EMCLAIRE FINANCIAL CORP - Quarter Report: 2021 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, 2021

☐	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 2,721,212 at May 14, 2021.

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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, 2021 and December 31, 2020	1

	Consolidated Statements of Net Income for the three months ended March 31, 2021 and 2020	2

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020	3

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020	4

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

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, 2021 and December 31, 2020

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

	March 31, 2021			December 31, 2020
Assets
Cash and due from banks	$	3,545		$	3,526
Interest earning deposits with banks		54,371			33,913
Total cash and cash equivalents		57,916			37,439
Interest earning time deposits		5,718			5,718
Securities - available-for-sale		141,871			113,041
Securities - equity investments		13			15
Loans held for sale		48			75
Loans receivable, net of allowance for loan losses of $9,685 and $9,580		785,503			800,338
Federal bank stocks, at cost		5,711			5,635
Bank-owned life insurance		15,562			15,468
Accrued interest receivable		4,217			3,786
Premises and equipment, net		18,095			18,202
Goodwill		19,460			19,460
Core deposit intangible, net		1,044			1,083
Prepaid expenses and other assets		12,553			12,063
Total Assets	$	1,067,711		$	1,032,323
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	215,887		$	193,752
Interest bearing		710,340			699,875
Total deposits		926,227			893,627
Short-term borrowed funds		2,050			2,050
Long-term borrowed funds		30,000			30,000
Accrued interest payable		468			474
Accrued expenses and other liabilities		18,096			14,692
Total Liabilities		976,841			940,843
Stockholders' Equity
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 286,888 shares issued and outstanding; Series D, non-cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding		4,206			4,206
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,823,229 shares issued; 2,721,212 shares outstanding		3,529			3,529
Additional paid-in capital		47,312			47,200
Treasury stock, at cost; 102,017 shares		(2,114	)		(2,114	)
Retained earnings		43,501			42,143
Accumulated other comprehensive loss		(5,564	)		(3,484	)
Total Stockholders' Equity		90,870			91,480
Total Liabilities and Stockholders' Equity	$	1,067,711		$	1,032,323

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, 2021 and 2020

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

	For the three months ended March 31,
	2021		2020
Interest and dividend income:
Loans receivable, including fees	$	8,295	$	7,981
Securities:
Taxable		501		664
Exempt from federal income tax		202		84
Federal bank stocks		69		108
Interest earning deposits with banks		31		66
Total interest and dividend income		9,098		8,903
Interest expense:
Deposits		1,267		1,940
Borrowed funds		179		273
Total interest expense		1,446		2,213
Net interest income		7,652		6,690
Provision for loan losses		275		792
Net interest income after provision for loan losses		7,377		5,898
Noninterest income:
Fees and service charges		326		451
Net realized gain on sales of securities		26		78
Net gain on sales of loans		102		—
Earnings on bank-owned life insurance		95		94
Other		503		402
Total noninterest income		1,052		1,025
Noninterest expense:
Compensation and employee benefits		3,023		2,912
Premises and equipment		862		794
Intangible asset amortization		39		42
Professional fees		270		221
Federal deposit insurance		157		103
Other		1,463		1,418
Total noninterest expense		5,814		5,490
Income before provision for income taxes		2,615		1,433
Provision for income taxes		441		243
Net income	$	2,174	$	1,190
Basic earnings per common share	$	0.80	$	0.44
Diluted earnings per common share		0.79		0.44
Average common shares outstanding - basic		2,721,212		2,708,712
Average common shares outstanding - diluted		2,740,189		2,723,610

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, 2021 and 2020

(Dollar amounts in thousands)

	For the three months ended March 31,
	2021			2020
Net income	$	2,174		$	1,190
Other comprehensive income (loss)
Unrealized gains/(losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period		(2,607	)		1,595
Reclassification adjustment for (gains) losses included in net income		(26	)		(78	)
Net period change		(2,633	)		1,517
Tax effect		553			(320	)
Net of tax		(2,080	)		1,197
Comprehensive income	$	94		$	2,387

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, 2021 and 2020

(Dollar amounts in thousands)

	For the three months ended March 31,
	2021			2020
Cash flows from operating activities
Net income	$	2,174		$	1,190
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		348			354
Provision for loan losses		275			792
Amortization/accretion of premiums, discounts and deferred costs and fees, net		(214	)		265
Amortization of operating lease right-of-use assets		35			34
Amortization of intangible assets and mortgage servicing rights		65			62
Realized gain on sales of debt securities, net		(26	)		(78	)
Change in fair value of equity securities		2			10
Net gain on sales of loans		(102	)		—
Net (gain) loss on foreclosed real estate		(17	)		5
Loans originated for sale		(3,068	)		—
Proceeds from the sale of loans originated for sale		3,198			—
Stock compensation expense		112			112
Increase in bank-owned life insurance		(95	)		(94	)
Increase in accrued interest receivable		(431	)		(261	)
Increase in prepaid expenses and other assets		(320	)		(59	)
Increase (decrease) in accrued interest payable		(6	)		45
Increase (decrease) in accrued expenses and other liabilities		3,404			(386	)
Net cash provided by operating activities		5,334			1,991
Cash flows from investing activities
Loan originations and principal collections, net		14,159			(40,577	)
Proceeds from sales of loans held for sale previously classified as portfolio loans		700			—
Available-for-sale securities:
Sales		—			8,226
Maturities, repayments and calls		4,202			5,772
Purchases		(35,723	)		(6,786	)
Purchase of federal bank stocks		(404	)		(2,512	)
Redemption of federal bank stocks		328			1,436
Net change in interest earning time deposits		—			750
Proceeds from surrender of bank-owned life insurance		—			220
Purchases of premises and equipment		(241	)		(312	)
Proceeds from the sale of foreclosed real estate		338			115
Net cash used in investing activities		(16,641	)		(33,668	)
Cash flows from financing activities
Net increase (decrease) in deposits		32,600			(4,408	)
Proceeds from long-term debt		—			20,000
Repayments on long-term debt		—			(250	)
Net change in short-term borrowings		—			12,250
Dividends paid		(816	)		(812	)
Net cash provided by financing activities		31,784			26,780
Net increase (decrease) in cash and cash equivalents		20,477			(4,897	)
Cash and cash equivalents at beginning of period		37,439			14,986
Cash and cash equivalents at end of period	$	57,916		$	10,089
Supplemental information:
Interest paid	$	1,452		$	2,168
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		—			209
Transfers from portfolio loans to loans held for sale		700			—
Bonds purchased, not yet settled		3,544			—

