Quarterly Report (10-q)

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Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

or

 

☐	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:001-34527

 

EMCLAIRE FINANCIAL CORP

(Exact name of registrant as specified in its charter)

 

Pennsylvania	25-1606091
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
612 Main Street, Emlenton, Pennsylvania	16373
(Address of principal executive offices)	(Zip Code)

[phone]

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $1.25 per share	EMCF	NASDAQ Capital Market (NASDAQ)
(Title of Class)	(Trading Symbol)	(Name of exchange on which registered)

 

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 web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

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 financial 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 Exchange Act).     Yes ☐ No ☒

 

The number of shares outstanding of the Registrant’s common stock was 2,721,212 at August 13, 2021.

 

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Table of Contents

 

 

 

EMCLAIRE FINANCIAL CORP

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

  

PART I – FINANCIAL INFORMATION
Item 1.	Interim Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020	1
	Consolidated Statements of Net Income for the three and six months ended June 30, 2021 and 2020	2
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020	4
	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures		40

 

 

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Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Interim Financial Statements

 

 

Emclaire Financial Corp

Consolidated Balance Sheets (Unaudited)

As of June 30, 2021 and December 31, 2020

(Dollar amounts in thousands, except share and per share data)

 

		June 30, 2021				December 31, 2020
Assets
Cash and due from banks		$	3,607			$	3,526
Interest earning deposits with banks			46,911				33,913
Total cash and cash equivalents			50,518				37,439
Interest earning time deposits			3,480				5,718
Securities - available-for-sale			183,675				113,041
Securities - equity investments			9				15
Loans held for sale			—				75
Loans receivable, net of allowance for loan losses of $9,848 and $9,580			794,291				800,338
Federal bank stocks, at cost			5,846				5,635
Bank-owned life insurance			15,680				15,468
Accrued interest receivable			4,140				3,786
Premises and equipment, net			16,770				18,202
Goodwill			19,460				19,460
Core deposit intangible, net			1,005				1,083
Prepaid expenses and other assets			12,185				12,063
Total Assets		$	1,107,059			$	1,032,323
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing		$	218,992			$	193,752
Interest bearing			740,327				699,875
Total deposits			959,319				893,627
Short-term borrowed funds			2,050				2,050
Long-term borrowed funds			30,000				30,000
Accrued interest payable			448				474
Accrued expenses and other liabilities			22,009				14,692
Total Liabilities			1,013,826				940,843
Stockholders' Equity
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 286,888 shares issued and outstanding; Series D, non-cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding			4,206				4,206
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,823,229 shares issued; 2,721,212 shares outstanding			3,529				3,529
Additional paid-in capital			47,424				47,200
Treasury stock, at cost; 102,017 shares			(2,114	)			(2,114	)
Retained earnings			44,524				42,143
Accumulated other comprehensive loss			(4,336	)			(3,484	)
Total Stockholders' Equity			93,233				91,480
Total Liabilities and Stockholders' Equity		$	1,107,059			$	1,032,323

 

See accompanying notes to consolidated financial statements.

 

 

1

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Emclaire Financial Corp

Consolidated Statements of Net Income (Unaudited)

For the three and six months ended June 30, 2021 and 2020

(Dollar amounts in thousands, except share and per share data)

 

	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Interest and dividend income:
Loans receivable, including fees	$	7,647	$	8,298	$	15,943	$	16,279
Securities:
Taxable		623		558		1,123		1,222
Exempt from federal income tax		233		90		435		174
Federal bank stocks		77		86		146		193
Interest earning deposits with banks		33		50		64		117
Total interest and dividend income		8,613		9,082		17,711		17,985
Interest expense:
Deposits		1,214		1,901		2,481		3,841
Borrowed funds		181		259		360		532
Total interest expense		1,395		2,160		2,841		4,373
Net interest income		7,218		6,922		14,870		13,612
Provision for loan losses		250		1,100		525		1,892
Net interest income after provision for loan losses		6,968		5,822		14,345		11,720
Noninterest income:
Fees and service charges		335		288		661		739
Net realized gain on sales of securities		4		557		29		635
Net gain on sales of loans		100		—		202		—
Earnings on bank-owned life insurance		117		115		212		209
Other		522		418		1,026		820
Total noninterest income		1,078		1,378		2,130		2,403
Noninterest expense:
Compensation and employee benefits		2,935		2,841		5,957		5,754
Premises and equipment		799		801		1,660		1,596
Intangible asset amortization		39		41		78		83
Professional fees		267		185		537		405
Federal deposit insurance		131		81		289		184
Other		1,546		1,691		3,009		3,109
Total noninterest expense		5,717		5,640		11,530		11,131
Income before provision for income taxes		2,329		1,560		4,945		2,992
Provision for income taxes		395		266		837		508
Net income		1,934		1,294		4,108		2,484
Preferred stock dividends		95		91		95		91
Net income available to common stockholders	$	1,839	$	1,203	$	4,013	$	2,393
Basic earnings per common share	$	0.68	$	0.44	$	1.47	$	0.88
Diluted earnings per common share		0.67		0.44		1.46		0.88
Average common shares outstanding - basic		2,721,212		2,708,712		2,721,212		2,708,712
Average common shares outstanding - diluted		2,744,344		2,722,149		2,742,269		2,722,665

 

See accompanying notes to consolidated financial statements.

 

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Emclaire Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and six months ended June 30, 2021 and 2020

(Dollar amounts in thousands)

 

		For the three months ended June 30,								For the six months ended June 30,
		2021				2020				2021				2020
Net income		$	1,934			$	1,294			$	4,108			$	2,484
Other comprehensive income (loss)
Unrealized gains/(losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period			1,558				1,186				(1,049	)			2,781
Reclassification adjustment for gains included in net income			(4	)			(557	)			(29	)			(635	)
Net period change			1,554				629				(1,078	)			2,146
Tax effect			(326	)			(132	)			226				(452	)
Net of tax			1,228				497				(852	)			1,694
Comprehensive income		$	3,162			$	1,791			$	3,256			$	4,178

 

See accompanying notes to consolidated financial statements.

 

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Emclaire Financial Corp

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2021 and 2020

(Dollar amounts in thousands)

 

		For the six months ended June 30,
		2021				2020
Cash flows from operating activities
Net income		$	4,108			$	2,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment			692				707
Provision for loan losses			525				1,892
Amortization/accretion of premiums, discounts and deferred costs and fees, net			70				371
Amortization of operating lease right-of-use assets			71				68
Amortization of intangible assets and mortgage servicing rights			130				137
Realized gain on sales of debt securities, net			(29	)			(635	)
Change in fair value of equity securities			5				5
Net gain on sales of loans			(202	)			—
Net gain on foreclosed real estate			(35	)			—
Net loss on sale of premises and equipment			16				—
Loans originated for sale			(8,285	)			—
Proceeds from the sale of loans originated for sale			8,562				—
Write-down of foreclosed real estate			—				32
Stock compensation expense			224				224
Increase in bank-owned life insurance			(212	)			(209	)
Increase in accrued interest receivable			(354	)			(849	)
Increase in prepaid expenses and other assets			(365	)			(196	)
Decrease in accrued interest payable			(26	)			(42	)
Increase in accrued expenses and other liabilities			7,317				241
Net cash provided by operating activities			12,212				4,230
Cash flows from investing activities
Loan originations and principal collections, net			4,938				(110,767	)
Proceeds from sales of loans held for sale previously classified as portfolio loans			700				—
Available-for-sale securities:
Sales			248				40,011
Maturities, repayments and calls			9,753				11,801
Purchases			(81,868	)			(20,459	)
Purchase of federal bank stocks			(700	)			(2,512	)
Redemption of federal bank stocks			489				2,121
Net change in interest earning time deposits			2,238				3,236
Proceeds from surrender of bank-owned life insurance			—				220
Proceeds from the sale of bank premises and equipment			971				—
Purchases of premises and equipment			(247	)			(571	)
Proceeds from the sale of foreclosed real estate			380				166
Net cash used in investing activities			(63,098	)			(76,754	)
Cash flows from financing activities
Net increase in deposits			65,692				81,588
Proceeds from long-term debt			—				20,000
Repayments on long-term debt			—				(16,500	)
Dividends paid			(1,727	)			(1,716	)
Net cash provided by financing activities			63,965				83,372
Net increase in cash and cash equivalents			13,079				10,848
Cash and cash equivalents at beginning of period			37,439				14,986
Cash and cash equivalents at end of period		$	50,518			$	25,834
Supplemental information:
Interest paid		$	2,867			$	4,415
Income taxes paid			1,650				100
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate			—				267
Transfers from portfolio loans to loans held for sale			700				—
Bonds purchased, not yet settled			7,992				—

 

See accompanying notes to consolidated financial statements.

