Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

(Mark One)

For the quarterly period ended September 30, 20202021

or

For the transition period from _____________ to _____________

Commission File Number: 001-34527

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

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

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

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

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

Smaller reporting company ☒        Emerging growth company ☐

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

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

The number of shares outstanding of the Registrant’s common stock was 2,708,7122,721,212 at November 6, 2020.10, 2021.

Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania and northern West Virginia.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-Q10-Q and Article 10 of Regulation S-XS-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, 20192020, as contained in the Corporation’s Annual Report on Form 10-K10-K for the year ended December 31, 20192020 filed with the SEC.

The balance sheet at December 31, 20192020 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

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

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

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

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

Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19.the pandemic.  Under these provisions, loan modifications deemed to be COVID-19-relatedCOVID-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-19COVID-19 national emergency or December 31, 2020.  The banking regulators issued a similar guidance, which also clarified that a COVID-19-relatedCOVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term.  Under these terms, as of September 30, 2020,The Corporation implemented a short-term modification program to provide relief to consumer and commercial customers following the Corporation had processed payment deferrals for 420 loans with an aggregate balance of $110.9 million. Through November 2, 2020, 35 loans with an aggregate balance of $28.6 million remained on deferral while 385 loans with an aggregate balance of $82.3 million have resumed normal repayment or paid off. The majorityguidelines of these deferrals were generally 30provisions.  Most modifications fall into the 90 to 90180-day range with deferred principal and interest due and payable on the maturity date of the existing loans.  Recently, Section 541 of the Consolidated Appropriations Act, 2021, has extended this relief to the earlier of 60 days after the end of the national emergency proclamation or January 1, 2022.  Specific detail describing these modifications made in duration.  Includedrelation to the CARES Act can be found in the aggregate balanceTDR discussion in "Note 4 - Loans" on page 15.

Following the enactment of loans remaining on deferral as of November 2,these provisions, in December 2020, are 29 loans with an aggregate balance of $28.1 million for which the Corporation had granted a second deferral of upBipartisan-Bicameral Omnibus COVID Relief Deal was enacted to 90 daysprovide additional economic stimulus to individuals and businesses in duration dueresponse to the uncertainty surroundingextended economic distress caused by the COVID-19 pandemic.

Additionally,  This included additional stimulus payments to individuals and their dependents, the Bank isextension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.  The Corporation was a lender for the Small Business Administration's (SBA) Paycheck Protection Program (PPP), ainitial SBA program underand closed 688 PPP loans totaling $54.9 million.  As of October 25, 2021, 684 loans totaling $51.1 million were fully repaid, including 5 loans totaling $66,000 that were voluntarily repaid, rather than forgiven by the CARES Act, and other SBA, Federal Reserve or United States Treasury programs thatSBA.  Five loans had aggregate unforgiven balances totaling $97,000, two of which have been created in response to the pandemic, and may be a lender for programs createdremaining outstanding balances totaling $94,000.  The Corporation also participated in the future. These programs are newsecond round of the program and their effects on the Corporation’s business are uncertain. Through September 30, 2020, the Bank had closed 685 PPP421 loans amounting to $54.9totaling $26.7 million.  As of October 25, 2021, 378 loans totaling $20.9 million under the allocation approved by Congress.were fully repaid.

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: