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Table of Contents



Washington, D.C. 20549



(Mark One):




For the fiscal year ended: December 31, 2021




For the transition period from: ___________ to ___________


Commission File Number: 000-18464



(Exact name of registrant as specified in its charter)




(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


612 Main Street, Emlenton, PA


(Address of principal executive office)

(Zip Code)


Registrant’s telephone number: (844) 767-2311


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


Common Stock, par value $1.25 per share


NASDAQ Capital Market (NASDAQ)

(Title of Class)

 (Trading Symbol) 

(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:         None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (do not check if a smaller reporting company).

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 accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its financial control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registerd public accounting firm that prepared or issued its audit report.

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

As of June 30, 2021, the aggregate value of the 2,269,332 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 451,880 shares held by the directors and officers of the Registrant as a group, was approximately $68.7 million. This figure is based on the last sales price of $30.27 per share of the Registrant’s Common Stock on June 30, 2021. The number of outstanding shares of common stock as of March 16, 2022, was 2,735,212.
















Item 1.






Item 1A.

Risk Factors





Item 1B.

Unresolved Staff Comments





Item 2.






Item 3.

Legal Proceedings





Item 4.

Mine Safety Disclosures









Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





Item 6.






Item 7.

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





Item 7A.

Quantitative and Qualitative Disclosures About Market Risk





Item 8.

Financial Statements and Supplementary Data





Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





Item 9A.

Controls and Procedures





Item 9B.

Other Information


Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections K-27








Item 10.

Directors, Executive Officers and Corporate Governance





Item 11.

Executive Compensation





Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





Item 13.

Certain Relationships and Related Transactions, and Director Independence





Item 14.

Principal Accountant Fees and Services









Item 15.

Exhibits and Financial Statement Schedules











Discussions of certain matters in this Form 10-K and other related year end documents may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and as such, may involve risks and uncertainties. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words or phrases such as “believe”, “plan”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “may increase”, “may fluctuate”, “may improve” and similar expressions of future or conditional verbs such as “will”, “should”, “would”, and “could”. These forward-looking statements relate to, among other things, expectations of the business environment in which Emclaire Financial Corp operates, projections of future performance, potential future credit experience, perceived opportunities in the market and statements regarding the Corporation’s mission and vision. The Corporation’s actual results, performance and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of factors. These factors include, but are not limited to, changes in interest rates, the effects of the COVID-19 pandemic on the Corporation or the U.S. economy, general economic conditions, the local economy, the demand for the Corporation’s products and services, accounting principles or guidelines, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, U.S. Treasury, and Federal Reserve, real estate markets, competition in the financial services industry, attracting and retaining key personnel, performance of new employees, regulatory actions, changes in and utilization of new technologies and other risks detailed in the Corporation’s reports filed with the Securities and Exchange Commission (SEC) from time to time. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.




Item 1. Business




Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and financial holding company that provides a full range of retail and commercial financial products and services to customers in western Pennsylvania through its wholly owned subsidiary bank, The Farmers National Bank of Emlenton (the Bank).


The Bank was organized in 1900 as a national banking association and is a financial intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens on residential and commercial properties, consumer loans, commercial business loans, marketable securities and interest-earning deposits. The Bank currently operates through a network of 19 retail branch offices in Venango, Allegheny, Butler, Clarion, Clearfield, Crawford, Elk, Jefferson and Mercer counties, Pennsylvania. The Corporation and the Bank are headquartered in Emlenton, Pennsylvania.


The Bank is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank’s chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (BHCA), and a financial holding company under the Gramm-Leach Bliley Act of 1999 (GLBA) and is subject to regulation and examination by the FRB.


At December 31, 2021, the Corporation had $1.1 billion in total assets, $97.0 million in stockholders’ equity, $780.0 million in net loans and $918.5 million in total deposits.


COVID-19 Pandemic

The outbreak of the novel coronavirus (COVID-19) has adversely impacted and continues to impact certain industries in which the Corporation's clients operate and may have impaired their ability to fulfill their outstanding obligations due to continued financial distress. The spread of COVID-19 has caused unprecedented uncertainty, volatility and disruption in the U.S. and global economy at large.  The Corporation's business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. With the easing of restrictions during the latter part of 2020 and into 2021, and the availability and distribution of vaccines, the U.S. economy has slowly begun to improve as consumer and business spending has rebounded in recent months.  However, the lasting effects are uncertain as government aid programs and stimulus packages taper, and the ultimate long-term impact of the business shutdowns that occurred as a result of COVID-19 remains uncertain in many sectors of the economy, such as the travel, hospitality and entertainment industries. This may cause business sectors that have had better recoveries not to be able to maintain those recoveries in the long term.  Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will continue to be effective.



To help address the impact of the COVID-19 pandemic on the economy and financial markets, the Board of Governors of the Federal Reserve System lowered the federal funds target rate to a range of between zero and 0.25% during the first quarter of 2020.  Throughout 2021, the Federal Reserve has continued to maintain the targeted federal funds rate at these levels because of the pandemic-related risks to the economy.  The Corporation's earnings and related cash flows are largely dependent upon net interest income, representing the difference between interest income received on interest-earning assets, primarily loans and securities, and the interest paid on interest-bearing liabilities, primarily customer deposits and borrowed funds.  As a result of the significant decline in interest rates and prepayments on higher yielding existing loans, the yield on the total loan portfolio has decreased.  Additionally, with significant cash inflows realized from a growth in deposits and the forgiveness of PPP loans, the current yields on funds reinvested into the purchase of securities are lower than existing portfolio yields.  However, the fees arising from the Paycheck Protection Program (PPP) loan program have mitigated some of this decline during 2020 and 2021.  As economic conditions have started to improve, the Federal Reserve has begun to shift its focus to limiting the inflationary and other potentially adverse effects of the expiration of government aid programs and stimulus packages.  Since the Corporation's balance sheet is asset sensitive and rate sensitive assets reprice more quickly than rate sensitive liabilities, margin compression may be somewhat mitigated during 2022 in the event that the Federal Reserve begins to raise rates.


The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions caused by the pandemic.  On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and containment measures.  On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic consequences of the pandemic.  On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States.  Among other measures, the CARES Act provided $349 billion for the PPP loans administered by the Small Business Administration (SBA) to assist qualified small businesses with certain operational expenses, certain credits for individuals and their dependents against their 2020 personal income tax and expanded eligibility for unemployment benefits.  This legislation was later amended on April 24, 2020, by the Paycheck Protection Program and Healthcare Enhancement Act (PPPHE Act) which provided an additional $310 billion of funding for PPP loans.  In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress caused by the pandemic.  This included additional stimulus payments to individuals and their dependents, an extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.  The Bank was a lender for the SBA program and closed 1,109 PPP loans totaling $81.6 million.  As of March 1, 2022, 1,098 loans totaling $80.5 million were fully forgiven, five loan totaling $66,000 were voluntarily repaid, rather than forgiven by the SBA, and two loans were partially forgiven and have aggregate unforgiven balances totaling $93,000.


Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic.  Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020.  This provision was extended, and expired on January 1, 2022 under the Consolidated Appropriations Act, 2021. The banking regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term.  The Corporation implemented a short-term modification program to provide relief to consumer and commercial customers following the guidelines of these provisions.  Most modifications fall into the 90 to 180-day range with deferred principal and interest due and payable on the maturity date of the existing loans.  Specific detail describing these modifications made in relation to the CARES Act can be found in the TDR discussion in "Note 3 - Loans" to the Consolidated Financial Statements on page F-19.


The Corporation responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by holding meetings virtually, restricting travel and attendance at external gatherings, expending remote-access availability and limiting banking office lobby hours.  Effective July, 6, 2021, remote-access employees transitioned back to the office and banking offices resumed normal business hours.  The Corporation continues to monitor events related to the pandemic and will take necessary precautions to ensure the safety of its customers and employees.


Lending Activities

General. The principal lending activities of the Corporation are the origination of residential mortgage, commercial mortgage, commercial business and consumer loans. The majority of the Corporation’s loans are originated in and secured by property within the Corporation’s primary market area.

One-to-Four Family Mortgage Loans. The Corporation offers first mortgage loans secured by one-to-four family residences located mainly in the Corporation’s primary lending area. One-to-four family mortgage loans amounted to 34.6% of the total loan portfolio at December 31, 2021. Typically such residences are single-family owner occupied units. The Corporation is an approved, qualified lender for the Federal Home Loan Mortgage Corporation (FHLMC) and the FHLB. As a result, the Corporation may sell loans to and service loans for the FHLMC and FHLB in market conditions and circumstances where this is advantageous in managing interest rate risk.

