
|
Commercial business |
(163 | ) | (250 | ) | — | (14 | ) | (11 | ) | |||||||||||
|
Consumer loans |
(82 | ) | (133 | ) | (279 | ) | (71 | ) | (48 | ) | ||||||||||
| (473 | ) | (913 | ) | (989 | ) | (366 | ) | (296 | ) | |||||||||||
|
Recoveries: |
||||||||||||||||||||
|
Residential mortgages |
6 | 40 | 3 | — | — | |||||||||||||||
|
Home equity loans and lines of credit |
15 | 6 | 14 | 23 | 3 | |||||||||||||||
|
Commercial real estate |
107 | 134 | 48 | 8 | 158 | |||||||||||||||
|
Commercial business |
70 | — | 1 | 2 | — | |||||||||||||||
|
Consumer loans |
52 | 66 | 24 | 12 | 11 | |||||||||||||||
| 250 | 246 | 90 | 45 | 172 | ||||||||||||||||
|
Net charge-offs |
(223 | ) | (667 | ) | (899 | ) | (321 | ) | (124 | ) | ||||||||||
|
Balance at end of period |
$ | 9,580 | $ | 6,556 | $ | 6,508 | $ | 6,127 | $ | 5,545 | ||||||||||
|
Ratio of net charge-offs to average loans outstanding |
0.03 | % | 0.09 | % | 0.14 | % | 0.06 | % | 0.03 | % | ||||||||||
|
Ratio of allowance to total loans at end of period |
1.18 | % | 0.93 | % | 0.91 | % | 1.05 | % | 1.06 | % | ||||||||||
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) |
2020 |
2019 |
2018 |
2017 |
2016 |
|||||||||||||||||||||||||||||||||||
|
Loan Categories: |
Dollar Amount | Percent of total loans | Dollar Amount | Percent of total loans | Dollar Amount |
Percent of total loans |
Dollar Amount |
Percent of total loans |
Dollar Amount |
Percent of total loans |
||||||||||||||||||||||||||||||
|
Residential mortgages |
$ | 2,774 | 38.0 | % | $ | 2,309 | 41.8 | % | $ | 2,198 | 41.3 | % | $ | 2,090 | 38.1 | % | $ | 1,846 | 32.0 | % | ||||||||||||||||||||
|
Home equity loans and lines of credit |
620 | 10.8 | % | 626 | 13.9 | % | 648 | 14.5 | % | 646 | 17.1 | % | 633 | 20.1 | % | |||||||||||||||||||||||||
|
Commercial real estate |
5,180 | 35.3 | % | 2,898 | 32.7 | % | 3,106 | 33.4 | % | 2,753 | 33.1 | % | 2,314 | 29.8 | % | |||||||||||||||||||||||||
|
Commercial business |
677 | 11.0 | % | 636 | 9.5 | % | 500 | 9.2 | % | 585 | 10.1 | % | 700 | 16.5 | % | |||||||||||||||||||||||||
|
Consumer loans |
329 | 4.9 | % | 87 | 2.1 | % | 56 | 1.6 | % | 53 | 1.6 | % | 52 | 1.6 | % | |||||||||||||||||||||||||
| $ | 9,580 | 100.0 | % | $ | 6,556 | 100.0 | % | $ | 6,508 | 100.0 | % | $ | 6,127 | 100.0 | % | $ | 5,545 | 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, 2020:
|
(Dollar amounts in thousands) |
Due in 1 year or less |
Due from 1 to 3 years |
Due from 3 to 5 years |
Due from 5 to 10 years |
Due after 10 years |
No scheduled maturity |
Total |
|||||||||||||||||||||
|
U.S. government sponsored entities and agencies |
$ | — | $ | 1,011 | $ | — | $ | — | $ | 1,996 | $ | — | $ | 3,007 | ||||||||||||||
|
U.S. agency mortgage-backed securities: residential |
— | — | — | — | 16,581 | — | 16,581 | |||||||||||||||||||||
|
U.S. agency collateralized mortgage obligations: residential |
— | — | — | 1,273 | 14,638 | — | 15,911 | |||||||||||||||||||||
|
State and political subdivision |
— | 250 | 1,327 | 6,793 | 47,207 | — | 55,577 | |||||||||||||||||||||
|
Corporate securities |
500 | — | 2,043 | 19,422 | — | — | 21,965 | |||||||||||||||||||||
|
Equity securities |
— | — | — | — | — | 15 | 15 | |||||||||||||||||||||
|
Estimated fair value |
$ | 500 | $ | 1,261 | $ | 3,370 | $ | 27,488 | $ | 80,422 | $ | 15 | $ | 113,056 | ||||||||||||||
|
Weighted average yield (1) |
3.88 | % | 3.03 | % | 4.67 | % | 3.99 | % | 2.65 | % | 0.00 | % | 0.83 | % | ||||||||||||||
(1) Taxable equivalent adjustments have been made in calculating yields on state and political subdivision securities.
The following table sets forth the fair value of the Corporation’s investment securities as of December 31:
|
(Dollar amounts in thousands) |
2020 |
2019 |
2018 |
|||||||||
|
U.S. Treasury |
$ | — | $ | — | $ | 4,445 | ||||||
|
U.S. government sponsored entities and agencies |
3,007 | 7,077 | 16,783 | |||||||||
|
U.S. agency mortgage-backed securities: residential |
16,581 | 41,075 | 27,176 | |||||||||
|
U.S. agency collateralized mortgage obligations: residential |
15,911 | 32,837 | 18,664 | |||||||||
|
State and political subdivision |
55,577 | 11,322 | 7,918 | |||||||||
|
Corporate securities |
21,965 | 27,796 | 22,732 | |||||||||
|
Equity securities |
15 | 19 | 7 | |||||||||
| $ | 113,056 | $ | 120,126 | $ | 97,725 | |||||||
For additional information regarding the Corporation’s investment portfolio see “Note 2 – Securities” to the Consolidated Financial Statements on page F-13.
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) |
2020 |
2019 |
||||||||||||||||||||||
|
Weighted |
Weighted |
|||||||||||||||||||||||
|
Type of accounts |
average rate |
Amount |
Percent |
average rate |
Amount |
Percent |
||||||||||||||||||
|
Non-interest bearing deposits |
— | $ | 193,752 | 21.7 | % | — | $ | 148,842 | 18.9 | % | ||||||||||||||
|
Interest bearing demand deposits |
0.42 | % | 511,928 | 57.3 | % | 0.76 | % | 420,515 | 53.4 | % | ||||||||||||||
|
Time deposits |
2.03 | % | 187,947 | 21.0 | % | 2.17 | % | 217,767 | 27.7 | % | ||||||||||||||
|
Total |
0.67 | % | $ | 893,627 | 100.0 | % | 1.01 | % | $ | 787,124 | 100.0 | % | ||||||||||||
The following table sets forth maturities of the Corporation’s time deposits of $100,000 or more at December 31, 2020 by time remaining to maturity:
|
(Dollar amounts in thousands) |
Amount |
|||
|
Three months or less |
$ | 11,246 | ||
|
Over three months to six months |
8,225 | |||
|
Over six months to twelve months |
30,841 | |||
|
Over twelve months |
60,023 | |||
| $ | 110,335 | |||
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) |
2020 |
2019 |
||||||
|
Ending balance |
$ | 32,050 | $ | 28,550 | ||||
|
Average balance |
39,896 | 36,508 | ||||||
|
Maximum balance |
61,300 | 60,050 | ||||||
|
Average rate |
2.25 | % | 2.73 | % | ||||
For additional information regarding the Corporation’s deposit base and borrowed funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deposits and Borrowed Funds” in Item 7 and “Note 8 – Deposits” on page F-22 and “Note 9 – Borrowed Funds” on page F-23 to the Consolidated Financial Statements.
The Corporation has one wholly owned subsidiary, the Bank. As of December 31, 2020, the Bank had no subsidiaries. Emclaire Settlement Services, LLC, a former subsidiary of the Corporation ceased operations and was dissolved during 2019, provided real estate settlement services to the Bank and other customers.
Personnel
At December 31, 2020, the Corporation had 160 full time equivalent employees, compared to 162 at December 31, 2019. There is no collective bargaining agreement between the Corporation and its employees, and the Corporation believes its relationship with its employees is satisfactory.
Competition
The Corporation competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers.
Supervision and Regulation
General. Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain provisions of certain laws that relate to the regulation of the Corporation and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
The Corporation. The Corporation is a registered bank holding company and subject to regulation and examination by the FRB under the BHCA. The Corporation is required to file periodic reports with the FRB and such additional information as the FRB may require. The Bank Holding Company rating system emphasizes risk management and evaluation of the potential impact of non-depository entities on safety and soundness.
The FRB may require the Corporation to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Corporation must file written notice and obtain FRB approval prior to purchasing or redeeming its equity securities.
The Corporation is required to obtain prior FRB approval for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior FRB approval is also required for the merger or consolidation of the Corporation and another bank holding company.
The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, subject to the prior FRB approval, a bank holding company may engage in any, or acquire shares of companies engaged in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The BHCA also authorizes bank holding companies to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. In order to undertake these activities, a bank holding company must become a financial holding company by submitting to the appropriate FRB a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. The Corporation submitted a declaration of election to become a financial holding company with the FRB which became effective in March 2007. Federal legislation also directed federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
Under FRB regulations, the Corporation is required to serve as a source of financial and managerial strength to the Bank and may not conduct operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both.
The Corporation is also a bank holding company within the meaning of the Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the Pennsylvania Department of Banking and Securities.
The Corporation’s securities are registered with the SEC under the Exchange Act. As such, the Corporation is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act. The public may obtain all forms and information filed with the SEC through its website http://www.sec.gov.
In December 2013, federal regulators adopted final rules to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule and established July 21, 2015 as the end of the conformance period. The regulations contain prohibitions and restrictions on the ability of financial institutions, holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Recently promulgated Federal regulations exclude from the Volcker Rule restrictions community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5% or less of total consolidated assets. The Corporation qualifies for the exclusion from the Volcker Rule restrictions.
The Bank. As a national banking association, the Bank is subject to primary supervision, examination and regulation by the OCC. The Bank is also subject to regulations of the FDIC as administrator of the Deposit Insurance Fund (DIF) and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank’s growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank’s deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that the Bank’s conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.
A national bank may have a financial subsidiary engaged in any activity authorized for national banks directly or certain permissible activities. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank itself. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance, issue annuities or engage in real estate development or investment or merchant banking.
The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board that is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysis; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts and extended the period during which certain types of lawsuits can be brought against a company or its insiders.
2010 Regulatory Reform. On July 21, 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law. The goals of the Dodd Frank Act included restoring public confidence in the financial system following the financial crisis, preventing another financial crisis and permitting regulators to identify shortfalls in the system before another financial crisis can occur. The Dodd Frank Act is also intended to promote a fundamental restructuring of federal banking regulation by taking a systemic view of regulation rather than focusing on regulation of individual financial institutions.
Many of the provisions in the Dodd Frank Act require that regulatory agencies draft implementing regulations. Implementation of the Dodd Frank Act has had and will continue to have a broad impact on the financial services industry by introducing significant regulatory and compliance changes including, among other things: (i) changing the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated total assets less average tangible equity, eliminating the ceiling and increasing the size of the floor of the DIF and offsetting the impact of the increase in the minimum floor on institutions with less than $10 billion in assets; (ii) making permanent the $250,000 limit for federal deposit insurance and increasing the cash limit of Securities Investor Protection Corporation protection to $250,000; (iii) eliminating the requirement that the FDIC pay dividends from the DIF when the reserve ratio is between 1.35% and 1.50%, but continuing the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.50%; however, the FDIC is granted sole discretion in determining whether to suspend or limit the declaration or payment of dividends; (iv) repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; (v) implementing certain corporate governance revisions that apply to all public companies, including regulations that require publicly traded companies to give shareholders a non-binding advisory vote to approve executive compensation, commonly referred to as a “say-on-pay” vote and an advisory role on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions; new director independence requirements and considerations to be taken into account by compensation committees and their advisers relating to executive compensation; additional executive compensation disclosures; and a requirement that companies adopt a policy providing for the recovery of executive compensation in the event of a restatement of its financial statements, commonly referred to as a “clawback” policy; (vi) centralizing responsibility for consumer financial protection by creating a new independent federal agency, the Consumer Financial Protection Bureau (CFPB) responsible for implementing federal consumer protection laws to be applicable to all depository institutions; (vii) imposing new requirements for mortgage lending, including new minimum underwriting standards, limitations on prepayment penalties and imposition of new mandated disclosures to mortgage borrowers; (viii) imposing new limits on affiliate transactions and causing derivative transactions to be subject to lending limits and other restrictions including adoption of the “Volcker Rule” regulating transactions in derivative securities; (ix) limiting debit card interchange fees that financial institutions with $10 billion or more in assets are permitted to charge their customers; and (x) implementing regulations to incentivize and protect individuals, commonly referred to as whistleblowers to report violations of federal securities laws.
2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd Frank Act. While the Act maintains most of the regulatory structure established by the Dodd Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as the Bank.
The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
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, 2020, 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, 2020, the Bank’s loans-to-one-borrower limit was $12.7 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, 2020, the Bank’s largest single lending relationship had an outstanding balance of $17.1 million.
Capital Standards. The Bank is required to comply with applicable capital adequacy standards established by the federal banking agencies. Beginning on January 1, 2015, the Bank became subject to a new comprehensive capital framework for U.S. banking organizations. In July 2013, the Federal Reserve Board, FDIC and OCC adopted a final rule that implements the Basel III changes to the international regulatory capital framework. The Basel III rules include requirements contemplated by the Dodd Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010.
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 have phase-in periods. In 2015, the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and the 2018 legislation summarized above increased that asset threshold to $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.
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, 2020 |
December 31, 2019 |
||||||||||||||
|
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||
|
Total capital to risk-weighted assets: |
||||||||||||||||
|
Actual |
$ | 84,583 | 12.71 | % | $ | 80,418 | 13.74 | % | ||||||||
|
For capital adequacy purposes |
53,255 | 8.00 | % | 46,836 | 8.00 | % | ||||||||||
|
To be well capitalized |
66,569 | 10.00 | % | 58,544 | 10.00 | % | ||||||||||
|
Tier 1 capital to risk-weighted assets: |
||||||||||||||||
|
Actual |
$ | 76,246 | 11.45 | % | $ | 73,862 | 12.62 | % | ||||||||
|
For capital adequacy purposes |
39,941 | 6.00 | % | 35,127 | 6.00 | % | ||||||||||
|
To be well capitalized |
53,255 | 8.00 | % | 46,836 | 8.00 | % | ||||||||||
|
Common Equity Tier 1 capital to risk-weighted assets: |
||||||||||||||||
|
Actual |
$ | 76,246 | 11.45 | % | $ | 73,862 | 12.62 | % | ||||||||
|
For capital adequacy purposes |
29,956 | 4.50 | % | 26,345 | 4.50 | % | ||||||||||
|
To be well capitalized |
43,270 | 6.50 | % | 38,054 | 6.50 | % | ||||||||||
|
Tier 1 capital to average assets: |
||||||||||||||||
|
Actual |
$ | 76,246 | 7.58 | % | $ | 73,862 | 8.17 | % | ||||||||
|
For capital adequacy purposes |
40,213 | 4.00 | % | 36,146 | 4.00 | % | ||||||||||
|
To be well capitalized |
50,267 | 5.00 | % | 45,182 | 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, 2020, 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.
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.
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.
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 15, 2019, the Bank was rated “satisfactory.”
In June 2020, the OCC issued a final rule clarifying and expanding the activities that qualify for Community Reinvestment Act credit and seeking to create a more consistent and objective method for evaluating Community Reinvestment Act performance. The final rule became effective October 1, 2020, but compliance with the revised requirements is not mandatory until January 1, 2024 for institutions the Bank’s asset size.
The Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act of 2003 (FACTA), requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with the FACTA, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer’s election to opt out would be applicable for at least five years.
The Federal Trade Commission (FTC), the federal bank regulatory agencies and the National Credit Union Administration (NCUA) have issued regulations (the Red Flag Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs as part of the FACTA. The programs must provide for the identification, detection and response to patterns, practices or specific activities – known as red flags – that could indicate identity theft. These red flags may include unusual account activity, fraud alerts on a consumer report or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the institution or creditor, include appropriate staff training and provide oversight of any service providers.
The Check Clearing for the 21st Century Act (Check 21) facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a “substitute check,” which is the legal equivalent of an original check. Check 21 does not require banks to create substitute checks or accept checks electronically; however, it does require banks to accept a legally equivalent substitute check in place of an original.
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act (FHA) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FHA, including some that are not specifically mentioned in the FHA itself.
The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. Generally speaking, predatory lending involves at least one, and perhaps all three, of the following elements (i) making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”); (ii) inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); and (iii) engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.
FRB regulations aimed at curbing such lending significantly widened the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid.
OCC guidelines require national banks and their operating subsidiaries to comply with certain standards when making or purchasing loans to avoid predatory or abusive residential mortgage lending practices. Failure to comply with the guidelines could be deemed an unsafe and unsound or unfair or deceptive practice, subjecting the bank to supervisory enforcement actions.
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with the CRA, FACTA, TILA, FHA, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.
Federal Home Loan Bank System. The Bank is a member of the FHLB. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2020, 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, 2020, the Bank was in compliance with these requirements.
Not required as the Corporation is a smaller reporting company.
Item 1B. Unresolved Staff Comments
None.
The Corporation owns no real property but utilizes the main office of the Bank, which is owned by the Bank. The Corporation’s and the Bank’s executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent or other form of consideration for the use of this facility.
The Bank owns and leases numerous other premises for use in conducting business activities. The Bank considers these facilities owned or occupied under lease to be adequate. For additional information regarding the Bank’s properties, see “Note 5 - Premises and Equipment” to the Consolidated Financial Statements on page F-20.
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.
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 |
|||||||||||||
|
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 | ||||||||||||
|
2019: |
||||||||||||||||
|
Fourth quarter |
$ | 34.00 | $ | 29.92 | $ | 32.53 | $ | 0.29 | ||||||||
|
Third quarter |
37.00 | 30.42 | 32.90 | 0.29 | ||||||||||||
|
Second quarter |
34.50 | 29.83 | 34.50 | 0.29 | ||||||||||||
|
First quarter |
32.35 | 29.34 | 30.80 | 0.29 | ||||||||||||
As of March 1, 2021, there were approximately 722 stockholders of record and 2,721,212 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, 2020.
Item 6. Selected Financial Data
Not required as the Corporation is a smaller reporting company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents a review of the Corporation’s consolidated financial condition and results of operations for the years ended December 31, 2020 and 2019. This review should be read in conjunction with the consolidated financial statements beginning on page F-3.
Overview
The Corporation reported consolidated net income available to common stockholders of $6.6 million, or $2.41 per diluted common share, for 2020, compared to $7.8 million, or $2.86 per diluted common share, for 2019. Net income available to common stockholders was impacted by the following:
|
• |
Net interest income increased $1.0 million, or 3.6%, to $29.1 million for the year ended December 31, 2020 from $28.1 million for 2019. This increase primarily related to an increase in interest income of $1.0 million, or 2.8%, while interest expense remained flat. Driving the increase in interest income was a $90.2 million increase in the average balance of loans. Interest expense increased a modest $21,000 as a result of growth in average interest-bearing liabilities of $52.0 million, which was offset by a decrease in the cost of interest-bearing liabilities of 9 basis points to 1.13% at December 31, 2020 from 1.22% at December 31, 2019. |
|
• |
Provision for loan losses increased $2.5 million to $3.2 million for the year ended December 31, 2020 from $715,000 for 2019. This increase was primarily related to the $105.0 million increase in outstanding loan balances and the addition of a specific pandemic allowance qualitative factor and risk rating changes for loans that were granted payment deferrals. |
|
• |
Noninterest income decreased $28,000 to remain flat at $4.4 million for the year ended December 31, 2020 and 2019 due to decreases in fees and service charges and earnings on bank-owned life insurance of $659,000 and $165,000, respectively, offset by increases in gains on the sale of securities, gains on the sale of loans and other noninterest income of $609,000, $127,000 and $60,000, respectively. |
|
• |
Noninterest expense decreased $104,000 to $22.0 million for the year ended December 31, 2020 from $22.1 million for 2019. This decrease was primarily related to decreases in compensation and employee benefits, professional fees and premises and equipment expense of $590,000, $87,000 and $73,000, respectively, partially offset by increases in other noninterest expense and FDIC insurance expense of $393,000 and $265,000, respectively. The increase in other expense was primarily related to $238,000 in FHLB prepayment penalties resulting from the early retirement of $15.0 million of FHLB long-term debt. |
Changes in Financial Condition
Total assets increased $117.0 million, or 12.8%, to $1.03 billion at December 31, 2020 from $915.3 million at December 31, 2019. This increase primarily related to increases in net loans and cash and cash equivalents of $105.0 million and $22.5 million, respectively, partially offset by decreases in securities and interest earning time deposits of $7.1 million and $4.0 million, respectively. Liabilities increased $111.4 million, or 13.4%, to $940.8 million at December 31, 2020 from $829.4 million at December 31, 2019 due to increases in customer deposits and borrowed funds of $106.5 million and $3.5 million, respectively.
Cash and cash equivalents. Cash and cash equivalents increased $22.5 million to $37.4 million at December 31, 2020 from $15.0 million at December 31, 2019. This increase primarily resulted from an increase in customer deposits and borrowed funds and a decrease in securities, partially offset by an increase in loans.
Interest earning time deposits. Interest earning time deposits decreased $4.0 million, or 41.0%, to $5.7 million at December 31, 2020 from $9.7 million at December 31, 2019. This decrease resulted from maturities of certificates of deposits with other financial institutions totaling $4.7 million, partially offset by purchases totaling $746,000 during the year.
Securities. Securities decreased $7.1 million, or 5.9%, to $113.0 million at December 31, 2020 from $120.1 million at December 31, 2019. This decrease primarily resulted from investment security sales, maturities and repayments totaling $67.1 million, partially offset by purchases of $56.8 million during the year.
Loans receivable. Net loans receivable increased $105.0 million, or 15.1%, to $800.3 million at December 31, 2020 from $695.3 million at December 31, 2019. The increase was driven by increases in the Corporation’s commercial mortgage, consumer, commercial business and residential mortgage portfolios of $55.7 million, $25.4 million, $22.5 million and $14.9 million, respectively, partially offset by a decrease in the home equity portfolio of $10.5 million. Included in commercial business loan balances at December 31, 2020 was $30.4 million of loans made under the SBA's PPP lending program.
Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days past due and still accruing, repossessions and real estate owned. Nonperforming assets were $4.4 million, or 0.43% of total assets, at December 31, 2020 compared to $3.2 million, or 0.34% of total assets, at December 31, 2019. Nonperforming assets consisted of nonperforming loans and real estate owned of $4.1 million and $344,000, respectively, at December 31, 2020 and $2.9 million and $249,000, respectively, at December 31, 2019. At December 31, 2020, nonperforming loans consisted primarily of residential mortgage and commercial mortgage loans.
Federal bank stocks. Federal bank stocks were comprised of FHLB stock and FRB stock of $3.8 million and $1.8 million, respectively, at December 31, 2020. 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 $181,000, or 1.2%, to $15.5 million at December 31, 2020 from $15.3 million at December 31, 2019.
Premises and equipment. Premises and equipment decreased $839,000 to $18.2 million at December 31, 2020 from $19.0 million at December 31, 2019. The overall decrease in premises and equipment during the year was due to depreciation and amortization of $1.4 million, partially offset by purchases of $1.2 million. In addition, the Corporation sold $350,000 in assets and recorded asset write-downs of approximately $250,000.
Goodwill. Goodwill remained unchanged at $19.5 million at December 31, 2020 and 2019. 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, 2020.
Core deposit intangible. The core deposit intangible was $1.1 million at December 31, 2020, compared to $1.2 million at December 31, 2019. 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 $164,000 and $176,000 of intangible amortization in 2020 and 2019, respectively.
Deposits. Total deposits increased $106.5 million, or 13.5%, to $893.6 million at December 31, 2020 from $787.1 million at December 31, 2019. Interest bearing deposits increased $61.6 million, or 9.7%, and non-interest bearing deposits increased $44.9 million, or 30.2%. These increases were driven by increases in public funds and government stimulus deposits coupled with decreased consumer spending and the retention of certain PPP loan proceeds.
Borrowed funds. Borrowed funds increased $3.5 million, or 12.3%, to $32.1 million at December 31, 2020 from $28.6 million at December 31, 2019. Borrowed funds at December 31, 2020 consisted of short-term borrowings of $2.1 million and long-term borrowings of $30.0 million. Short-term borrowed funds at December 31, 2020 consisted of an outstanding balance of $2.1 million on a line of credit with a correspondent bank at rate of 4.25%. Long-term borrowed funds consisted of six $5.0 million FHLB term advances totaling $30.0 million, maturing between 2021 and 2025 and having fixed interest rates between 0.97% and 2.85%. 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 $5.6 million, or 6.5%, to $91.5 million at December 31, 2020 from $85.9 million at December 31, 2019. The increase was primarily due to net income of $6.7 million and an increase of $1.9 million in accumulated other comprehensive income, partially offset by common stock and preferred dividends paid of $3.3 million and $186,000, respectively.
