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EMCLAIRE FINANCIAL CORP - Quarter Report: 2019 March (Form 10-Q)

emcf20190331_10q.htm
 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2019

 

or

 

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

 

For the transition period from _____________ to _____________

 

Commission File Number: 001-34527

 

 

EMCLAIRE FINANCIAL CORP

(Exact name of registrant as specified in its charter)

 

Pennsylvania

25-1606091

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

 

612 Main Street, Emlenton, Pennsylvania

16373

(Address of principal executive offices)

(Zip Code)

 

(844) 767-2311

(Registrant’s telephone number)

 

N/A

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

 

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

 

Common Stock, par value $1.25 per share

EMCF

NASDAQ Capital Market (NASDAQ)

(Title of Class)

(Trading Symbol)

(Name of exchange on which registered)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒ No ☐

 

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

 

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

 

Large accelerated filer ☐                Accelerated filer ☐                      Non-accelerated filer ☐

Smaller reporting company ☒        Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐ No ☒

 

The number of shares outstanding of the Registrant’s common stock was 2,698,712 at May 10, 2019.

 


 

 

 

EMCLAIRE FINANCIAL CORP

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

  

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Interim Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

1

 

 

 

 

Consolidated Statements of Net Income for the three months ended March 31, 2019 and 2018

2

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

4

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

33

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Interim Financial Statements

 

 

Emclaire Financial Corp

Consolidated Balance Sheets (Unaudited)

As of March 31, 2019 and December 31, 2018

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

 

   

March 31,

2019

 

December 31,

2018

Assets

               

Cash and due from banks

  $ 2,999     $ 3,623  

Interest earning deposits with banks

    4,728       7,332  

Cash and cash equivalents

    7,727       10,955  
Interest earning time deposits     6,238       6,738  

Securities - available-for-sale

    98,992       97,718  

Securities - equity investments

    17       7  

Loans held for sale

    212        

Loans receivable, net of allowance for loan losses of $6,639 and $6,508

    700,352       708,664  

Federal bank stocks, at cost

    5,799       6,351  

Bank-owned life insurance

    14,976       14,881  

Accrued interest receivable

    2,735       2,570  

Premises and equipment, net

    20,709       18,911  

Goodwill

    19,448       19,448  

Core deposit intangible, net

    1,378       1,423  

Prepaid expenses and other assets

    11,060       11,209  

Total Assets

  $ 889,643     $ 898,875  

Liabilities and Stockholders' Equity

               

Liabilities:

               

Deposits:

               

Non-interest bearing

  $ 151,398     $ 148,893  

Interest bearing

    608,029       612,653  

Total deposits

    759,427       761,546  

Short-term borrowed funds

    3,050       12,850  

Long-term borrowed funds

    32,250       32,500  

Accrued interest payable

    603       495  

Accrued expenses and other liabilities

    12,224       11,476  

Total Liabilities

    807,554       818,867  

Commitments and Contingent Liabilities

           

Stockholders' Equity:

               
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 268,888 shares issued and outstanding; Series D, non-cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding     4,206       4,206  

Common stock, $1.25 par value, 12,000,000 shares authorized; 2,800,729 shares issued; 2,698,712 shares outstanding

    3,501       3,501  

Additional paid-in capital

    46,491       46,401  

Treasury stock, at cost; 102,017 shares

    (2,114 )     (2,114 )

Retained earnings

    35,489       34,371  

Accumulated other comprehensive loss

    (5,484 )     (6,357 )

Total Stockholders' Equity

    82,089       80,008  

Total Liabilities and Stockholders' Equity

  $ 889,643     $ 898,875  

 

See accompanying notes to consolidated financial statements.

 

 

 

Emclaire Financial Corp

Consolidated Statements of Net Income (Unaudited)

For the three months ended March 31, 2019 and 2018

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

 

   

For the three months ended
March 31,

   

2019

 

2018

Interest and dividend income:

               

Loans receivable, including fees

  $ 8,231     $ 6,337  

Securities:

               

Taxable

    492       408  

Exempt from federal income tax

    122       152  

Federal bank stocks

    100       64  

Interest earning deposits with banks

    47       33  

Total interest and dividend income

    8,992       6,994  

Interest expense:

               

Deposits

    1,471       991  

Borrowed funds

    301       158  

Total interest expense

    1,772       1,149  

Net interest income

    7,220       5,845  

Provision for loan losses

    180       380  

Net interest income after provision for loan losses

    7,040       5,465  

Noninterest income:

               

Fees and service charges

    555       437  

Net realized gain (loss) on sales of securities

    2       (7 )

Net gain on sales of loans

    14       22  

Earnings on bank-owned life insurance

    95       104  

Other

    391       343  

Total noninterest income

    1,057       899  

Noninterest expense:

               

Compensation and employee benefits

    2,917       2,453  

Premises and equipment

    886       770  

Intangible asset amortization

    46       69  

Professional fees

    221       216  

Federal deposit insurance

    136       137  

Other

    1,353       1,091  

Total noninterest expense

    5,559       4,736  

Income before provision for income taxes

    2,538       1,628  

Provision for income taxes

    456       266  

Net income

  $ 2,082     $ 1,362  

Basic earnings per common share

  $ 0.77     $ 0.60  

Diluted earnings per common share

    0.77       0.60  

Average common shares outstanding - basic

    2,698,712       2,271,139  

Average common shares outstanding - diluted

    2,712,418       2,285,315  

 

See accompanying notes to consolidated financial statements.

 

 

 

Emclaire Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

For the three months ended March 31, 2019 and 2018

(Dollar amounts in thousands)

 

   

For the three months ended
March 31,

   

2019

 

2018

Net income

  $ 2,082     $ 1,362  

Other comprehensive income

               

Unrealized gains/(losses) on securities available-for-sale:

               

Unrealized holding gain (loss) arising during the period

    1,106       (1,292 )

Reclassification adjustment for (gains) losses included in net income

    (2 )     7  
Net period change     1,104       (1,285 )

Tax effect

    (231 )     270  

Net of tax

    873       (1,015 )

Comprehensive income

  $ 2,955     $ 347  

 

See accompanying notes to consolidated financial statements.

 

 

 

Emclaire Financial Corp

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2019 and 2018

(Dollar amounts in thousands)

 

   

For the three months ended
March 31,

   

2019

 

2018

Cash flows from operating activities

               

Net income

  $ 2,082     $ 1,362  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization of premises and equipment

    325       294  

Provision for loan losses

    180       380  
Amortization/accretion of premiums, discounts and deferred costs and fees, net     24       120  
Amortization of operating lease right-of-use assets     33        

Amortization of intangible assets and mortgage servicing rights

    62       81  

Realized loss (gains) on sales of debt securities, net

    (2 )     7  
Change in fair value of equity securities, including realized (gains)/losses     (10 )     28  

Net gains on sales of loans

    (14 )     (22 )

Net loss on foreclosed real estate

    14       41  

Net gain on sale of premises and equipment

          (25 )

Loans originated for sale

    (724 )     (1,237 )

Proceeds from the sale of loans originated for sale

    526       1,524  
Write-down of foreclosed real estate     21        

Stock compensation expense

    90       75  

Increase in bank-owned life insurance, net

    (95 )     (84 )

Increase in accrued interest receivable

    (165 )     (19 )

Increase in prepaid expenses and other assets

    (1 )     (221 )

Increase (decrease) in accrued interest payable

    108       (46 )
Decrease in accrued expenses and other liabilities     (1,072 )     (407 )

Net cash provided by operating activities

    1,382       1,851  

Cash flows from investing activities

               
Loan originations and principal collections, net     7,846       (7,992 )

Available-for-sale securities:

               

Sales

    3,975       6,531  

Maturities, repayments and calls

    3,577       1,902  
Purchases     (7,740 )     (5,667 )

Net change in federal bank stocks

    552       333  
Maturities of interest earning time deposits     500       200  

Proceeds from the sale of bank premises and equipment

    190       155  

Purchases of premises and equipment

    (704 )     (195 )

Proceeds from the sale of foreclosed real estate

    146       129  

Net cash used in investing activities

    8,342       (4,604 )

Cash flows from financing activities

               

Net increase (decrease) in deposits

    (2,119 )     12,092  

Repayments on long-term debt

    (250 )     (5,250 )

Net change in short-term borrowings

    (9,800 )     (450 )

Dividends paid

    (783 )     (636 )

Net cash provided by financing activities

    (12,952 )     5,756  

Increase (decrease) in cash and cash equivalents

    (3,228 )     3,003  

Cash and cash equivalents at beginning of period

    10,955       10,176  

Cash and cash equivalents at end of period

  $ 7,727     $ 13,179  

Supplemental information:

               

Interest paid

  $ 1,664     $ 1,195  

Supplemental noncash disclosure:

               

Transfers from loans to foreclosed real estate

    283       498  
Initial recognition of operating lease right-of-use assets     1,642        

Initial recognition of operating lease liabilities

    1,858        

 

See accompanying notes to consolidated financial statements.

