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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March ~~September 30~~31, ~~2021~~2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 001-34527

EMCLAIRE FINANCIAL CORP

(Exact name of registrant as specified in its charter)

Pennsylvania	25-1606091
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

612 Main Street, Emlenton, Pennsylvania	16373
(Address of principal executive offices)	(Zip Code)

(844) 767-2311

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Common Stock, par value $1.25 per share	EMCF	NASDAQ Capital Market (NASDAQ)
(Title of Class)	(Trading Symbol)	(Name of exchange on which registered)

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

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

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

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

Smaller reporting company ☒ Emerging growth company ☐

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

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

The number of shares outstanding of the Registrant’s common stock was 2,~~721~~735,212 at ~~November~~May 106, ~~2021~~2022.

Table of Contents

EMCLAIRE FINANCIAL CORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

PART I – FINANCIAL INFORMATION
Item 1.	Interim Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	1
	Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	1
	Consolidated Statements of Net Income for the three and nine months ended September 30, 2021 and 2020	2
	Consolidated Statements of Net Income for the three months ended March 31, 2022 and 2021	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	3
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	4
	Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2722
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3828
Item 4.	Controls and Procedures	3828
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3929
Item 1A.	Risk Factors	3929
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3929
Item 3.	Defaults Upon Senior Securities	3929
Item 4.	Mine Safety Disclosures	3929
Item 5.	Other Information	3929
Item 6.	Exhibits	3929
Signatures		4030

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Emclaire Financial Corp Consolidated Balance Sheets (Unaudited) As of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021 (Dollar amounts in thousands, except share and per share data)

	September 30, 2021			December 31, 2020
	March 31, 2022			December 31, 2021
Assets
Cash and due from banks	$	3,~~558~~765		$	3,~~526~~505
Interest earning deposits with banks		345,~~508~~784			335,~~913~~575
Total cash and cash equivalents		389,~~066~~549			379,~~439~~080
Interest earning time deposits		2,~~982~~484			52,~~718~~484
Securities - available-for-sale		~~186~~166,~~925~~155			~~113~~186,~~041~~270
Securities - equity investments		5			155
Loans held for sale		~~300~~120			75469
Loans receivable, net of allowance for loan losses of $9,949 and $9,580		781,559			800,338
Loans receivable, net of allowance for loan losses of $10,268 and $10,393		794,932			780,010
Federal bank stocks, at cost		5,~~611~~547			5,~~635~~715
Bank-owned life insurance		1522,~~775~~041			1521,~~468~~902
Accrued interest receivable		43,~~343~~970			3,~~786~~731
Premises and equipment, net		16,~~599~~292			1816,~~202~~444
Goodwill		19,460			19,460
Core deposit intangible, net		~~937~~861			~~1,083~~899
Prepaid expenses and other assets		1216,~~412~~156			1213,~~063~~039
Total Assets	$	1,~~084~~057,~~974~~572		$	1,~~032~~059,~~323~~508
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	~~224~~232,~~029~~162		$	~~193~~221,~~752~~993
Interest bearing		~~724~~703,~~494~~794			~~699~~696,~~875~~503
Total deposits		~~948~~935,~~523~~956			~~893~~918,~~627~~496
Short-term borrowed funds		23,050			27,050
Long-term borrowed funds		2515,000			3015,000
Accrued interest payable		~~373~~333			~~474~~338
Accrued expenses and other liabilities		1416,~~588~~571			1421,~~692~~665
Total Liabilities		~~990~~970,~~534~~910			~~940~~962,~~843~~549
Stockholders' Equity
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 286,888 shares issued and outstanding; Series D, non-cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding		4,206			4,206
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,823,229 shares issued; 2,721,212 shares outstanding		3,529			3,529
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,837,229 shares issued; 2,735,212 shares outstanding		3,547			3,547
Additional paid-in capital		47,~~536~~765			47,~~200~~645
Treasury stock, at cost; 102,017 shares		(2,114	)		(2,114	)
Retained earnings		4750,~~082~~440			4248,~~143~~852
Accumulated other comprehensive loss		(517,~~799~~182	)		(35,~~484~~177	)
Total Stockholders' Equity		9486,~~440~~662			9196,~~480~~959
Total Liabilities and Stockholders' Equity	$	1,~~084~~057,~~974~~572		$	1,~~032~~059,~~323~~508

See accompanying notes to consolidated financial statements.

Table of Contents

~~Table~~Emclaire Financial Corp Consolidated Statements of ~~Contents~~ Net Income (Unaudited) For the three months ended March 31, 2022 and 2021 (Dollar amounts in thousands, except share and per share data)

Emclaire Financial Corp Consolidated Statements of Net Income (Unaudited) For the three and nine months ended September 30, 2021 and 2020 (Dollar amounts in thousands, except share and per share data)

	*For the three months ended March 31,*
	*2022*			*2021*
Interest and dividend income:
Loans receivable, including fees	$	7,612		$	8,295
Securities:
Taxable		695			501
Exempt from federal income tax		285			202
Federal bank stocks		71			69
Interest earning deposits with banks		4			31
Total interest and dividend income		8,667			9,098
Interest expense:
Deposits		822			1,267
Borrowed funds		105			179
Total interest expense		927			1,446
Net interest income		7,740			7,652
Provision for (recovery of) loan losses		(80	)		275
Net interest income after provision for loan losses		7,820			7,377
Noninterest income:
Fees and service charges		401			326
Net realized gain on sales of securities		9			26
Net gain (loss) on sales of loans		(3	)		102
Earnings on bank-owned life insurance		139			95
Other		461			503
Total noninterest income		1,007			1,052
Noninterest expense:
Compensation and employee benefits		2,893			3,023
Premises and equipment		848			862
Intangible asset amortization		38			39
Professional fees		482			270
Federal deposit insurance		149			157
Other		1,463			1,463
Total noninterest expense		5,873			5,814
Income before provision for income taxes		2,954			2,615
Provision for income taxes		518			441
Net income	$	2,436		$	2,174
Basic earnings per common share	$	0.89		$	0.80
Diluted earnings per common share		0.88			0.79
Average common shares outstanding - basic		2,735,212			2,721,212
Average common shares outstanding - diluted		2,757,354			2,740,189

	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020
Interest and dividend income:
Loans receivable, including fees	$	8,785	$	8,489	$	24,728	$	24,767
Securities:
Taxable		652		414		1,775		1,636
Exempt from federal income tax		289		136		724		310
Federal bank stocks		72		94		218		287
Interest earning deposits with banks		18		39		82		156
Total interest and dividend income		9,816		9,172		27,527		27,156
Interest expense:
Deposits		1,007		1,753		3,488		5,594
Borrowed funds		172		182		532		714
Total interest expense		1,179		1,935		4,020		6,308
Net interest income		8,637		7,237		23,507		20,848
Provision for loan losses		125		750		650		2,642
Net interest income after provision for loan losses		8,512		6,487		22,857		18,206
Noninterest income:
Fees and service charges		380		362		1,041		1,100
Net realized gain on sales of securities		170		—		201		635
Net gain on sales of loans		151		181		353		181
Earnings on bank-owned life insurance		95		96		308		305
Other		552		501		1,575		1,322
Total noninterest income		1,348		1,140		3,478		3,543
Noninterest expense:
Compensation and employee benefits		2,806		2,750		8,763		8,503
Premises and equipment		819		837		2,479		2,433
Intangible asset amortization		68		41		146		124
Professional fees		268		211		805		616
Federal deposit insurance		137		144		425		328
Other		1,653		1,462		4,663		4,571
Total noninterest expense		5,751		5,445		17,281		16,575
Income before provision for income taxes		4,109		2,182		9,054		5,174
Provision for income taxes		734		384		1,571		892
Net income		3,375		1,798		7,483		4,282
Preferred stock dividends		—		—		95		91
Net income available to common stockholders	$	3,375	$	1,798	$	7,388	$	4,191
Basic earnings per common share	$	1.24	$	0.66	$	2.72	$	1.55
Diluted earnings per common share		1.23		0.66		2.69		1.54
Average common shares outstanding - basic		2,721,212		2,708,712		2,721,212		2,708,712
Average common shares outstanding - diluted		2,748,579		2,725,574		2,744,382		2,723,555

See accompanying notes to consolidated financial statements.

Table of Contents

~~Table~~Emclaire Financial Corp Consolidated Statements of ~~Contents~~ Comprehensive Income (Loss) (Unaudited) For the three months ended March 31, 2022 and 2021 (Dollar amounts in thousands)

Emclaire Financial Corp Consolidated Statements of Comprehensive Income (Unaudited) For the three and nine months ended September 30, 2021 and 2020 (Dollar amounts in thousands)

	*For the three months ended March 31,*
	*2022*			*2021*
Net income	$	2,436		$	2,174
Other comprehensive income (loss)
Unrealized gains/(losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period		(15,187	)		(2,607	)
Reclassification adjustment for gains included in net income		(9	)		(26	)
Net period change		(15,196	)		(2,633	)
Tax effect		3,191			553
Net of tax		(12,005	)		(2,080	)
Comprehensive income (loss)	$	(9,569	)	$	94

	For the three months ended September 30,						For the nine months ended September 30,
	2021			2020			2021			2020
Net income	$	3,375		$	1,798		$	7,483		$	4,282
Other comprehensive income (loss)
Unrealized gains/(losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period		(1,682	)		68			(2,729	)		2,848
Reclassification adjustment for gains included in net income		(170	)		—			(201	)		(635	)
Net period change		(1,852	)		68			(2,930	)		2,213
Tax effect		389			(14	)		615			(465	)
Net of tax		(1,463	)		54			(2,315	)		1,748
Comprehensive income	$	1,912		$	1,852		$	5,168		$	6,030

See accompanying notes to consolidated financial statements.

Table of Contents

~~Table~~Emclaire Financial Corp Condensed Consolidated Statements of ~~Contents~~ Cash Flows (Unaudited) For the three months ended March 31, 2022 and 2021 (Dollar amounts in thousands)

Emclaire Financial Corp Condensed Consolidated Statements of Cash Flows (Unaudited) For the nine months ended September 30, 2021 and 2020 (Dollar amounts in thousands)

	*For the three months ended March 31,*
	*2022*			*2021*
Cash flows from operating activities
Net income	$	2,436		$	2,174
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		328			348
Provision for (recovery of) loan losses		(80	)		275
Amortization/accretion of premiums, discounts and deferred costs and fees, net		377			(214	)
Amortization of operating lease right-of-use assets		54			35
Amortization of intangible assets and mortgage servicing rights		60			65
Realized gain on sales of debt securities, net		(9	)		(26	)
Change in fair value of equity securities		—			2
Net (gain) loss on sales of loans		3			(102	)
Net gain on foreclosed real estate		—			(17	)
Loans originated for sale		(1,234	)		(3,068	)
Proceeds from the sale of loans originated for sale		1,579			3,198
Stock compensation expense		120			112
Increase in bank-owned life insurance		(139	)		(95	)
Increase in accrued interest receivable		(239	)		(431	)
(Increase) decrease in prepaid expenses and other assets		26			(320	)
Decrease in accrued interest payable		(5	)		(6	)
Increase (decrease) in accrued expenses and other liabilities		(5,094	)		3,404
Net cash provided by (used in) operating activities		(1,817	)		5,334
Cash flows from investing activities
Loan originations and principal collections, net		(15,155	)		14,159
Proceeds from sales of loans held for sale previously classified as portfolio loans		—			700
Available-for-sale securities:
Sales		4,939			—
Maturities, repayments and calls		3,543			4,202
Purchases		(3,645	)		(35,723	)
Purchase of federal bank stocks		(1,727	)		(404	)
Redemption of federal bank stocks		1,895			328
Purchases of premises and equipment		(176	)		(241	)
Proceeds from the sale of foreclosed real estate		—			338
Net cash used in investing activities		(10,326	)		(16,641	)
Cash flows from financing activities
Net increase in deposits		17,460			32,600
Net change in short-term borrowings		(4,000	)		—
Dividends paid		(848	)		(816	)
Net cash provided by financing activities		12,612			31,784
Net increase in cash and cash equivalents		469			20,477
Cash and cash equivalents at beginning of period		9,080			37,439
Cash and cash equivalents at end of period	$	9,549		$	57,916
Supplemental information:
Interest paid	$	932		$	1,452
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		26			—
Transfers from portfolio loans to loans held for sale		—			700
Bonds purchased, not yet settled		—			3,544