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, 2021 and 2020

(Dollar amounts in thousands, except per share data)

	Preferred Stock		Additional Paid-in Capital - Preferred		Common Stock		Additional Paid-in Capital - Common		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at January 1, 2020	$	421	$	3,785	$	3,513	$	46,757	$	(2,114	)	$	38,831		$	(5,335	)	$	85,858
Net income		—		—		—		—		—			1,190			—			1,190
Other comprehensive income		—		—		—		—		—			—			1,197			1,197
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(812	)		—			(812	)
Balance at March 31, 2020	$	421	$	3,785	$	3,513	$	46,869	$	(2,114	)	$	39,209		$	(4,138	)	$	87,545

Balance at January 1, 2021	$	421	$	3,785	$	3,529	$	47,200	$	(2,114	)	$	42,143		$	(3,484	)	$	91,480
Net income		—		—		—		—		—			2,174			—			2,174
Other comprehensive loss		—		—		—		—		—			—			(2,080	)		(2,080	)
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(816	)		—			(816	)
Balance at March 31, 2021	$	421	$	3,785	$	3,529	$	47,312	$	(2,114	)	$	43,501		$	(5,564	)	$	90,870

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

1.	Nature of Operations and Basis of Presentation

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

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

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

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

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

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

Effective March 16, 2020, the Federal Reserve lowered the federal funds target rate to a range of between zero and 0.25%. This action followed a prior reduction of the federal funds target rate to a range of 1.00% to 1.25% effective on March 4, 2020. These actions were taken in an emergency response to stem the economic impact of the pandemic. The Federal Reserve has indicated that it expects to maintain the targeted federal funds rate at current levels until such time that the economic environment has stabilized for a period of time. The Corporation’s earnings and related cash flows are largely dependent upon net interest income, representing the difference between interest income received on interest-earnings assets, primarily loans and securities, and the interest paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. Since the Corporation’s balance sheet is asset sensitive, earnings are more adversely affected by falling rates since rate sensitive assets reprice more quickly than rate sensitive liabilities. Should the Federal Reserve take any further action regarding rates in relation to the pandemic, the Corporation’s margins could be compressed even further, perpetuating the negative effect on net income.

The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions caused by the pandemic. On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and containment measures. On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic consequences of the pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Among other measures, the CARES Act provided $349 billion for the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA) to assist qualified small businesses with certain operational expenses, certain credits for individuals and their dependents against their 2020 personal income tax and expanded eligibility for unemployment benefits. This legislation was later amended on April 24, 2020, by the Paycheck Protection Program and Healthcare Enhancement Act (PPPHE Act) which provided an additional $310 billion of funding for PPP loans.

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

Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. The Corporation implemented a short-term modification program to provide relief to consumer and commercial customers following the guidelines of these provisions. Most modifications fall into the 90 to 180-day range with deferred principal and interest due and payable on the maturity date of the existing loans. Recently, Section 541 of the Consolidated Appropriations Act, 2021, has extended this relief to the earlier of 60 days after the end of the national emergency proclamation or January 1, 2022. Specific detail describing these modifications made in relation to the CARES Act can be found in the TDR discussion in "Note 4 - Loans" on page 15.

Following the enactment of these provisions, in December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress caused by the pandemic. This included additional stimulus payments to individuals and their dependents, the extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. The Bank was a lender for the initial SBA program and closed 688 PPP loans totaling $54.9 million. As of April 30, 2021, 640 loans totaling $48.3 million were fully repaid, including 5 loan totaling $66,000 that were voluntarily repaid, rather than forgiven by the SBA. Five loans had aggregate unforgiven balances totaling $97,000, two of which have remaining outstanding balances totaling $96,000. The Bank is also participating in the second round of the program and through April 30, 2021 has closed 390 loans totaling $26.5 million. There are an additional 59 loans totaling $1.9 million awaiting final processing and approval.

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,
	2021		2020
Net income	$	2,174	$	1,190
Less: Preferred stock dividends		—		—
Net income available to common stockholders	$	2,174	$	1,190
Average common shares outstanding		2,721,212		2,708,712
Add: Dilutive effects of restricted stock awards		18,977		14,898
Average shares and dilutive potential common shares		2,740,189		2,723,610
Basic earnings per common share	$	0.80	$	0.44
Diluted earnings per common share	$	0.79	$	0.44

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3.	Securities

Equity Securities

The Corporation held equity securities with fair values of $13,000 and $15,000 at March 31, 2021 and December 31, 2020, respectively. Changes in the fair value of these securities are included in other noninterest income on the consolidated statements of net income. During the three months ended March 31, 2021 and 2020, the Corporation recognized losses of $2,000 and $10,000, respectively, on equity securities held at March 31. During the three months ended March 31, 2021 and 2020, the Corporation did not sell any equity securities.

Debt Securities - Available-for-Sale

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

(Dollar amounts in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2021:
U.S. government sponsored entities and agencies	$	6,035	$	36	$	(12	)	$	6,059
U.S. agency mortgage-backed securities: residential		19,826		340		(121	)		20,045
U.S. agency collateralized mortgage obligations: residential		22,573		233		(130	)		22,676
State and political subdivisions		69,519		742		(1,018	)		69,243
Corporate debt securities		23,742		222		(116	)		23,848
Total securities available-for-sale	$	141,695	$	1,573	$	(1,397	)	$	141,871

December 31, 2020:
U.S. government sponsored entities and agencies	$	3,036	$	11	$	(40	)	$	3,007
U.S. agency mortgage-backed securities: residential		16,151		436		(6	)		16,581
U.S. agency collateralized mortgage obligations: residential		15,658		263		(10	)		15,911
State and political subdivisions		53,834		1,781		(38	)		55,577
Corporate debt securities		21,553		434		(22	)		21,965
Total securities available-for-sale	$	110,232	$	2,925	$	(116	)	$	113,041