Home Equity Loans. The Corporation originates home equity loans secured by single-family residences. Home equity loans amounted to 9.6% of the total loan portfolio at December 31, 2021. These loans may be either a single advance fixed-rate loan with a term of up to 20 years or a variable rate revolving line of credit. These loans are made only on owner-occupied single-family residences.

Commercial Business and Commercial Real Estate Loans. Commercial lending constitutes a significant portion of the Corporation’s lending activities. Commercial business and commercial real estate loans amounted to 49.6% of the total loan portfolio at December 31, 2021. Commercial real estate loans generally consist of loans granted for commercial purposes secured by commercial or other nonresidential real estate. Commercial loans consist of secured and unsecured loans for such items as capital assets, inventory, operations and other commercial purposes.




Consumer Loans. Consumer loans generally consist of fixed-rate term loans for automobile purchases, home improvements not secured by real estate, capital and other personal expenditures. The Corporation also offers unsecured revolving personal lines of credit and overdraft protection. Consumer loans amounted to 6.2% of the total loan portfolio at December 31, 2021.


Loans to One Borrower. National banks are subject to limits on the amount of credit that they can extend to one borrower. Under current law, loans to one borrower are limited to an amount equal to 15% of unimpaired capital and surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and surplus if the loan is secured by readily marketable collateral. At December 31, 2021, the Bank’s loans to one borrower limit based upon 15% of unimpaired capital was $13.9 million. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2021, the Bank’s largest single lending relationship had an exposure of $17.0 million with outstanding loan balances of $13.3 million, which was permissible under the pilot program.


Loan Portfolio. The following table sets forth the composition and percentage of the Corporation’s loans receivable in dollar amounts and in percentages of the portfolio as of December 31:











(Dollar amounts in thousands)










Mortgage loans on real estate:


Residential mortgages

  $ 273,823       34.6 %   $ 308,031       38.0 %

Home equity loans and lines of credit

    75,810       9.6 %     87,088       10.8 %

Commercial real estate

    326,341       41.3 %     285,625       35.3 %

Total real estate loans

    675,974       85.5 %     680,744       84.1 %

Other loans:


Commercial business

    65,877       8.3 %     89,139       11.0 %


    48,552       6.2 %     40,035       4.9 %

Total other loans

    114,429       14.5 %     129,174       15.9 %

Total loans receivable

    790,403       100.0 %     809,918       100.0 %



Allowance for loan losses

    10,393               9,580          

Net loans receivable

  $ 780,010             $ 800,338          



The following table sets forth the final maturity of loans in the Corporation’s portfolio as of December 31, 2021. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year.


(Dollar amounts in thousands)


Due in one year or less


Due from one to five years


Due from five to fifteen years


Due after fifteen years



Residential mortgages

  $ 353     $ 5,411     $ 91,278     $ 176,781     $ 273,823  

Home equity loans and lines of credit

    827       6,836       40,767       27,380       75,810  

Commercial real estate

    1,164       65,672       166,999       92,506       326,341  

Commercial business

    1,168       24,145       21,276       19,288       65,877  


    303       28,333       6,401       13,515       48,552  
    $ 3,815     $ 130,397     $ 326,721     $ 329,470     $ 790,403  






The following table sets forth the dollar amount of the Corporation’s fixed and adjustable rate loans with maturities greater than one year as of December 31, 2021:






(Dollar amounts in thousands)





Residential mortgages

  $ 266,176     $ 7,294  

Home equity loans and lines of credit

    65,170       9,813  

Commercial real estate

    52,823       272,354  

Commercial business

    13,022       51,687  


    47,127       1,122  
    $ 444,318     $ 342,270  


Contractual maturities of loans do not reflect the actual term of the Corporation’s loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which give the Corporation the right to declare a loan immediately payable in the event, among other things, that the borrower sells the real property subject to the mortgage. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates substantially exceed rates on existing mortgages and conversely, decrease when rates on existing mortgages substantially exceed current market interest rates.


Delinquencies and Classified Assets

Delinquent Loans and Other Real Estate Acquired Through Foreclosure (OREO). Typically, a loan is considered past due and a late charge is assessed when the borrower has not made a payment within 15 days from the payment due date. When a borrower fails to make a required payment on a loan, the Corporation attempts to cure the deficiency by contacting the borrower. The initial contact with the borrower is made shortly after the 17th day following the due date for which a payment was not received. In most cases, delinquencies are cured promptly.

If the delinquency exceeds 60 days, the Corporation works with the borrower to set up a satisfactory repayment schedule. Typically, loans are considered nonaccruing upon reaching 90 days delinquent unless the credit is well secured and in the process of collection, although the Corporation may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Corporation institutes foreclosure action on secured loans only if all other remedies have been exhausted. If an action to foreclose is instituted and the loan is not reinstated or paid in full, the property is sold at a judicial or trustee’s sale at which the Corporation may be the buyer.

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure less costs to sell, thereby establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less the cost to sell the property. Changes in the valuation allowance are included in the loss on foreclosed real estate. The Corporation generally attempts to sell its OREO properties as soon as practical upon receipt of clear title.

As of December 31, 2021, the Corporation’s nonperforming assets were $3.3 million, or 0.32% of the Corporation’s total assets, compared to $4.4 million, or 0.43% of the Corporation’s total assets, at December 31, 2020. Nonperforming assets at December 31, 2021 was comprised entirely of nonperforming loans.  Included in nonperforming loans at December 31, 2021 were five loans totaling $346,000 considered to be TDRs.

Classified Assets. Regulations applicable to insured institutions require the classification of problem assets as “substandard,” “doubtful,” or “loss” depending upon the existence of certain characteristics as discussed below. A category designated “special mention” must also be maintained for assets currently not requiring the above classifications but having potential weaknesses or risk characteristics that could result in future problems. An asset is classified as substandard if not adequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset is characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified as substandard and these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable. Assets classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted.

The Corporation’s classification of assets policy requires the establishment of valuation allowances for loan losses in an amount deemed prudent by management. Valuation allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities. When the Corporation classifies a problem asset as a loss, the portion of the asset deemed uncollectible is charged off immediately.

The Corporation regularly reviews the problem loans and other assets in its portfolio to determine whether any require classification in accordance with the Corporation’s policy and applicable regulations. As of December 31, 2021, the Corporation’s classified and criticized assets amounted to $38.2 million or 3.6% of total assets, with $8.9 million identified as special mention and $29.4 million classified as substandard.

Included in classified and criticized assets at December 31, 2021, is a combination of relationships with an outstanding balance of $30.0 million, representing eight distinct relationships with extensions of credit supporting hotel operations.  The debt obligations are primarily secured with nationally franchised hotels along with related furniture, fixtures, and equipment.  These hotels were initially adversely impacted by state-wide travel restrictions in response to the COVID-19 pandemic and continue to be impacted by shifting consumer and business behaviors.  Current data supports improvement in occupancy levels which is resulting in an improvement in operating performance.  Ultimately, due to the estimated value of the collateral and the willingness and ability of the guarantors to support the loans, the Corporation does not currently expect to incur a loss on these loans.




Also included in classified and criticized assets at December 31, 2021, is a relationship with an outstanding balance of $1.5 million, consisting of two commercial mortgages and one commercial business loan which primarily refinanced third-party debt obligations and is secured with residential rental investment properties.  Excessive personal debt obligations have resulted in marginal financial performance of the borrowers. The collateral properties securing the indebtedness services the related debt at a satisfactory level. Ultimately, due to the estimated value of the collateral held, the Corporation does not currently expect to incur a loss on these loans.


The following table sets forth information regarding the Corporation’s nonperforming assets as of December 31:


(Dollar amounts in thousands)






Accruing loans 90+ days past due

  $ 685     $ 579  

Nonaccrual loans

    2,654       3,523  

Nonperforming loans

    3,339       4,102  



Real estate acquired through foreclosure


Total nonperforming assets

  $ 3,339     $ 4,446  

Nonperforming assets as a percentage of total assets

    0.32 %     0.43 %

Nonaccrual loans as a percentage of gross loans

    0.34 %     0.43 %

Nonperforming loans as a percentage of gross loans

    0.42 %     0.51 %

Allowance for loan losses as a percentage of nonaccrual loans

    391.60 %     271.93 %

Allowance for loan losses as a percentage of nonperforming loans

    311.26 %     233.54 %


Allowance for Loan Losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans; and the current economic conditions affecting the collectability of loans in the portfolio. The Corporation analyzes its loan portfolio at least quarterly for valuation purposes and to determine the adequacy of its allowance for loan losses. Based upon the factors discussed above, management believes that the Corporation’s allowance for loan losses as of December 31, 2021 of $10.4 million was adequate to cover probable incurred losses in the portfolio at such time.