	For the nine months ended September 30,
	2021			2020
Cash flows from operating activities
Net income	$	7,483		$	4,282
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		1,031			1,058
Provision for loan losses		650			2,642
Amortization/accretion of premiums, discounts and deferred costs and fees, net		(586	)		427
Amortization of operating lease right-of-use assets		116			102
Amortization of intangible assets and mortgage servicing rights		220			199
Realized gain on sales of debt securities, net		(201	)		(635	)
Change in fair value of equity securities		10			7
Net gain on sales of loans		(353	)		(181	)
Net (gain) loss on foreclosed real estate		(42	)		14
Net gain on sale of premises and equipment		(28	)		—
Loans originated for sale		(10,816	)		—
Proceeds from the sale of loans originated for sale		10,873			—
Write-down of foreclosed real estate		—			56
Stock compensation expense		336			336
Increase in bank-owned life insurance		(308	)		(305	)
Proceeds from bank-owned life insurance claim		—			220
Increase in accrued interest receivable		(557	)		(1,631	)
Increase in prepaid expenses and other assets		(289	)		(162	)
Decrease in accrued interest payable		(101	)		(82	)
Increase (decrease) in accrued expenses and other liabilities		(276	)		556
Net cash provided by operating activities		7,162			6,903
Cash flows from investing activities
Loan originations and principal collections, net		16,284			(143,273	)
Proceeds from sales of loans held for sale previously classified as portfolio loans		2,800			3,994
Available-for-sale securities:
Sales		4,845			40,011
Maturities, repayments and calls		14,818			17,179
Purchases		(96,598	)		(34,125	)
Purchase of federal bank stocks		(845	)		(2,840	)
Redemption of federal bank stocks		868			2,831
Net change in interest earning time deposits		2,736			3,286
Proceeds from the sale of bank premises and equipment		1,297			—
Purchases of premises and equipment		(478	)		(751	)
Proceeds from the sale of foreclosed real estate		386			339
Net cash used in investing activities		(53,887	)		(113,349	)
Cash flows from financing activities
Net increase in deposits		54,896			112,392
Proceeds from long-term debt		—			20,000
Repayments on long-term debt		(5,000	)		(16,500	)
Dividends paid		(2,544	)		(2,529	)
Net cash provided by financing activities		47,352			113,363
Net increase in cash and cash equivalents		627			6,917
Cash and cash equivalents at beginning of period		37,439			14,986
Cash and cash equivalents at end of period	$	38,066		$	21,903
Supplemental information:
Interest paid	$	4,121		$	6,390
Income taxes paid		2,050			600
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		24			277
Transfers from portfolio loans to loans held for sale		2,728			4,127

See accompanying notes to consolidated financial statements.

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~~Table~~Emclaire Financial Corp Consolidated Statements of ~~Contents~~ Changes in Stockholders’ Equity (Unaudited) For the three months ended March 31, 2022 and 2021 (Dollar amounts in thousands, except per share data)

Emclaire Financial Corp Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) For the three and nine months ended September 30, 2021 and 2020 (Dollar amounts in thousands, except per share data)

	*Preferred Stock*		*Additional Paid-in Capital - Preferred*		*Common Stock*		*Additional Paid-in Capital - Common*		*Treasury Stock*			*Retained Earnings*			*Accumulated Other Comprehensive Loss*			*Total Stockholders' Equity*
Balance at January 1, 2021	$	421	$	3,785	$	3,529	$	47,200	$	(2,114	)	$	42,143		$	(3,484	)	$	91,480
Net income		—		—		—		—		—			2,174			—			2,174
Other comprehensive loss		—		—		—		—		—			—			(2,080	)		(2,080	)
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(816	)		—			(816	)
Balance at March 31, 2021	$	421	$	3,785	$	3,529	$	47,312	$	(2,114	)	$	43,501		$	(5,564	)	$	90,870

Balance at January 1, 2022	$	421	$	3,785	$	3,547	$	47,645	$	(2,114	)	$	48,852		$	(5,177	)	$	96,959
Net income		—		—		—		—		—			2,436			—			2,436
Other comprehensive loss		—		—		—		—		—			—			(12,005	)		(12,005	)
Stock compensation expense		—		—		—		120		—			—			—			120
Cash dividends declared on common stock ($0.31 per share)		—		—		—		—		—			(848	)		—			(848	)
Balance at March 31, 2022	$	421	$	3,785	$	3,547	$	47,765	$	(2,114	)	$	50,440		$	(17,182	)	$	86,662

	Preferred Stock		Additional Paid-in Capital - Preferred		Common Stock		Additional Paid-in Capital - Common		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at January 1, 2020	$	421	$	3,785	$	3,513	$	46,757	$	(2,114	)	$	38,831		$	(5,335	)	$	85,858
Net income		—		—		—		—		—			1,190			—			1,190
Other comprehensive income		—		—		—		—		—			—			1,197			1,197
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(812	)		—			(812	)
Balance at March 31, 2020		421		3,785		3,513		46,869		(2,114	)		39,209			(4,138	)		87,545
Net income		—		—		—		—		—			1,294			—			1,294
Other comprehensive income		—		—		—		—		—			—			497			497
Cash dividends declared on preferred stock		—		—		—		—		—			(91	)		—			(91	)
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(813	)		—			(813	)
Balance at June 30, 2020		421		3,785		3,513		46,981		(2,114	)		39,599			(3,641	)		88,544
Net income		—		—		—		—		—			1,798			—			1,798
Other comprehensive income		—		—		—		—		—			—			54			54
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(813	)		—			(813	)
Balance at September 30, 2020	$	421	$	3,785	$	3,513	$	47,093	$	(2,114	)	$	40,584		$	(3,587	)	$	89,695
Balance at January 1, 2021	$	421	$	3,785	$	3,529	$	47,200	$	(2,114	)	$	42,143		$	(3,484	)	$	91,480
Net income		—		—		—		—		—			2,174			—			2,174
Other comprehensive loss		—		—		—		—		—			—			(2,080	)		(2,080	)
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(816	)		—			(816	)
Balance at March 31, 2021		421		3,785		3,529		47,312		(2,114	)		43,501			(5,564	)		90,870
Net income		—		—		—		—		—			1,934			—			1,934
Other comprehensive income		—		—		—		—		—			—			1,228			1,228
Cash dividends declared on preferred stock		—		—		—		—		—			(95	)		—			(95	)
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(816	)		—			(816	)
Balance at June 30, 2021		421		3,785		3,529		47,424		(2,114	)		44,524			(4,336	)		93,233
Net income		—		—		—		—		—			3,375			—			3,375
Other comprehensive loss		—		—		—		—		—			—			(1,463	)		(1,463	)
Stock compensation expense		—		—		—		112		—			—			—			112
Cash dividends declared on common stock ($0.30 per share)		—		—		—		—		—			(817	)		—			(817	)
Balance at September 30, 2021	$	421	$	3,785	$	3,529	$	47,536	$	(2,114	)	$	47,082		$	(5,799	)	$	94,440

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

1.	Nature of Operations and Basis of Presentation

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

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

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, ~~2020~~2021, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC.

The balance sheet at December 31, ~~2020~~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) ~~pandemic~~ has ~~negatively~~adversely impacted ~~the~~and ~~global~~continues ~~economy,~~to ~~disrupted~~impact ~~global~~certain ~~supply~~industries ~~chains~~in ~~and~~which ~~increased unemployment levels. Although~~ the ~~temporary~~Corporation's clients ~~closure~~operate ~~of many businesses~~ and may ~~shelter-in-place~~have ~~policies~~impaired ~~have~~their ~~eased,~~ability ~~restrictions~~to ~~and~~fulfill ~~social~~their ~~distancing~~outstanding obligations ~~continue~~due to ~~impact~~continued ~~many~~financial ~~of the Corporation's customers~~distress. ~~While the~~ ~~full~~The ~~effects~~spread of ~~the~~COVID-19 ~~pandemic~~has ~~still~~caused ~~remain~~unprecedented ~~unknown~~uncertainty, ~~the~~volatility ~~Corporation~~and isdisruption ~~committed~~in tothe ~~supporting~~U.S. ~~its customers, employees~~ and ~~communities~~global ~~during~~economy ~~this~~at ~~difficult time~~large. The Corporation's ~~has~~business is ~~given~~dependent ~~hardship~~upon ~~relief~~the ~~assistance~~willingness toand ~~customers,~~ability ~~including~~of ~~the~~our ~~consideration~~employees ofand ~~various~~clients ~~loan~~to ~~payment~~conduct ~~deferral~~banking and ~~fee~~other ~~waiver~~financial ~~options,~~transactions. ~~and~~With ~~encourages~~the ~~customers~~easing toof ~~reach~~restrictions ~~out~~during ~~for~~the ~~assistance~~latter topart ~~support~~of ~~their~~2020 ~~individual~~and ~~circumstances.~~into ~~The~~2021, ~~pandemic~~and ~~could~~the ~~result~~availability inand ~~the~~distribution ~~recognition~~ of ~~credit~~vaccines, ~~losses~~the inU.S. ~~our~~economy ~~loan~~has ~~portfolios~~slowly ~~and~~begun ~~increases~~to inimprove ~~our~~as ~~allowance~~consumer ~~for~~and ~~credit~~business ~~losses,~~spending ~~particularly~~has ifrebounded ~~businesses~~in ~~remain~~recent ~~closed~~months. However, the ~~impact~~lasting oneffects ~~the~~are ~~global~~uncertain ~~economy~~as ~~worsens,~~government oraid ~~more~~programs ~~customers~~and ~~draw~~stimulus onpackages ~~their~~taper, ~~lines~~and ofthe ~~credit~~ultimate orlong-term ~~seek~~impact ~~additional~~of ~~loans~~the tobusiness ~~help~~shutdowns ~~finance~~that occurred ~~their~~as ~~businesses. Similarly,~~a ~~because~~result of ~~changing~~COVID-19 ~~economic~~remains ~~and~~uncertain ~~market~~in ~~conditions,~~many ~~we may~~sectors beof ~~required~~the toeconomy, ~~recognize~~such ~~impairments~~as onthe ~~securities~~travel, ~~goodwill~~hospitality orand ~~other~~entertainment ~~significant estimates~~industries. This ~~The~~may ~~extent~~cause ~~to which the pandemic impacts our~~ business, ~~results~~sectors ofthat ~~operations,~~have ~~and~~had ~~financial~~better ~~condition,~~recoveries asnot ~~well~~to asbe ~~our~~able ~~regulatory~~to ~~capital~~maintain ~~and~~those ~~liquidity~~recoveries ~~ratios,~~in ~~will~~the ~~depend~~long onterm. Although ~~future~~the ~~developments,~~Corporation ~~which~~has ~~are~~business ~~highly~~continuity ~~uncertain~~plans and ~~cannot~~other besafeguards ~~predicted~~in place, ~~including~~there ~~the~~is ~~scope~~no ~~and~~assurance ~~duration~~that ofsuch ~~the~~plans ~~pandemic~~ and ~~actions~~safeguards ~~taken~~will bycontinue ~~governmental authorities and other third parties in response~~ to ~~the~~be ~~pandemic~~effective.