 

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Emclaire Financial Corp

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the three and six months ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

 

		Preferred Stock				Additional Paid-in Capital - Preferred				Common Stock				Additional Paid-in Capital - Common				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
Balance at January 1, 2020		$	421			$	3,785			$	3,513			$	46,757			$	(2,114	)		$	38,831			$	(5,335	)		$	85,858
Net income			—				—				—				—				—				1,190				—				1,190
Other comprehensive income			—				—				—				—				—				—				1,197				1,197
Stock compensation expense			—				—				—				112				—				—				—				112
Cash dividends declared on common stock ($0.30 per share)			—				—				—				—				—				(812	)			—				(812	)
Balance at March 31, 2020			421				3,785				3,513				46,869				(2,114	)			39,209				(4,138	)			87,545
Net income			—				—				—				—				—				1,294				—				1,294
Other comprehensive income			—				—				—				—				—				—				497				497
Cash dividends declared on preferred stock			—				—				—				—				—				(91	)			—				(91	)
Stock compensation expense			—				—				—				112				—				—				—				112
Cash dividends declared on common stock ($0.30 per share)			—				—				—				—				—				(813	)			—				(813	)
Balance at June 30, 2020		$	421			$	3,785			$	3,513			$	46,981			$	(2,114	)		$	39,599			$	(3,641	)		$	88,544
Balance at January 1, 2021		$	421			$	3,785			$	3,529			$	47,200			$	(2,114	)		$	42,143			$	(3,484	)		$	91,480
Net income			—				—				—				—				—				2,174				—				2,174
Other comprehensive loss			—				—				—				—				—				—				(2,080	)			(2,080	)
Stock compensation expense			—				—				—				112				—				—				—				112
Cash dividends declared on common stock ($0.30 per share)			—				—				—				—				—				(816	)			—				(816	)
Balance at March 31, 2021			421				3,785				3,529				47,312				(2,114	)			43,501				(5,564	)			90,870
Net income			—				—				—				—				—				1,934				—				1,934
Other comprehensive income			—				—				—				—				—				—				1,228				1,228
Cash dividends declared on preferred stock			—				—				—				—				—				(95	)			—				(95	)
Stock compensation expense			—				—				—				112				—				—				—				112
Cash dividends declared on common stock ($0.30 per share)			—				—				—				—				—				(816	)			—				(816	)
Balance at June 30, 2021		$	421			$	3,785			$	3,529			$	47,424			$	(2,114	)		$	44,524			$	(4,336	)		$	93,233

 

See accompanying notes to consolidated financial statements.

 

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Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

 

 

1.	Nature of Operations and Basis of Presentation

 

Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.

 

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.

 

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2020, as contained in the Corporation’s Annual Report on Form 10-K for the year ended  December 31, 2020 filed with the SEC.

 

The balance sheet at  December 31, 2020 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

 

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim quarterly or year-to-date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year’s financial statement presentation.

 

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.

 

 

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1.	Nature of Operations and Basis of Presentation (continued)

 

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.  Recently, Section 541 of the Consolidated Appropriations Act, 2021, has extended this relief to the earlier of 60 days after the end of the national emergency proclamation or January 1, 2022.  Specific detail describing these modifications made in relation to the CARES Act can be found in the TDR discussion in "Note 4 - Loans" on page 15

 

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 to the extended economic distress caused by the pandemic.  This included additional stimulus payments to individuals and their dependents, the 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 Corporation was a lender for the initial SBA program and closed 688 PPP loans totaling $54.9 million.  As of July 27, 2021, 677 loans totaling $51.1 million were fully repaid, including 5 loans totaling $66,000 that were voluntarily repaid, rather than forgiven by the SBA.  Five loans had aggregate unforgiven balances totaling $97,000, two of which have remaining outstanding balances totaling $95,000.  The Corporation also participated in the second round of the program and closed 421 loans totaling $26.7 million.  As of July 27, 2021, 111 loans totaling $6.1 million were fully repaid.

 

 

2.	Earnings per Common Share

 

Basic earnings per common share (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 for assumed issuance of restricted stock.

 

The factors used in the Corporation’s earnings per common share computation follow:

 

(Dollar amounts in thousands, except for per share amounts)		For the three months ended June 30,								For the six months ended June 30,
		2021				2020				2021				2020
Net income		$	1,934			$	1,294			$	4,108			$	2,484
Less: Preferred stock dividends			95				91				95				91
Net income available to common stockholders		$	1,839			$	1,203			$	4,013			$	2,393
Average common shares outstanding			2,721,212				2,708,712				2,721,212				2,708,712
Add: Dilutive effects of restricted stock awards			23,132				13,437				21,057				13,953
Average shares and dilutive potential common shares			2,744,344				2,722,149				2,742,269				2,722,665
Basic earnings per common share		$	0.68			$	0.44			$	1.47			$	0.88
Diluted earnings per common share		$	0.67			$	0.44			$	1.46			$	0.88

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3.	Securities

 

Equity Securities

 

The Corporation held equity securities with fair values of $9,000 and $15,000 at June 30, 2021 and  December 31, 2020, respectively. Changes in the fair value of these securities are included in other income on the consolidated statements of net income. During the three and six months ended June 30, 2021 the Corporation recognized a loss of $3,000 and $5,000, respectively, on equity securities held at June 30, 2021, compared to a gain of $5,000 and a loss of $5,000, respectively, for the same periods in 2020. During the three and six months ended June 30, 2021 and 2020, the Corporation did not sell any equity securities.

 

Debt Securities - Available-for-Sale

 

The following table summarizes the Corporation’s debt securities as of June 30, 2021 and  December 31, 2020:

 

(Dollar amounts in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2021:
U.S. government sponsored entities and agencies		$	8,147			$	62			$	—			$	8,209
U.S. agency mortgage-backed securities: residential			20,108				320				(85	)			20,343
U.S. agency collateralized mortgage obligations: residential			43,883				250				(278	)			43,855
State and political subdivisions			86,077				1,521				(435	)			87,163
Corporate debt securities			23,729				422				(46	)			24,105
Total securities available-for-sale		$	181,944			$	2,575			$	(844	)		$	183,675
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

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The following table summarizes scheduled maturities of the Corporation’s debt securities as of June 30, 2021. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

 

(Dollar amounts in thousands)		Available-for-sale
		Amortized Cost				Fair Value
Due in one year or less		$	-			$	-
Due after one year through five years			3,297				3,355
Due after five years through ten years			31,589				32,085
Due after ten years			83,067				84,037
Mortgage-backed securities: residential			20,108				20,343
Collateralized mortgage obligations: residential			43,883				43,855
Total securities available-for-sale		$	181,944			$	183,675

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3.	Securities (continued)

 

Information pertaining to debt securities with gross unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:

 

(Dollar amounts in thousands)		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
June 30, 2021:
U.S. government sponsored entities and agencies		$	—			$	—			$	—			$	—			$	—			$	—
U.S. agency mortgage-backed securities: residential			7,851				(85	)			—				—				7,851				(85	)
U.S. agency collateralized mortgage obligations: residential			27,109				(277	)			967				(1	)			28,076				(278	)
State and political subdivisions			20,859				(435	)			—				—				20,859				(435	)
Corporate debt securities			3,204				(46	)			—				—				3,204				(46	)
Total		$	59,023			$	(843	)		$	967			$	(1	)		$	59,990			$	(844	)
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	)

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Gains and losses on sales of securities for the three and six months ended June 30, 2021 and 2020 were as follows:

 

(Dollar amounts in thousands)		For the three months ended June 30,								For the six months ended June 30,
		2021				2020				2021				2020
Proceeds		$	248			$	31,785			$	248			$	40,011
Gains			4				558				29				640
Losses			—				(1	)			—				(5	)
Tax provision related to gains (losses)			1				117				6				133

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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.

 

There were 75 debt securities in an unrealized loss position as of  June 30, 2021, one of which was in an unrealized loss position for more than 12 months. Of these 75 securities, 42 were state and political subdivision securities, 17 were collateralized mortgage obligations (issued by U.S. government sponsored entities), 10 were corporate securities and six were mortgage-backed securities. Management believes the unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely 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 their amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of  June 30, 2021 to be other-than-temporarily impaired.

 

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4.	Loans Receivable and Related Allowance for Loan Losses

 

The Corporation’s loans receivable as of the respective dates are summarized as follows:

 

(Dollar amounts in thousands)		June 30, 2021				December 31, 2020
Mortgage loans on real estate:
Residential first mortgages		$	288,378			$	308,031
Home equity loans and lines of credit			80,552				87,088
Commercial real estate			303,501				285,625
Total real estate loans			672,431				680,744
Other loans:
Commercial business			85,622				89,139
Consumer			46,086				40,035
Total other loans			131,708				129,174
Total loans, gross			804,139				809,918
Less allowance for loan losses			9,848				9,580
Total loans, net		$	794,291			$	800,338

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Included in total loans above are net deferred costs of $1.8 million and $2.5 million at June 30, 2021 and  December 31, 2020, respectively. In addition, included in commercial loans at  June 30, 2021 and  December 31, 2020 were $28.5 million and $30.4 million, respectively, of PPP loans that are guaranteed by the SBA.  The Corporation received $3.7 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020, $924,000 was recognized during the six months ended  June 30, 2021 and $1.5 million will be recognized in future periods upon forgiveness by the SBA.

 

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans.  While the Corporation has historically experienced strong trends in asset quality, as a result of the 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.

 

The allowance for loan losses is based on estimates and actual losses may 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 June 30, 2021, 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.