 

 

 

Emclaire Financial Corp

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the three months ended March 31, 2019 and 2018

(Dollar amounts in thousands, except per share data)

 

    Preferred Stock   Additional Paid-in Capital - Preferred  

Common Stock

  Additional Paid-in Capital - Common  

Treasury Stock

 

Retained Earnings

 

Accumulated Other Comprehensive Loss

 

Total Stockholders' Equity

Balance at January 1, 2018, as previously presented

  $     $     $ 2,966     $ 31,031     $ (2,114 )   $ 32,726     $ (5,518 )   $ 59,091  

Cumulative effect of change in accounting principle for marketable equity securities, net of tax

                                  187       (187 )      

Balance at January 1, 2018, as adjusted

  $     $     $ 2,966     $ 31,031     $ (2,114 )   $ 32,913     $ (5,705 )   $ 59,091  

Net income

                                  1,362             1,362  

Other comprehensive loss

                                        (1,015 )     (1,015 )

Stock compensation expense

                      75                         75  

Cash dividends declared on common stock ($0.28 per share)

                                  (636 )           (636 )

Balance at March 31, 2018

  $     $     $ 2,966     $ 31,106     $ (2,114 )   $ 33,639     $ (6,720 )   $ 58,877  
                                                                 

Balance at January 1, 2019, as previously presented

  $ 421     $ 3,785     $ 3,501     $ 46,401     $ (2,114 )   $ 34,371     $ (6,357 )   $ 80,008  

Cumulative effect of change in accounting principle for leases and security premiums, net of tax

                                  (181 )           (181 )

Balance at January 1, 2019, as adjusted

  $ 421     $ 3,785     $ 3,501     $ 46,401     $ (2,114 )   $ 34,190     $ (6,357 )   $ 79,827  

Net income

                                  2,082             2,082  

Other comprehensive income

                                        873       873  

Stock compensation expense

                      90                         90  

Cash dividends declared on common stock ($0.29 per share)

                                  (783 )           (783 )

Balance at March 31, 2019

  $ 421     $ 3,785     $ 3,501     $ 46,491     $ (2,114 )   $ 35,489     $ (5,484 )   $ 82,089  

 

See accompanying notes to consolidated financial statements.

 

 

Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

 

 

1.

Nature of Operations and Basis of Presentation

 

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

 

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

 

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2018, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

 

The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

 

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

 

 

 

2.

Earnings per Common Share

 

Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares for assumed issuance of restricted stock and shares issued under stock options.

 

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

 

(Dollar amounts in thousands, except for per share amounts)

 

For the three months ended
March 31,

   

2019

 

2018

Earnings per common share

               

Net income

  $ 2,082     $ 1,362  

Less: Preferred stock dividends

           

Net income available to common stockholders

  $ 2,082     $ 1,362  

Average common shares outstanding

    2,698,712       2,271,139  

Add: Dilutive effects of restricted stock awards

    13,706       14,176  

Average shares and dilutive potential common shares

    2,712,418       2,285,315  
Basic earnings per common share   $ 0.77     $ 0.60  
Diluted earnings per common share   $ 0.77     $ 0.60  

Restricted stock awards not considered in computing earnings per share because they were antidulitive

           

 

 

 

3.

Securities

 

Equity Securities

 

The Corporation held equity securities with fair values of $17,000 and $7,000 at March 31, 2019 and December 31, 2018, respectively. Beginning January 1, 2018, with the adoption of ASU 2016-01, changes in the fair value of these securities are included in other income on the consolidated statements of net income as opposed to accumulated other comprehensive loss on the consolidated balance sheets. During the three months ended March 31, 2019 and 2018, the Corporation recognized a gain of $10,000 and a loss of $5,000, respectively, on equity securities held at March 31. During the three month period ended March 31, 2019, the Corporation did not sell any equity securities.  During the three month period ended March 31, 2018, the Corporation sold $961,000 of equity securities with a realized net gain of $59,000.

 

Debt Securities - Available-for-Sale

 

The following table summarizes the Corporation’s debt securities as of March 31, 2019 and December 31, 2018:

 

(Dollar amounts in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

March 31, 2019:

                               

U.S. Treasury and federal agency

  $ 4,529     $     $ (57 )   $ 4,472  

U.S. government sponsored entities and agencies

    14,083       24       (164 )     13,943  

U.S. agency mortgage-backed securities: residential

    30,905       42       (142 )     30,805  

U.S. agency collateralized mortgage obligations: residential

    21,866       19       (613 )     21,272  

State and political subdivisions

    19,921       101       (15 )     20,007  

Corporate debt securities

    8,505       20       (32 )     8,493  
Total securities available-for-sale   $ 99,809     $ 206     $ (1,023 )   $ 98,992  
                                 

December 31, 2018:

                               

U.S. Treasury and federal agency

  $ 4,532     $     $ (87 )   $ 4,445  

U.S. government sponsored entities and agencies

    17,052       30       (299 )     16,783  

U.S. agency mortgage-backed securities: residential

    27,666             (490 )     27,176  

U.S. agency collateralized mortgage obligations: residential

    19,440       34       (810 )     18,664  

State and political subdivisions

    22,943       13       (224 )     22,732  

Corporate debt securities

    8,006       9       (97 )     7,918  
Total securities available-for-sale   $ 99,639     $ 86     $ (2,007 )   $ 97,718  

 

The following table summarizes scheduled maturities of the Corporation’s debt securities as of March 31, 2019. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

 

(Dollar amounts in thousands)

 

Available-for-sale

   

Amortized
Cost

 

Fair
Value

Due in one year or less

  $ 925     $ 922  

Due after one year through five years

    27,660       27,449  

Due after five through ten years

    16,716       16,786  

Due after ten years

    1,737       1,758  

Mortgage-backed securities: residential

    30,905       30,805  

Collateralized mortgage obligations: residential

    21,866       21,272  
Total securities available-for-sale   $ 99,809     $ 98,992  

 

 

3.

Securities (continued)

 

Information pertaining to debt securities with gross unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:

 

(Dollar amounts in thousands)

 

Less than 12 Months

 

12 Months or More

 

Total

Description of Securities

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

March 31, 2019:

                                               

U.S. Treasury and federal agency

  $     $     $ 4,472     $ (57 )   $ 4,472     $ (57 )

U.S. government sponsored entities and agencies

                10,434       (164 )     10,434       (164 )

U.S. agency mortgage-backed securities: residential

    3,922       (5 )     15,066       (137 )     18,988       (142 )

U.S. agency collateralized mortgage obligations: residential

    1,784       (14 )     16,392       (599 )     18,176       (613 )

State and political subdivisions

    794             1,959       (15 )     2,753       (15 )

Corporate debt securities

                2,973       (32 )     2,973       (32 )
Total   $ 6,500     $ (19 )   $ 51,296     $ (1,004 )   $ 57,796     $ (1,023 )
                                                 

December 31, 2018:

                                               

U.S. Treasury and federal agency

  $     $     $ 4,445     $ (87 )   $ 4,445     $ (87 )

U.S. government sponsored entities and agencies

    2,472       (30 )     10,337       (269 )     12,809       (299 )

U.S. agency mortgage-backed securities: residential

    19,483       (297 )     7,693       (193 )     27,176       (490 )