The following table sets forth an analysis of the allowance for losses on loans receivable for the years ended December 31: 


(Dollar amounts in thousands)






Balance at beginning of period

  $ 9,580     $ 6,556  

Provision for loan losses

    1,066       3,247  



Residential mortgages

          (27 )

Home equity loans and lines of credit

    (41 )     (126 )

Commercial real estate

    (150 )     (75 )

Commercial business

          (163 )

Consumer loans

    (178 )     (82 )
      (369 )     (473 )



Residential mortgages


Home equity loans and lines of credit

    27       15  

Commercial real estate

    37       107  

Commercial business

    19       70  

Consumer loans

    33       52  
      116       250  

Net charge-offs

    (253 )     (223 )

Balance at end of period

  $ 10,393     $ 9,580  

Ratio of net charge-offs to average loans outstanding

    0.03 %     0.03 %

Ratio of allowance to total loans at end of period

    1.31 %     1.18 %





The following table provides a breakdown of the allowance for loan losses by major loan category for the years ended December 31:


(Dollar amounts in thousands)






Loan Categories:


Dollar Amount


Percent of total loans


Dollar Amount


Percent of total loans


Residential mortgages

  $ 2,335       34.6 %   $ 2,774       38.0 %

Home equity loans and lines of credit

    525       9.6 %     620       10.8 %

Commercial real estate

    6,253       41.3 %     5,180       35.3 %

Commercial business

    904       8.3 %     677       11.0 %

Consumer loans

    376       6.2 %     329       4.9 %

Total allowance for loan losses

  $ 10,393       100.0 %   $ 9,580       100.0 %



Investment Activities


General. The Corporation maintains an investment portfolio of securities such as U.S. government agencies, mortgage-backed securities, collateralized mortgage obligations, municipal, corporate and equity securities.


Investment decisions are made within policy guidelines as established by the Board of Directors. This policy is aimed at maintaining a diversified investment portfolio, which complements the overall asset/liability and liquidity objectives of the Corporation, while limiting the related credit risk to an acceptable level.


The following table sets forth certain information regarding the fair value, weighted average yields and contractual maturities of the Corporation’s securities as of December 31, 2021:



Due in 1 year or less


Due from 1 to 5 years


Due from 5 to 10 years


Due after 10 years




(Dollar amounts in thousands)


Fair Value


Average Yield


Fair Value


Average Yield


Fair Value


Average Yield


Fair Value


Average Yield


Fair Value


Average Yield


U.S. government sponsored entities and agencies

  $       %   $       %   $ 2,983       1.67 %   $ 5,176       1.50 %   $ 8,159       1.56 %

U.S. agency mortgage-backed securities: residential

          %           %           %     12,035       2.60 %     12,035       2.60 %

U.S. agency collateralized mortgage obligations: residential

          %           %     863       1.43 %     48,627       1.44 %     49,490       1.44 %

State and political subdivision

          %     3,148       3.07 %     7,558       2.53 %     81,856       2.45 %     92,562       2.48 %

Corporate securities

          %     1,531       4.85 %     22,493       4.48 %           %     24,024       4.50 %

Total available-for-sale debt securities

  $       %   $ 4,679       3.65 %   $ 33,897       3.72 %   $ 147,694       2.10 %   $ 186,270       2.43 %

1) Taxable equivalent adjustments have been made in calculating yields on state and political subdivision securities.

2)  The yields are calculated using the amortized value.


The following table sets forth the fair value of the Corporation’s investment securities as of December 31:


(Dollar amounts in thousands)






U.S. government sponsored entities and agencies

  $ 8,159     $ 3,007  

U.S. agency mortgage-backed securities: residential

    12,035       16,581  

U.S. agency collateralized mortgage obligations: residential

    49,490       15,911  

State and political subdivision

    92,562       55,577  

Corporate securities

    24,024       21,965  

Equity securities

    5       15  

Total available-for-sale securities

  $ 186,275     $ 113,056  


For additional information regarding the Corporation’s investment portfolio see “Note 2 – Securities” to the Consolidated Financial Statements on page F-13.



Sources of Funds


General. Deposits are the primary source of the Corporation’s funds for lending and investing activities. Secondary sources of funds are derived from loan repayments, investment maturities and borrowed funds. Loan repayments can be considered a relatively stable funding source, while deposit activity is greatly influenced by interest rates and general market conditions. The Corporation also has access to funds through other various sources. For additional information about the Corporation’s sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity” in Item 7.


Deposits. The Corporation offers a wide variety of deposit account products to both consumer and commercial deposit customers, including time deposits, noninterest bearing and interest bearing demand deposit accounts, savings deposits and money market accounts.


Deposit products are promoted in periodic newspaper, radio and other forms of advertisements, along with notices provided in customer account statements. The Corporation’s marketing strategy is based on its reputation as a community bank that provides quality products and personalized customer service.


The Corporation sets interest rates on its interest bearing deposit products that are competitive with rates offered by other financial institutions in its market area. Management reviews interest rates on deposits weekly and considers a number of factors, including: (1) the Corporation’s internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Corporation’s liquidity position.


The following table summarizes the Corporation’s deposits as of December 31: 


(Dollar amounts in thousands)










Type of accounts


average rate






average rate





Non-interest bearing deposits

        $ 221,993       24.2 %         $ 193,752       21.7 %

Interest bearing demand deposits

    0.13 %     545,846       59.4 %     0.42 %     511,928       57.3 %

Time deposits

    1.78 %     150,657       16.4 %     2.03 %     187,947       21.0 %


    0.37 %   $ 918,496       100.0 %     0.67 %   $ 893,627       100.0 %


At December 31, 2021 and 2020, the Corporation's uninsured deposits are estimated to be $374.4 million and $361.5 million, respectively.


The following table sets forth maturities of the Corporation’s time deposits of $100,000 or more at December 31, 2021 by time remaining to maturity: 


(Dollar amounts in thousands)




Three months or less

  $ 9,812  

Over three months to six months


Over six months to twelve months


Over twelve months

    $ 84,593  


Borrowings. Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support lending and investment activities. These borrowings include FHLB advances, federal funds, repurchase agreements, advances from the Federal Reserve Discount Window and lines of credit at the Bank and the Corporation with other correspondent banks. The following table summarizes information with respect to borrowings at or for the years ending December 31: 


(Dollar amounts in thousands)





Ending balance

  $ 22,050     $ 32,050  

Average balance

    29,801       39,896  

Maximum balance

    32,050       61,300  

Average rate

    2.26 %     2.25 %


For additional information regarding the Corporation’s deposit base and borrowed funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deposits and Borrowed Funds” in Item 7 and “Note 8 – Deposits” on page F-23 and “Note 9 – Borrowed Funds” on page F-24 to the Consolidated Financial Statements.


Subsidiary Activity


The Corporation has one wholly owned subsidiary, the Bank. As of December 31, 2021, the Bank had no subsidiaries.




At December 31, 2021, the Corporation had 148 full time equivalent employees, compared to 160 at December 31, 2020. There is no collective bargaining agreement between the Corporation and its employees, and the Corporation believes its relationship with its employees is satisfactory.







The Corporation competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers.


Supervision and Regulation


General. Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain provisions of certain laws that relate to the regulation of the Corporation and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.


The Corporation. The Corporation is a registered bank holding company and subject to regulation and examination by the FRB under the BHCA. The Corporation is required to file periodic reports with the FRB and such additional information as the FRB may require. The Bank Holding Company rating system emphasizes risk management and evaluation of the potential impact of non-depository entities on safety and soundness.


The FRB may require the Corporation to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Corporation must file written notice and obtain FRB approval prior to purchasing or redeeming its equity securities.


The Corporation is required to obtain prior FRB approval for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior FRB approval is also required for the merger or consolidation of the Corporation and another bank holding company.


The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, subject to the prior FRB approval, a bank holding company may engage in any, or acquire shares of companies engaged in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.


The BHCA also authorizes bank holding companies to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. In order to undertake these activities, a bank holding company must become a financial holding company by submitting to the appropriate FRB a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. The Corporation submitted a declaration of election to become a financial holding company with the FRB which became effective in March 2007. Federal legislation also directed federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.


Under FRB regulations, the Corporation is required to serve as a source of financial and managerial strength to the Bank and may not conduct operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both.


The Corporation is also a bank holding company within the meaning of the Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the Pennsylvania Department of Banking and Securities.


The Corporation’s securities are registered with the SEC under the Exchange Act. As such, the Corporation is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act. The public may obtain all forms and information filed with the SEC through its website http://www.sec.gov.


Regulations have been adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions, holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5% or less of total consolidated assets are excluded from the Volcker Rule restrictions.  The Corporation qualifies for the exclusion from the Volcker Rule restrictions.



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The Bank. As a national banking association, the Bank is subject to primary supervision, examination and regulation by the OCC. The Bank is also subject to regulations of the FDIC as administrator of the Deposit Insurance Fund (DIF) and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank’s growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank’s deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that the Bank’s conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.


A national bank may have a financial subsidiary engaged in any activity authorized for national banks directly or certain permissible activities. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank itself. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance, issue annuities or engage in real estate development or investment or merchant banking.


The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board that is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysis; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts and extended the period during which certain types of lawsuits can be brought against a company or its insiders.


2010 Regulatory Reform. On July 21, 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act) was signed into law. The goals of the Dodd Frank Act included restoring public confidence in the financial system following the financial crisis, preventing another financial crisis and permitting regulators to identify shortfalls in the system before another financial crisis can occur. The Dodd Frank Act is also intended to promote a fundamental restructuring of federal banking regulation by taking a systemic view of regulation rather than focusing on regulation of individual financial institutions.


Many of the provisions in the Dodd Frank Act require that regulatory agencies draft implementing regulations. Implementation of the Dodd Frank Act has had and will continue to have a broad impact on the financial services industry by introducing significant regulatory and compliance changes including, among other things: (i) changing the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated total assets less average tangible equity, eliminating the ceiling and increasing the size of the floor of the DIF and offsetting the impact of the increase in the minimum floor on institutions with less than $10 billion in assets; (ii) making permanent the $250,000 limit for federal deposit insurance and increasing the cash limit of Securities Investor Protection Corporation protection to $250,000; (iii) eliminating the requirement that the FDIC pay dividends from the DIF when the reserve ratio is between 1.35% and 1.50%, but continuing the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.50%; however, the FDIC is granted sole discretion in determining whether to suspend or limit the declaration or payment of dividends; (iv) repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; (v) implementing certain corporate governance revisions that apply to all public companies, including regulations that require publicly traded companies to give shareholders a non-binding advisory vote to approve executive compensation, commonly referred to as a “say-on-pay” vote and an advisory role on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions; new director independence requirements and considerations to be taken into account by compensation committees and their advisers relating to executive compensation; additional executive compensation disclosures; and a requirement that companies adopt a policy providing for the recovery of executive compensation in the event of a restatement of its financial statements, commonly referred to as a “clawback” policy; (vi) centralizing responsibility for consumer financial protection by creating a new independent federal agency, the Consumer Financial Protection Bureau (CFPB) responsible for implementing federal consumer protection laws to be applicable to all depository institutions; (vii) imposing new requirements for mortgage lending, including new minimum underwriting standards, limitations on prepayment penalties and imposition of new mandated disclosures to mortgage borrowers; (viii) imposing new limits on affiliate transactions and causing derivative transactions to be subject to lending limits and other restrictions including adoption of the “Volcker Rule” regulating transactions in derivative securities; (ix) limiting debit card interchange fees that financial institutions with $10 billion or more in assets are permitted to charge their customers; and (x) implementing regulations to incentivize and protect individuals, commonly referred to as whistleblowers to report violations of federal securities laws.


2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd Frank Act. While the Act maintained most of the regulatory structure established by the Dodd Frank Act, it amended certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes resulted in meaningful regulatory relief for community banks such as the Bank.



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The Act, among other matters, expanded the definition of qualified mortgages which may be held by a financial institution and simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expanded the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd Frank Act. In addition, the Act included regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.


Anti-Money Laundering. All financial institutions, including national banks, are subject to federal laws that are designed to prevent the use of the U.S. financial system to fund terrorist activities. Financial institutions operating in the United States must develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. The Bank has established policies and procedures to ensure compliance with these provisions.


Privacy. Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide (i) initial notices to customers about their privacy policies, describing conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; (ii) annual notices of their privacy policies to current customers and (iii) a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Corporation’s privacy policies have been implemented in accordance with the law.


Dividends and Other Transfers of Funds. Dividends from the Bank constitute the principal source of income to the Corporation. The Corporation is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. In addition, the Bank’s regulators have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.


Limitations on Transactions with Affiliates. Transactions between national banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a national bank includes any company or entity which controls the national bank or that is controlled by a company that controls the national bank. In a holding company context, the holding company of a national bank (such as the Corporation) and any companies which are controlled by such holding company are affiliates of the national bank. Generally, Section 23A limits the extent to which the national bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the national bank as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a national bank to an affiliate.


In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal shareholders of the national bank and its affiliates. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% shareholder of a national bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the national bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to any director, executive officer or principal shareholder, or certain affiliated interests of either, over other employees of the national bank. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a national bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. The Bank currently is subject to Sections 22(g) and (h) of the Federal Reserve Act and at December 31, 2021, was in compliance with the above restrictions.


Loans to One Borrower Limitations. With certain limited exceptions, the maximum amount that a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At December 31, 2021, the Bank’s loans-to-one-borrower limit was $13.9 million based upon the 15% of unimpaired capital and surplus measurement. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2021, the Bank's lending limit under the Pilot Program was $25.1 million.  At December 31, 2021, the Bank’s largest single lending relationship had a total potential exposure of $17.0 million which includes outstanding loan balances of $13.3 million.



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Capital Standards. The Bank is required to comply with applicable capital adequacy standards established by the federal banking agencies. Beginning on January 1, 2015, the Bank became subject to a new comprehensive capital framework for U.S. banking organizations. In July 2013, the Federal Reserve Board, FDIC and OCC adopted a final rule that implements the Basel III changes to the international regulatory capital framework. The Basel III rules include requirements contemplated by the Dodd Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010.


Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the "CBLR") requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios.  The CBLR is equal to Tier 1 capital divided by average total consolidated assets.  In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (ii) have less than $10 billion in average total consolidated assets, (iii) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (iv) not be an advanced approaches banking organization.  A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be "well capitalized" under the prompt corrective action rules.  The Bank has not elected to be subject to the CBLR.


Unless a community bank qualifies for, and elects to comply with, the CBLR beginning on January 1, 2020, national banks are required to maintain the Basel III minimum levels of regulatory capital described below. The Basel III rules include risk-based and leverage capital ratio requirements that refine the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements are (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital consists of retained earnings and common stock instruments, subject to certain adjustments.


The Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conversation buffer was fully phased in as of January 1, 2019 and results in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5% and (iii) a total risk-based capital ratio of 10.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.
The Basel III rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels do not meet certain thresholds. The prompt corrective action rules were modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. Insured depository institutions are required to meet the following capital levels in order to qualify as “well capitalized”: (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

The Basel III rules set forth certain changes in the methods of calculating risk-weighted assets, which in turn affect the calculation of risk-based ratios. Under the Basel III rules, higher or more sensitive risk weights are assigned to various categories of assets including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures of credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, Basel III rules include (i) alternate standards of credit worthiness consistent with the Dodd Frank Act; (ii) greater recognition of collateral guarantees and (iii) revised capital treatment for derivatives and repo-style transactions.

In addition, the final rule includes certain exemptions to address concerns about the regulatory burden on community banks. Banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a permanent basis without any phase out. Community banks were required to make this election by their March 31, 2015 quarterly filings with the appropriate federal regulator to opt-out of the requirement to include most accumulated other comprehensive income (AOCI) components in the calculation of Common equity Tier 1 capital and in effect retain the AOCI treatment under the current capital rules. The Bank made in its March 31, 2015 quarterly filing a one-time permanent election to continue to exclude accumulated other comprehensive income from capital. If it would not have made this election, unrealized gains and losses would have been included in the calculation of its regulatory capital.

The Basel III rules generally became effective beginning January 1, 2015; however, certain calculations under the Basel III rules had phase-in periods. In 2015, the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and the 2018 legislation summarized above increased that asset threshold to $3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.



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


(Dollar amounts in thousands)


December 31, 2021


December 31, 2020










Total capital to risk-weighted assets:



  $ 92,495       13.11 %   $ 84,583       12.71 %

For capital adequacy purposes

    56,448       8.00 %     53,255       8.00 %

To be well capitalized

    70,559       10.00 %     66,569       10.00 %

Tier 1 capital to risk-weighted assets:



  $ 83,656       11.86 %   $ 76,246       11.45 %

For capital adequacy purposes

    42,336       6.00 %     39,941       6.00 %

To be well capitalized

    56,448       8.00 %     53,255       8.00 %

Common Equity Tier 1 capital to risk-weighted assets:



  $ 83,656       11.86 %   $ 76,246       11.45 %

For capital adequacy purposes

    31,752       4.50 %     29,956       4.50 %

To be well capitalized

    45,864       6.50 %     43,270       6.50 %

Tier 1 capital to average assets:



  $ 83,656       7.98 %   $ 76,246       7.58 %

For capital adequacy purposes

    41,926       4.00 %     40,213       4.00 %

To be well capitalized

    52,407       5.00 %     50,267       5.00 %


Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2021, the Bank exceeded the required ratios for classification as “well capitalized.”


An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized.


In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized – without the permission of the institution’s primary regulator.


Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.


Insurance of Accounts . Deposit accounts are currently insured by the DIF generally up to a maximum of $250,000 per separately insured depositor. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against insured institutions.
The Dodd Frank Act raised the minimum reserve ratio of the DIF from 1.15% to 1.35% and required the FDIC to offset the effect of this increase on insured institutions with assets of less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016 and exceeded 1.35% effective as of September 30, 2018. Small institutions received credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The credits reduced regular assessments by 2 basis points for quarters when the reserve ratio is at least 1.38%.  The FDIC applied credits to the Bank's assessments due in 2019.  In 2020, the FDIC announced that all credits have been remitted and the credit program has ended.


The FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is its average total assets reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios; its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates).  The initial base assessment rate is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with assets of $10 billion or more are assessed using a scorecard method.


In addition, all FDIC insured institutions were required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. The Financing Corporation bonds matured in 2019.
Under the Federal Deposit Insurance Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order or condition imposed by the FDIC.

Interstate Banking and Branching. Banks have the ability, subject to certain state restrictions, to acquire, by acquisition or merger, branches outside its home state. In addition, federal legislation permits a bank headquartered in Pennsylvania to enter another state through de novo branching (as compared to an acquisition) if under the state law in the state which the proposed branch is to be located a state-chartered institution would be permitted to establish the branch. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets.

Consumer Protection Laws and Regulations. The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with such laws and regulations. The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.

The Community Reinvestment Act (CRA) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, in a manner consistent with safe and sound banking practices. CRA regulations (i) establish the definition of “Intermediate Small Bank” as an institution with total assets of $330 million to $1.322 billion, without regard to any holding company; and (ii) take into account abusive lending practices by a bank or its affiliates in determining a bank’s CRA rating. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last examination for CRA compliance, as of January 10, 2022, the Bank was rated “satisfactory.”

On December 14, 2021, the OCC issued a final rule to rescind its June 2020 CRA rule and replace it with a rule based on the rules adopted jointly by the federal banking agencies in 1995, as amended.  The final rule aligns the OCC's CRA rule with the rules of the Federal Reserve and FDIC and thereby, according to the OCC, facilitates the ongoing interagency work to modernize the CRA framework and create consistency for all insured depository institutions.

The Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act of 2003 (FACTA), requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with the FACTA, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer’s election to opt out would be applicable for at least five years.


The Federal Trade Commission (FTC), the federal bank regulatory agencies and the National Credit Union Administration (NCUA) have issued regulations (the Red Flag Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs as part of the FACTA. The programs must provide for the identification, detection and response to patterns, practices or specific activities – known as red flags – that could indicate identity theft. These red flags may include unusual account activity, fraud alerts on a consumer report or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the institution or creditor, include appropriate staff training and provide oversight of any service providers.


The Check Clearing for the 21st Century Act (Check 21) facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a “substitute check,” which is the legal equivalent of an original check. Check 21 does not require banks to create substitute checks or accept checks electronically; however, it does require banks to accept a legally equivalent substitute check in place of an original.


The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.



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The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.


The Fair Housing Act (FHA) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FHA, including some that are not specifically mentioned in the FHA itself.


The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.


The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. Generally speaking, predatory lending involves at least one, and perhaps all three, of the following elements (i) making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”); (ii) inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); and (iii) engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.


FRB regulations aimed at curbing such lending significantly widened the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid.


OCC guidelines require national banks and their operating subsidiaries to comply with certain standards when making or purchasing loans to avoid predatory or abusive residential mortgage lending practices. Failure to comply with the guidelines could be deemed an unsafe and unsound or unfair or deceptive practice, subjecting the bank to supervisory enforcement actions.


Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with the CRA, FACTA, TILA, FHA, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.


Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2021, the Bank was in compliance with the stock requirements.


Federal Reserve System. The FRB requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking) and non-personal time deposits. At December 31, 2021, the Bank was in compliance with these requirements.


Item 1A. Risk Factors


Not required as the Corporation is a smaller reporting company.


Item 1B. Unresolved Staff Comments




Item 2. Properties


The Corporation owns no real property but utilizes the main office of the Bank, which is owned by the Bank. The Corporation’s and the Bank’s executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent or other form of consideration for the use of this facility.


The Bank owns and leases numerous other premises for use in conducting business activities. The Bank considers these facilities owned or occupied under lease to be adequate. For additional information regarding the Bank’s properties, see “Note 5 - Premises and Equipment” to the Consolidated Financial Statements on page F-21.






Item 3. Legal Proceedings


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


Item 4. Mine Safety Disclosures


Not applicable.




Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


Market, Holder and Dividend Information


Emclaire Financial Corp common stock is traded on NASDAQ Capital Market (NASDAQ) under the symbol “EMCF”. The listed market makers for the Corporation’s common stock include:


Boenning and Scattergood, Inc.

Janney Montgomery Scott LLC

Raymond James & Associates, Inc.

4 Tower Bridge

1717 Arch Street

550 West Washington Boulevard

200 Barr Harbor Drive, Suite 300

Philadelphia, PA  19103

Suite 1050

West Conshohocken, PA  19428-2979

Telephone:  (215) 665-6000

Chicago, IL  60661

Telephone:  (800) 883-1212


Telephone:  (312) 869-3800


The Corporation has traditionally paid regular quarterly cash dividends. Future dividends will be determined by the Board of Directors after giving consideration to the Corporation’s financial condition, results of operations, tax status, industry standards, economic conditions, regulatory requirements and other factors.


The following table sets forth the high and low sale and quarter-end closing market prices of our common stock for the last two years as reported by the Nasdaq Capital Market as well as cash dividends paid for the quarterly periods presented.



Market Price













Fourth quarter

  $ 30.00     $ 26.03     $ 28.90     $ 0.30  

Third quarter

    30.39       26.02       26.72       0.30  

Second quarter

    30.55       26.50       30.27       0.30  

First quarter

    31.12       25.60       28.99       0.30  



Fourth quarter

  $ 32.00     $ 23.10     $ 30.63     $ 0.30  

Third quarter

    28.35       20.40       25.11       0.30  

Second quarter

    26.10       18.10       20.01       0.30  

First quarter

    33.50       20.92       23.47       0.30  


As of March 1, 2022, there were approximately 710 stockholders of record and 2,735,212 shares of common stock entitled to vote, receive dividends and considered outstanding for financial reporting purposes. The number of stockholders of record does not include the number of persons or entities who hold their stock in nominee or “street name."


Common stockholders may have dividends reinvested to purchase additional shares through the Corporation’s dividend reinvestment plan. Participants may also make optional cash purchases of common stock through this plan. To obtain a plan document and authorization card to participate in the plan, please call 888-509-4619.


Purchases of Equity Securities


The Corporation did not repurchase any of its equity securities in the year ended December 31, 2021.


Item 6. [Reserved]


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following discussion and analysis represents a review of the Corporation’s consolidated financial condition and results of operations for the years ended December 31, 2021 and 2020. This review should be read in conjunction with the consolidated financial statements beginning on page F-5.



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The Corporation reported consolidated net income available to common stockholders of $10.0 million, or $3.63 per diluted common share, for 2021, an increase of $3.4 million, or 52.0%, compared to $6.6 million, or $2.41 per diluted common share, for 2020. Net income available to common stockholders was impacted by the following:



Net interest income increased $2.4 million, or 8.2%, to $31.5 million for the year ended December 31, 2021 from $29.1 million for 2020. This increase primarily related to a decrease in interest expense of $2.9 million, or 36.4%, while interest income decreased $566,000, or 1.5%. Driving the decrease in interest expense was a 44 basis point decrease in the cost of interest-bearing liabilities to 0.69% for 2021 from 1.13% for 2020.


Provision for loan losses decreased $2.2 million, or 67.2%, to $1.1 million for the year ended December 31, 2021 from $3.2 million for 2020. The higher provision for loan losses recorded in 2020 was due to growth in the residential and consumer loan portolios, the addition of a specific pandemic qualitative allowance factor, increased risk ratings for loans which were granted payment deferrals and an increase in criticized and classified loans.  During 2021, the provision for loan losses decreased as criticized and classified loans decreased and the specific pandemic allowance qualitative factor was reduced.