Changes in Results of Operations
The Corporation reported net income before preferred stock dividends of $6.7 million and $8.0 million in 2020 and 2019, 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, |
|||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||
|
Average |
Yield/ |
Average |
Yield/ |
|||||||||||||||||||||
|
Balance |
Interest |
Rate |
Balance |
Interest |
Rate |
|||||||||||||||||||
|
Interest-earning assets: |
||||||||||||||||||||||||
|
Loans, taxable |
$ | 771,073 | $ | 33,402 | 4.33 | % | $ | 679,607 | $ | 31,824 | 4.68 | % | ||||||||||||
|
Loans, tax exempt |
19,463 | 745 | 3.83 | % | 20,736 | 812 | 3.92 | % | ||||||||||||||||
|
Total loans receivable |
790,536 | 34,147 | 4.32 | % | 700,343 | 32,636 | 4.66 | % | ||||||||||||||||
|
Securities, taxable |
81,812 | 2,070 | 2.53 | % | 87,544 | 2,258 | 2.58 | % | ||||||||||||||||
|
Securities, tax exempt |
22,205 | 559 | 2.52 | % | 16,995 | 457 | 2.69 | % | ||||||||||||||||
|
Total securities |
104,017 | 2,629 | 2.53 | % | 104,539 | 2,715 | 2.60 | % | ||||||||||||||||
|
Interest-earning deposits with banks |
26,570 | 191 | 0.72 | % | 31,905 | 566 | 1.77 | % | ||||||||||||||||
|
Federal bank stocks |
6,040 | 371 | 6.14 | % | 5,858 | 419 | 7.15 | % | ||||||||||||||||
|
Total interest-earning cash equivalents |
32,610 | 562 | 1.72 | % | 37,763 | 985 | 2.61 | % | ||||||||||||||||
|
Total interest-earning assets |
927,163 | 37,338 | 4.03 | % | 842,645 | 36,336 | 4.31 | % | ||||||||||||||||
|
Cash and due from banks |
3,507 | 3,333 | ||||||||||||||||||||||
|
Other noninterest-earning assets |
61,123 | 62,572 | ||||||||||||||||||||||
|
Total Assets |
$ | 991,793 | $ | 908,550 | ||||||||||||||||||||
|
Interest-bearing liabilities: |
||||||||||||||||||||||||
|
Interest-bearing demand deposits |
$ | 471,766 | $ | 2,858 | 0.61 | % | $ | 401,564 | $ | 2,630 | 0.65 | % | ||||||||||||
|
Time deposits |
201,662 | 4,307 | 2.14 | % | 223,222 | 4,457 | 2.00 | % | ||||||||||||||||
|
Total interest-bearing deposits |
673,428 | 7,165 | 1.06 | % | 624,786 | 7,087 | 1.13 | % | ||||||||||||||||
|
Borrowed funds, short-term |
4,366 | 131 | 3.00 | % | 4,663 | 183 | 3.93 | % | ||||||||||||||||
|
Borrowed funds, long-term |
35,530 | 766 | 2.16 | % | 31,845 | 813 | 2.55 | % | ||||||||||||||||
|
Total borrowed funds |
39,896 | 897 | 2.25 | % | 36,508 | 996 | 2.73 | % | ||||||||||||||||
|
Total interest-bearing liabilities |
713,324 | 8,062 | 1.13 | % | 661,294 | 8,083 | 1.22 | % | ||||||||||||||||
|
Noninterest-bearing demand deposits |
175,279 | — | — | 149,744 | — | — | ||||||||||||||||||
|
Funding and cost of funds |
888,603 | 8,062 | 0.91 | % | 811,038 | 8,083 | 1.00 | % | ||||||||||||||||
|
Other noninterest-bearing liabilities |
14,473 | 13,761 | ||||||||||||||||||||||
|
Total Liabilities |
903,076 | 824,799 | ||||||||||||||||||||||
|
Stockholders' Equity |
88,717 | 83,751 | ||||||||||||||||||||||
|
Total Liabilities and Stockholders' Equity |
$ | 991,793 | $ | 908,550 | ||||||||||||||||||||
|
Net interest income |
$ | 29,276 | $ | 28,253 | ||||||||||||||||||||
|
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities) |
2.90 | % | 3.09 | % | ||||||||||||||||||||
|
Net interest margin (net interest income as a percentage of average interest-earning assets) |
3.16 | % | 3.35 | % | ||||||||||||||||||||
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, |
|||||||||||
|
2020 versus 2019 |
||||||||||||
|
Increase (Decrease) due to |
||||||||||||
|
Volume |
Rate |
Total |
||||||||||
|
Interest income: |
||||||||||||
|
Loans |
$ | 4,007 | $ | (2,496 | ) | $ | 1,511 | |||||
|
Securities |
(13 | ) | (73 | ) | (86 | ) | ||||||
|
Interest-earning deposits with banks |
(82 | ) | (293 | ) | (375 | ) | ||||||
|
Federal bank stocks |
13 | (61 | ) | (48 | ) | |||||||
|
Total interest-earning assets |
3,925 | (2,923 | ) | 1,002 | ||||||||
|
Interest expense: |
||||||||||||
|
Interest-bearing deposits |
533 | (455 | ) | 78 | ||||||||
|
Borrowed funds, short-term |
(11 | ) | (41 | ) | (52 | ) | ||||||
|
Borrowed funds, long-term |
88 | (135 | ) | (47 | ) | |||||||
|
Total interest-bearing liabilities |
610 | (631 | ) | (21 | ) | |||||||
|
Net interest income |
$ | 3,315 | $ | (2,292 | ) | $ | 1,023 | |||||
2020 Results Compared to 2019 Results
The Corporation reported net income available to common stockholders of $6.6 million and $7.8 million for 2020 and 2019, respectively. The $1.2 million, or 15.6%, decrease in net income was attributed to $2.5 million increase in the provision for loan losses and a $28,000 decrease in noninterest income, partially offset by a $1.0 million increase in net interest income and decreases in the provision for income taxes and noninterest expense of $227,000 and $104,000, respectively. Returns on average equity and assets were 7.61% and 0.68%, respectively, for 2020, compared to 9.50% and 0.88%, respectively, for 2019.
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 $1.0 million to $29.3 million for 2020, compared to $28.3 million for 2019. This increase in net interest income can be attributed to an increase in tax equivalent interest income of $1.0 million.
Interest income. Tax equivalent interest income increased $1.0 million, or 2.8%, to $37.3 million for 2020, compared to $36.3 million for 2019. This increase can be attributed to a $1.5 million increase in interest earned on loans, partially offset by decreases in interest earned on deposits with banks and securities and dividends received on federal bank stocks of $375,000, $86,000 and $48,000, respectively.
Tax equivalent interest earned on loans receivable increased $1.5 million, or 4.6%, to $34.1 million for 2020, compared to $32.6 million for 2019. The average balance of loans increased $90.2 million, or 12.9%, generating $4.0 million of additional interest income on loans. Partially offsetting this increase, the average yield on loans decreased 34 basis points to 4.32% for 2020, versus 4.66% for 2019 causing an $2.5 million decrease in interest income. Included in interest earned on loans for the year ended December 31, 2020, is $1.6 million of interest and fees earned on the SBA's PPP lending program.
Interest earned on interest-earning deposits with banks decreased $375,000, or 66.3%, to $191,000 for 2020, compared to $566,000 for 2019. The average yield on interest-earning deposits decreased 105 basis points to 0.72% for 2020, versus 1.77% for 2019 causing a $293,000 decrease in interest income. In addition, the average balance of these accounts decreased $5.3 million, or 16.7%, causing an $82,000 decrease in interest income.
Tax equivalent interest earned on securities decreased $86,000, or 3.2%, to $2.6 million for 2020, compared to $2.7 million for 2019. The average yield on securities decreased 7 basis points to 2.53% for 2020 versus 2.60% for 2019 causing a $73,000 decrease in interest income. Additionally, the average balance of securities decreased $522,000 causing a $13,000 reduction in interest income.
Interest earned on federal bank stocks decreased $48,000, or 11.5%, to $371,000 for 2020, compared to $419,000 for 2019. The average yield on federal bank stocks decreased 101 basis points to 6.14% for 2020 versus 7.15% for 2019 causing a $61,000 decrease in interest income. Partially offsetting this decrease, the average balance of federal bank stocks increased $182,000, or 3.1%, resulting in $13,000 of additional interest income.
Interest expense. Interest expense decreased $21,000 to remain flat at $8.1 million for 2020 and 2019. This decrease can be attributed to a $99,000 decrease in interest expense on borrowed funds, partially offset by a $78,000 increase in interest expense on interest-bearing deposits.
Interest expense on deposits increased $78,000, or 1.1%, to $7.2 million for 2020, compared to $7.1 million for 2019. The average balance of interest-bearing deposits increased $48.6 million, or 7.8%, causing a $533,000 increase in interest expense. Partially offsetting this increase, the average rate on interest-bearing deposits decreased by 7 basis points to 1.06% for 2020 versus 1.13% for 2019 causing a $455,000 decrease in interest expense.
Interest expense on borrowed funds decreased $99,000, or 9.9%, to $897,000 for 2020, compared to $996,000 for 2019. The average rate on borrowed funds decreased 48 basis points to 2.25% for 2020 versus 2.73% for 2019 causing a $176,000 decrease in interest expense. Partially offsetting this decrease, the average balance of borrowed funds increased $3.4 million, or 9.3%, to $39.9 million for 2020, compared to $36.5 million for 2019 causing a $77,000 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) |
2020 |
2019 |
||||||
|
Interest income per Consolidated Statements of Income |
$ | 37,147 | $ | 36,145 | ||||
|
Adjustment to fully taxable equivalent basis |
191 | 191 | ||||||
|
Interest income adjusted to fully taxable equivalent basis (non-GAAP) |
37,338 | 36,336 | ||||||
|
Interest expense |
8,062 | 8,083 | ||||||
|
Net interest income adjusted to fully taxable equivalent basis (non-GAAP) |
$ | 29,276 | $ | 28,253 | ||||
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 increased $1.2 million, or 41.1%, to $4.1 million at December 31, 2020 from $2.9 million at December 31, 2019. The increase in nonperforming loans was primarily related to an increase in non-accrual loans in the residential mortgage and commercial real estate portfolios of $664,000 and $706,000, respectively.
The provision for loan losses increased $2.5 million to $3.2 million for 2020 from $715,000 for 2019. The Corporation’s allowance for loan losses amounted to $9.6 million, or 1.18% of the Corporation’s total loan portfolio at December 31, 2020 compared to $6.6 million or 0.93% of total loans at December 31, 2019. The allowance for loan losses, as a percentage of nonperforming loans at December 31, 2020 and 2019, was 233.5% and 225.5%, respectively. The allocation of the allowance for loan losses related to commercial real estate, residential mortgage and consumers loans increased during the year primarily as a result of growth in the balances, partially offset by a reduction of net charge-off in these portfolios. In addition, the allowance increased in general, due to risk rating changes for loans which were granted payment deferrals in connection with the pandemic, an increase in criticized and classified loans and the addition of a specific pandemic qualitative allowance factor. This pandemic factor, which was initially set at 2 basis points for the first quarter, increased to 9 basis points and added approximately $628,000 to the provision expense during the year ended December 31, 2020. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is expected 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, 2020, 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 decreased $28,000 and remained flat at $4.4 million for 2020 and 2019. The decrease in noninterest income is due to decreases in fees and service charges and earnings on BOLI of $659,000 and $165,000, respectively, partially offset by increases in gains on the sale of securities and loans and other income of $609,000, $127,000 and $60,000, respectively. The reductions in fees and service charges was primarily caused by a substantial decrease in consumer spending related to the pandemic, resulting in higher deposit balances and less account overdrafts. Additionally, the Corporation sold approximately $43.2 million of low yielding securities, in part to repay higher cost overnight borrowings, and to realize a gain of $687,000.
Professional fee expense decreased $87,000, or 9.4%, to $841,000 for 2020, compared to $928,000 for 2019. This decrease is primarily related to a decrease in legal costs due to a decrease in foreclosure activity as a result of the pandemic.
FDIC insurance expense increased $265,000, or 97.1%, to $538,000 for 2020, compared to $273,000 for 2019. This increase was primarily related to an increase in assessment charges due to increases in non-performing assets and decreases in capital ratios during 2020 related to the pandemic and $215,000 in Small Bank Assessment credits received by the Bank and utilized in the third and fourth quarters of 2019.
The provision for income taxes decreased $227,000, or 13.7%, to $1.4 million for 2020, compared to $1.7 million for 2019 primarily due to the decrease in net income available to common stockholders.
Market Risk Management
Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. The Corporation is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Corporation does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets.
The primary objective of the Corporation’s asset liability management function is to maximize the Corporation’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Corporation’s operating environment, capital and liquidity requirements, balance sheet mix, performance objectives and overall business focus. One of the primary measures of the exposure of the Corporation’s earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of 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 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, 2020, the Corporation’s interest-earning assets maturing or repricing within one year totaled $383.0 million while the Corporation’s interest-bearing liabilities maturing or repricing within one year totaled $160.4 million, providing an excess of interest-earning assets over interest-bearing liabilities of $222.6 million or 21.6% of total assets. At December 31, 2020, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 238.8%.
The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2020 which are expected to mature, prepay or reprice in each of the future time periods presented:
|
(Dollar amounts in thousands) |
Six months
|
Six months
|
One to
|
Three to
|
Over
|
Total |
||||||||||||||||||
|
Total interest-earning assets |
$ | 283,739 | $ | 99,269 | $ | 244,145 | 65,137 | $ | 267,003 | $ | 959,293 | |||||||||||||
|
Total interest-bearing liabilities |
71,714 | 88,678 | 234,728 | 106,796 | 227,959 | 729,875 | ||||||||||||||||||
|
Interest rate sensitivity gap |
$ | 212,025 | $ | 10,591 | $ | 9,417 | $ | (41,659 | ) | $ | 39,044 | $ | 229,418 | |||||||||||
|
Cumulative rate sensitivity gap |
$ | 212,025 | $ | 222,616 | $ | 232,033 | $ | 190,374 | $ | 229,418 | ||||||||||||||
|
Ratio of gap during the period to total interest earning assets |
22.10 | % | 1.10 | % | 0.98 | % | (4.34% | ) | 4.07 | % | ||||||||||||||
|
Ratio of cumulative gap to total interest earning assets |
22.10 | % | 23.21 | % | 24.19 | % | 19.85 | % | 23.92 | % | ||||||||||||||
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%.
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, 2020 and 2019, respectively. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2020 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, 2020 levels for net interest income.
|
Increase |
Decrease |
|||||||||||||||
|
+100 BP |
+200 BP |
-100 BP |
-200 BP |
|||||||||||||
|
2020 Net interest income - increase (decrease) |
3.53 | % | 5.84 | % | (2.77 | %) | (1.87 | %) | ||||||||
|
2019 Net interest income - increase (decrease) |
1.87 | % | 2.06 | % | (1.83 | %) | (5.28 | %) | ||||||||
The expected increase in 2019 and 2020 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 $5.6 million, or 6.5%, to $91.5 million at December 31, 2020 from $85.9 million at December 31, 2019. Net income available to common stockholders of $6.6 million in 2020 represented a decrease in earnings of $1.2 million, or 15.6%, compared to 2019. The Corporation’s capital to assets ratio decreased to 8.9% at December 31, 2020 from 9.4% at December 31, 2019.
While continuing to sustain a strong capital position, dividends on common stock increased to $3.3 million in 2020 from $3.1 million in 2019. In addition, stockholders have taken part in the Corporation’s dividend reinvestment plan introduced during 2003 with 39% of registered shareholder accounts active in the plan at December 31, 2020. 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, 2020, the Bank was in excess of all regulatory capital requirements. See "Note 10 - Regulatory Matters" to the consolidated financial statements on page F-24.