 

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4.	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:

 

(Dollar amounts in thousands)		Residential Mortgages				Home Equity & Lines of Credit				Commercial Real Estate				Commercial Business				Consumer				Total
Three months ended June 30, 2021:
Allowance for loan losses:
Beginning Balance		$	2,660			$	585			$	5,472			$	612			$	356			$	9,685
Charge-offs			—				—				(56	)			—				(38	)			(94	)
Recoveries			—				1				1				—				5				7
Provision			(211	)			(49	)			409				63				38				250
Ending Balance		$	2,449			$	537			$	5,826			$	675			$	361			$	9,848
Six months ended June 30, 2021:
Allowance for loan losses:
Beginning Balance		$	2,774			$	620			$	5,180			$	677			$	329			$	9,580
Charge-offs			—				—				(151	)			—				(128	)			(279	)
Recoveries			—				8				1				1				12				22
Provision			(325	)			(91	)			796				(3	)			148				525
Ending Balance		$	2,449			$	537			$	5,826			$	675			$	361			$	9,848
At June 30, 2021:
Ending ALL balance attributable to loans:
Individually evaluated for impairment		$	—			$	—			$	27			$	4			$	—			$	31
Acquired loans collectively evaluated for impairment			—				—				—				—				—				—
Originated loans collectively evaluated for impairment			2,449				537				5,799				671				361				9,817
Total		$	2,449			$	537			$	5,826			$	675			$	361			$	9,848
Total loans:
Individually evaluated for impairment		$	312			$	4			$	1,328			$	124			$	—			$	1,768
Acquired loans collectively evaluated for impairment			35,065				7,245				26,203				3,598				744				72,855
Originated loans collectively evaluated for impairment			253,001				73,303				275,970				81,900				45,342				729,516
Total		$	288,378			$	80,552			$	303,501			$	85,622			$	46,086			$	804,139
At December 31, 2020:
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
Three months ended June 30, 2020:
Allowance for loan losses:
Beginning Balance		$	2,329			$	641			$	3,434			$	681			$	135			$	7,220
Charge-offs			—				—				—				(147	)			(39	)			(186	)
Recoveries			—				11				2				1				11				25
Provision			253				2				465				268				112				1,100
Ending Balance		$	2,582			$	654			$	3,901			$	803			$	219			$	8,159
Six months ended June 30, 2020:
Allowance for loan losses:
Beginning Balance		$	2,309			$	626			$	2,898			$	636			$	87			$	6,556
Charge-offs			(11	)			(39	)			(73	)			(147	)			(54	)			(324	)
Recoveries			—				11				5				1				18				35
Provision			284				56				1,071				313				168				1,892
Ending Balance		$	2,582			$	654			$	3,901			$	803			$	219			$	8,159

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4.	Loans Receivable and Related Allowance for Loan Losses (continued)

 

The following table presents 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 June 30, 2021:

 

(Dollar amounts in thousands)
		Impaired Loans with Specific Allowance
		As of June 30, 2021												For the three months ended June 30, 2021
		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	—			$	—			$	—			$	35			$	—			$	—
Home equity and lines of credit			—				—				—				—				—				—
Commercial real estate			315				315				27				344				5				5
Commercial business			4				4				4				33				—				—
Consumer			—				—				—				—				—				—
Total		$	319			$	319			$	31			$	412			$	5			$	5

 

		For the six months ended June 30, 2021
		Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	23			$	—			$	—
Home equity and lines of credit			—				—				—
Commercial real estate			356				8				8
Commercial business			48				—				—
Consumer			—				—				—
Total		$	427			$	8			$	8

 

		Impaired Loans with No Specific Allowance
		As of June 30, 2021								For the three months ended June 30, 2021
		Unpaid Principal Balance				Recorded Investment				Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	424			$	312			$	282			$	1			$	1
Home equity and lines of credit			4				4				4				—				—
Commercial real estate			1,013				1,013				1,053				10				10
Commercial business			120				120				93				2				2
Consumer			—				—				—				—				—
Total		$	1,561			$	1,449			$	1,432			$	13			$	13

 

		For the six months ended June 30, 2021
		Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	297			$	2			$	2
Home equity and lines of credit			4				—				—
Commercial real estate			1,122				24				24
Commercial business			84				3				3
Consumer			—				—				—
Total		$	1,507			$	29			$	29

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4.	Loans Receivable and Related Allowance for Loan Losses (continued)

 

The following table presents 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, 2020:

 

(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

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4.	Loans Receivable and Related Allowance for Loan Losses (continued)

 

The following table presents 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 June 30, 2020:

 

(Dollar amounts in thousands)
		Impaired Loans with Specific Allowance
		As of June 30, 2020												For the three months ended June 30, 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		$	71			$	71			$	1			$	71			$	1			$	1
Home equity and lines of credit			4				4				—				4				—				—
Commercial real estate			—				—				—				75				—				—
Commercial business			72				72				11				58				—				—
Consumer			—				—				—				—				—				—
Total		$	147			$	147			$	12			$	208			$	1			$	1

 

		For the six months ended June 30, 2020
		Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	71			$	2			$	2
Home equity and lines of credit			4				—				—
Commercial real estate			50				—				—
Commercial business			39				1				1
Consumer			—				—				—
Total		$	164			$	3			$	3

 

		Impaired Loans with No Specific Allowance
		As of June 30, 2020								For the three months ended June 30, 2020
		Unpaid Principal Balance				Recorded Investment				Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	384			$	273			$	276			$	—			$	—
Home equity and lines of credit			—				—				—				—				—
Commercial real estate			1,734				1,734				1,400				40				24
Commercial business			141				141				92				4				2
Consumer			—				—				—				—				—
Total		$	2,259			$	2,148			$	1,768			$	44			$	26

 

		For the six months ended June 30, 2020
		Average Recorded Investment				Interest Income Recognized in Period				Cash Basis Interest Recognized in Period
Residential first mortgages		$	279			$	1			$	1
Home equity and lines of credit			—				—				—
Commercial real estate			960				54				37
Commercial business			75				4				2
Consumer			—				—				—
Total		$	1,314			$	59			$	40

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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.

 

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4.	Loans Receivable and Related Allowance for Loan Losses (continued)

 

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 generally does not extend additional credit to borrowers with loans classified as TDRs.

At June 30, 2021 and  December 31, 2020, the Corporation had $372,000 and $396,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $0 and $6,000 of specific allowance for these loans at June 30, 2021 and  December 31, 2020, respectively.

During the three and six months ended June 30, 2021 and 2020, the Corporation did not modify any loans as TDRs.   

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three and six months ended June 30, 2021 and 2020, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

COVID-19 related deferrals.  Under the provisions of the CARES Act, at the peak, the Corporation had granted modifications on 419 loans with an aggregate balance of $111.6 million, representing 14.7% of gross outstanding loan balances.  As of June 30, 2021, 15 loans with an aggregate balance of $25.3 million, or 3.1%, of gross loans outstanding remained on deferral while the remaining loans have resumed normal repayment or have been repaid in full.  As of June 30, 2021, hospitality loans comprised 100% of the loans remaining on deferral.  However, nine loans totaling $17.6 million, or 69.6%, have resumed interest only payments.  The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

 

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

 

The reserve allocation for risk rated loan pools is developed by applying the following factors:

 

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.

 

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

 

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4.	Loans Receivable and Related Allowance for Loan Losses (continued)

 

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 a 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.

 

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 June 30, 2021 and  December 31, 2020:

 

(Dollar amounts in thousands)
		Not Rated				Pass				Special Mention				Substandard				Doubtful				Total
June 30, 2021:
Residential first mortgages		$	286,767			$	—			$	—			$	1,611			$	—			$	288,378
Home equity and lines of credit			80,405				—				—				147				—				80,552
Commercial real estate			—				268,967				7,524				27,010				—				303,501
Commercial business			—				78,948				1,369				5,305				—				85,622
Consumer			46,070				—				—				16				—				46,086
Total loans		$	413,242			$	347,915			$	8,893			$	34,089			$	—			$	804,139
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

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4.	Loans Receivable and Related Allowance for Loan Losses (continued)

 

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 recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of June 30, 2021 and  December 31, 2020:

 

(Dollar amounts in thousands)
		Performing												Nonperforming
		Accruing Loans Not Past Due				Accruing 30-59 Days Past Due				Accruing 60-89 Days Past Due				Accruing 90+ Days Past Due				Nonaccrual				Total
June 30, 2021:
Residential first mortgages		$	284,959			$	1,365			$	444			$	359			$	1,251			$	288,378
Home equity and lines of credit			79,448				534				423				15				132				80,552
Commercial real estate			301,768				421				—				—				1,312				303,501
Commercial business			85,240				6				—				235				141				85,622
Consumer			45,993				6				71				—				16				46,086
Total loans		$	797,408			$	2,332			$	938			$	609			$	2,852			$	804,139
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

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The following table presents the Corporation’s nonaccrual loans by aging category as of June 30, 2021 and  December 31, 2020:

 

(Dollar amounts in thousands)
		Not Past Due				30-59 Days Past Due				60-89 Days Past Due				90 Days + Past Due				Total
June 30, 2021:
Residential first mortgages		$	208			$	—			$	69			$	974			$	1,251
Home equity and lines of credit			4				—				—				128				132
Commercial real estate			849				20				60				383				1,312
Commercial business			141				—				—				—				141
Consumer			—				—				—				16				16
Total loans		$	1,202			$	20			$	129			$	1,501			$	2,852
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

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5.	Goodwill and Intangible Assets

 

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of June 30, 2021 and  December 31, 2020: 

 

(Dollar amounts in thousands)		June 30, 2021								December 31, 2020
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Goodwill		$	19,460			$	—			$	19,460			$	—
Core deposit intangibles			5,634				4,629				5,634				4,551
Total		$	25,094			$	4,629			$	25,094			$	4,551

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Goodwill resulted from five acquisitions. Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test. No goodwill impairment charges were recorded during 2020 or in the first six months of 2021.  Although the annual review of goodwill revealed no impairment consideration, management will continue to monitor the status of current economic conditions related to the COVID-19 pandemic in the event that subsequent deterioration would warrant an interim assessment of goodwill. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. 