U.S. agency collateralized mortgage obligations: residential

    1,443       (5 )     15,388       (805 )     16,831       (810 )

State and political subdivisions

    7,061       (67 )     10,083       (157 )     17,144       (224 )

Corporate debt securities

    962       (38 )     2,448       (59 )     3,410       (97 )
Total   $ 31,421     $ (437 )   $ 50,394     $ (1,570 )   $ 81,815     $ (2,007 )

 

Gains and losses on sales of securities for the three months ended March 31 were as follows:

 

(Dollar amounts in thousands)

 

For the three months
ended March 31,

   

2019

 

2018

Proceeds

  $ 3,975     $ 6,531  
Gains     6       14  

Losses

    (4 )     (21 )

Tax provision related to losses

          (1 )

 

Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

 

There were 70 debt securities in an unrealized loss position as of March 31, 2019, of which 64 were in an unrealized loss position for more than 12 months. Of these 64 securities, 25 were collateralized mortgage obligations (issued by U.S. government sponsored entities), 11 were mortgage-backed securities, 10 were U.S. government sponsored entities and agency securities, seven were state and political subdivision securities, six were corporate securities and five were U.S. Treasury securities. The unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of its amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of March 31, 2019 to be other-than-temporarily impaired.

 

 

 

4.

Loans Receivable and Related Allowance for Loan Losses

 

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

 

(Dollar amounts in thousands)

 

March 31,

2019

 

December 31,

2018

                 

Mortgage loans on real estate:

               

Residential first mortgages

  $ 293,903     $ 295,405  

Home equity loans and lines of credit

    102,553       103,752  

Commercial real estate

    232,315       238,734  
Total real estate loans     628,771       637,891  

Other loans:

               

Commercial business

    67,317       66,009  

Consumer

    10,903       11,272  
Total other loans     78,220       77,281  

Total loans, gross

    706,991       715,172  

Less allowance for loan losses

    6,639       6,508  

Total loans, net

  $ 700,352     $ 708,664  

 

Included in total loans above are net deferred costs of $2.2 million and $2.2 million at March 31, 2019 and December 31, 2018, respectively.

 

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

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

 

The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

At March 31, 2019, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc (2018).

 

 

4.

Loans Receivable and Related Allowance for Loan Losses (continued)

 

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

 

(Dollar amounts in thousands)

 

Residential Mortgages

 

Home Equity

& Lines

of Credit

 

Commercial
Real Estate

 

Commercial Business

 

Consumer

 

Total

Three months ended March 31, 2019:

                                               

Allowance for loan losses:

                                               

Beginning Balance

  $ 2,198     $ 648     $ 3,106     $ 500     $ 56     $ 6,508  

Charge-offs

    (10 )     (4 )     (5 )     (71 )     (39 )     (129 )

Recoveries

    40       1       15             24       80  

Provision

    28       5       (73 )     206       14       180  

Ending Balance

  $ 2,256     $ 650     $ 3,043     $ 635     $ 55     $ 6,639  
                                                 

At March 31, 2019:

                                               

Ending ALL balance attributable to loans:

                                               

Individually evaluated for impairment

  $ 7     $     $     $ 63     $     $ 70  

Acquired loans collectively evaluated for impairment

                                   

Originated loans collectively evaluated for impairment

    2,249       650       3,043       572       55       6,569  

Total

  $ 2,256     $ 650     $ 3,043     $ 635     $ 55     $ 6,639  

Total loans:

                                               

Individually evaluated for impairment

  $ 380     $ 5     $ 32     $ 103     $     $ 520  

Acquired loans collectively evaluated for impairment

    70,981       13,131       54,151       10,258       2,900       151,421  

Originated loans collectively evaluated for impairment

    222,542       89,417       178,132       56,956       8,003       555,050  

Total

  $ 293,903     $ 102,553     $ 232,315     $ 67,317     $ 10,903     $ 706,991  
                                                 

At December 31, 2018:

                                               

Ending ALL balance attributable to loans:

                                               

Individually evaluated for impairment

  $ 12     $     $     $     $     $ 12  

Acquired loans collectively evaluated for impairment

                                   

Originated loans collectively evaluated for impairment

    2,186       648       3,106       500       56       6,496  

Total

  $ 2,198     $ 648     $ 3,106     $ 500     $ 56     $ 6,508  

Total loans:

                                               

Individually evaluated for impairment

  $ 389     $ 6     $ 34     $ 39     $     $ 468  

Acquired loans collectively evaluated for impairment

    72,654       13,750       56,690       12,974       3,306       159,374  

Originated loans collectively evaluated for impairment

    222,362       89,996       182,010       52,996       7,966       555,330  

Total

  $ 295,405     $ 103,752     $ 238,734     $ 66,009     $ 11,272     $ 715,172  
                                                 

Three months ended March 31, 2018:

                                               

Allowance for loan losses:

                                               

Beginning Balance

  $ 2,090     $ 646     $ 2,753     $ 585     $ 53     $ 6,127  

Charge-offs

    (62 )     (19 )     (385 )           (119 )     (585 )

Recoveries

    3       1       2       1       6       13  

Provision

    (112 )     23       381       (26 )     114       380  

Ending Balance

  $ 1,919     $ 651     $ 2,751     $ 560     $ 54     $ 5,935  

 

 

4.

Loans Receivable and Related Allowance for Loan Losses (continued)

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2019:

 

(Dollar amounts in thousands)

                                               
   

Impaired Loans with Specific Allowance

   

As of March 31, 2019

 

For the three months

ended March 31, 2019

   

Unpaid

Principal

Balance

 

Recorded

Investment

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest Income

Recognized

in Period

 

Cash Basis

Interest

Recognized

in Period

Residential first mortgages

  $ 73     $ 73     $ 7     $ 73     $ 1     $ 1  

Home equity and lines of credit

    5       5             6              

Commercial real estate

                                   

Commercial business

    63       63       63       31              

Consumer

                                   

Total

  $ 141     $ 141     $ 70     $ 110     $ 1     $ 1  

 

   

Impaired Loans with No Specific Allowance

   

As of March 31, 2019

 

For the three months

ended March 31, 2019

   

Unpaid

Principal

Balance

 

Recorded

Investment

 

Average

Recorded

Investment

 

Interest Income

Recognized in

Period

 

Cash Basis

Interest

Recognized

in Period

Residential first mortgages

  $ 382     $ 307     $ 311     $ 1     $ 1  

Home equity and lines of credit

                             

Commercial real estate

    32       32       33       1       1  

Commercial business

    40       40       39       1       1  

Consumer

                             

Total

  $ 454     $ 379     $ 383     $ 3     $ 3  

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2018:

 

(Dollar amounts in thousands)

                                               
   

Impaired Loans with Specific Allowance

   

As of December 31, 2018

 

For the year ended

December 31, 2018

   

Unpaid

Principal

Balance

 

Recorded

Investment

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest Income

Recognized

in Period

 

Cash Basis

Interest

Recognized

in Period

Residential first mortgages

  $ 74     $ 74     $ 12     $ 74     $ 2     $ 2  

Home equity and lines of credit

    6       6             7              

Commercial real estate

                                   

Commercial business

                                   

Consumer

                                   

Total

  $ 80     $ 80     $ 12     $ 81     $ 2     $ 2  

 

   

Impaired Loans with No Specific Allowance

   

As of December 31, 2018

 

For the year ended

December 31, 2018

   

Unpaid

Principal

Balance

 

Recorded

Investment

 

Average

Recorded

Investment

 

Interest Income

Recognized

in Period

 

Cash Basis

Interest

Recognized

in Period

Residential first mortgages

  $ 427     $ 315     $ 334     $ 5     $ 5  

Home equity and lines of credit

                             

Commercial real estate

    34       34       768       156       73  

Commercial business

    39       39       248       74       74  

Consumer

                             

Total

  $ 500     $ 388     $ 1,350     $ 235     $ 152  

 

 

4.

Loans Receivable and Related Allowance for Loan Losses (continued)

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2018:

 

(Dollar amounts in thousands)

                                               
   

Impaired Loans with Specific Allowance

   

As of March 31, 2018

 

For the three months

ended March 31, 2018

   

Unpaid

Principal

Balance

 

Recorded

Investment

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest Income

Recognized

in Period

 

Cash Basis

Interest

Recognized

in Period

Residential first mortgages

  $ 75     $ 75     $ 6     $ 75     $ 1     $ 1  

Home equity and lines of credit

    8       8             8              

Commercial real estate

                                   

Commercial business

                                   

Consumer

                                   

Total

  $ 83     $ 83     $ 6     $ 83     $ 1     $ 1  

 

   

Impaired Loans with No Specific Allowance

   

As of March 31, 2018

 

For the three months

ended March 31, 2018

   

Unpaid

Principal

Balance

 

Recorded

Investment

 

Average

Recorded

Investment

 

Interest Income

Recognized

in Period

 

Cash Basis

Interest

Recognized

in Period

Residential first mortgages

  $ 456     $ 344     $ 347     $ 1     $ 1  

Home equity and lines of credit

                             

Commercial real estate

    336       336       625              

Commercial business

    555       555       562       1       1  

Consumer

                             

Total

  $ 1,347     $ 1,235     $ 1,534     $ 2     $ 2  

 

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material.

 

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDRs.

 

At March 31, 2019 and December 31, 2018, the Corporation had $459,000 and $394,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $7,000 and $12,000 of specific allowance for these loans at March 31, 2019 and December 31, 2018, respectively.

 

During the three period ended March 31, 2019, the Corporation modified the interest rate and extended the payment amortization on one commercial real estate loan with a recorded investment of $74,000. At March 31, 2019, the Corporation did not have any specific allowance for loan losses allocated to this specific loan. During the three month period ended March 31, 2018, the Corporation did not modify any loans as TDRs.

 

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three month periods ended March 31, 2019 and 2018, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

 

 

4.

Loans Receivable and Related Allowance for Loan Losses (continued)

 

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

 

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

 

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

 

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

 

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

 

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

 

Management uses the following definitions for risk ratings:

 

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

 

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

 

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

 

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of March 31, 2019 and December 31, 2018:

 

(Dollar amounts in thousands)

                                               
   

Not Rated

 

Pass

 

Special

Mention

 

Substandard

 

Doubtful

 

Total

March 31, 2019:

                                               

Residential first mortgages

  $ 291,963     $     $     $ 1,940     $     $ 293,903  

Home equity and lines of credit

    101,766                   787             102,553  

Commercial real estate

          216,887       5,741       9,687             232,315  

Commercial business

          64,137       512       2,668             67,317  

Consumer

    10,775                   128             10,903  

Total loans

  $ 404,504     $ 281,024     $ 6,253     $ 15,210     $     $ 706,991  
                                                 

December 31, 2018:

                                               

Residential first mortgages

  $ 293,919     $     $     $ 1,486     $     $ 295,405  

Home equity and lines of credit

    102,869                   883             103,752  

Commercial real estate

          222,335       5,942       10,457             238,734  

Commercial business

          62,022       542       3,445             66,009  

Consumer

    11,157                   115             11,272  

Total loans

  $ 407,945     $ 284,357     $ 6,484     $ 16,386     $     $ 715,172  

 

 

4.

Loans Receivable and Related Allowance for Loan Losses (continued)

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of March 31, 2019 and December 31, 2018:

 

(Dollar amounts in thousands)

                                               
   

Performing

 

Nonperforming

       
   

Accruing

Loans Not

Past Due

 

Accruing
30-59 Days

Past Due

 

Accruing
60-89 Days

Past Due

 

Accruing
90+ Days
Past Due

 

Nonaccrual

 

Total

March 31, 2019:

                                               

Residential first mortgages

  $ 288,819     $ 3,258     $ 32     $ 528     $ 1,266     $ 293,903  

Home equity and lines of credit

    100,822       937       114       88       592       102,553  

Commercial real estate

    225,737       5,252       355       292       679       232,315  

Commercial business

    67,118       70       26             103       67,317  

Consumer

    10,663       74       27       12       127       10,903  

Total loans

  $ 693,159     $ 9,591     $ 554     $ 920     $ 2,767     $ 706,991  
                                                 

December 31, 2018:

                                               

Residential first mortgages

  $ 289,732     $ 3,586     $ 747     $ 485     $ 855     $ 295,405  

Home equity and lines of credit

    101,920       707       351       287       487       103,752  

Commercial real estate

    232,865       5,013       231       19       606       238,734  

Commercial business

    65,538       50       247             174       66,009  

Consumer

    10,961       160       36             115       11,272  

Total loans

  $ 701,016     $ 9,516     $ 1,612     $ 791     $ 2,237     $ 715,172  

 

The following table presents the Corporation’s nonaccrual loans by aging category as of March 31, 2019 and December 31, 2018:

 

(Dollar amounts in thousands)

                                       
   

Not

Past Due

 

30-59 Days

Past Due

 

60-89 Days

Past Due

 

90 Days +

Past Due

 

Total

March 31, 2019:

                                       

Residential first mortgages

  $ 329     $ 73     $     $ 864     $ 1,266  

Home equity and lines of credit

    5                   587       592  

Commercial real estate

    111       307             261       679  

Commercial business

                40       63       103  

Consumer

                      127       127  

Total loans

  $ 445     $ 380     $ 40     $ 1,902     $ 2,767  
                                         

December 31, 2018:

                                       

Residential first mortgages

  $ 335     $     $ 74     $ 446     $ 855  

Home equity and lines of credit

    6                   481       487  

Commercial real estate

    111       265             230       606  

Commercial business

                39       135       174  

Consumer

                      115       115  

Total loans

  $ 452     $ 265     $ 113     $ 1,407     $ 2,237  

 

 

 

5.

Goodwill and Intangible Assets

 

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of March 31, 2019 and December 31, 2018: 

 

(Dollar amounts in thousands)

 

March 31, 2019

 

December 31, 2018

   

Gross Carrying

Amount

 

Accumulated

Amortization

 

Gross Carrying

Amount

 

Accumulated

Amortization

Goodwill

  $ 19,448     $     $ 19,448     $  

Core deposit intangibles

    5,634       4,256       5,634       4,211  

Total

  $ 25,082     $ 4,256     $ 25,082     $ 4,211  

 

Goodwill resulted from five acquisitions. Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test. No goodwill impairment charges were recorded during 2018 or in the first three months of 2019.

 

The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three month periods ending March 31, 2019 and 2018, the Corporation recorded intangible amortization expense totaling $46,000 and $69,000, respectively.

 

 

6.

Stock Compensation Plan

 

In April 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 2014 Plan), which was approved by shareholders and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock. As of March 31, 2019, 37,783 shares of restricted stock and 88,433 stock options remain available for issuance under the plan.

 

Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plan. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of ten years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Compensation cost related to share-based payment transactions must be recognized in the financial statements with measurement based upon the fair value of the equity instruments issued.

 

At March 31, 2019, there are no options that were granted or outstanding under the Plan.

 

A summary of the status of the Corporation’s nonvested restricted stock awards as of March 31, 2019, and changes during the period then ended is presented below:

 

   

Shares

 

Weighted-Average

Grant-date Fair Value

Nonvested at January 1, 2019

    37,250     $ 29.94  

Granted

           

Vested

           

Forfeited

           

Nonvested as of March 31, 2019

    37,250     $ 29.94  

 

For the three month periods ended March 31, 2019 and 2018, the Corporation recognized stock compensation expense of $90,000 and $75,000, respectively. As of March 31, 2019, there was $694,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the next three years. It is the Corporation’s policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation.

 

 

 

7.

Fair Value

 

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year-end.

 

Assets measured at fair value on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

 

Debt securities available-for-sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt and equity securities held by the Corporation.

 

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

 

(Dollar amounts in thousands)

         

(Level 1)

 

(Level 2)

 

(Level 3)

Description

 

Total

 

Quoted Prices in Active Markets for Identical Assets

 

Significant
Other
Observable Inputs

 

Significant Unobservable

Inputs

March 31, 2019:

                               

Securities available-for-sale

                               

U.S. Treasury and federal agency

  $ 4,472     $ 4,472     $     $  

U.S. government sponsored entities and agencies

    13,943             13,943        

U.S. agency mortgage-backed securities: residential

    30,805             30,805        

U.S. agency collateralized mortgage obligations: residential

    21,272             21,272        

State and political subdivision

    20,007             20,007        

Corporate debt securities

    8,493             4,993       3,500  
Total available-for-sale securities   $ 98,992     $ 4,472     $ 91,020     $ 3,500  
                                 

Equity securities

  $ 17     $ 17     $     $  
                                 

December 31, 2018:

                               

Securities available-for-sale

                               

U.S. Treasury and federal agency

  $ 4,445     $ 4,445     $     $  

U.S. government sponsored entities and agencies

    16,783             16,783        

U.S. agency mortgage-backed securities: residential

    27,176             27,176        

U.S. agency collateralized mortgage obligations: residential

    18,664             18,664        

State and political subdivisions

    22,732             22,732        

Corporate debt securities

    7,918             4,418       3,500  
Total available-for-sale securities   $ 97,718     $ 4,445     $ 89,773     $ 3,500  
                                 

Equity securities

  $ 7     $ 7     $     $  

 

The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the three month period ended March 31, 2019, the Corporation had no transfers between levels. For the same period in 2018, the Corporation reclassified a restricted bank stock from the equity security portfolio to other assets and certain corporate securities from Level 3 to Level 2.

 

16

 

 

7.

Fair Value (continued)

 

The following table presents changes in Level 3 assets measured on a recurring basis for the three month periods ended March 31, 2019 and 2018:

 

(Dollar amounts in thousands)

 

Three months ended

March 31,

   

2019

 

2018

Balance at the beginning of the period

  $ 3,500     $ 8,132  

Total gains or losses (realized/unrealized):

               

Included in earnings

          1  

Included in other comprehensive income

           

Acquired

           

Transfers in and/or out of Level 3

          (4,608 )

Balance at the end of the period

  $ 3,500     $ 3,525  

 

Assets measured at fair value on a non-recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

 

Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of March 31, 2019, the Corporation had one impaired loan carried at fair value of $0, which consisted of the outstanding balance of $63,000 less a specific reserve of $63,000.  The loan is secured by general business assets and at the time of valuation, current financials were not available in order to make a reasonable determination of the value of these assets, therefore a discount of 100% was applied.  At December 31, 2018, the Corporation did not have any impaired loans carried at fair value measured using the fair value of collateral. There was additional provision for loan losses recorded for impaired loans of $63,000 and $0, respectively, during the three month periods ended March 31, 2019 and 2018.

 

Other real estate owned (OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of March 31, 2019, OREO measured at fair value less costs to sell had a net carrying amount of $6,000, which consisted of the outstanding balance of $27,000 less write-downs of $21,000.  As of December 31, 2018, OREO measured at fair value less costs to sell had a net carrying amount of $160,000, which consisted of the outstanding balance of $415,000 less write-downs of $255,000.  There was $21,000 and $0 of expense recorded in the three month periods ended March 31, 2019 and 2018, respectively, associated with the write-down of OREO.

 

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied.

 

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

 

(Dollar amounts in thousands)

         

(Level 1)

 

(Level 2)

 

(Level 3)

Description

 

Total

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

March 31, 2019:

                               

Other real estate owned

  $ 6     $ -     $ -     $ 6  

Total

  $ 6     $ -     $ -     $ 6  
                                 

December 31, 2018:

                               

Other real estate owned

  $ 160     $ -     $ -     $ 160  

Total

  $ 160     $ -     $ -     $ 160  

 

17

 

 

7.

Fair Value (continued)

 

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis:

 

(Dollar amounts in thousands)

       

Valuation

Unobservable

 

Weighted

         

Techniques(s)

Input (s)

 

Average

March 31, 2019:

                 

Other real estate owned

  $ 6  

Sales comparison approach

Adjustment for differences between comparable sales

  10 %
                   

December 31, 2018:

                 

Other real estate owned

  $ 160  

Sales comparison approach

Adjustment for differences between comparable sales

  10 %

 

Excluded from the tables above at March 31, 2019 and December 31, 2018 was an impaired residential mortgage loan totaling $66,000 and $61,000, respectively, and an impaired home equity loan totaling $5,000 and $6,000, respectively, which were classified as TDRs and measured using a discounted cash flow methodology.

 

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

 

(Dollar amounts in thousands)

                                       
   

Carrying

 

Fair Value Measurements using:

Description

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

March 31, 2019:

                                       

Financial Assets:

                                       

Cash and cash equivalents

  $ 7,727     $ 7,727     $ 7,727     $     $  
Interest earning time deposits     6,238       6,238             6,238        

Securities - available-for-sale

    98,992       98,992       4,472       91,020       3,500  

Securities - equities

    17       17       17              

Loans held for sale

    212       212             212        

Loans, net

    700,352       691,947                   691,947  

Federal bank stock

    5,799       N/A       N/A       N/A       N/A  

Accrued interest receivable

    2,735       2,735       100       349       2,286  
Total   $ 822,072     $ 807,868     $ 12,316     $ 97,819     $ 697,733  

Financial Liabilities:

                                       

Deposits

    759,427       767,115       540,936       226,179        

Borrowed funds

    35,300       34,863             34,863        

Accrued interest payable

    603       603       46       557        
Total   $ 795,330     $ 802,581     $ 540,982     $ 261,599     $  

 

         
   

Carrying

 

Fair Value Measurements using:

   

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

December 31, 2018:

                                       

Financial Assets:

                                       

Cash and cash equivalents

  $ 10,955     $ 10,955     $ 10,955     $     $  

Interest earning time deposits

    6,738       6,738             6,738        

Securities - available-for-sale

    97,718       97,718       4,445       89,773       3,500  

Securities - equities

    7       7       7              

Loans held for sale

                             

Loans, net

    708,664       702,747                   702,747  

Federal bank stock

    6,351       N/A       N/A       N/A       N/A  

Accrued interest receivable

    2,570       2,570       63       351       2,156  

Total

  $ 833,003     $ 820,735     $ 15,470     $ 96,862     $ 708,403  

Financial Liabilities:

                                       

Deposits

    761,546       767,009       539,946       227,063        

Borrowed funds

    45,350       44,869             44,869        

Accrued interest payable

    495       495       30       465        

Total

  $ 807,391     $ 812,373     $ 539,976     $ 272,397     $  

 

This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful.

 

 

 

8.

Regulatory Matters

 

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

 

In 2018, the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $1 billion to $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.

 

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2019 is 2.50% and for 2018 was 1.875%. Amounts recorded to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of March 31, 2019, the Bank meets all capital adequacy requirements to which they are subject.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

 

The following table sets forth certain information concerning the Bank’s regulatory capital as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer. 

 

(Dollar amounts in thousands)

 

March 31, 2019

 

December 31, 2018

   

Amount

 

Ratio

 

Amount

 

Ratio

Total capital to risk-weighted assets:

                               

Actual

  $ 77,459       13.26 %   $ 76,344       12.93 %

For capital adequacy purposes

    46,738       8.00 %     47,252       8.00 %

To be well capitalized

    58,421       10.00 %     59,065       10.00 %

Tier 1 capital to risk-weighted assets:

                               

Actual

  $ 70,820       12.12 %   $ 69,836       11.82 %

For capital adequacy purposes

    35,053       6.00 %     35,439       6.00 %

To be well capitalized

    46,738       8.00 %     47,252       8.00 %

Common Equity Tier 1 capital to risk-weighted assets:

                               

Actual

  $ 70,820       12.12 %   $ 69,836       11.82 %

For capital adequacy purposes

    26,289       4.50 %     26,579       4.50 %

To be well capitalized

    37,974       6.50 %     38,393       6.50 %

Tier 1 capital to average assets:

                               

Actual

  $ 70,820       8.13 %   $ 69,836       7.95 %

For capital adequacy purposes

    34,851       4.00 %     35,126       4.00 %

To be well capitalized

    43,564       5.00 %     43,908       5.00 %

 

 

 

9.