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 2020, the Corporation used its sources of funds primarily to fund additional loans and increase interest-earning deposits. As of December 31, 2020, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $115.2 million, and standby letters of credit totaling $493,000, 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, 2020, time deposits amounted to $187.9 million, or 21.0%, of the Corporation’s total consolidated deposits, including approximately $76.1 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 and term borrowing capacity from the FHLB and, to a more limited extent, through the sale of loans. At December 31, 2020, 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 $268.6 million.
The Corporation pays a regular quarterly cash dividend. The Corporation paid dividends of $0.30 and $0.29 per common share for each of the four quarters of 2020 and 2019, respectively. On February 17, 2021, the Corporation declared a quarterly dividend of $0.30 per common share payable on March 19, 2021 to shareholders of record on March 1, 2021. 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-8. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies:
Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.
Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery.
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, 2020. 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-10 for the Corporation's accounting policy on goodwill and see "Note 6 - Goodwill and Intangible Assets" on page F-21 in the Consolidated Financial Statements for a detailed discussion of the factors considered by management in the assessment.
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
The information required by this item is incorporated herein by reference to the sections captioned “Relationship with Independent Registered Public Accounting Firm” in the Corporation’s definitive proxy statement for the Corporation’s Annual Meeting of Stockholders to be held on April 21, 2021 (the Proxy Statement).
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, 2020, 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 2020, 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, 2020. 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, 2020. Our independent registered public accounting firm has not expressed an opinion on our internal control over financial reporting for the year ended December 31, 2020.
None.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the sections captioned “Principal Beneficial Owners of the Corporation’s Common Stock”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Information With Respect to Nominees For Director, Continuing Director and Executive Officers” in the Proxy Statement.
The Corporation maintains a Code of Personal and Business Conduct and Ethics (the Code) that applies to all employees, including the CEO and the CFO. A copy of the Code has previously been filed with the SEC and is posted on our website at www.emclairefinancial.com. Any waiver of the Code with respect to the CEO and the CFO will be publicly disclosed in accordance with applicable regulations.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the section captioned “Executive Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the section captioned “Principal Beneficial Owners of the Corporation’s Common Stock” in the Proxy Statement.
Equity Compensation Plan Information. The following table provides certain information as of December 31, 2020 with respect to shares of common stock that may be issued under our 2014 Stock Incentive Plan, which was approved by shareholders in April 2014.
|
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) |
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Equity compensation plans approved by security holders |
— | $ | — | 95,216 | ||||||||
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Equity compensation plans not approved by security holders |
— | — | — | |||||||||
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Total |
— | $ | — | 95,216 | ||||||||
(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 81,650 shares of restricted stock have been granted at December 31, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections captioned “Information With Respect to Nominees For Director, Continuing Directors and Executive Officers” and “Executive Compensation” in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Relationship With Independent Registered Public Accounting Firm” in the Proxy Statement.
Item 15. Exhibits and Financial Statement Schedules
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(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.
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(b) |
Exhibits are either attached as part of this Report or incorporated herein by reference. |
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* |
Compensatory plan or arrangement. |
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(1) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated May 23, 2018. |
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(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. |
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(3) |
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB40 for the year ended December 31, 1997. |
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(4) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 18, 2015. |
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(5) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 15, 2017. |
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(6) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 8, 2019. |
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(7) |
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2002. |
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(8) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 15, 2008. |
| (9) | Incorporated by reference to the Registrant’s Definitive Proxy Statement dated March 24, 2016. |
| (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. |
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.
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EMCLAIRE FINANCIAL CORP |
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Dated: March 19, 2021 |
By: |
/s/ William C. Marsh |
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William C. Marsh |
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Chairman, Chief Executive Officer, President and Director |
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(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.
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By: |
/s/ William C. Marsh |
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By: |
/s/ Amanda L. Engles |
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William C. Marsh |
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Amanda L. Engles |
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Chairman of the Board |
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Treasurer and Chief Financial Officer |
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Chief Executive Officer |
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(Principal Financial Officer) |
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President |
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Date: |
March 19, 2021 |
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Director |
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(Principal Executive Officer) |
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Date: |
March 19, 2021 |
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By: |
/s/ Milissa S. Bauer |
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By: |
/s/ David L. Cox |
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Milissa S. Bauer |
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David L. Cox |
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Director |
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Director |
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Date: |
March 19, 2021 |
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Date: |
March 19, 2021 |
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By: |
/s/ James M. Crooks |
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By: |
/s/ Henry H. Deible |
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James M. Crooks |
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Henry H. Deible |
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Director |
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Director |
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Date: |
March 19, 2021 |
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Date: |
March 19, 2021 |
| By: | /s/ Henry H. Deible II | By: | /s/ Robert W. Freeman | |
| Henry H. Deible II | Robert W. Freeman | |||
| Director | Director | |||
| Date: | March 19, 2021 | Date: | March 19, 2021 | |
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By: |
/s/ Mark A. Freemer |
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By: |
/s/ Steven J. Hunter |
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Mark A. Freemer |
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Steven J. Hunter |
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Director |
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Director |
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Date: |
March 19, 2021 |
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Date: |
March 19, 2021 |
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/s/ John B. Mason |
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By: |
/s/ Deanna K. McCarrier |
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John B. Mason |
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Deanna K. McCarrier |
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Director |
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Director |
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Date: |
March 19, 2021 |
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Date: |
March 19, 2021 |
| By: | /s/ Nicholas D. Varischetti | |||
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Nicholas D. Varischetti |
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Director |
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Date: |
March 19, 2021 |
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Financial Statements
Table of Contents
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of Emclaire Financial Corp
Emlenton, Pennsylvania
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Emclaire Financial Corp (the "Corporation") as of December 31, 2020 and 2019, the related consolidated statements of net income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years 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 2019, and the results of its operations and its cash flows for each of the years 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 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 included 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.
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 the critical audit matter 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 - Qualitative Factors
As described in Notes 1 and 3 to the consolidated financial statements, the Corporation's allowance for loan losses is a critical accounting estimate that requires significant management judgment in the evaluation of credit quality and the application of qualitative factors. The allowance for loan losses includes components related to loans individually and collectively evaluated for impairment. The specific component relates to loans individually evaluated for impairment which includes loans for which it is probable that the Corporation will be unable to collect principal and interest when due and restructured loans. The general component relates to loans collectively evaluated for impairment, which is based on historical loss experience adjusted for qualitative factors.
The calculation of the general component of the allowance for loan losses involves significant estimates and subjective assumptions, which require a high degree of judgment. The qualitative factors component of the general allowance is based on 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 amount of the allowance for loan loss allocated is increased or decreased for each loan segment based on management's assessment of these qualitative factors.
We identified auditing the impact of qualitative factors in the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment. Auditing management's determination of qualitative factors involved especially subjective auditor judgment because management's estimate relies on an inherently subjective analysis to determine the quantitative impact the qualitative factors have on the allowance. Management's analysis of these factors requires significant judgment.
The primary procedures we performed to address this critical audit matter include:
Substantively testing management's process, including evaluating their judgments and assumptions, for developing the qualitative factors which included:
| • | Evaluating the reliability and relevancy of data used as a basis for the adjustments relating to qualitative factors; | |
| • | 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; | |
| • | Analytically evaluating the collectively evaluated for impairment component year over year; | |
| • | Verifying the mathematical accuracy of the adjustment factors for the qualitative component; | |
| • | Evaluating the reasonableness of the qualitative factor allowance allocation derived by management; | |
| • | Recalculating the dollar amount of the reserve derived from the qualitative factor assessment; and | |
| • | Agreeing the allowance allocation from the qualitative factor analysis to the overall allowance calculation. |
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/s/ Crowe LLP |
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We have served as the Corporation's auditor since 2010. |
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Oak Brook, Illinois |
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March 19, 2021 |
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(Dollar amounts in thousands, except share and per share data) |
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December 31, 2020 |
December 31, 2019 |
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Assets |
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Cash and due from banks |
$ | 3,526 | $ | 3,750 | ||||
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Interest earning deposits with banks |
33,913 | 11,236 | ||||||
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Total cash and cash equivalents |
37,439 | 14,986 | ||||||
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Interest earning time deposits |
5,718 | 9,698 | ||||||
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Securities - available-for-sale |
113,041 | 120,107 | ||||||
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Securities - equity investments |
15 | 19 | ||||||
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Loans held for sale |
75 | — | ||||||
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Loans receivable, net of allowance for loan losses of $9,580 and $6,556 |
800,338 | 695,348 | ||||||
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Federal bank stocks, at cost |
5,635 | 5,790 | ||||||
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Bank-owned life insurance |
15,468 | 15,287 | ||||||
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Accrued interest receivable |
3,786 | 2,600 | ||||||
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Premises and equipment, net |
18,202 | 19,041 | ||||||
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Goodwill |
19,460 | 19,460 | ||||||
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Core deposit intangible, net |
1,083 | 1,247 | ||||||
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Prepaid expenses and other assets |
12,063 | 11,713 | ||||||
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Total Assets |
$ | 1,032,323 | $ | 915,296 | ||||
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Liabilities and Stockholders' Equity |
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Liabilities |
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Deposits: |
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Non-interest bearing |
$ | 193,752 | $ | 148,842 | ||||
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Interest bearing |
699,875 | 638,282 | ||||||
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Total deposits |
893,627 | 787,124 | ||||||
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Short-term borrowed funds |
2,050 | 2,050 | ||||||
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Long-term borrowed funds |
30,000 | 26,500 | ||||||
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Accrued interest payable |
474 | 616 | ||||||
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Accrued expenses and other liabilities |
14,692 | 13,148 | ||||||
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Total Liabilities |
940,843 | 829,438 | ||||||
| Commitments and Contingent Liabilities (Note 11) | — | — | ||||||
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Stockholders' Equity |
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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 | ||||||
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Common stock, $1.25 par value, 12,000,000 shares authorized; 2,823,229 and 2,810,729 shares issued; 2,721,212 and 2,708,712 shares outstanding |
3,529 | 3,513 | ||||||
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Additional paid-in capital |
47,200 | 46,757 | ||||||
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Treasury stock, at cost; 102,017 shares |
(2,114 | ) | (2,114 | ) | ||||
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Retained earnings |
42,143 | 38,831 | ||||||
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Accumulated other comprehensive loss |
(3,484 | ) | (5,335 | ) | ||||
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Total Stockholders' Equity |
91,480 | 85,858 | ||||||
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Total Liabilities and Stockholders' Equity |
$ | 1,032,323 | $ | 915,296 | ||||
See accompanying notes to consolidated financial statements.
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(Dollar amounts in thousands, except share and per share data) |
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Year ended December 31, |
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2020 |
2019 |
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Interest and dividend income |
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Loans receivable, including fees |
$ | 34,029 | $ | 32,507 | ||||
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Securities: |
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Taxable |
2,070 | 2,258 | ||||||
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Exempt from federal income tax |
486 | 395 | ||||||
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Federal bank stocks |
371 | 419 | ||||||
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Interest earning deposits with banks |
191 | 566 | ||||||
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Total interest and dividend income |
37,147 | 36,145 | ||||||
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Interest expense |
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Deposits |
7,165 | 7,087 | ||||||
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Short-term borrowed funds |
131 | 183 | ||||||
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Long-term borrowed funds |
766 | 813 | ||||||
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Total interest expense |
8,062 | 8,083 | ||||||
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Net interest income |
29,085 | 28,062 | ||||||
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Provision for loan losses |
3,247 | 715 | ||||||
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Net interest income after provision for loan losses |
25,838 | 27,347 | ||||||
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Noninterest income |
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Fees and service charges |
1,498 | 2,157 | ||||||
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Net gain on sales of available for sale securities |
687 | 78 | ||||||
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Net gain on sales of loans |
241 | 114 | ||||||
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Earnings on bank-owned life insurance |
401 | 566 | ||||||
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Other |
1,536 | 1,476 | ||||||
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Total noninterest income |
4,363 | 4,391 | ||||||
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Noninterest expense |
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Compensation and employee benefits |
11,148 | 11,738 | ||||||
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Premises and equipment |
3,300 | 3,373 | ||||||
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Intangible asset amortization |
164 | 176 | ||||||
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Professional fees |
841 | 928 | ||||||
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Federal deposit insurance |
538 | 273 | ||||||
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Other |
6,027 | 5,634 | ||||||
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Total noninterest expense |
22,018 | 22,122 | ||||||
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Income before provision for income taxes |
8,183 | 9,616 | ||||||
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Provision for income taxes |
1,435 | 1,662 | ||||||
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Net income |
6,748 | 7,954 | ||||||
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Preferred stock dividends |
186 | 182 | ||||||
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Net income available to common stockholders |
$ | 6,562 | $ | 7,772 | ||||
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Earnings per common share |
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Basic |
$ | 2.42 | $ | 2.88 | ||||
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Diluted |
$ | 2.41 | $ | 2.86 | ||||
See accompanying notes to consolidated financial statements.
