UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________
Commission File Number:
| EMCLAIRE FINANCIAL CORP |
| (Exact name of registrant as specified in its charter) |
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| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
| ( |
| (Registrant’s telephone number) |
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| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| | | |
| (Title of Class) | (Trading Symbol) | (Name of exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of the Registrant’s common stock was
INDEX TO QUARTERLY REPORT ON FORM 10-Q
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Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
| Emclaire Financial Corp |
| Consolidated Balance Sheets (Unaudited) |
| As of September 30, 2022 and December 31, 2021 |
| (Dollar amounts in thousands, except share and per share data) |
| September 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest earning deposits with banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Interest earning time deposits | ||||||||
| Securities - available-for-sale | ||||||||
| Securities - equity investments | ||||||||
| Loans held for sale | ||||||||
| Loans receivable, net of allowance for loan losses of $ and $ | ||||||||
| Federal bank stocks, at cost | ||||||||
| Bank-owned life insurance | ||||||||
| Accrued interest receivable | ||||||||
| Premises and equipment, net | ||||||||
| Goodwill | ||||||||
| Core deposit intangible, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | $ | ||||||
| Interest bearing | ||||||||
| Total deposits | ||||||||
| Short-term borrowed funds | ||||||||
| Long-term borrowed funds | ||||||||
| Accrued interest payable | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity | ||||||||
| Preferred stock, $ par value, shares authorized; Series C, non-cumulative preferred stock, $ and $ million liquidation value, and shares issued and outstanding; Series D, non-cumulative preferred stock, $ and $ million liquidation value, and shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized; shares issued; shares outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; shares | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| For the three months ended September 30, |
For the nine months ended September 30, |
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| 2022 |
2021 |
2022 |
2021 |
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| Interest and dividend income: |
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| Loans receivable, including fees |
$ | $ | $ | $ | ||||||||||||
| Securities: |
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| Taxable |
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| Exempt from federal income tax |
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| Federal bank stocks |
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| Interest earning deposits with banks |
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| Total interest and dividend income |
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| Interest expense: |
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| Deposits |
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| Borrowed funds |
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| Total interest expense |
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| Net interest income |
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| Provision for loan losses |
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| Net interest income after provision for loan losses |
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| Noninterest income: |
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| Fees and service charges |
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| Net realized gain (loss) on sales of securities |
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| Net gain (loss) on sales of loans |
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| Earnings on bank-owned life insurance |
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| Other |
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| Total noninterest income |
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| Noninterest expense: |
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| Compensation and employee benefits |
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| Premises and equipment |
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| Intangible asset amortization |
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| Professional fees |
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| Federal deposit insurance |
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| Other |
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| Total noninterest expense |
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| Income before provision for income taxes |
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| Provision for income taxes |
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| Net income |
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| Preferred stock dividends |
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| Net income available to common stockholders |
$ | $ | $ | $ | ||||||||||||
| Basic earnings per common share |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share |
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| Average common shares outstanding - basic |
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| Average common shares outstanding - diluted |
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See accompanying notes to consolidated financial statements.
| Emclaire Financial Corp |
| Consolidated Statements of Comprehensive Income (Loss) (Unaudited) |
| For the three and nine months ended September 30, 2022 and 2021 |
| (Dollar amounts in thousands) |
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss) |
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| Unrealized gains/(losses) on securities available-for-sale: |
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| Unrealized holding gain/(loss) arising during the period |
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| Reclassification adjustment for (gains)/losses included in net income |
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| Net period change |
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| Tax effect |
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| Net of tax |
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| Comprehensive income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
See accompanying notes to consolidated financial statements.
| Emclaire Financial Corp |
| Condensed Consolidated Statements of Cash Flows (Unaudited) |
| For the nine months ended September 30, 2022 and 2021 |
| (Dollar amounts in thousands) |
| For the nine months ended September 30, | ||||||||
| 2022 |
2021 |
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| Cash flows from operating activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization of premises and equipment |
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| Provision for loan losses |
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| Amortization/accretion of premiums, discounts and deferred costs and fees, net |
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| Amortization of operating lease right-of-use assets |
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| Amortization of intangible assets and mortgage servicing rights |
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| Realized (gain) loss on sales of debt securities, net |
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| Change in fair value of equity securities |
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| Net (gain) loss on sales of loans |
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| Net (gain) loss on foreclosed real estate |
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| Net gain on sale of premises and equipment |
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| Loans originated for sale |
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| Proceeds from the sale of loans originated for sale |
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| Stock compensation expense |
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| Increase in bank-owned life insurance |
( |
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| (Increase) decrease in accrued interest receivable |
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| (Increase) decrease in prepaid expenses and other assets |
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| Decrease in accrued interest payable |
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| Decrease in accrued expenses and other liabilities |
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| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Loan originations and principal collections, net |
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| Proceeds from sales of loans held for sale previously classified as portfolio loans |
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| Available-for-sale securities: |
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| Sales |
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| Maturities, repayments and calls |
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| Purchases |
( |
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| Purchase of federal bank stocks |
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| Redemption of federal bank stocks |
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| Net change in interest earning time deposits |
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| Proceeds from the sale of bank premises and equipment |
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| Purchases of premises and equipment |
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| Proceeds from the sale of foreclosed real estate |
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| Net cash used in investing activities |
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| Cash flows from financing activities |
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| Net increase in deposits |
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| Repayments on long-term debt |
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| Net change in short-term borrowings |
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| Redemption of preferred stock |
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| Dividends paid |
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| Net cash provided by financing activities |
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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental information: |
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| Interest paid |
$ | $ | ||||||
| Income taxes paid |
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| Supplemental noncash disclosure: |
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| Transfers from loans to foreclosed real estate |
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| Transfers from portfolio loans to loans held for sale |
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See accompanying notes to consolidated financial statements.
| Preferred Stock | Additional Paid-in Capital - Preferred | Common Stock | Additional Paid-in Capital - Common | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Cash dividends declared on preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Cash dividends declared on preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Cash dividends declared on preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Redemption of preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Cash dividends declared on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
| 1. | Nature of Operations and Basis of Presentation |
Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2021, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.
The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim quarterly or year-to-date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year’s financial statement presentation.
The 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 (Federal Reserve) 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 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 Paycheck Protection Program (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 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 and has begun raising interest rates. 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 as the Federal Reserve raises 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.
| 1. | Nature of Operations and Basis of Presentation (continued) |
Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. This provision was extended, and expired on January 1, 2022 under the Consolidated Appropriations Act. The banking regulators issued similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. 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 4 - Loans Receivable and Related Allowance for Loan Losses" to the Consolidated Financial Statements.
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. Remote-access employees have since 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.
| 2. |
Earnings per Common Share |
Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares for assumed issuance of restricted stock.