~~Effective March~~To ~~16,~~help ~~2020~~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%~~. This~~ ~~action~~during ~~followed a prior reduction of~~ the ~~federal~~first ~~funds~~quarter ~~target rate to a range~~ of ~~1.00% to 1.25% effective on March 4,~~ 2020. ~~These~~Throughout ~~actions~~2021, ~~were taken in an emergency response to stem~~ the ~~economic impact of the pandemic. The~~ Federal Reserve ~~has indicated that it expects~~ continued to maintain the targeted federal funds rate at ~~current~~these levels ~~until~~because ~~such~~of ~~time that~~ the ~~economic~~pandemic-related ~~environment~~risks ~~has~~to ~~stabilized~~the ~~for a period of time~~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-~~earnings~~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. ~~Since~~Additionally, with significant cash inflows realized from a growth in deposits and the ~~Corporation’s~~forgiveness ~~balance~~of ~~sheet~~Paycheck isProtection ~~asset~~Program ~~sensitive~~(PPP) loans, ~~earnings~~the current yields on funds reinvested into the purchase of securities are ~~more~~lower ~~adversely~~than ~~affected~~existing byportfolio ~~falling~~yields. However, ~~rates~~the ~~since~~fees ~~rate~~arising ~~sensitive~~from ~~assets~~the ~~reprice~~PPP loan ~~more~~program ~~quickly~~have ~~than~~mitigated ~~rate~~some ~~sensitive~~of ~~liabilities~~this decline during 2020 and 2021. ~~Should~~As economic conditions have started to improve, the Federal Reserve ~~take~~has ~~any~~begun ~~further~~to ~~action~~shift ~~regarding~~its ~~rates~~focus into ~~relation~~limiting tothe inflationary and other potentially adverse effects of the ~~pandemic,~~ expiration of government aid programs and stimulus packages. Since the Corporation’'s ~~margins~~balance ~~could~~sheet beis ~~compressed~~asset ~~even~~sensitive ~~further~~and rate sensitive assets reprice more quickly than rate sensitive liabilities, ~~perpetuating~~margin compression may be somewhat mitigated during 2022 as the ~~negative~~Federal ~~effect~~Reserve onbegins ~~net~~to ~~income~~raise rates.

The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions caused by the pandemic. On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and containment measures. On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic consequences of the pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Among other measures, the CARES Act provided $349 billion for the ~~Paycheck Protection Program (~~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.

Table of Contents

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 a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. The Corporation implemented a short-term modification program to provide relief to consumer and commercial customers following the guidelines of these provisions. Most modifications fall into the 90 to 180-day range with deferred principal and interest due and payable on the maturity date of the existing loans. ~~Recently, Section 541 of the Consolidated Appropriations Act, 2021, has extended this relief to the earlier of 60 days after the end of the national emergency proclamation or January 1, 2022.~~ Specific detail describing these modifications made in relation to the CARES Act can be found in the TDR discussion in "Note 4 - Loans Receivable and Related Allowance for Loan Losses" onto the ~~page~~Consolidated 15Financial Statements.

~~Following~~The ~~the~~Corporation ~~enactment~~responded ~~of these provisions, in December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted~~ to ~~provide additional economic stimulus to individuals and businesses in response to~~ the ~~extended~~circumstances ~~economic~~surrounding ~~distress caused by~~ the pandemic~~. This~~ ~~included additional stimulus payments~~ to ~~individuals~~support ~~and their dependents,~~ the ~~extension~~ ofsafety ~~enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans~~ and awell-being ~~new simplified forgiveness procedure for PPP loans~~ of ~~$150,000 or less. The Corporation was a lender for~~ the ~~initial~~employees, ~~SBA~~customers ~~program~~ and ~~closed~~shareholders ~~688~~by ~~PPP~~holding ~~loans totaling~~meetings ~~$54.9 million. As of October 25~~virtually, ~~2021,~~restricting ~~684 loans~~travel ~~totaling~~and ~~$51.1 million~~attendance ~~were~~at ~~fully~~external ~~repaid~~gatherings, ~~including~~expending ~~five loans~~remote-access ~~totaling~~availability ~~$66,000~~and ~~that~~limiting ~~were~~banking ~~voluntarily~~office ~~repaid,~~lobby ~~rather than forgiven by the SBA~~hours. ~~Five loans~~Remote-access ~~had aggregate~~employees ~~unforgiven~~have ~~balances~~since ~~totaling~~transitioned ~~$97,000,~~back ~~two~~to ofthe ~~which~~office ~~have~~and ~~remaining~~banking ~~outstanding~~offices ~~balances~~resumed ~~totaling~~normal ~~$94,000~~business hours. The Corporation ~~also~~ ~~participated~~continues into ~~the~~monitor ~~second~~events ~~round~~related ofto the ~~program~~pandemic and ~~closed~~will ~~421 loans~~take ~~totaling~~necessary ~~$26.7~~precautions ~~million. As~~to ~~of October~~ensure ~~25,~~the ~~2021,~~safety ~~378~~of ~~loans~~its ~~totaling~~customers ~~$20.9~~and ~~million were fully repaid~~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~~March 3031,				~~For the nine months ended September 30,~~
	2021		2020		2021		2020
	2022		2021
Net income	$	32,~~375~~436	$	12,~~798~~174	$	~~7,483~~	$	~~4,282~~
Less: Preferred stock dividends		—		—		95		91
Net income available to common stockholders	$	32,~~375~~436	$	12,~~798~~174	$	~~7,388~~	$	~~4,191~~
Average common shares outstanding		2,~~721~~735,212		2,~~708~~721,~~712~~212		~~2,721,212~~		~~2,708,712~~
Add: Dilutive effects of restricted stock awards		2722,~~367~~142		1618,~~862~~977		~~23,170~~		~~14,843~~
Average shares and dilutive potential common shares		2,~~748~~757,~~579~~354		2,~~725~~740,~~574~~189		~~2,744,382~~		~~2,723,555~~
Basic earnings per common share	$	10.2489	$	0.6680	$	~~2.72~~	$	~~1.55~~
Diluted earnings per common share	$	10.2388	$	0.6679	$	~~2.69~~	$	~~1.54~~

Table of Contents

3.	Securities

Equity Securities

The Corporation held equity securities with fair values of $5,000 and $155,000 at ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. Changes in the fair value of these securities are included in other income on the consolidated statements of net income. During the three ~~and nine~~ months ended ~~September~~March 3031, 2022 and 2021, the Corporation recognized alosses ~~loss~~ of $~~4,000~~0 and $102,000, respectively, on equity securities held at ~~September~~March ~~30, 2021, compared to a loss of $2,000 and $7,000, respectively, for the same periods in 2020~~31. During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~ 2022 and ~~2020~~ 2021, the Corporation did not sell any equity securities.

Debt Securities - Available-for-Sale

The following table summarizes the Corporation’s debt securities as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021:

(Dollar amounts in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

September 30, 2021:

March 31, 2022:

U.S. government sponsored entities and agencies

86,~~145~~107

69—

(24560

)

85,~~190~~547

U.S. agency mortgage-backed securities: residential

1411,~~485~~308

~~171~~19

(97511

)

1410,~~559~~816

U.S. agency collateralized mortgage obligations: residential

4549,~~702~~276

~~160~~4

(~~379~~3,255

)

4546,~~483~~025

State and political subdivisions

9489,~~497~~353

~~1,093~~35

(110,~~413~~630

)

9478,~~177~~758

Corporate debt securities

2425,~~217~~443

~~369~~95

(70529

)

2425,~~516~~009

Total securities available-for-sale

~~187~~181,~~046~~487

~~1,862~~153

(115,~~983~~485

)

~~186~~166,~~925~~155

December 31, 2020:

December 31, 2021:

U.S. government sponsored entities and agencies

38,~~036~~142

1152

(4035

)

38,~~007~~159

U.S. agency mortgage-backed securities: residential

1612,~~151~~049

~~436~~116

(6130

)

1612,~~581~~035

U.S. agency collateralized mortgage obligations: residential

1550,~~658~~202

~~263~~92

(10804

)

1549,~~911~~490

State and political subdivisions

5392,~~834~~307

1,~~781~~099

(38844

)

5592,~~577~~562

Corporate debt securities

2123,~~553~~705

~~434~~424

(22105

)

2124,~~965~~024

Total securities available-for-sale

~~110~~186,~~232~~405

21,~~925~~783

(~~116~~1,918

)

~~113~~186,~~041~~270

~~The following table summarizes scheduled maturities of the Corporation’s debt securities as of~~ ~~September~~7 30, 2021. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

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(Dollar amounts in thousands)	Available-for-sale
	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due after one year through five years		4,326		4,401
Due after five years through ten years		33,552		33,934
Due after ten years		88,981		88,548
Mortgage-backed securities: residential		14,485		14,559
Collateralized mortgage obligations: residential		45,702		45,483
Total securities available-for-sale	$	187,046	$	186,925

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3.	Securities (continued)

~~Information~~The ~~pertaining~~following totable summarizes scheduled maturities of the Corporation’s debt securities ~~with~~as ~~gross~~of March ~~unrealized~~31, ~~losses~~2022. atExpected maturities ~~September~~may ~~30,~~differ ~~2021 and~~from contractual maturities because issuers ~~December~~may ~~31,~~have ~~2020,~~the ~~aggregated~~right byto ~~investment~~call ~~category~~or ~~and~~prepay ~~length~~obligations ofwith ~~time~~or ~~that~~without ~~individual~~call ~~securities~~or ~~have~~prepayment ~~been~~penalties. inMortgage-backed asecurities ~~continuous~~and ~~loss~~collateralized ~~position~~mortgage obligations are ~~included~~not indue ~~the~~at ~~table~~a ~~below:~~single maturity and are shown separately.

(Dollar amounts in thousands)	~~Less than 12 Months~~Available-for-sale					~~12 Months or More~~					~~Total~~
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	Amortized Cost		Fair Value
September 30, 2021:
Due in one year or less	$	—	$	—
U.S. government sponsored entities and agencies	$	1,580	$	(24	)	$	—	$	—		$	1,580	$	(24	)
Due after one year through five years		4,607		4,622
U.S. agency mortgage-backed securities: residential		7,196		(97	)		—		—			7,196		(97	)
Due after five years through ten years		33,443		32,311
U.S. agency collateralized mortgage obligations: residential		32,710		(376	)		1,693		(3	)		34,403		(379	)
Due after ten years		82,853		72,381
State and political subdivisions		52,581		(1,358	)		1,420		(55	)		54,001		(1,413	)
Mortgage-backed securities: residential		11,308		10,816
Corporate debt securities		6,880		(70	)		—		—			6,880		(70	)
Collateralized mortgage obligations: residential		49,276		46,025
Total	$	100,947	$	(1,925	)	$	3,113	$	(58	)	$	104,060	$	(1,983	)
Total securities available-for-sale	$	181,487	$	166,155
December 31, 2020:
U.S. government sponsored entities and agencies	$	1,996	$	(40	)	$	—	$	—		$	1,996	$	(40	)
U.S. agency mortgage-backed securities: residential		1,547		(6	)		—		—			1,547		(6	)
U.S. agency collateralized mortgage obligations: residential		1,515		(4	)		4,845		(6	)		6,360		(10	)
State and political subdivisions		1,705		(11	)		1,641		(27	)		3,346		(38	)
Corporate debt securities		2,509		(10	)		988		(12	)		3,497		(22	)
Total	$	9,272	$	(71	)	$	7,474	$	(45	)	$	16,746	$	(116	)