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(Dollar amounts in thousands) |
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Year ended December 31, |
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2020 |
2019 |
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Net income |
$ | 6,748 | $ | 7,954 | ||||
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Other comprehensive income |
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Unrealized gains on securities available-for-sale: |
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Unrealized holding gain arising during the period |
3,634 | 1,861 | ||||||
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Reclassification adjustment for gains included in net income |
(687 | ) | (78 | ) | ||||
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Net period change |
2,947 | 1,783 | ||||||
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Tax effect |
(619 | ) | (374 | ) | ||||
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Net of tax |
2,328 | 1,409 | ||||||
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Defined benefit pension plans: |
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Unrealized holding gain arising during the period |
(871 | ) | (742 | ) | ||||
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Reclassification adjustment for gains included in net income |
268 | 252 | ||||||
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Net period change |
(603 | ) | (490 | ) | ||||
|
Tax effect |
126 | 103 | ||||||
|
Net of tax |
(477 | ) | (387 | ) | ||||
|
Total other comprehensive income |
1,851 | 1,022 | ||||||
|
Comprehensive income |
$ | 8,599 | $ | 8,976 | ||||
See accompanying notes to consolidated financial statements.
| (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, 2019 |
$ | 421 | $ | 3,785 | $ | 3,501 | $ | 46,401 | $ | (2,114 | ) | $ | 34,190 | $ | (6,357 | ) | $ | 79,827 | ||||||||||||||
|
Net income |
— | — | — | — | — | 7,954 | — | 7,954 | ||||||||||||||||||||||||
|
Other comprehensive income |
— | — | — | — | — | — | 1,022 | 1,022 | ||||||||||||||||||||||||
|
Cash dividends declared on preferred stock |
— | — | — | — | — | (182 | ) | — | (182 | ) | ||||||||||||||||||||||
|
Issuance of common stock for restricted stock awards (10,000 shares) |
— | — | 12 | (12 | ) | — | — | — | — | |||||||||||||||||||||||
|
Stock compensation expense |
— | — | — | 368 | — | — | — | 368 | ||||||||||||||||||||||||
|
Cash dividends declared on common stock ($1.16 per share) |
— | — | — | — | — | (3,131 | ) | — | (3,131 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2019 |
$ | 421 | $ | 3,785 | $ | 3,513 | $ | 46,757 | $ | (2,114 | ) | $ | 38,831 | $ | (5,335 | ) | $ | 85,858 | ||||||||||||||
|
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 | ||||||||||||||
See accompanying notes to consolidated financial statements.
| (Dollar amounts in thousands, except share and per share data) |
|
For the year ended December 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Cash flows from operating activities |
||||||||
|
Net income |
$ | 6,748 | $ | 7,954 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
|
Depreciation and amortization of premises and equipment |
1,406 | 1,388 | ||||||
|
Provision for loan losses |
3,247 | 715 | ||||||
|
Amortization/accretion of premiums, discounts and deferred costs and fees, net |
(213 | ) | 406 | |||||
|
Amortization of operating lease right-of-use assets |
136 | 132 | ||||||
|
Amortization of intangible assets and mortgage servicing rights |
261 | 249 | ||||||
|
Realized gain on sales of debt securities, net |
(687 | ) | (78 | ) | ||||
|
Change in fair value of equity securities |
4 | (12 | ) | |||||
|
Net gain on sales of loans |
(241 | ) | (114 | ) | ||||
|
Net (gain) loss on foreclosed real estate |
3 | (49 | ) | |||||
|
Net loss on sale of premises and equipment |
277 | 279 | ||||||
|
Loans originated for sale |
(213 | ) | (6,027 | ) | ||||
|
Proceeds from the sale of loans originated for sale |
144 | 6,178 | ||||||
|
Write-down of foreclosed real estate |
56 | 37 | ||||||
|
Stock compensation expense |
459 | 368 | ||||||
|
Increase in bank-owned life insurance |
(401 | ) | (406 | ) | ||||
| Proceeds from bank-owned life insurance claim | — | (160 | ) | |||||
|
Decrease (increase) in deferred taxes |
(603 | ) | 122 | |||||
|
Increase in accrued interest receivable |
(1,186 | ) | (30 | ) | ||||
|
Increase in prepaid expenses and other assets |
(590 | ) | (107 | ) | ||||
|
Increase (decrease) in accrued interest payable |
(142 | ) | 121 | |||||
|
Increase (decrease) in accrued expenses and other liabilities |
1,066 | (538 | ) | |||||
|
Net cash provided by operating activities |
9,531 | 10,428 | ||||||
|
Cash flows from investing activities |
||||||||
|
Loan originations and principal collections, net |
(113,305 | ) | 10,791 | |||||
|
Proceeds from sales of loans held for sale previously classified as portfolio loans |
5,260 | 967 | ||||||
|
Available-for-sale securities: |
||||||||
|
Sales |
43,906 | 36,370 | ||||||
|
Maturities, repayments and calls |
23,238 | 19,007 | ||||||
|
Purchases |
(56,777 | ) | (76,149 | ) | ||||
|
Purchase of federal bank stocks |
(3,190 | ) | (1,946 | ) | ||||
|
Redemption of federal bank stocks |
3,345 | 2,507 | ||||||
|
Net change in interest earning time deposits |
3,980 | (2,960 | ) | |||||
|
Proceeds from surrender of bank-owned life insurance |
220 | — | ||||||
|
Proceeds from the sale of bank premises and equipment |
397 | 251 | ||||||
|
Purchases of premises and equipment |
(1,155 | ) | (1,809 | ) | ||||
|
Proceeds from the sale of foreclosed real estate |
436 | 1,109 | ||||||
|
Net cash used in investing activities |
(93,645 | ) | (11,862 | ) | ||||
|
Cash flows from financing activities |
||||||||
|
Net increase in deposits |
106,503 | 25,578 | ||||||
|
Proceeds from long-term debt |
20,000 | — | ||||||
|
Repayments on long-term debt |
(16,500 | ) | (6,000 | ) | ||||
|
Net change in short-term borrowings |
— | (10,800 | ) | |||||
|
Dividends paid |
(3,436 | ) | (3,313 | ) | ||||
|
Net cash provided by financing activities |
106,567 | 5,465 | ||||||
|
Net increase in cash and cash equivalents |
22,453 | 4,031 | ||||||
|
Cash and cash equivalents at beginning of period |
14,986 | 10,955 | ||||||
|
Cash and cash equivalents at end of period |
$ | 37,439 | $ | 14,986 | ||||
|
Supplemental information: |
||||||||
|
Interest paid |
$ | 8,204 | $ | 7,962 | ||||
|
Income taxes paid |
1,350 | 1,410 | ||||||
|
Supplemental noncash disclosure: |
||||||||
|
Transfers from loans to foreclosed real estate |
590 | 645 | ||||||
|
Initial recognition of operating lease right-of-use assets |
— | 1,642 | ||||||
|
Initial recognition of operating lease liabilities |
— | 1,858 | ||||||
|
Transfers from portfolio loans to loans held for sale |
5,025 | 1,004 | ||||||
See accompanying notes to consolidated financial statements.
|
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 Pennsylvania and West Virginia. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.
Use of Estimates and Classifications. In preparing consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts previously reported may have been reclassified to conform to the current year financial statement presentation. Such reclassifications did not affect net income or stockholders’ equity. Additionally, the global spread of the coronavirus resulted in business and social disruption and was declared a Public Health Emergency of International Concern by the World Health Organization. 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 contain the coronavirus.
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.
|
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.
| Notes to Consolidated Financial Statements |
|
1. |
Summary of Significant Accounting Policies (continued) |
Commercial real estate: Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to real estate markets such as geographic location and property type.
Commercial business: Commercial credit is extended to business customers for use in normal operations to finance working capital needs, equipment purchases or other projects. The majority of these borrowers are customers doing business within our geographic region. These loans are generally underwritten individually and secured with the assets of the company and the personal guarantee of the business owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors.
Consumer: Consumer loans are loans to an individual for non-business purposes such as automobile purchases or debt consolidation. These loans are originated based primarily on credit scores and debt-to-income ratios which may be adversely affected by economic or individual performance factors.
Loans Held for Sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold.
Federal Bank Stocks. The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and the Federal Reserve Bank of Cleveland (FRB). As a member of these federal banking systems, the Bank maintains an investment in the capital stock of the respective regional banks. These stocks are held at cost and classified as restricted stock. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships. These stocks are periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Bank-Owned Life Insurance (BOLI). The Bank purchased life insurance policies on certain key officers and employees. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment. Land is carried at cost. Premises, furniture and equipment, and leasehold improvements are carried at cost less accumulated depreciation or amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets, which are twenty-five years to forty years for buildings and three to ten years for furniture and equipment. Amortization of leasehold improvements is computed using the straight-line method over the shorter of their estimated useful life or the expected term of the leases. Expected terms include lease option periods to the extent that the exercise of such option is reasonably assured. Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, assets are recorded at fair value.
Goodwill and Intangible Assets. Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. 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 is 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, 2020 and 2019, the outstanding balance of loans serviced for other totaled $26.8 million and $32.8 million, respectively, and are not included in the accompanying consolidated balance sheet. At December 31, 2020 and 2019, the mortgage servicing rights associated with these outstanding balances were $165,000 and $211,000, respectively, and are included with other assets in the consolidated balance sheet. In addition, for the years ended December 31, 2020 and 2019, the Corporation recognized $80,000 and $85,000, respectively, for the servicing of these loans and is recorded in other noninterest income,.
|
Notes to Consolidated Financial Statements |
||
|
1. |
Summary of Significant Accounting Policies (continued) |
Other Real Estate Acquired Through Foreclosure (OREO). Real estate properties acquired through foreclosure are initially recorded at fair value less cost to sell when acquired, thereby establishing a new cost basis for the asset. These assets are subsequently accounted for at the lower of carrying amount or fair value less cost to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Revenue and expenses from operations of the properties, gains and losses on sales and additions to the valuation allowance are included in operating results. Real estate acquired through foreclosure is classified in prepaid expenses and other assets and totaled $344,000 and $249,000 at December 31, 2020 and 2019, respectively. Loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.3 million and $545,000 at December 31, 2020 and 2019, respectively.
Treasury Stock. Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the first-in, first-out basis.
Income Taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings Per Common Share (EPS). Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares issuable under stock options and restricted stock awards.
Comprehensive Income. Comprehensive income includes net income and other comprehensive income (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.
|
Notes to Consolidated Financial Statements |
||
|
1. |
Summary of Significant Accounting Policies (continued) |
Fair Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there currently are such matters that will have a material effect on the financial statements.
Newly Issued Not Yet Effective Accounting Standards. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU 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.
| Notes to Consolidated Financial Statements |
|
1. |
Summary of Significant Accounting Policies (continued) |
Adoption of New Accounting Policies. In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment". This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The Corporation has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying value. ASU 2017-04 was effective on January 1, 2020 and the adoption did not have a material impact on the Corporation's financial statement disclosures.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement". ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Disclosures for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurement were removed. Additional disclosures were required relating to (a) changes in unrealized gains/losses in OCI for Level 3 fair value measurements for assets held at the end of the reporting period, and (b) the process of calculating weighted average for significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-03 was effective on January 1, 2020 and the adoption did not have a material impact on the Corporation's financial statement disclosures.
|
2. |
Securities |
Equity Securities. The Corporation held equity securities with fair values of $15,000 and $19,000 as of December 31, 2020 and 2019, respectively. Changes in the fair value of these securities are included in other income on the consolidated statements of net income and is included in other noninterest income on the consolidated statement of income. The Corporation recognized a loss of $4,000 and a gain of $12,000 on the equity securities held at December 31, 2020 and 2019, 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, 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 | |||||||
|
December 31, 2019: |
||||||||||||||||
|
U.S. government sponsored entities and agencies |
$ | 7,069 | $ | 14 | $ | (6 | ) | $ | 7,077 | |||||||
|
U.S. agency mortgage-backed securities: residential |
40,868 | 291 | (84 | ) | 41,075 | |||||||||||
|
U.S. agency collateralized mortgage obligations: residential |
33,001 | 71 | (235 | ) | 32,837 | |||||||||||
|
State and political subdivisions |
27,848 | 217 | (269 | ) | 27,796 | |||||||||||
|
Corporate debt securities |
11,459 | 93 | (230 | ) | 11,322 | |||||||||||
|
Total securities available-for-sale |
$ | 120,245 | $ | 686 | $ | (824 | ) | $ | 120,107 | |||||||
Securities with carrying values of $36.0 million and $22.1 million as of December 31, 2020 and 2019, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Gains on sales of available for sale debt securities for the years ended December 31 were as follows:
|
2020 |
2019 |
|||||||
|
Proceeds |
$ | 43,906 | $ | 36,370 | ||||
|
Gains |
699 | 135 | ||||||
|
Losses |
(12 | ) | (57 | ) | ||||
|
Tax provision related to gains (losses) |
144 | 16 | ||||||
|
Notes to Consolidated Financial Statements |
|
2. |
Securities (continued) |
The following table summarizes scheduled maturities of the Corporation’s debt securities as of December 31, 2020. 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 |
$ | 497 | $ | 500 | ||||
|
Due after one year through five years |
4,547 | 4,631 | ||||||
|
Due after five years through ten years |
25,648 | 26,215 | ||||||
|
Due after ten years |
47,731 | 49,203 | ||||||
|
Mortgage-backed securities: residential |
16,151 | 16,581 | ||||||
|
Collateralized mortgage obligations: residential |
15,658 | 15,911 | ||||||
|
Total securities available-for-sale |
$ | 110,232 | $ | 113,041 | ||||
Information pertaining to securities with gross unrealized losses at December 31, 2020 and 2019 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, 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 | ) | |||||||||
|
December 31, 2019: |
||||||||||||||||||||||||
|
U.S. government sponsored entities and agencies |
$ | — | $ | — | $ | 2,032 | $ | (6 | ) | $ | 2,032 | $ | (6 | ) | ||||||||||
|
U.S. agency mortgage-backed securities: residential |
14,578 | (76 | ) | 2,325 | (8 | ) | 16,903 | (84 | ) | |||||||||||||||
|
U.S. agency collateralized mortgage obligations: residential |
12,319 | (32 | ) | 11,621 | (203 | ) | 23,940 | (235 | ) | |||||||||||||||
|
State and political subdivisions |
15,636 | (269 | ) | — | — | 15,636 | (269 | ) | ||||||||||||||||
|
Corporate debt securities |
4,031 | (229 | ) | 499 | (1 | ) | 4,530 | (230 | ) | |||||||||||||||
|
Total |
$ | 46,564 | $ | (606 | ) | $ | 16,477 | $ | (218 | ) | $ | 63,041 | $ | (824 | ) | |||||||||
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.