The factors used in the Corporation’s earnings per common share computation follow:
| (Dollar amounts in thousands, except for per share amounts) |
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Less: Preferred stock dividends |
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| Net income available to common stockholders |
$ | $ | $ | $ | ||||||||||||
| Average common shares outstanding |
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| Add: Dilutive effects of restricted stock awards |
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| Average shares and dilutive potential common shares |
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| Basic earnings per common share |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share |
$ | $ | $ | $ | ||||||||||||
| 3. | Securities |
Equity Securities
The Corporation held equity securities with fair values of $
Debt Securities - Available-for-Sale
The following table summarizes the Corporation’s debt securities as of September 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| September 30, 2022: | ||||||||||||||||
| U.S. government sponsored entities and agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. agency mortgage-backed securities: residential | ( | ) | ||||||||||||||
| U.S. agency collateralized mortgage obligations: residential | ( | ) | ||||||||||||||
| State and political subdivisions | ( | ) | ||||||||||||||
| Corporate debt securities | ( | ) | ||||||||||||||
| Total securities available-for-sale | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2021: | ||||||||||||||||
| U.S. government sponsored entities and agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. agency mortgage-backed securities: residential | ( | ) | ||||||||||||||
| U.S. agency collateralized mortgage obligations: residential | ( | ) | ||||||||||||||
| State and political subdivisions | ( | ) | ||||||||||||||
| Corporate debt securities | ( | ) | ||||||||||||||
| Total securities available-for-sale | $ | $ | $ | ( | ) | $ | ||||||||||
| 3. | Securities (continued) |
The following table summarizes scheduled maturities of the Corporation’s debt securities as of September 30, 2022. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.
| (Dollar amounts in thousands) | Available-for-sale | |||||||
| Amortized Cost | Fair Value | |||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Mortgage-backed securities: residential | ||||||||
| Collateralized mortgage obligations: residential | ||||||||
| Total securities available-for-sale | $ | $ | ||||||
Information pertaining to debt securities with gross unrealized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:
| (Dollar amounts in thousands) | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||||||
| U.S. government sponsored entities and agencies | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| U.S. agency mortgage-backed securities: residential | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| U.S. agency collateralized mortgage obligations: residential | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| State and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Corporate debt securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2021: | ||||||||||||||||||||||||
| U.S. government sponsored entities and agencies | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||
| U.S. agency mortgage-backed securities: residential | ( | ) | ( | ) | ||||||||||||||||||||
| U.S. agency collateralized mortgage obligations: residential | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| State and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Corporate debt securities | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
Gains and losses on sales of securities for the three and nine months ended September 30, 2022 and 2021 were as follows:
| (Dollar amounts in thousands) | For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Proceeds | $ | $ | $ | $ | ||||||||||||
| Gains | ||||||||||||||||
| Losses | ( | ) | ( | ) | ||||||||||||
| Tax provision related to gains (losses) | ( | ) | ( | ) | ||||||||||||
Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
There were
| 4. | Loans Receivable and Related Allowance for Loan Losses |
The Corporation’s loans receivable as of the respective dates are summarized as follows:
| (Dollar amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Mortgage loans on real estate: | ||||||||
| Residential first mortgages | $ | $ | ||||||
| Home equity loans and lines of credit | ||||||||
| Commercial real estate | ||||||||
| Total real estate loans | ||||||||
| Other loans: | ||||||||
| Commercial business | ||||||||
| Consumer | ||||||||
| Total other loans | ||||||||
| Total loans, gross | ||||||||
| Less allowance for loan losses | ||||||||
| Total loans, net | $ | $ | ||||||
Included in total loans above are net deferred costs of $
An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans. While the Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-19 pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
At September 30, 2022, there was
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:
| (Dollar amounts in thousands) | Residential Mortgages | Home Equity & Lines of Credit | Commercial Real Estate | Commercial Business | Consumer | Total | ||||||||||||||||||
| Three months ended September 30, 2022: | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine months ended September 30, 2022: | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| At September 30, 2022: | ||||||||||||||||||||||||
| Ending ALL balance attributable to loans: | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Acquired loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Originated loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total loans: | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Acquired loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Originated loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| At December 31, 2021: | ||||||||||||||||||||||||
| Ending ALL balance attributable to loans: | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Acquired loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Originated loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total loans: | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Acquired loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Originated loans collectively evaluated for impairment | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Three months ended September 30, 2021: | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine months ended September 30, 2021: | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2022:
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
| Impaired Loans with Specific Allowance | ||||||||||||||||||||||||
| As of September 30, 2022 | For the three months ended September 30, 2022 | |||||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | |||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||
| Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||
| Residential first mortgages | $ | $ | $ | |||||||||
| Home equity and lines of credit | ||||||||||||
| Commercial real estate | ||||||||||||
| Commercial business | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Impaired Loans with No Specific Allowance | ||||||||||||||||||||
| As of September 30, 2022 | For the three months ended September 30, 2022 | |||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | |||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial business | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||
| Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||
| Residential first mortgages | $ | $ | $ | |||||||||
| Home equity and lines of credit | ||||||||||||
| Commercial real estate | ||||||||||||
| Commercial business | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
| Impaired Loans with Specific Allowance | ||||||||||||||||||||||||
| As of December 31, 2021 | For the year ended December 31, 2021 | |||||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | |||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impaired Loans with No Specific Allowance | ||||||||||||||||||||
| As of December 31, 2021 | For the year ended December 31, 2021 | |||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | |||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial business | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2021:
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
| Impaired Loans with Specific Allowance | ||||||||||||||||||||||||
| As of September 30, 2021 | For the three months ended September 30, 2021 | |||||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | |||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the nine months ended September 30, 2021 | ||||||||||||
| Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||
| Residential first mortgages | $ | $ | $ | |||||||||
| Home equity and lines of credit | ||||||||||||
| Commercial real estate | ||||||||||||
| Commercial business | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
|
| Impaired Loans with No Specific Allowance | ||||||||||||||||||||
| As of September 30, 2021 | For the three months ended September 30, 2021 | |||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | |||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial business | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| For the nine months ended September 30, 2021 | ||||||||||||
| Average Recorded Investment | Interest Income Recognized in Period | Cash Basis Interest Recognized in Period | ||||||||||
| Residential first mortgages | $ | $ | $ | |||||||||
| Home equity and lines of credit | ||||||||||||
| Commercial real estate | ||||||||||||
| Commercial business | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material.
At September 30, 2022 and December 31, 2021, the Corporation had $
During the three months ended September 30, 2022, the Corporation did modify any loans as TDRs. During the nine months ended September 30, 2022, the Corporation modified
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three and nine months ended September 30, 2022 and 2021, the Corporation did have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.
COVID-19 related deferrals. Under the provisions of the CARES Act, at the peak, the Corporation had granted modifications on
Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.
Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.
Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The reserve allocation for risk rated loan pools is developed by applying the following factors:
Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.
Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.
Management uses the following definitions for risk ratings:
Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.
Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.
Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.
Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.
The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of September 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
| Not Rated | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2021: | ||||||||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of September 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
| Performing | Nonperforming | |||||||||||||||||||||||
| Accruing Loans Not Past Due | Accruing 30-59 Days Past Due | Accruing 60-89 Days Past Due | Accruing 90+ Days Past Due | Nonaccrual | Total | |||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2021: | ||||||||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following table presents the Corporation’s nonaccrual loans by aging category as of September 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | ||||||||||||||||||||
| Not Past Due | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days + Past Due | Total | ||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | |||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial business | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2021: | ||||||||||||||||||||
| Residential first mortgages | $ | $ | $ | $ | $ | |||||||||||||||
| Home equity and lines of credit | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial business | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | |||||||||||||||
| 5. | Goodwill and Intangible Assets |
The following table summarizes the Corporation’s acquired goodwill and intangible assets as of September 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Goodwill | $ | $ | — | $ | $ | — | ||||||||||
| Core deposit intangibles | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Goodwill resulted from five acquisitions. Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test.
The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three and nine months ended September 30, 2022, the Corporation recorded intangible amortization expense totaling $
| 6. | Stock Compensation Plan |
In February 2021, the Corporation adopted the 2021 Stock Incentive Plan (the 2021 Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to
In addition, in February 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 2014 Plan, and together with the 2021 Plan, the Plans), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to
Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plans. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Compensation cost related to share-based payment transactions must be recognized in the financial statements with measurement based upon the fair value of the equity instruments issued.