 

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. During the three and six months ended June 30, 2021, the Corporation recorded intangible amortization expense totaling $39,000 and $78,000, respectively, compared to $41,000 and $83,000, respectively, for the same periods in 2020.

 

 

6.	Stock Compensation Plan

 

In April 2021, the Corporation adopted the 2021 Stock Incentive Plan (the 2021 Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 204,091 shares of common stock, all of which remain available for issuance under the 2021 Plan.

 

In addition, 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. As of June 30, 2021, 6,783 shares of restricted stock and 88,433 stock options remain available for issuance under the 2014 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.

 

At June 30, 2021, there were no options that were granted or outstanding under the Plans.

 

A summary of the status of the Corporation’s nonvested restricted stock awards as of June 30, 2021, and changes during the period then ended is presented below:

 

		Shares				Weighted-Average Grant-date Fair Value
Nonvested at January 1, 2021			47,950			$	28.83
Granted			—				—
Vested			—				—
Forfeited			—				—
Nonvested as of June 30, 2021			47,950			$	28.83

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For the three and six month periods ended June 30, 2021, the Corporation recognized stock compensation expense of $112,000 and $224,000, respectively, compared to $112,000 and $224,000, respectively, for the same periods in 2020.  As of June 30, 2021, there was $659,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over the next three years. 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.

 

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7.	Fair Value

 

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 period 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.

 

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 and equity securities held by the Corporation.

 

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
June 30, 2021:
Securities available-for-sale
U.S. government sponsored entities and agencies		$	8,209			$	—			$	8,209			$	—
U.S. agency mortgage-backed securities: residential			20,343				—				20,343				—
U.S. agency collateralized mortgage obligations: residential			43,855				—				43,855				—
State and political subdivision			87,163				—				87,163				—
Corporate debt securities			24,105				—				22,099				2,006
Total available-for-sale securities		$	183,675			$	—			$	181,669			$	2,006
Equity securities		$	9			$	9			$	—			$	—
December 31, 2020:
Securities available-for-sale
U.S. government sponsored entities and agencies		$	3,007			$	—			$	3,007			$	—
U.S. agency mortgage-backed securities: residential			16,581				—				16,581				—
U.S. agency collateralized mortgage obligations: residential			15,911				—				15,911				—
State and political subdivisions			55,577				—				55,577				—
Corporate debt securities			21,965				—				19,959				2,006
Total available-for-sale securities		$	113,041			$	—			$	111,035			$	2,006
Equity securities		$	15			$	15			$	—			$	—

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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 the three and six month periods ended June 30, 2021 and 2020, the Corporation had no transfers between levels.

 

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7.	Fair Value (continued)

 

The following table presents changes in Level 3 assets measured on a recurring basis for the three and six month periods ended  June 30, 2021 and 2020:

 

(Dollar amounts in thousands)		Three months ended June 30,								Six months ended June 30,
		2021				2020				2021				2020
Balance at the beginning of the period		$	2,006			$	4,022			$	2,006			$	4,022
Total gains or losses (realized/unrealized):
Included in earnings			—				—				—				—
Included in other comprehensive income			—				—				—				—
Purchased into Level 3			—				—				—				—
Transfers in and/or out of Level 3			—				—				—				—
Balance at the end of the period		$	2,006			$	4,022			$	2,006			$	4,022

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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 June 30, 2021, the Corporation had one impaired commercial real estate loan carried at a fair value of $288,000, which consisted of the outstanding balance of $315,000 less a specific reserve of $27,000. As of  December 31, 2020, the Corporation had two impaired commercial real estate loans carried at a fair value of $340,000, which consisted of the outstanding balance of $380,000 less a specific reserve of $40,000 and three impaired commercial business loans carried at a fair value of $58,000, which consisted of the outstanding balance of $78,000, less a specific reserve of $20,000. During the three and six month periods ended  June 30, 2021, there was additional provision for loans losses recorded for impaired loans of $1,000, compared to $7,000 and $31,000, respectively, for the three and six month periods ended June 30, 2020.

 

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  June 30, 2021, the Corporation did not have any OREO measured at fair value less costs to sell. 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.  This property was sold during the second quarter of 2021.  During the three and six month periods ended  June 30, 2021, there was no expense recorded associated with the write-down of OREO. During the three and six month periods ended June 30, 2020, there was $32,000 of expense recorded associated with the write-down of OREO.

 

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.

 

For assets measured at fair value on a non-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
June 30, 2021:
Impaired commercial real estate loan		$	288			$	—			$	—			$	288
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

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7.	Fair Value (continued)

 

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
June 30, 2021:
Impaired commercial real estate loan		$	288		Sales comparison approach	Adjustment for differences between comparable sales		10	%
December 31, 2020:
Impaired commercial business loans		$	58		Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial real estate loans			340		Sales comparison approach	Adjustment for differences between comparable sales		10	%
Other real estate owned			9		Sales comparison approach	Adjustment for differences between comparable sales		10	%

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Excluded from the tables above at  June 30, 2021 was one $4,000 unsecured commercial business loan.  Excluded from the tables above at  December 31, 2020 were two unsecured commercial business loans totaling $4,000.  At June 30, 2021, there were no impaired loans which were classified as TDRs and measured using a discounted cash flow methodology.

 

The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet: 

 

(Dollar amounts in thousands)
		Carrying				Fair Value Measurements using:
Description		Amount				Total				Level 1				Level 2				Level 3
June 30, 2021:
Financial Assets:
Cash and cash equivalents		$	50,518			$	50,518			$	50,518			$	—			$	—
Interest earning time deposits			3,480				3,480				—				3,480				—
Securities - available-for-sale			183,675				183,675				—				181,669				2,006
Securities - equities			9				9				9				—				—
Loans held for sale			—				—				—				—				—
Loans, net			794,291				794,221				—				—				794,221
Federal bank stock			5,846				N/A				N/A				N/A				N/A
Accrued interest receivable			4,140				4,140				38				766				3,336
Financial Liabilities:
Deposits			959,319				963,294				780,222				183,072				—
Borrowed funds			32,050				32,484				—				32,484				—
Accrued interest payable			448				448				9				439				—

 

December 31, 2020:
Financial Assets:
Cash and cash equivalents		$	37,439			$	37,439			$	37,439			$	—			$	—
Interest earning time deposits			5,718				5,718				—				5,718				—
Securities - available-for-sale			113,041				113,041				—				111,035				2,006
Securities - equities			15				15				15				—				—
Loans held for sale			75				75				—				75				—
Loans, net			800,338				807,170				—				—				807,170
Federal bank stock			5,635				N/A				N/A				N/A				N/A
Accrued interest receivable			3,786				3,786				52				513				3,221
Financial Liabilities:
Deposits			893,627				899,446				705,680				193,766				—
Borrowed funds			32,050				33,256				—				33,256				—
Accrued interest payable			474				474				19				455				—

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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.

 

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8.	Regulatory Matters

 

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 final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in on  January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019. The capital conservation buffer for 2019 and subsequent periods is 2.50%. Amounts recorded to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of June 30, 2021, the Bank met all capital adequacy requirements to which it was 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 June 30, 2021, 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.

 

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)		June 30, 2021								December 31, 2020
		Amount				Ratio				Amount				Ratio
Total capital to risk-weighted assets:
Actual		$	87,481				12.74	%		$	84,583				12.71	%
For capital adequacy purposes			54,936				8.00	%			53,255				8.00	%
To be well capitalized			68,670				10.00	%			66,569				10.00	%
Tier 1 capital to risk-weighted assets:
Actual		$	78,882				11.49	%		$	76,246				11.45	%
For capital adequacy purposes			41,202				6.00	%			39,941				6.00	%
To be well capitalized			54,936				8.00	%			53,255				8.00	%
Common Equity Tier 1 capital to risk-weighted assets:
Actual		$	78,882				11.49	%		$	76,246				11.45	%
For capital adequacy purposes			30,901				4.50	%			29,956				4.50	%
To be well capitalized			44,635				6.50	%			43,270				6.50	%
Tier 1 capital to average assets:
Actual		$	78,882				7.44	%		$	76,246				7.58	%
For capital adequacy purposes			42,428				4.00	%			40,213				4.00	%
To be well capitalized			53,035				5.00	%			50,267				5.00	%

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9.	Accumulated Other Comprehensive Income (Loss)

 

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three month periods ended June 30, 2021 and 2020 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):

 

 

(Dollar amounts in thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Defined Benefit Pension Items				Totals
Accumulated Other Comprehensive Income (Loss) at April 1, 2021		$	140			$	(5,704	)		$	(5,564	)
Other comprehensive income before reclassification			1,231				—				1,231
Amounts reclassified from accumulated other comprehensive income (loss)			(3	)			—				(3	)
Net current period other comprehensive income (loss)			1,228				—				1,228
Accumulated Other Comprehensive Income (Loss) at June 30, 2021		$	1,368			$	(5,704	)		$	(4,336	)