Notes to Consolidated Financial Statements
|
2. |
Securities (continued) |
There were 20 debt securities in an unrealized loss position as of December 31, 2020, of which 7 were in an unrealized loss position for more than 12 months. Of these 20 securities, 7 were corporate securities, 6 were collateralized mortgage obligations (issued by U.S. government sponsored entities), 4 were state and political subdivisions securities, 2 were mortgage-backed securities and 1 was a U.S. government sponsored entities and agencies security. 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, 2020 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, 2020 |
December 31, 2019 |
||||||
|
Mortgage loans on real estate: |
||||||||
|
Residential first mortgages |
$ | 308,031 | $ | 293,170 | ||||
|
Home equity loans and lines of credit |
87,088 | 97,541 | ||||||
|
Commercial real estate |
285,625 | 229,951 | ||||||
|
Total real estate loans |
680,744 | 620,662 | ||||||
|
Other loans: |
||||||||
|
Commercial business |
89,139 | 66,603 | ||||||
|
Consumer |
40,035 | 14,639 | ||||||
|
Total other loans |
129,174 | 81,242 | ||||||
|
Total loans, gross |
809,918 | 701,904 | ||||||
|
Less allowance for loan losses |
9,580 | 6,556 | ||||||
|
Total loans, net |
$ | 800,338 | $ | 695,348 | ||||
Included in total loans above are net deferred costs of $2.5 million and $2.6 million at December 31, 2020 and 2019, respectively. In addition, included in commercial loans at December 31, 2020 are $30.4 million of Paycheck Protection Program (PPP) loans that are guaranteed by the Small Business Administration (SBA). The Corporation received $2.1 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020 and $795,000 will be recognized in 2021 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 to Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the 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 the current economic situation.
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) |
2020 |
2019 |
||||||
|
Balance at the beginning of the year |
$ | 6,556 | $ | 6,508 | ||||
|
Provision for loan losses |
3,247 | 715 | ||||||
|
Charge-offs |
(473 | ) | (913 | ) | ||||
|
Recoveries |
250 | 246 | ||||||
|
Balance at the end of the year |
$ | 9,580 | $ | 6,556 | ||||
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, 2020 and 2019:
|
Home Equity |
||||||||||||||||||||||||
|
Residential |
& Lines |
Commercial |
Commercial |
|||||||||||||||||||||
|
(Dollar amounts in thousands) |
Mortgages |
of Credit |
Real Estate |
Business |
Consumer |
Total |
||||||||||||||||||
|
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 | ||||||||||||
|
At December 31, 2019: |
||||||||||||||||||||||||
|
Beginning Balance |
$ | 2,198 | $ | 648 | $ | 3,106 | $ | 500 | $ | 56 | $ | 6,508 | ||||||||||||
|
Charge-offs |
(227 | ) | (61 | ) | (242 | ) | (250 | ) | (133 | ) | (913 | ) | ||||||||||||
|
Recoveries |
40 | 6 | 134 | — | 66 | 246 | ||||||||||||||||||
|
Provision |
298 | 33 | (100 | ) | 386 | 98 | 715 | |||||||||||||||||
|
Ending Balance |
$ | 2,309 | $ | 626 | $ | 2,898 | $ | 636 | $ | 87 | $ | 6,556 | ||||||||||||
|
Ending ALL balance attributable to loans: |
||||||||||||||||||||||||
|
Individually evaluated for impairment |
$ | 5 | $ | — | $ | — | $ | — | $ | — | $ | 5 | ||||||||||||
|
Acquired loans collectively evaluated for impairment |
— | — | — | — | — | — | ||||||||||||||||||
|
Originated loans collectively evaluated for impairment |
2,304 | 626 | 2,898 | 636 | 87 | 6,551 | ||||||||||||||||||
|
Total |
$ | 2,309 | $ | 626 | $ | 2,898 | $ | 636 | $ | 87 | $ | 6,556 | ||||||||||||
|
Total loans: |
||||||||||||||||||||||||
|
Individually evaluated for impairment |
$ | 358 | $ | 4 | $ | 81 | $ | 40 | $ | — | $ | 483 | ||||||||||||
|
Acquired loans collectively evaluated for impairment |
60,523 | 10,901 | 41,993 | 7,930 | 1,982 | 123,329 | ||||||||||||||||||
|
Originated loans collectively evaluated for impairment |
232,289 | 86,636 | 187,877 | 58,633 | 12,657 | 578,092 | ||||||||||||||||||
|
Total |
$ | 293,170 | $ | 97,541 | $ | 229,951 | $ | 66,603 | $ | 14,639 | $ | 701,904 | ||||||||||||
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, 2020 and 2019, 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.
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, 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 | ||||||||||
|
(Dollar amounts in thousands) |
||||||||||||||||||||||||
|
Impaired Loans with Specific Allowance |
||||||||||||||||||||||||
|
As of December 31, 2019 |
For the year ended December 31, 2019 |
|||||||||||||||||||||||
|
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized in Period |
Cash Basis Interest Recognized in Period |
|||||||||||||||||||
|
Residential first mortgages |
$ | 72 | $ | 72 | $ | 5 | $ | 72 | $ | 3 | $ | 3 | ||||||||||||
|
Home equity and lines of credit |
4 | 4 | — | 5 | — | — | ||||||||||||||||||
|
Commercial real estate |
— | — | — | — | — | — | ||||||||||||||||||
|
Commercial business |
— | — | — | — | — | — | ||||||||||||||||||
|
Consumer |
— | — | — | — | — | — | ||||||||||||||||||
|
Total |
$ | 76 | $ | 76 | $ | 5 | $ | 77 | $ | 3 | $ | 3 | ||||||||||||
|
Impaired Loans with No Specific Allowance |
||||||||||||||||||||
|
As of December 31, 2019 |
For the year ended December 31, 2019 |
|||||||||||||||||||
|
Unpaid Principal Balance |
Recorded Investment |
Average Recorded Investment |
Interest Income Recognized in Period |
Cash Basis Interest Recognized in Period |
||||||||||||||||
|
Residential first mortgages |
$ | 398 | $ | 286 | $ | 301 | $ | 4 | $ | 4 | ||||||||||
|
Home equity and lines of credit |
— | — | — | — | — | |||||||||||||||
|
Commercial real estate |
81 | 81 | 1,019 | 88 | 35 | |||||||||||||||
|
Commercial business |
40 | 40 | 79 | 7 | 2 | |||||||||||||||
|
Consumer |
— | — | — | — | — | |||||||||||||||
|
Total |
$ | 519 | $ | 407 | $ | 1,399 | $ | 99 | $ | 41 | ||||||||||
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, 2020 and 2019, the Corporation had $396,000 and $409,000, respectively, of loans classified as TDRs, which are included in impaired loans above. At December 31, 2020 and 2019, the Corporation had $6,000 and $5,000, respectively, of the allowance for loan losses allocated to these specific loans.
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 reamortized over the extended period. At December 31, 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. During the year ended December 31, 2019, the Corporation initially reported one modified commercial mortgage loans with a recorded investment of $67,000. Subsequently, it was determined that the parameters applied to the loan did not required reporting as a TDR. As a result, the Corporation did not have any loans modified to TDR status for the year ending December 31, 2019.
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, 2020 and 2019, there were no loans classified as TDRs which defaulted within twelve months of their modification.
Under the provisions of the CARES Act, as of December 31, 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. As of February 28, 2021, 28 loans with an aggregate balance of $35.4 million remained on deferral while 382 loans with an aggregate balance of $75.0 million have resumed normal repayment or paid off. Also, as of February 28, 2021, hospitality (hotel and restaurant) loans comprised $32.8 million, or 92.7% of the loans remaining on deferral. 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 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.
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, 2020 and 2019:
|
(Dollar amounts in thousands) |
||||||||||||||||||||||||
|
Not Rated |
Pass |
Special Mention |
Substandard |
Doubtful |
Total |
|||||||||||||||||||
|
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 | ||||||||||||
|
December 31, 2019: |
||||||||||||||||||||||||
|
Residential first mortgages |
$ | 291,843 | $ | — | $ | — | $ | 1,327 | $ | — | $ | 293,170 | ||||||||||||
|
Home equity and lines of credit |
97,087 | — | — | 454 | — | 97,541 | ||||||||||||||||||
|
Commercial real estate |
— | 216,744 | 5,370 | 7,837 | — | 229,951 | ||||||||||||||||||
|
Commercial business |
— | 64,636 | 204 | 1,763 | — | 66,603 | ||||||||||||||||||
|
Consumer |
14,557 | — | — | 82 | — | 14,639 | ||||||||||||||||||
|
Total loans |
$ | 403,487 | $ | 281,380 | $ | 5,574 | $ | 11,463 | $ | — | $ | 701,904 | ||||||||||||
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, 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 Coronavirus Aid, Relief, and Economic Security Act (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, 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, 2020 and 2019:
|
(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, 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 | ||||||||||||
|
December 31, 2019: |
||||||||||||||||||||||||
|
Residential first mortgages |
$ | 288,399 | $ | 2,405 | $ | 1,039 | $ | 372 | $ | 955 | $ | 293,170 | ||||||||||||
|
Home equity and lines of credit |
95,908 | 626 | 553 | 26 | 428 | 97,541 | ||||||||||||||||||
|
Commercial real estate |
226,133 | 2,141 | 543 | 227 | 907 | 229,951 | ||||||||||||||||||
|
Commercial business |
66,087 | 225 | 72 | 4 | 215 | 66,603 | ||||||||||||||||||
|
Consumer |
14,458 | 84 | 15 | — | 82 | 14,639 | ||||||||||||||||||
|
Total loans |
$ | 690,985 | $ | 5,481 | $ | 2,222 | $ | 629 | $ | 2,587 | $ | 701,904 | ||||||||||||
Notes to Consolidated Financial Statements
|
3. |
Loans Receivable and Related Allowance for Loan Losses (continued) |
|
(Dollar amounts in thousands) |
||||||||||||||||||||
|
Not Past Due |
30-59 Days Past Due |
60-89 Days Past Due |
90 Days + Past Due |
Total |
||||||||||||||||
|
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 | ||||||||||
|
December 31, 2019: |
||||||||||||||||||||
|
Residential first mortgages |
$ | 245 | $ | — | $ | 72 | $ | 638 | $ | 955 | ||||||||||
|
Home equity and lines of credit |
4 | — | — | 424 | 428 | |||||||||||||||
|
Commercial real estate |
28 | 309 | 31 | 539 | 907 | |||||||||||||||
|
Commercial business |
— | — | 175 | 40 | 215 | |||||||||||||||
|
Consumer |
— | — | — | 82 | 82 | |||||||||||||||
|
Total loans |
$ | 277 | $ | 309 | $ | 278 | $ | 1,723 | $ | 2,587 | ||||||||||
|
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 $3.8 million and $1.8 million, respectively, at December 31, 2020, and $4.0 million and $1.8 million, respectively, at December 31, 2019.
|
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) |
2020 |
2019 |
||||||
|
Land |
$ | 5,290 | $ | 5,269 | ||||
|
Buildings and improvements |
15,228 | 15,127 | ||||||
|
Leasehold improvements |
1,541 | 1,522 | ||||||
|
Furniture, fixtures and equipment |
10,749 | 10,539 | ||||||
|
Software |
3,440 | 3,397 | ||||||
|
Construction in progress |
2 | 321 | ||||||
| Total | 36,250 | 36,175 | ||||||
|
Less: accumulated depreciation and amortization |
18,048 | 17,134 | ||||||
| Net premises and equipment | $ | 18,202 | $ | 19,041 | ||||
Depreciation and amortization expense for the years ended December 31, 2020 and 2019 were $1.4 million and $1.4 million, respectively.
Notes to Consolidated Financial Statements
|
5. |
Premises, Equipment and Leases (continued) |
Leases
As of December 31, 2020, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. There are currently no circumstances in which the leases would be terminated before expiration. The weighted average remaining life of the lease term for these leases was 12.45 years as of December 31, 2020 compared to 12.99 years as of December 31,2019.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease terms as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was was 3.51% as of December 31, 2020 compared to 3.49% as of December 31, 2019.
The total operating lease costs were $192,000 and $194,000, respectively, for the years ended December 31, 2020 and 2019. The right-of-use asset, included in other assets, and lease liability, included in other liabilities, were $1.4 million and $1.6 million, respectively, as of December 31, 2020, and $1.5 million and $1.7 million, respectively, as of December 31, 2019.
Total estimated rental commitments for the operating leases were as follows as of December 31, 2020:
|
(Dollar amounts in thousands) |
||||
|
Year ending December 31: |
||||
|
2021 |
$ | 217 | ||
|
2022 |
222 | |||
|
2023 |
222 | |||
|
2024 |
227 | |||
|
2025 |
212 | |||
|
Thereafter |
851 | |||
|
Total minimum lease payments |
1,951 | |||
|
Discount effect of cash flows |
(400 | ) | ||
|
Present value of lease liabilities |
$ | 1,551 |
|
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, 2020 |
December 31, 2019 |
||||||||||||||
|
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||
|
Goodwill |
$ | 19,460 | $ | — | $ | 19,460 | $ | — | ||||||||
|
Core deposit intangibles |
5,634 | 4,551 | 5,634 | 4,387 | ||||||||||||
|
Total |
$ | 25,094 | $ | 4,551 | $ | 25,094 | $ | 4,387 | ||||||||
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 $164,000 and $176,000 in 2020 and 2019, respectively.