At September 30, 2022, there were
A summary of the status of the Corporation’s nonvested restricted stock awards as of September 30, 2022, and changes during the period then ended is presented below:
| Shares | Weighted-Average Grant-date Fair Value | |||||||
| Nonvested at January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited | ( | ) | ||||||
| Nonvested as of September 30, 2022 | $ | |||||||
For the three and nine month periods ended September 30, 2022, the Corporation recognized stock compensation expense of $
| 7. | Fair Value |
Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.
Assets measured at fair value on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:
Debt securities available-for-sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt and equity securities held by the Corporation.
For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
| (Dollar amounts in thousands) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Description | Total | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||
| September 30, 2022: | ||||||||||||||||
| Securities available-for-sale | ||||||||||||||||
| U.S. government sponsored entities and agencies | $ | $ | $ | $ | ||||||||||||
| U.S. agency mortgage-backed securities: residential | ||||||||||||||||
| U.S. agency collateralized mortgage obligations: residential | ||||||||||||||||
| State and political subdivision | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Total available-for-sale securities | $ | $ | $ | $ | ||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| December 31, 2021: | ||||||||||||||||
| Securities available-for-sale | ||||||||||||||||
| U.S. government sponsored entities and agencies | $ | $ | $ | $ | ||||||||||||
| U.S. agency mortgage-backed securities: residential | ||||||||||||||||
| U.S. agency collateralized mortgage obligations: residential | ||||||||||||||||
| State and political subdivisions | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Total available-for-sale securities | $ | $ | $ | $ | ||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the three and nine month periods ended September 30, 2022, the Corporation had no transfers between levels.
| 7. | Fair Value (continued) |
The following table presents changes in Level 3 assets measured on a recurring basis for the three and nine month periods ended September 30, 2022 and 2021:
| (Dollar amounts in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Balance at the beginning of the period | $ | $ | $ | $ | ||||||||||||
| Total gains or losses (realized/unrealized): | ||||||||||||||||
| Included in earnings | ||||||||||||||||
| Included in other comprehensive income | ||||||||||||||||
| Purchased into Level 3 | ||||||||||||||||
| Sold out of Level 3 | ( | ) | ( | ) | ||||||||||||
| Transfers in and/or out of Level 3 | ||||||||||||||||
| Balance at the end of the period | $ | $ | $ | $ | ||||||||||||
Assets measured at fair value on a non-recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:
Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of September 30, 2022, the Corporation had two impaired commercial real estate loans carried at a fair value of $
Other real estate owned(OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of September 30, 2022 and December 31, 2021, the Corporation did have any OREO measured at fair value less costs to sell. During the three and nine month periods ended September 30, 2022 and 2021, there was
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of
For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
| (Dollar amounts in thousands) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Description | Total | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||
| September 30, 2022: | ||||||||||||||||
| Impaired commercial real estate loans | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2021: | ||||||||||||||||
| Impaired commercial business loan | $ | $ | $ | $ | ||||||||||||
| Impaired commercial real estate loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 7. | Fair Value (continued) |
The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis:
| (Dollar amounts in thousands) | Valuation | Unobservable | Weighted | ||||||
| Techniques(s) | Input(s) | Average | |||||||
| September 30, 2022: | |||||||||
| Impaired commercial real estate loans | $ | Sales comparison approach | Adjustment for differences between comparable sales | % | |||||
| December 31, 2021: | |||||||||
| Impaired commercial business loan | $ | Sales comparison approach | Adjustment for differences between comparable sales | % | |||||
| Impaired commercial real estate loans | Sales comparison approach | Adjustment for differences between comparable sales | % | ||||||
Excluded from the tables above at September 30, 2022 were two unsecured commercial business loan totaling $
The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet:
| (Dollar amounts in thousands) | ||||||||||||||||||||
| Carrying | Fair Value Measurements using: | |||||||||||||||||||
| Description | Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| September 30, 2022: | ||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Interest earning time deposits | ||||||||||||||||||||
| Securities - available-for-sale | ||||||||||||||||||||
| Securities - equities | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Federal bank stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Borrowed funds | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2021: | ||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Interest earning time deposits | ||||||||||||||||||||
| Securities - available-for-sale | ||||||||||||||||||||
| Securities - equities | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Federal bank stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Borrowed funds | ||||||||||||||||||||
| Accrued interest payable |
This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful.
| 8. | Regulatory Matters |
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
To qualify as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less. The primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, becoming fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.
The following table sets forth certain information concerning the Bank’s regulatory capital as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer.
| (Dollar amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
| Total capital to risk-weighted assets: | ||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||
| For capital adequacy purposes | % | % | ||||||||||||||
| To be well capitalized | % | % | ||||||||||||||
| Tier 1 capital to risk-weighted assets: | ||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||
| For capital adequacy purposes | % | % | ||||||||||||||
| To be well capitalized | % | % | ||||||||||||||
| Common Equity Tier 1 capital to risk-weighted assets: | ||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||
| For capital adequacy purposes | % | % | ||||||||||||||
| To be well capitalized | % | % | ||||||||||||||
| Tier 1 capital to average assets: | ||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||
| For capital adequacy purposes | % | % | ||||||||||||||
| To be well capitalized | % | % | ||||||||||||||
| 9. | Accumulated Other Comprehensive Income (Loss) |
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three month periods ended September 30, 2022 and 2021 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):
| (Dollar amounts in thousands) | Unrealized Gains and Losses on Available-for-Sale Securities | Defined Benefit Pension Items | Totals | |||||||||
| Accumulated Other Comprehensive Income (Loss) at July 1, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive income before reclassification | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ||||||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Accumulated Other Comprehensive Income (Loss) at September 30, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| (Dollar amounts in thousands) | Amount Reclassified | ||||
| from Accumulated Other Comprehensive Income | |||||
| Details about Accumulated Other Comprehensive (Income) Loss Components | For the three months ended September 30, 2022 | Affected Line Item in the Statement Where Net Income is Presented | |||
| Unrealized gains and losses on available-for-sale securities | $ | Net gain on sale of available-for-sale securities | |||
| Tax effect | ( | ) | Provision for income taxes | ||
| Total reclassifications for the period | $ | Net of tax | |||
| (Dollar amounts in thousands) | Unrealized Gains and Losses on Available-for-Sale Securities | Defined Benefit Pension Items | Totals | |||||||||
| Accumulated Other Comprehensive Income (Loss) at July 1, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||
| Other comprehensive income before reclassification | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Accumulated Other Comprehensive Income (Loss) at September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| (Dollar amounts in thousands) | Amount Reclassified | ||||
| from Accumulated Other Comprehensive Income | |||||
| Details about Accumulated Other Comprehensive (Income) Loss Components | For the three months ended September 30, 2021 | Affected Line Item in the Statement Where Net Income is Presented | |||
| Unrealized gains and losses on available-for-sale securities | $ | ( | ) | Net gain on sale of available-for-sale securities | |
| Tax effect | Provision for income taxes | ||||
| Total reclassifications for the period | $ | ( | ) | Net of tax | |
| 9. | Accumulated Other Comprehensive Income (Loss) |
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the nine months ended September 30, 2022 and 2021 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):
| (Dollar amounts in thousands) | Unrealized Gains and Losses on Available-for-Sale Securities | Defined Benefit Pension Items | Totals | |||||||||