The following table summarizes scheduled maturities of the Corporation’s debt securities as of March 31, 2021. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

(Dollar amounts in thousands)	Available-for-sale
	Amortized Cost		Fair Value
Due in one year or less	$	-	$	-
Due after one year through five years		4,547		4,597
Due after five years through ten years		30,848		31,028
Due after ten years		63,901		63,525
Mortgage-backed securities: residential		19,826		20,045
Collateralized mortgage obligations: residential		22,573		22,676
Total securities available-for-sale	$	141,695	$	141,871

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3.	Securities (continued)

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

(Dollar amounts in thousands)	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
March 31, 2021:
U.S. government sponsored entities and agencies	$	1,988	$	(12	)	$	—	$	—		$	1,988	$	(12	)
U.S. agency mortgage-backed securities: residential		7,598		(121	)		—		—			7,598		(121	)
U.S. agency collateralized mortgage obligations: residential		7,899		(128	)		2,053		(2	)		9,952		(130	)
State and political subdivisions		35,270		(1,009	)		1,655		(9	)		36,925		(1,018	)
Corporate debt securities		8,373		(101	)		485		(15	)		8,858		(116	)
Total	$	61,128	$	(1,371	)	$	4,193	$	(26	)	$	65,321	$	(1,397	)

December 31, 2020:
U.S. government sponsored entities and agencies	$	1,996	$	(40	)	$	—	$	—		$	1,996	$	(40	)
U.S. agency mortgage-backed securities: residential		1,547		(6	)		—		—			1,547		(6	)
U.S. agency collateralized mortgage obligations: residential		1,515		(4	)		4,845		(6	)		6,360		(10	)
State and political subdivisions		1,705		(11	)		1,641		(27	)		3,346		(38	)
Corporate debt securities		2,509		(10	)		988		(12	)		3,497		(22	)
Total	$	9,272	$	(71	)	$	7,474	$	(45	)	$	16,746	$	(116	)

Gains and losses on sales of securities for the three months ended March 31, 2021 and 2020 were as follows:

(Dollar amounts in thousands)	For the three months ended March 31,
	2021		2020
Proceeds	$	—	$	8,226
Gains		26		82
Losses		—		(4	)
Tax provision related to gains (losses)		5		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 100 debt securities in an unrealized loss position as of March 31, 2021, four of which were in an unrealized loss position for more than 12 months. Of these 100 securities, 62 were state and political subdivision securities, 23 were corporate securities, eight were collateralized mortgage obligations (issued by U.S. government sponsored entities), six were mortgage-backed securities and one was a U.S government sponsored entities and agencies security. Management believes the unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of their amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of March 31, 2021 to be other-than-temporarily impaired.

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4.	Loans Receivable and Related Allowance for Loan Losses

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

(Dollar amounts in thousands)	March 31, 2021		December 31, 2020
Mortgage loans on real estate:
Residential first mortgages	$	298,491	$	308,031
Home equity loans and lines of credit		83,523		87,088
Commercial real estate		285,133		285,625
Total real estate loans		667,147		680,744
Other loans:
Commercial business		84,953		89,139
Consumer		43,088		40,035
Total other loans		128,041		129,174
Total loans, gross		795,188		809,918
Less allowance for loan losses		9,685		9,580
Total loans, net	$	785,503	$	800,338

Included in total loans above are net deferred costs of $1.8 million and $2.5 million at March 31, 2021 and December 31, 2020, respectively. In addition, included in commercial loans at March 31, 2021 and December 31, 2020 were $32.6 million and $30.4 million, respectively, of Paycheck Protection Program (PPP) loans that are guaranteed by the Small Business Administration (SBA). The Corporation received $3.3 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020, $641,000 was recognized in the quarter ended March 31, 2021 and $1.4 million will be recognized in future periods upon forgiveness by the SBA.

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans. While the Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-19 pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.

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

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

At March 31, 2021, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc (2018) because the unaccreted purchase discount still exceeded the calculated allowance.

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

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

(Dollar amounts in thousands)	Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total
Three months ended March 31, 2021:
Allowance for loan losses:
Beginning Balance	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580
Charge-offs		—			—			(94	)		—			(90	)		(184	)
Recoveries		—			8			—			—			6			14
Provision		(114	)		(43	)		386			(65	)		111			275
Ending Balance	$	2,660		$	585		$	5,472		$	612		$	356		$	9,685

At March 31, 2021:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	1		$	—		$	33		$	6		$	—		$	40
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,659			585			5,439			606			356			9,645
Total	$	2,660		$	585		$	5,472		$	612		$	356		$	9,685
Total loans:
Individually evaluated for impairment	$	320		$	4		$	1,467		$	129		$	—		$	1,920
Acquired loans collectively evaluated for impairment		40,182			7,780			29,169			3,389			901			81,421
Originated loans collectively evaluated for impairment		257,989			75,739			254,497			81,435			42,187			711,847
Total	$	298,491		$	83,523		$	285,133		$	84,953		$	43,088		$	795,188

At December 31, 2020:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	—		$	—		$	40		$	20		$	—		$	60
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,774			620			5,140			657			329			9,520
Total	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580
Total loans:
Individually evaluated for impairment	$	329		$	3		$	1,639		$	143		$	—		$	2,114
Acquired loans collectively evaluated for impairment		44,209			8,491			30,913			5,131			1,017			89,761
Originated loans collectively evaluated for impairment		263,493			78,594			253,073			83,865			39,018			718,043
Total	$	308,031		$	87,088		$	285,625		$	89,139		$	40,035		$	809,918

Three months ended 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

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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, 2021:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of March 31, 2021						For the three months ended March 31, 2021
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	69	$	69	$	1	$	35	$	1	$	1
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		373		373		33		376		4		4
Commercial business		64		64		6		71		1		1
Consumer		—		—		—		—		—		—
Total	$	506	$	506	$	40	$	482	$	6	$	6