Accumulated Other Comprehensive Income (Loss)

 

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2019 and 2018 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

 

(Dollar amounts in thousands)

 

Unrealized Gains
and Losses on
Available-for-Sale
Securities

 

Defined Benefit

Pension Items

 

Totals

Accumulated Other Comprehensive Income (Loss) at January 1, 2019

  $ (1,517 )   $ (4,840 )   $ (6,357 )

Other comprehensive income before reclassification

    875             875  

Amounts reclassified from accumulated other comprehensive income (loss)

    (2 )           (2 )

Net current period other comprehensive income (loss)

    873             873  

Accumulated Other Comprehensive Income (Loss) at March 31, 2019

  $ (644 )   $ (4,840 )   $ (5,484 )

 

(Dollar amounts in thousands)

 

Amount Reclassified

 

Details about Accumulated Other
Comprehensive Loss Components

 

from Accumulated

Other Comprehensive Income

For the three months ended

March 31, 2019

Affected Line Item in the
Statement Where Net
Income is Presented

Unrealized gains and losses on available-for-sale securities

  $

(2

)

Net gain on sale of securities

Tax effect       Provision for income taxes

Total reclassifications for the period

  $ (2 )

Net of tax


 

(Dollar amounts in thousands)

 

Unrealized Gains
and Losses on
Available-for-Sale
Securities

 

Defined Benefit

Pension Items

 

Totals

Accumulated Other Comprehensive Income (Loss) at January 1, 2018, as previously presented

  $ (679 )   $ (4,839 )   $ (5,518 )
Cumulative effect of change in accounting principle for marketable equity securities, net of tax     (187 )           (187 )
Accumulated Other Comprehensive Income (Loss) at January 1, 2018, as adjusted   $ (866 )   $ (4,839 )   $ (5,705 )

Other comprehensive income before reclassification

    (1,021 )           (1,021 )

Amounts reclassified from accumulated other comprehensive income (loss)

    6             6  

Net current period other comprehensive income (loss)

    (1,015 )           (1,015 )

Accumulated Other Comprehensive Income (Loss) at March 31, 2018

  $ (1,881 )   $ (4,839 )   $ (6,720 )

 

 

(Dollar amounts in thousands)

 

Amount Reclassified

   

Details about Accumulated Other
Comprehensive Loss Components

 

from Accumulated

Other Comprehensive Income

For the three months ended

March 31, 2018

 

Affected Line Item in the
Statement Where Net
Income is Presented

Unrealized gains and losses on available-for-sale securities

  $ 7  

Net loss on sale of securities

Tax effect

    (1 )

Provision for income taxes

Total reclassifications for the period

  $ 6  

Net of tax


 

 

 

10.

Revenue Recognition

 

On January 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. Interest income, net securities gains (losses) and bank-owned life insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Corporation's revenue from contracts with customers is recognized within noninterest income.

 

Service charges on deposits: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

 

Electronic banking fees: The Corporation earns interchange and other ATM related fees from cardholder transactions conducted through the various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees are processed through noninterest income. Other fees, such a transaction surcharges and card replacement fees are withdrawn from the customer's account balance at the time of service.

 

The following table presents the Corporation's sources of noninterest income for the three months ended March 31, 2019 and 2018.

 

(Dollar amounts in thousands)

 

For the three months ended

March 31,

   

2019

 

2018

Noninterest income

               

In-scope of Topic 606:

               

Service charges on deposits

               

Maintenance fees

  $ 40     $ 39  

Overdraft fees

    438       329  

Other fees

    77       69  

Electronic banking fees

    324       315  

Noninterest income (in-scope of Topic 606)

    879       752  

Noninterest income (out-of-scope of Topic 606)(1)

    178       147  

Total noninterest income

  $ 1,057     $ 899  

 

(1)

Noninterest income items that are out-of-scope include net realized gains (losses) on sales of securities, net gains (losses) on sales of loans, earnings on bank-owned life insurance and certain other noninterest income items.

 

 

 

11.

Leases

 

Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842).  As of March 31, 2019, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before exhausting all options for extensions.  The weighed average remaining life of the lease term for these leases was 13.45 years as of March 31, 2019.

 

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption.  This methodology will be continued for the commencement of any subsequent lease agreements.  The weighted average discount rate for the leases was 3.47% as of March 31, 2019.

 

The total operating lease costs were $49,000 for the three months ended March 31, 2019.  The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, were $1.6 million and $1.8 million, respectively, as of March 31, 2019.  Rental expense for operating leases classified under ASC 840 for the three months ended March 31, 2018 was $50,000.

 

Total estimated rental commitments for the operating leases were as follows as of March 31, 2019:

 

(Dollar amounts in thousands)

       

Year ending December 31:

       
2019 (excluding three months)   $ 159  

2020

    212  

2021

    217  

2022

    222  

2023

    222  

Thereafter

    1,289  

Total minimum lease payments

    2,321  

Discount effect of cash flows

    (501 )

Present value of lease liabilities

  $ 1,820  

 

 

 

12.

Recent Accounting Pronouncements (continued)

 

Newly Issued Not Yet Effective Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. Management is currently in the developmental stages of collecting available historical information in order to assess the expected credit losses and determine the impact of the adoption of ASU 2016-13 on the Corporation's financial statements.

 

In January 2017, FASB ASU 2017-04, "Simplifying the Test for Goodwill Impairment". This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Corporation has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Corporation's most recent annual impairment assessment determined that the Corporation's goodwill was not impaired. Although the Corporation cannot anticipate future goodwill impairment assessments, based on the most recent assessment it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact from these amendments to the Corporation's financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

 

Adoption of New Accounting Policies

 

In February 2016, the FASB issued ASU 2016-02 "Leases". This ASU requires lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU 2016-02 was effective for annual periods beginning after December 15, 2018, and interim periods therein. In January 2018, the FASB issued ASU 2018-01, which allows entities the option to apply the provisions of the new lease guidance at the effective date without adjusting the comparative periods presented. Adoption of this guidance as of January 1, 2019 resulted in the recording of operating lease right-of-use assets of $1.6 million and operating lease liabilities of $1.8 million.  The Corporation recorded a cumulative adjustment to retained earning for prior periods of $170,000, net of deferred taxes of $45,000.  See Note 11 Leases for more information.

 

In March 2017, the FASB issued ASU 2017-08, “Receivable - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities to shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods therein.  The adoption of this guidance on January 1, 2019 resulted in a cumulative adjustment to retained earnings of $10,000, net of deferred taxes of $3,000, for the prior periods. The remaining securities subject to this guidance have a call date one month prior to maturity, therefore the impact to the statement of income in subsequent periods is immaterial.

 

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this Update are to better reflect the economic results of hedging in the financial statements along with simplification of certain hedge accounting requirements. Specifically, the entire change in the fair value of the hedging instrument is required to be presented in the same income statement line as and in the same period that the earnings effect of the hedged item is recognized. Therefore, hedge ineffectiveness will not be reported separately or in a different period. In addition, hedge effectiveness can be determined qualitatively in periods following inception. The amendments permit an entity to measure the change in fair value of the hedged item on the basis of the benchmark rate component. They also permit an entity to measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged. For a closed portfolio of prepayable financial assets, an entity is permitted to designate the amount that is not expected to be affected by prepayments or defaults as the hedged item. For public business entities, the new guidance was effective for fiscal years beginning after December 15, 2018, and interim periods therein. The Corporation currently does not have derivative or hedging instruments so this guidance had no impact on consolidated financial statements.

 

 

 

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

 

This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three months ended March 31, 2019, compared to the same period in 2018 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC and with the accompanying consolidated financial statements and notes presented in this Form 10-Q.

 

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

 

CHANGES IN FINANCIAL CONDITION

 

Total assets decreased $9.2 million, or 1.0%, to $889.6 million at March 31, 2019 from $898.9 million at December 31, 2018. The change in assets was driven primarily by a decrease in net loans receivable of $8.3 million. Liabilities decreased $11.3 million, or 1.4%, to $807.6 million at March 31, 2019 from $818.9 million at December 31, 2018 due to decreases in customer deposits and borrowed funds of $2.1 million and $10.1 million, respectively.