| Accumulated Other Comprehensive Income (Loss) at January 1, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive income (loss) before reclassification | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ||||||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Accumulated Other Comprehensive Income (Loss) at September 30, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| (Dollar amount in thousands) | Amount Reclassified | ||||
| from Accumulated Other Comprehensive Income | |||||
| Details about Accumulated Other | For the nine months ended | Affected Line Item in the Statement | |||
| Comprehensive (Income) Loss Components | September 30, 2022 | Where Net Income is Presented | |||
| Unrealized gains and losses on available-for-sale securities | $ | Net gain on sale of available-for-sale securities | |||
| Tax effect | ( | ) | Provision for income taxes | ||
| Total security reclassifications for the period | |||||
| (Dollar amounts in thousands) | Unrealized Gains and Losses on Available-for-Sale Securities | Defined Benefit Pension Items | Totals | |||||||||
| Accumulated Other Comprehensive Income (Loss) at January 1, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||
| Other comprehensive income (loss) before reclassification | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Accumulated Other Comprehensive Income (Loss) at September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| (Dollar amount in thousands) | Amount Reclassified | ||||
| from Accumulated Other Comprehensive Income | |||||
| Details about Accumulated Other | For the nine months ended | Affected Line Item in the Statement | |||
| Comprehensive (Income) Loss Components | September 30, 2021 | Where Net Income is Presented | |||
| Unrealized gains and losses on available-for-sale securities | $ | ( | ) | Net gain on sale of available-for-sale securities | |
| Tax effect | Provision for income taxes | ||||
| Total security reclassifications for the period | ( | ) | |||
| 10. | Leases |
As of September 30, 2022, the Corporation leases real estate for seven branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from June 2024 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before expiration. The weighted average remaining life of the lease term for these leases was
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was
The total operating lease costs were $
| 10. | Leases (continued) |
Total estimated rental commitments for the operating leases were as follows as of September 30, 2022:
| (Dollar amounts in thousands) | ||||
| Year ending December 31: | ||||
| 2022 (excluding nine months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Discount effect of cash flows | ( | ) | ||
| Present value of lease liabilities | $ |
| 11. |
Recent Accounting Pronouncements |
Newly Issued Not Yet Effective Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU was originally effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. However, on October 16, 2019, FASB announced a delay for the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. As the Corporation is a smaller reporting company, the delay would be applicable. Management has selected a software vendor and is currently working through the implementation process. The Corporation is reviewing available historical information in order to assess the expected credit losses and determine the impact the adoption of ASU 2016-13 will have on the financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform". ASU 2020-04 contains optional guidance to ease the potential burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the London Interbank Offered Rate (LIBOR) likely being discontinued as a benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate that may be discontinued. This ASU became effective upon issuance and generally can be applied through December 31, 2022. As of September 30, 2022, the Corporation has identified
| 12. |
Pending Merger |
On March 23, 2022, the Corporation, Farmers National Banc Corp., an Ohio corporation (“Farmers”) and FMNB Merger Subsidiary V, LLC, a wholly-owned subsidiary of Farmers (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Farmers will acquire the Corporation pursuant to the merger of the Corporation with and into the Merger Sub (the “Merger”). Promptly following the consummation of the Merger, the Bank will merge with and into The Farmers National Bank of Canfield, the national banking subsidiary of Farmers (the “Bank Merger”). Upon completion of the Merger, each share of common stock of the Corporation will be converted into the right receive right to receive, at the election of the holder, either $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiary for the three and nine months ended September 30, 2022, compared to the same periods in 2021 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC and with the accompanying consolidated financial statements and notes presented in this Form 10-Q.
FORWARD LOOKING STATEMENTS
This Form 10-Q, including the financial statements and related notes, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or phrases of similar meaning. We caution that the forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performances or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. Therefore, we caution you not to place undue reliance on our forward looking information and statements. Except as required by applicable law or regulation, we will not update the forward looking statements to reflect actual results or changes in factors affecting the forward looking statements.
USE OF NON-GAAP FINANCIAL MEASURES
In addition to the results of operations presented in accordance with generally accepted accounting principals (GAAP), management uses certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the underlying operational performance and business and performance trends as they facilitate comparison with the performance of others in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors' understanding of the Corporation's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
Management believes the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 25 and 29 for the three and nine months ended September 30, 2022 and 2021, respectively.
CHANGES IN FINANCIAL CONDITION
Total assets decreased $26.9 million, or 2.5%, to $1.0 billion at September 30, 2022 from $1.1 billion at December 31, 2021. The decrease in assets was driven primarily by a $50.8 million, or 27.3%, decrease in securities to $135.4 million at September 30, 2022 from $186.3 million at December 31, 2021, primarily due to a $34.4 million decrease in the market value of securities as a result of an increase in market interest rates. Partially offsetting the decrease in securities, loans receivable increased $19.5 million, or 2.5%, to $799.5 million at September 30, 2022 from $780.0 million at December 31, 2021. During the nine months ended September 30, 2022, the Corporation's loan production totaled $123.3 million in commitments and resulted in new outstanding loan balances of $100.7 million at September 30, 2022. Liabilities decreased $940,000, or 0.1%, to $961.6 million at September 30, 2022 from $962.5 million at December 31, 2021, due to a $8.0 million, or 37.1%, decrease in accrued expenses and other liabilities and a $1.1 million, or 4.8%, decrease in borrowed funds, partially offset by a $8.2 million, or 0.9%, increase in customer deposits.
At September 30, 2022, the Bank was considered “well-capitalized” with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.86%, 11.51%, 11.51% and 12.76%, respectively. The Bank was also considered “well-capitalized” at December 31, 2021 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.98%, 11.86%, 11.86% and 13.11%, respectively.
RESULTS OF OPERATIONS
Comparison of Results for the Three Months Ended September 30, 2022 and 2021
General. Net income available to common stockholders decreased $366,000, or 10.9%, to $3.0 million for the three months ended September 30, 2022 from $3.4 million for the same period in 2021. The decrease resulted from decreases in net interest income and noninterest income of $78,000 and $465,000, respectively, and a $15,000 increase in the provision for loans losses, partially offset by decreases in the noninterest expense and the provision for income taxes of $146,000 and $77,000.
Net interest income. Tax equivalent net interest income decreased $80,000, or 0.9%, to $8.6 million for the three months ended September 30, 2022 from $8.7 million for the three months ended September 30, 2021. This decrease was attributed to a decrease in tax equivalent interest income of $246,000 partially offset by a decrease in interest expense of $166,000.
Interest income. Tax equivalent interest income decreased $246,000, or 2.5%, to $9.6 million for the three months ended September 30, 2022 from $9.9 million for the same period in 2021. This decrease was attributed to decreases in interest earned on loans and interest-earning deposits with banks of $269,000 and $5,000, respectively, partially offset by increases in interest earned on securities and dividends on federal bank stocks of $19,000 and $9,000, respectively.
Tax equivalent interest earned on loans receivable decreased $269,000, or 3.1%, to $8.5 million for the three months ended September 30, 2022 compared to $8.8 million for the same period in 2021. The decrease resulted from an 18 basis point decrease in the average yield on loans to 4.18% for the three months ended September 30, 2022, versus 4.36% for the same period in 2021. This unfavorable yield variance accounted for a $371,000 decrease in interest income. Partially offsetting the unfavorable yield variance, average loan volume increased by $9.4 million, accounting for a $102,000 increase in interest income. Included in interest earned on loans for the three months ended September 30, 2022, is $1,000 of interest and fees earned on the SBA's PPP lending program, compared to $1.2 million for the same period in 2021.