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(Dollar amounts in thousands)		Amount Reclassified
		from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive (Income) Loss Components		For the three months ended June 30, 2021			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	(4	)	Net gain on sale of available-for-sale securities
Tax effect			1		Provision for income taxes
Total reclassifications for the period		$	(3	)	Net of tax

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(Dollar amounts in thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Defined Benefit Pension Items				Totals
Accumulated Other Comprehensive Income (Loss) at April 1, 2020		$	1,089			$	(5,227	)		$	(4,138	)
Other comprehensive income before reclassification			937				—				937
Amounts reclassified from accumulated other comprehensive income (loss)			(440	)			—				(440	)
Net current period other comprehensive income (loss)			497				—				497
Accumulated Other Comprehensive Income (Loss) at June 30, 2020		$	1,586			$	(5,227	)		$	(3,641	)

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(Dollar amounts in thousands)		Amount Reclassified
		from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive (Income) Loss Components		For the three months ended June 30, 2020			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	(557	)	Net gain on sale of available-for-sale securities
Tax effect			117		Provision for income taxes
Total reclassifications for the period		$	(440	)	Net of tax

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9.	Accumulated Other Comprehensive Income (Loss)

 

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the six months ended June 30, 2021 and 2020 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):

 

(Dollar amounts in thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Defined Benefit Pension Items				Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2021		$	2,220			$	(5,704	)		$	(3,484	)
Other comprehensive income (loss) before reclassification			(829	)			—				(829	)
Amounts reclassified from accumulated other comprehensive income (loss)			(23	)			—				(23	)
Net current period other comprehensive income (loss)			(852	)			—				(852	)
Accumulated Other Comprehensive Income (Loss) at June 30, 2021		$	1,368			$	(5,704	)		$	(4,336	)

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(Dollar amount in thousands)		Amount Reclassified
		from Accumulated Other Comprehensive Income
Details about Accumulated Other		For the six months ended			Affected Line Item in the Statement
Comprehensive (Income) Loss Components		June 30, 2021			Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	(29	)	Net gain on sale of available-for-sale securities
Tax effect			6		Provision for income taxes
Total reclassifications for the period		$	(23	)	Net of tax

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(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			2,196				—				2,196
Amounts reclassified from accumulated other comprehensive income (loss)			(502	)			—				(502	)
Net current period other comprehensive income (loss)			1,694				—				1,694
Accumulated Other Comprehensive Income (Loss) at June 30, 2020		$	1,586			$	(5,227	)		$	(3,641	)

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(Dollar amount in thousands)		Amount Reclassified
		from Accumulated Other Comprehensive Income
Details about Accumulated Other		For the six months ended			Affected Line Item in the Statement
Comprehensive (Income) Loss Components		June 30, 2020			Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	(635	)	Net gain on sale of available-for-sale securities
Tax effect			133		Provision for income taxes
Total reclassifications for the period		$	(502	)	Net of tax

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10.

Leases

 

As of June 30, 2021, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before expiration.  The weighted average remaining life of the lease term for these leases was 12.23 years as of June 30, 2021 compared to 12.70 years as of  June 30, 2020.

 

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption.  This methodology will be continued for the commencement of any subsequent lease agreements.  The weighted average discount rate for the leases was 3.52% as of June 30, 2021 compared to 3.50% as of  June 30, 2020.

 

The total operating lease costs were $48,000 and $96,000, respectively, for the three and six months ended June 30, 2021 and $48,000 and $96,000, respectively, for the three and six months ended June 30, 2020.  The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $1.3 million and $1.5 million, respectively, as of June 30, 2021, and $1.4 million and $1.6 million, respectively, as of June 30, 2020.

 

Total estimated rental commitments for the operating leases were as follows as of June 30, 2021:

 

(Dollar amounts in thousands)
Year ending December 31:
2021 (excluding six months)		$	110
2022			222
2023			222
2024			227
2025			212
Thereafter			850
Total minimum lease payments			1,843
Discount effect of cash flows			(374	)
Present value of lease liabilities		$	1,469

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11.	Recent Accounting Pronouncements

 

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.

 

In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans".  ASU 2018-14 removes disclosures pertaining to (a) the amounts of AOCI expected to be recognized as pension costs over the next fiscal year, (b) the amount and timing of plan assets expected to be returned to the employer, and (c) the effect of one-percentage-point change in the assumed health care trends on (i) service and interest costs and (ii) post-retirement health care benefit obligation.  A disclosure will be added requiring an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.  The amendments in this update are effective retrospectively for annual periods and interim periods within those annual periods beginning after December 15, 2020.  The Corporation does not expect ASU 2018-14 to have a material impact on its financial statements and disclosure

 

In December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes".  ASU 2019-12 is effective for fiscal years beginning after December 15, 2020.  Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption.  The Corporation is currently evaluating the effect that this ASU will have on its financial statements and disclosures.

 

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform".  ASU 2020-04 contains optional guidance to ease the potential burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting.  The new standard is a result of the London Interbank Offered Rate (LIBOR) likely being discontinued as a benchmark rate.  The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate that may be discontinued.  This ASU became effective upon issuance and generally can be applied through December 31, 2022.  As of June 30, 2021, the Corporation has identified seventeen purchased participation loans totaling $57.8 million in outstanding balances and two tax-exempt commercial business loans totaling $1.6 million in outstanding balances tied to the LIBOR reference rate.  The Corporation has not yet made any contract modifications related to the outstanding loans, however, does not expect any changes to have a material impact on financial statements or disclosures.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three and six months ended June 30, 2021, compared to the same periods in 2020 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC and with the accompanying consolidated financial statements and notes presented in this Form 10-Q.

 

FORWARD LOOKING STATEMENTS

 

This Form 10-Q, including the financial statements and related notes, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or phrases of similar meaning. We caution that the forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performances or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. Therefore, we caution you not to place undue reliance on our forward looking information and statements. Except as required by applicable law or regulation, we will not update the forward looking statements to reflect actual results or changes in factors affecting the forward looking statements.

 

USE OF NON-GAAP FINANCIAL MEASURES

 

In addition to the results of operations presented in accordance with generally accepted accounting principals (GAAP), management uses certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis.  Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the underlying operational performance and business and performance trends as they facilitate comparison with the performance of others in the financial services industry.  Although management believes that these non-GAAP financial measures enhance investors' understanding of the Corporation's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

 

Management believes the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.  Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 29 and 33 for the three and six months ended June 30, 2021 and 2020, respectively.

 

COVID-19 UPDATE

 

The outbreak of the novel coronavirus (COVID-19) has adversely impacted certain industries in which the Corporation's clients operate and may have impaired their ability to fulfill their outstanding obligations. The Corporation's business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. The spread of COVID-19 has caused severe disruptions in the U.S. economy at large, and for small businesses in particular, which could further disrupt operations. If the global response to contain COVID-19 escalates or is unsuccessful, the Corporation could experience a more material adverse effect on it's financial condition, results of operations, cash flows and capital levels. The outbreak may result in a decrease in the Corporation's clients' businesses, a decrease in consumer confidence and a possible disruption in the services provided by vendors. Continued disruptions to the operations of the Corporation's clients could result in increased risk of delinquencies, defaults, foreclosures and losses on loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of the Corporation's growth strategy. The Corporation relies upon third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide these services, it could negatively impact the ability to serve our clients. Furthermore, the continued disruptions due to the outbreak could negatively impact the ability of employees and clients to engage in banking and other financial transactions in the geographic areas in which the Corporation operates and could create widespread business continuity issues. The Corporation also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a more substantial COVID-19 outbreak in local market areas. Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will continue to be effective.

 

 

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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 and 2021 Annual Shareholder Meetings were held virtually.

•  Non-essential travel and large external gatherings were restricted and mandatory quarantine periods and testing were instituted for anyone that has had 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.  The provision for loan loss expense may 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 may 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.  The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.

 

CHANGES IN FINANCIAL CONDITION

 

Total assets increased $74.7 million, or 7.2%, to $1.1 billion at June 30, 2021 from $1.0 billion at December 31, 2020. The increase in assets was driven primarily by an increase in securities and cash and equivalents of $70.6 million and $13.1 million, respectively, partially offset by a $6.0 million decrease in net loans receivable.  Liabilities increased $73.0 million, or 7.8%, to $1.0 billion at June 30, 2021 from $940.8 million at December 31, 2020 due to an increase in customer deposits of $65.7 million.

 

Stockholders’ equity increased $1.8 million, or 1.9%, to $93.2 million at  June 30, 2021 from $91.5 million at  December 31, 2020 primarily due to a $2.4 million increase retained earnings as a result of $4.0 million of net income available to common stockholders, less $1.6 million of common dividends paid, partially offset by an $852,000 decrease in accumulated other comprehensive income.  The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at 8.4% of total assets.  Book value per common share was $32.72 at June 30, 2021, compared to $32.07 at December 31, 2020. 

 

At June 30, 2021, the Bank was considered “well-capitalized” with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.44%, 11.49%, 11.49% and 12.74%, respectively. The Bank was also considered “well-capitalized” at December 31, 2020 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.58%, 11.45%, 11.45% and 12.71%, respectively.