Noninterest income increased $227,000, or 5.2%, to $4.6 million for the year ended December 31, 2021 from $4.4 million for 2020 due to increases in other noninterest income, gains on the sale of loans and earnings on bank-owned life insurance of $549,000, $149,000 and $34,000, respectively, partially offset by decreases in gains on the sale of securities and fees and service charges of $442,000 and $63,000, respectively.


Noninterest expense increased $578,000, or 2.6%, to $22.6 million for the year ended December 31, 2021 from $22.0 million for 2020. This increase was primarily related to increases in compensation and employee benefits, other noninterest expense, professional fees, FDIC insurance expense and intangible asset amortization expense of $192,000, $188,000, $176,000, $41,000 and $21,000, respectively, partially offset by a decrease in premises and equipment expense of $40,000.


Changes in Financial Condition


Total assets increased $27.2 million, or 2.6%, to $1.1 billion at December 31, 2021 from $1.0 billion at December 31, 2020.  The increase in assets was driven primarily by a $73.2 million increase in securities, partially offset by decreases in cash and equivalents and net loans receivable of $28.4 million and $20.3 million.  The decrease in net loans receivable was driven by a $29.2 million reduction in PPP loans to $1.2 million at December 31, 2021, from $30.4 million at December 31, 2020.  Liabilities increased $21.7 million, or 2.3%, to $962.5 million at December 31, 2021 from $940.8 million at December 31, 2020 due to a $24.9 million increase in customer deposits, partially offset by a $10.0 million reduction in borrowed funds.


Cash and cash equivalents. Cash and cash equivalents decreased $28.4 million, or 75.8%,  to $9.1 million at December 31, 2021 from $37.4 million at December 31, 2020. Excess cash balances resulting from deposit inflows and the repayment of loans were utilized to fund security purchases and repay borrowed funds.


Interest earning time deposits. Interest earning time deposits decreased $3.2 million, or 56.6%, to $2.5 million at December 31, 2021 from $5.7 million at December 31, 2020.  This decrease resulted from maturities of certificates of deposits with other financial institutions totaling $3.7 million, partially offset by purchases totaling $496,000 during the year.


Securities. Securities increased $73.2 million, or 64.8%, to $186.3 million at December 31, 2021 from $113.0 million at December 31, 2020. This increase primarily resulted from investment purchases of $105.1 million during the year, partially offset by security sales, maturities and repayments totaling $28.5 million.


Loans receivable. Net loans receivable decreased $20.3 million, or 2.5%, to $780.0 million at December 31, 2021 from $800.3 million at December 31, 2020. The decrease was driven by decreases in the Corporation’s residential mortgage, commercial business and home equity portfolios of $34.2 million, $23.3 million and $11.3 million, respectively, partially offset by increases in the commercial mortgage and consumer portfolios of $40.7 million and $8.5 million, respectively.  Included in the decrease of the commercial business loan balances for 2021 was $29.2 million of loans forgiven under the SBA's PPP lending program.



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Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days past due and still accruing, repossessions and real estate owned. Nonperforming assets were $3.3 million, or 0.32% of total assets, at December 31, 2021 compared to $4.4 million, or 0.43% of total assets, at December 31, 2020. Nonperforming assets consisted of nonperforming loans of $3.3 million at December 31, 2021 and nonperforming loans of $4.1 million and other real estate owned of $344,000 at December 31, 2020. At December 31, 2021, nonperforming loans consisted primarily of commercial mortgage and residential mortgage loans.


Federal bank stocks. Federal bank stocks were comprised of FHLB stock and FRB stock of $3.9 million and $1.8 million, respectively, at December 31, 2021. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships between the Corporation and the federal banks.


Bank-owned life insurance (BOLI). The Corporation maintains single premium life insurance policies on certain current and former officers and employees of the Bank. In addition to providing life insurance coverage, whereby the Bank as well as the officers and employees receive life insurance benefits, the appreciation of the cash surrender value of the BOLI will serve to offset and finance existing and future employee benefit costs. Increases in this account are typically associated with an increase in the cash surrender value of the policies, partially offset by certain administrative expenses.  BOLI increased $6.4 million, or 41.6%, to $21.9 million at December 31, 2021 from $15.5 million at December 31, 2020.  The increase in BOLI during the year was primarily due to the purchase of $6.0 million in additional policies.


Premises and equipment. Premises and equipment decreased $1.8 million to $16.4 million at December 31, 2021 from $18.2 million at December 31, 2020. The overall decrease in premises and equipment during the year was due to depreciation and amortization of $1.4 million and sales of $1.3 million, partially offset by purchases of $872,000.  During 2021, the Corporation sold its Chester, West Virginia office building following the closure of that branch in April.  In addition, the Corporation sold its building located in the Southside of Pittsburgh, Pennsylvania and entered into a lease to continue operating the branch in that location.


Goodwill. Goodwill remained unchanged at $19.5 million at December 31, 2021 and 2020.  Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed during the year ended December 31, 2021.


Core deposit intangible. The core deposit intangible was $899,000 at December 31, 2021, compared to $1.1 million at December 31, 2020. The core deposit intangible includes amounts associated with the assumption of deposits in the 2018 Community First Bancorp, Inc. (CFB) acquisition, the 2017 Northern Hancock Bank and Trust Co. (NHB) acquisition and the 2016 United American Savings Bank (UASB) acquisition. This asset represents the long-term value of the core deposits acquired. In each instance, the fair value was determined using a third-party valuation expert specializing in estimating fair values of core deposit intangibles. The fair value was derived using an industry standard present value methodology. All-in costs and runoff balances by year were discounted by comparable term FHLB advance rates, used as an alternative cost of funds measure. This intangible asset amortizes over a weighted average estimated life of the related deposits. The core deposit intangible asset is not estimated to have a significant residual value. The Corporation recorded $185,000 and $164,000 of intangible amortization in 2021 and 2020, respectively.


Deposits. Total deposits increased $24.9 million, or 2.8%, to $918.5 million at December 31, 2021 from $893.6 million at December 31, 2020. Non-interest bearing deposits increased $28.2 million, or 14.6%, and interest bearing demand deposits increased $33.4 million, or 6.6%.  These increases were driven by increases in public funds and government stimulus deposits.  The increase in demand deposits were partially offset by a $37.3 million, or 19.8%, decrease in time deposits due to the maturity of certificates of deposit.


Borrowed funds. Borrowed funds decreased $10.0 million, or 31.2%, to $22.1 million at December 31, 2021 from $32.1 million at December 31, 2020. Borrowed funds at December 31, 2021 consisted of short-term borrowings of $7.1 million and long-term borrowings of $15.0 million. Short-term borrowed funds at December 31, 2021 consisted of an outstanding balance of $2.1 million on a line of credit with a correspondent bank at rate of 4.25% and $5.0 million of FHLB overnight funds at a rate of 0.28%. Long-term borrowed funds consisted of three $5.0 million FHLB term advances totaling $15.0 million, maturing between 2023 and 2025 and having fixed interest rates between 1.65% and 2.79%. Long-term advances are utilized primarily to fund loan growth and short-term advances are utilized primarily to compensate for normal deposit fluctuations.


Stockholders’ equity. Stockholders’ equity increased $5.5 million, or 6.0%, to $97.0 million at December 31, 2021 from $91.5 million at December 31, 2020. The increase was primarily due to net income of $10.2 million, partially offset by a decrease of $1.7 million in accumulated other comprehensive income and common stock and preferred dividends paid of $3.3 million and $196,000, respectively.



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Changes in Results of Operations


The Corporation reported net income before preferred stock dividends of $10.2 million and $6.7 million in 2021 and 2020, respectively. The following “Average Balance Sheet and Yield/Rate Analysis” and “Analysis of Changes in Net Interest Income” tables should be utilized in conjunction with the discussion of the interest income and interest expense components of net interest income.


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


(Dollar amounts in thousands)


For the year ended December 31,






Average Balance




Yield / Rate


Average Balance




Yield / Rate


Interest-earning assets:


Loans, taxable

  $ 782,030     $ 32,241       4.12 %   $ 771,073     $ 33,402       4.33 %

Loans, tax exempt

    15,770       596       3.78 %     19,463       745       3.83 %

Total loans receivable

    797,800       32,837       4.12 %     790,536       34,147       4.32 %

Securities, taxable

    108,464       2,435       2.24 %     81,812       2,070       2.53 %

Securities, tax exempt

    52,957       1,156       2.18 %     22,205       559       2.52 %

Total securities

    161,421       3,591       2.22 %     104,017       2,629       2.53 %

Interest-earning deposits with banks

    40,619       91       0.22 %     26,570       191       0.72 %

Federal bank stocks

    5,685       293       5.15 %     6,040       371       6.14 %

Total interest-earning cash equivalents

    46,304       384       0.83 %     32,610       562       1.72 %

Total interest-earning assets

    1,005,525       36,812       3.66 %     927,163       37,338       4.03 %

Cash and due from banks

    3,452                       3,507                  

Other noninterest-earning assets

    60,484                       61,123                  

Total Assets

  $ 1,069,461                     $ 991,793                  

Interest-bearing liabilities:


Interest-bearing demand deposits

  $ 542,740     $ 1,127       0.21 %   $ 471,766     $ 2,858       0.61 %

Time deposits

    171,113       3,323       1.94 %     201,662       4,307       2.14 %

Total interest-bearing deposits

    713,853       4,450       0.62 %     673,428       7,165       1.06 %

Borrowed funds, short-term

    2,143       89       4.13 %     4,366       131       3.00 %

Borrowed funds, long-term

    27,658       585       2.12 %     35,530       766       2.16 %

Total borrowed funds

    29,801       674       2.26 %     39,896       897       2.25 %

Total interest-bearing liabilities

    743,654       5,124       0.69 %     713,324       8,062       1.13 %

Noninterest-bearing demand deposits

    216,811                   175,279              

Funding and cost of funds

    960,465       5,124       0.53 %     888,603       8,062       0.91 %

Other noninterest-bearing liabilities

    15,676                       14,473                  

Total Liabilities

    976,141                       903,076                  

Stockholders' Equity

    93,320                       88,717                  

Total Liabilities and Stockholders' Equity

  $ 1,069,461                     $ 991,793                  

Net interest income

          $ 31,688                     $ 29,276          

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

                    2.97 %                     2.90 %

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

                    3.15 %                     3.16 %


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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 rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.


(Dollar amounts in thousands)


For the year ended December 31,


2021 versus 2020


Increase (Decrease) due to








Interest income:



  $ 311     $ (1,621 )   $ (1,310 )


    1,308       (346 )     962  

Interest-earning deposits with banks

    71       (171 )     (100 )

Federal bank stocks

    (21 )     (57 )     (78 )

Total interest-earning assets

    1,669       (2,195 )     (526 )

Interest expense:


Interest-bearing deposits

    408       (3,123 )     (2,715 )

Borrowed funds, short-term

    (81 )     39       (42 )

Borrowed funds, long-term

    (167 )     (14 )     (181 )

Total interest-bearing liabilities

    160       (3,098 )     (2,938 )

Net interest income

  $ 1,509     $ 903     $ 2,412  


2021 Results Compared to 2020 Results


The Corporation reported net income available to common stockholders of $10.0 million and $6.6 million for 2021 and 2020, respectively. The $3.4 million, or 52.0%, increase resulted primarily from increases in net interest income and noninterest income of $2.4 million and $227,000, respectively, and a $2.2 million decrease in the provision for loan losses, partially offset by increases in noninterest expense and the provision for income taxes of $578,000 and $779,000, respectively.  Returns on average equity and assets were 10.90% and 0.95%, respectively, for 2021, compared to 7.61% and 0.68%, respectively, for 2020.


Net interest income. The primary source of the Corporation’s revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowed funds, used to fund the earning assets. Net interest income is impacted by the volume and composition of interest-earning assets and interest-bearing liabilities, and changes in the level of interest rates. Tax equivalent net interest income increased $2.4 million to $31.7 million for 2021, compared to $29.3 million for 2020. This increase in net interest income can be attributed to a decrease in interest expense of $2.9 million, partially offset by a decrease in tax equivalent interest income of $526,000.


Interest income. Tax equivalent interest income decreased $526,000, or 1.4%, to $36.8 million for 2021, compared to $37.3 million for 2020. This decrease can be attributed to decreases in interest earned on loans, deposits with banks and dividends received on federal bank stocks of $1.3 million, $100,000 and $78,000, respectively, partially offset by an increase in interest earned on securities of $962,000.


Tax equivalent interest earned on loans receivable decreased $1.3 million, or 3.8%, to $32.8 million for 2021, compared to $34.1 million for 2020. The average yield on loans decreased 20 basis points to 4.12% for 2021, versus 4.32% for 2020 causing an $1.6 million decrease in interest income.  Partially offseting this decrease, the average balance of loans increased $7.3 million generating $311,000 of additional interest income on loans.  Included in interest earned on loans for the year ended December 31, 2021, is $2.6 million of interest and fees earned on the SBA's PPP lending program compared to $1.6 million for 2020.


Tax equivalent interest earned on securities increased $962,000, or 36.6%, to $3.6 million for 2021, compared to $2.6 million for 2020.  The average balance of securities increased $57.4 million resulting in a $1.3 million increase in interest income.  Partially offsetting this increase, the average yield on securities decreased 31 basis points to 2.22% for 2021 versus 2.53% for 2020 causing a $346,000 decrease in interest income. 


Interest earned on interest-earning deposits with banks decreased $100,000, or 52.4%, to $91,000 for 2021, compared to $191,000 for 2020.   The average yield on interest-earning deposits decreased 50 basis points to 0.22% for 2021, versus 0.72% for 2020 causing a $171,000 decrease in interest income.  Partially offsetting this decrease, the average balance of these accounts increased $14.0 million, or 52.9%, causing a $71,000 increase in interest income.


Interest earned on federal bank stocks decreased $78,000, or 21.0%, to $293,000 for 2021, compared to $371,000 for 2020.  The average yield on federal bank stocks decreased 99 basis points to 5.15% for 2021 versus 6.14% for 2020 causing a $57,000 decrease in interest income.  Additionally, the average balance of federal bank stocks decreased $355,000, or 5.9%, resulting in an additional $21,000 decrease in interest income.



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Interest expense. Interest expense decreased $2.9 million, or 36.4% to $5.1 million for 2021, compared to $8.1 million for 2020. This decrease can be attributed to decreases in interest expense on interest-bearing deposits and borrowed funds of $2.7 million and $223,000, repsectively.

Interest expense on deposits decreased $2.7 million, or 37.9%, to $4.5 million for 2021, compared to $7.2 million for 2020.  The average rate on interest-bearing deposits decreased by 44 basis points to 0.62% for 2021 versus 1.06% for 2020 causing a $3.1 million decrease in interest expense.  Partially offsetting this decrease, the average balance of interest-bearing deposits increased $40.4 million, or 6.0%, causing a $408,000 increase in interest expense.


Interest expense on borrowed funds decreased $223,000, or 24.9%, to $674,000 for 2021, compared to $897,000 for 2020.  The average balance of borrowed funds decreased $10.1 million, or 25.3%, to $29.8 million for 2021, compared to $39.9 million for 2020 causing a $248,000 decrease in interest expense.  Partially offsetting this decrease, the average rate on borrowed funds increased 1 basis point to 2.26% for 2021 versus 2.25% for 2020 causing a $25,000 increase in interest expense.


The following table reconciles interest income on the Consolidated Statements of Net Income to net interest income adjusted to a fully taxable equivalent basis for the years ended December 31:


(Dollar amounts in thousands)






Interest income per Consolidated Statements of Net Income

  $ 36,581     $ 37,147  

Adjustment to fully taxable equivalent basis

    231       191  

Interest income adjusted to fully taxable equivalent basis (non-GAAP)

    36,812       37,338  

Interest expense

    5,124       8,062  

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)

  $ 31,688     $ 29,276  


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

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

Nonperforming loans decreased $763,000, or 18.6%, to $3.3 million at December 31, 2021 from $4.1 million at December 31, 2020. The decrease in nonperforming loans was primarily related to a decrease in non-accrual loans in the residential mortgage and commercial real estate portfolios of $809,000 and $363,000, respectively.


The provision for loan losses decreased $2.2 million to $1.1 million for 2021 from $3.2 million for 2020. The Corporation’s allowance for loan losses amounted to $10.4 million, or 1.31% of the Corporation’s total loan portfolio at December 31, 2021 compared to $9.6 million or 1.18% of total loans at December 31, 2020. The higher provision for loan losses recorded in 2020 was due to growth in the residential and consumer loan porfolios, the addition of a specifice pandemic qualitative allowance factor, increased risk ratings for loans which were granted payment deferrals and an increase in criticized and classified loans.  During 2021, the provision for loan losses decreased as criticized and classified loans decreased and the specific pandemic allowance qualitative factor was reduced.  The allowance for loan losses, as a percentage of nonperforming loans at December 31, 2021 and 2020, was 311.3% and 233.5%, respectively. The allocation of the allowance for loan losses related to commercial real estate, commercial business and consumers loans increased during the year primarily as a result of growth in the balances.  Some uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is may occur as a result of the pandemic.  The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision expense accordingly.  At December 31, 2021, there was no provision for loan losses allocated to loans acquired from UASB, NHB or CFB because the unaccreted purchase discount still exceeded the calculated allowance.