Tax equivalent interest earned on securities increased $19,000, or 1.9%, to $998,000 for the three months ended September 30, 2022 compared to $979,000 for the same period in 2021. The increase resulted from a 61 basis point increase in the average yield on securities to 2.69% for the three months ended September 30, 2022, versus 2.06% for the same period in 2021. This favorable yield variance accounted for a $251,000 increase in interest income. Partially offsetting the favorable yield variance, average securities volume decreased by $39.3 million, accounting for a $232,000 decrease in interest income.
Interest earned on deposits with banks decreased $5,000, or 27.8%, to $13,000 for the three months ended September 30, 2022 compared to $18,000 for the same period in 2021. This decrease was due to a $32.7 million decrease in average interest-earning cash balances which accounted for a $22,000 decrease in interest income. Partially offsetting this unfavorable variance, the average yield on these balances increased 40 basis points to 0.57% for the three months ended September 30, 2022, versus 0.17% for the same period in 2021, accounting for a $17,000 increase in interest income.
Dividends on federal bank stocks increased $9,000, or 26.4%, to $81,000 for the three months ended September 30, 2022 compared to $72,000 for the same period in 2021. This increase was primarily due to a 71 basis point increase in the average yield to 5.67% for the three months ended September 30, 2022, versus 4.96% for the same period in 2021, accounting for a $10,000 increase in interest income. This increase was partially offset by a decrease in the average balance of federal bank stocks of $97,000, accounting for a $1,000 decrease in interest income.
Interest expense. Interest expense decreased $166,000, or 14.1%, to $1.0 million for the three months ended September 30, 2022 from $1.2 million for the same period in 2021. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $144,000 and $22,000, respectively.
Interest expense incurred on deposits decreased $144,000, or 14.3%, to $863,000 for the three months ended September 30, 2022 compared to $1.0 million for the same period in 2021. The average cost of interest-bearing deposits decreased 6 basis points to 0.49% for the three months ended September 30, 2022, versus 0.55% for the same period in 2021, accounting for a $94,000 decrease in interest expense. This decrease in cost was driven primarily due to the expiration of special rates on money market accounts and maturity of CD specials which were offered in 2019. Additionally, the average balance of interest-bearing deposits decreased $37.5 million, or 5.1%, to $692.1 million for the three months ended September 30, 2022, compared to $729.6 million for the same period in 2021 resulting in a $50,000 decrease in interest expense.
Interest expense incurred on borrowed funds decreased $22,000, or 12.8%, to $150,000 for the three months ended September 30, 2022, compared to $172,000 for the same period in 2021. The decrease was primarily the result of a $7.4 million, or 24.4%, decrease in the average balance of borrowed funds to $23.0 million for the three months ended September 30, 2022, compared to $30.4 million for the same period in 2021,resulting in a $106,000 decrease in interest expense. Partially offsetting the favorable volume variance, the average cost of borrowed funds increased 33 basis points to 2.58% for the three months ended September 30, 2022, compared to 2.25% for the same period in 2021 resulting in a $90,000 increase in interest expense.
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended September 30:
| (Dollar amounts in thousands) |
2022 |
2021 |
||||||
| Interest income per Consolidated Statements of Net Income |
$ | 9,572 | $ | 9,816 | ||||
| Adjustment to fully taxable equivalent basis |
59 | 61 | ||||||
| Interest income adjusted to fully taxable equivalent basis (non-GAAP) |
9,631 | 9,877 | ||||||
| Interest expense |
1,013 | 1,179 | ||||||
| Net interest income adjusted to fully taxable equivalent basis (non-GAAP) |
$ | 8,618 | $ | 8,698 | ||||
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.
| (Dollar amounts in thousands) |
Three months ended September 30, |
|||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average Balance |
Interest |
Yield/ Rate |
Average Balance |
Interest |
Yield/ Rate |
|||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans, taxable |
$ | 801,256 | $ | 8,440 | 4.18 | % | $ | 786,294 | $ | 8,661 | 4.37 | % | ||||||||||||
| Loans, tax exempt |
9,812 | 99 | 4.00 | % | 15,423 | 147 | 3.79 | % | ||||||||||||||||
| Total loans receivable |
811,068 | 8,539 | 4.18 | % | 801,717 | 8,808 | 4.36 | % | ||||||||||||||||
| Securities, taxable |
99,049 | 678 | 2.72 | % | 125,420 | 652 | 2.06 | % | ||||||||||||||||
| Securities, tax exempt |
48,062 | 320 | 2.64 | % | 60,993 | 327 | 2.13 | % | ||||||||||||||||
| Total securities |
147,111 | 998 | 2.69 | % | 186,413 | 979 | 2.08 | % | ||||||||||||||||
| Interest-earning deposits with banks |
9,007 | 13 | 0.57 | % | 41,754 | 18 | 0.17 | % | ||||||||||||||||
| Federal bank stocks |
5,667 | 81 | 5.67 | % | 5,764 | 72 | 4.96 | % | ||||||||||||||||
| Total interest-earning cash equivalents |
14,674 | 94 | 2.54 | % | 47,518 | 90 | 0.75 | % | ||||||||||||||||
| Total interest-earning assets |
972,853 | 9,631 | 3.93 | % | 1,035,648 | 9,877 | 3.78 | % | ||||||||||||||||
| Cash and due from banks |
3,524 | 3,533 | ||||||||||||||||||||||
| Other noninterest-earning assets |
68,175 | 58,926 | ||||||||||||||||||||||
| Total Assets |
$ | 1,044,552 | $ | 1,098,107 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 557,626 | $ | 239 | 0.17 | % | $ | 564,867 | $ | 237 | 0.17 | % | ||||||||||||
| Time deposits |
134,469 | 624 | 1.84 | % | 164,698 | 770 | 1.85 | % | ||||||||||||||||
| Total interest-bearing deposits |
692,095 | 863 | 0.49 | % | 729,565 | 1,007 | 0.55 | % | ||||||||||||||||
| Borrowed funds, short-term |
22,983 | 150 | 2.58 | % | 2,050 | 22 | 4.31 | % | ||||||||||||||||
| Borrowed funds, long-term |
— | — | 0.00 | % | 28,333 | 150 | 2.10 | % | ||||||||||||||||
| Total borrowed funds |
22,983 | 150 | 2.58 | % | 30,383 | 172 | 2.25 | % | ||||||||||||||||
| Total interest-bearing liabilities |
715,078 | 1,013 | 0.56 | % | 759,948 | 1,179 | 0.62 | % | ||||||||||||||||
| Noninterest-bearing demand deposits |
236,049 | — | — | 227,818 | — | — | ||||||||||||||||||
| Funding and cost of funds |
951,127 | 1,013 | 0.42 | % | 987,766 | 1,179 | 0.47 | % | ||||||||||||||||
| Other noninterest-bearing liabilities |
14,843 | 15,708 | ||||||||||||||||||||||
| Total Liabilities |
965,970 | 1,003,474 | ||||||||||||||||||||||
| Stockholders' Equity |
78,582 | 94,633 | ||||||||||||||||||||||
| Total Liabilities and Stockholders' Equity |
$ | 1,044,552 | $ | 1,098,107 | ||||||||||||||||||||
| Net interest income |
$ | 8,618 | $ | 8,698 | ||||||||||||||||||||
| Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities) |
3.37 | % | 3.17 | % | ||||||||||||||||||||
| Net interest margin (net interest income as a percentage of average interest-earning assets) |
3.51 | % | 3.33 | % | ||||||||||||||||||||
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
| (Dollar amounts in thousands) |
Three months ended September 30, |
|||||||||||
| 2022 versus 2021 |
||||||||||||
| Increase (Decrease) due to |
||||||||||||
| Volume |
Rate |
Total |
||||||||||
| Interest income: |
||||||||||||
| Loans |
$ | 102 | $ | (371 | ) | $ | (269 | ) | ||||
| Securities |
(232 | ) | 251 | 19 | ||||||||
| Interest-earning deposits with banks |
(22 | ) | 17 | (5 | ) | |||||||
| Federal bank stocks |
(1 | ) | 10 | 9 | ||||||||
| Total interest-earning assets |
(153 | ) | (93 | ) | (246 | ) | ||||||
| Interest expense: |
||||||||||||
| Interest-bearing deposits |
(50 | ) | (94 | ) | (144 | ) | ||||||
| Borrowed funds, short-term |
140 | (12 | ) | 128 | ||||||||
| Borrowed funds, long-term |
(75 | ) | (75 | ) | (150 | ) | ||||||
| Total interest-bearing liabilities |
15 | (181 | ) | (166 | ) | |||||||
| Net interest income |
$ | (168 | ) | $ | 88 | $ | (80 | ) | ||||
Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.