 

RESULTS OF OPERATIONS

 

Comparison of Results for the Three Months Ended June 30, 2021 and 2020

 

General. Net income available to common stockholders increased $636,000, or 52.9%, to $1.8 million for the three months ended June 30, 2021 from $1.2 million for the same period in 2020. The increase resulted from a $296,000 increase in net interest income and an $850,000 decrease in the provision for loan losses, partially offset by a $300,000 decrease in noninterest income and increases in noninterest expense and the provision for income taxes of $77,000 and $129,000, respectively.

 

Net interest income. Tax equivalent net interest income increased $307,000, or 4.4%, to $7.3 million for the three months ended June 30, 2021 from $7.0 million for the three months ended June 30, 2020. This increase was attributed to a decrease in interest expense of $765,000 partially offset by a decrease in tax equivalent interest income of $458,000.

 

Interest income. Tax equivalent interest income decreased $458,000, or 5.0%, to $8.7 million for the three months ended June 30, 2021 from $9.1 million for the same period in 2020. This decrease was attributed to decreases in interest earned on loans and interest-earning deposits and dividends on federal bank stocks of $658,000, $17,000 and $9,000, respectively, partially offset by an increase in interest earned on securities of $226,000.

 

 

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Tax equivalent interest earned on loans receivable decreased $658,000, or 7.9%, to $7.7 million for the three months ended June 30, 2021 compared to $8.3 million for the same period in 2020. The decrease resulted from a 41 basis point decrease in the average yield on loans to 3.87% for the three months ended June 30, 2021, versus 4.28% for the same period in 2020.  This unfavorable yield variance accounted for a $789,000 decrease in interest income.  The accretion of purchase accounting adjustments on acquired loans mitigated the yield decrease by approximately 3 basis points.  Partially offsetting this unfavorable variance, average loan volumes increased by $12.4 million as a result of record loan production during 2020 and the addition of PPP loans in 2020 and 2021.  This additional loan volume accounted for a $131,000 increase in interest income. Included in interest earned on loans for the three months ended June 30, 2021, is $361,000 of interest and fees earned on the SBA's PPP lending program, compared to $265,000 for the same period in 2020.

 

Interest earned on deposits with banks decreased $17,000, or 34.0%, to $33,000 for the three months ended June 30, 2021 compared to $50,000 for the same period in 2020.  This decrease was due to a 40 basis point decrease in the average yield on these balances to 0.21% for the three months ended June 30, 2021, versus 0.61% for the same period in 2020, accounting for a $45,000 decrease in interest income.  Partially offsetting this unfavorable variance,  average cash balances increased by $29.6 million, or 90.5%, accounting for a $28,000 increase in interest income.

 

Dividends on federal bank stocks decreased $9,000, or 10.5%, to $77,000 for the three months ended June 30, 2021 from $86,000 for the same period in 2020. This decrease was primarily due to a decrease in the average balance of federal bank stocks of $553,000, accounting for a $7,000 decrease in interest income.  Also, a 12 basis point decrease in the average yield to 5.32% for the three months ended June 30, 2021, versus 5.44% for the same period in 2020, accounted for an additional $2,000 decrease in interest income.  

 

Tax equivalent interest earned on securities increased $226,000, or 34.1%, to $888,000 for the three months ended June 30, 2021 compared to $662,000 for the same period in 2020. The average balance of securities increased $51.5 million, or 49.8%, accounting for a $301,000 increase in interest income.  Partially offsetting the favorable variance in the average balance, the average yield on securities decreased by 27 basis points to 2.30% for the three months ended June 30, 2021 versus 2.57% for the same period in 2020. This unfavorable yield variance accounted for a $75,000 decrease in interest income.

 

Interest expense. Interest expense decreased $765,000, or 35.4%, to $1.4 million for the three months ended June 30, 2021 from $2.2 million for the same period in 2020. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $687,000 and $78,000, respectively.

 

Interest expense incurred on deposits decreased $687,000, or 36.1%, to $1.2 million for the three months ended June 30, 2021 compared to $1.9 million for the same period in 2020. The average cost of interest-bearing deposits decreased 48 basis points to 0.67% for the three months ended June 30, 2021, versus 1.15% for the same period in 2020, accounting for an $847,000 decrease in interest expense.  This decrease in cost was driven primarily due to the expiration of special rates on money market accounts and maturity of CD specials which were offered in 2019.  Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $60.2 million, or 9.1%, to $772.3 million for the three months ended June 30, 2021, compared to $622.1 million for the same period in 2020 resulting in a $160,000 increase in interest expense.

 

Interest expense incurred on borrowed funds decreased $78,000, or 30.1%, to $181,000 for the three months ended June 30, 2021, compared to $259,000 for the same period in 2020.  The decrease was primarily the result of a $16.6 million, or 34.1%, decrease in the average balance of borrowed funds to $32.1 million for the three months ended June 30, 2021, compared to $48.6 million for the same period in 2020 resulting in a $91,000 decrease in interest expense.  Partially offsetting this decrease, the average cost of borrowed funds increased 12 basis points to 2.26% for the three months ended June 30, 2021, compared to 2.14% for the same period in 2020 resulting in a $13,000 increase in interest expense.

 

The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended June 30:

 

(Dollar amounts in thousands)		2021				2020
Interest income per Consolidated Statements of Net Income		$	8,613			$	9,082
Adjustment to fully taxable equivalent basis			55				44
Interest income adjusted to fully taxable equivalent basis (non-GAAP)			8,668				9,126
Interest expense			1,395				2,160
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)		$	7,273			$	6,966

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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)		Three months ended June 30,
		2021												2020
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
Interest-earning assets:
Loans, taxable		$	779,860			$	7,522				3.87	%		$	763,455			$	8,140				4.29	%
Loans, tax exempt			15,764				148				3.77	%			19,725				188				3.84	%
Total loans receivable			795,624				7,670				3.87	%			783,180				8,328				4.28	%
Securities, taxable			107,157				623				2.33	%			87,951				558				2.55	%
Securities, tax exempt			47,935				265				2.21	%			15,607				104				2.68	%
Total securities			155,092				888				2.30	%			103,558				662				2.57	%
Interest-earning deposits with banks			62,331				33				0.21	%			32,721				50				0.61	%
Federal bank stocks			5,804				77				5.32	%			6,357				86				5.44	%
Total interest-earning cash equivalents			68,135				110				0.65	%			39,078				136				1.40	%
Total interest-earning assets			1,018,851				8,668				3.41	%			925,816				9,126				3.96	%
Cash and due from banks			3,480												3,469
Other noninterest-earning assets			60,474												61,917
Total Assets		$	1,082,805											$	991,202
Interest-bearing liabilities:
Interest-bearing demand deposits		$	541,113			$	320				0.24	%		$	454,992			$	779				0.69	%
Time deposits			181,170				894				1.98	%			207,125				1,122				2.18	%
Total interest-bearing deposits			722,283				1,214				0.67	%			662,117				1,901				1.15	%
Borrowed funds, short-term			2,050				22				4.31	%			2,778				23				3.27	%
Borrowed funds, long-term			30,000				159				2.12	%			45,822				236				2.07	%
Total borrowed funds			32,050				181				2.26	%			48,600				259				2.14	%
Total interest-bearing liabilities			754,333				1,395				0.74	%			710,717				2,160				1.22	%
Noninterest-bearing demand deposits			221,209				—				—				178,386				—				—
Funding and cost of funds			975,542				1,395				0.57	%			889,103				2,160				0.98	%
Other noninterest-bearing liabilities			15,319												14,204
Total Liabilities			990,861												903,307
Stockholders' Equity			91,944												87,895
Total Liabilities and Stockholders' Equity		$	1,082,805											$	991,202
Net interest income						$	7,273											$	6,966
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)											2.67	%											2.74	%
Net interest margin (net interest income as a percentage of average interest-earning assets)											2.86	%											3.03	%

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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 volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) 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)		Three months ended June 30,
		2021 versus 2020
		Increase (Decrease) due to
		Volume				Rate				Total
Interest income:
Loans		$	131			$	(789	)		$	(658	)
Securities			301				(75	)			226
Interest-earning deposits with banks			28				(45	)			(17	)
Federal bank stocks			(7	)			(2	)			(9	)
Total interest-earning assets			453				(911	)			(458	)
Interest expense:
Interest-bearing deposits			160				(847	)			(687	)
Borrowed funds, short-term			(7	)			6				(1	)
Borrowed funds, long-term			(84	)			7				(77	)
Total interest-bearing liabilities			69				(834	)			(765	)
Net interest income		$	384			$	(77	)		$	307

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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.

 

Information pertaining to the allowance for loan losses and nonperforming assets for the three month periods ended June 30, 2021 and 2020 is as follows:

 

(Dollar amounts in thousands)		As of or for the three months ended
		June 30,
		2021				2020
Balance at the beginning of the period		$	9,685			$	7,220
Provision for loan losses			250				1,100
Charge-offs			(94	)			(186	)
Recoveries			7				25
Balance at the end of the period		$	9,848			$	8,159
Nonperforming loans		$	3,461			$	5,082
Nonperforming assets			3,461				5,400
Nonperforming loans to total loans			0.43	%			0.63	%
Nonperforming assets to total assets			0.31	%			0.54	%
Allowance for loan losses to total loans			1.22	%			1.00	%
Allowance for loan losses to nonperforming loans			284.54	%			160.55	%

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Nonperforming loans decreased $173,000, or 4.8%, to $3.5 million at June 30, 2021 from $3.6 million at March 31, 2021. This was primarily due to a $135,000 decrease in nonperforming commercial real estate loans as a result of a charge-off of $54,000, a repayment of $40,000 and a $41,000 90+ days past due and still accruing loan which was brought current.

