EDGAR 10-K Filing

Company CIK: 858800
Filing Year: 2022
Filename: 858800_10-K_2022_0001437749-22-006432.json

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ITEM 1. BUSINESS
Item 1. Business
General
Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and financial holding company that provides a full range of retail and commercial financial products and services to customers in western Pennsylvania through its wholly owned subsidiary bank, The Farmers National Bank of Emlenton (the Bank).
The Bank was organized in 1900 as a national banking association and is a financial intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens on residential and commercial properties, consumer loans, commercial business loans, marketable securities and interest-earning deposits. The Bank currently operates through a network of 19 retail branch offices in Venango, Allegheny, Butler, Clarion, Clearfield, Crawford, Elk, Jefferson and Mercer counties, Pennsylvania. The Corporation and the Bank are headquartered in Emlenton, Pennsylvania.
The Bank is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank’s chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (BHCA), and a financial holding company under the Gramm-Leach Bliley Act of 1999 (GLBA) and is subject to regulation and examination by the FRB.
At December 31, 2021, the Corporation had $1.1 billion in total assets, $97.0 million in stockholders’ equity, $780.0 million in net loans and $918.5 million in total deposits.
COVID-19 Pandemic
The outbreak of the novel coronavirus (COVID-19) has adversely impacted and continues to impact certain industries in which the Corporation's clients operate and may have impaired their ability to fulfill their outstanding obligations due to continued financial distress. The spread of COVID-19 has caused unprecedented uncertainty, volatility and disruption in the U.S. and global economy at large. The Corporation's business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. With the easing of restrictions during the latter part of 2020 and into 2021, and the availability and distribution of vaccines, the U.S. economy has slowly begun to improve as consumer and business spending has rebounded in recent months. However, the lasting effects are uncertain as government aid programs and stimulus packages taper, and the ultimate long-term impact of the business shutdowns that occurred as a result of COVID-19 remains uncertain in many sectors of the economy, such as the travel, hospitality and entertainment industries. This may cause business sectors that have had better recoveries not to be able to maintain those recoveries in the long term. Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will continue to be effective.
K-3
To help address the impact of the COVID-19 pandemic on the economy and financial markets, the Board of Governors of the Federal Reserve System lowered the federal funds target rate to a range of between zero and 0.25% during the first quarter of 2020. Throughout 2021, the Federal Reserve has continued to maintain the targeted federal funds rate at these levels because of the pandemic-related risks to the economy. The Corporation's earnings and related cash flows are largely dependent upon net interest income, representing the difference between interest income received on interest-earning assets, primarily loans and securities, and the interest paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. As a result of the significant decline in interest rates and prepayments on higher yielding existing loans, the yield on the total loan portfolio has decreased. Additionally, with significant cash inflows realized from a growth in deposits and the forgiveness of PPP loans, the current yields on funds reinvested into the purchase of securities are lower than existing portfolio yields. However, the fees arising from the Paycheck Protection Program (PPP) loan program have mitigated some of this decline during 2020 and 2021. As economic conditions have started to improve, the Federal Reserve has begun to shift its focus to limiting the inflationary and other potentially adverse effects of the expiration of government aid programs and stimulus packages. Since the Corporation's balance sheet is asset sensitive and rate sensitive assets reprice more quickly than rate sensitive liabilities, margin compression may be somewhat mitigated during 2022 in the event that the Federal Reserve begins to raise rates.
The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions caused by the pandemic. On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and containment measures. On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic consequences of the pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Among other measures, the CARES Act provided $349 billion for the PPP loans administered by the Small Business Administration (SBA) to assist qualified small businesses with certain operational expenses, certain credits for individuals and their dependents against their 2020 personal income tax and expanded eligibility for unemployment benefits. This legislation was later amended on April 24, 2020, by the Paycheck Protection Program and Healthcare Enhancement Act (PPPHE Act) which provided an additional $310 billion of funding for PPP loans. In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress caused by the pandemic. This included additional stimulus payments to individuals and their dependents, an extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. The Bank was a lender for the SBA program and closed 1,109 PPP loans totaling $81.6 million. As of March 1, 2022, 1,098 loans totaling $80.5 million were fully forgiven, five loan totaling $66,000 were voluntarily repaid, rather than forgiven by the SBA, and two loans were partially forgiven and have aggregate unforgiven balances totaling $93,000.
Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. This provision was extended, and expired on January 1, 2022 under the Consolidated Appropriations Act, 2021. The banking regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. The Corporation implemented a short-term modification program to provide relief to consumer and commercial customers following the guidelines of these provisions. Most modifications fall into the 90 to 180-day range with deferred principal and interest due and payable on the maturity date of the existing loans. Specific detail describing these modifications made in relation to the CARES Act can be found in the TDR discussion in "Note 3 - Loans" to the Consolidated Financial Statements on page.
The Corporation responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by holding meetings virtually, restricting travel and attendance at external gatherings, expending remote-access availability and limiting banking office lobby hours. Effective July, 6, 2021, remote-access employees transitioned back to the office and banking offices resumed normal business hours. The Corporation continues to monitor events related to the pandemic and will take necessary precautions to ensure the safety of its customers and employees.
Lending Activities
General. The principal lending activities of the Corporation are the origination of residential mortgage, commercial mortgage, commercial business and consumer loans. The majority of the Corporation’s loans are originated in and secured by property within the Corporation’s primary market area.
One-to-Four Family Mortgage Loans. The Corporation offers first mortgage loans secured by one-to-four family residences located mainly in the Corporation’s primary lending area. One-to-four family mortgage loans amounted to 34.6% of the total loan portfolio at December 31, 2021. Typically such residences are single-family owner occupied units. The Corporation is an approved, qualified lender for the Federal Home Loan Mortgage Corporation (FHLMC) and the FHLB. As a result, the Corporation may sell loans to and service loans for the FHLMC and FHLB in market conditions and circumstances where this is advantageous in managing interest rate risk.
Home Equity Loans. The Corporation originates home equity loans secured by single-family residences. Home equity loans amounted to 9.6% of the total loan portfolio at December 31, 2021. These loans may be either a single advance fixed-rate loan with a term of up to 20 years or a variable rate revolving line of credit. These loans are made only on owner-occupied single-family residences.
Commercial Business and Commercial Real Estate Loans. Commercial lending constitutes a significant portion of the Corporation’s lending activities. Commercial business and commercial real estate loans amounted to 49.6% of the total loan portfolio at December 31, 2021. Commercial real estate loans generally consist of loans granted for commercial purposes secured by commercial or other nonresidential real estate. Commercial loans consist of secured and unsecured loans for such items as capital assets, inventory, operations and other commercial purposes.
K-4
Consumer Loans. Consumer loans generally consist of fixed-rate term loans for automobile purchases, home improvements not secured by real estate, capital and other personal expenditures. The Corporation also offers unsecured revolving personal lines of credit and overdraft protection. Consumer loans amounted to 6.2% of the total loan portfolio at December 31, 2021.
Loans to One Borrower. National banks are subject to limits on the amount of credit that they can extend to one borrower. Under current law, loans to one borrower are limited to an amount equal to 15% of unimpaired capital and surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and surplus if the loan is secured by readily marketable collateral. At December 31, 2021, the Bank’s loans to one borrower limit based upon 15% of unimpaired capital was $13.9 million. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2021, the Bank’s largest single lending relationship had an exposure of $17.0 million with outstanding loan balances of $13.3 million, which was permissible under the pilot program.
Loan Portfolio. The following table sets forth the composition and percentage of the Corporation’s loans receivable in dollar amounts and in percentages of the portfolio as of December 31:
Dollar
Dollar
(Dollar amounts in thousands)
Amount
%
Amount
%
Mortgage loans on real estate:
Residential mortgages
$ 273,823
34.6 %
$ 308,031
38.0 %
Home equity loans and lines of credit
75,810
9.6 %
87,088
10.8 %
Commercial real estate
326,341
41.3 %
285,625
35.3 %
Total real estate loans
675,974
85.5 %
680,744
84.1 %
Other loans:
Commercial business
65,877
8.3 %
89,139
11.0 %
Consumer
48,552
6.2 %
40,035
4.9 %
Total other loans
114,429
14.5 %
129,174
15.9 %
Total loans receivable
790,403
100.0 %
809,918
100.0 %
Less:
Allowance for loan losses
10,393
9,580
Net loans receivable
$ 780,010
$ 800,338
The following table sets forth the final maturity of loans in the Corporation’s portfolio as of December 31, 2021. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year.
(Dollar amounts in thousands)
Due in one year or less
Due from one to five years
Due from five to fifteen years
Due after fifteen years
Total
Residential mortgages
$
$ 5,411
$ 91,278
$ 176,781
$ 273,823
Home equity loans and lines of credit
6,836
40,767
27,380
75,810
Commercial real estate
1,164
65,672
166,999
92,506
326,341
Commercial business
1,168
24,145
21,276
19,288
65,877
Consumer
28,333
6,401
13,515
48,552
$ 3,815
$ 130,397
$ 326,721
$ 329,470
$ 790,403
K-5
The following table sets forth the dollar amount of the Corporation’s fixed and adjustable rate loans with maturities greater than one year as of December 31, 2021:
Fixed
Adjustable
(Dollar amounts in thousands)
rates
rates
Residential mortgages
$ 266,176
$ 7,294
Home equity loans and lines of credit
65,170
9,813
Commercial real estate
52,823
272,354
Commercial business
13,022
51,687
Consumer
47,127
1,122
$ 444,318
$ 342,270
Contractual maturities of loans do not reflect the actual term of the Corporation’s loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which give the Corporation the right to declare a loan immediately payable in the event, among other things, that the borrower sells the real property subject to the mortgage. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates substantially exceed rates on existing mortgages and conversely, decrease when rates on existing mortgages substantially exceed current market interest rates.
Delinquencies and Classified Assets
Delinquent Loans and Other Real Estate Acquired Through Foreclosure (OREO). Typically, a loan is considered past due and a late charge is assessed when the borrower has not made a payment within 15 days from the payment due date. When a borrower fails to make a required payment on a loan, the Corporation attempts to cure the deficiency by contacting the borrower. The initial contact with the borrower is made shortly after the 17th day following the due date for which a payment was not received. In most cases, delinquencies are cured promptly.
If the delinquency exceeds 60 days, the Corporation works with the borrower to set up a satisfactory repayment schedule. Typically, loans are considered nonaccruing upon reaching 90 days delinquent unless the credit is well secured and in the process of collection, although the Corporation may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Corporation institutes foreclosure action on secured loans only if all other remedies have been exhausted. If an action to foreclose is instituted and the loan is not reinstated or paid in full, the property is sold at a judicial or trustee’s sale at which the Corporation may be the buyer.
Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure less costs to sell, thereby establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less the cost to sell the property. Changes in the valuation allowance are included in the loss on foreclosed real estate. The Corporation generally attempts to sell its OREO properties as soon as practical upon receipt of clear title.
As of December 31, 2021, the Corporation’s nonperforming assets were $3.3 million, or 0.32% of the Corporation’s total assets, compared to $4.4 million, or 0.43% of the Corporation’s total assets, at December 31, 2020. Nonperforming assets at December 31, 2021 was comprised entirely of nonperforming loans. Included in nonperforming loans at December 31, 2021 were five loans totaling $346,000 considered to be TDRs.
Classified Assets. Regulations applicable to insured institutions require the classification of problem assets as “substandard,” “doubtful,” or “loss” depending upon the existence of certain characteristics as discussed below. A category designated “special mention” must also be maintained for assets currently not requiring the above classifications but having potential weaknesses or risk characteristics that could result in future problems. An asset is classified as substandard if not adequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset is characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified as substandard and these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable. Assets classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted.
The Corporation’s classification of assets policy requires the establishment of valuation allowances for loan losses in an amount deemed prudent by management. Valuation allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities. When the Corporation classifies a problem asset as a loss, the portion of the asset deemed uncollectible is charged off immediately.
The Corporation regularly reviews the problem loans and other assets in its portfolio to determine whether any require classification in accordance with the Corporation’s policy and applicable regulations. As of December 31, 2021, the Corporation’s classified and criticized assets amounted to $38.2 million or 3.6% of total assets, with $8.9 million identified as special mention and $29.4 million classified as substandard.
Included in classified and criticized assets at December 31, 2021, is a combination of relationships with an outstanding balance of $30.0 million, representing eight distinct relationships with extensions of credit supporting hotel operations. The debt obligations are primarily secured with nationally franchised hotels along with related furniture, fixtures, and equipment. These hotels were initially adversely impacted by state-wide travel restrictions in response to the COVID-19 pandemic and continue to be impacted by shifting consumer and business behaviors. Current data supports improvement in occupancy levels which is resulting in an improvement in operating performance. Ultimately, due to the estimated value of the collateral and the willingness and ability of the guarantors to support the loans, the Corporation does not currently expect to incur a loss on these loans.
K-6
Also included in classified and criticized assets at December 31, 2021, is a relationship with an outstanding balance of $1.5 million, consisting of two commercial mortgages and one commercial business loan which primarily refinanced third-party debt obligations and is secured with residential rental investment properties. Excessive personal debt obligations have resulted in marginal financial performance of the borrowers. The collateral properties securing the indebtedness services the related debt at a satisfactory level. Ultimately, due to the estimated value of the collateral held, the Corporation does not currently expect to incur a loss on these loans.
The following table sets forth information regarding the Corporation’s nonperforming assets as of December 31:
(Dollar amounts in thousands)
Accruing loans 90+ days past due
$
$
Nonaccrual loans
2,654
3,523
Nonperforming loans
3,339
4,102
Repossessions
-
-
Real estate acquired through foreclosure
-
Total nonperforming assets
$ 3,339
$ 4,446
Nonperforming assets as a percentage of total assets
0.32 %
0.43 %
Nonaccrual loans as a percentage of gross loans
0.34 %
0.43 %
Nonperforming loans as a percentage of gross loans
0.42 %
0.51 %
Allowance for loan losses as a percentage of nonaccrual loans
391.60 %
271.93 %
Allowance for loan losses as a percentage of nonperforming loans
311.26 %
233.54 %
Allowance for Loan Losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans; and the current economic conditions affecting the collectability of loans in the portfolio. The Corporation analyzes its loan portfolio at least quarterly for valuation purposes and to determine the adequacy of its allowance for loan losses. Based upon the factors discussed above, management believes that the Corporation’s allowance for loan losses as of December 31, 2021 of $10.4 million was adequate to cover probable incurred losses in the portfolio at such time.
The following table sets forth an analysis of the allowance for losses on loans receivable for the years ended December 31:
(Dollar amounts in thousands)
Balance at beginning of period
$ 9,580
$ 6,556
Provision for loan losses
1,066
3,247
Charge-offs:
Residential mortgages
-
(27 )
Home equity loans and lines of credit
(41 )
(126 )
Commercial real estate
(150 )
(75 )
Commercial business
-
(163 )
Consumer loans
(178 )
(82 )
(369 )
(473 )
Recoveries:
Residential mortgages
-
Home equity loans and lines of credit
Commercial real estate
Commercial business
Consumer loans
Net charge-offs
(253 )
(223 )
Balance at end of period
$ 10,393
$ 9,580
Ratio of net charge-offs to average loans outstanding
0.03 %
0.03 %
Ratio of allowance to total loans at end of period
1.31 %
1.18 %
K-7
The following table provides a breakdown of the allowance for loan losses by major loan category for the years ended December 31:
(Dollar amounts in thousands)
Loan Categories:
Dollar Amount
Percent of total loans
Dollar Amount
Percent of total loans
Residential mortgages
$ 2,335
34.6 %
$ 2,774
38.0 %
Home equity loans and lines of credit
9.6 %
10.8 %
Commercial real estate
6,253
41.3 %
5,180
35.3 %
Commercial business
8.3 %
11.0 %
Consumer loans
6.2 %
4.9 %
Total allowance for loan losses
$ 10,393
100.0 %
$ 9,580
100.0 %
Investment Activities
General. The Corporation maintains an investment portfolio of securities such as U.S. government agencies, mortgage-backed securities, collateralized mortgage obligations, municipal, corporate and equity securities.
Investment decisions are made within policy guidelines as established by the Board of Directors. This policy is aimed at maintaining a diversified investment portfolio, which complements the overall asset/liability and liquidity objectives of the Corporation, while limiting the related credit risk to an acceptable level.
The following table sets forth certain information regarding the fair value, weighted average yields and contractual maturities of the Corporation’s securities as of December 31, 2021:
Due in 1 year or less
Due from 1 to 5 years
Due from 5 to 10 years
Due after 10 years
Total
(Dollar amounts in thousands)
Fair Value
Average Yield
Fair Value
Average Yield
Fair Value
Average Yield
Fair Value
Average Yield
Fair Value
Average Yield
U.S. government sponsored entities and agencies
$ -
- %
$ -
- %
$ 2,983
1.67 %
$ 5,176
1.50 %
$ 8,159
1.56 %
U.S. agency mortgage-backed securities: residential
-
- %
-
- %
-
- %
12,035
2.60 %
12,035
2.60 %
U.S. agency collateralized mortgage obligations: residential
-
- %
-
- %
1.43 %
48,627
1.44 %
49,490
1.44 %
State and political subdivision
-
- %
3,148
3.07 %
7,558
2.53 %
81,856
2.45 %
92,562
2.48 %
Corporate securities
-
- %
1,531
4.85 %
22,493
4.48 %
-
- %
24,024
4.50 %
Total available-for-sale debt securities
$ -
- %
$ 4,679
3.65 %
$ 33,897
3.72 %
$ 147,694
2.10 %
$ 186,270
2.43 %
1) Taxable equivalent adjustments have been made in calculating yields on state and political subdivision securities.
2) The yields are calculated using the amortized value.
The following table sets forth the fair value of the Corporation’s investment securities as of December 31:
(Dollar amounts in thousands)
U.S. government sponsored entities and agencies
$ 8,159
$ 3,007
U.S. agency mortgage-backed securities: residential
12,035
16,581
U.S. agency collateralized mortgage obligations: residential
49,490
15,911
State and political subdivision
92,562
55,577
Corporate securities
24,024
21,965
Equity securities
Total available-for-sale securities
$ 186,275
$ 113,056
For additional information regarding the Corporation’s investment portfolio see “Note 2 - Securities” to the Consolidated Financial Statements on page.
K-8
Sources of Funds
General. Deposits are the primary source of the Corporation’s funds for lending and investing activities. Secondary sources of funds are derived from loan repayments, investment maturities and borrowed funds. Loan repayments can be considered a relatively stable funding source, while deposit activity is greatly influenced by interest rates and general market conditions. The Corporation also has access to funds through other various sources. For additional information about the Corporation’s sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity” in Item 7.
Deposits. The Corporation offers a wide variety of deposit account products to both consumer and commercial deposit customers, including time deposits, noninterest bearing and interest bearing demand deposit accounts, savings deposits and money market accounts.
Deposit products are promoted in periodic newspaper, radio and other forms of advertisements, along with notices provided in customer account statements. The Corporation’s marketing strategy is based on its reputation as a community bank that provides quality products and personalized customer service.
The Corporation sets interest rates on its interest bearing deposit products that are competitive with rates offered by other financial institutions in its market area. Management reviews interest rates on deposits weekly and considers a number of factors, including: (1) the Corporation’s internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Corporation’s liquidity position.
The following table summarizes the Corporation’s deposits as of December 31:
(Dollar amounts in thousands)
Weighted
Weighted
Type of accounts
average rate
Amount
Percent
average rate
Amount
Percent
Non-interest bearing deposits
-
$ 221,993
24.2 %
-
$ 193,752
21.7 %
Interest bearing demand deposits
0.13 %
545,846
59.4 %
0.42 %
511,928
57.3 %
Time deposits
1.78 %
150,657
16.4 %
2.03 %
187,947
21.0 %
Total
0.37 %
$ 918,496
100.0 %
0.67 %
$ 893,627
100.0 %
At December 31, 2021 and 2020, the Corporation's uninsured deposits are estimated to be $374.4 million and $361.5 million, respectively.
The following table sets forth maturities of the Corporation’s time deposits of $100,000 or more at December 31, 2021 by time remaining to maturity:
(Dollar amounts in thousands)
Amount
Three months or less
$ 9,812
Over three months to six months
5,217
Over six months to twelve months
13,053
Over twelve months
56,511
$ 84,593
Borrowings. Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support lending and investment activities. These borrowings include FHLB advances, federal funds, repurchase agreements, advances from the Federal Reserve Discount Window and lines of credit at the Bank and the Corporation with other correspondent banks. The following table summarizes information with respect to borrowings at or for the years ending December 31:
(Dollar amounts in thousands)
Ending balance
$ 22,050
$ 32,050
Average balance
29,801
39,896
Maximum balance
32,050
61,300
Average rate
2.26 %
2.25 %
For additional information regarding the Corporation’s deposit base and borrowed funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Deposits and Borrowed Funds” in Item 7 and “Note 8 - Deposits” on page and “Note 9 - Borrowed Funds” on page to the Consolidated Financial Statements.
Subsidiary Activity
The Corporation has one wholly owned subsidiary, the Bank. As of December 31, 2021, the Bank had no subsidiaries.
Personnel
At December 31, 2021, the Corporation had 148 full time equivalent employees, compared to 160 at December 31, 2020. There is no collective bargaining agreement between the Corporation and its employees, and the Corporation believes its relationship with its employees is satisfactory.
K-9
Competition
The Corporation competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers.
Supervision and Regulation
General. Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain provisions of certain laws that relate to the regulation of the Corporation and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
The Corporation. The Corporation is a registered bank holding company and subject to regulation and examination by the FRB under the BHCA. The Corporation is required to file periodic reports with the FRB and such additional information as the FRB may require. The Bank Holding Company rating system emphasizes risk management and evaluation of the potential impact of non-depository entities on safety and soundness.
The FRB may require the Corporation to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Corporation must file written notice and obtain FRB approval prior to purchasing or redeeming its equity securities.
The Corporation is required to obtain prior FRB approval for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior FRB approval is also required for the merger or consolidation of the Corporation and another bank holding company.
The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, subject to the prior FRB approval, a bank holding company may engage in any, or acquire shares of companies engaged in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The BHCA also authorizes bank holding companies to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. In order to undertake these activities, a bank holding company must become a financial holding company by submitting to the appropriate FRB a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. The Corporation submitted a declaration of election to become a financial holding company with the FRB which became effective in March 2007. Federal legislation also directed federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
Under FRB regulations, the Corporation is required to serve as a source of financial and managerial strength to the Bank and may not conduct operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both.
The Corporation is also a bank holding company within the meaning of the Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the Pennsylvania Department of Banking and Securities.
The Corporation’s securities are registered with the SEC under the Exchange Act. As such, the Corporation is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act. The public may obtain all forms and information filed with the SEC through its website http://www.sec.gov.
Regulations have been adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions, holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5% or less of total consolidated assets are excluded from the Volcker Rule restrictions. The Corporation qualifies for the exclusion from the Volcker Rule restrictions.
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The Bank. As a national banking association, the Bank is subject to primary supervision, examination and regulation by the OCC. The Bank is also subject to regulations of the FDIC as administrator of the Deposit Insurance Fund (DIF) and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank’s growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank’s deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that the Bank’s conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.
A national bank may have a financial subsidiary engaged in any activity authorized for national banks directly or certain permissible activities. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank itself. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance, issue annuities or engage in real estate development or investment or merchant banking.
The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board that is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysis; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts and extended the period during which certain types of lawsuits can be brought against a company or its insiders.
2010 Regulatory Reform. On July 21, 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act) was signed into law. The goals of the Dodd Frank Act included restoring public confidence in the financial system following the financial crisis, preventing another financial crisis and permitting regulators to identify shortfalls in the system before another financial crisis can occur. The Dodd Frank Act is also intended to promote a fundamental restructuring of federal banking regulation by taking a systemic view of regulation rather than focusing on regulation of individual financial institutions.
Many of the provisions in the Dodd Frank Act require that regulatory agencies draft implementing regulations. Implementation of the Dodd Frank Act has had and will continue to have a broad impact on the financial services industry by introducing significant regulatory and compliance changes including, among other things: (i) changing the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated total assets less average tangible equity, eliminating the ceiling and increasing the size of the floor of the DIF and offsetting the impact of the increase in the minimum floor on institutions with less than $10 billion in assets; (ii) making permanent the $250,000 limit for federal deposit insurance and increasing the cash limit of Securities Investor Protection Corporation protection to $250,000; (iii) eliminating the requirement that the FDIC pay dividends from the DIF when the reserve ratio is between 1.35% and 1.50%, but continuing the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.50%; however, the FDIC is granted sole discretion in determining whether to suspend or limit the declaration or payment of dividends; (iv) repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; (v) implementing certain corporate governance revisions that apply to all public companies, including regulations that require publicly traded companies to give shareholders a non-binding advisory vote to approve executive compensation, commonly referred to as a “say-on-pay” vote and an advisory role on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions; new director independence requirements and considerations to be taken into account by compensation committees and their advisers relating to executive compensation; additional executive compensation disclosures; and a requirement that companies adopt a policy providing for the recovery of executive compensation in the event of a restatement of its financial statements, commonly referred to as a “clawback” policy; (vi) centralizing responsibility for consumer financial protection by creating a new independent federal agency, the Consumer Financial Protection Bureau (CFPB) responsible for implementing federal consumer protection laws to be applicable to all depository institutions; (vii) imposing new requirements for mortgage lending, including new minimum underwriting standards, limitations on prepayment penalties and imposition of new mandated disclosures to mortgage borrowers; (viii) imposing new limits on affiliate transactions and causing derivative transactions to be subject to lending limits and other restrictions including adoption of the “Volcker Rule” regulating transactions in derivative securities; (ix) limiting debit card interchange fees that financial institutions with $10 billion or more in assets are permitted to charge their customers; and (x) implementing regulations to incentivize and protect individuals, commonly referred to as whistleblowers to report violations of federal securities laws.
2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd Frank Act. While the Act maintained most of the regulatory structure established by the Dodd Frank Act, it amended certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes resulted in meaningful regulatory relief for community banks such as the Bank.
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The Act, among other matters, expanded the definition of qualified mortgages which may be held by a financial institution and simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expanded the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd Frank Act. In addition, the Act included regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Anti-Money Laundering. All financial institutions, including national banks, are subject to federal laws that are designed to prevent the use of the U.S. financial system to fund terrorist activities. Financial institutions operating in the United States must develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. The Bank has established policies and procedures to ensure compliance with these provisions.
Privacy. Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide (i) initial notices to customers about their privacy policies, describing conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; (ii) annual notices of their privacy policies to current customers and (iii) a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Corporation’s privacy policies have been implemented in accordance with the law.
Dividends and Other Transfers of Funds. Dividends from the Bank constitute the principal source of income to the Corporation. The Corporation is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. In addition, the Bank’s regulators have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.
Limitations on Transactions with Affiliates. Transactions between national banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a national bank includes any company or entity which controls the national bank or that is controlled by a company that controls the national bank. In a holding company context, the holding company of a national bank (such as the Corporation) and any companies which are controlled by such holding company are affiliates of the national bank. Generally, Section 23A limits the extent to which the national bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the national bank as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a national bank to an affiliate.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal shareholders of the national bank and its affiliates. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% shareholder of a national bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the national bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to any director, executive officer or principal shareholder, or certain affiliated interests of either, over other employees of the national bank. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a national bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. The Bank currently is subject to Sections 22(g) and (h) of the Federal Reserve Act and at December 31, 2021, was in compliance with the above restrictions.
Loans to One Borrower Limitations. With certain limited exceptions, the maximum amount that a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At December 31, 2021, the Bank’s loans-to-one-borrower limit was $13.9 million based upon the 15% of unimpaired capital and surplus measurement. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2021, the Bank's lending limit under the Pilot Program was $25.1 million. At December 31, 2021, the Bank’s largest single lending relationship had a total potential exposure of $17.0 million which includes outstanding loan balances of $13.3 million.
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Capital Standards. The Bank is required to comply with applicable capital adequacy standards established by the federal banking agencies. Beginning on January 1, 2015, the Bank became subject to a new comprehensive capital framework for U.S. banking organizations. In July 2013, the Federal Reserve Board, FDIC and OCC adopted a final rule that implements the Basel III changes to the international regulatory capital framework. The Basel III rules include requirements contemplated by the Dodd Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010.
Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the "CBLR") requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided by average total consolidated assets. In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (ii) have less than $10 billion in average total consolidated assets, (iii) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (iv) not be an advanced approaches banking organization. A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be "well capitalized" under the prompt corrective action rules. The Bank has not elected to be subject to the CBLR.
Unless a community bank qualifies for, and elects to comply with, the CBLR beginning on January 1, 2020, national banks are required to maintain the Basel III minimum levels of regulatory capital described below. The Basel III rules include risk-based and leverage capital ratio requirements that refine the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements are (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital consists of retained earnings and common stock instruments, subject to certain adjustments.
The Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conversation buffer was fully phased in as of January 1, 2019 and results in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5% and (iii) a total risk-based capital ratio of 10.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.
The Basel III rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels do not meet certain thresholds. The prompt corrective action rules were modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. Insured depository institutions are required to meet the following capital levels in order to qualify as “well capitalized”: (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).
The Basel III rules set forth certain changes in the methods of calculating risk-weighted assets, which in turn affect the calculation of risk-based ratios. Under the Basel III rules, higher or more sensitive risk weights are assigned to various categories of assets including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures of credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, Basel III rules include (i) alternate standards of credit worthiness consistent with the Dodd Frank Act; (ii) greater recognition of collateral guarantees and (iii) revised capital treatment for derivatives and repo-style transactions.
In addition, the final rule includes certain exemptions to address concerns about the regulatory burden on community banks. Banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a permanent basis without any phase out. Community banks were required to make this election by their March 31, 2015 quarterly filings with the appropriate federal regulator to opt-out of the requirement to include most accumulated other comprehensive income (AOCI) components in the calculation of Common equity Tier 1 capital and in effect retain the AOCI treatment under the current capital rules. The Bank made in its March 31, 2015 quarterly filing a one-time permanent election to continue to exclude accumulated other comprehensive income from capital. If it would not have made this election, unrealized gains and losses would have been included in the calculation of its regulatory capital.
The Basel III rules generally became effective beginning January 1, 2015; however, certain calculations under the Basel III rules had phase-in periods. In 2015, the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and the 2018 legislation summarized above increased that asset threshold to $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.
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The following table sets forth certain information concerning regulatory capital ratios of the Bank as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer.
(Dollar amounts in thousands)
December 31, 2021
December 31, 2020
Amount
Ratio
Amount
Ratio
Total capital to risk-weighted assets:
Actual
$ 92,495
13.11 %
$ 84,583
12.71 %
For capital adequacy purposes
56,448
8.00 %
53,255
8.00 %
To be well capitalized
70,559
10.00 %
66,569
10.00 %
Tier 1 capital to risk-weighted assets:
Actual
$ 83,656
11.86 %
$ 76,246
11.45 %
For capital adequacy purposes
42,336
6.00 %
39,941
6.00 %
To be well capitalized
56,448
8.00 %
53,255
8.00 %
Common Equity Tier 1 capital to risk-weighted assets:
Actual
$ 83,656
11.86 %
$ 76,246
11.45 %
For capital adequacy purposes
31,752
4.50 %
29,956
4.50 %
To be well capitalized
45,864
6.50 %
43,270
6.50 %
Tier 1 capital to average assets:
Actual
$ 83,656
7.98 %
$ 76,246
7.58 %
For capital adequacy purposes
41,926
4.00 %
40,213
4.00 %
To be well capitalized
52,407
5.00 %
50,267
5.00 %
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2021, the Bank exceeded the required ratios for classification as “well capitalized.”
An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized - without the permission of the institution’s primary regulator.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.
Insurance of Accounts . Deposit accounts are currently insured by the DIF generally up to a maximum of $250,000 per separately insured depositor. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against insured institutions.
The Dodd Frank Act raised the minimum reserve ratio of the DIF from 1.15% to 1.35% and required the FDIC to offset the effect of this increase on insured institutions with assets of less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016 and exceeded 1.35% effective as of September 30, 2018. Small institutions received credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The credits reduced regular assessments by 2 basis points for quarters when the reserve ratio is at least 1.38%. The FDIC applied credits to the Bank's assessments due in 2019. In 2020, the FDIC announced that all credits have been remitted and the credit program has ended.
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The FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is its average total assets reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios; its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates). The initial base assessment rate is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with assets of $10 billion or more are assessed using a scorecard method.
In addition, all FDIC insured institutions were required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. The Financing Corporation bonds matured in 2019.
Under the Federal Deposit Insurance Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order or condition imposed by the FDIC.
Interstate Banking and Branching. Banks have the ability, subject to certain state restrictions, to acquire, by acquisition or merger, branches outside its home state. In addition, federal legislation permits a bank headquartered in Pennsylvania to enter another state through de novo branching (as compared to an acquisition) if under the state law in the state which the proposed branch is to be located a state-chartered institution would be permitted to establish the branch. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets.
Consumer Protection Laws and Regulations. The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with such laws and regulations. The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.
The Community Reinvestment Act (CRA) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, in a manner consistent with safe and sound banking practices. CRA regulations (i) establish the definition of “Intermediate Small Bank” as an institution with total assets of $330 million to $1.322 billion, without regard to any holding company; and (ii) take into account abusive lending practices by a bank or its affiliates in determining a bank’s CRA rating. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last examination for CRA compliance, as of January 10, 2022, the Bank was rated “satisfactory.”
On December 14, 2021, the OCC issued a final rule to rescind its June 2020 CRA rule and replace it with a rule based on the rules adopted jointly by the federal banking agencies in 1995, as amended. The final rule aligns the OCC's CRA rule with the rules of the Federal Reserve and FDIC and thereby, according to the OCC, facilitates the ongoing interagency work to modernize the CRA framework and create consistency for all insured depository institutions.
The Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act of 2003 (FACTA), requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with the FACTA, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer’s election to opt out would be applicable for at least five years.
The Federal Trade Commission (FTC), the federal bank regulatory agencies and the National Credit Union Administration (NCUA) have issued regulations (the Red Flag Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs as part of the FACTA. The programs must provide for the identification, detection and response to patterns, practices or specific activities - known as red flags - that could indicate identity theft. These red flags may include unusual account activity, fraud alerts on a consumer report or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the institution or creditor, include appropriate staff training and provide oversight of any service providers.
The Check Clearing for the 21st Century Act (Check 21) facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a “substitute check,” which is the legal equivalent of an original check. Check 21 does not require banks to create substitute checks or accept checks electronically; however, it does require banks to accept a legally equivalent substitute check in place of an original.
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
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The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act (FHA) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FHA, including some that are not specifically mentioned in the FHA itself.
The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. Generally speaking, predatory lending involves at least one, and perhaps all three, of the following elements (i) making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”); (ii) inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); and (iii) engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.
FRB regulations aimed at curbing such lending significantly widened the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid.
OCC guidelines require national banks and their operating subsidiaries to comply with certain standards when making or purchasing loans to avoid predatory or abusive residential mortgage lending practices. Failure to comply with the guidelines could be deemed an unsafe and unsound or unfair or deceptive practice, subjecting the bank to supervisory enforcement actions.
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with the CRA, FACTA, TILA, FHA, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2021, the Bank was in compliance with the stock requirements.
Federal Reserve System. The FRB requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking) and non-personal time deposits. At December 31, 2021, the Bank was in compliance with these requirements.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Not required as the Corporation is a smaller reporting company.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Corporation owns no real property but utilizes the main office of the Bank, which is owned by the Bank. The Corporation’s and the Bank’s executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent or other form of consideration for the use of this facility.
The Bank owns and leases numerous other premises for use in conducting business activities. The Bank considers these facilities owned or occupied under lease to be adequate. For additional information regarding the Bank’s properties, see “Note 5 - Premises and Equipment” to the Consolidated Financial Statements on page.
K-16

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Neither the Bank nor the Corporation is involved in any material legal proceedings. The Bank, from time to time, is party to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial position, results of operation, or liquidity of the Bank or the Corporation.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market, Holder and Dividend Information
Emclaire Financial Corp common stock is traded on NASDAQ Capital Market (NASDAQ) under the symbol “EMCF”. The listed market makers for the Corporation’s common stock include:
Boenning and Scattergood, Inc.
Janney Montgomery Scott LLC
Raymond James & Associates, Inc.
4 Tower Bridge
1717 Arch Street
550 West Washington Boulevard
200 Barr Harbor Drive, Suite 300
Philadelphia, PA 19103
Suite 1050
West Conshohocken, PA 19428-2979
Telephone: (215) 665-6000
Chicago, IL 60661
Telephone: (800) 883-1212
Telephone: (312) 869-3800
The Corporation has traditionally paid regular quarterly cash dividends. Future dividends will be determined by the Board of Directors after giving consideration to the Corporation’s financial condition, results of operations, tax status, industry standards, economic conditions, regulatory requirements and other factors.
The following table sets forth the high and low sale and quarter-end closing market prices of our common stock for the last two years as reported by the Nasdaq Capital Market as well as cash dividends paid for the quarterly periods presented.
Market Price
Cash
High
Low
Close
Dividend
2021:
Fourth quarter
$ 30.00
$ 26.03
$ 28.90
$ 0.30
Third quarter
30.39
26.02
26.72
0.30
Second quarter
30.55
26.50
30.27
0.30
First quarter
31.12
25.60
28.99
0.30
2020:
Fourth quarter
$ 32.00
$ 23.10
$ 30.63
$ 0.30
Third quarter
28.35
20.40
25.11
0.30
Second quarter
26.10
18.10
20.01
0.30
First quarter
33.50
20.92
23.47
0.30
As of March 1, 2022, there were approximately 710 stockholders of record and 2,735,212 shares of common stock entitled to vote, receive dividends and considered outstanding for financial reporting purposes. The number of stockholders of record does not include the number of persons or entities who hold their stock in nominee or “street name."
Common stockholders may have dividends reinvested to purchase additional shares through the Corporation’s dividend reinvestment plan. Participants may also make optional cash purchases of common stock through this plan. To obtain a plan document and authorization card to participate in the plan, please call 888-509-4619.
Purchases of Equity Securities
The Corporation did not repurchase any of its equity securities in the year ended December 31, 2021.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents a review of the Corporation’s consolidated financial condition and results of operations for the years ended December 31, 2021 and 2020. This review should be read in conjunction with the consolidated financial statements beginning on page.
K-17
Overview
The Corporation reported consolidated net income available to common stockholders of $10.0 million, or $3.63 per diluted common share, for 2021, an increase of $3.4 million, or 52.0%, compared to $6.6 million, or $2.41 per diluted common share, for 2020. Net income available to common stockholders was impacted by the following:
•
Net interest income increased $2.4 million, or 8.2%, to $31.5 million for the year ended December 31, 2021 from $29.1 million for 2020. This increase primarily related to a decrease in interest expense of $2.9 million, or 36.4%, while interest income decreased $566,000, or 1.5%. Driving the decrease in interest expense was a 44 basis point decrease in the cost of interest-bearing liabilities to 0.69% for 2021 from 1.13% for 2020.
•
Provision for loan losses decreased $2.2 million, or 67.2%, to $1.1 million for the year ended December 31, 2021 from $3.2 million for 2020. The higher provision for loan losses recorded in 2020 was due to growth in the residential and consumer loan portolios, the addition of a specific pandemic qualitative allowance factor, increased risk ratings for loans which were granted payment deferrals and an increase in criticized and classified loans. During 2021, the provision for loan losses decreased as criticized and classified loans decreased and the specific pandemic allowance qualitative factor was reduced.
•
Noninterest income increased $227,000, or 5.2%, to $4.6 million for the year ended December 31, 2021 from $4.4 million for 2020 due to increases in other noninterest income, gains on the sale of loans and earnings on bank-owned life insurance of $549,000, $149,000 and $34,000, respectively, partially offset by decreases in gains on the sale of securities and fees and service charges of $442,000 and $63,000, respectively.
•
Noninterest expense increased $578,000, or 2.6%, to $22.6 million for the year ended December 31, 2021 from $22.0 million for 2020. This increase was primarily related to increases in compensation and employee benefits, other noninterest expense, professional fees, FDIC insurance expense and intangible asset amortization expense of $192,000, $188,000, $176,000, $41,000 and $21,000, respectively, partially offset by a decrease in premises and equipment expense of $40,000.
Changes in Financial Condition
Total assets increased $27.2 million, or 2.6%, to $1.1 billion at December 31, 2021 from $1.0 billion at December 31, 2020. The increase in assets was driven primarily by a $73.2 million increase in securities, partially offset by decreases in cash and equivalents and net loans receivable of $28.4 million and $20.3 million. The decrease in net loans receivable was driven by a $29.2 million reduction in PPP loans to $1.2 million at December 31, 2021, from $30.4 million at December 31, 2020. Liabilities increased $21.7 million, or 2.3%, to $962.5 million at December 31, 2021 from $940.8 million at December 31, 2020 due to a $24.9 million increase in customer deposits, partially offset by a $10.0 million reduction in borrowed funds.
Cash and cash equivalents. Cash and cash equivalents decreased $28.4 million, or 75.8%, to $9.1 million at December 31, 2021 from $37.4 million at December 31, 2020. Excess cash balances resulting from deposit inflows and the repayment of loans were utilized to fund security purchases and repay borrowed funds.