Noninterest income. Noninterest income includes revenue that is related to services rendered and activities conducted in the financial services industry, including fees on depository accounts, general transaction and service fees, security and loan sale gains and losses, and earnings on BOLI. Noninterest income increased $227,000, or 5.2%, to $4.6 million for 2021, compared to $4.4 million for 2020. The increase in noninterest income is due to increases in other income, gains on the sale of loans and earnings on bank-owned life insurance of $549,000, $149,000 and $34,000, respectively, partially offset by decreases in gains on the sale of securities and fees and service charges of $442,000 and $63,000, respectively.  The increase in other income was primarily related to a non-recurring $337,000 write down in the value of a bank-owned property recognized during 2020 and an increase in interchange fee income in 2021 resulting from easing pandemic restrictions leading to an increase in consumer spending.  During 2021, the Corporation sold $14.2 million of residential mortgage loans to the FHLB and realized a net gain of $390,000, compared to sales of $5.2 million and a net gain of $241,000 recognized during 2020. During 2021, the Corporation sold a total of $9.1 million of primarily low-yielding mortgage-backed securities and realized a net gain of $245,000.  The sale proceeds were utilized to repay $10.0 million in FHLB term advances.  During 2020, the Corporation sold a total of $43.9 million of low-yielding mortgage-backed and collateralized mortgage obligation securities and realized a net gain of $687,000.  The sale proceeds were utilized to repay $15.0 million in FHLB term advances and purchase higher yielding municipal and corporate securities.



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Noninterest expense. Noninterest expense increased $578,000, or 2.6%, to $22.6 million for 2021, compared to $22.0 million for 2020.   This increase was primarily attributable to increases in compensation and benefits expense, other noninterest expense, professional fees, FDIC insurance expense and intangible amortization expense of $192,000, $188,000, $176,000, $41,000 and $21,000, respectively, partially offset by a $40,000 decrease in premises and equipment e


Compensation and employee benefits expense increased $192,000, or 1.7%, to $11.3 million for 2021, compared to $11.1 million for 2020.  This increase primarily related to a $306,000 increase management incentive plan expense due to favorable results during 2021, partially offset by a decrease in salary expense and commission expense of $100,000 and $100,000, respectively.
Other noninterest expense increased $188,000, or 3.1%, to $6.2 million for 2021, compared to $6.0 million for 2020.  For additional information regarding other noninterest expense see "Note 17 - Other Noninterest Income and Expense" to the Consolidated Financial Statements on page F-38.


Professional fee expense increased $176,000, or 20.9%, to $1.0 million for 2021, compared to $841,000 for 2020.  This increase is primarily related to consulting fees related to IT and succession planning projects completed during 2021.


FDIC insurance expense increased $41,000, or 7.6%, to $579,000 for 2021, compared to $538,000 for 2020.  This increase was primarily related to an increase in the assessment base, partially offset by a reduction in the assesment rate due to decreases in non-performing assets and increases in capital ratios during 2021.


Premises and equipment expense decreased $40,000, or 1.2%, at $3.3 million for 2021 and 2020. This decrease primarily related to reductions in building repairs and maintenance expense and building depreciation expense of $26,000 and $20,000, respectively due to the sale of two Bank properties.

The provision for income taxes increased $779,000, or 54.3%, to $2.2 million for 2021, compared to $1.4 million for 2020 primarily due to the increase in net income available to common stockholders.  The Corporation's effective tax rate was 17.9% for 2021, compared to 17.5% for 2020.


Market Risk Management


Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. The Corporation is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Corporation does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets.


The primary objective of the Corporation’s asset liability management function is to maximize the Corporation’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Corporation’s operating environment, capital and liquidity requirements, balance sheet mix, performance objectives and overall business focus. One of the primary measures of the exposure of the Corporation’s earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of interest-bearing liabilities.


The Corporation’s Board of Directors has established a Finance Committee, consisting of five outside directors, the President and Chief Executive Officer (CEO), Treasurer and Chief Financial Officer (CFO) and Chief Operating Officer (COO), to monitor market risk, including primarily interest rate risk. This committee, which meets at least quarterly, generally establishes and monitors the investment, interest rate risk and asset liability management policies of the Corporation.


In order to minimize the potential for adverse affects of material and prolonged changes in interest rates on the Corporation’s results of operations, the Corporation’s management team has implemented and continues to monitor asset liability management policies to better match the maturities and repricing terms of the Corporation’s interest-earning assets and interest-bearing liabilities. Such policies have consisted primarily of (i) originating adjustable-rate mortgage loans; (ii) originating short-term secured commercial loans with the rate on the loan tied to the prime rate or reset features in which the rate changes at determined intervals; (iii) emphasizing investment in shorter-term (expected duration of five years or less) investment securities; (iv) selling longer-term (30-year) fixed-rate residential mortgage loans in the secondary market; (v) maintaining a high level of liquid assets (including securities classified as available for sale) that can be readily reinvested in higher yielding investments should interest rates rise; (vi) emphasizing the retention of lower cost savings accounts and other core deposits; and (vii) lengthening liabilities and locking in lower borrowing rates with longer terms whenever possible.


Interest Rate Sensitivity Gap Analysis


The implementation of asset and liability initiatives and strategies and compliance with related policies, combined with other external factors such as demand for the Corporation’s products and economic and interest rate environments in general, has resulted in the Corporation typically maintaining a one-year cumulative interest rate sensitivity gap within internal policy limits of between a positive and negative 15% of total assets. The one-year interest rate sensitivity gap is identified as the difference between the Corporation’s interest-earning assets that are scheduled to mature or reprice within one year and interest-bearing liabilities that are scheduled to mature or reprice within one year.



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The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities, and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero, or more neutral, that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.


Based on certain assumptions derived from the Corporation’s historical experience, at December 31, 2021, the Corporation’s interest-earning assets maturing or repricing within one year totaled $345.6 million while the Corporation’s interest-bearing liabilities maturing or repricing within one year totaled $128.8 million, providing an excess of interest-earning assets over interest-bearing liabilities of $216.8 million or 22.04% of total assets. At December 31, 2021, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 268.8%.


The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2021 which are expected to mature, prepay or reprice in each of the future time periods presented:


(Dollar amounts in thousands)


Six months or less


Six months to one year


One to three years


Three to four years


Over four years




Total interest-earning assets

  $ 248,917     $ 96,714     $ 234,869       82,473     $ 321,027     $ 984,000  

Total interest-bearing liabilities

    67,937       60,845       243,433       80,208       264,080       716,503  

Interest rate sensitivity gap

  $ 180,980     $ 35,869     $ (8,564 )   $ 2,265     $ 56,947     $ 267,497  

Cumulative rate sensitivity gap

  $ 180,980     $ 216,849     $ 208,285     $ 210,550     $ 267,497          

Ratio of gap during the period to total interest earning assets

    18.39 %     3.65 %     (0.87 %)     0.23 %     5.79 %        

Ratio of cumulative gap to total interest earning assets

    18.39 %     22.04 %     21.17 %     21.40 %     27.18 %        


Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.


Interest Rate Sensitivity Simulation Analysis


The Corporation also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Finance Committee of the Board of Directors believes that simulation modeling enables the Corporation to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates and different loan and security prepayment and deposit decay assumptions under various interest rate scenarios.


As with gap analysis and earnings simulation modeling, assumptions about the timing and variability of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Corporation’s historical experience.


The Corporation has established the following guidelines for assessing interest rate risk:


Net interest income simulation. Given a 200 basis point immediate increase or decrease in market interest rates, net interest income may not change by more than 8% for a one-year period.


Economic value of equity simulation. Economic value of equity is the present value of the Corporation’s existing assets less the present value of the Corporation’s existing liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, economic value of equity may not correspondingly decrease or increase by more than 20%.



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These guidelines take into consideration the current interest rate environment, the Corporation’s financial asset and financial liability product mix and characteristics and liquidity sources among other factors. Given the current rate environment, a drop in short-term market interest rates of 200 basis points immediately or over a one-year horizon would seem unlikely. This should be considered in evaluating modeling results outlined in the table below.