EMCLAIRE FINANCIAL CORP - Quarter Report: 2020 March (Form 10-Q)

emcf20190331_10q.htm

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, 2020

☐	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 2,708,712 at May 12, 2020.

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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, 2020 and December 31, 2019	1

	Consolidated Statements of Net Income for the three months ended March 31, 2020 and 2019	2

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019	3

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	4

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

Signatures		36

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PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Emclaire Financial Corp

Consolidated Balance Sheets (Unaudited)

As of March 31, 2020 and December 31, 2019

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

	March 31, 2020			December 31, 2019
Assets
Cash and due from banks	$	3,839		$	3,750
Interest earning deposits with banks		6,250			11,236
Total cash and cash equivalents		10,089			14,986
Interest earning time deposits		8,948			9,698
Securities - available-for-sale		114,419			120,107
Securities - equity investments		9			19
Loans receivable, net of allowance for loan losses of $7,220 and $6,556		734,730			695,348
Federal bank stocks, at cost		6,866			5,790
Bank-owned life insurance		15,161			15,287
Accrued interest receivable		2,861			2,600
Premises and equipment, net		18,999			19,041
Goodwill		19,460			19,460
Core deposit intangible, net		1,205			1,247
Prepaid expenses and other assets		11,487			11,713
Total Assets	$	944,234		$	915,296
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	149,131		$	148,842
Interest bearing		633,585			638,282
Total deposits		782,716			787,124
Short-term borrowed funds		14,300			2,050
Long-term borrowed funds		46,250			26,500
Accrued interest payable		661			616
Accrued expenses and other liabilities		12,762			13,148
Total Liabilities		856,689			829,438

Stockholders' Equity
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 286,888 shares issued and outstanding; Series D, non-cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding		4,206			4,206
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,810,729 shares issued; 2,708,712 shares outstanding		3,513			3,513
Additional paid-in capital		46,869			46,757
Treasury stock, at cost; 102,017 shares		(2,114	)		(2,114	)
Retained earnings		39,209			38,831
Accumulated other comprehensive loss		(4,138	)		(5,335	)
Total Stockholders' Equity		87,545			85,858
Total Liabilities and Stockholders' Equity	$	944,234		$	915,296

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Consolidated Statements of Net Income (Unaudited)

For the three months ended March 31, 2020 and 2019

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

	For the Three Months Ended March 31,
	2020		2019
Interest and dividend income:
Loans receivable, including fees	$	7,981	$	8,231
Securities:
Taxable		664		492
Exempt from federal income tax		84		122
Federal bank stocks		108		100
Interest earning deposits with banks		66		47
Total interest and dividend income		8,903		8,992
Interest expense:
Deposits		1,940		1,471
Borrowed funds		273		301
Total interest expense		2,213		1,772
Net interest income		6,690		7,220
Provision for loan losses		792		180
Net interest income after provision for loan losses		5,898		7,040
Noninterest income:
Fees and service charges		451		555
Net realized gain on sales of securities		78		2
Net gain on sales of loans		—		14
Earnings on bank-owned life insurance		94		95
Other		402		391
Total noninterest income		1,025		1,057
Noninterest expense:
Compensation and employee benefits		2,912		2,917
Premises and equipment		794		886
Intangible asset amortization		42		46
Professional fees		221		221
Federal deposit insurance		103		136
Other		1,418		1,353
Total noninterest expense		5,490		5,559
Income before provision for income taxes		1,433		2,538
Provision for income taxes		243		456
Net income	$	1,190	$	2,082
Basic earnings per common share	$	0.44	$	0.77
Diluted earnings per common share		0.44		0.77
Average common shares outstanding - basic		2,708,712		2,698,712
Average common shares outstanding - diluted		2,723,610		2,712,418

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

For the three months ended March 31, 2020 and 2019

(Dollar amounts in thousands)

	For the Three Months Ended March 31,
	2020			2019
Net income	$	1,190		$	2,082
Other comprehensive income (loss)
Unrealized gains/(losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period		1,595			1,106
Reclassification adjustment for (gains) losses included in net income		(78	)		(2	)
Net period change		1,517			1,104
Tax effect		(320	)		(231	)
Net of tax		1,197			873
Comprehensive income	$	2,387		$	2,955

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2020 and 2019

(Dollar amounts in thousands)

	For the Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income	$	1,190		$	2,082
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		354			325
Provision for loan losses		792			180
Amortization/accretion of premiums, discounts and deferred costs and fees, net		265			24
Amortization of operating lease right-of-use assets		34			33
Amortization of intangible assets and mortgage servicing rights		62			62
Realized gain on sales of debt securities, net		(78	)		(2	)
Change in fair value of equity securities, including realized gain		10			(10	)
Net gain on sales of loans		—			(14	)
Net loss on foreclosed real estate		5			14
Loans originated for sale		—			(724	)
Proceeds from the sale of loans originated for sale		—			526
Write-down of foreclosed real estate		—			21
Stock compensation expense		112			90
Decrease (increase) in bank-owned life insurance, net		126			(95	)
Increase in accrued interest receivable		(261	)		(165	)
Increase in prepaid expenses and other assets		(59	)		(1	)
Increase in accrued interest payable		45			108
Increase (decrease) in accrued expenses and other liabilities		(386	)		(1,072	)
Net cash provided by operating activities		2,211			1,382
Cash flows from investing activities
Loan originations and principal collections, net		(40,577	)		7,846
Available-for-sale securities:
Sales		8,226			3,975
Maturities, repayments and calls		5,772			3,577
Purchases		(6,786	)		(7,740	)
Net change in federal bank stocks		(1,076	)		552
Net change in interest earning time deposits		750			500
Proceeds from the sale of bank premises and equipment		—			190
Purchases of premises and equipment		(312	)		(704	)
Proceeds from the sale of foreclosed real estate		115			146
Net cash provided by (used in) investing activities		(33,888	)		8,342
Cash flows from financing activities
Net increase in deposits		(4,408	)		(2,119	)
Proceeds from long-term debt		20,000			—
Repayments on long-term debt		(250	)		(250	)
Net change in short-term borrowings		12,250			(9,800	)
Dividends paid		(812	)		(783	)
Net cash provided by (used in) financing activities		26,780			(12,952	)
Net decrease in cash and cash equivalents		(4,897	)		(3,228	)
Cash and cash equivalents at beginning of period		14,986			10,955
Cash and cash equivalents at end of period	$	10,089		$	7,727
Supplemental information:
Interest paid	$	2,168		$	1,664
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		209			283
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.

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Emclaire Financial Corp

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the three months ended March 31, 2020 and 2019

(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, 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	)	$	37,657		$	(5,484	)	$	84,257

Balance at January 1, 2020	$	421	$	3,785	$	3,513	$	46,757	$	(2,114	)	$	38,831		$	(5,335	)	$	85,858
Net income		—		—		—		—		—			1,190			—			1,190
Other comprehensive income		—		—		—		—		—			—			1,197			1,197
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(812	)		—			(812	)
Balance at March 31, 2020	$	421	$	3,785	$	3,513	$	46,869	$	(2,114	)	$	39,209		$	(4,138	)	$	87,545

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

1.	Nature of Operations and Basis of Presentation

Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania 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, 2019, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

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

The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has and may continue to impact many of the Corporation’s customers. While the full effects of the pandemic remain unknown, the Corporation is committed to supporting its customers, employees and communities during this difficult time. The Corporation has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances. The pandemic could result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions, we may be required to recognize impairments on securities, goodwill or other significant estimates. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, loan modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. Under these terms, as of March 31, 2020, the Corporation had processed payment deferrals for 76 loans with an aggregate balance of $15.1 million. Through May 6, 2020, the number of deferrals increased to 391 with an aggregate balance of $78.7 million. The majority of these deferrals were generally 30 to 90 days in duration.

Additionally, the Bank is a lender for the Small Business Administration's (SBA) Paycheck Protection Program (PPP), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic, and may be a lender for programs created in the future. These programs are new and their effects on the Corporation’s business are uncertain. Through May 6, 2020, the Bank had closed 470 PPP loans amounting to $45.3 million under the allocation approved by Congress.

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2.	Earnings per Common Share

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

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

(Dollar amounts in thousands, except for per share amounts)	For the Three Months Ended March 31,
	2020		2019
Net income	$	1,190	$	2,082
Less: Preferred stock dividends		—		—
Net income available to common stockholders	$	1,190	$	2,082
Average common shares outstanding		2,708,712		2,698,712
Add: Dilutive effects of restricted stock awards		14,898		13,706
Average shares and dilutive potential common shares		2,723,610		2,712,418
Basic earnings per common share	$	0.44	$	0.77
Diluted earnings per common share	$	0.44	$	0.77
Restricted stock awards not considered in computing earnings per share because they were antidulitive		—		—

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3.	Securities

Equity Securities

The Corporation held equity securities with fair values of $9,000 and $19,000 at March 31, 2020 and December 31, 2019, 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, 2020 and 2019, the Corporation recognized a loss of $10,000 and a gain of $16,000, respectively, on equity securities held at March 31. During the three months ended March 31, 2020 and 2019, the Corporation did not sell any equity securities.

Debt Securities - Available-for-Sale

The following table summarizes the Corporation’s debt securities as of March 31, 2020 and December 31, 2019:

(Dollar amounts in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2020:
U.S. government sponsored entities and agencies	$	1,000	$	27	$	—		$	1,027
U.S. agency mortgage-backed securities: residential		40,099		1,011		(53	)		41,057
U.S. agency collateralized mortgage obligations: residential		31,385		541		(153	)		31,773
State and political subdivisions		28,123		390		(146	)		28,367
Corporate debt securities		12,433		130		(368	)		12,195
Total securities available-for-sale	$	113,040	$	2,099	$	(720	)	$	114,419

December 31, 2019:
U.S. government sponsored entities and agencies	$	7,069	$	14	$	(6	)	$	7,077
U.S. agency mortgage-backed securities: residential		40,868		291		(84	)		41,075
U.S. agency collateralized mortgage obligations: residential		33,001		71		(235	)		32,837
State and political subdivisions		27,848		217		(269	)		27,796
Corporate debt securities		11,459		93		(230	)		11,322
Total securities available-for-sale	$	120,245	$	686	$	(824	)	$	120,107

The following table summarizes scheduled maturities of the Corporation’s debt securities as of March 31, 2020. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

(Dollar amounts in thousands)	Available-for-sale
	Amortized Cost		Fair Value
Due in one year or less	$	1,240	$	1,203
Due after one year through five years		2,067		2,106
Due after five through ten years		14,994		14,900
Due after ten years		23,255		23,380
Mortgage-backed securities: residential		40,099		41,057
Collateralized mortgage obligations: residential		31,385		31,773
Total securities available-for-sale	$	113,040	$	114,419

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3.	Securities (continued)

Information pertaining to debt securities with gross unrealized losses at March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:

(Dollar amounts in thousands)	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
March 31, 2020:
U.S. agency mortgage-backed securities: residential	$	—	$	—		$	10,791	$	(53	)	$	10,791	$	(53	)
U.S. agency collateralized mortgage obligations: residential		6,268		(72	)		3,248		(81	)		9,516		(153	)
State and political subdivisions		6,375		(146	)		—		—			6,375		(146	)
Corporate debt securities		6,590		(300	)		432		(68	)		7,022		(368	)
Total	$	19,233	$	(518	)	$	14,471	$	(202	)	$	33,704	$	(720	)

December 31, 2019:
U.S. government sponsored entities and agencies	$	—	$	—		$	2,032	$	(6	)	$	2,032	$	(6	)
U.S. agency mortgage-backed securities: residential		14,578		(76	)		2,325		(8	)		16,903		(84	)
U.S. agency collateralized mortgage obligations: residential		12,319		(32	)		11,621		(203	)		23,940		(235	)
State and political subdivisions		15,636		(269	)		—		—			15,636		(269	)
Corporate debt securities		4,031		(229	)		499		(1	)		4,530		(230	)
Total	$	46,564	$	(606	)	$	16,477	$	(218	)	$	63,041	$	(824	)

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,
	2020			2019
Proceeds	$	8,226		$	3,975
Gains		82			6
Losses		(4	)		(4	)
Tax provision related to gains (losses)		16			—

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 37 debt securities in an unrealized loss position as of March 31, 2020, four of which were in an unrealized loss position for more than 12 months. Of these 37 securities, 15 were corporate securities, eight were mortgage-backed securities, seven were collateralized mortgage obligations (issued by U.S. government sponsored entities) and seven were state and political subdivision 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 their amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of March 31, 2020 to be other-than-temporarily impaired.

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4.	Loans Receivable and Related Allowance for Loan Losses

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

(Dollar amounts in thousands)	March 31, 2020		December 31, 2019
Mortgage loans on real estate:
Residential first mortgages	$	294,361	$	293,170
Home equity loans and lines of credit		95,459		97,541
Commercial real estate		263,948		229,951
Total real estate loans		653,768		620,662
Other loans:
Commercial business		69,077		66,603
Consumer		19,105		14,639
Total other loans		88,182		81,242
Total loans, gross		741,950		701,904
Less allowance for loan losses		7,220		6,556
Total loans, net	$	734,730	$	695,348

Included in total loans above are net deferred costs of $3.1 million and $2.6 million at March 31, 2020 and December 31, 2019, 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. While the Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-19 pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.

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

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

At March 31, 2020, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc (2018).

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

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

(Dollar amounts in thousands)	Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total
Three months ended March 31, 2020:
Allowance for loan losses:
Beginning Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556
Charge-offs		(11	)		(39	)		(73	)		—			(15	)		(138	)
Recoveries		—			—			3			—			7			10
Provision		31			54			606			45			56			792
Ending Balance	$	2,329		$	641		$	3,434		$	681		$	135		$	7,220

At March 31, 2020:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	2		$	—		$	19		$	5		$	—		$	26
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,327			641			3,415			676			135			7,194
Total	$	2,329		$	641		$	3,434		$	681		$	135		$	7,220
Total loans:
Individually evaluated for impairment	$	349		$	4		$	1,217		$	88		$	—		$	1,658
Acquired loans collectively evaluated for impairment		57,891			10,177			38,619			7,026			1,607			115,320
Originated loans collectively evaluated for impairment		236,121			85,278			224,112			61,963			17,498			624,972
Total	$	294,361		$	95,459		$	263,948		$	69,077		$	19,105		$	741,950

At December 31, 2019:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	5		$	—		$	—		$	—		$	—		$	5
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,304			626			2,898			636			87			6,551
Total	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556
Total loans:
Individually evaluated for impairment	$	358		$	4		$	81		$	40		$	—		$	483
Acquired loans collectively evaluated for impairment		60,523			10,901			41,993			7,930			1,982			123,329
Originated loans collectively evaluated for impairment		232,289			86,636			187,877			58,633			12,657			578,092
Total	$	293,170		$	97,541		$	229,951		$	66,603		$	14,639		$	701,904

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

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2020:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of March 31, 2020						For the Three Months Ended March 31, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	71	$	71	$	2	$	71	$	1	$	1
Home equity and lines of credit		4		4		—		4		—		—
Commercial real estate		150		150		19		75		—		—
Commercial business		45		45		5		23		1		1
Consumer		—		—		—		—		—		—
Total	$	270	$	270	$	26	$	173	$	2	$	2

	Impaired Loans with No Specific Allowance
	As of March 31, 2020				For the Three Months Ended March 31, 2020
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	390	$	278	$	282	$	1	$	1
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		1,067		1,067		574		13		13
Commercial business		43		43		41		1		—
Consumer		—		—		—		—		—
Total	$	1,500	$	1,388	$	897	$	15	$	14

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

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

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2019						For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	72	$	72	$	5	$	72	$	3	$	3
Home equity and lines of credit		4		4		—		5		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	76	$	76	$	5	$	77	$	3	$	3

	Impaired Loans with No Specific Allowance
	As of December 31, 2019				For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	398	$	286	$	301	$	4	$	4
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		81		81		1,019		88		35
Commercial business		40		40		79		7		2
Consumer		—		—		—		—		—
Total	$	519	$	407	$	1,399	$	99	$	41

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

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

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

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

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

At March 31, 2020 and December 31, 2019, the Corporation had $354,000 and $409,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $2,000 and $5,000 of specific allowance for these loans at March 31, 2020 and December 31, 2019, respectively.

During the three months ended March 31, 2020, the Corporation did not modify any loans as TDRs. During the three months 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.

Under the provisions of the CARES Act, as of March 31, 2020, the Corporation has granted modifications on 76 loans with an aggregate balance of $15.1 million, representing 2.0% of gross outstanding loan balances. Through May 6, 2020, the number of modifications increased to 391 loans with an aggregate balance of $78.7 million, or 10.0% of gross loans outstanding. The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three months ended March 31, 2020 and 2019, 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.

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

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

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

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

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

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

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

Management uses the following definitions for risk ratings:

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

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

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

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

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of March 31, 2020 and December 31, 2019:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2020:
Residential first mortgages	$	293,491	$	—	$	—	$	870	$	—	$	294,361
Home equity and lines of credit		94,928		—		—		531		—		95,459
Commercial real estate		—		251,246		5,159		7,543		—		263,948
Commercial business		—		67,130		203		1,744		—		69,077
Consumer		18,983		—		—		122		—		19,105
Total loans	$	407,402	$	318,376	$	5,362	$	10,810	$	—	$	741,950

December 31, 2019:
Residential first mortgages	$	291,843	$	—	$	—	$	1,327	$	—	$	293,170
Home equity and lines of credit		97,087		—		—		454		—		97,541
Commercial real estate		—		216,744		5,370		7,837		—		229,951
Commercial business		—		64,636		204		1,763		—		66,603
Consumer		14,557		—		—		82		—		14,639
Total loans	$	403,487	$	281,380	$	5,574	$	11,463	$	—	$	701,904

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

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of March 31, 2020 and December 31, 2019:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
March 31, 2020:
Residential first mortgages	$	290,062	$	2,050	$	1,379	$	62	$	808	$	294,361
Home equity and lines of credit		93,725		731		472		180		351		95,459
Commercial real estate		260,032		1,620		1,019		235		1,042		263,948
Commercial business		68,571		172		68		3		263		69,077
Consumer		18,865		66		52		—		122		19,105
Total loans	$	731,255	$	4,639	$	2,990	$	480	$	2,586	$	741,950

December 31, 2019:
Residential first mortgages	$	288,399	$	2,405	$	1,039	$	372	$	955	$	293,170
Home equity and lines of credit		95,908		626		553		26		428		97,541
Commercial real estate		226,133		2,141		543		227		907		229,951
Commercial business		66,087		225		72		4		215		66,603
Consumer		14,458		84		15		—		82		14,639
Total loans	$	690,985	$	5,481	$	2,222	$	629	$	2,587	$	701,904

The following table presents the Corporation’s nonaccrual loans by aging category as of March 31, 2020 and December 31, 2019:

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
March 31, 2020:
Residential first mortgages	$	239	$	—	$	71	$	498	$	808
Home equity and lines of credit		3		—		—		348		351
Commercial real estate		134		250		159		499		1,042
Commercial business		—		41		—		222		263
Consumer		—		—		—		122		122
Total loans	$	376	$	291	$	230	$	1,689	$	2,586

December 31, 2019:
Residential first mortgages	$	245	$	—	$	72	$	638	$	955
Home equity and lines of credit		4		—		—		424		428
Commercial real estate		28		309		31		539		907
Commercial business		—		—		175		40		215
Consumer		—		—		—		82		82
Total loans	$	277	$	309	$	278	$	1,723	$	2,587

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5.	Goodwill and Intangible Assets

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of March 31, 2020 and December 31, 2019:

(Dollar amounts in thousands)	March 31, 2020				December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill	$	19,460	$	—	$	19,460	$	—
Core deposit intangibles		5,634		4,429		5,634		4,387
Total	$	25,094	$	4,429	$	25,094	$	4,387

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 2019 or in the first three months of 2020. Although the annual review of goodwill revealed no impairment consideration, based on current economic conditions related to COVID-19, management performed an interim assessment as of March 31, 2020. Management concluded that goodwill was not impaired at this date. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material.

The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three month periods ended March 31, 2020 and 2019, respectively, the Corporation recorded intangible amortization expense totaling $42,000 and $46,000.

6.	Stock Compensation Plan

In April 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 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, 2020, 19,833 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, 2020, there were 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, 2020, and changes during the period then ended is presented below:

	Shares		Weighted-Average Grant-date Fair Value
Nonvested at January 1, 2020		44,450	$	31.11
Granted		—		—
Vested		—		—
Forfeited		—		—
Nonvested as of March 31, 2020		44,450	$	31.11

For the three month periods ended March 31, 2020 and 2019, the Corporation recognized stock compensation expense of $112,000 and $90,000, respectively. As of March 31, 2020, there was $839,000 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.

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7.	Fair Value

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective 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.

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, 2020:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	1,027	$	—	$	1,027	$	—
U.S. agency mortgage-backed securities: residential		41,057		—		41,057		—
U.S. agency collateralized mortgage obligations: residential		31,773		—		31,773		—
State and political subdivision		28,367		—		28,367		—
Corporate debt securities		12,195		—		8,173		4,022
Total available-for-sale securities	$	114,419	$	—	$	110,397	$	4,022

Equity securities	$	9	$	9	$	—	$	—

December 31, 2019:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	7,077	$	—	$	7,077	$	—
U.S. agency mortgage-backed securities: residential		41,075		—		41,075		—
U.S. agency collateralized mortgage obligations: residential		32,837		—		32,837		—
State and political subdivisions		27,796		—		27,796		—
Corporate debt securities		11,322		—		7,300		4,022
Total available-for-sale securities	$	120,107	$	—	$	116,085	$	4,022

Equity securities	$	19	$	19	$	—	$	—

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 periods ended March 31, 2020 and 2019, the Corporation had no transfers between levels.

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7.	Fair Value (continued)

The following table presents changes in Level 3 assets measured on a recurring basis for the three and three month periods ended March 31, 2020 and 2019:

(Dollar amounts in thousands)	Three Months Ended March 31,
	2020		2019
Balance at the beginning of the period	$	4,022	$	3,500
Total gains or losses (realized/unrealized):
Included in earnings		—		—
Included in other comprehensive income		—		—
Transfers in and/or out of Level 3		—		—
Balance at the end of the period	$	4,022	$	3,500

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, 2020, the Corporation had one impaired commercial real estate loan carried at a fair value of $131,000, which consisted of the outstanding balance of $150,000 less a specific reserve of $19,000. In addition, the Corporation had two impaired commercial business loans carried at a fair value of $40,000, which consisted of the outstanding balance of $45,000, less a specific reserve of $5,000. As of December 31, 2019, the Corporation did not have any impaired loans carried at fair value measured using the fair value of collateral. During the three month periods ended March 31, 2020 and 2019, there was additional provision for loan losses recorded for impaired loans of $24,000 and $63,000, respectively.

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, 2020, the Corporation had no OREO measured at fair value. As of December 31, 2019, OREO measured at fair value less costs to sell had a net carrying amount of $88,000, which consisted of the outstanding balance of $91,000, less write-downs of $3,000. This property was sold during the first quarter of 2020. During the three month period ended March 31, 2020, there was no recorded expense associated with the write-down of OREO, compared to $21,000 for the same period in 2019.

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, 2020:
Impaired commercial real estate loans	$	131	$	—	$	—	$	131
Impaired commercial business loans		40		—		—		40
Total	$	171	$	—	$	—	$	171

December 31, 2019:
Other real estate owned	$	88	$	—	$	—	$	88
Total	$	88	$	—	$	—	$	88

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7.	Fair Value (continued)

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

(Dollar amounts in thousands)			Valuation	Unobservable	Weighted
			Techniques(s)	Input(s)	Average
March 31, 2020:
Impaired commercial real estate loans	$	131	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial business loans		40	Liquidation value of business assets	Adjustment for differences between comparable business assets		10-100% (18.5%)

December 31, 2019:
Other real estate owned	$	88	Sales comparison approach	Adjustment for differences between comparable sales		10	%

At March 31, 2020 and December 31, 2019 was an impaired residential mortgage loan totaling $70,000 and $67,000, respectively, and an impaired home equity loan totaling $4,000 and $4,000, 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, 2020:
Financial Assets:
Cash and cash equivalents	$	10,089	$	10,089	$	10,089	$	—	$	—
Interest earning time deposits		8,948		8,948		—		8,948		—
Securities - available-for-sale		114,419		114,419		—		110,397		4,022
Securities - equities		9		9		9		—		—
Loans, net		734,730		730,472		—		—		730,472
Federal bank stock		6,866		N/A		N/A		N/A		N/A
Accrued interest receivable		2,861		2,861		114		476		2,271
Total	$	877,922	$	866,798	$	10,212	$	119,821	$	736,765
Financial Liabilities:
Deposits		782,716		788,806		570,399		218,407		—
Borrowed funds		60,550		52,678		—		52,678		—
Accrued interest payable		661		661		57		604		—
Total	$	843,927	$	842,145	$	570,456	$	271,689	$	—

December 31, 2019:
Financial Assets:
Cash and cash equivalents	$	14,986	$	14,986	$	14,986	$	—	$	—
Interest earning time deposits		9,698		9,698		—		9,698		—
Securities - available-for-sale		120,107		120,107		—		116,085		4,022
Securities - equities		19		19		19		—		—
Loans, net		695,348		697,990		—		—		697,990
Federal bank stock		5,790		N/A		N/A		N/A		N/A
Accrued interest receivable		2,600		2,600		78		419		2,103
Total	$	848,548	$	845,400	$	15,083	$	126,202	$	704,115
Financial Liabilities:
Deposits		787,124		793,999		569,357		224,642		—
Borrowed funds		28,550		29,133		—		29,133		—
Accrued interest payable		616		616		51		565		—
Total	$	816,290	$	823,748	$	569,408	$	254,340	$	—

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

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8.	Regulatory Matters

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

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019. The capital conservation buffer for 2019 and subsequent periods is 2.50% 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, 2020, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

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, 2020					December 31, 2019
	Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Actual	$	81,321		12.99	%	$	80,418		13.74	%
For capital adequacy purposes		50,073		8.00	%		46,836		8.00	%
To be well capitalized		62,592		10.00	%		58,544		10.00	%
Tier 1 capital to risk-weighted assets:
Actual	$	74,101		11.84	%	$	73,862		12.62	%
For capital adequacy purposes		37,555		6.00	%		35,127		6.00	%
To be well capitalized		50,073		8.00	%		46,836		8.00	%
Common Equity Tier 1 capital to risk-weighted assets:
Actual	$	74,101		11.84	%	$	73,862		12.62	%
For capital adequacy purposes		28,166		4.50	%		26,345		4.50	%
To be well capitalized		40,685		6.50	%		38,054		6.50	%
Tier 1 capital to average assets:
Actual	$	74,101		8.10	%	$	73,862		8.17	%
For capital adequacy purposes		36,608		4.00	%		36,146		4.00	%
To be well capitalized		45,761		5.00	%		45,182		5.00	%

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9.	Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three month periods ended March 31, 2020 and 2019 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):

(Dollar amounts in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2020	$	(108	)	$	(5,227	)	$	(5,335	)
Other comprehensive income before reclassification		1,259			—			1,259
Amounts reclassified from accumulated other comprehensive income (loss)		(62	)		—			(62	)
Net current period other comprehensive income (loss)		1,197			—			1,197
Accumulated Other Comprehensive Income (Loss) at March 31, 2020	$	1,089		$	(5,227	)	$	(4,138	)

(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, 2020			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(78	)	Net gain on sale of available-for-sale securities
Tax effect		16		Provision for income taxes
Total reclassifications for the period	$	(62	)	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, 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 available-for-sale securities
Tax effect		—		Provision for income taxes
Total reclassifications for the period	$	(2	)	Net of tax

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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, 2020 and 2019.

(Dollar amounts in thousands)	For the Three Months Ended March 31,
	2020		2019
Noninterest income
In-scope of Topic 606:
Service charges on deposits
Maintenance fees	$	53	$	40
Overdraft fees		328		438
Other fees		70		77
Electronic banking fees (1)		332		324
Noninterest income (in-scope of Topic 606)		783		879
Noninterest income (out-of-scope of Topic 606) (2)		242		178
Total noninterest income	$	1,025	$	1,057

⁽¹⁾

Included in other noninterest income on the consolidated statement of income.

⁽²⁾

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.

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11.

Leases

Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2020, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before expiration. The weighted average remaining life of the lease term for these leases was 12.84 years as of March 31, 2020 compared to 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 3.49% as of March 31, 2020 compared to 3.47% as of March 31, 2019.