~~Gains~~Information ~~and~~pertaining ~~losses~~to ondebt ~~sales of~~ securities ~~for~~with ~~the~~gross ~~three~~unrealized ~~and~~losses ~~nine~~at March ~~months~~31, ~~ended~~2022 and ~~September~~December 3031, 2021 , aggregated by investment category and ~~2020 were~~length asof ~~follows~~time that individual securities have been in a continuous loss position are included in the table below:

(Dollar amounts in thousands)	~~For~~Less ~~the~~than ~~three~~12 ~~months ended September 30,~~Months					~~For~~12 ~~the~~Months ~~nine~~or ~~months ended September 30,~~More					Total
	2021		2020			2021		2020
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Proceeds	$	4,597	$	—		$	4,845	$	40,011
March 31, 2022:
Gains		170		—			201		640
U.S. government sponsored entities and agencies	$	5,547	$	(560	)	$	—	$	—		$	5,547	$	(560	)
Losses		—		—			—		(5	)
U.S. agency mortgage-backed securities: residential		5,365		(165	)		4,460		(346	)		9,825		(511	)
Tax provision related to gains (losses)		35		—			42		133
U.S. agency collateralized mortgage obligations: residential		40,792		(2,929	)		4,502		(326	)		45,294		(3,255	)
State and political subdivisions		59,987		(8,209	)		11,538		(2,421	)		71,525		(10,630	)
Corporate debt securities		12,698		(437	)		1,658		(92	)		14,356		(529	)
Total	$	124,389	$	(12,300	)	$	22,158	$	(3,185	)	$	146,547	$	(15,485	)
December 31, 2021:
U.S. government sponsored entities and agencies	$	4,568	$	(35	)	$	—	$	—		$	4,568	$	(35	)
U.S. agency mortgage-backed securities: residential		7,254		(130	)		—		—			7,254		(130	)
U.S. agency collateralized mortgage obligations: residential		39,964		(801	)		1,584		(3	)		41,548		(804	)
State and political subdivisions		39,872		(814	)		1,442		(30	)		41,314		(844	)
Corporate debt securities		6,104		(105	)		—		—			6,104		(105	)
Total	$	97,762	$	(1,885	)	$	3,026	$	(33	)	$	100,788	$	(1,918	)

Gains and losses on sales of securities for the three months ended March 31, 2022 and 2021 were as follows:

(Dollar amounts in thousands)	*For the three months ended March 31,*
	*2022*			*2021*
Proceeds	$	4,939		$	—
Gains		16			26
Losses		(7	)		—
Tax provision related to gains (losses)		2			5

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 ~~140~~ 231 debt securities in an unrealized loss position as of ~~September~~March 3031, ~~2021~~2022, ~~four~~ 43 of which were in an unrealized loss position for more than 12 months. Of these ~~140~~ 231 securities, 94 133 were state and political subdivision securities, 2146 were collateralized mortgage obligations (issued by U.S. government sponsored entities), 1835 were corporate securities, ~~six~~13 were mortgage-backed securities and ~~one~~four ~~was~~were U.S angovernment ~~agency~~sponsored entities and agencies security. Management believes the unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of their amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of ~~September~~March 3031, ~~2021~~2022 to be other-than-temporarily impaired.

9 8

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4.	Loans Receivable and Related Allowance for Loan Losses

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

(Dollar amounts in thousands)	~~September~~March 3031, ~~2021~~2022		December 31, ~~2020~~2021
Mortgage loans on real estate:
Residential first mortgages	$	~~278~~273,~~412~~724	$	~~308~~273,~~031~~823
Home equity loans and lines of credit		7873,~~265~~731		8775,~~088~~810
Commercial real estate		~~313~~347,~~048~~447		~~285~~326,~~625~~341
Total real estate loans		~~669~~694,~~725~~902		~~680~~675,~~744~~974
Other loans:
Commercial business		7261,~~672~~381		8965,~~139~~877
Consumer		4948,~~111~~917		4048,~~035~~552
Total other loans		~~121~~110,~~783~~298		~~129~~114,~~174~~429
Total loans, gross		~~791~~805,~~508~~200		~~809~~790,~~918~~403
Less allowance for loan losses		910,~~949~~268		910,~~580~~393
Total loans, net	$	~~781~~794,~~559~~932	$	~~800~~780,~~338~~010

Included in total loans above are net deferred costs of $3.1 2 million and $23.53 million at ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. In addition, included in commercial loans at ~~September~~March 3031, ~~2021~~ 2022 and December 31, ~~2020~~2021 were $~~10.4~~945,000 ~~million~~ and $301.42 million, respectively, of Paycheck Protection Program (PPP ) loans that are guaranteed by the Small Business Administration (SBA). The Corporation received $3.7 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020, $2.14 million was recognized ~~during~~in 2021, $19,000 was recognized in the ~~nine months~~quarter ended ~~September 30~~ March 31, ~~2021~~2022 and $~~335~~22,000 ~~will~~ is expected to be recognized in future periods upon forgiveness by the SBA.

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

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

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

At ~~September~~March 3031, ~~2021~~2022, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc. (2018) because the unaccreted purchase discount still exceeded the calculated allowance.

10 9

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

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

(Dollar amounts in thousands)	Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total
Three months ended September 30, 2021:
Three months ended March 31, 2022:
Allowance for loan losses:
Beginning Balance	$	2,~~449~~335		$	~~537~~525		$	56,~~826~~253		$	~~675~~904		$	~~361~~376		$	910,~~848~~393
Charge-offs		—			(3615	)		—			—			(3383	)		(6998	)
Recoveries		—			11—			2147			1—			126			4553
Provision		(~~101~~25	)		21(25	)		~~153~~144			7(253	)		4579			~~125~~(80	)
Ending Balance	$	2,~~348~~310		$	~~533~~485		$	6,~~000~~444		$	~~683~~651		$	~~385~~378		$	910,~~949~~268
Nine months ended September 30, 2021:
At March 31, 2022:
Allowance for loan losses:
Beginning Balance	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580
Charge-offs		—			(36	)		(151	)		—			(160	)		(347	)
Recoveries		—			19			22			1			24			66
Provision		(426	)		(70	)		949			5			192			650
Ending Balance	$	2,348		$	533		$	6,000		$	683		$	385		$	9,949
At September 30, 2021:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	—7		$	—		$	21118		$	43		$	—		$	25128
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,~~348~~303			~~533~~485			56,~~979~~326			~~679~~648			~~385~~378			910,~~924~~140
Total	$	2,~~348~~310		$	~~533~~485		$	6,~~000~~444		$	~~683~~651		$	~~385~~378		$	910,~~949~~268
Total loans:
Individually evaluated for impairment	$	~~303~~287		$	4		$	12,~~224~~601		$	~~121~~89		$	—		$	12,~~652~~981
Acquired loans collectively evaluated for impairment		3227,~~520~~156			6,~~754~~203			2320,~~992~~108			2,~~552~~077			~~617~~523			6656,~~435~~067
Originated loans collectively evaluated for impairment		~~245~~246,~~589~~281			7167,~~507~~524			~~287~~324,~~832~~738			6959,~~999~~215			48,~~494~~394			~~723~~746,~~421~~152
Total	$	~~278~~273,~~412~~724		$	7873,~~265~~731		$	~~313~~347,~~048~~447		$	7261,~~672~~381		$	4948,~~111~~917		$	~~791~~805,~~508~~200
At December 31, 2020:
At December 31, 2021:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	—1		$	—		$	4088		$	20196		$	—		$	60285
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,~~774~~334			~~620~~525			56,~~140~~165			~~657~~708			~~329~~376			910,~~520~~108
Total	$	2,~~774~~335		$	~~620~~525		$	56,~~180~~253		$	~~677~~904		$	~~329~~376		$	910,~~580~~393
Total loans:
Individually evaluated for impairment	$	~~329~~294		$	34		$	1,~~639~~225		$	~~143~~363		$	—		$	21,~~114~~886
Acquired loans collectively evaluated for impairment		4429,~~209~~573			86,~~491~~370			3021,~~913~~471			52,~~131~~055			~~1,017~~538			8960,~~761~~007
Originated loans collectively evaluated for impairment		~~263~~243,~~493~~956			7869,~~594~~436			~~253~~303,~~073~~645			8363,~~865~~459			3948,~~018~~014			~~718~~728,~~043~~510
Total	$	~~308~~273,~~031~~823		$	8775,~~088~~810		$	~~285~~326,~~625~~341		$	8965,~~139~~877		$	4048,~~035~~552		$	~~809~~790,~~918~~403
Three months ended September 30, 2020:
Three months ended March 31, 2021:
Allowance for loan losses:
Beginning Balance	$	2,~~582~~774		$	~~654~~620		$	35,~~901~~180		$	~~803~~677		$	~~219~~329		$	89,~~159~~580
Charge-offs		—			~~(51~~—	)		(194	)		—			(2890	)		(80184	)
Recoveries		5—			18			1—			36—			336			7614
Provision		~~111~~(114	)		57(43	)		~~578~~386			(8165	)		85111			~~750~~275
Ending Balance	$	2,~~698~~660		$	~~661~~585		$	45,~~479~~472		$	~~758~~612		$	~~309~~356		$	89,~~905~~685
Nine months ended September 30, 2020:
Allowance for loan losses:
Beginning Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556
Charge-offs		(11	)		(89	)		(75	)		(147	)		(82	)		(404	)
Recoveries		6			12			6			37			50			111
Provision		394			112			1,650			232			254			2,642
Ending Balance	$	2,698		$	661		$	4,479		$	758		$	309		$	8,905

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2022:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of March 31, 2022						For the three months ended March 31, 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	$	68	$	68	$	7	$	68	$	—	$	—
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		443		443		118		501		6		6
Commercial business		3		3		3		126		—		—
Consumer		—		—		—		—		—		—
Total	$	514	$	514	$	128	$	695	$	6	$	6

	Impaired Loans with No Specific Allowance
	As of March 31, 2022				For the three months ended March 31, 2022
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	330	$	219	$	223	$	1	$	1
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		2,158		2,158		1,412		31		9
Commercial business		86		86		99		4		4
Consumer		—		—		—		—		—
Total	$	2,578	$	2,467	$	1,738	$	36	$	14

(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	$	68	$	68	$	1	$	28	$	3	$	3
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		559		559		88		387		30		30
Commercial business		250		250		196		79		8		8
Consumer		—		—		—		—		—		—
Total	$	877	$	877	$	285	$	494	$	41	$	41

	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	$	338	$	226	$	284	$	3	$	3
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		666		666		990		71		71
Commercial business		113		113		96		5		5
Consumer		—		—		—		—		—
Total	$	1,121	$	1,009	$	1,374	$	79	$	79

Table of Contents

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~~March 3031, 2021:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of September 30, 2021						For the three months ended September 30, 2021
	As of March 31, 2021						For the three months ended March 31, 2021
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—69	$	—69	$	—1	$	—35	$	—1	$	—1
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		~~309~~373		~~309~~373		2133		~~312~~376		34		34
Commercial business		464		464		46		471		—1		—1
Consumer		—		—		—		—		—		—
Total	$	~~313~~506	$	~~313~~506	$	2540	$	~~316~~482	$	36	$	36

	For the nine months ended September 30, 2021
	Impaired Loans with No Specific Allowance
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
	As of March 31, 2021				For the three months ended March 31, 2021
Residential first mortgages	$	17	$	—	$	—
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Home equity and lines of credit		—		—		—
Residential first mortgages	$	363	$	251	$	290	$	1	$	1
Commercial real estate		344		12		12
Home equity and lines of credit		4		4		4		—		—
Commercial business		37		—		—
Commercial real estate		1,110		1,094		1,177		12		12
Consumer		—		—		—
Commercial business		65		65		65		1		1
Total	$	398	$	12	$	12
Consumer		—		—		—		—		—
Total	$	1,542	$	1,414	$	1,536	$	14	$	14