	Impaired Loans with No Specific Allowance
	As of March 31, 2021				For the three months ended March 31, 2021
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	363	$	251	$	290	$	1	$	1
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		1,110		1,094		1,177		12		12
Commercial business		65		65		65		1		1
Consumer		—		—		—		—		—
Total	$	1,542	$	1,414	$	1,536	$	14	$	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, 2020:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2020						For the year ended December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—	$	—	$	—	$	43	$	—	$	—
Home equity and lines of credit		—		—		—		2		—		—
Commercial real estate		380		380		40		106		17		11
Commercial business		78		78		20		53		5		4
Consumer		—		—		—		—		—		—
Total	$	458	$	458	$	60	$	204	$	22	$	15

	Impaired Loans with No Specific Allowance
	As of December 31, 2020				For the year ended December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	440	$	329	$	300	$	7	$	7
Home equity and lines of credit		3		3		2		—		—
Commercial real estate		1,259		1,259		1,167		76		66
Commercial business		65		65		80		10		6
Consumer		—		—		—		—		—
Total	$	1,767	$	1,656	$	1,549	$	93	$	79

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

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

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, 2021 and December 31, 2020, the Corporation had $384,000 and $396,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $3,000 and $6,000 of specific allowance for these loans at March 31, 2021 and December 31, 2020, respectively.

During the three months ended March 31, 2021 and 2020, the Corporation did not modify any loans as TDRs.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three months ended March 31, 2021 and 2020, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

COVID-19 related deferrals. Under the provisions of the CARES Act, at the peak, the Corporation had granted modifications on 419 loans with an aggregate balance of $111.6 million, representing 14.7% of gross outstanding loan balances. As of March 31, 2021, 29 loans with an aggregate balance of $33.9 million, or 4.4%, of gross loans outstanding remained on deferral while the remaining loans have resumed normal repayment or have been repaid in full. As of March 31, 2021, hotel loans comprised $30.1 million, or 88.8% of the loans remaining on deferral. The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status.

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

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status 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, 2021 and December 31, 2020:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2021:
Residential first mortgages	$	296,999	$	—	$	—	$	1,492	$	—	$	298,491
Home equity and lines of credit		83,298		—		—		225		—		83,523
Commercial real estate		—		250,095		14,801		20,237		—		285,133
Commercial business		—		78,925		1,575		4,453		—		84,953
Consumer		43,046		—		—		42		—		43,088
Total loans	$	423,343	$	329,020	$	16,376	$	26,449	$	—	$	795,188

December 31, 2020:
Residential first mortgages	$	306,237	$	—	$	—	$	1,794	$	—	$	308,031
Home equity and lines of credit		86,867		—		—		221		—		87,088
Commercial real estate		—		249,357		19,669		16,599		—		285,625
Commercial business		—		83,059		2,054		4,026		—		89,139
Consumer		39,987		—		—		48		—		40,035
Total loans	$	433,091	$	332,416	$	21,723	$	22,688	$	—	$	809,918

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

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of March 31, 2021 and December 31, 2020:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
March 31, 2021:
Residential first mortgages	$	295,560	$	1,213	$	226	$	191	$	1,301	$	298,491
Home equity and lines of credit		82,810		241		247		151		74		83,523
Commercial real estate		282,799		844		—		41		1,449		285,133
Commercial business		84,553		15		—		239		146		84,953
Consumer		42,992		20		34		—		42		43,088
Total loans	$	788,714	$	2,333	$	507	$	622	$	3,012	$	795,188

December 31, 2020:
Residential first mortgages	$	304,161	$	1,836	$	239	$	176	$	1,619	$	308,031
Home equity and lines of credit		86,093		446		328		146		75		87,088
Commercial real estate		283,373		580		41		18		1,613		285,625
Commercial business		88,614		72		46		239		168		89,139
Consumer		39,917		28		42		—		48		40,035
Total loans	$	802,158	$	2,962	$	696	$	579	$	3,523	$	809,918

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

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
March 31, 2021:
Residential first mortgages	$	214	$	69	$	—	$	1,018	$	1,301
Home equity and lines of credit		4		—		—		70		74
Commercial real estate		876		—		—		573		1,449
Commercial business		146		—		—		—		146
Consumer		—		—		—		42		42
Total loans	$	1,240	$	69	$	—	$	1,703	$	3,012

December 31, 2020:
Residential first mortgages	$	220	$	70	$	—	$	1,329	$	1,619
Home equity and lines of credit		4		—		—		71		75
Commercial real estate		1,016		—		24		573		1,613
Commercial business		168		—		—		—		168
Consumer		—		—		—		48		48
Total loans	$	1,408	$	70	$	24	$	2,021	$	3,523

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5.	Goodwill and Intangible Assets

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

(Dollar amounts in thousands)	March 31, 2021				December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill	$	19,460	$	—	$	19,460	$	—
Core deposit intangibles		5,634		4,590		5,634		4,551
Total	$	25,094	$	4,590	$	25,094	$	4,551

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

The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three month periods ended March 31, 2021 and 2020, respectively, the Corporation recorded intangible amortization expense totaling $39,000 and $42,000.

6.	Stock Compensation Plan

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

In addition, in April 2014, the Corporation adopted the 2014 Stock Incentive Plan (the Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock. As of March 31, 2021, 6,783 shares of restricted stock and 88,433 stock options remain available for issuance under the Plan.

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

For the period ended March 31, 2021, 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, 2021, and changes during the period then ended is presented below:

	Shares		Weighted-Average Grant-date Fair Value
Nonvested at January 1, 2021		47,950	$	28.83
Granted		—		—
Vested		—		—
Forfeited		—		—
Nonvested as of March 31, 2021		47,950	$	28.83

For the three month periods ended March 31, 2021 and 2020, the Corporation recognized stock compensation expense of $112,000 and $112,000, respectively. As of March 31, 2021, there was $771,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That expense 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. The Level 3 corporate debt securities valuations were supported by inputs such as the security issuer's publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors.