Interest earning time deposits. Interest earning time deposits decreased $3.2 million, or 56.6%, to $2.5 million at December 31, 2021 from $5.7 million at December 31, 2020. This decrease resulted from maturities of certificates of deposits with other financial institutions totaling $3.7 million, partially offset by purchases totaling $496,000 during the year.
Securities. Securities increased $73.2 million, or 64.8%, to $186.3 million at December 31, 2021 from $113.0 million at December 31, 2020. This increase primarily resulted from investment purchases of $105.1 million during the year, partially offset by security sales, maturities and repayments totaling $28.5 million.
Loans receivable. Net loans receivable decreased $20.3 million, or 2.5%, to $780.0 million at December 31, 2021 from $800.3 million at December 31, 2020. The decrease was driven by decreases in the Corporation’s residential mortgage, commercial business and home equity portfolios of $34.2 million, $23.3 million and $11.3 million, respectively, partially offset by increases in the commercial mortgage and consumer portfolios of $40.7 million and $8.5 million, respectively. Included in the decrease of the commercial business loan balances for 2021 was $29.2 million of loans forgiven under the SBA's PPP lending program.
K-18
Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days past due and still accruing, repossessions and real estate owned. Nonperforming assets were $3.3 million, or 0.32% of total assets, at December 31, 2021 compared to $4.4 million, or 0.43% of total assets, at December 31, 2020. Nonperforming assets consisted of nonperforming loans of $3.3 million at December 31, 2021 and nonperforming loans of $4.1 million and other real estate owned of $344,000 at December 31, 2020. At December 31, 2021, nonperforming loans consisted primarily of commercial mortgage and residential mortgage loans.
Federal bank stocks. Federal bank stocks were comprised of FHLB stock and FRB stock of $3.9 million and $1.8 million, respectively, at December 31, 2021. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships between the Corporation and the federal banks.
Bank-owned life insurance (BOLI). The Corporation maintains single premium life insurance policies on certain current and former officers and employees of the Bank. In addition to providing life insurance coverage, whereby the Bank as well as the officers and employees receive life insurance benefits, the appreciation of the cash surrender value of the BOLI will serve to offset and finance existing and future employee benefit costs. Increases in this account are typically associated with an increase in the cash surrender value of the policies, partially offset by certain administrative expenses. BOLI increased $6.4 million, or 41.6%, to $21.9 million at December 31, 2021 from $15.5 million at December 31, 2020. The increase in BOLI during the year was primarily due to the purchase of $6.0 million in additional policies.
Premises and equipment. Premises and equipment decreased $1.8 million to $16.4 million at December 31, 2021 from $18.2 million at December 31, 2020. The overall decrease in premises and equipment during the year was due to depreciation and amortization of $1.4 million and sales of $1.3 million, partially offset by purchases of $872,000. During 2021, the Corporation sold its Chester, West Virginia office building following the closure of that branch in April. In addition, the Corporation sold its building located in the Southside of Pittsburgh, Pennsylvania and entered into a lease to continue operating the branch in that location.
Goodwill. Goodwill remained unchanged at $19.5 million at December 31, 2021 and 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed during the year ended December 31, 2021.
Core deposit intangible. The core deposit intangible was $899,000 at December 31, 2021, compared to $1.1 million at December 31, 2020. The core deposit intangible includes amounts associated with the assumption of deposits in the 2018 Community First Bancorp, Inc. (CFB) acquisition, the 2017 Northern Hancock Bank and Trust Co. (NHB) acquisition and the 2016 United American Savings Bank (UASB) acquisition. This asset represents the long-term value of the core deposits acquired. In each instance, the fair value was determined using a third-party valuation expert specializing in estimating fair values of core deposit intangibles. The fair value was derived using an industry standard present value methodology. All-in costs and runoff balances by year were discounted by comparable term FHLB advance rates, used as an alternative cost of funds measure. This intangible asset amortizes over a weighted average estimated life of the related deposits. The core deposit intangible asset is not estimated to have a significant residual value. The Corporation recorded $185,000 and $164,000 of intangible amortization in 2021 and 2020, respectively.
Deposits. Total deposits increased $24.9 million, or 2.8%, to $918.5 million at December 31, 2021 from $893.6 million at December 31, 2020. Non-interest bearing deposits increased $28.2 million, or 14.6%, and interest bearing demand deposits increased $33.4 million, or 6.6%. These increases were driven by increases in public funds and government stimulus deposits. The increase in demand deposits were partially offset by a $37.3 million, or 19.8%, decrease in time deposits due to the maturity of certificates of deposit.
Borrowed funds. Borrowed funds decreased $10.0 million, or 31.2%, to $22.1 million at December 31, 2021 from $32.1 million at December 31, 2020. Borrowed funds at December 31, 2021 consisted of short-term borrowings of $7.1 million and long-term borrowings of $15.0 million. Short-term borrowed funds at December 31, 2021 consisted of an outstanding balance of $2.1 million on a line of credit with a correspondent bank at rate of 4.25% and $5.0 million of FHLB overnight funds at a rate of 0.28%. Long-term borrowed funds consisted of three $5.0 million FHLB term advances totaling $15.0 million, maturing between 2023 and 2025 and having fixed interest rates between 1.65% and 2.79%. Long-term advances are utilized primarily to fund loan growth and short-term advances are utilized primarily to compensate for normal deposit fluctuations.
Stockholders’ equity. Stockholders’ equity increased $5.5 million, or 6.0%, to $97.0 million at December 31, 2021 from $91.5 million at December 31, 2020. The increase was primarily due to net income of $10.2 million, partially offset by a decrease of $1.7 million in accumulated other comprehensive income and common stock and preferred dividends paid of $3.3 million and $196,000, respectively.
K-19
Changes in Results of Operations
The Corporation reported net income before preferred stock dividends of $10.2 million and $6.7 million in 2021 and 2020, respectively. The following “Average Balance Sheet and Yield/Rate Analysis” and “Analysis of Changes in Net Interest Income” tables should be utilized in conjunction with the discussion of the interest income and interest expense components of net interest income.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.
(Dollar amounts in thousands)
For the year ended December 31,
Average Balance
Interest
Yield / Rate
Average Balance
Interest
Yield / Rate
Interest-earning assets:
Loans, taxable
$ 782,030
$ 32,241
4.12 %
$ 771,073
$ 33,402
4.33 %
Loans, tax exempt
15,770
3.78 %
19,463
3.83 %
Total loans receivable
797,800
32,837
4.12 %
790,536
34,147
4.32 %
Securities, taxable
108,464
2,435
2.24 %
81,812
2,070
2.53 %
Securities, tax exempt
52,957
1,156
2.18 %
22,205
2.52 %
Total securities
161,421
3,591
2.22 %
104,017
2,629
2.53 %
Interest-earning deposits with banks
40,619
0.22 %
26,570
0.72 %
Federal bank stocks
5,685
5.15 %
6,040
6.14 %
Total interest-earning cash equivalents
46,304
0.83 %
32,610
1.72 %
Total interest-earning assets
1,005,525
36,812
3.66 %
927,163
37,338
4.03 %
Cash and due from banks
3,452
3,507
Other noninterest-earning assets
60,484
61,123
Total Assets
$ 1,069,461
$ 991,793
Interest-bearing liabilities:
Interest-bearing demand deposits
$ 542,740
$ 1,127
0.21 %
$ 471,766
$ 2,858
0.61 %
Time deposits
171,113
3,323
1.94 %
201,662
4,307
2.14 %
Total interest-bearing deposits
713,853
4,450
0.62 %
673,428
7,165
1.06 %
Borrowed funds, short-term
2,143
4.13 %
4,366
3.00 %
Borrowed funds, long-term
27,658
2.12 %
35,530
2.16 %
Total borrowed funds
29,801
2.26 %
39,896
2.25 %
Total interest-bearing liabilities
743,654
5,124
0.69 %
713,324
8,062
1.13 %
Noninterest-bearing demand deposits
216,811
-
-
175,279
-
-
Funding and cost of funds
960,465
5,124
0.53 %
888,603
8,062
0.91 %
Other noninterest-bearing liabilities
15,676
14,473
Total Liabilities
976,141
903,076
Stockholders' Equity
93,320
88,717
Total Liabilities and Stockholders' Equity
$ 1,069,461
$ 991,793
Net interest income
$ 31,688
$ 29,276
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)
2.97 %
2.90 %
Net interest margin (net interest income as a percentage of average interest-earning assets)
3.15 %
3.16 %
K-20
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
(Dollar amounts in thousands)
For the year ended December 31,
2021 versus 2020
Increase (Decrease) due to
Volume
Rate
Total
Interest income:
Loans
$
$ (1,621 )
$ (1,310 )
Securities
1,308
(346 )
Interest-earning deposits with banks
(171 )
(100 )
Federal bank stocks
(21 )
(57 )
(78 )
Total interest-earning assets
1,669
(2,195 )
(526 )
Interest expense:
Interest-bearing deposits
(3,123 )
(2,715 )
Borrowed funds, short-term
(81 )
(42 )
Borrowed funds, long-term
(167 )
(14 )
(181 )
Total interest-bearing liabilities
(3,098 )
(2,938 )
Net interest income
$ 1,509
$
$ 2,412
2021 Results Compared to 2020 Results
The Corporation reported net income available to common stockholders of $10.0 million and $6.6 million for 2021 and 2020, respectively. The $3.4 million, or 52.0%, increase resulted primarily from increases in net interest income and noninterest income of $2.4 million and $227,000, respectively, and a $2.2 million decrease in the provision for loan losses, partially offset by increases in noninterest expense and the provision for income taxes of $578,000 and $779,000, respectively. Returns on average equity and assets were 10.90% and 0.95%, respectively, for 2021, compared to 7.61% and 0.68%, respectively, for 2020.
Net interest income. The primary source of the Corporation’s revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowed funds, used to fund the earning assets. Net interest income is impacted by the volume and composition of interest-earning assets and interest-bearing liabilities, and changes in the level of interest rates. Tax equivalent net interest income increased $2.4 million to $31.7 million for 2021, compared to $29.3 million for 2020. This increase in net interest income can be attributed to a decrease in interest expense of $2.9 million, partially offset by a decrease in tax equivalent interest income of $526,000.
Interest income. Tax equivalent interest income decreased $526,000, or 1.4%, to $36.8 million for 2021, compared to $37.3 million for 2020. This decrease can be attributed to decreases in interest earned on loans, deposits with banks and dividends received on federal bank stocks of $1.3 million, $100,000 and $78,000, respectively, partially offset by an increase in interest earned on securities of $962,000.
Tax equivalent interest earned on loans receivable decreased $1.3 million, or 3.8%, to $32.8 million for 2021, compared to $34.1 million for 2020. The average yield on loans decreased 20 basis points to 4.12% for 2021, versus 4.32% for 2020 causing an $1.6 million decrease in interest income. Partially offseting this decrease, the average balance of loans increased $7.3 million generating $311,000 of additional interest income on loans. Included in interest earned on loans for the year ended December 31, 2021, is $2.6 million of interest and fees earned on the SBA's PPP lending program compared to $1.6 million for 2020.
Tax equivalent interest earned on securities increased $962,000, or 36.6%, to $3.6 million for 2021, compared to $2.6 million for 2020. The average balance of securities increased $57.4 million resulting in a $1.3 million increase in interest income. Partially offsetting this increase, the average yield on securities decreased 31 basis points to 2.22% for 2021 versus 2.53% for 2020 causing a $346,000 decrease in interest income.
Interest earned on interest-earning deposits with banks decreased $100,000, or 52.4%, to $91,000 for 2021, compared to $191,000 for 2020. The average yield on interest-earning deposits decreased 50 basis points to 0.22% for 2021, versus 0.72% for 2020 causing a $171,000 decrease in interest income. Partially offsetting this decrease, the average balance of these accounts increased $14.0 million, or 52.9%, causing a $71,000 increase in interest income.
Interest earned on federal bank stocks decreased $78,000, or 21.0%, to $293,000 for 2021, compared to $371,000 for 2020. The average yield on federal bank stocks decreased 99 basis points to 5.15% for 2021 versus 6.14% for 2020 causing a $57,000 decrease in interest income. Additionally, the average balance of federal bank stocks decreased $355,000, or 5.9%, resulting in an additional $21,000 decrease in interest income.
K-21
Interest expense. Interest expense decreased $2.9 million, or 36.4% to $5.1 million for 2021, compared to $8.1 million for 2020. This decrease can be attributed to decreases in interest expense on interest-bearing deposits and borrowed funds of $2.7 million and $223,000, repsectively.
Interest expense on deposits decreased $2.7 million, or 37.9%, to $4.5 million for 2021, compared to $7.2 million for 2020. The average rate on interest-bearing deposits decreased by 44 basis points to 0.62% for 2021 versus 1.06% for 2020 causing a $3.1 million decrease in interest expense. Partially offsetting this decrease, the average balance of interest-bearing deposits increased $40.4 million, or 6.0%, causing a $408,000 increase in interest expense.
Interest expense on borrowed funds decreased $223,000, or 24.9%, to $674,000 for 2021, compared to $897,000 for 2020. The average balance of borrowed funds decreased $10.1 million, or 25.3%, to $29.8 million for 2021, compared to $39.9 million for 2020 causing a $248,000 decrease in interest expense. Partially offsetting this decrease, the average rate on borrowed funds increased 1 basis point to 2.26% for 2021 versus 2.25% for 2020 causing a $25,000 increase in interest expense.
The following table reconciles interest income on the Consolidated Statements of Net Income to net interest income adjusted to a fully taxable equivalent basis for the years ended December 31:
(Dollar amounts in thousands)
Interest income per Consolidated Statements of Net Income
$ 36,581
$ 37,147
Adjustment to fully taxable equivalent basis
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
36,812
37,338
Interest expense
5,124
8,062
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$ 31,688
$ 29,276
Use of Non-GAAP Financial Measures. In addition to the results of operations presented in accordance with generally accepted accounting principals (GAAP), management uses certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the underlying operations, performance and business trends as they facilitate comparison with the performance of others in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors' understanding of the Corporation's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.