 

As of June 30, 2021, the Corporation’s classified and criticized assets amounted to $43.0 million, or 3.9% of total assets, with $34.1 million classified as substandard and $8.9 million identified as special mention. This compares to classified and criticized assets of $42.8 million, or 4.0% of total assets, with $26.4 million classified as substandard and $16.4 million identified as special mention at March 31, 2021. This increase was primarily related to the downgrade of two commercial relationships from pass to substandard totaling $1.2 million, partially offset by the repayment of four commercial real estate loans totaling $452,000, the $54,000 charge-off of one commercial real estate loan and the repayment of two commercial business loans in the amount of $370,000.

 

The provision for loan losses decreased $850,000, or 77.3%, to $250,000 for the three months ended June 30, 2021 from $1.1 million for the same period in 2020. The higher provision for loan losses recorded during the second quarter of 2020 was due to growth in the residential and consumer loan portfolios, risk rating changes for loans which were granted payment deferrals in connection with COVID-19, an increase in criticized and classified loans, and an increase in the specific pandemic qualitative allowance factor.  Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs.  The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

 

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Noninterest income.  Noninterest income decreased $300,000, or 21.8%, to $1.1 million for the three months ended June 30, 2021, compared to $1.4 million for the same period in 2020 due to a $553,000 decrease in gains on the sale of securities, partially offset by increases in other income, gains on the sale of loans and fees and service charges of $104,000, $100,000 and $47,000, respectively. During the quarter ended June 30, 2020, the Corporation sold $31.2 million of primarily low yielding mortgage-backed and collateralized mortgage obligation securities and realized a net gain of $557,000.  The sale proceeds were utilized to repay $15.0 million of Federal Home Loan Bank (FHLB) term advances and purchase higher yielding municipal securities.  The increase in other income was primarily due to an increase in interchange fee income and the increase in fees and service charges was primarily due to an increase in overdraft charges, both resulting from easing pandemic restrictions leading to an increase in consumer spending.

 

Noninterest expense.  Noninterest expense increased $77,000, or 1.4%, to $5.7 million for the three months ended June 30, 2021 from $5.6 million for the same period in 2020.  The increase was primarily attributable to increases in compensation and benefits expense, professional fees and FDIC insurance expense of $94,000, $82,000 and $50,000, respectively, partially offset by a decrease in other noninterest expense of $145,000.  The decrease in other noninterest expense primarily related to prepayment penalties of $238,000 incurred during the quarter ended June 30, 2020 as a result of the aforementioned early repayment of FHLB term advances.

 

Provision for income taxes. The provision for income taxes increased $129,000, or 48.5%, to $395,000 for the three months ended June 30, 2021 compared to $266,000 for the same period in 2020 as a result of the increase in net income before provision for income taxes.

 

Comparison of Results for the Six Months Ended June 30, 2021 and 2020

 

General. Net income available to common stockholders increased $1.6 million, or 67.7%, to $4.0 million for the six months ended June 30, 2021 from $2.4 million for the same period in 2020. This increase resulted from a $1.3 million increase in net interest income and a $1.4 million decrease in the provision for loan losses, partially offset by a $273,000 decrease in noninterest income and increases in noninterest expense and the provision for income taxes of $399,000 and $329,000, respectively.

 

Net interest income. Tax equivalent net interest income increased $1.3 million, or 9.3%, to $15.0 million for the six months ended June 30, 2021 from $13.7 million for the six months ended June 30, 2020. This increase was attributed to a decrease in interest expense of $1.5 million, partially offset by a decrease in tax equivalent interest income of $253,000.

 

Interest income. Tax equivalent interest income decreased $253,000, or 1.4%, to $17.8 million for the six months ended June 30, 2021 from $18.1 million for the same period in 2020. This decrease was attributed to decreases in interest on loans and interest-earning deposits with banks and dividends on federal bank stocks of $348,000, $53,000 and $47,000, respectively, partially offset by a $195,000 increase in interest earned on securities.

 

Tax equivalent interest earned on loans receivable decreased $348,000, or 2.1%, to $16.0 million for the six months ended June 30, 2021 compared to $16.3 million for the same period in 2020. This decrease resulted from a 33 basis point decrease in the average yield on loans to 4.04% for the six months ended June 30, 2021, versus 4.37% for the same period in 2020.  The average yield was impacted by the 150 basis point decline in the Wall Street Journal Prime Rate in March 2020 which resulted in the immediate decrease in interest rates on adjustable rate loans linked to that index.  This unfavorable yield variance accounted for a $1.3 million decrease in interest income.  Partially offsetting this unfavorable variance, average loans increased $46.3 million, or 6.2%, accounting for a $971,000 increase in interest income.  Interest income recognized on the PPP loans was $1.1 million for the six months ended June 30, 2021, compared to $265,000 for the same period in 2020.  The accretion of purchase accounting adjustments on acquired loans mitigated the yield decrease by approximately 3 basis points.

 

Interest earned on deposits with banks decreased $53,000, or 45.3%, to $64,000 for the six months ended June 30, 2021 compared to $117,000 for the same period in 2020. This decrease resulted from a 69 basis point decrease in the average yield on these balances to 0.26% for the six months ended June 30, 2021, versus 0.95% for the same period in 2020, accounting for a $122,000 decrease in interest income.  Partially offsetting this unfavorable variance, average cash balances increased $25.7 million, accounting for a $69,000 increase in interest income.

 

Dividends on federal bank stocks decreased $47,000, or 24.4%, to $146,000 for the six months ended June 30, 2021 from $193,000 for the same period in 2020. This decrease was primarily due to a decrease of 92 basis points in the average yield to 5.16% for the six months ended June 30, 2021, versus 6.08% for the same period in 2020, accounting for a $28,000 decrease in interest income. Also, the average balance of federal bank stocks decreased $678,000, or 10.6%, accounting for a $19,000 decrease in interest income.

 

Tax equivalent interest earned on securities increased $195,000, or 13.7%, to $1.6 million for the six months ended June 30, 2021 compared to $1.4 million for the same period in 2020. The average balance of securities increased $27.2 million, or 24.8%, accounting for a $330,000 increase in interest income.  Partially offsetting this favorable variance, the average yield on securities decreased by 23 basis points to 2.39% for the six months ended June 30, 2021 versus 2.62% for the same period in 2020 causing a $135,000 decrease in interest income.

 

Interest expense. Interest expense decreased $1.5 million, or 35.0%, to $2.8 million for the six months ended June 30, 2021 from $4.4 million for the same period in 2020. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $1.4 million and $172,000, respectively.

 

Interest expense incurred on deposits decreased $1.4 million, or 35.4%, to $2.5 million for the six months ended June 30, 2021 compared to $3.8 million for the same period in 2020. The average cost of interest-bearing deposits decreased 48 basis points to 0.71% for the six months ended June 30, 2021, versus 1.19% for the same period in 2020, accounting for a $1.7 million decrease in interest expense.  This decrease in cost was driven primarily due to the expiration of special rates on money market accounts and maturity of CD specials which were offered in 2019.  Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $60.7 million, or 9.4%, to $708.2 million for the six months ended June 30, 2021, compared to $647.5 million for the same period in 2020 causing a $332,000 increase in interest expense.

 

 

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Interest expense incurred on borrowed funds decreased $172,000, or 32.3%, to $360,000 for the six months ended June 30, 2021, compared to $532,000 for the same period in 2020.  The decrease was primarily the result of a decrease in the average balance of borrowed funds of $15.8 million, or 33.0%, to $32.1 million for the six months ended June 30, 2021 from $47.8 million for the same period in 2020 causing a $198,000 decrease in interest expense.  Partially offsetting this reduction, the cost of borrowed funds increased 2 basis points to 2.26% for the six months ended June 30, 2021, compared to 2.24% for the same period in 2020 causing a $26,000 increase in interest expense.