 

Stockholders’ equity increased $2.1 million, or 2.6%, to $82.1 million at March 31, 2019 from $80.0 million at December 31, 2018 primarily due to a $1.1 million increase in retained earnings as a result of $2.1 million of net income, partially offset by $783,000 of common dividends paid.  Additionally, accumulated other comprehensive income increased $873,000.  The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at 9.2% of total assets.  Book value per common share was $28.86 at March 31, 2019, compared to $28.09 at December 31, 2018. 

At March 31, 2019, the Bank was considered “well-capitalized” with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.13%, 12.12%, 12.12% and 13.26%, respectively. The Bank was also considered “well-capitalized” at December 31, 2018 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.95%, 11.82%, 11.82% and 12.93%, respectively.

RESULTS OF OPERATIONS

 

Comparison of Results for the Three Months Ended March 31, 2019 and 2018

 

General. Net income increased $720,000, or 52.8%, to $2.1 million for the three months ended March 31, 2019 from $1.4 million for the same period in 2018. This increase was the result of increases in net interest income and noninterest income of $1.4 million and $158,000, respectively, and a decrease of $200,000 in the provision for loan losses, partially offset by increases in noninterest expense and the provision for income taxes of $823,000 and $190,000, respectively.

 

Net interest income. Tax equivalent net interest income increased $1.4 million, or 23.5%, to $7.3 million for the three months ended March 31, 2019 from $5.9 million for the three months ended March 31, 2018. This increase was attributed to an increase in tax equivalent interest income of $2.0 million, partially offset by an increase in interest expense of $623,000.

 

Interest income. Tax equivalent interest income increased $2.0 million, or 28.6%, to $9.0 million for the three months ended March 31, 2019 from $7.0 million for the same period in 2018. This increase was attributed to increases in interest earned on loans and securities, dividends on federal bank stocks and interest-earning deposits with banks of $1.9 million, $50,000, $36,000 and $14,000, respectively.

 

Tax equivalent interest earned on loans receivable increased $1.9 million, or 29.7%, to $8.3 million for the three months ended March 31, 2019 compared to $6.4 million for the same period in 2018. This increase resulted from a $124.8 million, or 21.3%, increase in average loans, accounting for an increase of $1.4 million in interest income. The increase in loans receivable was related to the acquisition of Community First Bancorp, Inc. in October 2018 and strong loan growth during 2018. Adding to this favorable volume variance, the average yield on loans increased 30 basis points to 4.72% for the three months ended March 31, 2019, versus 4.42% for the same period in 2018. This favorable yield variance accounted for a $464,000 increase in interest income.

 

 

Tax equivalent interest earned on securities increased $50,000, or 8.6%, to $633,000 for the three months ended March 31, 2019 compared to $583,000 for the three months ended March 31, 2018. This increase resulted from a 26 basis point increase in the average yield on securities to 2.64% for the three months ended March 31, 2019 versus 2.38% for the same period in 2018. This favorable yield variance accounted for a $63,000 increase in interest income. Partially offsetting this favorable variance, the average balance of securities decreased $2.2 million, or 2.3%, accounting for a $13,000 decrease in interest income.

 

Interest earned on deposits with banks increased $14,000, or 42.4%, to $47,000 for the three months ended March 31, 2019 compared to $33,000 for the three months ended March 31, 2018. This increase resulted from a 42 basis point increase in the average yield on these accounts to 1.52% for the three months ended March 31, 2019, versus 1.10% for the same period in 2018, accounting for an $13,000 increase in interest income. Additionally, the average balance of interest-earning deposits increased $392,000, or 3.2%, accounting for an increase of $1,000 in interest income.

 

Dividends on federal bank stocks increased $36,000, or 56.3%, to $100,000 for the three months ended March 31, 2019 from $64,000 for the same period in 2018. This increase was primarily due to a $1.5 million, or 32.1%, increase in federal bank stock, accounting for a $23,000 increase in interest income.  Furthermore, an increase of 104 basis points in the average yield on federal bank stocks to 6.74% for the three months ended March 31, 2019, versus 5.70% for the same period in 2018, accounted for a $13,000 increase in interest income.

 

Interest expense. Interest expense increased $623,000, or 54.2%, to $1.8 million for the three months ended March 31, 2019 from $1.1 million for the same period in 2018. This increase in interest expense can be attributed to a $480,000 increase in interest incurred on deposits and an increase of $143,000 in interest incurred on borrowed funds.

 

Interest expense incurred on deposits increased $480,000, or 48.4%, to $1.5 million for the three months ended March 31, 2019 compared to $991,000 for the same period in 2018. The average cost of interest-bearing deposits increased 23 basis points to 0.98% for the three months ended March 31, 2019, versus 0.75% for the same period in 2018, accounting for a $326,000 increase in interest expense. Additionally, the average balance of interest-bearing deposits increased $75.3 million, or 14.1%, to $607.7 million for the three months ended March 31, 2019, compared to $532.4 million for the same period in 2018 causing a $154,000 increase in interest expense. This increase was primarily due to the acquisition of Community First in October 2018.

 

Interest expense incurred on borrowed funds increased $143,000, or 90.5%, to $301,000 for the three months ended March 31, 2019, compared to $158,000 for the same period in the prior year. The average balance of borrowed funds increased $20.3 million, or 82.4%, to $44.8 million for the three months ended March 31, 2019, compared to $24.6 million for the same period in 2018 causing a $139,000 increase in interest expense. The increase in the outstanding balance of borrowed funds primarily resulted from three additional $5.0 million FHLB long-term notes taken in December 2018. Additionally, the average cost of borrowed funds increased 11 basis points to 2.72% for the three months ended March 31, 2019 compared to 2.61% for the same period in 2018 causing a $4,000 increase in interest expense.

 

 

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.

 

(Dollar amounts in thousands)

 

Three months ended March 31,

   

2019

 

2018

   

Average
Balance

 

Interest

 

Yield/
Rate

 

Average
Balance

 

Interest

 

Yield/
Rate

Interest-earning assets:

                                               
Loans, taxable   $ 689,527     $ 8,072       4.75 %   $ 562,925     $ 6,173       4.45 %

Loans, tax exempt

    19,852       189       3.87 %     21,656       194       3.64 %
Total loans receivable     709,379       8,261       4.72 %     584,581       6,367       4.42 %
Securities, taxable     75,454       492       2.64 %     72,118       408       2.29 %
Securities, tax exempt     21,791       141       2.62 %     27,376       175       2.60 %
Total securities     97,245       633       2.64 %     99,494       583       2.38 %
Interest-earning deposits with banks     12,564       47       1.52 %     12,172       33       1.10 %
Federal bank stocks     6,015       100       6.74 %     4,554       64       5.70 %
Total interest-earning cash equivalents     18,579       147       3.21 %     16,726       97       2.35 %
Total interest-earning assets     825,203       9,041       4.44 %     700,801       7,047       4.08 %

Cash and due from banks

    3,258                       2,652                  

Other noninterest-earning assets

    62,964                       45,690                  

Total Assets

  $ 891,425                     $ 749,143                  

Interest-bearing liabilities:

                                               
Interest-bearing demand deposits   $ 387,720     $ 528       0.55 %   $ 361,712     $ 402       0.45 %
Time deposits     220,006       943       1.74 %     170,691       589       1.40 %
Total interest-bearing deposits     607,726       1,471       0.98 %     532,403       991       0.75 %
Borrowed funds, short-term     12,587       96       3.08 %     4,362       37       3.45 %
Borrowed funds, long-term     32,250       205       2.58 %     20,219       121       2.43 %
Total borrowed funds     44,837       301       2.72 %     24,581       158       2.61 %
Total interest-bearing liabilities     652,563       1,772       1.10 %     556,984       1,149       0.84 %
Noninterest-bearing demand deposits     144,496                   122,859              
Funding and cost of funds     797,059       1,772       0.90 %     679,843       1,149       0.69 %

Other noninterest-bearing liabilities

    13,745                       10,420                  

Total Liabilities

    810,804                       690,263                  

Stockholders' Equity

    80,621                       58,880                  

Total Liabilities and Stockholders' Equity

  $ 891,425                     $ 749,143                  

Net interest income

          $ 7,269                     $ 5,898          
                                                 

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)

                    3.34 %                     3.24 %
                                                 

Net interest margin (net interest income as a percentage of average interest-earning assets)

                    3.57 %                     3.41 %

 

 

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.