Nonperforming loans decreased $763,000, or 18.6%, to $3.3 million at December 31, 2021 from $4.1 million at December 31, 2020. The decrease in nonperforming loans was primarily related to a decrease in non-accrual loans in the residential mortgage and commercial real estate portfolios of $809,000 and $363,000, respectively.
The provision for loan losses decreased $2.2 million to $1.1 million for 2021 from $3.2 million for 2020. The Corporation’s allowance for loan losses amounted to $10.4 million, or 1.31% of the Corporation’s total loan portfolio at December 31, 2021 compared to $9.6 million or 1.18% of total loans at December 31, 2020. The higher provision for loan losses recorded in 2020 was due to growth in the residential and consumer loan porfolios, the addition of a specifice pandemic qualitative allowance factor, increased risk ratings for loans which were granted payment deferrals and an increase in criticized and classified loans. During 2021, the provision for loan losses decreased as criticized and classified loans decreased and the specific pandemic allowance qualitative factor was reduced. The allowance for loan losses, as a percentage of nonperforming loans at December 31, 2021 and 2020, was 311.3% and 233.5%, respectively. The allocation of the allowance for loan losses related to commercial real estate, commercial business and consumers loans increased during the year primarily as a result of growth in the balances. Some uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is may occur as a result of the pandemic. The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision expense accordingly. At December 31, 2021, there was no provision for loan losses allocated to loans acquired from UASB, NHB or CFB because the unaccreted purchase discount still exceeded the calculated allowance.
Noninterest income. Noninterest income includes revenue that is related to services rendered and activities conducted in the financial services industry, including fees on depository accounts, general transaction and service fees, security and loan sale gains and losses, and earnings on BOLI. Noninterest income increased $227,000, or 5.2%, to $4.6 million for 2021, compared to $4.4 million for 2020. The increase in noninterest income is due to increases in other income, gains on the sale of loans and earnings on bank-owned life insurance of $549,000, $149,000 and $34,000, respectively, partially offset by decreases in gains on the sale of securities and fees and service charges of $442,000 and $63,000, respectively. The increase in other income was primarily related to a non-recurring $337,000 write down in the value of a bank-owned property recognized during 2020 and an increase in interchange fee income in 2021 resulting from easing pandemic restrictions leading to an increase in consumer spending. During 2021, the Corporation sold $14.2 million of residential mortgage loans to the FHLB and realized a net gain of $390,000, compared to sales of $5.2 million and a net gain of $241,000 recognized during 2020. During 2021, the Corporation sold a total of $9.1 million of primarily low-yielding mortgage-backed securities and realized a net gain of $245,000. The sale proceeds were utilized to repay $10.0 million in FHLB term advances. During 2020, the Corporation sold a total of $43.9 million of low-yielding mortgage-backed and collateralized mortgage obligation securities and realized a net gain of $687,000. The sale proceeds were utilized to repay $15.0 million in FHLB term advances and purchase higher yielding municipal and corporate securities.
K-22
Noninterest expense. Noninterest expense increased $578,000, or 2.6%, to $22.6 million for 2021, compared to $22.0 million for 2020. This increase was primarily attributable to increases in compensation and benefits expense, other noninterest expense, professional fees, FDIC insurance expense and intangible amortization expense of $192,000, $188,000, $176,000, $41,000 and $21,000, respectively, partially offset by a $40,000 decrease in premises and equipment e
xpense.
Compensation and employee benefits expense increased $192,000, or 1.7%, to $11.3 million for 2021, compared to $11.1 million for 2020. This increase primarily related to a $306,000 increase management incentive plan expense due to favorable results during 2021, partially offset by a decrease in salary expense and commission expense of $100,000 and $100,000, respectively.
Other noninterest expense increased $188,000, or 3.1%, to $6.2 million for 2021, compared to $6.0 million for 2020. For additional information regarding other noninterest expense see "Note 17 - Other Noninterest Income and Expense" to the Consolidated Financial Statements on page.
Professional fee expense increased $176,000, or 20.9%, to $1.0 million for 2021, compared to $841,000 for 2020. This increase is primarily related to consulting fees related to IT and succession planning projects completed during 2021.
FDIC insurance expense increased $41,000, or 7.6%, to $579,000 for 2021, compared to $538,000 for 2020. This increase was primarily related to an increase in the assessment base, partially offset by a reduction in the assesment rate due to decreases in non-performing assets and increases in capital ratios during 2021.
Premises and equipment expense decreased $40,000, or 1.2%, at $3.3 million for 2021 and 2020. This decrease primarily related to reductions in building repairs and maintenance expense and building depreciation expense of $26,000 and $20,000, respectively due to the sale of two Bank properties.
The provision for income taxes increased $779,000, or 54.3%, to $2.2 million for 2021, compared to $1.4 million for 2020 primarily due to the increase in net income available to common stockholders. The Corporation's effective tax rate was 17.9% for 2021, compared to 17.5% for 2020.
Market Risk Management
Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. The Corporation is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Corporation does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets.
The primary objective of the Corporation’s asset liability management function is to maximize the Corporation’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Corporation’s operating environment, capital and liquidity requirements, balance sheet mix, performance objectives and overall business focus. One of the primary measures of the exposure of the Corporation’s earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of interest-bearing liabilities.
The Corporation’s Board of Directors has established a Finance Committee, consisting of five outside directors, the President and Chief Executive Officer (CEO), Treasurer and Chief Financial Officer (CFO) and Chief Operating Officer (COO), to monitor market risk, including primarily interest rate risk. This committee, which meets at least quarterly, generally establishes and monitors the investment, interest rate risk and asset liability management policies of the Corporation.
In order to minimize the potential for adverse affects of material and prolonged changes in interest rates on the Corporation’s results of operations, the Corporation’s management team has implemented and continues to monitor asset liability management policies to better match the maturities and repricing terms of the Corporation’s interest-earning assets and interest-bearing liabilities. Such policies have consisted primarily of (i) originating adjustable-rate mortgage loans; (ii) originating short-term secured commercial loans with the rate on the loan tied to the prime rate or reset features in which the rate changes at determined intervals; (iii) emphasizing investment in shorter-term (expected duration of five years or less) investment securities; (iv) selling longer-term (30-year) fixed-rate residential mortgage loans in the secondary market; (v) maintaining a high level of liquid assets (including securities classified as available for sale) that can be readily reinvested in higher yielding investments should interest rates rise; (vi) emphasizing the retention of lower cost savings accounts and other core deposits; and (vii) lengthening liabilities and locking in lower borrowing rates with longer terms whenever possible.
Interest Rate Sensitivity Gap Analysis
The implementation of asset and liability initiatives and strategies and compliance with related policies, combined with other external factors such as demand for the Corporation’s products and economic and interest rate environments in general, has resulted in the Corporation typically maintaining a one-year cumulative interest rate sensitivity gap within internal policy limits of between a positive and negative 15% of total assets. The one-year interest rate sensitivity gap is identified as the difference between the Corporation’s interest-earning assets that are scheduled to mature or reprice within one year and interest-bearing liabilities that are scheduled to mature or reprice within one year.
K-23
The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities, and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero, or more neutral, that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.
Based on certain assumptions derived from the Corporation’s historical experience, at December 31, 2021, the Corporation’s interest-earning assets maturing or repricing within one year totaled $345.6 million while the Corporation’s interest-bearing liabilities maturing or repricing within one year totaled $128.8 million, providing an excess of interest-earning assets over interest-bearing liabilities of $216.8 million or 22.04% of total assets. At December 31, 2021, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 268.8%.
The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2021 which are expected to mature, prepay or reprice in each of the future time periods presented:
(Dollar amounts in thousands)
Six months or less
Six months to one year
One to three years
Three to four years
Over four years
Total
Total interest-earning assets
$ 248,917
$ 96,714
$ 234,869
82,473
$ 321,027
$ 984,000
Total interest-bearing liabilities
67,937
60,845
243,433
80,208
264,080
716,503
Interest rate sensitivity gap
$ 180,980
$ 35,869
$ (8,564 )
$ 2,265
$ 56,947
$ 267,497
Cumulative rate sensitivity gap
$ 180,980
$ 216,849
$ 208,285
$ 210,550
$ 267,497
Ratio of gap during the period to total interest earning assets
18.39 %
3.65 %
(0.87 %)
0.23 %
5.79 %
Ratio of cumulative gap to total interest earning assets
18.39 %
22.04 %
21.17 %
21.40 %
27.18 %
Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.
Interest Rate Sensitivity Simulation Analysis
The Corporation also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Finance Committee of the Board of Directors believes that simulation modeling enables the Corporation to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates and different loan and security prepayment and deposit decay assumptions under various interest rate scenarios.
As with gap analysis and earnings simulation modeling, assumptions about the timing and variability of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Corporation’s historical experience.
The Corporation has established the following guidelines for assessing interest rate risk:
Net interest income simulation. Given a 200 basis point immediate increase or decrease in market interest rates, net interest income may not change by more than 8% for a one-year period.
Economic value of equity simulation. Economic value of equity is the present value of the Corporation’s existing assets less the present value of the Corporation’s existing liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, economic value of equity may not correspondingly decrease or increase by more than 20%.
K-24
These guidelines take into consideration the current interest rate environment, the Corporation’s financial asset and financial liability product mix and characteristics and liquidity sources among other factors. Given the current rate environment, a drop in short-term market interest rates of 200 basis points immediately or over a one-year horizon would seem unlikely. This should be considered in evaluating modeling results outlined in the table below.
The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income for the years ended December 31, 2021 and 2020, respectively. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2021 remained constant. The impact of the market rate movements on net interest income was developed by simulating the effects of rates changing immediately for a one-year period from the December 31, 2021 levels for net interest income.
Increase
Decrease
+100 BP
+200 BP
-100 BP
-200 BP
2021 Net interest income - increase (decrease)
2.69 %
4.13 %
(6.68 %)
(10.68 %)
2020 Net interest income - increase (decrease)
3.53 %
5.84 %
(2.77 %)
(1.87 %)
The expected increase in 2020 and 2021 net interest income in the rising rate scenarios shown in the table above resulted from the Corporation having an excess of immediately repricing interest-earning assets over immediately repricing interest-bearing liabilities.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Corporation and related notes presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger degree than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels.
Capital Resources
Total stockholders’ equity increased $5.5 million, or 6.0%, to $97.0 million at December 31, 2021 from $91.5 million at December 31, 2020. Net income available to common stockholders of $10.0 million in 2021 represented an increase in earnings of $3.4 million, or 52.0%, compared to 2020. The Corporation’s capital to assets ratio increased to 9.2% at December 31, 2021 from 8.9% at December 31, 2020.
While continuing to sustain a strong capital position, dividends on common stock were $3.3 million in 2021 and 2020. In addition, stockholders have taken part in the Corporation’s dividend reinvestment plan introduced during 2003 with 40% of registered shareholder accounts active in the plan at December 31, 2021. Dividend reinvestment is achieved through the purchase of common shares on the secondary market.
Capital adequacy is intended to enhance the Corporation’s ability to support growth while protecting the interest of stockholders and depositors and to ensure that capital ratios are in compliance with regulatory minimum requirements. Regulatory agencies have developed certain capital ratio requirements that are used to assist them in monitoring the safety and soundness of financial institutions. At December 31, 2021, the Bank was in excess of all regulatory capital requirements. See "Note 10 - Regulatory Matters" to the consolidated financial statements on page.
Liquidity
The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, and amortization and prepayments of outstanding loans and maturing securities. During 2021, the Corporation used its sources of funds primarily to purchase securities and retire outstanding debt. As of December 31, 2021, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $124.6 million, and standby letters of credit totaling $444,000, net of cash collateral maintained by the Bank. The Bank has established policies to monitor and manage liquidity levels to ensure the Bank’s ability to meet demands for customer withdrawals and the repayment of borrowings.
At December 31, 2021, time deposits amounted to $150.7 million, or 16.4%, of the Corporation’s total consolidated deposits, including approximately $48.0 million scheduled to mature within the next year. Management believes that the Corporation has adequate resources to fund all of its commitments, that all of its commitments will be funded as required by related maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation and the Bank have alternative sources of funds. These sources include a line of credit for the Corporation with a correspondent bank, the Bank’s line of credit and term borrowing capacity from the FHLB and, to a more limited extent, through the sale of loans. At December 31, 2021, the Bank’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issued to secure certain deposit accounts, was $249.3 million.
K-25
The Corporation pays a regular quarterly cash dividend. The Corporation paid dividends of $0.30 per common share for each of the four quarters of 2021 and 2020, respectively. On February 16, 2022, the Corporation declared a quarterly dividend of $0.31 per common share payable on March 18, 2022 to shareholders of record on March 1, 2022. The determination of future dividends on the Corporation’s common stock will depend on conditions existing at that time with consideration given to the Corporation’s earnings, capital and liquidity needs, among other factors.
Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.
Critical Accounting Policies
The Corporation’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily though the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Corporation are presented in "Note 1 - Summary of Significant Accounting Policies" to the Consolidated Financial Statements beginning on page. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies:
Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.
Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery.
Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. As part of the Corporation's qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that significant change in the general economic environment and financial markets, including the Corporation's market capitalization, represented an interim impairment indicator requiring continued evaluation. Because of the economic uncertainty surrounding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of goodwill as of November 30. Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired as of November 30, 2021. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk-based capital ratios. See "Note 1 - Summary of Significant Accounting Policies" on page for the Corporation's accounting policy on goodwill and see "Note 6 - Goodwill and Intangible Assets" on page in the Consolidated Financial Statements for a detailed discussion of the factors considered by management in the assessment.
K-26

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Information required by this item is included beginning on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
In March 2021, the audit committee of the Board of Directors appointed BKD, LLP, Certified Public Accountants, as the independent registered public acconting firm to audit the Corporation's financial statements for the year ending December 31, 2021. In addition to performing customary audit services related to the audit of the Corporation's financial statements, BKD will perform required retirement plan audits.
Crowe LLP performed an audit of the Corporation’s consolidated financial statements for the year ended December 31, 2020. Crowe’s report did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended December 31, 2020, there were no (i) disagreements between the Corporation and Crowe on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to its satisfaction, would have caused Crowe to make reference to the subject matter of such disagreements in connection with its report, or (ii) “reportable events,” as described in Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. During the year ended December 31, 2020 and through the engagement of BKD as the Corporation’s independent registered public accounting firm, neither the Corporation nor anyone on its behalf had consulted BKD with respect to any accounting or auditing issues involving the Corporation.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).
As of December 31, 2021, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective.
During the fourth quarter of fiscal year 2021, there has been no change made in the Corporation’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its valuation.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management’s Report on Internal Control Over Financial Reporting
Management completed an assessment of the Corporation’s internal control over financial reporting as of December 31, 2021. This assessment was based on criteria for evaluating internal control over financial reporting established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2021. Our independent registered public accounting firm has not expressed an opinion on our internal control over financial reporting for the year ended December 31, 2021.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not Applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The Corporation has a classified Board of Directors with staggered three-year terms of office. In a classified board, the directors are generally divided into separate classes of equal number. The terms of the separate classes expire in successive years. Thus, at each annual meeting of shareholders, successors to the class of directors whose term then expires are to be elected to hold office for a term of three years, so that the office of one class will expire each year.
In connection with the acquisition of CFB in 2018, the Corporation agreed to appoint two former directors of CFB, Henry H. Deible and Hentry H. Deible II, to the Board of Directors of the Corporation and the Bank in the class of directors whose terms expired at the respective 2021 and 2019 annual meetings of shareholders and also agreed to re-nominate them for an additional term, subject to the fiduciary duties of the Board of Directors and any applicable eligibility requirements set forth in the Corporation's or the Bank's, as the case may be, articles of incorporation, bylaws, or nominating and corporate governance committee guidelines or any applicable law, rule, regulation or listing standard. There are no other arrangements or understandings between the Corporation and any other person pursuant to which such person has been elected a director. Ages are reflected as of December 31, 2021.
Directors Whose Terms Expire in 2022
Principal Occupation
Director Since
Name
Age
for Past Five Years
Bank/Corporation
David L. Cox
Retired, former Chairman, President and Chief Executive Officer of the Bank and the Corporation. Mr. Cox's prior service as Chairman, President and Chief Executive Officer as well as his subsequent years of service as a director provide the Board with valuable knowledge and experience.
1991/1991
Henry H. Deible II
Owner and President of Forestland Investments, LLC and Owner and Forester for Sustainable Forestry Consultants, LLC. As a business executive in the Corporation's market area as well as previous experience as a director of a community banking institution, Mr. Deible is well qualified to serve as a director.
2018/2018
Mark A. Freemer
Chief Financial Officer for Varischetti Holdings, LP. Mr. Freemer is a certified public accountant. As a business executive in the Corporation's market area as well as his many years of service as a director of the Corporation and his public accounting experience, Mr. Freemer is well qualified to serve as a director.
2004/2004
William C. Marsh
Chairman, President and Chief Executive Officer of the Bank and the Corporation. Mr. Marsh is a certified public accountant. Mr. Marsh's positions as Chairman, President and Chief Executive Officer, his extensive involvement with and background in the banking industry and involvement in business and civic organizations in the communities that the Corporation operates, as well as his prior accounting background provide the Board valuable insight regarding the business and operations of the Corporation.
2006/2006
K-28
Directors Whose Terms Expire in 2023
Principal Occupation
Director Since
Name
Age
for Past Five Years
Bank/Corporation
James M. Crooks
Owner, F.L. Crooks Clothing Company, Inc. As a business owner in the Corporation's market area as well as his many years of service as a director of the Corporation, Mr. Crooks is well qualified to serve as a director.
2004/2004
Robert W. Freeman
Partner, Beaconfield Consulting Group, LLC. Based on Mr. Freeman's past employment experiences and financial and technological background, he is well qualified to serve as a director.
2015/2015
Steven J. Hunter
Managing Director of TM Capital Corp. He previously served as Managing Director of Greene Holcomb Fisher and Morgan Keegan. Based on Mr. Hunter's past employment experiences and extensive background in finance and investment banking, he is well qualified to serve as a director.
2021/2021
John B. Mason
Retired, former President, H. B. Beels & Son, Inc. As a former business owner in the Corporation's market area as well as his many years of service as a director of the Corporation, Mr. Mason is well qualified to serve as a director.
1985/1989
Directors Whose Terms Expire in 2024
Principal Occupation
Director Since
Name
Age
for Past Five Years
Bank/Corporation
Milissa S. Bauer
Executive Vice President of Kriebel Companies and President of Z Train Corporation. As a business executive in the Corporation's market area as well as extensive involvement with various business and civic organizations in the communities that the Corporation operates, Ms. Bauer is well qualified to serve as a director.
2015/2015
Henry H. Deible
Former President and Chief Executive Officer of Community First Bancorp, Inc., Owner of Northern Horizons, LLC and Owner/Partner of Forestland Investments, LLC and Sustainable Forestry Consultants, LLC. As a business executive in the Corporation's market area and with his extensive prior service in community banking, Mr. Deible provides the Board with valuable knowledge and experience and is well qualified to serve as a director.
2018/2018
Deanna K. McCarrier
Owner, McCarrier, CPAs. Ms. McCarrier is a certified public accountant. As a business owner in the Corporation's market area as well as involvement with various business and civic organizations in the communities that the Corporation operates, Ms. McCarrier is well qualified to serve as a director.
2016/2016
Nicholas D. Varischetti
Attorney with Burns White and Partner in Varischetti Holdings, LP and Allegheny Strategy Partners. Based on Mr. Varischetti's legal background, business ownership within the Corporation's market area and involvement with various business and civic organizations, he is well qualified to serve as a director.
2015/2015
K-29
Board Leadership Structure and Risk Oversight
Board Leadership Structure. Since the Corporation was founded in 1989, the Corporation has employed a traditional board leadership model, with our Chief Executive Officer also serving as Chairman of our Board of Directors. We believe this traditional leadership structure benefits the Corporation. A combined Chairman and Chief Executive Officer role helps provide strong, unified leadership for our management team and Board of Directors. William C. Marsh has served as our Chairman and Chief Executive Officer since January 1, 2009. Prior to becoming Chairman and Chief Executive Officer, Mr. Marsh served as Executive Vice President and Chief Financial Officer of the Corporation beginning in 2006. Our Board of Directors is currently comprised of twelve directors of which eleven, or a majority, are independent directors. The board has three standing committees with separate chairs-the audit, executive and human resources committees. The audit committee and human resources committee are led by independent directors and our executive committee is comprised of a majority of independent directors. We do not have a lead independent director position. The Board has reviewed our Corporation’s current Board leadership structure in light of the composition of the Board, the Corporation’s size, the nature of the Corporation’s business, the regulatory framework under which the Corporation operates, the Corporation’s shareholder base, the Corporation’s peer group and other relevant factors, and has determined that a combined Chairman and Chief Executive Officer position, is currently the most appropriate Board leadership structure for our Corporation. The Board noted the following factors in reaching its determination:
•
The Board acts efficiently and effectively under its current structure, where the Chief Executive Officer also acts as Chairman.
•
A combined Chairman and Chief Executive Officer is in the best position to be aware of major issues facing the Corporation on a day-to-day and long-term basis, and is in the best position to identify key risks and developments facing the Corporation to be brought to the Board’s attention.
•
A combined Chairman and Chief Executive Officer position eliminates the potential for confusion and duplication of efforts, including among employees.
•
A combined Chairman and Chief Executive Officer position eliminates the potential for confusion as to who leads the Corporation, providing the Corporation with a single public “face” in dealing with shareholders, employees, regulators, analysts and other constituencies.
Risk Oversight. The Board’s role in the Corporation’s risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the Corporation, including operational, financial, legal and regulatory, and strategic and reputational risks. The full Board (or the appropriate committee in the case of risks that are under the purview of a particular committee) receives these reports from the appropriate “risk owner” within the organization to enable it to understand our risk identification, risk management and risk mitigation strategies. When a committee receives the report, the Chairman of the relevant committee reports on the discussion to the full Board during the next Board meeting. This enables the Board and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
Directors Attendance at Annual Meetings
Although we do not have a formal policy regarding attendance by members of the Board of Directors at annual meetings of shareholders, all directors are expected to attend the Corporation’s annual meeting of shareholders. All twelve directors of the Corporation at the time attended the Corporation’s 2021 annual meeting of shareholders.
Committees and Meetings of the Corporation and the Bank
During 2021, the Board of Directors of the Corporation held eight regular meetings and seven special meetings, and the Board of Directors of the Bank held 13 regular meetings. Each of the directors attended at least seventy-five percent (75%) of the combined total number of meetings of the Corporation’s Board of Directors and of the committees on which they serve.
Membership on Certain Board Committees. The Board of Directors of the Corporation has established an audit committee, executive committee, human resources committee and a nominating and corporate governance committee. The human resources committee functions as the Corporation’s compensation committee.
The following table sets forth the membership of such committees as of the date of this annual report.
Nominating
Human
and Corporate
Directors
Audit
Executive
Resources
Governance
Milissa S. Bauer
**
*
David L. Cox
*
*
James M. Crooks
*
Henry H. Deible
*
*
*
Henry H. Deible II
Robert W. Freeman
*
*
Mark A. Freemer
*
*
*
**
Steven J. Hunter
*
*
William C. Marsh
**
John B. Mason
*
*
*
Deanna C. McCarrier
*
*
**
Nicholas D. Varischetti
*
*
*
*
Member
**
Chairman
K-30
Audit Committee. The audit committee of the Board is composed of seven members and operates under a written charter adopted by the Board of Directors. During 2021, the audit committee consisted of Directors Bauer (Chairman), Crooks, Deible, Freemer, Hunter, McCarrier and Varischetti. The Board of Directors has identified Milissa S. Bauer as an audit committee financial expert. The audit committee met four times in 2021. The Board of Directors has determined that each committee member is “independent,” as defined by Corporation policy, SEC rules and the NASDAQ listing standards.
The audit committee charter adopted by the Board sets forth the responsibilities, authority and specific duties of the audit committee. The full text of the audit committee charter is available on our website at www.emclairefinancial.com. Pursuant to the charter, the audit committee has the following responsibilities:
•
To monitor the preparation of quarterly and annual financial reports;
•
To review the adequacy of internal control systems and financial reporting procedures with management and independent auditors; and
•
To review the general scope of the annual audit and the fees charged by the independent auditors.
Human Resources Committee. The human resources committee of the Board functions as the compensation committee and has the responsibility to evaluate the performance of and determine the compensation for the Chairman of the Board, President and Chief Executive Officer of the Corporation, to approve the compensation structure for senior management and the members of the Board of Directors, to review the Corporation’s salary administration program and to review and administer the Corporation’s bonus plans, including the management incentive program.
The human resources committee, which is currently composed entirely of independent directors, administers the Corporation’s executive compensation program. In 2021, the members of the human resources committee consisted of Directors McCarrier (Chairman), Deible, Freeman, Freemer, Hunter, Mason and Varischetti. All of the members meet all of the independence requirements under the listing requirements of the NASDAQ Stock Market.
The human resources committee is committed to high standards of corporate governance. The human resources committee’s charter reflects the foregoing responsibilities and commitment, and the human resources committee and the Board will periodically review and revise the charter, as appropriate. The full text of the human resources committee charter is available on our website at www.emclairefinancial.com. The human resources committee’s membership is determined by the Board. There were four meetings of the full human resources committee in 2021.
The human resources committee has exercised exclusive authority over the compensation paid to the Corporation’s Chairman of the Board, President and Chief Executive Officer and reviews and approves salary increases and bonuses for the Corporation’s other executive officers as prepared and submitted to the human resources committee by the Chairman of the Board, President and Chief Executive Officer. Although the human resources committee does not delegate any of its authority for determining executive compensation, the human resources committee has the authority under its charter to engage the services of outside advisors, experts and others to assist the human resources committee.
Nominating and Corporate Governance Committee. The Corporation has established a nominating and corporate governance committee to identify and recommend to the full Board of Directors the selection of qualified individuals to serve as Board members, recommend to the full Board director nominees for each annual meeting of shareholders, review existing corporate governance documents, establish corporate governance principles applicable to the Corporation and to govern the conduct of the Board and its members, and review nominations for director submitted by shareholders. During 2021, the members of this committee were Directors Mark Freemer (Chairman), Cox, Deible, Mason and Varischetti. Each of these persons is independent within the meaning of the rules of the NASDAQ Stock Market. The nominating and corporate governance committee operates pursuant to a written charter, which can be viewed on our website at www.emclairefinancial.com. The nominating and corporate governance committee met one time in connection with the nomination for the election of directors.
The nominating and corporate governance committee considers candidates for director suggested by its members and other directors, as well as management and shareholders. The nominating and corporate governance committee also may solicit prospective nominees. The committee will also consider whether to nominate any person nominated pursuant to the provision of our bylaws relating to shareholder nominations. The nominating and corporate governance committee has the authority and ability to retain a search firm to identify or evaluate potential nominees if it so desires.
The charter of the nominating and corporate governance committee sets forth certain criteria the committee may consider when recommending individuals for nomination as director including: (a) ensuring that the Board of Directors, as a whole, is diverse and consists of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise (including expertise that could qualify a director as a “financial expert,” as that term is defined by the rules of the SEC), local or community ties and (b) minimum individual qualifications, including strength of character, mature judgment, familiarity with our business and industry, independence of thought and an ability to work collegially. The committee also may consider the extent to which the candidate would fill a present need on the Board of Directors.
Once the nominating and corporate governance committee has identified a prospective nominee, the committee makes an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on whatever information is provided to the committee with the recommendation of the prospective candidate, as well as the committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others.