Information pertaining to the allowance for loan losses and nonperforming assets for the three month periods ended September 30, 2022 and 2021 is as follows:
| (Dollar amounts in thousands) |
As of or for the three months ended |
|||||||
| September 30, |
||||||||
| 2022 |
2021 |
|||||||
| Balance at the beginning of the period |
$ | 10,525 | $ | 9,848 | ||||
| Provision for loan losses |
140 | 125 | ||||||
| Charge-offs |
(93 | ) | (69 | ) | ||||
| Recoveries |
17 | 45 | ||||||
| Balance at the end of the period |
$ | 10,589 | $ | 9,949 | ||||
| Nonperforming loans |
$ | 3,679 | $ | 3,009 | ||||
| Nonperforming assets |
3,797 | 3,033 | ||||||
| Nonperforming loans to total loans |
0.45 | % | 0.38 | % | ||||
| Nonperforming assets to total assets |
0.37 | % | 0.28 | % | ||||
| Allowance for loan losses to total loans |
1.31 | % | 1.26 | % | ||||
| Allowance for loan losses to nonperforming loans |
287.82 | % | 330.64 | % | ||||
Nonperforming loans increased $340,000, or 10.2%, to $3.7 million at September 30, 2022 from $3.3 million at December 31, 2021. This increase was primarily due to a $1.8 million commercial real estate loan being place on nonaccrual status during the nine months ended September 30, 2022. This loan is secured by a hotel located in Fayette County, Pennsylvania and all related furniture, fixtures and equipment. The hotel remains operational; however, cash flow has been adversely impacted by suppressed occupancy levels and the willingness of the guarantors to support the loan is uncertain. Partially offsetting this increase, five loans to one commercial customer which were previously on nonaccrual status were repaid in full during the nine months ended September 30, 2022, resulting in a $502,000 reduction in nonperforming loans and loans 90 days or more past due and still accruing decreased $60,000.
As of September 30, 2022 the Corporation’s classified and criticized assets amounted to $40.9 million, or 4.0% of total assets, with $29.1 million classified as substandard and $11.8 million identified as special mention. This compares to classified and criticized assets of $38.2 million, or 3.6% of total assets, with $29.4 million classified as substandard and $8.9 million identified as special mention at December 31, 2021. This increase was primarily related to downgrades of a $1.9 million commercial real estate loan from pass to substandard and a $2.8 million commercial real estate loan from pass to special mention, partially offset by the repayment of $502,000 of loans from one commercial relationship. Classified and criticized assets remain elevated largely due to the impact of COVID-19 on the hospitality loan portfolio. At September 30, 2022, the Corporation's hotel portfolio totaled $31.1 million, of which $29.2 million was rated classified or criticized.
The provision for loan losses increased $15,000, or 12.0%, to $140,000 for the three months ended September 30, 2022 from $125,000 for the same period in 2021. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Noninterest income. Noninterest income decreased $465,000, or 34.5%, to $883,000 for the three months ended September 30, 2022, compared to $1.3 million for the same period in 2021 due to decreases in gains on the sale of securities, gains on the sale of loans and other income of $351,000, $151,000 and $54,000, respectively, partially offset by increases in fees and services charges and earnings on BOLI of $48,000 and $49,000, respectively. During the quarter ended September 30, 2022, the Corporation sold $4.3 million of primarily low yielding mortgage-backed and collateralized mortgage obligation securities and realized a net loss of $181,000, compared to security sales of $4.4 million with a gain of $170,000 recognized during the same period in 2021. During the quarter ended September 30, 2021, the Corporation sold $4.3 million of residential mortgages and realized a gain of $151,000, while no loans were sold during the same period in 2022.
Noninterest expense. Noninterest expense decreased $146,000, or 2.5%, to $5.6 million for the three months ended September 30, 2022 from $5.8 million for the same period in 2021. The decrease was primarily attributable to decreases in compensation and benefits expense, professional fees and intangible asset amortization of $291,000, $35,000 and $30,000, respectively, partially offset by increases in other noninterest expense and premises and equipment expense of $159,000 and $45,000, respectively.
Provision for income taxes. The provision for income taxes decreased $77,000, or 10.5%, to $657,000 for the three months ended September 30, 2022 compared to $734,000 for the same period in 2021 as a result of the decrease in net income before provision for income taxes. Additionally, the Corporation's effective tax rate decreased to 17.8% for the quarter ended September 30, 2022 from 17.9% for the same period in 2021.
Comparison of Results for the Nine Months Ended September 30, 2022 and 2021
General. Net income available to common stockholders increased $192,000, or 2.6%, to $7.6 million for the nine months ended September 30, 2022 from $7.4 million for the same period in 2021. This increase resulted from a $890,000 increase in net interest income and a $215,000 decrease in the provision for loan losses, partially offset by a $636,000 decrease in noninterest income and increases in noninterest expense and the provision for income taxes of $64,000 and $175,000, respectively.
Net interest income. Tax equivalent net interest income increased $896,000 or 3.8%, to $24.6 million for the nine months ended September 30, 2022 from $23.7 million for the nine months ended September 30, 2021. This increase was attributed to a decrease in interest expense of $1.2 million partially offset by a decrease in tax equivalent interest income of $254,000.
Interest income. Tax equivalent interest income decreased $254,000, or 0.9%, at $27.4 million for the nine months ended September 30, 2022 from $27.7 million for the same period in 2021. This decrease was attributed to decreases in interest on loans and interest-earning deposits of $643,000 and $59,000, respectively, partially offset by a $441,000 increase in interest on securities.
Tax equivalent interest earned on loans receivable decreased $643,000 to $24.2 million for the nine months ended September 30, 2022 compared to $24.8 million for the same period in 2021. The average yield on loans decreased by 14 basis points to 4.01% for the nine months ended September 30, 2022, versus 4.15% for the same period in 2021 causing a $793,000 decrease in interest income. During the first nine months of 2021, the Corporation recognized $2.3 million of interest income related to PPP loans, compared to $42,000 for the same period in 2022. Partially offsetting this unfavorable variance, the average balance of loans increased$4.9 million, accounting for a $150,000 increase in interest income.