 

(Dollar amounts in thousands)

 

Three months ended March 31,

   

2019 versus 2018

   

Increase (Decrease) due to

   

Volume

 

Rate

 

Total

Interest income:

                       

Loans

  $ 1,430     $ 464     $ 1,894  

Securities

    (13 )     63       50  

Interest-earning deposits with banks

    1       13       14  

Federal bank stocks

    23       13       36  

Total interest-earning assets

    1,441       553       1,994  
                         

Interest expense:

                       

Interest-bearing deposits

    154       326       480  

Borrowed funds, short-term

    63       (4 )     59  

Borrowed funds, long-term

    76       8       84  

Total interest-bearing liabilities

    293       330       623  

Net interest income

  $ 1,148     $ 223     $ 1,371  

 

Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.

 

 

Information pertaining to the allowance for loan losses and nonperforming assets for the three months ended March 31, 2019 and 2018 is as follows:

 

(Dollar amounts in thousands)

 

As of or for the three months ended

   

March 31,

   

2019

 

2018

Balance at the beginning of the period

  $ 6,508     $ 6,127  

Provision for loan losses

    180       380  

Charge-offs

    (129 )     (585 )

Recoveries

    80       13  

Balance at the end of the period

  $ 6,639     $ 5,935  
                 

Nonperforming loans

  $ 3,687     $ 3,157  

Nonperforming assets

    4,507       4,004  

Nonperforming loans to total loans

    0.52 %     0.53 %

Nonperforming assets to total assets

    0.51 %     0.53 %

Allowance for loan losses to total loans

    0.94 %     1.01 %

Allowance for loan losses to nonperforming loans

    180.07 %     187.99 %

 

Nonperforming loans increased $659,000, or 21.8%, to $3.7 million at March 31, 2019 from $3.0 million at December 31, 2018. This was primarily due to an increase in the loans past due more than 90 days and still accruing of $504,000 during the three months ended March 31, 2019. Of the $3.7 million in nonperforming loans, $445,000 were not 30 days or more past due at March 31, 2019.

 

As of March 31, 2019, the Corporation’s classified and criticized assets amounted to $21.5 million, or 2.4% of total assets, with $15.2 million classified as substandard and $6.3 million identified as special mention. This compares to classified and criticized assets of $22.9 million, or 2.5% of total assets, with $16.4 million classified as substandard and $6.5 million identified as special mention at December 31, 2018. This decrease was primarily related to the payoff of  two commercial relationships totaling $1.2 million and the transfer to OREO of one commercial relationship totaling $232,000.

 

The provision for loan losses decreased $200,000, or 52.6%, to $180,000 for the three months ended March 31, 2019 from $380,000 for the same period in 2018 as loan balances declined $8.1 million during the three months ended March 31, 2019 and portfolio charge-offs were lower than normal.  The provision for loan losses recorded for the three months ended March 31, 2018 was higher due to growth in the loan portfolio of $6.7 million and higher than normal charge-offs for the period.

 

Noninterest income.  Noninterest income increased $158,000, or 17.5%, to $1.1 million for the three months ended March 31, 2019, compared to $899,000 for the same period in 2018. Fees and service charges and other noninterest income increased $118,000 and $48,000, respectively, primarily associated with the operation of the new full-service banking offices which were acquired from Community First and general increases in overdraft fee income.

 

Noninterest expense.  Noninterest expense increased $823,000, or 17.4%, to $5.6 million for the three months ended March 31, 2019 from $4.7 million for the same period in 2018.  The increase primarily related to increases in compensation and benefits expense, other noninterest expense and occupancy and equipment expense of $464,000, $262,000 and $116,000, respectively. The increases primarily related to costs associated with the aforementioned new banking offices and normal salary and benefit and operating expense increases.

 

Provision for income taxes. The provision for income taxes increased $190,000, or 71.4%, to $456,000 for the three months ended March 31, 2019 compared to $266,000 for the same period in the prior year as a result of the increase in net income before provision for income taxes.

 

 

LIQUIDITY

 

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and maturing securities. During the three months ended March 31, 2019, the Corporation used its sources of funds primarily to reduce short-term borrowed funds. As of March 31, 2019, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $96.4 million, and standby letters of credit totaling $712,000, net of collateral maintained by the Bank.

 

At March 31, 2019, time deposits amounted to $220.5 million, or 29.1% of the Corporation’s total consolidated deposits, including approximately $69.3 million of which are scheduled to mature within the next year. Management of the Corporation believes (i) it has adequate resources to fund all of its commitments, (ii) all of its commitments will be funded as required by related maturity dates and (iii) based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities if necessary.

 

Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation and the Bank have alternative sources of funds. These sources include a line of credit for the Corporation with a correspondent bank, the Bank's line of credit and term borrowing capacity from the FHLB and the Federal Reserve’s discount window and, to a more limited extent, through the sale of loans. At March 31, 2019, the Corporation had borrowed funds of $35.3 million consisting of $30.0 million of long-term FHLB advances, $1.0 million of FHLB overnight advances, a $2.3 million long-term advance with a correspondent bank and $2.1 million outstanding on a line of credit with a correspondent bank. At March 31, 2019, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issue to secure certain deposit accounts, was $243.3 million.

 

Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.

 

RECENT REGULATORY DEVELOPMENTS

 

The final rules implementing the Basel Committee on Banking Supervision’s (BCBS) capital guidelines for U.S. banks were approved by the FRB and FDIC. Under the final rules, minimum requirements increased for both the quantity and quality of capital. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer comprised of common equity Tier 1 capital was also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and has increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revised the definition and calculation of Tier 1 capital, Total Capital and risk-weighted assets. The phase-in period for the final rules became effective on January 1, 2015 with full compliance with all of the final rules’ requirements phased in over a multi-year schedule which was fully phased-in on January 1, 2019.

 

At March 31, 2019, the Bank exceeded all minimum capital requirements under these capital guidelines.

 

 

CRITICAL ACCOUNTING POLICIES

 

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

 

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018. These policies, along with the disclosures presented in the other financial statement notes provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies.

 

Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.

 

Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.

 

Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At November 30, 2018, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and interest-bearing liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets and interest-bearing liabilities. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area.

 

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

 

Interest rate sensitivity is the result of differences in the amounts and repricing dates of the Bank’s rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing “gap”, provide an indication of the extent that the Corporation’s net interest income is affected by future changes in interest rates. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.

 

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation’s assets and liabilities to interest rate changes. As of March 31, 2019, the Corporation’s interest-earning assets maturing or repricing within one year totaled $215.1 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $177.0 million, providing an excess of interest-earning assets over interest-bearing liabilities of $38.1 million. At March 31, 2019, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 121.5%.

 

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 4. Controls and Procedures

 

The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).

 

As of March 31, 2019, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation.

 

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

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

Not applicable.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

(a)

Not applicable.

 

(b)

Not applicable.

 

Item 6. Exhibits

 

Exhibit 31.1

Rule 13a-14(a) Certification of Principal Executive Officer

Exhibit 31.2

Rule 13a-14(a) Certification of Principal Financial Officer

Exhibit 32.1

CEO Certification Pursuant to 18 U.S.C. Section 1350

Exhibit 32.2

CFO Certification Pursuant to 18 U.S.C. Section 1350

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

Signatures

 

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

 

     

 

EMCLAIRE FINANCIAL CORP

 

 

 

Date: May 10, 2019

By:

/s/ William C. Marsh

 

William C. Marsh

 

Chairman of the Board,

 

President and Chief Executive Officer

 

 

 

Date: May 10, 2019

By:

/s/ Amanda L. Engles

 

Amanda L. Engles

 

Chief Financial Officer

 

Treasurer

 

33