	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	$	415	$	303	$	308	$	2	$	2
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		915		915		964		8		8
Commercial business		117		117		119		1		1
Consumer		—		—		—		—		—
Total	$	1,451	$	1,339	$	1,395	$	11	$	11

	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	$	299	$	4	$	4
Home equity and lines of credit		4		—		—
Commercial real estate		1,070		32		32
Commercial business		92		4		4
Consumer		—		—		—
Total	$	1,465	$	40	$	40

Table of Contents

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

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

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

Table of Contents

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

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of September 30, 2020						For the three months ended September 30, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—	$	—	$	—	$	35	$	—	$	—
Home equity and lines of credit		—		—		—		2		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		69		69		15		70		1		1
Consumer		—		—		—		—		—		—
Total	$	69	$	69	$	15	$	107	$	1	$	1

	For the nine months ended September 30, 2020
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	53	$	—	$	—
Home equity and lines of credit		3		—		—
Commercial real estate		37		—		—
Commercial business		47		2		2
Consumer		—		—		—
Total	$	140	$	2	$	2

	Impaired Loans with No Specific Allowance
	As of September 30, 2020				For the three months ended September 30, 2020
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	336	$	225	$	304	$	3	$	3
Home equity and lines of credit		4		4		2		—		—
Commercial real estate		1,694		1,694		1,714		23		23
Commercial business		113		113		127		4		2
Consumer		—		—		—		—		—
Total	$	2,147	$	2,036	$	2,147	$	30	$	28

	For the nine months ended September 30, 2020
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	293	$	6	$	6
Home equity and lines of credit		1		—		—
Commercial real estate		1,144		75		59
Commercial business		84		8		5
Consumer		—		—		—
Total	$	1,522	$	89	$	70

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.

Table of Contents

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

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

At ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, the Corporation had $~~360~~336,000 and $~~396~~346,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $07,000 and $6,000 of specific allowance for these loans at ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, respectively.

During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~ 2021, the Corporation did not modify any loans as TDRs.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

COVID-19 related deferrals. Under the provisions of the CARES Act, at the peak, during 2020, the Corporation had granted modifications on ~~419~~410 loans with an aggregate balance of $~~111~~110.6 4 million, representing 1413.76% of gross outstanding loan balances. As of ~~September~~March 3031, ~~2021~~2022, ~~ten loans~~one loan with ~~an aggregate~~ a balance of $163.09 million~~, or 2.0%, of gross loans outstanding~~ remained on deferral while the remaining loans have resumed normal repayment or have been repaid in full. ~~As of September 30, 2021, hospitality loans comprised 100% of the loans remaining on deferral. Eight of these loans totaling $14.0 million, or 87.4%, have resumed interest only payments.~~ The characteristics of these modifications ~~are~~were considered short-term and do did not result in a reclassification of these loans to TDR status.

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

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

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

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

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

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

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

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

Management uses the following definitions for risk ratings:

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

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

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

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

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2021:
March 31, 2022:
Residential first mortgages	$	~~277~~272,~~309~~544	$	—	$	—	$	1,~~103~~180	$	—	$	~~278~~273,~~412~~724
Home equity and lines of credit		7773,~~955~~534		—		—		~~310~~197		—		7873,~~265~~731
Commercial real estate		—		~~281~~317,~~271~~367		7,~~518~~459		2422,~~259~~621		—		~~313~~347,~~048~~447
Commercial business		—		6655,~~554~~593		1,~~369~~308		4,~~749~~480		—		7261,~~672~~381
Consumer		4948,~~095~~907		—		—		1610		—		4948,~~111~~917
Total loans	$	~~404~~394,~~359~~985	$	~~347~~372,~~825~~960	$	8,~~887~~767	$	3028,~~437~~488	$	—	$	~~791~~805,~~508~~200
December 31, 2020:
December 31, 2021:
Residential first mortgages	$	~~306~~272,~~237~~722	$	—	$	—	$	1,~~794~~101	$	—	$	~~308~~273,~~031~~823
Home equity and lines of credit		8675,~~867~~408		—		—		~~221~~402		—		8775,~~088~~810
Commercial real estate		—		~~249~~295,~~357~~891		197,~~669~~494		1622,~~599~~956		—		~~285~~326,~~625~~341
Commercial business		—		8359,~~059~~628		21,~~054~~356		4,~~026~~893		—		8965,~~139~~877
Consumer		3948,~~987~~538		—		—		4814		—		4048,~~035~~552
Total loans	$	~~433~~396,~~091~~668	$	~~332~~355,~~416~~519	$	218,~~723~~850	$	2229,~~688~~366	$	—	$	~~809~~790,~~918~~403

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

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~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, 2021:

March 31, 2022:

Residential first mortgages

~~274~~270,~~327~~100

2,~~432~~190

~~550~~254

~~357~~450

~~746~~730

~~278~~273,~~412~~724

Home equity and lines of credit

7773,~~247~~030

~~340~~299

~~368~~206

~~103~~74

~~207~~122

7873,~~265~~731

Commercial real estate

~~311~~344,~~606~~447

~~194~~358

2341

—

12,~~225~~601

~~313~~347,~~048~~447

Commercial business

7261,~~286~~030

3156

—

~~234~~206

~~121~~89

7261,~~672~~381

Consumer

4948,~~083~~738

7158

510

—

1611

4948,~~111~~917

Total loans

~~784~~797,~~549~~345

3,~~004~~061

~~946~~511

~~694~~730

23,~~315~~553

~~791~~805,~~508~~200

December 31, 2020:

December 31, 2021:

Residential first mortgages

~~304~~270,~~161~~221

1,~~836~~913

~~239~~588

~~176~~291

~~1,619~~810

~~308~~273,~~031~~823

Home equity and lines of credit

8674,~~093~~853

~~446~~230

~~328~~325

~~146~~160

75242

8775,~~088~~810

Commercial real estate

~~283~~325,~~373~~018

~~580~~73

41—

18—

1,~~613~~250

~~285~~326,~~625~~341

Commercial business

8865,~~614~~305

72—

46—

~~239~~234

~~168~~338

8965,~~139~~877

Consumer

3948,~~917~~344

28117

4277

—

4814

4048,~~035~~552

Total loans

~~802~~783,~~158~~741

2,~~962~~333

~~696~~990

~~579~~685

32,~~523~~654

~~809~~790,~~918~~403

The following table presents the Corporation’s nonaccrual loans by aging category as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~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, 2021:
March 31, 2022:
Residential first mortgages	$	~~202~~190	$	—68	$	69—	$	~~475~~472	$	~~746~~730
Home equity and lines of credit		34		—		—		~~204~~118		~~207~~122
Commercial real estate		~~795~~2,420		89		—6		~~422~~166		12,~~225~~601
Commercial business		~~121~~89		—		—		—		~~121~~89
Consumer		—		—		—		1611		1611
Total loans	$	12,~~121~~703	$	877	$	696	$	~~1,117~~767	$	23,~~315~~553
December 31, 2020:
December 31, 2021:
Residential first mortgages	$	~~220~~196	$	70—	$	—69	$	~~1,329~~545	$	~~1,619~~810
Home equity and lines of credit		4		—		—		71238		75242
Commercial real estate		1,~~016~~052		—10		24—		~~573~~188		1,~~613~~250
Commercial business		~~168~~338		—		—		—		~~168~~338
Consumer		—		—		—		4814		4814
Total loans	$	1,~~408~~590	$	7010	$	2469	$	~~2,021~~985	$	32,~~523~~654

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5.	Goodwill and Intangible Assets

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021:

(Dollar amounts in thousands)	~~September~~March 3031, ~~2021~~2022				December 31, ~~2020~~2021
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill	$	19,460	$	—	$	19,460	$	—
Core deposit intangibles		5,634		4,~~697~~773		5,634		4,~~551~~735
Total	$	25,094	$	4,~~697~~773	$	25,094	$	4,~~551~~735

Goodwill resulted from five acquisitions. Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test. No goodwill impairment charges were recorded during ~~2020~~2021 or in the first ~~nine~~three months of ~~2021~~2022. Although the annual review of goodwill revealed no impairment consideration, management will continue to monitor the status of current economic conditions related to the COVID-19 pandemic in the event that subsequent deterioration would warrant an interim assessment of goodwill. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material.

The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three ~~and~~month ~~nine~~periods ~~months~~ ended ~~September~~March 3031, 2022 and 2021, respectively, the Corporation recorded intangible amortization expense totaling $6838,000 and $~~146~~39,000~~, respectively, compared to $41,000 and $124,000, respectively, for the same periods in 2020~~.

6.	Stock Compensation Plan

In ~~April~~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 204,091 shares of common stock. As of March 31, ~~all~~2022, of192,591 ~~which~~shares remain available for issuance under the 2021 Plan.

In addition, in ~~April~~February 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 2014 Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock. As of ~~September~~March 3031, ~~2021~~2022, ~~6,783~~33 shares of restricted stock and 88,433 stock options remain available for issuance under the ~~2014~~ Plan.

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

~~At September~~For 30the period ended March 31, ~~2021~~2022, there were no options that were granted or outstanding under the Plans.

A summary of the status of the Corporation’s nonvested restricted stock awards as of ~~September~~March 3031, ~~2021~~2022, and changes during the period then ended is presented below:

	Shares		Weighted-Average Grant-date Fair Value
Nonvested at January 1, 2021		47,950	$	28.83
Nonvested at January 1, 2022		52,200	$	28.32
Granted		—		—
Vested		—		—
Forfeited		—		—
Nonvested as of September 30, 2021		47,950	$	28.83
Nonvested as of March 31, 2022		52,200	$	28.32

For the three ~~and nine~~ month periods ended ~~September~~March 3031, 2022 and 2021, the Corporation recognized stock compensation expense of $~~112~~120,000 and $~~336,000, respectively, compared to $~~112,000 ~~and $336~~,~~000,~~ respectively~~, for the same periods in 2020~~. As of ~~September~~March 3031, ~~2021~~2022, there was $~~547~~830,000 of total unrecognized compensation cost related to ~~nonvested~~restricted ~~share-based~~stock ~~compensation arrangements~~ awards granted under the ~~Plans~~Plan. That ~~cost~~expense is expected to be recognized over the next three years. It is the Corporation’s policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation.

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7.	Fair Value

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective ~~period~~ year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.

Assets measured at fair value on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

Debt securities available-for-sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt and equity securities held by the Corporation. The Level 3 corporate debt securities valuations were supported by inputs such as the security issuer's publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors.