Interest earned on deposits with banks decreased $59,000, or 72.0%, to $23,000 for the nine months ended September 30, 2022 compared to $82,000 for the same period in 2021. This decrease was due to a $38.3 million decrease in average interest-earning cash balances which accounted for an $85,000 decrease in interest income. Partially offsetting the favorable volume variance, the average yield on these balances increased 10 basis points to 0.33% for the nine months ended September 30, 2022, versus 0.23% for the same period in 2021, accounting for a $26,000 increase in interest income.
Tax equivalent interest earned on securities increased $441,000, or 17.0%, to $3.0 million for the nine months ended September 30, 2022 compared to $2.6 million for the same period in 2021. The average balance of securities increased $8.8 million, or 5.8%, accounting for a $158,000 increase in interest income. Additionally, the average yield on securities increased by 24 basis points to 2.46% for the nine months ended September 30, 2022 versus 2.26% for the same period in 2021 causing a $155,000 increase in interest income.
Interest expense. Interest expense decreased $1.2 million, or 28.6%, to $2.9 million for the nine months ended September 30, 2022 from $4.0 million for the same period in 2021. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $976,000 and $174,000, respectively.
Interest expense incurred on deposits decreased $976,000, or 28.0%, to $3.0 million for the nine months ended September 30, 2022 compared to $2.6 million for the same period in 2021. The average cost of interest-bearing deposits decreased 17 basis points to 0.48% for the nine months ended September 30, 2022, versus 0.65% for the same period in 2021, accounting for an $890,000 decrease in interest expense. This decrease in cost was driven primarily due to the expiration of special rates on money market accounts and maturity of CD specials which were offered in 2019 and general rate decreases as a result of current economic conditions. Additionally, the average balance of interest-bearing deposits decreased $18.1 million, or 2.5%, to $697.3 million for the nine months ended September 30, 2022, compared to $715.4 million for the same period in 2021 causing an $86,000 decrease in interest expense.
Interest expense incurred on borrowed funds decreased $174,000, or 32.7%, to $358,000 for the nine months ended September 30, 2022, compared to $532,000 for the same period in 2021. The decrease was primarily the result of a decrease in the average balance of borrowed funds of $7.3 million, or 23.3%, to $24.2 million for the nine months ended September 30, 2022 from $31.5 million for the same period in 2021 resulting in a $107,000 decrease in interest expense. Additionally, the cost of borrowed funds decreased 28 basis points to 1.98% for the nine months ended September 30, 2022, compared to 2.26% for the same period in 2021 causing a $67,000 decrease in interest expense.
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the nine months ended September 30:
| (Dollar amounts in thousands) |
2022 |
2021 |
||||||
| Interest income per Consolidated Statements of Net Income |
$ | 27,267 | $ | 27,527 | ||||
| Adjustment to fully taxable equivalent basis |
177 | 171 | ||||||
| Interest income adjusted to fully taxable equivalent basis (non-GAAP) |
27,444 | 27,698 | ||||||
| Interest expense |
2,870 | 4,020 | ||||||
| Net interest income adjusted to fully taxable equivalent basis (non-GAAP) |
$ | 24,574 | $ | 23,678 | ||||
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 nine months ended September 30, |
|||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average Balance |
Interest |
Yield / Rate |
Average Balance |
Interest |
Yield / Rate |
|||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans, taxable |
$ | 793,164 | $ | 23,826 | 4.02 | % | $ | 783,272 | $ | 24,338 | 4.15 | % | ||||||||||||
| Loans, tax exempt |
11,457 | 332 | 3.87 | % | 16,476 | 463 | 3.76 | % | ||||||||||||||||
| Total loans receivable |
804,621 | 24,158 | 4.01 | % | 799,748 | 24,801 | 4.15 | % | ||||||||||||||||
| Securities, taxable |
110,007 | 2,077 | 2.52 | % | 103,474 | 1,775 | 2.29 | % | ||||||||||||||||
| Securities, tax exempt |
52,237 | 961 | 2.46 | % | 49,940 | 822 | 2.20 | % | ||||||||||||||||
| Total securities |
162,244 | 3,038 | 2.50 | % | 153,414 | 2,597 | 2.26 | % | ||||||||||||||||
| Interest-earning deposits with banks |
9,250 | 23 | 0.33 | % | 47,581 | 82 | 0.23 | % | ||||||||||||||||
| Federal bank stocks |
5,679 | 225 | 5.30 | % | 5,724 | 218 | 5.09 | % | ||||||||||||||||
| Total interest-earning cash equivalents |
14,929 | 248 | 2.22 | % | 53,305 | 300 | 0.75 | % | ||||||||||||||||
| Total interest-earning assets |
981,794 | 27,444 | 3.74 | % | 1,006,467 | 27,698 | 3.68 | % | ||||||||||||||||
| Cash and due from banks |
3,479 | 3,457 | ||||||||||||||||||||||
| Other noninterest-earning assets |
67,107 | 59,757 | ||||||||||||||||||||||
| Total Assets |
$ | 1,052,380 | $ | 1,069,681 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 556,005 | $ | 585 | 0.14 | % | $ | 538,582 | $ | 925 | 0.23 | % | ||||||||||||
| Time deposits |
141,265 | 1,927 | 1.82 | % | 176,834 | 2,563 | 1.94 | % | ||||||||||||||||
| Total interest-bearing deposits |
697,270 | 2,512 | 0.48 | % | 715,416 | 3,488 | 0.65 | % | ||||||||||||||||
| Borrowed funds, short-term |
15,153 | 220 | 1.94 | % | 2,050 | 66 | 4.31 | % | ||||||||||||||||
| Borrowed funds, long-term |
9,011 | 138 | 2.05 | % | 29,451 | 466 | 2.12 | % | ||||||||||||||||
| Total borrowed funds |
24,164 | 358 | 1.98 | % | 31,501 | 532 | 2.26 | % | ||||||||||||||||
| Total interest-bearing liabilities |
721,434 | 2,870 | 0.53 | % | 746,917 | 4,020 | 0.72 | % | ||||||||||||||||
| Noninterest-bearing demand deposits |
228,477 | — | — | 214,628 | — | — | ||||||||||||||||||
| Funding and cost of funds |
949,911 | 2,870 | 0.40 | % | 961,545 | 4,020 | 0.56 | % | ||||||||||||||||
| Other noninterest-bearing liabilities |
17,108 | 15,424 | ||||||||||||||||||||||
| Total Liabilities |
967,019 | 976,969 | ||||||||||||||||||||||
| Stockholders' Equity |
85,361 | 92,712 | ||||||||||||||||||||||
| Total Liabilities and Stockholders' Equity |
$ | 1,052,380 | $ | 1,069,681 | ||||||||||||||||||||
| Net interest income |
$ | 24,574 | $ | 23,678 | ||||||||||||||||||||
| Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities) |
3.21 | % | 2.96 | % | ||||||||||||||||||||
| Net interest margin (net interest income as a percentage of average interest-earning assets) |
3.35 | % | 3.15 | % | ||||||||||||||||||||
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
| (Dollar amounts in thousands) |
For the nine months ended September 30, | |||||||||||
| 2022 versus 2021 |
||||||||||||
| Increase (Decrease) due to |
||||||||||||
| Volume |
Rate |
Total |
||||||||||
| Interest income: |
||||||||||||
| Loans |
$ | 150 | $ | (793 | ) | $ | (643 | ) | ||||
| Securities |
155 | 286 | 441 | |||||||||
| Interest-earning deposits with banks |
(85 | ) | 26 | (59 | ) | |||||||
| Federal bank stocks |
(2 | ) | 9 | 7 | ||||||||
| Total interest-earning assets |
218 | (472 | ) | (254 | ) | |||||||
| Interest expense: |
||||||||||||
| Interest-bearing deposits |
(86 | ) | (890 | ) | (976 | ) | ||||||
| Borrowed funds, short-term |
208 | (54 | ) | 154 | ||||||||
| Borrowed funds, long-term |
(315 | ) | (13 | ) | (328 | ) | ||||||
| Total interest-bearing liabilities |
(193 | ) | (957 | ) | (1,150 | ) | ||||||
| Net interest income |
$ | 411 | $ | 485 | $ | 896 | ||||||
Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.
Information pertaining to the allowance for loan losses and nonperforming assets for the nine months ended September 30, 2022 and 2021 is as follows:
| (Dollar amounts in thousands) |
As of or for the nine months ended | |||||||
| September 30, | ||||||||
| 2022 |
2021 |
|||||||
| Balance at the beginning of the period |
$ | 10,393 | $ | 9,580 | ||||
| Provision for loan losses |
435 | 650 | ||||||
| Charge-offs |
(368 | ) | (347 | ) | ||||
| Recoveries |
129 | 66 | ||||||
| Balance at the end of the period |
$ | 10,589 | $ | 9,949 | ||||
| Nonperforming loans |
$ | 3,679 | $ | 3,009 | ||||
| Nonperforming assets |
3,797 | 3,033 | ||||||
| Nonperforming loans to total loans |
0.45 | % | 0.38 | % | ||||
| Nonperforming assets to total assets |
0.37 | % | 0.28 | % | ||||
| Allowance for loan losses to total loans |
1.31 | % | 1.26 | % | ||||
| Allowance for loan losses to nonperforming loans |
287.82 | % | 330.64 | % | ||||
Nonperforming loans increased $340,000, or 10.2%, to $3.7 million at September 30, 2022 from $3.3 million at December 31, 2021. This increase was primarily due to a $1.8 million commercial real estate loan being place on nonaccrual status during the nine months ended September 30, 2022. This loan is secured by a hotel located in Fayette County, Pennsylvania and all related furniture, fixtures and equipment. The hotel remains operational; however, cash flow has been adversely impacted by suppressed occupancy levels and the willingness of the guarantors to support the loan is uncertain. Partially offsetting this increase, five loans to one commercial customer which were previously on nonaccrual status were repaid in full during the nine months ended September 30, 2022, resulting in a $502,000 reduction in nonperforming loans and loans 90 days or more past due and still accruing decreased $60,000.
The provision for loan losses decreased $215,000, or 33.1%, to $435,000 for the nine months ended September 30, 2022 from $650,000 for the same period in 2021. The lower provision for loan losses recorded during the first nine months of 2022 was due to a decrease in the amount of specific reserve required on impaired loans and a decrease in the qualitative allowance factor related to the pandemic which was added to the allowance for loan losses calculation during 2020. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Noninterest income. Noninterest income decreased $636,000, or 18.3%, to $2.8 million for the nine months ended September 30, 2022, compared to $3.5 million for the same period in 2021 due to decreases in gains on the sale of securities, gains on the sale of loans and other income of $475,000, $360,000 and $121,000, respectively, partially offset by increases in fees and service changes and earnings on BOLI of $193,000 and $127,000, respectively. During the nine months ended September 30, 2022, the Corporation sold $11.3 million of primarily municipal, mortgage-backed and collateralized mortgage obligation securities and realized a net loss of $274,000. During the same period in 2021, security sales totaled $4.6 million and the Corporation realized a net gain of $201,000. During the nine months ended September 30, 2022, the Corporation sold $1.7 million of residential mortgages and realized a loss of $7,000, compared to the sale of $13.5 million during the nine months ended September 30, 2021 and realized a gain of $353,000.
Noninterest expense. Noninterest expense increased $64,000, or 0.4%, to $17.35 million for the nine months ended September 30, 2022 from $17.28 million for the same period in 2021. The increase was primarily attributable to increases in professional fees and other noninterest expense of $434,000 and $204,000, respectively, partially offset by decreases in compensation and benefits expenses, intangible asset amortization and FDIC insurance premiums of $583,000, $32,000 and $13,000, respectively. The increase in professional fees primarily related to merger expenses of $818,000 incurred during the nine months ended September 30, 2022.
Provision for income taxes. The provision for income taxes increased $175,000, or 11.1%, to $1.7 million for the nine months ended September 30, 2022 compared to $1.6 million for the same period in 2021 as a result of the increase in net income before provision for income taxes. Additionally, the Corporation's effective tax rate increased to 18.5% for the nine months ended September 30, 2022 from 17.4% for the same period in 2021 as a result of certain non-deductible merger expenses incurred during the first nine months 2022.
LIQUIDITY
The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and sold or maturing securities. During the nine months ended September 30, 2022, the Corporation used its sources of funds primarily to fund loan originations. As of September 30, 2022, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $105.3 million, and standby letters of credit totaling $464,000, net of collateral maintained by the Bank.
At September 30, 2022, time deposits amounted to $130.9 million, or 14.1% of the Corporation’s total consolidated deposits, including approximately $64.1 million of which are scheduled to mature within the next year. Management of the Corporation believes (i) it has adequate resources to fund all of its commitments, (ii) all of its commitments will be funded as required by related maturity dates and (iii) based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities if necessary.
Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation and the Bank have alternative sources of funds. These sources include a line of credit for the Corporation with a correspondent bank, the Bank's line of credit and term borrowing capacity from the FHLB and the Federal Reserve’s discount window and, to a more limited extent, through the sale of loans. At September 30, 2022, the Corporation had borrowed funds of $21.0 million consisting entirely of FHLB overnight advances. At September 30, 2022, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issue to secure certain deposit accounts, was $228.9 million.
Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.
CRITICAL ACCOUNTING POLICIES
The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily though the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021. These policies, along with the disclosures presented in the other financial statement notes provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies.
Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.
Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.
Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. As part of the Corporation's qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that significant change in the general economic environment and financial markets, including the Corporation's market capitalization, represented and interim impairment indicator requiring continued evaluation. Because of the economic uncertainty surrounding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of goodwill as of November 30, 2021. Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired as of November 30, 2021. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and interest-bearing liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets and interest-bearing liabilities. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation’s asset/liability management committee is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability committee is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates.
Interest rate sensitivity is the result of differences in the amounts and repricing dates of the Bank’s rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing “gap”, provide an indication of the extent that the Corporation’s net interest income is affected by future changes in interest rates. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.
Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation’s assets and liabilities to interest rate changes. As of September 30, 2022, the Corporation’s interest-earning assets maturing or repricing within one year totaled $244.1 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $161.8 million, providing an excess of interest-earning assets over interest-bearing liabilities of $82.3 million. At September 30, 2022, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 150.9%.
For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).
As of September 30, 2022, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation.
There has been no change made in the Corporation’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
The Corporation is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially affect the Corporation’s consolidated financial position or results of operations.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
| (a) |
Not applicable. |
| (b) |
Not applicable. |
| Exhibit 31.1 |
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| Exhibit 31.2 |
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| Exhibit 32.1 |
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| Exhibit 32.2 |
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| 101.INS |
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
Inline XBRL Taxonomy Extension Definitions Linkbase Document |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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EMCLAIRE FINANCIAL CORP |
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| Date: November 10, 2022 |
By: |
/s/ William C. Marsh |
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William C. Marsh |
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Chairman of the Board, |
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President and Chief Executive Officer |
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| Date: November 10, 2022 |
By: |
/s/ Amanda L. Engles |
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Amanda L. Engles |
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Chief Financial Officer and |
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Treasurer |
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