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 |
||||
|
2021 |
$ | 154 | ||
|
2022 |
149 | |||
|
2023 |
149 | |||
|
2024 |
149 | |||
|
2025 |
143 | |||
|
Thereafter |
339 | |||
| Total | $ | 1,083 | ||
|
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 $5.5 million and $4.7 million at December 31, 2020 and 2019, respectively. During 2020, there were $1.3 million of principal additions while total principal reductions associated with these loans were $540,000. Deposits from principal officers and directors and their affiliates held by the Bank at December 31, 2020 and 2019 totaled $3.1 million and $3.1 million, respectively.
|
8. |
Deposits |
The following table summarizes the Corporation’s deposits as of December 31:
|
(Dollar amounts in thousands) |
2020 |
2019 |
||||||||||||||||||||||
|
Weighted |
Weighted |
|||||||||||||||||||||||
|
Type of accounts |
average rate |
Amount |
Percent |
average rate |
Amount |
Percent |
||||||||||||||||||
|
Non-interest bearing deposits |
— | $ | 193,752 | 21.7 | % | — | $ | 148,842 | 18.9 | % | ||||||||||||||
|
Interest bearing demand deposits |
0.42 | % | 511,928 | 57.3 | % | 0.76 | % | 420,515 | 53.4 | % | ||||||||||||||
|
Time deposits |
2.03 | % | 187,947 | 21.0 | % | 2.17 | % | 217,767 | 27.7 | % | ||||||||||||||
|
Total |
0.67 | % | $ | 893,627 | 100.0 | % | 1.01 | % | $ | 787,124 | 100.0 | % | ||||||||||||
Scheduled maturities of time deposits for the next five years and thereafter are as follows:
|
(Dollar amounts in thousands) |
Amount |
Percent |
||||||
|
2021 |
$ | 76,091 | 40.5 | % | ||||
|
2022 |
24,022 | 12.8 | % | |||||
|
2023 |
41,622 | 22.1 | % | |||||
|
2024 |
35,659 | 18.9 | % | |||||
|
2025 |
6,503 | 3.5 | % | |||||
|
Thereafter |
4,050 | 2.2 | % | |||||
|
Total |
$ | 187,947 | 100.0 | % | ||||
Notes to Consolidated Financial Statements
|
8. |
Deposits (continued) |
The Corporation had a total of $58.7 million and $67.9 million in time deposits of $250,000 or more at December 31, 2020 and 2019, respectively. Scheduled maturities of time deposits of $250,000 or more at December 31, 2020 are as follows:
|
(Dollar amounts in thousands) |
Amount |
|||
|
Three months or less |
$ | 6,894 | ||
|
Over three months to six months |
3,902 | |||
|
Over six months to twelve months |
20,538 | |||
|
Over twelve months |
27,374 | |||
| Total | $ | 58,708 | ||
|
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) |
2020 |
2019 |
||||||||||||||||||||||
|
Average |
Average |
Average |
Average |
|||||||||||||||||||||
|
Balance |
Balance |
Rate |
Balance |
Balance |
Rate |
|||||||||||||||||||
|
Short-term borrowed funds |
$ | 2,050 | $ | 4,366 | 3.00% | $ | 2,050 | $ | 4,663 | 3.93% | ||||||||||||||
|
Long-term borrowed funds |
30,000 | 35,530 | 2.16% | 26,500 | 31,845 | 2.55% | ||||||||||||||||||
| Total | $ | 32,050 | $ | 39,896 | $ | 28,550 | $ | 36,508 | ||||||||||||||||
Short-term borrowed funds at December 31, 2020 consisted of $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 $7.0 million unsecured line of credit with a correspondent bank with a rate of 5.00% at December 31, 2019.
Long-term borrowed funds at December 31, 2020 consisted of six $5.0 million FHLB term advances totaling $30.0 million, maturing between 2021 and 2025 and having fixed interest rates between 0.97% and 2.85%. This compares to five $5.0 million FHLB advances totaling $25.0 million at December 31, 2019. All borrowings from the FHLB are secured by a blanket lien of qualified collateral. Qualified collateral at December 31, 2020 totaled $436.3 million. In addition, the Corporation had a five year unsecured term advance with a correspondent bank, which was paid in full during June 2020. At December 31, 2019, the outstanding balance on this term advance was $1.5 million.
Scheduled maturities of borrowed funds for the next five years are as follows:
|
(Dollar amounts in thousands) |
Amount |
|||
|
2021 |
$ | 7,050 | ||
|
2022 |
— | |||
|
2023 |
10,000 | |||
|
2024 |
5,000 | |||
|
2025 |
10,000 | |||
|
Thereafter |
— | |||
| Total | $ | 32,050 | ||
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 $30.0 million and irrevocable standby letters of credit issued to secure certain deposit accounts of $137.7 million at December 31, 2020 was $268.6 million. In addition, the Corporation has $2.4 million of funds available on a line of credit through a correspondent bank.
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, 2020, $7.4 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, 2020 and 2019, 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, 2020, 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 2020 and 2019, 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.
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, 2020 |
December 31, 2019 |
||||||||||||||
|
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||
|
Total capital to risk-weighted assets: |
||||||||||||||||
|
Actual |
$ | 84,583 | 12.71 | % | $ | 80,418 | 13.74 | % | ||||||||
|
For capital adequacy purposes |
53,255 | 8.00 | % | 46,836 | 8.00 | % | ||||||||||
|
To be well capitalized |
66,569 | 10.00 | % | 58,544 | 10.00 | % | ||||||||||
|
Tier 1 capital to risk-weighted assets: |
||||||||||||||||
|
Actual |
$ | 76,246 | 11.45 | % | $ | 73,862 | 12.62 | % | ||||||||
|
For capital adequacy purposes |
39,941 | 6.00 | % | 35,127 | 6.00 | % | ||||||||||
|
To be well capitalized |
53,255 | 8.00 | % | 46,836 | 8.00 | % | ||||||||||
|
Common Equity Tier 1 capital to risk-weighted assets: |
||||||||||||||||
|
Actual |
$ | 76,246 | 11.45 | % | $ | 73,862 | 12.62 | % | ||||||||
|
For capital adequacy purposes |
29,956 | 4.50 | % | 26,345 | 4.50 | % | ||||||||||
|
To be well capitalized |
43,270 | 6.50 | % | 38,054 | 6.50 | % | ||||||||||
|
Tier 1 capital to average assets: |
||||||||||||||||
|
Actual |
$ | 76,246 | 7.58 | % | $ | 73,862 | 8.17 | % | ||||||||
|
For capital adequacy purposes |
40,213 | 4.00 | % | 36,146 | 4.00 | % | ||||||||||
|
To be well capitalized |
50,267 | 5.00 | % | 45,182 | 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) |
2020 |
2019 |
||||||
|
Current |
$ | 1,916 | $ | 1,437 | ||||
|
Deferred |
(481 | ) | 225 | |||||
| Total | $ | 1,435 | $ | 1,662 | ||||
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, 2020 and 2019 is as follows:
|
(Dollar amounts in thousands) |
2020 |
2019 |
||||||||||||||
|
% Pre-tax |
% Pre-tax |
|||||||||||||||
|
Amount |
Income |
Amount |
Income |
|||||||||||||
|
Provision at statutory tax rate |
$ | 1,718 | 21.0 | % | $ | 2,019 | 21.0 | % | ||||||||
|
Increase (decrease) resulting from: |
||||||||||||||||
|
Tax free interest, net of disallowance |
(219 | ) | (2.7 | %) | (210 | ) | (2.2 | %) | ||||||||
|
Earnings on bank-owned life insurance |
(84 | ) | (1.0 | %) | (85 | ) | (0.9 | %) | ||||||||
|
Other, net |
20 | 0.2 | % | (62 | ) | (0.6 | %) | |||||||||
|
Provision |
$ | 1,435 | 17.5 | % | $ | 1,662 | 17.3 | % | ||||||||
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) |
2020 |
2019 |
||||||
|
Deferred tax assets: |
||||||||
|
Allowance for loan losses |
$ | 2,005 | $ | 1,365 | ||||
|
Funded status of pension plan |
1,516 | 1,389 | ||||||
| Lease liability | 326 | 358 | ||||||
|
Net unrealized loss on securities |
— | 26 | ||||||
|
Deferred compensation |
444 | 417 | ||||||
|
Accrued incentive compensation |
60 | 91 | ||||||
|
Nonaccrual loan interest income |
48 | 40 | ||||||
|
Securities impairment |
70 | 70 | ||||||
|
Stock compensation |
105 | 91 | ||||||
|
Other |
15 | 9 | ||||||
|
Gross deferred tax assets |
4,589 | 3,856 | ||||||
|
Deferred tax liabilities: |
||||||||
|
Accrued pension liability |
1,036 | 1,029 | ||||||
|
Depreciation |
772 | 656 | ||||||
|
Deferred loan fees and costs |
519 | 555 | ||||||
| Lease right-of-use asset | 289 | 317 | ||||||
|
Intangible assets |
305 | 260 | ||||||
| Net unrealized gains on securities | 593 | — | ||||||
| Business combination adjustments | 188 | 137 | ||||||
|
Other |
47 | 51 | ||||||
|
Gross deferred tax liabilities |
3,749 | 3,005 | ||||||
|
Net deferred tax asset |
$ | 840 | $ | 851 | ||||
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, 2020 and December 31, 2019, 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 2017.
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) |
2020 |
2019 |
||||||
|
Change in plan assets: |
||||||||
|
Fair value of plan assets at beginning of year |
$ | 10,599 | $ | 9,482 | ||||
|
Actual return on plan assets |
1,156 | 1,534 | ||||||
|
Employer contribution |
— | - | ||||||
|
Benefits paid |
(439 | ) | (417 | ) | ||||
|
Fair value of plan assets at end of year |
11,316 | 10,599 | ||||||
|
Change in benefit obligation: |
||||||||
|
Benefit obligation at beginning of year |
12,304 | 10,628 | ||||||
|
Interest cost |
395 | 443 | ||||||
|
Actuarial (gain) loss |
(29 | ) | (22 | ) | ||||
|
Effect of change in assumptions |
1,357 | 1,672 | ||||||
|
Benefits paid |
(439 | ) | (417 | ) | ||||
|
Benefit obligation at end of year |
13,588 | 12,304 | ||||||
|
Funded status (plan assets less benefit obligation) |
$ | (2,272 | ) | $ | (1,705 | ) | ||
| Amounts recognized in accumulated other comprehensive loss consists of: | ||||||||
|
Accumulated net actuarial loss |
$ | 7,220 | $ | 6,616 | ||||
|
Accumulated prior service benefit |
— | — | ||||||
|
Amount recognized, end of year |
$ | 7,220 | $ | 6,616 | ||||
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, 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 | $ | — | $ | — | |||||||||
|
December 31, 2019: |
||||||||||||||||
|
Money markets |
$ | 385 | $ | 385 | $ | — | $ | — | ||||||||
|
Mutual funds - debt |
4,322 | 4,322 | — | — | ||||||||||||
|
Mutual funds - equity |
4,981 | 4,981 | — | — | ||||||||||||
|
Emclaire stock |
911 | 911 | — | — | ||||||||||||
| $ | 10,599 | $ | 10,599 | $ | — | $ | — | |||||||||
There were no transfers between Level 1 and Level 2 during 2019.
The accumulated benefit obligation for the defined benefit pension plan was $13.6 million and $12.3 million at December 31, 2020 and 2019, 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) |
2020 |
2019 |
||||||
|
Interest cost |
$ | 395 | $ | 443 | ||||
|
Expected return on plan assets |
(699 | ) | (626 | ) | ||||
|
Amortization of prior service beneft and net loss |
268 | 252 | ||||||
|
Net periodic pension cost |
(36 | ) | 69 | |||||
|
Amortization of prior service benefit and net loss |
(268 | ) | (252 | ) | ||||
|
Net loss |
871 | 742 | ||||||
|
Total recognized in other comprehensive loss |
603 | 490 | ||||||
|
Total recognized in net periodic benefit and other comprehensive loss |
$ | 567 | $ | 559 | ||||
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 $293,000 as of December 31, 2020.
Weighted-average actuarial assumptions for the years ended December 31 include the following:
|
2020 |
2019 |
|||||||
|
Discount rate for net periodic benefit cost |
3.28 | % | 4.26 | % | ||||
|
Discount rate for benefit obligations |
2.54 | % | 3.28 | % | ||||
|
Expected rate of return on plan assets |
6.75 | % | 6.75 | % | ||||
Notes to Consolidated Financial Statements
|
13. |
Employee Benefit Plans (continued) |
The Corporation’s pension plan asset allocation at December 31, 2020 and 2019, target allocation for 2021, 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 | |||||||||||||
|
2021 |
2020 |
2019 |
2020 |
|||||||||||||
|
Equity securities |
55% | 59% | 56% | 5.15% | ||||||||||||
|
Debt securities |
37% | 40% | 41% | 1.57% | ||||||||||||
|
Money markets |
8% | 1% | 3% | 0.03% | ||||||||||||
| 100% | 100% | 100% | 6.75% | |||||||||||||
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 does currently not expect to make a contribution to its pension plan in 2021.
Estimated future benefit payments are as follows:
|
(Dollar amounts in thousands) |
Pension |
|||
|
For year ended December 31, |
Benefits |
|||
|
2021 |
$ | 470 | ||
|
2022 |
506 | |||
|
2023 |
507 | |||
|
2024 |
516 | |||
|
2025 |
551 | |||
|
2026-2030 |
2,762 | |||
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 2020 and 2019, matching contributions were $260,000 and $266,000, respectively. The Corporation may also make, at the sole discretion of its Board of Directors, a profit sharing contribution. For the years ended 2020 and 2019, the Corporation made profit sharing contributions of $143,000 and $140,000, 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, 2020 and 2019, the Corporation’s SERP liability was $2.0 million and $1.9 million, respectively. For the years ended December 31, 2020 and 2019, the Corporation recognized expense of $205,000 and $224,000, respectively, related to the SERP.
Notes to Consolidated Financial Statements
|
14. |
Stock Compensation Plans |
In April 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 2014 Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock, of which 6,783 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 2020 and 2019, the Corporation granted restricted stock awards of 16,000 and 17,950 shares, respectively, with a face value of $392,000 and $558,000, respectively, based on the weighted-average grant date stock prices of $24.48 and $31.10, 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 2020 or 2019. For the year ended December 31, 2020 and 2019 the Corporation recognized $459,000 and $368,000, respectively, in stock compensation expense.
A summary of the status of the Corporation’s nonvested restricted stock awards as of December 31, 2020, and changes during the period then ended is presented below:
|
Shares |
Weighted-Average Grant-date Fair Value |
|||||||
|
Nonvested at January 1, 2020 |
44,450 | $ | 31.11 | |||||
|
Granted |
16,000 | 24.48 | ||||||
|
Vested |
(12,500 | ) | 31.37 | |||||
|
Forfeited |
— | — | ||||||
|
Nonvested as of December 31, 2020 |
47,950 | $ | 28.83 | |||||
As of December 31, 2020, there was $884,000 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. |
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, 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 subdivision |
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 | $ | — | $ | — | ||||||||
|
December 31, 2019: |
||||||||||||||||
|
Securities available-for-sale |
||||||||||||||||
|
U.S. government sponsored entities and agencies |
$ | 7,077 | $ | — | $ | 7,077 | $ | — | ||||||||
|
U.S. agency mortgage-backed securities: residential |
41,075 | — | 41,075 | — | ||||||||||||
|
U.S. agency collateralized mortgage obligations: residential |
32,837 | — | 32,837 | — | ||||||||||||
|
State and political subdivisions |
27,796 | — | 27,796 | — | ||||||||||||
|
Corporate debt securities |
11,322 | — | 7,300 | 4,022 | ||||||||||||
|
Total available-for-sale securities |
$ | 120,107 | $ | — | $ | 116,085 | $ | 4,022 | ||||||||
|
Equity securities |
$ | 19 | $ | 19 | $ | — | $ | — | ||||||||
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 2020, certain corporate debt securities were tranferred out of Level 3 because of the availability of market pricing. During 2019, certain corporate debt securities were purchased and placed into Level 3 because of a lack of observable market data. The following table presents changes in Level 3 assets measured on a recurring basis for the years ended December 31, 2020 and 2019:
|
(Dollar amounts in thousands) |
2020 |
2019 |
||||||
|
Balance at the beginning of the period |
$ | 4,022 | $ | 3,500 | ||||
|
Total gains or losses (realized/unrealized): |
||||||||
|
Included in other comprehensive income |
234 | (228 | ) | |||||
|
Purchased into Level 3 |
— | 1,250 | ||||||
|
Transfers in and/or out of Level 3 |
(2,250 | ) | (500 | ) | ||||
|
Balance at the end of the period |
$ | 2,006 | $ | 4,022 | ||||
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, 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. As of December 31, 2019, the Corporation did not have any impaired loans carried at fair value measured using the fair value of collateral. During the years ended December 31, 2020 and 2019, there was additional provision for loan losses of $81,000 and $63,000, 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, 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. As of December 31, 2019, OREO measured at fair value less costs to sell had a net carrying amount of $88,000, which consisted of the outstanding balance of $91,000 less write-downs of $3,000.
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.
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, 2020 and 2019, 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, 2020: |
||||||||||||||||
| Impaired commercial business loans | $ | 58 | $ | — | $ | — | $ | 58 | ||||||||
| Impaired commercial real estate loans | 340 | — | — | 340 | ||||||||||||
|
Other real estate owned |
9 | — | — | 9 | ||||||||||||
|
Total |
$ | 407 | $ | — | $ | — | $ | 407 | ||||||||
| December 31, 2019: | ||||||||||||||||
| Other real estate owned | $ | 88 | $ | — | $ | — | $ | 88 | ||||||||
| Total | $ | 88 | $ | — | $ | — | $ | 88 | ||||||||
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, 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% | |||||||
| December 31, 2019: | |||||||||||
|
Other real estate owned |
$ | 88 |
Sales comparison approach |
Adjustment for differences between comparable sales |
10% | ||||||
Excluded from the tables above at December 31, 2020 were two unsecured commercial business loans totaling $14,000. At December 31, 2019, there was one impaired residential mortgage loan totaling $67,000 and one impaired home equity loan totaling $4,000 which were classified as TDRs and measured using a discounted cash flow methodology.
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, 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 | |||||||||||||||
|
Total |
$ | 966,047 | $ | 967,244 | $ | 37,506 | $ | 117,341 | $ | 812,397 | ||||||||||
|
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 | — | |||||||||||||||
|
Total |
$ | 926,151 | $ | 933,176 | $ | 705,699 | $ | 227,477 | $ | — | ||||||||||
|
December 31, 2019: |
||||||||||||||||||||
|
Financial Assets: |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 14,986 | $ | 14,986 | $ | 14,986 | $ | — | $ | — | ||||||||||
|
Interest earning time deposits |
9,698 | 9,698 | — | 9,698 | — | |||||||||||||||
|
Securities - available-for-sale |
120,107 | 120,107 | — | 116,085 | 4,022 | |||||||||||||||
|
Securities - equities |
19 | 19 | 19 | — | — | |||||||||||||||
|
Loans, net |
695,348 | 697,990 | — | — | 697,990 | |||||||||||||||
|
Federal bank stock |
5,790 | N/A | N/A | N/A | N/A | |||||||||||||||
|
Accrued interest receivable |
2,600 | 2,600 | 78 | 419 | 2,103 | |||||||||||||||
|
Total |
$ | 848,548 | $ | 845,400 | $ | 15,083 | $ | 126,202 | $ | 704,115 | ||||||||||
|
Financial Liabilities: |
||||||||||||||||||||
|
Deposits |
787,124 | 793,999 | 569,357 | 224,642 | — | |||||||||||||||
|
Borrowed funds |
28,550 | 29,133 | — | 29,133 | — | |||||||||||||||
|
Accrued interest payable |
616 | 616 | 51 | 565 | — | |||||||||||||||
|
Total |
$ | 816,290 | $ | 823,748 | $ | 569,408 | $ | 254,340 | $ | — |
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.
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) |
2020 |
2019 |
||||||||||||||
|
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||
|
Commitments to make loans |
$ | 3,749 | $ | 3,737 | $ | 1,646 | $ | 10,840 | ||||||||
|
Unused lines of credit |
20,229 | 87,478 | 21,928 | 88,071 | ||||||||||||
| Total | $ | 23,978 | $ | 91,215 | $ | 23,574 | $ | 98,911 | ||||||||
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 $493,000 and $548,000 at December 31, 2020 and 2019, respectively. The current amount of the liability as of December 31, 2020 and 2019 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) |
2020 |
2019 |
||||||
|
Assets: |
||||||||
|
Cash and cash equivalents |
$ | 114 | $ | 40 | ||||
|
Equity in net assets of subsidiaries |
88,132 | 84,065 | ||||||
| Goodwill | 5,190 | 5,190 | ||||||
|
Other assets |
134 | 171 | ||||||
|
Total Assets |
$ | 93,570 | $ | 89,466 | ||||
|
Liabilities and Stockholders' Equity: |
||||||||
|
Other short-term borrowed funds |
$ | 2,050 | $ | 2,050 | ||||
|
Long-term borrowed funds |
— | 1,500 | ||||||
|
Accrued expenses and other liabilities |
40 | 58 | ||||||
|
Stockholders' equity |
91,480 | 85,858 | ||||||
|
Total Liabilities and Stockholders' Equity |
$ | 93,570 | $ | 89,466 | ||||
Consolidated Financial Statements
|
16. |
Emclaire Financial Corp – Condensed Financial Statements, Parent Corporation Only (continued) |
|
Condensed Statements of Income |
||||||||
|
(Dollar amounts in thousands) |
2020 |
2019 |
||||||
|
Income: |
||||||||
|
Dividends from subsidiaries |
$ | 5,186 | $ | 4,688 | ||||
|
Expense: |
||||||||
|
Interest expense |
118 | 205 | ||||||
|
Noninterest expense |
710 | 634 | ||||||
|
Total expense |
828 | 839 | ||||||
|
Income before income taxes and undistributed subsidiary income |
4,358 | 3,849 | ||||||
|
Undistributed equity in net income of subsidiary |
2,216 | 3,922 | ||||||
|
Net income before income taxes |
6,574 | 7,771 | ||||||
|
Income tax benefit |
174 | 183 | ||||||
|
Net income |
$ | 6,748 | $ | 7,954 | ||||
|
Comprehensive income |
$ | 8,599 | $ | 8,976 | ||||
|
Condensed Statements of Cash Flows |
||||||||
|
(Dollar amounts in thousands) |
2020 |
2019 |
||||||
|
Operating activities: |
||||||||
|
Net income |
$ | 6,748 | $ | 7,954 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
|
Undistributed equity in net income of subsidiary |
(2,216 | ) | (3,922 | ) | ||||
|
Other, net |
478 | 303 | ||||||
|
Net cash provided by operating activities |
5,010 | 4,335 | ||||||
|
Financing activities: |
||||||||
|
Net change in borrowings |
(1,500 | ) | (1,000 | ) | ||||
|
Dividends paid |
(3,436 | ) | (3,313 | ) | ||||
|
Net cash used in financing activities |
(4,936 | ) | (4,313 | ) | ||||
|
Increase (decrease) in cash and cash equivalents |
74 | 22 | ||||||
|
Cash and cash equivalents at beginning of period |
40 | 18 | ||||||
|
Cash and cash equivalents at end of period |
$ | 114 | $ | 40 | ||||
Notes to Consolidated Financial Statements
|
17. |
Other Noninterest Income and Expense |
Other noninterest income includes electronic banking fees of $1.4 million and $1.4 million for 2020 and 2019, respectively.
The following summarizes the Corporation’s other noninterest expenses for the years ended December 31:
|
(Dollar amounts in thousands) |
2020 |
2019 |
||||||
|
Subscriptions |
$ |
752 |
$ |
607 |
||||
| Customer bank card processing | 700 | 697 | ||||||
|
Item processing |
669 |
310 |
||||||
|
Telephone and data communications |
572 |
567 |
||||||
|
Pennsylvania shares and use taxes |
474 |
482 |
||||||
|
Correspondent bank and courier fees |
402 |
411 |
||||||
|
Internet banking and bill pay |
357 |
347 |
||||||
| Credit bureau and other loan expense | 246 | 132 | ||||||
|
Marketing and advertising |
240 |
264 |
||||||
| FHLB prepayment penalties | 238 | — | ||||||
|
Printing and supplies |
219 |
278 |
||||||
| Bad checks and other losses | 193 | 199 | ||||||
|
Regulatory examinations |
186 |
204 |
||||||
|
Charitable contributions |
185 |
240 |
||||||
|
Travel, entertainment and conferences |
167 |
390 |
||||||
|
Postage and freight |
148 |
169 |
||||||
|
Memberships and dues |
99 |
112 |
||||||
|
Other |
180 |
225 |
||||||
|
Total other noninterest expenses |
$ |
6,027 |
$ |
5,634 |
||||
|
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, | |||||||
|
2020 |
2019 |
|||||||
|
Net income |
$ | 6,748 | $ | 7,954 | ||||
|
Less: Preferred stock dividends |
186 | 182 | ||||||
|
Net income available to common stockholders |
$ | 6,562 | $ | 7,772 | ||||
|
Average common shares outstanding |
2,709,532 | 2,699,397 | ||||||
|
Add: Dilutive effects of restricted stock awards |
17,815 | 19,349 | ||||||
|
Average shares and dilutive potential common shares |
2,727,347 | 2,718,746 | ||||||
|
Basic earnings per common share |
$ | 2.42 | $ | 2.88 | ||||
|
Diluted earnings per common share |
$ | 2.41 | $ | 2.86 | ||||
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, 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 | ) | ||||
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 |
|
The following are changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax for the year ending December 31, 2019:
|
(Dollar amounts in thousands) |
Unrealized Gains and Losses on Available-for-Sale Securities |
Defined Benefit Pension Items |
Totals |
|||||||||
|
Accumulated Other Comprehensive Income (Loss) at January 1, 2019 |
$ | (1,517 | ) | $ | (4,840 | ) | $ | (6,357 | ) | |||
|
Other comprehensive income (loss) before reclassification |
1,471 | (586 | ) | 885 | ||||||||
|
Amounts reclassified from accumulated other comprehensive income (loss) |
(62 | ) | 199 | 137 | ||||||||
|
Net current period other comprehensive income (loss) |
1,409 | (387 | ) | 1,022 | ||||||||
|
Accumulated Other Comprehensive Income (Loss) at December 31, 2019 |
$ | (108 | ) | $ | (5,227 | ) | $ | (5,335 | ) | |||
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, 2019:
|
(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, 2019 | Where Net Income is Presented | |||
|
Unrealized gains and losses on available-for-sale securities |
$ | (78 | ) |
Net gain on sale of available-for-sale securities |
|
|
Tax effect |
16 |
Provision for income taxes |
|||
|
Total security reclassifications for the period |
(62 | ) | |||
|
Amortization of defined benefit pension items |
|||||
|
Prior service costs |
— |
Other noninterest income |
|||
|
Actuarial gains |
252 |
Compensation and employee benefits |
|||
|
Total before tax |
252 | ||||
|
Tax effect |
(53 | ) |
Provision for income taxes |
||
|
Total defined benefit pension reclassifications for the period |
199 | ||||
|
Total reclassifications for the period |
$ | 137 |
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) |
2020 |
2019 |
||||||
|
Noninterest income |
||||||||
|
In-scope of Topic 606: |
||||||||
|
Service charges on deposits |
||||||||
|
Maintenance fees |
$ | 203 | $ | 190 | ||||
|
Overdraft fees |
1,044 | 1,657 | ||||||
|
Other fees |
251 | 310 | ||||||
|
Electronic banking fees (1) |
1,497 | 1,446 | ||||||
|
Noninterest income (in-scope of Topic 606) |
2,995 | 3,603 | ||||||
|
Noninterest income (out-of-scope of Topic 606) |
1,368 | 788 | ||||||
|
Total noninterest income |
$ | 4,363 | $ | 4,391 | ||||
(1) included in other noninterest income on the Consolidated Statements of Net Income
F-40
1 Year Emclaire Financial Chart |
1 Month Emclaire Financial Chart |
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