The total operating lease costs were $48,000 and $49,000, respectively, for the three months ended March 31, 2020 and 2019. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $1.5 million and $1.7 million, respectively, as of March 31, 2020, and $1.6 million and $1.8 million, respectively, as of March 31, 2019.

Total estimated rental commitments for the operating leases were as follows as of March 31, 2020:

(Dollar amounts in thousands)
Year ending December 31:
2020 (excluding three months)	$	159
2021		217
2022		222
2023		222
2024		227
Thereafter		1,063
Total minimum lease payments		2,110
Discount effect of cash flows		(441	)
Present value of lease liabilities	$	1,669

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12.

Recent Accounting Pronouncements

Newly Issued Not Yet Effective Accounting Standards

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. However, on October 16, 2019, FASB announced a delay for the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. As the Corporation is a smaller reporting company, the delay would be applicable. Management has selected a software vendor and is currently working through the implementation process. The Corporation is reviewing available historical information in order to assess the expected credit losses and determine the impact the adoption of ASU 2016-13 will have on the financial statements.

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

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

Adoption of New Accounting Policies

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 was 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. In conjunction with most recent annual impairment assessment as of November 30, 2019, the Corporation adopted the simplified measurement of goodwill. Although the Corporation cannot anticipate future goodwill impairment assessments, based on the most recent assessment, the adoption of this guidance had no impact on consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement". ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Disclosures for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurement will be removed. Additional disclosures will be required relating to (a) changes in unrealized gains/losses in OCI for Level 3 fair value measurements for assets held at the end of the reporting period, and (b) the process of calculating weighted average for significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The adoption of this ASU did not have a material impact on the Corporation's financial statements and disclosures.

In March 2020, in accordance with provisions in the CARES Act, the Corporation has elected not to apply the guidance in ASC 310-40 on accounting for TDRs to loan modifications related to COVID-19 made between March 1, 2020 and the earlier of (1) December 31, 2020 or (2) 60 days after the end of the COVID-19 national emergency. This relief was only applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and may include payment deferrals, fee waivers, extension of repayments or other delays in payment.

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

This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three months ended March 31, 2020, compared to the same periods in 2019 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, 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.

COVID-19 UPDATE

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

The Corporation has responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by enacting the following measures:

• The Annual Shareholder Meeting was held virtually.

• Operational areas within the Bank have been segregated and employees directed to work from home or alternate locations, where possible, to mitigate possible spread of illness to an entire department.

• Branch lobby hours have been temporarily suspended to the public for walk-in transactions. Appointments can be made as necessary to complete paperwork or complex transactions. Drive-thru services remain open where available, and the use of ATMs and on-line banking is encouraged.

• Loan modifications, including extensions and deferrals, have been made available to customers who were not 30 days past due as of December 31, 2019.

• Customers were assisted with applications for resources available through the PPP, administered by the SBA. These government guaranteed, forgivable loans were created as part of the CARES Act.

The duration and full impact of this economic disruption is unknown at this time, and continued deterioration of the economic environment could adversely impact the Corporation's financial condition. While the full impact of the COVID-19 pandemic cannot be predicted or measured, there will be a definite impact on net income. It is anticipated that provision for loan loss expense will remain elevated in expectation of a deterioration in a portion of the loan portfolio. As a result of the significant decline in interest rates, the Corporation has and will continue to experience a decline in net income and resulting net interest margin, however, there will be a benefit from the fees arising from the PPP loan program. Also, it is expected that noninterest income will be reduced as customers may use fewer fee-based services due to COVID-19 mitigation efforts such as stay-at-home orders. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.

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CHANGES IN FINANCIAL CONDITION

Total assets increased $28.9 million, or 3.2%, to $944.2 million at March 31, 2020 from $915.3 million at December 31, 2019. The increase in assets was driven primarily by a $39.4 million increase in net loans receivable, partially offset by decreases in securities and cash and cash equivalents of $5.7 million and $4.9 million, respectively. Total liabilities increased $27.3 million, or 3.3%, to $856.7 million at March 31, 2020 from $829.4 million at December 31, 2019 due to an increase in borrowed funds of $32.0 million, partially offset by a decrease in customer deposits of $4.4 million.

Stockholders’ equity increased $1.7 million, or 2.0%, to $87.5 million at March 31, 2020 from $85.9 million at December 31, 2019 primarily due to a $1.2 million increase in accumulated other comprehensive income and a $378,000 increase in retained earnings as a result of $1.2 million of net income available to common stockholders, partially offset by $812,000 of common dividends paid. The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at 9.3% of total assets. Book value per common share was $30.77 at March 31, 2020, compared to $30.14 at December 31, 2019.

At March 31, 2020, 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 8.10%, 11.84%, 11.84% and 12.99%, respectively. The Bank was also considered “well-capitalized” at December 31, 2019 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.17%, 12.62%, 12.62% and 13.74%, respectively.

RESULTS OF OPERATIONS

Comparison of Results for the Three Months Ended March 31, 2020 and 2019

General. Net income available to common stockholders decreased $892,000, or 42.8%, to $1.2 million for the three months ended March 31, 2020 from $2.1 million for the same period in 2019. This decrease resulted from decreases in net interest income and noninterest income of $530,000 and $32,000, respectively, and an increase of $612,000 in the provision for loan losses, partially offset by decreases in noninterest expense and the provision for income taxes of $69,000 and $213,000, respectively.

Net interest income. Tax equivalent net interest income decreased $535,000, or 7.4%, to $6.7 million for the three months ended March 31, 2020 from $7.3 million for the three months ended March 31, 2019. This increase was attributed to an increase in interest expense of $441,000 and a decrease in tax equivalent interest income of $94,000.

Interest income. Tax equivalent interest income decreased $94,000, or 1.0%, to $8.9 million for the three months ended March 31, 2020 from $9.0 million for the same period in 2019. This decrease was attributed to a $249,000 decrease in interest earned on loans, partially offset by increases in interest on securities and interest-earning deposits with banks and dividends on federal bank stocks of $128,000, $19,000 and $8,000, respectively.

Tax equivalent interest earned on loans receivable decreased $249,000, or 3.0%, to $8.0 million for the three months ended March 31, 2020 compared to $8.3 million for the same period in 2019. This decrease resulted from a 25 basis point decrease in the average yield on loans to 4.47% for the three months ended March 31, 2020, versus 4.72% for the same period in 2019. The average yield was impacted by the 150 basis point decline in the Wall Street Journal Prime Rate in March 2020 which resulted in the immediate decrease in interest rates on adjustable rate loans linked to that index. Accretion of purchase accounting adjustments on acquired loans accounted for approximately 1 basis point of the yield decrease. This unfavorable yield variance accounted for a $390,000 decrease in interest income. Partially offsetting this unfavorable variance, average loans increased $12.3 million, or 1.7%, accounting for a $141,000 increase in interest income.

Tax equivalent interest earned on securities increased $128,000, or 20.2%, to $761,000 for the three months ended March 31, 2020 compared to $633,000 for the same period in 2019. The average balance of securities increased $18.1 million, or 18.6%, accounting for a $119,000 increase in interest income. Additionally, the average yield on securities increased by 1 basis point to 2.65% for the three months ended March 31, 2020 versus 2.64% for the same period in 2019. This favorable yield variance accounted for a $9,000 increase in interest income.

Interest earned on deposits with banks increased $19,000, or 40.4%, to $66,000 for the three months ended March 31, 2020 compared to $47,000 for the same period in 2019. This increase resulted from a $4.3 million, or 34.0%, increase in average cash balances, accounting for a $17,000 increase in interest income. Additionally, the average yield on these balances increased 6 basis points to 1.58% for the three months ended March 31, 2020, versus 1.52% for the same period in 2019, accounting for a $2,000 increase in interest income.

Dividends on federal bank stocks increased $8,000, or 8.0%, to $108,000 for the three months ended March 31, 2020 from $100,000 for the same period in 2019. This increase was primarily due to a $395,000, or 6.6%, increase in the average balance of federal bank stocks, accounting for a $7,000 increase in interest income. Additionally, an increase of 4 basis points in the average yield to 6.78% for the three months ended March 31, 2020, versus 6.74% for the same period in 2019, accounted for a $1,000 increase in interest income.

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Interest expense. Interest expense increased $441,000, or 24.9%, to $2.2 million for the three months ended March 31, 2020 from $1.8 million for the same period in 2019. This increase in interest expense can be attributed to an increase in interest incurred on deposits of $469,000, partially offset by a decrease in interest incurred on borrowed funds of $28,000.

Interest expense incurred on deposits increased $469,000, or 31.9%, to $1.9 million for the three months ended March 31, 2020 compared to $1.5 million for the same period in 2019. The average cost of interest-bearing deposits increased 25 basis points to 1.23% for the three months ended March 31, 2020, versus 0.98% for the same period in 2019, accounting for a $406,000 increase in interest expense. This temporary increase in cost was driven primarily due to money market and CD specials offered in 2019 and will gradually decline as the special rates expire or the accounts mature. Additionally, the average balance of interest-bearing deposits increased $25.1 million, or 4.1%, to $632.9 million for the three months ended March 31, 2020, compared to $607.7 million for the same period in 2019 causing a $63,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $28,000, or 9.3%, to $273,000 for the three months ended March 31, 2020, compared to $301,000 for the same period in the prior year. The decrease was primarily the result of a 39 basis point decrease in the average cost of borrowed funds to 2.33% for the three months ended March 31, 2020 compared to 2.72% for the same period in 2019 causing a $40,000 decrease in interest expense. Partially offsetting this reduction, the average balance of borrowed funds increased $2.3 million, or 5.1%, to $47.1 million for the three months ended March 31, 2020, compared to $44.8 million for the same period in 2019 causing a $12,000 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,
	2020							2019
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Loans, taxable	$	701,694	$	7,818		4.48	%	$	689,527	$	8,072		4.75	%
Loans, tax exempt		19,953		194		3.91	%		19,852		189		3.87	%
Total loans receivable		721,647		8,012		4.47	%		709,379		8,261		4.72	%
Securities, taxable		101,015		664		2.64	%		75,454		492		2.64	%
Securities, tax exempt		14,361		97		2.72	%		21,791		141		2.62	%
Total securities		115,376		761		2.65	%		97,245		633		2.64	%
Interest-earning deposits with banks		16,838		66		1.58	%		12,564		47		1.52	%
Federal bank stocks		6,410		108		6.78	%		6,015		100		6.74	%
Total interest-earning cash equivalents		23,248		174		3.01	%		18,579		147		3.21	%
Total interest-earning assets		860,271		8,947		4.18	%		825,203		9,041		4.44	%
Cash and due from banks		3,493							3,258
Other noninterest-earning assets		62,306							62,964
Total Assets	$	926,070						$	891,425
Interest-bearing liabilities:
Interest-bearing demand deposits	$	417,514	$	779		0.75	%	$	387,720	$	528		0.55	%
Time deposits		215,336		1,161		2.17	%		220,006		943		1.74	%
Total interest-bearing deposits		632,850		1,940		1.23	%		607,726		1,471		0.98	%
Borrowed funds, short-term		10,712		64		2.40	%		12,587		96		3.08	%
Borrowed funds, long-term		36,414		209		2.31	%		32,250		205		2.58	%
Total borrowed funds		47,126		273		2.33	%		44,837		301		2.72	%
Total interest-bearing liabilities		679,976		2,213		1.31	%		652,563		1,772		1.10	%
Noninterest-bearing demand deposits		144,532		—		—			144,496		—		—
Funding and cost of funds		824,508		2,213		1.08	%		797,059		1,772		0.90	%
Other noninterest-bearing liabilities		14,177							13,745
Total Liabilities		838,685							810,804
Stockholders' Equity		87,385							80,621
Total Liabilities and Stockholders' Equity	$	926,070						$	891,425
Net interest income			$	6,734						$	7,269

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						2.87	%						3.34	%

Net interest margin (net interest income as a percentage of average interest-earning assets)						3.15	%						3.57	%

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

(Dollar amounts in thousands)	Three Months Ended March 31,
	2020 versus 2019
	Increase (Decrease) due to
	Volume			Rate			Total
Interest income:
Loans	$	141		$	(390	)	$	(249	)
Securities		119			9			128
Interest-earning deposits with banks		17			2			19
Federal bank stocks		7			1			8
Total interest-earning assets		284			(378	)		(94	)

Interest expense:
Interest-bearing deposits		63			406			469
Borrowed funds, short-term		(13	)		(19	)		(32	)
Borrowed funds, long-term		25			(21	)		4
Total interest-bearing liabilities		75			366			441
Net interest income	$	209		$	(744	)	$	(535	)

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

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Information pertaining to the allowance for loan losses and nonperforming assets for the three month periods ended March 31, 2020 and 2019 is as follows:

(Dollar amounts in thousands)	As of or for the three months ended
	March 31,
	2020			2019
Balance at the beginning of the period	$	6,556		$	6,508
Provision for loan losses		792			180
Charge-offs		(138	)		(129	)
Recoveries		10			80
Balance at the end of the period	$	7,220		$	6,639

Nonperforming loans	$	3,066		$	3,687
Nonperforming assets		3,404			4,507
Nonperforming loans to total loans		0.41	%		0.52	%
Nonperforming assets to total assets		0.36	%		0.51	%
Allowance for loan losses to total loans		0.97	%		0.94	%
Allowance for loan losses to nonperforming loans		235.49	%		180.07	%

Nonperforming loans increased $159,000, or 5.5% to $3.1 million at March 31, 2020 from $2.9 million at December 31, 2019. This was primarily due to a general increase in loans 90+ days past due and still accruing,

As of March 31, 2020, the Corporation’s classified and criticized assets amounted to $16.2 million, or 1.7% of total assets, with $10.8 million classified as substandard and $5.4 million identified as special mention. This compares to classified and criticized assets of $17.0 million, or 1.9% of total assets, with $11.5 million classified as substandard and $5.6 million identified as special mention at December 31, 2019. This $865,000 decrease was primarily related to the upgrade of a $187,000 commercial relationship from substandard to pass, the upgrade of a $120,000 commercial relationship from special mention to pass, and the payoff of two commercial real estate loans totaling $179,000.

The provision for loan losses increased $612,000 to $792,000 for the three months ended March 31, 2020 from $180,000 for the same period in 2019. The increase in the provision for loan losses was primarily due to a $39.4 million increase in loan portfolio balances and the addition of a new specific pandemic qualitative factor to the allowance for loan losses calculation. This new pandemic factor, set at 2 basis points, added approximately $125,000 to the provision expense for the period ended March 31, 2020. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is expected. The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

Noninterest income. Noninterest income decreased $32,000, or 3.0%, to $1.0 million for the three months ended March 31, 2020, compared to $1.1 million for the same period in 2019 due to a $104,000 decrease in fees and service charges, partially offset by a $74,000 increase in gains on the sale of securities. The decrease in fees and service charges was primarily due to a decline in overdraft charges.

Noninterest expense. Noninterest expense decreased $69,000, or 1.2%, to $5.5 million for the three months ended March 31, 2020 from $5.6 million for the same period in 2019. The decrease was primarily attributable to decreases in premises and equipment expense and FDIC insurance expense of $92,000 and $33,000, respectively, partially offset by an increase in other noninterest expense of $65,000.

Provision for income taxes. The provision for income taxes decreased $213,000, or 46.7%, to $243,000 for the three months ended March 31, 2020 compared to $456,000 for the same period in the prior year as a result of the decrease in net income before provision for income taxes.

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LIQUIDITY

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and sold or maturing securities. During the three months ended March 31, 2020, the Corporation used its sources of funds primarily to fund the production of new loans. As of March 31, 2020, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $130.4 million, and standby letters of credit totaling $444,000, net of collateral maintained by the Bank.

At March 31, 2020, time deposits amounted to $212.3 million, or 27.1% of the Corporation’s total consolidated deposits, including approximately $67.3 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, 2020, the Corporation had borrowed funds of $60.6 million consisting of $45.0 million of long-term FHLB advances, $12.3 million of overnight FHLB advances, a $1.3 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, 2020, 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 $226.6 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 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, 2020, the Bank exceeded all minimum capital requirements under these capital guidelines.

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CRITICAL ACCOUNTING POLICIES

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

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2019, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. Although the annual review of goodwill revealed no impairment consideration, based on current economic conditions related to COVID-19, management performed an interim assessment as of March 31, 2020. Management concluded that goodwill was not impaired at this date. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation’s assets and liabilities to interest rate changes. As of March 31, 2020, the Corporation’s interest-earning assets maturing or repricing within one year totaled $313.0 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $150.3 million, providing an excess of interest-earning assets over interest-bearing liabilities of $162.7 million. At March 31, 2020, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 208.2%.

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

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, 2020, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation.

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a)	Not applicable.

(b)	Not applicable.

Item 6. Exhibits

Exhibit 31.1	Rule 13a-14(a) Certification of Principal Executive Officer
Exhibit 31.2	Rule 13a-14(a) Certification of Principal Financial Officer
Exhibit 32.1	CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2	CFO Certification Pursuant to 18 U.S.C. Section 1350
101.INS	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

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Signatures

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


	EMCLAIRE FINANCIAL CORP

Date: May 12, 2020	By:	/s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer

Date: May 12, 2020	By:	/s/ Amanda L. Engles
	Amanda L. Engles
	Chief Financial Officer
	Treasurer