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

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2021:
March 31, 2022:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	85,~~190~~547	$	—	$	85,~~190~~547	$	—
U.S. agency mortgage-backed securities: residential		1410,~~559~~816		—		1410,~~559~~816		—
U.S. agency collateralized mortgage obligations: residential		4546,~~483~~025		—		4546,~~483~~025		—
State and political subdivision		9478,~~177~~758		—		9478,~~177~~758		—
Corporate debt securities		2425,~~516~~009		—		2220,~~510~~424		24,~~006~~585
Total available-for-sale securities	$	~~186~~166,~~925~~155	$	—	$	~~184~~161,~~919~~570	$	24,~~006~~585
Equity securities	$	5	$	5	$	—	$	—
December 31, 2020:
December 31, 2021:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	38,~~007~~159	$	—	$	38,~~007~~159	$	—
U.S. agency mortgage-backed securities: residential		1612,~~581~~035		—		1612,~~581~~035		—
U.S. agency collateralized mortgage obligations: residential		1549,~~911~~490		—		1549,~~911~~490		—
State and political subdivisions		5592,~~577~~562		—		5592,~~577~~562		—
Corporate debt securities		2124,~~965~~024		—		1920,~~959~~439		23,~~006~~585
Total available-for-sale securities	$	~~113~~186,~~041~~270	$	—	$	~~111~~182,~~035~~685	$	23,~~006~~585
Equity securities	$	155	$	155	$	—	$	—

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~~March 3031, 2022 and 2021, the Corporation had no transfers between levels. ~~During the three and nine month periods ended September 30, 2020, the Corporation reclassified one security from Level 3 to Level 2.~~

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7.	Fair Value (continued)

The following table presents changes in Level 3 assets measured on a recurring basis for the three ~~and nine~~ month periods ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021:

(Dollar amounts in thousands)	Three months ended ~~September~~March 3031,					~~Nine months ended September 30,~~
	2021		2020			2021		2020
	2022		2021
Balance at the beginning of the period	$	23,~~006~~585	$	42,~~022~~006		$	~~2,006~~	$	~~4,022~~
Total gains or losses (realized/unrealized):
Included in earnings		—		—			—		—
Included in other comprehensive income		—		—			—		—
Purchased into Level 3		—1,000		—			—		—
Transfers in and/or out of Level 3		—		~~(500~~—	)		—		~~(500~~	)
Balance at the end of the period	$	24,~~006~~585	$	32,~~522~~006		$	~~2,006~~	$	~~3,522~~

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~~March 3031, ~~2021~~2022, the Corporation had ~~one~~two impaired commercial real estate ~~loan~~loans carried at a fair value of $~~288~~325,000, which consisted of the outstanding balance of $~~309~~443,000 less a specific reserve of $21118,000. As of December 31, ~~2020~~2021, the Corporation had ~~two~~ five impaired commercial real estate loans carried at a fair value of $~~340~~470,000, which consisted of the outstanding balance of $~~380~~558,000 less a specific reserve of $4088,000 ~~and three~~ . In addition, the Corporation had one impaired commercial business ~~loans~~ loan carried at a fair value of $5854,000, which consisted of the outstanding balance of $78247,000, less a specific reserve of $20193,000. During the three month periods ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~ 2021, there was no additional provision for ~~loans~~loan losses ~~related to impaired loans. During the nine month periods ended September 30, 2021 and 2020, there was additional provision expense~~ recorded for impaired loans of $155,000 and $311,000, respectively.

Other real estate owned(OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of ~~September~~March 3031, 2022 and December 31, 2021, the Corporation did not have any OREO ~~measured~~carried at fair value ~~less costs to sell~~. ~~As of December 31, 2020, OREO measured at fair value less costs to sell had a net carrying amount of $9,000, which consisted of the outstanding balance of $18,000, less write-downs of $9,000.~~ ~~This property was sold during the second quarter of 2021.~~ During the three ~~and nine~~ month periods ended ~~September~~March 3031, 2022 and 2021, there was no ~~expense~~ recorded ~~associated with the write-down of OREO. During the three and nine month periods ended September 30, 2020, there was $25,000 and $56,000, respectively, of~~ expense ~~recorded~~ associated with the write-down of OREO.

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

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

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2021:
March 31, 2022:
Impaired commercial real estate loan	$	288	$	—	$	—	$	288
Impaired commercial real estate loans	$	325	$	—	$	—	$	325
December 31, 2020:
Total	$	325	$	—	$	—	$	325
Impaired commercial business loans	$	58	$	—	$	—	$	58
December 31, 2021:
Impaired commercial real estate loans		340		—		—		340
Impaired commercial business loan	$	54	$	—	$	—	$	54
Other real estate owned		9		—		—		9
Impaired commercial real estate loans		470		—		—		470
Total	$	~~407~~524	$	—	$	—	$	~~407~~524

20 17

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7.	Fair Value (continued)

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

(Dollar amounts in thousands)			Valuation	Unobservable	Weighted
			Techniques(s)	Input(s)	Average
September 30, 2021:
March 31, 2022:
Impaired commercial real estate loan	$	288	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial real estate loans	$	325	Sales comparison approach	Adjustment for differences between comparable sales		10	%
December 31, 2020:
December 31, 2021:
Impaired commercial business loans	$	58	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial business loan	$	54	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial real estate loans		~~340~~470	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Other real estate owned		9	Sales comparison approach	Adjustment for differences between comparable sales		10	%

Excluded from the tables above at ~~September~~ March 3031, ~~2021~~ 2022 was one ~~$4,000~~ unsecured commercial business loan~~. Excluded~~ ~~from~~totaling ~~the tables above at December 31~~$3,000 ~~2020 were~~and ~~two~~an ~~unsecured~~impaired ~~commercial~~residential ~~business~~mortgage ~~loans~~loan totaling $1468,000 which was classified as a TDR and measured using a discounted cash flow methodology. ~~At September~~As 30of December 31, 2021, there ~~were~~was one unsecured commercial business noloan totaling $3,000 and an impaired ~~loans~~residential mortgage loan totaling $69,000 which ~~were~~was classified as ~~TDRs~~a TDR and measured using a discounted cash flow methodology excluded from the tables.

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, 2021:

March 31, 2022:

Financial Assets:

Cash and cash equivalents

389,~~066~~549

—

Interest earning time deposits

2,~~982~~484

—

2,~~982~~484

—

Securities - available-for-sale

~~186~~166,~~925~~155

—

~~184~~161,~~919~~570

24,~~006~~585

Securities - equities

—

Loans held for sale

~~300~~120

—

~~300~~120

—

Loans, net

~~781~~794,~~559~~932

~~781~~794,~~754~~968

—

~~781~~794,~~754~~968

Federal bank stock

5,~~611~~547

N/A

Accrued interest receivable

43,~~343~~970

6059

~~954~~958

32,~~329~~953

Financial Liabilities:

Deposits

~~948~~935,~~523~~956

~~951~~938,~~634~~613

792,~~950~~257

~~158~~146,~~684~~356

—

Borrowed funds

2718,050

2717,~~300~~647

—

2717,~~300~~647

—

Accrued interest payable

~~373~~333

~~368~~329

—

December 31, 2020:

December 31, 2021:

Financial Assets:

Cash and cash equivalents

379,~~439~~080

—

Interest earning time deposits

52,~~718~~484

—

52,~~718~~484

—

Securities - available-for-sale

~~113~~186,~~041~~270

—

~~111~~182,~~035~~685

23,~~006~~585

Securities - equities

155

—

Loans held for sale

75469

—

75469

—

Loans, net

~~800~~780,~~338~~010

~~807~~780,~~170~~086

—

~~807~~780,~~170~~086

Federal bank stock

5,~~635~~715

N/A

Accrued interest receivable

3,~~786~~731

5235

~~513~~817

32,~~221~~879

Financial Liabilities:

Deposits

~~893~~918,~~627~~496

~~899~~921,~~446~~811

~~705~~767,~~680~~840

~~193~~153,~~766~~971

—

Borrowed funds

3222,050

3322,~~256~~121

—

3322,~~256~~121

—

Accrued interest payable

~~474~~338

195

~~455~~333

—

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.

21 18

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8.	Regulatory Matters

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

~~The~~To ~~final~~qualify ~~rules~~as ~~implementing~~a ~~Basel~~"Small ~~Committee~~Bank onHolding ~~Banking~~Company" ~~Supervision’s~~under ~~capital~~federal ~~guidelines~~regulations, ~~for~~a ~~U.S.~~bank ~~banks~~must ~~(BASEL~~have consolidated ~~III~~assets ~~rules)~~of $3 ~~became~~billion ~~effective~~or ~~for~~less. The ~~the~~primary ~~Bank~~benefit ~~on January 1, 2015 with full compliance with all~~ of ~~the requirements~~ being ~~phased~~deemed ~~in over~~ a ~~multi-year~~"Small ~~schedule, and fully phased in on January 1, 2019. Under the BASEL III rules, the~~ Bank ~~must~~Holding ~~hold~~Company" ais ~~capital conservation buffer above~~ the ~~adequately~~exemption ~~capitalized risk-based capital ratios. The capital conservation buffer was phased in~~ from ~~0.0%~~the ~~for~~requirement ~~2015~~ to ~~2.50%~~maintain ~~in 2019.~~consolidated ~~The~~regulatory capital ~~conservation~~ratios; ~~buffer~~instead, ~~for 2019 and subsequent periods is 2.50%. Amounts recorded to accumulated other comprehensive income are not included in computing~~ regulatory capital. ~~Management~~ratios ~~believes~~only asapply ~~of September~~at ~~30, 2021,~~ the ~~Bank~~subsidiary ~~met all~~bank ~~capital adequacy requirements to which it was subject~~level.

~~Prompt~~The ~~corrective~~final ~~action~~rules ~~regulations~~implementing ~~provide~~Basel ~~five~~Committee ~~classifications:~~on ~~well~~Banking ~~capitalized,~~Supervision’s ~~adequately~~capital ~~capitalized,~~guidelines ~~undercapitalized,~~for ~~significantly~~U.S. ~~undercapitalized~~banks ~~and~~(BASEL ~~critically~~III ~~undercapitalized,~~rules) ~~although~~became ~~these~~effective ~~terms~~for ~~are~~the ~~not~~Bank ~~used~~on January to1, ~~represent~~2015 ~~overall~~with ~~financial~~full ~~condition.~~compliance Ifwith ~~adequately~~all ~~capitalized,~~of ~~regulatory~~the ~~approval~~requirements isbeing ~~required~~phased toin ~~accept~~over ~~brokered~~a ~~deposits.~~multi-year ~~If undercapitalized~~schedule, ~~capital~~becoming fully ~~distributions~~phased ~~are~~in ~~limited~~on January 1, as2019. isUnder ~~asset~~the ~~growth~~BASEL ~~and~~III ~~expansion~~rules, ~~and~~the ~~capital~~Bank ~~restoration~~must ~~plans~~hold ~~are~~a ~~required.~~capital ~~At September~~conservation ~~30,~~buffer ~~2021,~~above the ~~most~~adequately ~~recent~~capitalized ~~regulatory~~risk-based ~~notifications~~capital ~~categorized~~ratios. ~~the~~The ~~Bank~~capital asconservation ~~well~~buffer ~~capitalized~~was phased ~~under~~in ~~the~~from ~~regulatory~~0.0% ~~framework~~ for ~~prompt~~2015 ~~corrective~~to ~~action~~2.50% ~~There~~in 2019 ~~are~~and nosubsequent ~~conditions~~periods. orAmounts ~~events~~recorded ~~since~~to ~~that~~accumulated ~~notification~~other ~~that~~comprehensive ~~management~~income are not included in computing regulatory capital. Management believes ~~have~~as ~~changed~~of March 31, 2022, the ~~institution's~~Bank ~~category~~met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 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~~March 3031, ~~2021~~2022					December 31, ~~2020~~2021
	Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Actual	$	9094,~~322~~629		13.0611	%	$	8492,~~583~~495		1213.7111	%
For capital adequacy purposes		5557,~~340~~736		8.00	%		5356,~~255~~448		8.00	%
To be well capitalized		6972,~~175~~170		10.00	%		6670,~~569~~559		10.00	%
Tier 1 capital to risk-weighted assets:
Actual	$	8185,~~660~~592		11.8086	%	$	7683,~~246~~656		11.4586	%
For capital adequacy purposes		4143,~~505~~302		6.00	%		3942,~~941~~336		6.00	%
To be well capitalized		5557,~~340~~736		8.00	%		5356,~~255~~448		8.00	%
Common Equity Tier 1 capital to risk-weighted assets:
Actual	$	8185,~~660~~592		11.8086	%	$	7683,~~246~~656		11.4586	%
For capital adequacy purposes		3132,~~129~~477		4.50	%		2931,~~956~~752		4.50	%
To be well capitalized		4446,~~964~~911		6.50	%		4345,~~270~~864		6.50	%
Tier 1 capital to average assets:
Actual	$	8185,~~660~~592		78.6018	%	$	7683,~~246~~656		7.5898	%
For capital adequacy purposes		4241,~~986~~834		4.00	%		4041,~~213~~926		4.00	%
To be well capitalized		5352,~~733~~292		5.00	%		5052,~~267~~407		5.00	%