Section 10.1 of our bylaws governs shareholder nominations for election to the Board of Directors and requires all nominations for election to the Board of Directors by a shareholder to be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholders’ notice must be received by the Corporation no later than 60 days prior to the annual meeting called for the election of directors. Each written notice of a shareholder nomination must set forth certain information specified in the bylaws. Any nomination of any person not made in compliance with the procedures set forth in the bylaws shall be disregarded by the presiding officer of the meeting and any votes for such nominee shall be disregarded.
K-31
Executive Officers Who are Not Directors
Set forth below is information with respect to the principal occupations during at least the last five years for the current executive officers of the Corporation who do not serve as directors. All executive officers of the Corporation are elected annually by the Board of Directors and serve at the discretion of the Board. There are no arrangements or understandings between the executive officers and the Corporation and any person pursuant to which such persons have been selected officers. Ages are reflected as of December 31, 2021.
Jennifer A. Poulsen, age 52. Ms. Poulsen is Secretary of the Corporation and Senior Vice President and Chief Operating Officer of the Bank. Ms. Poulsen was appointed Assistant Secretary in 2018 and has served in her role at the Bank since October 2011.
Amanda L. Engles, age 43. Ms. Engles is Treasurer and Chief Financial Officer of the Corporation and Senior Vice President and Chief Financial Officer of the Bank, positions she has held since July 2017. Ms. Engles previously served as Principal Accounting Officer and Secretary of the Corporation as well as Vice President and Controller of the Bank since October 2007. She previously served as Treasurer of the Corporation from October 2007 through August 2010.
Robert A. Vernick, age 55. Mr. Vernick is Senior Vice President and Chief Lending Officer of the Bank, a position he has held since July 2012.
Eric J. Gantz, age 35. Mr. Gantz is Senior Vice President and Chief Credit Officer of the Bank, a position he has held since April 2019. Mr. Gantz previously served as Vice President and Senior Credit Officer from September 2018 through April 2019, Assistant Vice President and Senior Risk Analyst from September 2017 through September 2018 and Assistant Vice President and Senior Credit Analyst from August 2014 through September 2017.
Section 16(a) Beneficial Ownership Reporting Compliance. The Corporation’s common stock is registered pursuant to Section 12(b) of the 1934 Act. The officers and directors of the Corporation and beneficial owners of greater than 10% of the common stock are required to file reports on Forms 3, 4, and 5 with the SEC disclosing changes in beneficial ownership of the common stock. Based on the Corporation’s review of such ownership reports, to the Corporation’s knowledge, no executive officer, director, or 10% beneficial owner of the Corporation failed to file such ownership reports on a timely basis for the fiscal year ended December 31, 2021, except that Nicholas D. Varischetti, a director, filed late two Form 4's with respect to the purchase of 500 shares of common stock in June 2020 and 360 shares of common stock in June 2020.
The Corporation maintains a Code of Personal and Business Conduct and Ethics (the Code) that applies to all employees, including the CEO and the CFO. A copy of the Code has previously been filed with the SEC and is posted on our website at www.emclairefinancial.com. Any waiver of the Code with respect to the CEO and the CFO will be publicly disclosed in accordance with applicable regulations.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Summary Compensation Table. The following table sets forth a summary of certain information concerning the compensation awarded to or paid by the Corporation or its subsidiaries for services rendered in all capacities during the past two years to our principal executive officer as well as our two other highest compensated executive officers in 2021 (who we refer to as “named executive officers”).
Non-equity
All
Stock
Incentive Plan
Other
Name and Principal Position
Year
Salary
Awards (1)
Compensation (2)
Compensation (3)
Total
William C. Marsh, Chairman,
$ 417,857
$ 144,800
$ 125,522
$ 24,136
$ 712,315
President and Chief Executive Officer
417,857
122,400
48,939
19,757
608,954
Jennifer A. Poulsen, Senior Vice President,
194,151
28,960
38,881
13,970
275,962
Secretary and Chief Operating Officer
194,151
12,240
15,159
11,774
233,324
Amanda L. Engles, Senior Vice President,
179,928
28,960
36,033
13,145
258,066
Treasurer and Chief Financial Officer
160,650
18,360
12,544
10,494
202,048
(1) Reflects the grant date fair value, computed in accordance with FASB ASC Topic 718, for stock awards granted in 2021 and 2020 pursuant to the Stock Incentive Plans adopted in 2014 and 2021. For a description of the assumptions used for purposes of determining grant date fair value, see Note 14 to the Financial Statements.
(2) Amounts presented for a fiscal year were paid in the next year for performance pursuant to the Corporation's Incentive Compensation Plan.
(3) Includes matching amounts and discretionary profit sharing contributions made under the Corporation’s 401(k) plan for all the named executive officers.
Outside Compensation Consultants. Periodically, the Corporation retains a compensation consulting firm to review its compensation structure. The Corporation retained McLagan Partners, Inc. in 2021 and 2020 to assist the human resources committee in setting compensation levels. The human resources committee considered the consultants to be independent and concluded that the consultants had no conflicts of interest with respect to the engagements. The consultants' reviewed the Corporation’s compensation practices and compared them with compensation practices of institutions similar in size and performance to the Corporation. The human resources committee considered the consultants' reviews of compensation levels in establishing the compensation amounts of the Corporation’s President and Chief Executive Officer and Board of Directors.
K-32
Pension Plan. The Bank previously maintained a defined benefit pension plan for all eligible employees which was frozen in 2013. An employee became vested in the plan after three years. Upon retirement at age 65, a terminated participant is entitled to receive a monthly benefit. Prior to a 2002 amendment to the plan, the benefit formula was 1.1% of average monthly compensation plus 0.4% of average monthly compensation in excess of $675 multiplied by years of service. In 2002, the plan was amended to change the benefit structure to a cash balance formula under which the benefit payable is the actuarial equivalent of the hypothetical account balance at normal retirement age. However, the benefits already accrued by the employees prior to the amendment were not reduced. In addition, the prior benefit formula continued through December 31, 2012, as a minimum benefit. The Bank amended the defined benefit pension plan to freeze the benefits under the plan effective as of April 30, 2013, with no additional benefits to accrue after such date.
401(k) Plan. The Corporation maintains a defined contribution 401(k) plan. Employees are eligible to participate by providing tax-deferred contributions up to 20% of qualified compensation. Employee contributions are vested at all times. The Corporation provides a matching contribution of up to 4% of the participant’s salary, which vests after three years. The Corporation may also make, at the sole discretion of its Board of Directors, a profit sharing contribution.
Supplemental Retirement Agreements. The Bank maintains Supplemental Executive Retirement Plan Agreements (the “SERPs”) with William C. Marsh, Chairman, President and Chief Executive Officer of the Corporation and the Bank, Jennifer A. Poulsen, Secretary of the Corporation and Senior Vice President and Chief Operating Officer of the Bank and Amanda L. Engles, Treaurer and Chief Financial Officer of the Corporation and Senior Vice President and Chief Financial Officer of the Bank, as well as other officers. The SERPs are periodically amended to conform to the current salary levels of the officers.
The SERPs are non-qualified defined benefit plans and are unfunded. The SERPs have no assets, and the benefits payable under the SERPs are not secured. The SERP participants are general creditors of the Bank in regards to their vested SERP benefits. The SERPs provide for retirement benefits upon reaching age 65, and the participants become vested in their benefits up until their normal retirement age. Upon attaining normal retirement age, Mr. Marsh, Ms. Poulsen and Ms. Engles would be entitled to receive an annual payment of $110,000, $56,500 and $45,000, respectively, payable in equal monthly installments each year for a 20-year period under the SERPs, as amended.
Each of the SERPs provide that in the event of a change in control of the Corporation or the Bank (as defined in the agreements), the executive will receive their supplemental retirement benefits in a lump sum payment if the change in control occurs before the executive’s employment is terminated and before the executive reaches normal retirement age. If a change in control had occurred on December 31, 2021, Mr. Marsh, Ms. Poulsen and Ms. Engles would have been entitled to lump sum payments of $988,098, $431,558 and $58,404, respectively. Such payments could be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code, as amended.
The SERPs prohibit the executives from competing against the Bank or soliciting customers or employees of the Bank for a period of three years following a termination of employment if such termination occurs prior to a change in control. If the executives are still employed at the time of a change in control, the SERPs impose non-compete and non-solicitation provisions on Ms. Poulsen and Ms. Engles for a period of six months following the change in control. An existing employment agreement imposes non-compete and non-solicitation provisions on Mr. Marsh for a period of 12 months following a change in control.
Employment and Change in Control Agreements. The Corporation and the Bank maintain an employment agreement with William C. Marsh to serve as Chairman, President and Chief Executive Officer. The current term of the agreement expires on December 31, 2024 and will renew for successive one-year periods each January 1 unless notice to the contrary is provided at least 30 days prior to the renewal. The agreement also provides that if the executive is terminated by the Corporation or the Bank for other than cause, disability, retirement or the executive’s death or the executive terminates employment for good reason (as defined in the agreement) after a change in control of the Corporation or the Bank, then Mr. Marsh will be entitled to the payment of a lump sum cash severance amount equal to three times his average annual compensation (as defined in the agreement) during the five calendar years preceding the year of termination, the continuation of his insurance benefits for up to 36 months and a lump sum cash payment equal to the projected cost of providing certain other benefits for 36 months, provided that such payments will be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code as amended. The employment agreement imposes non-compete and non-solicitation provisions on Mr. Marsh for a period of 18 months if his employment is terminated prior to a change in control and for a period of 12 months if his employment is terminated concurrently with or following a change in control.
The Corporation and the Bank maintain change in control agreements with Jennifer A. Poulsen and Amanda L. Engles. The change in control agreements currently expire on December 31, 2023, and the term will renew for successive one-year periods each January 1 unless notice to the contrary is provided at least 30 days prior to the renewal. If a change in control occurs during the term of the agreements at a time when there is less than one year remaining in the term, then the remaining term of the agreements will be automatically extended until the one-year anniversary of the completion of the change in control.
The change in control agreements for Ms. Poulsen and Ms. Engles provide that if the executive is terminated by the Corporation or the Bank (or any successor) within 24 months subsequent to a change in control of the Corporation or the Bank for other than cause, disability, retirement or the executive’s death or the executive terminates employment for good reason (as defined in the agreement) after a change in control of the Corporation or the Bank, then the executive will be entitled to the payment of a lump sum cash severance amount equal to two times the executive’s highest annual compensation (as defined in the agreement) during the year of termination (determined on an annual basis) or either of the two preceding calendar years, the continuation of the executive’s insurance benefits for up to 24 months and a lump sum cash payment equal to the projected cost of providing certain other benefits for 24 months, provided that such payments will be limited if they are deemed “parachute payments” under Section 280G of the Internal Revenue Code as amended. The Corporation and the Bank have entered into similar change in control agreements with other officers.
K-33
Outstanding Equity Awards at Fiscal Year-End. The following tables set forth, with respect to the executive officers named in the Summary Compensation Table, information with respect to the number of restricted stock awards held as of December 31, 2021. All awards were granted pursuant to the Corporation’s 2014 or 2021 Stock Incentive Plans.
Stock Awards
Name
Number of Shares of Stock Not Vested
Market Value of Shares of Stock Not Vested (1)
Vesting Date
William C. Marsh
4,100
$ 118,490
12/06/2022
William C. Marsh
5,000
144,500
12/11/2023
William C. Marsh
5,000
144,500
12/10/2024
Jennifer A. Poulsen
1,500
43,350
12/06/2022
Jennifer A. Poulsen
14,450
12/11/2023
Jennifer A. Poulsen
1,000
28,900
12/10/2024
Amanda L. Engles
1,500
43,350
12/06/2022
Amanda L. Engles
21,675
12/11/2023
Amanda L. Engles
1,000
28,900
12/10/2024
(1) Based upon the fair market value of a share of common stock of the Corporation as of December 31, 2021.
Group Term Carve-Out Plan. The Bank has a Group Term Carve-Out Plan (the "Carve-Out Plan"), pursuant to which the Bank owns a life insurance policy on each participant's life and will provide a portion of the death proceeds to the participant's beneficiary following the participant's death. Mr. Marsh, Ms. Poulsen, Ms. Engles and various other officers of the Bank participate in the Carve-Out Plan. The Bank owns the life insurance policies and pays the premiums on the policies. If a participant dies while employed by the Bank and prior to a change in control, the participant's beneficiary will be entitled to a benefit equal to 2.5 times the deceased participant's annual base salary at the date of death, but not in excess of a maximum benefit equal to the net death proceeds, which is the total death benefit less the cash value of the endorsed policies. If Mr. Marsh, Ms. Poulsen and Ms. Engles had died at December 31, 2021, their beneficiaries would have received a death benefit of $941,561, $435,377 and $399,820, respectively.
A participant's continued participation in the Carve-Out Plan is at the Bank's discretion; provided, however, if the participant is employed by the Bank on the date of a change in control, then the participant shall continue participation in the plan until the earlier of (i) the participant's waiver of his or her rights in the plan, or (ii) the participant's death. If a participant dies after a change in control, the participant's beneficiary shall be entitle to a benefit equal to 1.5 times the deceased participant's annual base salary at the earlier of (a) the date of death or (b) the date the participant's employment was terminated.
The payments and benefits pursuant to the Carve-Out Plan could be limited if they are deemed "parachute payments" under Section 280G of the Internal Revenue Code, as amended.
Director Compensation. During 2021, directors received $1,750 per month for their services as a director of the Bank and $750 for attendance at board meetings. The Chairmen of each committee received an additional $200 per month for their services as Committee Chairmen. No additional compensation is paid for service as a director of the Corporation. In addition, non-employee directors received $400 for each Bank committee meeting that they attended during 2021.
The following table sets forth information concerning compensation paid or accrued by the Corporation and the Bank to each member of the Board of Directors with the exception of named executive officers reported within the Summary Compensation Table during the year ended December 31, 2021.
Fees Earned
Stock
All Other
Name
or Paid in Cash
Awards (1)
Compensation (2)
Total
Milissa S. Bauer
$ 44,550
$ 21,720
$ -
$ 66,270
David L. Cox
44,950
21,720
26,000
92,670
James M. Crooks
44,550
21,720
-
66,270
Henry H. Deible
35,800
21,720
12,000
69,520
Henry H. Deible II
40,600
21,720
-
62,320
Robert W. Freeman
39,750
21,720
-
61,470
Mark A. Freemer
41,350
21,720
-
63,070
Steven J. Hunter
36,950
21,720
-
58,670
John B. Mason
45,000
21,720
-
66,720
Deanna K. McCarrier
40,950
21,720
-
62,670
Nicholas D. Varischetti
37,000
21,720
-
58,720
(1) Reflects the grant date fair value, computed in accordance with FASB ASC Topic 718, for stock awards granted in 2021 pursuant to the 2021 Stock Incentive Plan adopted in 2021. For a description of the assumptions used for purposes of determining grant date fair value, see Note 14 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Each director except Mr. Hunter has a total of 2,100 stock awards of which 600 vest on December 6, 2022, 750 vest on December 11, 2023 and 750 vest of December 10, 2024. Mr. Hunter has 750 stock awards which vest on December 10, 2024.
(2) Reflects amounts distributed under the Corporation’s Supplemental Retirement Agreement for Directors Cox and Deible.
K-34

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Beneficial Owners of the Corporation's Common Stock. Persons and groups owning in excess of 5% of the common stock are required to file certain reports regarding such ownership pursuant to the Securities Exchange Act of 1934, as amended (the “1934 Act”). The following table sets forth, as of March 1, 2022, certain information as to the common stock beneficially owned by (i) persons or groups who own more than 5% of the common stock, (ii) the directors of the Corporation, (iii) certain executive officers of the Corporation included in the Summary Compensation Table (which we refer to as “named executive officers”), and (iv) all directors and executive officers of the Corporation as a group. Management knows of no person or group that owned more than 5% of the outstanding shares of common stock at the voting record date.
Name
Amount and Nature of Beneficial Ownership(1)
Percent of Outstanding Common Stock Beneficially Owned
Directors:
Henry H. Deible
74,620
(2)
2.73%
Nicholas D. Varischetti
68,154
2.49%
Robert W. Freeman
65,271
(3)
2.39%
William C. Marsh
63,372
(4)
2.32%
John B. Mason
41,042
1.50%
Milissa S. Bauer
38,747
(5)
1.42%
James M. Crooks
30,029
(6)
1.10%
Mark A. Freemer
24,500
*
Deanna K. McCarrier
23,708
*
David L. Cox
20,830
(7)
*
Henry H. Deible II
*
Steven J. Hunter
*
Named Executive Officers:
Jennifer A. Poulsen
7,605
(8)
*
Amanda L. Engles
4,641
(9)
*
All directors and executive officers as a group (16 persons)
469,292
(10)
17.16%
* Represents less than 1% of the outstanding common stock.
(1) Based upon information provided by the respective beneficial owners and filings with the Securities and Exchange Commission (“SEC”) made pursuant to the 1934 Act. For purposes of this table, pursuant to rules promulgated under the 1934 Act, a person or entity is considered to beneficially own shares of common stock if they directly or indirectly have or share (1) voting power, which includes the power to vote or to direct the voting of the shares, or (2) investment power, which includes the power to dispose or direct the disposition of the shares. Unless otherwise indicated, a person or entity has sole voting power and sole investment power with respect to the indicated shares.
(2) Of the 74,620 shares beneficially owned by Mr. Deible, 34,254 shares are owned jointly with his spouse and 7,165 shares are held by an entity owned and controlled by Mr. Deible.
(3) Of the 65,271 shares beneficially owned by Mr. Freeman, 1,833 shares are owned individually by his spouse.
(4) Of the 63,115 shares beneficially owned by Mr. Marsh, 4,972 shares are held in the Corporation's 401(k) Plan.
(5) Of the 38,747 shares beneficially owned by Ms. Bauer, 6,306 shares are owned jointly with her spouse, 14,123 shares are owned individually by her spouse and 100 shares are owned individually by her son.
(6) Of the 30,029 shares beneficially owned by Mr. Crooks, 3,273 shares are owned jointly with his spouse and 635 shares are owned individually by his spouse.
(7) Of the 20,830 shares beneficially owned by Mr. Cox, 19,330 are owned jointly with his spouse and 500 shares are owned individually by his spouse.
(8) Of the 7,570 shares beneficially owned by Ms. Poulsen, 2,615 shares are held in the Corporation's 401(k) Plan.
(9) Of the 4,559 shares beneficially owned by Ms. Engles, 3,141 shares are held in the Corporation's 401(k) Plan.
(10) Of the 468,776 shares beneficially owned by all directors and officers as a group, 13,948 shares are held in the Corporation's 401(k) Plan.
K-35
Equity Compensation Plan Information. The following table provides certain information as of December 31, 2021 with respect to shares of common stock that may be issued under our 2014 and 2021 Stock Incentive Plans, which were approved by shareholders in April 2014 and April 2021, respectively.
Plan Category
Number of securities to be issued upon exercise of outstanding options
Weighted-average exercise price of outstanding options
Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in the first column) (1)
Equity compensation plans approved by security holders
-
$ -
281,057
Equity compensation plans not approved by security holders
-
-
-
Total
-
$ -
281,057
(1) The 2014 Stock Incentive Plan provides for the grant of options to purchase up to 88,433 shares of common stock and for grants of up to 88,433 shares of restricted common stock of which no options and 88,400 shares of restricted stock have been granted at December 31, 2021. The 2021 Stock Incentive Plan provides for the grant of restricted common stock and options for up to 204,091 shares of common stock of which no options and 11,950 shares of restricted stock have been granted at December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Transactions. Other than as set forth below, there have been no material transactions, proposed or consummated, between the Corporation and the Bank with any director or executive officer of the Corporation or the Bank, or any associate of the foregoing persons.
The Bank, like many financial institutions, has followed a written policy of granting various types of loans to officers, directors, and employees and under such policy grants a discount of 100 basis points on loans extended to all employees, including executive officers. With the exception of such policy, all loans to executive officers and directors of the Corporation and the Bank have been made in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Bank, and do not involve more than the normal risk of collectibility nor present other unfavorable features. All such loans are approved by the Board of Directors.
The following table presents a summary of loans in excess of $120,000 with preferential pricing (100 basis point discount) extended by the Bank to any of the Corporation’s directors, executive officers or immediate family members of such individuals. In addition, the Corporation had two directors and one executive officer whose loans totaled more than $120,000 at December 31, 2021, however in these instances the loans made with preferential pricing did not exceed $120,000.
Year
Highest Principal Balance
Balance
Amount Paid During Year
Interest
Name and Position
Type
Made
During Year
12/31/21
Principal
Interest
Rate
David L. Cox, Director
Residential Mortgage
$133,284
$0
$133,284
$1,324
2.88%
A majority of the members of our Board of Directors are independent based on an assessment of each member’s qualifications by the Board, taking into consideration the NASDAQ Stock Market’s requirements for independence. The Board of Directors has concluded that Directors Bauer, Cox, Crooks, Deible, Deible II, Freeman, Freemer, Hunter, Mason, McCarrier and Varischetti do not have any material relationships with the Corporation that would impair their independence.
K-36

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
General. The audit committee of the Board of Directors has appointed BKD, LLP, Certified Public Accountants, Fort Wayne, Indiana (PCAOB Firm ID: 686) as the independent registered public accounting firm to audit the Corporation’s financial statements for the year ending December 31, 2021. In addition to performing customary audit services related to the audit of the Corporation’s financial statements, BKD will perform required retirement plan audits. Crowe LLP audited the Corporation's financial statements for the year ending December 31, 2020.
The audit committee selects the Corporation’s independent registered public accounting firm and separately pre-approves all audit services to be provided by it to the Corporation. The audit committee also reviews and separately pre-approves all audit-related, tax and all other services rendered by our independent registered public accounting firm in accordance with the audit committee’s charter and policy on pre-approval of audit-related, tax and other services. In its review of these services and related fees and terms, the audit committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm.
Auditor Fees. The following table sets forth the aggregate fees paid by us for professional services rendered in connection with the audit of the Corporation’s consolidated financial statements for 2021 and 2020, as well as the fees paid for audit-related services, tax services and all other services rendered in 2021 and 2020. All auditor fees paid in relation to 2020 were paid to Crowe, LLP. Audit fees paid in relation to 2021 were paid to BKD, LLP. Audit-related fees for 2021 were partially paid to BKD, LLP and partially paid to Crowe LLP. All tax fees related to 2021 were paid to Crowe LLP.
Audit fees (1)
$ 115,350
$ 159,500
Audit-related fees (2)
30,069
26,000
Tax fees
33,057
24,763
Total
$ 178,476
$ 210,263
(1)
The audit fees include only fees that are customary under generally accepted auditing standards and are the aggregate fees the Corporation incurred for professional services rendered for the audit of the Corporation’s annual financial statements for fiscal years 2021 and 2020, and the reviews of the financial statements included in the Corporation’s Quarterly Reports on Forms 10-Q for fiscal years 2021 and 2020.
(2)
The audit-related fees include audits of the Corporation’s benefit plans for both years. In addition, 2021 audit-related fees include fees paid for services rendered associated with the Corporation's Form S-8 filing. These audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Corporation’s financial statements.
Report of the Audit Committee. In discharging its oversight responsibility, the audit committee has met and held discussions with management and BKD, the independent auditors for the Corporation. Management represented to the audit committee that all consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the audit committee has reviewed and discussed the consolidated financial statements with management and the independent auditors.
In addition, the audit committee has discussed with the independent auditors the auditors’ independence from management and the Corporation, and has received and discussed with the independent auditors the matters in the written disclosures required by the Independence Standards Board and as required under the Sarbanes-Oxley Act of 2002, including considering the permissibility of non-audit services with the auditors’ independence.
The audit committee also obtained from the independent auditors a formal written statement describing all relationships between the Corporation and BKD that bear on the auditors’ independence consistent with the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence. The audit committee discussed with the independent auditors any relationships that may impact the firm’s objectivity and independence and satisfied itself as to the auditors’ independence.
Based on these discussions and reviews, the audit committee recommended that the Board of Directors approve the inclusion of the Corporation’s audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2021, for filing with the SEC.
Respectfully submitted by the members of the audit committee of the Board of Directors:
Milissa S. Bauer, Chairman
James M. Crooks
Henry H. Deible
Mark A. Freemer
Steven J. Hunter
Deanna K. McCarrier
Nicholas D. Varischetti
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PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)(1)-(2)
Financial Statements and Schedules:
(i) The financial statements required in response to this item are incorporated by reference from Item 8 of this report.
(b)
Exhibits are either attached as part of this Report or incorporated herein by reference.
3.1
Amended and Restated Articles of Incorporation of Emclaire Financial Corp (1)
3.2
Bylaws of Emclaire Financial Corp (2)
4.1
Specimen Common Stock Certificate of Emclaire Financial Corp (3)
4.2
Description of Emclaire Common Stock (13)
10.1
Amended and Restated Employment Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and William C. Marsh, dated as of November 18, 2015 (4)*
10.2
Amended and Restated Change in Control Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and Jennifer A. Roxbury, dated as of November 18, 2015 (12)*
10.3
Amended and Restated Change in Control Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and Amanda L. Engles, dated as of November 15, 2017 (5)*
10.4
Amended and Restated Change in Control Agreement between Emclaire Financial Corp, The Farmers National Bank of Emlenton and Robert A. Vernick dated November 18, 2015 (12)*
10.5
Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and William C. Marsh, dated as of November 18, 2015 (4)*
10.6
Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Jennifer A. Roxbury, dated as of November 18, 2015 (6)*
10.7
Supplemental Executive Retirement Plan Agreement between the Farmers National Bank of Emlenton and Amanda L. Engles, dated as of November 15, 2017 (5)*
10.8
Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Robert A. Vernick dated November 18, 2015 (12)*
10.9
First Amendment dated as of February 8, 2019 to the Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and William C. Marsh, dated as of November 18, 2015 (6)*
10.10
First Amendment dated as of February 8, 2019 to the Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Jennifer A Roxbury, dated as of November 18, 2015 (6)*
10.11
First Amendment dated as of February 8, 2019 to the Amended and Restated Supplemental Executive Retirement Plan Agreement between The Farmers National Bank of Emlenton and Amanda L. Engles, dated as of November 15, 2017 (6)*
10.12
Group Term Carve-Out Plan between the Farmers National Bank of Emlenton and Officers and Employees (7)*
10.13
Emclaire Financial Corp 2014 Stock Incentive Plan (8)*
10.14
Emclaire Financial Corp 2021 Stock Incentive Plan (9)*
11.1
Statement regarding computation of earnings per share (see Note 1 of the Notes to Consolidated Financial Statements in the Annual Report).
14.0
Code of Personal and Business Conduct and Ethics. (10)
20.0
Emclaire Financial Corp Dividend Reinvestment and Stock Purchase Plan. (11)
21.0
Subsidiaries of the Registrant (see information contained herein under “Item 1. Description of Business - Subsidiary Activity”).
23.1
Consent of Crowe LLP
23.2
Consent of BKD, LLP
31.1
Principal Executive Officer Section 302 Certification.
31.2
Principal Financial Officer Section 302 Certification.
32.1
Principal Executive Officer Section 906 Certification.
32.2
Principal Financial Officer Section 906 Certification.
101.INS
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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*
Compensatory plan or arrangement.
(1)
Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated May 23, 2018.
(2)
Incorporated by reference to the Registrant’s Registration Statement on Form SB-2, as amended, (File No. 333-11773) declared effective by the SEC on October 25, 1996.
(3)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB40 for the year ended December 31, 1997.
(4)
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 18, 2015.
(5)
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 15, 2017.
(6)
Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 8, 2019.
(7)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2002.
(8) Incorporated by reference to the Registrant’s Definitive Proxy Statement dated March 24, 2014.
(9) Incorporated by reference to the Registrant's Definitive Proxy Statement dated March 19, 2021.
(10) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
(11) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSBfor the year ended December 31, 2001.
(12) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2019.
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