 

The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the six months ended June 30:

 

(Dollar amounts in thousands)		2021				2020
Interest income per Consolidated Statements of Net Income		$	17,711			$	17,985
Adjustment to fully taxable equivalent basis			109				88
Interest income adjusted to fully taxable equivalent basis (non-GAAP)			17,820				18,073
Interest expense			2,841				4,373
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)		$	14,979			$	13,700

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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)		Six months ended June 30,
		2021												2020
		Average Balance				Interest				Yield / Rate				Average Balance				Interest				Yield / Rate
Interest-earning assets:
Loans, taxable		$	781,722			$	15,677				4.04	%		$	732,582			$	15,958				4.38	%
Loans, tax exempt			17,009				315				3.74	%			19,839				382				3.87	%
Total loans receivable			798,731				15,992				4.04	%			752,421				16,340				4.37	%
Securities, taxable			92,321				1,123				2.45	%			94,475				1,222				2.60	%
Securities, tax exempt			44,330				495				2.25	%			14,979				201				2.70	%
Total securities			136,651				1,618				2.39	%			109,454				1,423				2.62	%
Interest-earning deposits with banks			50,542				64				0.26	%			24,841				117				0.95	%
Federal bank stocks			5,703				146				5.16	%			6,381				193				6.08	%
Total interest-earning cash equivalents			56,245				210				0.75	%			31,222				310				2.00	%
Total interest-earning assets			991,627				17,820				3.62	%			893,097				18,073				4.07	%
Cash and due from banks			3,419												3,480
Other noninterest-earning assets			60,248												62,071
Total Assets		$	1,055,294											$	958,648
Interest-bearing liabilities:
Interest-bearing demand deposits		$	525,252			$	688				0.26	%		$	436,282			$	1,558				0.72	%
Time deposits			182,955				1,793				1.98	%			211,247				2,283				2.17	%
Total interest-bearing deposits			708,207				2,481				0.71	%			647,529				3,841				1.19	%
Borrowed funds, short-term			2,050				44				4.31	%			6,684				87				2.60	%
Borrowed funds, long-term			30,000				316				2.12	%			41,121				445				2.18	%
Total borrowed funds			32,050				360				2.26	%			47,805				532				2.24	%
Total interest-bearing liabilities			740,257				2,841				0.77	%			695,334				4,373				1.26	%
Noninterest-bearing demand deposits			207,947				—				—				161,527				—				—
Funding and cost of funds			948,204				2,841				0.60	%			856,861				4,373				1.03	%
Other noninterest-bearing liabilities			15,350												14,150
Total Liabilities			963,554												871,011
Stockholders' Equity			91,740												87,637
Total Liabilities and Stockholders' Equity		$	1,055,294											$	958,648
Net interest income						$	14,979											$	13,700
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)											2.85	%											2.80	%
Net interest margin (net interest income as a percentage of average interest-earning assets)											3.05	%											3.08	%

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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 volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) 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)		Six months ended June 30,
		2021 versus 2020
		Increase (Decrease) due to
		Volume				Rate				Total
Interest income:
Loans		$	971			$	(1,319	)		$	(348	)
Securities			330				(135	)			195
Interest-earning deposits with banks			69				(122	)			(53	)
Federal bank stocks			(19	)			(28	)			(47	)
Total interest-earning assets			1,351				(1,604	)			(253	)
Interest expense:
Interest-bearing deposits			332				(1,692	)			(1,360	)
Borrowed funds, short-term			(80	)			37				(43	)
Borrowed funds, long-term			(118	)			(11	)			(129	)
Total interest-bearing liabilities			134				(1,666	)			(1,532	)
Net interest income		$	1,217			$	62			$	1,279

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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.

 

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Information pertaining to the allowance for loan losses and nonperforming assets for the six months ended June 30, 2021 and 2020 is as follows:

 

(Dollar amounts in thousands)		As of or for the six months ended
		June 30,
		2021				2020
Balance at the beginning of the period		$	9,580			$	6,556
Provision for loan losses			525				1,892
Charge-offs			(279	)			(324	)
Recoveries			22				35
Balance at the end of the period		$	9,848			$	8,159
Nonperforming loans		$	3,461			$	5,082
Nonperforming assets			3,461				5,400
Nonperforming loans to total loans			0.43	%			0.63	%
Nonperforming assets to total assets			0.31	%			0.54	%
Allowance for loan losses to total loans			1.22	%			1.00	%
Allowance for loan losses to nonperforming loans			284.54	%			160.55	%

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Nonperforming loans decreased $641,000, or 15.6% to $3.5 million at June 30, 2021 from $4.1 million at December 31, 2020. This was primarily due to the repayment of two commercial real estate loans and a residential mortgage loan totaling $160,000 and $185,000, respectively, the charge off of a $54,000 commercial real estate loan, three residential mortgage loans totaling $124,000 removed from non-accrual status and a $41,000 90+ days past due and still accruing commercial real estate loan which was brought current.

 

As of June 30, 2021, the Corporation’s classified and criticized assets amounted to $43.0 million, or 3.9% of total assets, with $34.1 million classified as substandard and $8.9 million identified as special mention. This compares to classified and criticized assets of $44.4 million, or 4.3% of total assets, with $22.7 million classified as substandard and $21.7 million identified as special mention at December 31, 2020. This $1.4 million decrease was primarily related to the sale of $800,000 in loans from one commercial relationship, the repayment of six commercial real estate loans totaling $661,000 and the repayment of one commercial business loan in the amount of $189,000.

 

The provision for loan losses decreased $1.4 million, or 72.3%, to $525,000 for the six months ended June 30, 2021 from $1.9 million for the same period in 2020. The higher provision for loan losses recorded during the first six months of 2020 was due to growth in the residential and consumer loan portfolios, risk rating changes for loans which were granted payment deferrals in connection with COVID-19, an increase in criticized and classified loans, and an increase in the specific pandemic qualitative allowance factor.  Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs.  The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

 

Noninterest income.  Noninterest income decreased $273,000, or 11.4%, to $2.1 million for the six months ended June 30, 2021, compared to $2.4 million for the same period in 2020 due decreases in gains on the sale of securities and fees and service charges of $606,000 and $78,000, respectively, partially offset by increases in other income and gains on the sale of loans of $206,000 and $202,000, respectively.  During the six months ended June 30, 2020, the Corporation sold $39.4 million of primarily low yielding mortgage-backed and collateralized mortgage obligation securities and realized a net gain of $635,000.  As previously mentioned, the sale proceeds were utilized to repay FHLB term advances and purchase higher yielding municipal securities.  During the six months ended June 30, 2021, the Corporation sold $8.4 million of residential mortgage loans to the FHLB and realized a net gain of $202,000.  The increase in other income was primarily related to an increase in interchange fee income resulting from easing pandemic restrictions leading to an increase in consumer spending.

 

Noninterest expense.  Noninterest expense increased $399,000, or 3.6%, to $11.5 million for the six months ended June 30, 2021 from $11.1 million for the same period in 2020.  The increase was primarily attributable to increases in compensation and benefits expense, professional fees, FDIC insurance expense and premises and equipment expense of $203,000, $132,000, $105,000 and $64,000, respectively, partially offset by a decrease in other noninterest expense of $100,000.  The decrease in other noninterest expense primarily related to prepayment penalties of $238,000 incurred during the six months ended June 30, 2020 as a result of the aforementioned early repayment of FHLB term advances.

 

Provision for income taxes. The provision for income taxes increased $329,000, or 64.8%, to $837,000 for the six months ended June 30, 2021 compared to $508,000 for the same period in 2020 as a result of the increase in net income before provision for income taxes.

 

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LIQUIDITY

 

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and sold or maturing securities. During the six months ended June 30, 2021, the Corporation used its sources of funds primarily to fund the purchase of securities. As of June 30, 2021, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $124.8 million, and standby letters of credit totaling $559,000, net of collateral maintained by the Bank.

 

At June 30, 2021, time deposits amounted to $179.2 million, or 18.7% of the Corporation’s total consolidated deposits, including approximately $70.7 million of which are scheduled to mature within the next year. Management of the Corporation believes (i) it has adequate resources to fund all of its commitments, (ii) all of its commitments will be funded as required by related maturity dates and (iii) based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities if necessary.

 

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 the Federal Reserve’s discount window and, to a more limited extent, through the sale of loans. At June 30, 2021, the Corporation had borrowed funds of $32.1 million consisting of $30.0 million of long-term FHLB advances and $2.1 million outstanding on a line of credit with a correspondent bank. At June 30, 2021, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issue to secure certain deposit accounts, was $230.0 million.

 

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.

 

 

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CRITICAL ACCOUNTING POLICIES

 

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily though the use of internal cash flow modeling techniques.

 

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020. 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 its 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 debt security or more likely than not will be required to sell the debt 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 and interim impairment indicator requiring continued evaluation.  Because of the economic uncertainty surronding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of goodwill as of November 30, 2020.  Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired as of November 30, 2020.  While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and interest-bearing liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank 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 Bank 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 and interest-bearing liabilities. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area.

 

One of the primary functions of the Corporation’s asset/liability management committee is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability committee is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates.

 

Interest rate sensitivity is the result of differences in the amounts and repricing dates of the Bank’s rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing “gap”, provide an indication of the extent that the Corporation’s net interest income is affected by future changes in interest rates. 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 that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.

 

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation’s assets and liabilities to interest rate changes. As of June 30, 2021, the Corporation’s interest-earning assets maturing or repricing within one year totaled $401.6 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $153.4 million, providing an excess of interest-earning assets over interest-bearing liabilities of $248.2 million. At June 30, 2021, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 261.8%.

 

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

Item 4. 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 Chief Executive Officer (CEO) and Chief Financial Officer (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 June 30, 2021, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. 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 evaluation.

 

There has been no change made in the Corporation’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Corporation is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially affect the Corporation’s consolidated financial position or results of operations.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

(a)	Not applicable.

 

(b)	Not applicable.

 

Item 6. Exhibits

 

Exhibit 31.1	Rule 13a-14(a) Certification of Principal Executive Officer
Exhibit 31.2	Rule 13a-14(a) Certification of Principal Financial Officer
Exhibit 32.1	CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2	CFO Certification Pursuant to 18 U.S.C. Section 1350
101.INS	Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	EMCLAIRE FINANCIAL CORP
Date: August 13, 2021	By:	/s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer
Date: August 13, 2021	By:	/s/ Amanda L. Engles
	Amanda L. Engles
	Chief Financial Officer
	Treasurer

 

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