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9.	Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three month periods ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~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, 2021	$	1,368		$	(5,704	)	$	(4,336	)
Accumulated Other Comprehensive Income (Loss) at January 1, 2022	$	(106	)	$	(5,071	)	$	(5,177	)
Other comprehensive income before reclassification		(111,~~329~~997	)		—			(111,~~329~~997	)
Amounts reclassified from accumulated other comprehensive income (loss)		(~~134~~7	)		—			(~~134~~7	)
Net current period other comprehensive income (loss)		(112,~~463~~005	)		—			(112,~~463~~005	)
Accumulated Other Comprehensive Income (Loss) at September 30, 2021	$	(95	)	$	(5,704	)	$	(5,799	)
Accumulated Other Comprehensive Income (Loss) at March 31, 2022	$	(12,111	)	$	(5,071	)	$	(17,182	)

(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~~March 3031, ~~2021~~2022			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(~~170~~9	)	Net gain on sale of available-for-sale securities
Tax effect		362		Provision for income taxes
Total reclassifications for the period	$	(~~134~~7	)	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, 2020	$	1,586		$	(5,227	)	$	(3,641	)
Accumulated Other Comprehensive Income (Loss) at January 1, 2021	$	2,220		$	(5,704	)	$	(3,484	)
Other comprehensive income before reclassification		54(2,060	)		—			54(2,060	)
Amounts reclassified from accumulated other comprehensive income (loss)		—(20	)		—			—(20	)
Net current period other comprehensive income (loss)		54(2,080	)		—			54(2,080	)
Accumulated Other Comprehensive Income (Loss) at September 30, 2020	$	1,640		$	(5,227	)	$	(3,587	)
Accumulated Other Comprehensive Income (Loss) at March 31, 2021	$	140		$	(5,704	)	$	(5,564	)

(Dollar amounts in thousands)	Amount Reclassified
	from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive (Income) Loss Components	For the three months ended ~~September~~March 3031, ~~2020~~2021			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	—(26	)	Net gain on sale of available-for-sale securities
Tax effect		—6		Provision for income taxes
Total reclassifications for the period	$	—(20	)	Net of tax

23 20

Table of Contents

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, 2021 and 2020 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):

(Dollar amounts in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2021	$	2,220		$	(5,704	)	$	(3,484	)
Other comprehensive income (loss) before reclassification		(2,157	)		—			(2,157	)
Amounts reclassified from accumulated other comprehensive income (loss)		(158	)		—			(158	)
Net current period other comprehensive income (loss)		(2,315	)		—			(2,315	)
Accumulated Other Comprehensive Income (Loss) at September 30, 2021	$	(95	)	$	(5,704	)	$	(5,799	)

(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	$	(201	)	Net gain on sale of available-for-sale securities
Tax effect		43		Provision for income taxes
Total reclassifications for the period	$	(158	)	Net of tax

(Dollar amounts in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2020	$	(108	)	$	(5,227	)	$	(5,335	)
Other comprehensive income (loss) before reclassification		2,250			—			2,250
Amounts reclassified from accumulated other comprehensive income (loss)		(502	)		—			(502	)
Net current period other comprehensive income (loss)		1,748			—			1,748
Accumulated Other Comprehensive Income (Loss) at September 30, 2020	$	1,640		$	(5,227	)	$	(3,587	)

(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, 2020			Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(635	)	Net gain on sale of available-for-sale securities
Tax effect		133		Provision for income taxes
Total reclassifications for the period	$	(502	)	Net of tax

Table of Contents

10.

Leases

As of ~~September~~March 3031, ~~2021~~2022, the Corporation leases real estate for ~~six branch~~seven offices under various operating lease agreements. ~~On July~~The ~~1, 2021, the Corporation entered into a new~~ lease ~~agreement for a branch office location. These 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 1110.1795 years as of ~~September~~March 3031, ~~2021~~2022 compared to 12.5733 years as of ~~September~~March 3031, ~~2020~~2021.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was 3.2923% as of ~~September~~March 3031, ~~2021~~2022 compared to 3.5051% as of ~~September~~March 3031, ~~2020~~2021.

The total operating lease costs were $6367,000 and $~~159~~48,000, respectively, for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~$48,000~~ ~~and $144,000, respectively, for the three and nine months ended September 30, 2020~~2021. The right-of-use asset, included in ~~premises~~other ~~and equipment~~assets, and lease liability, included in other liabilities, was $1.45 million and $1.6 million, respectively, as of ~~September~~March 3031, ~~2021~~2022, and $1.4 5 million and $1.6 7 million, respectively, as of ~~September~~December 3031, ~~2020~~2021.

Total estimated rental commitments for the operating leases were as follows as of ~~September~~March 3031, ~~2021~~2022:

(Dollar amounts in thousands)
Year ending December 31:
2021 (excluding nine months)	$	70
2022 (excluding three months)	$	222
2022		282
2023		296
2023		282
2024		271
2024		257
2025		227
2025		212
2026		144
Thereafter		~~850~~793
Total minimum lease payments		1,953
Discount effect of cash flows		(~~363~~351	)
Present value of lease liabilities	$	1,~~590~~602

Table of Contents

11.

Recent Accounting Pronouncements

Newly Issued Not Yet Effective Accounting Standards

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

In ~~August~~March ~~2018~~2020, the FASB issued ASU ~~2018~~2020-1404, "~~Compensation~~Reference -Rate ~~Retirement Benefits - Defined Benefit Plans~~Reform". ASU ~~2018~~2020-1404 ~~removes~~contains ~~disclosures~~optional ~~pertaining~~guidance to ~~(a)~~ease the ~~amounts~~potential ofburden ~~AOCI~~in ~~expected~~accounting tofor, beor ~~recognized~~recognizing asthe ~~pension~~effects ~~costs~~from, ~~over~~reference rate reform on financial reporting. The new standard is a result of the ~~next~~London ~~fiscal~~Interbank ~~year,~~Offered Rate (bLIBOR) ~~the~~likely ~~amount~~being discontinued as a benchmark rate. The standard is elective and ~~timing~~provides ofoptional ~~plan~~expedients ~~assets~~and ~~expected~~exceptions tofor beapplying ~~returned~~GAAP to ~~the employer~~contracts, ~~and~~hedging ~~(c)~~relationships, or ~~the~~other ~~effect~~transactions ofthat ~~one-percentage-point~~reference ~~change~~LIBOR, inor ~~the~~another ~~assumed~~reference ~~health~~rate ~~care~~that may ~~trends~~be ondiscontinued. This ~~(i)~~ASU ~~service~~became ~~and~~effective ~~interest~~upon ~~costs~~issuance and ~~(ii)~~generally ~~post-retirement~~can ~~health~~be ~~care~~applied ~~benefit~~through December ~~obligation~~31, 2022. AThe ~~disclosure~~Corporation ~~will~~has beidentified ~~added~~thirteeen ~~requiring~~purchased anparticipation ~~explanation~~loans oftotaling ~~the~~$48.1 million ~~reasons~~in ~~for~~outstanding ~~significant~~balances, ~~gains~~two ~~and~~purchased ~~losses~~National ~~related~~Syndicated toCredits ~~changes~~totaling $7.5 million in ~~the~~outstanding ~~benefit~~balances and ~~obligation~~one tax-exempt ~~for~~commercial ~~the~~business ~~period~~loan with an outstanding balance of $1. ~~The~~1 million ~~amendments~~tied into ~~this~~the ~~update~~LIBOR ~~are~~reference ~~effective~~rate. The ~~retrospectively~~Corporation ~~for~~has ~~annual~~not ~~periods~~yet ~~and~~made ~~interim~~any ~~periods~~contract ~~within~~modifications ~~those~~related ~~annual~~to ~~periods~~the ~~beginning~~outstanding ~~after December~~loans, 15however, ~~2020. The~~does ~~adoption~~not ~~of this~~expect ~~ASU~~any ~~did~~changes ~~not~~to have a material impact on ~~the Corporation's~~ financial statements ~~and~~or disclosures.

~~In December 2019, the FASB issued ASU 2019-~~12~~, "Income Taxes - Simplifying the Accounting for Income Taxes"~~. ~~ASU~~ ~~2019-12~~Pending is effective for fiscal years beginning after December 15, 2020. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of this ASU did not have a material impact on the Corporation's financial statements and disclosures.Mergers

InOn March ~~2020~~23, 2022, the ~~FASB~~Corporation, ~~issued~~Farmers ~~ASU~~National ~~2020-04~~Banc Corp., ~~"Reference~~an ~~Rate~~Ohio ~~Reform". ASU~~corporation ~~2020-04~~(“Farmers”) ~~contains~~and ~~optional~~FMNB ~~guidance~~Merger toSubsidiary ~~ease~~V, ~~the~~LLC, ~~potential~~a ~~burden~~wholly-owned insubsidiary ~~accounting~~of ~~for~~Farmers (“Merger Sub”), orentered ~~recognizing~~into an Agreement and Plan of Merger (the ~~effects~~“Merger ~~from~~Agreement”), ~~reference~~pursuant ~~rate~~to ~~reform~~which onFarmers ~~financial~~will ~~reporting. The~~acquire ~~new~~the ~~standard~~Corporation ispursuant ato ~~result~~the merger of the ~~London~~Corporation ~~Interbank~~with ~~Offered~~and ~~Rate~~into the Merger Sub (~~LIBOR~~the “Merger”). ~~likely~~Promptly ~~being~~following ~~discontinued~~the asconsummation aof ~~benchmark~~the ~~rate. The~~Merger, ~~standard~~it is ~~elective~~expected ~~and~~that ~~provides~~the ~~optional~~Bank ~~expedients~~will merge with and ~~exceptions~~into ~~for~~The ~~applying~~Farmers ~~GAAP~~National toBank ~~contracts~~of Canfield, ~~hedging~~the ~~relationships, or~~national ~~other~~banking ~~transactions~~subsidiary ~~that~~of ~~reference~~Farmers ~~LIBOR~~(the “Bank Merger”). Upon completion of the Merger, oreach ~~another~~share ~~reference~~of ~~rate~~common ~~that may~~stock of the Corporation will be ~~discontinued. This~~converted ~~ASU~~into ~~became~~the ~~effective~~right ~~upon~~receive ~~issuance~~right ~~and~~to ~~generally~~receive, ~~can~~at bethe ~~applied~~election ~~through December~~of 31the holder, ~~2022~~either $40. As00 in cash or 2.15 shares of ~~September 30,~~ ~~2021~~common stock of Farmers, subject to allocation and proration procedures to ensure that 70% of the outstanding shares of the Corporation ~~has~~common ~~identified~~stock ~~fifteen~~are ~~purchased~~converted ~~participation~~into ~~loans~~the ~~totaling~~right ~~$54.7~~to ~~million~~receive inFarmers ~~outstanding~~common ~~balances~~stock and ~~two~~30% ~~tax-exempt~~are ~~commercial~~converted ~~business~~into ~~loans~~the ~~totaling~~right $1to receive cash.6 ~~million~~Consummation inof ~~outstanding~~the ~~balances~~Merger ~~tied~~is subject to ~~the~~a ~~LIBOR~~number ~~reference~~of ~~rate. The~~customary ~~Corporation~~conditions, ~~has~~including, but not ~~yet~~limited ~~made~~to, ~~any~~the ~~contract~~approval ~~modifications~~of ~~related~~the toMerger Agreement by the ~~outstanding~~shareholders ~~loans,~~of ~~however,~~the ~~does~~Corporation ~~not~~and ~~expect~~the ~~any~~receipt ~~changes~~of torequired ~~have~~regulatory aapprovals. ~~material~~The ~~impact~~transaction onis ~~financial~~expected ~~statements~~to orbe ~~disclosures~~completed in the second half of 2022.