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

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
March 31, 2021:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	6,059	$	—	$	6,059	$	—
U.S. agency mortgage-backed securities: residential		20,045		—		20,045		—
U.S. agency collateralized mortgage obligations: residential		22,676		—		22,676		—
State and political subdivision		69,243		—		69,243		—
Corporate debt securities		23,848		—		21,842		2,006
Total available-for-sale securities	$	141,871	$	—	$	139,865	$	2,006

Equity securities	$	13	$	13	$	—	$	—

December 31, 2020:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	3,007	$	—	$	3,007	$	—
U.S. agency mortgage-backed securities: residential		16,581		—		16,581		—
U.S. agency collateralized mortgage obligations: residential		15,911		—		15,911		—
State and political subdivisions		55,577		—		55,577		—
Corporate debt securities		21,965		—		19,959		2,006
Total available-for-sale securities	$	113,041	$	—	$	111,035	$	2,006

Equity securities	$	15	$	15	$	—	$	—

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, 2021 and 2020, the Corporation had no transfers between levels.

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7.	Fair Value (continued)

The following table presents changes in Level 3 assets measured on a recurring basis for the three month periods ended March 31, 2021 and 2020:

(Dollar amounts in thousands)	Three months ended March 31,
	2021		2020
Balance at the beginning of the period	$	2,006	$	4,022
Total gains or losses (realized/unrealized):
Included in earnings		—		—
Included in other comprehensive income		—		—
Purchased into Level 3		—		—
Transfers in and/or out of Level 3		—		—
Balance at the end of the period	$	2,006	$	4,022

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, 2021, the Corporation had two impaired commercial real estate loans carried at a fair value of $339,000, which consisted of the outstanding balance of $372,000 less a specific reserve of $33,000. In addition, the Corporation had one impaired commercial business loan carried at a fair value of $58,000, which consisted of the outstanding balance of $60,000, less a specific reserve of $2,000. As of December 31, 2020, the Corporation had two impaired commercial real estate loans carried at a fair value of $340,000, which consisted of the outstanding balance of $380,000 less a specific reserve of $40,000. In addition, the Corporation had three impaired commercial business loans carried at a fair value of $58,000, which consisted of the outstanding balance of $78,000, less a specific reserve of $20,000. During the three month periods ended March 31, 2021 and 2020, there was additional provision for loan losses recorded for impaired loans of $1,000 and $24,000, 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, 2021 and December 31, 2020, OREO measured at fair value less costs to sell had a net carrying amount of $9,000, which consisted of the outstanding balance of $18,000 less write-downs of $9,000. During the three month periods ended March 31, 2021 and 2020, there was no recorded expense associated with the write-down of OREO.

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

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

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
March 31, 2021:
Impaired commercial business loans	$	58	$	—	$	—	$	58
Impaired commercial real estate loans		339		—		—		339
Other real estate owned		9		—		—		9
Total	$	406	$	—	$	—	$	406

December 31, 2020:
Impaired commercial business loans	$	58	$	—	$	—	$	58
Impaired commercial real estate loans		340		—		—		340
Other real estate owned		9		—		—		9
Total	$	407	$	—	$	—	$	407

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7.	Fair Value (continued)

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

(Dollar amounts in thousands)			Valuation	Unobservable	Weighted
			Techniques(s)	Input(s)	Average
March 31, 2021:
Impaired commercial business loans	$	58	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial real estate loans		339	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Other real estate owned		9	Sales comparison approach	Adjustment for differences between comparable sales		10	%

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

Excluded from the tables above at March 31, 2021 and December 31, 2020 were two unsecured commercial business loans totaling $4,000 and $14,000, respectively. Also excluded from the tables above at March 31, 2021 was an impaired residential mortgage loan totaling $69,000 which was classified as a TDR 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, 2021:
Financial Assets:
Cash and cash equivalents	$	57,916	$	57,916	$	57,916	$	—	$	—
Interest earning time deposits		5,718		5,718		—		5,718		—
Securities - available-for-sale		141,871		141,871		—		139,865		2,006
Securities - equities		13		13		13		—		—
Loans held for sale		48		48		—		48		—
Loans, net		785,503		782,755		—		—		782,755
Federal bank stock		5,711		N/A		N/A		N/A		N/A
Accrued interest receivable		4,217		4,217		68		763		3,386
Financial Liabilities:
Deposits		926,227		930,964		743,965		186,999		—
Borrowed funds		32,050		32,587		—		32,587		—
Accrued interest payable		468		468		11		457		—

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

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 Small Bank Holding Company threshold for consolidated assets is $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, becoming fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019 and subsequent periods. Amounts recorded to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of March 31, 2021, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

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

(Dollar amounts in thousands)	March 31, 2021					December 31, 2020
	Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Actual	$	86,134		12.96	%	$	84,583		12.71	%
For capital adequacy purposes		53,149		8.00	%		53,255		8.00	%
To be well capitalized		66,436		10.00	%		66,569		10.00	%
Tier 1 capital to risk-weighted assets:
Actual	$	77,813		11.71	%	$	76,246		11.45	%
For capital adequacy purposes		39,862		6.00	%		39,941		6.00	%
To be well capitalized		53,149		8.00	%		53,255		8.00	%
Common Equity Tier 1 capital to risk-weighted assets:
Actual	$	77,813		11.71	%	$	76,246		11.45	%
For capital adequacy purposes		29,896		4.50	%		29,956		4.50	%
To be well capitalized		43,184		6.50	%		43,270		6.50	%
Tier 1 capital to average assets:
Actual	$	77,813		7.74	%	$	76,246		7.58	%
For capital adequacy purposes		40,220		4.00	%		40,213		4.00	%
To be well capitalized		50,275		5.00	%		50,267		5.00	%

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9.	Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three month periods ended March 31, 2021 and 2020 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):

(Dollar amounts in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2021	$	2,220		$	(5,704	)	$	(3,484	)
Other comprehensive income before reclassification		(2,060	)		—			(2,060	)
Amounts reclassified from accumulated other comprehensive income (loss)		(20	)		—			(20	)
Net current period other comprehensive income (loss)		(2,080	)		—			(2,080	)
Accumulated Other Comprehensive Income (Loss) at March 31, 2021	$	140		$	(5,704	)	$	(5,564	)

(Dollar amounts in thousands)	Amount Reclassified
	from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive (Income) Loss Components	For the three months ended March 31, 2021			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(26	)	Net gain on sale of available-for-sale securities
Tax effect		6		Provision for income taxes
Total reclassifications for the period	$	(20	)	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, 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
	from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive (Income) Loss Components	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

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10.

Leases

As of March 31, 2021, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before expiration. The weighted average remaining life of the lease term for these leases was 12.33 years as of March 31, 2021 compared to 12.84 years as of March 31, 2020.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was 3.51% as of March 31, 2021 compared to 3.49% as of March 31, 2020.

The total operating lease costs were $48,000 and $48,000, respectively, for the three months ended March 31, 2021 and 2020. The right-of-use asset, included in other assets, and lease liability, included in other liabilities, was $1.3 million and $1.5 million, respectively, as of March 31, 2021, and $1.5 million and $1.7 million, respectively, as of March 31, 2020.

Total estimated rental commitments for the operating leases were as follows as of March 31, 2021:

(Dollar amounts in thousands)
Year ending December 31:
2021 (excluding three months)	$	164
2022		222
2023		222
2024		227
2025		212
Thereafter		850
Total minimum lease payments		1,897
Discount effect of cash flows		(387	)
Present value of lease liabilities	$	1,510

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11.

Recent Accounting Pronouncements

Newly Issued Not Yet Effective Accounting Standards

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

In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans". ASU 2018-14 removes disclosures pertaining to (a) the amounts of AOCI expected to be recognized as pension costs over the next fiscal year, (b) the amount and timing of plan assets expected to be returned to the employer, and (c) the effect of one-percentage-point change in the assumed health care trends on (i) service and interest costs and (ii) post-retirement health care benefit obligation. A disclosure will be added requiring an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments in this update are effective retrospectively for annual periods and interim periods within those annual periods beginning after December 15, 2020. The Corporation does not expect ASU 2018-14 to have a material impact on its financial statements and 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. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation is currently evaluating the effect that this ASU will have on its financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform". ASU 2020-04 contains optional guidance to ease the potential burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the London Interbank Offered Rate (LIBOR) likely being discontinued as a benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate that may be discontinued. This ASU became effective upon issuance and generally can be applied through December 31, 2022. The Corporation has identified fourteen purchased participation loans totaling $42.5 million in outstanding balances and two tax-exempt commercial business loans totaling $2.5 million in outstanding balances tied to the LIBOR reference rate. The Corporation has not yet made any contract modifications related to the outstanding loans, however, does not expect any changes to have a material impact on financial statements or disclosures.

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, 2021, compared to the same periods in 2020 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC and with the accompanying consolidated financial statements and notes presented in this Form 10-Q.

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.

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USE OF NON-GAAP FINANCIAL MEASURES

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

Management believes that the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Net Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 29 for the three months ended March 31, 2021 and 2020, respectively.

COVID-19 UPDATE

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

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

• The 2020 and 2021 Annual Shareholder Meetings were held virtually.

• Non-essential travel and large external gatherings were restricted and mandatory quarantine periods and testing were instituted for anyone that has had known exposure to COVID.

• Remote-access availability was expanded to enable, where possible, work at home or alternate locations, in order to segregate employees in operational areas to mitigate possible spread of illness to an entire department.

• At times when widespread COVID cases do not require complete lobby closures, limited lobby hours are available to the public for walk-in transactions. Appointments can be made as necessary to complete paperwork or complex transactions.

• Drive-thru services remain open where available, and the use of ATMs and on-line banking is encouraged.

• Social distancing policies were implemented and customer and employees are required to wear masks.

Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact the ongoing economic disruption will have on the Corporation. While this impact cannot be predicted or measured, there will be a definite impact on income. The provision for loan loss expense may remain elevated in expectation of a deterioration in a portion of the loan portfolio. As a result of the significant decline in interest rates, the Corporation has and may continue to experience a decline in net income and resulting net interest margin, however, there will be a benefit from the fees arising from the PPP loan program. Also, it is expected that noninterest income will continue to be reduced as customers may use fewer fee-based services due to continuing COVID-19 mitigation efforts. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.

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CHANGES IN FINANCIAL CONDITION

Total assets increased $35.4 million, or 3.4%, to $1.1 billion at March 31, 2021 from $1.0 billion at December 31, 2020. The increase in assets was driven primarily by an increase in securities and cash and cash equivalents of $28.8 million and $20.5 million, respectively, partially offset by a $14.8 million decrease in net loans receivable. Liabilities increased $36.0 million, or 3.8%, to $976.8 million at March 31, 2021 from $940.8 million at December 31, 2020 due to an increase in customer deposits of $32.6 million.

Stockholders’ equity decreased $610,000 to $90.9 million at March 31, 2021 from $91.5 million at December 31, 2020 primarily due to a $2.1 million decrease in accumulated other comprehensive income, partially offset by a $1.4 million increase in retained earnings as a result of $2.2 million of net income available to common stockholders, partially offset by $816,000 of common dividends paid. The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at 8.5% of total assets. Book value per common share was $31.85 at March 31, 2021, compared to $32.07 at December 31, 2020.

At March 31, 2021, the Bank was considered “well-capitalized” with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.74%, 11.71%, 11.71% and 12.96%, respectively. The Bank was also considered “well-capitalized” at December 31, 2020 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.58%, 11.45%, 11.45% and 12.71%, respectively.

RESULTS OF OPERATIONS

Comparison of Results for the Three Months Ended March 31, 2021 and 2020

General. Net income available to common stockholders increased $984,000, or 82.7%, to $2.2 million for the three months ended March 31, 2021 from $1.2 million for the same period in 2020. This increase resulted from increases in net interest income and noninterest income of $962,000 and $27,000, respectively, and a $517,000 decrease in the provision for loan losses, partially offset by increases in noninterest expense and the provision for income taxes of $324,000 and $198,000, respectively.

Net interest income. Tax equivalent net interest income increased $972,000, or 14.4%, to $7.7 million for the three months ended March 31, 2021 from $6.7 million for the three months ended March 31, 2020. This increase was attributed to an increase in tax equivalent interest income of $205,000 and a decrease in interest expense of $767,000.

Interest income. Tax equivalent interest income increased $205,000, or 2.3%, to $9.2 million for the three months ended March 31, 2021 from $8.9 million for the same period in 2020. This increase was attributed to a $309,000 increase in interest earned on loans, partially offset by decreases in interest on securities and interest-earning deposits with banks and dividends on federal bank stocks of $30,000, $35,000 and $39,000, respectively.

Tax equivalent interest earned on loans receivable decreased $309,000, or 3.9%, to $8.3 million for the three months ended March 31, 2021 compared to $8.0 million for the same period in 2020. The average balance of loans increased $80.2 million, or 11.1%, accounting for an $854,000 increase in interest income. Partially offsetting this favorable variance, the average yield on loans decreased by 26 basis points to 4.21% for the three months ended March 31, 2021, versus 4.47% for the same period in 2020. The average yield was impacted by the 150 basis point decline in the Wall Street Journal Prime Rate in March 2020 which resulted in the immediate decrease in interest rates on adjustable rate loans linked to that index. Accretion of purchase accounting adjustments on acquired loans offset the loan yield decrease by approximately 3 basis points. This unfavorable yield variance accounted for a $545,000 decrease in interest income. Included in interest earned on loans for the three months ended March 31, 2021, is $713,000 of interest and fees earned on the SBA's PPP lending program.

Tax equivalent interest earned on securities decreased $30,000, or 3.9%, to $731,000 for the three months ended March 31, 2021 compared to $761,000 for the same period in 2020. The average yield on securities decreased by 14 basis points to 2.51% for the three months ended March 31, 2021 versus 2.65% for the same period in 2020. This unfavorable yield variance accounted for a $47,000 decrease in interest income. Partially offsetting this unfavorable variance, the average balance of securities increased $2.6 million, or 2.3%, accounting for a $17,000 increase in interest income.

Interest earned on deposits with banks decreased $35,000, or 53.0%, to $31,000 for the three months ended March 31, 2021 compared to $66,000 for the same period in 2020. This decrease resulted from a 125 basis point decrease in the average yield on these balances to 0.33% for the three months ended March 31, 2021, versus 1.58% for the same period in 2020, accounting for a $78,000 decrease in interest income. Partially offsetting this unfavorable variance, average cash balances increased $21.5 million, accounting for a $43,000 increase in interest income.

Dividends on federal bank stocks decreased $39,000, or 36.1%, to $69,000 for the three months ended March 31, 2021 from $108,000 for the same period in 2020. This decrease was primarily due to a 178 basis point decrease in the average yield to 5.00% for the three months ended March 31, 2021, versus 6.78% for the same period in 2020, accounting for a $27,000 decrease in interest income. Additionally, a decrease of $811,000, or 12.7%, in the average balance of federal bank stocks accounted for a $12,000 decrease in interest income.

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Interest expense. Interest expense decreased $767,000, or 34.7%, to $1.4 million for the three months ended March 31, 2021 from $2.2 million for the same period in 2020. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $673,000 and $94,000, respectively.

Interest expense incurred on deposits decreased $673,000, or 34.7%, to $1.3 million for the three months ended March 31, 2021 compared to $1.9 million for the same period in 2020. The average cost of interest-bearing deposits decreased 49 basis points to 0.74% for the three months ended March 31, 2021, versus 1.23% for the same period in 2020, accounting for an $845,000 decrease in interest expense. This decrease in cost was driven by maturities in certificate of deposit specials and repricing money market specials initially offered in 2019 and general rate decreases as a result of current economic conditions. Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $61.0 million, or 9.6%, to $693.8 million for the three months ended March 31, 2021, compared to $632.9 million for the same period in 2020 causing a $172,000 increase in interest expense. The increase in deposit balances was driven by increases in public funds and government stimulus deposits coupled with decreased consumer spending.

Interest expense incurred on borrowed funds decreased $94,000, or 34.4%, to $179,000 for the three months ended March 31, 2021, compared to $273,000 for the same period in the prior year. This decrease was primarily the result of a $15.1 million, or 32.0%, reduction in the average balance of borrowed funds to $32.1 million for the three months ended March 31, 2021, compared to $47.1 million for the same period in 2020 causing a $107,000 decrease in interest expense. Additionally, a decrease of 19 basis points in the average cost of long-term borrowed funds to 2.12% for the three months ended March 31, 2021 from 2.31% for the same period in 2020 caused a $17,000 decrease in interest expense. Partially offsetting this reduction, a 191 basis point increase in the average cost of short-term borrowed funds to 4.31% for the three months ended March 31, 2021 from 2.40% for the same period in 2020 caused a $30,000 increase in interest expense.

The following table reconciles interest income in the Consolidated Statements of Net Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended March 31:

(Dollar amounts in thousands)	2021		2020
Interest income per Consolidated Statements of Net Income	$	9,098	$	8,903
Adjustment to fully taxable equivalent basis		54		44
Interest income adjusted to fully taxable equivalent basis (non-GAAP)		9,152		8,947
Interest expense		1,446		2,213
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	7,706	$	6,734

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

(Dollar amounts in thousands)	Three months ended March 31,
	2021							2020
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Loans, taxable	$	783,600	$	8,154		4.22	%	$	701,694	$	7,818		4.48	%
Loans, tax exempt		18,270		167		3.71	%		19,953		194		3.91	%
Total loans receivable		801,870		8,321		4.21	%		721,647		8,012		4.47	%
Securities, taxable		77,152		501		2.63	%		101,015		664		2.64	%
Securities, tax exempt		40,831		230		2.29	%		14,361		97		2.72	%
Total securities		117,983		731		2.51	%		115,376		761		2.65	%
Interest-earning deposits with banks		38,302		31		0.33	%		16,838		66		1.58	%
Federal bank stocks		5,599		69		5.00	%		6,410		108		6.78	%
Total interest-earning cash equivalents		43,901		100		0.92	%		23,248		174		3.01	%
Total interest-earning assets		963,754		9,152		3.85	%		860,271		8,947		4.18	%
Cash and due from banks		3,360							3,493
Other noninterest-earning assets		60,209							62,306
Total Assets	$	1,027,323						$	926,070
Interest-bearing liabilities:
Interest-bearing demand deposits	$	509,051	$	368		0.29	%	$	417,514	$	779		0.75	%
Time deposits		184,785		899		1.97	%		215,336		1,161		2.17	%
Total interest-bearing deposits		693,836		1,267		0.74	%		632,850		1,940		1.23	%
Borrowed funds, short-term		2,050		22		4.31	%		10,712		64		2.40	%
Borrowed funds, long-term		30,000		157		2.12	%		36,414		209		2.31	%
Total borrowed funds		32,050		179		2.26	%		47,126		273		2.33	%
Total interest-bearing liabilities		725,886		1,446		0.81	%		679,976		2,213		1.31	%
Noninterest-bearing demand deposits		194,327		—		—			144,532		—		—
Funding and cost of funds		920,213		1,446		0.64	%		824,508		2,213		1.08	%
Other noninterest-bearing liabilities		15,562							14,177
Total Liabilities		935,775							838,685
Stockholders' Equity		91,548							87,385
Total Liabilities and Stockholders' Equity	$	1,027,323						$	926,070
Net interest income			$	7,706						$	6,734

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						3.04	%						2.87	%

Net interest margin (net interest income as a percentage of average interest-earning assets)						3.24	%						3.15	%

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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,
	2021 versus 2020
	Increase (Decrease) due to
	Volume			Rate			Total
Interest income:
Loans	$	854		$	(545	)	$	309
Securities		17			(47	)		(30	)
Interest-earning deposits with banks		43			(78	)		(35	)
Federal bank stocks		(12	)		(27	)		(39	)
Total interest-earning assets		902			(697	)		205

Interest expense:
Interest-bearing deposits		172			(845	)		(673	)
Borrowed funds, short-term		(72	)		30			(42	)
Borrowed funds, long-term		(35	)		(17	)		(52	)
Total interest-bearing liabilities		65			(832	)		(767	)
Net interest income	$	837		$	135		$	972

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, 2021 and 2020 is as follows:

(Dollar amounts in thousands)	As of or for the three months ended
	March 31,
	2021			2020
Balance at the beginning of the period	$	9,580		$	6,556
Provision for loan losses		275			792
Charge-offs		(184	)		(138	)
Recoveries		14			10
Balance at the end of the period	$	9,685		$	7,220

Nonperforming loans	$	3,634		$	3,066
Nonperforming assets		3,657			3,404
Nonperforming loans to total loans		0.46	%		0.41	%
Nonperforming assets to total assets		0.34	%		0.36	%
Allowance for loan losses to total loans		1.22	%		0.97	%
Allowance for loan losses to nonperforming loans		266.51	%		235.49	%

Nonperforming loans decreased $468,000, or 11.4% to $3.6 million at March 31, 2021 from $4.1 million at December 31, 2020. This was primarily due to the repayment of a commercial real estate loan and a residential mortgage loan totaling $120,000 and $185,000, respectively, and three residential mortgage loans totaling $124,000 were removed from non-accrual status.

As of March 31, 2021, the Corporation’s classified and criticized assets amounted to $42.8 million, or 4.0% of total assets, with $26.4 million classified as substandard and $16.4 million identified as special mention. This compares to classified and criticized assets of $44.4 million, or 4.3% of total assets, with $22.7 million classified as substandard and $21.7 million identified as special mention at December 31, 2020. This $1.6 million decrease was primarily related to the sale of $800,000 in loans from one commercial relationship to an independent third party, a reduction of $309,000 in residential mortgage non-accrual loans and the repayment of three commercial real estate loans totaling $212,000.

The provision for loan losses decreased $517,000, or 65.3%, to $275,000 for the three months ended March 31, 2021 from $792,000 for the same period in 2020. The provision for loan losses for the first quarter of 2020 was driven by a $39.4 million increase in loan portfolio balances and the addition of a specific pandemic qualitative factor to the allowance for loan losses calculation. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

Noninterest income. Noninterest income increased $27,000, or 2.6%, to $1.1 million for the three months ended March 31, 2021, compared to $1.0 million for the same period in 2020 due to increases in gains on the sale of loans and other income of $102,000 and $101,000, respectively, partially offset by decrease in fees and service charges and gains on the sale of securities of $125,000 and $52,000, respectively. The increase in other income was primarily related to an increase in interchange fee income as a result of easing pandemic restrictions leading to an increase in consumer spending. The decrease in fees and service charges was primarily due to a decline in overdraft charges.

Noninterest expense. Noninterest expense increased $324,000, or 5.9%, to $5.8 million for the three months ended March 31, 2021 from $5.5 million for the same period in 2020. The increase was primarily attributable to increase in compensation and benefits expense, premises and equipment expense, FDIC insurance expense, professional fees and other noninterest expense of $111,000, $68,000, $54,000, $49,000 and $45,000, respectively.

Provision for income taxes. The provision for income taxes increased $198,000, or 81.5%, to $441,000 for the three months ended March 31, 2021 compared to $243,000 for the same period in 2020 as a result of the increase in net income before provision for income taxes.

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LIQUIDITY

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and sold or maturing securities. During the three months ended March 31, 2021, the Corporation used its sources of funds primarily to purchase of securities. As of March 31, 2021, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $127.5 million, and standby letters of credit totaling $636,000, net of collateral maintained by the Bank.

At March 31, 2021, time deposits amounted to $182.3 million, or 19.7% of the Corporation’s total consolidated deposits, including approximately $72.9 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, 2021, the Corporation had borrowed funds of $32.1 million consisting of $30.0 million of long-term FHLB advances and $2.1 million outstanding on a line of credit with a correspondent bank. At March 31, 2021, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issue to secure certain deposit accounts, was $250.2 million.

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

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CRITICAL ACCOUNTING POLICIES

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

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020. These policies, along with the disclosures presented in the other financial statement notes provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies.

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

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

Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. As part of the Corporation's qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that significant change in the general ecomnic environment and financial markets, including the Corporation's market capitalization, represented an interim impairment indicator requiring continued evaluation. Because of the economic uncertainty surrounding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of goodwill as of November 30, 2020. Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired oas of November 30, 2020. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving loan 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, 2021, the Corporation’s interest-earning assets maturing or repricing within one year totaled $400.4 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $154.0 million, providing an excess of interest-earning assets over interest-bearing liabilities of $246.5 million. At March 31, 2021, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 260.1%.

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

Item 4. Controls and Procedures

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

As of March 31, 2021, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. 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 14, 2021	By:	/s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer

Date: May 14, 2021	By:	/s/ Amanda L. Engles
	Amanda L. Engles
	Chief Financial Officer
	Treasurer