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

This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022, compared to the same periods in ~~2020~~2021 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~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 that the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Net Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on ~~pages~~page 2923 ~~and 33~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~ 2021, respectively.

COVID-19 UPDATE

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.

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Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact the ongoing economic disruption will have on the Corporation. While this impact cannot be predicted or measured, there will be a definite impact on income. As a result of the significant decline in interest rates and prepayments on higher yielding existing loans, the yield on the total loan portfolio is likely to continue to decrease. Additionally, with significant cash inflows realized from a growth in deposits and the forgiveness of PPP loans, the current yields on funds reinvested into the purchase of securities are lower than existing portfolio yields. However, the fees arising from the PPP loan program have mitigated some of this decline during 2020 and 2021. Considering the low market interest rates and ongoing economic uncertainty, the Corporation's net interest income and the resulting net interest margin could compress further in future periods. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.

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

CHANGES IN FINANCIAL CONDITION

Total assets ~~increased~~remained nearly unchanged at $521.71 billion at March 31, 2022 and December 31, 2021. Net loans receivable increased $14.9 million, or 5.1.9%, to $1794.~~1 billion~~9 million at ~~September~~ 30March 31, ~~2021~~ 2022 from $1780.0 ~~billion~~ million at December 31, ~~2020~~2021. ~~The~~ During ~~increase in~~the ~~assets was~~first ~~driven~~quarter, ~~primarily~~the byCorporation's aloan production totaled $7347.90 million ~~increase~~ in ~~securities,~~commitments ~~partially~~and ~~offset~~resulted byin annew outstanding loan balances of $1838.83 million ~~decrease~~ at March 31, 2022. Nearly half of this loan production was concentrated in ~~net~~commercial ~~loans~~real ~~receivable~~estate. ~~Liabilities~~Securities ~~increased~~decreased $4920.71 million, or 510.38%, to $~~990~~166.52 million at ~~September~~ 30March 31, ~~2021~~ 2022 from $~~940~~186.83 million at December 31, ~~2020,~~2021 due to a $5415.2 million decrease in the market value of securities following an increase in market interest rates. Liabilities increased $8.4 million to $970.9 million ~~increase~~at March 31, 2022 from $962.5 million at December 31, 2021 due to a $17.5 million increase in customer deposits, partially offset by a $54.0 million reduction in borrowed funds.

Stockholders’ equity ~~increased~~decreased $310.03 million, or 310.26%, to $9486.4 7 million at ~~September~~March 3031, ~~2021~~ 2022 from $9197.5 0 million at December 31, ~~2020 ,~~2021 primarily due to a $412.9 0 million ~~increase~~decrease in accumulated other comprehensive income as unrealized losses in the Corporation's securities portfolio were impacted due to the recent rise in market interest rates. Partially offsetting this reduction, retained earnings increased $1.6 million as a result of $72.4 million of net income available to common stockholders, less $~~2.4~~848,000 ~~million~~ of common dividends paid~~, partially offset by a $2~~.~~3 million decrease in accumulated other comprehensive income.~~ The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at 8.72% of total assets. Book value per common share was $3330.16 15 at ~~September~~March 3031, ~~2021~~ 2022, compared to $3233.07 91 at December 31, ~~2020~~ 2021.

At ~~September~~March 3031, ~~2021~~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 78.6018%, 11.8086%, 11.8086% and 13.0611%, respectively. The Bank was also considered “well-capitalized” at December 31, ~~2020~~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 7.5898%, 11.4586%, 11.4586% and 1213.7111%, respectively.

RESULTS OF OPERATIONS

Comparison of Results for the Three Months Ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021

General. Net income available to common stockholders increased $~~1.6 million~~262,000, or 8712.71%, to $32.4 million for the three months ended ~~September~~March 3031, ~~2021~~2022 from $12.82 million for the same period in ~~2020~~2021. ~~The~~ This increase resulted from ~~increases~~a $88,000 increase in net interest income and ~~noninterest income of $1.4 million and $208,000, respectively, and~~ a $~~625~~355,000 decrease in the provision for loan losses, partially offset by a $45,000 decrease in noninterest income and increases in noninterest expense and the provision for income taxes of $~~306~~59,000 and $~~350~~77,000, respectively.

Net interest income. Tax equivalent net interest income increased $~~1.4 million~~93,000, or 191.42%, to $8.7.8 million for the three months ended ~~September~~March 3031, ~~2021~~2022 from $7.37 million for the ~~three~~same ~~months~~period ~~ended~~in ~~September 30, 2020~~2021. This increase was attributed to a decrease in interest expense of $~~756~~519,000, ~~and~~partially anoffset ~~increase~~by a decrease in tax equivalent interest income of $~~656~~426,000.

Interest income. Tax equivalent interest income ~~increased~~decreased $~~656~~426,000, or 74.17%, to $98.9 7 million for the three months ended ~~September~~March 3031, ~~2021~~2022 from $9.2 million for the same period in ~~2020~~2021. This ~~increase~~decrease was attributed to ~~increases~~decreases in interest earned on ~~securities~~ loans and ~~loans~~interest-earning deposits with banks of $~~409~~689,000 and $~~290~~27,000, respectively, partially offset by ~~decreases~~increases in ~~dividends~~interest on ~~federal~~securities ~~bank~~and ~~stocks~~dividends ~~and interest~~ on ~~interest-earning~~federal ~~deposits~~bank stocks of $22288,000 and $212,000, respectively.

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Tax equivalent interest earned on loans receivable decreased $689,000, or 8.3%, to $7.6 million for the three months ended March 31, 2022 compared to $8.3 million for the same period in 2021. The average yield on loans decreased by 34 basis points to 3.87% for the three months ended March 31, 2022, versus 4.21% for the same period in 2021, causing a $663,000 decrease in interest income. During the first quarter of 2021, the Corporation recognized $713,000 of interest income related to PPP loans, compared to $22,000 for the same period in 2022. Excluding PPP loan balances and the related interest income, the Corporation would have experienced a yield on loans of 3.87% for the three months ended March 31, 2022, compared to 3.99% for the same period in 2021.

Tax equivalent interest earned on securities increased $288,000, or 39.4%, to $1.0 million for the three months ended March 31, 2022 compared to $731,000 for the same period in 2021. The average balance of securities increased $62.5 million, or 52.9%, accounting for a $ 358,000 increase in interest income. Partially offsetting this favorable variance, the average yield on securities decreased by 22 basis points to 2.29% for the three months ended March 31, 2022 versus 2.51% for the same period in 2021. This unfavorable yield variance accounted for a $70,000 decrease in interest income.

Interest earned on deposits with banks decreased $27,000, or 87.1%, to $4,000 for the three months ended March 31, 2022 compared to $31,000 for the same period in 2021. The average balance of deposits with banks decreased $29.6 million, or 77.2%, accounting for a $17,000 decrease in interest income. Additionally, a 14 basis point decrease in the average yield on these balances to 0.19% for the three months ended March 31, 2022, versus 0.33% for the same period in 2021, accounted for a $10,000 decrease in interest income.

Interest expense. Interest expense decreased $519,000, or 35.9%, to $927,000 for the three months ended March 31, 2022 from $1.4 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 $445,000 and $74,000, respectively.

Interest expense incurred on deposits decreased $445,000, or 35.1%, to $822,000 for the three months ended March 31, 2022 compared to $1.3 million for the same period in 2021. The average cost of interest-bearing deposits decreased 26 basis points to 0.48% for the three months ended March 31, 2022, versus 0.74% for the same period in 2021, accounting for an $454,000 decrease in interest expense. This decrease in cost was driven by maturities in certificate of deposit specials and repricing money market specials initially offered in 2019 and general rate decreases as a result of current economic conditions. Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $4.7 million to $698.6 million for the three months ended March 31, 2022, compared to $693.8 million for the same period in 2021 causing a $9,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $74,000, or 41.3%, to $105,000 for the three months ended March 31, 2022, compared to $179,000 for the same period in the prior year. This decrease was primarily the result of a $4.2 million, or 13.1%, reduction in the average balance of borrowed funds to $27.9 million for the three months ended March 31, 2022, compared to $32.1 million for the same period in 2021 causing a $40,000 decrease in interest expense. Additionally, a decrease of 73 basis points in the average cost of borrowed funds to 1.53% for the three months ended March 31, 2022 from 2.26% for the same period in 2021 caused a $34,000 decrease in interest expense.

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

(Dollar amounts in thousands)	2022		2021
Interest income per Consolidated Statements of Net Income	$	8,667	$	9,098
Adjustment to fully taxable equivalent basis		59		54
Interest income adjusted to fully taxable equivalent basis (non-GAAP)		8,726		9,152
Interest expense		927		1,446
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	7,799	$	7,706

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Tax equivalent interest earned on loans receivable increased $290,000, or 3.4%, to $8.8 million for the three months ended September 30, 2021 compared to $8.5 million for the same period in 2020. The increase resulted from a 25 basis point increase in the average yield on loans to 4.36% for the three months ended September 30, 2021, versus 4.11% for the same period in 2020. This favorable yield variance accounted for a $527,000 increase in interest income. The accretion of purchase accounting adjustments on acquired loans accounted for 2 basis points of the yield increase. Partially offsetting this favorable variance, average loan volume decreased by $22.5 million as a result of PPP loan forgiveness and a reduction in the Bank's residential mortgage and home equity portfolios. This decrease in loan volume accounted for a $237,000 decrease in interest income. Included in interest earned on loans for the three months ended September 30, 2021, is $1.2 million of interest and fees earned on the SBA's PPP lending program, compared to $389,000 for the same period in 2020.

Tax equivalent interest earned on securities increased $409,000, or 71.8%, to $979,000 for the three months ended September 30, 2021 compared to $570,000 for the same period in 2020. The average balance of securities increased $93.4 million, accounting for a $500,000 increase in interest income. Partially offsetting the favorable variance in the average balance, the average yield on securities decreased by 36 basis points to 2.08% for the three months ended September 30, 2021 versus 2.44% for the same period in 2020. This unfavorable yield variance accounted for a $91,000 decrease in interest income.

Interest earned on deposits with banks decreased $21,000, or 53.8%, to $18,000 for the three months ended September 30, 2021 compared to $39,000 for the same period in 2020. This decrease was due to a 29 basis point decrease in the average yield on these balances to 0.17% for the three months ended September 30, 2021, versus 0.46% for the same period in 2020, accounting for a $28,000 decrease in interest income. Partially offsetting this unfavorable variance, average interest-earning cash balances increased by $7.8 million, or 23.1%, accounting for a $7,000 increase in interest income.

Dividends on federal bank stocks decreased $22,000, or 23.4%, to $72,000 for the three months ended September 30, 2021 from $94,000 for the same period in 2020. This decrease was primarily due to a 166 basis point decrease in the average yield to 4.96% for the three months ended September 30, 2021, versus 6.62% for the same period in 2020, accounting for a $24,000 decrease in interest income. This decrease was partially offset by an increase in the average balance of federal bank stocks of $111,000, accounting for a $2,000 increase in interest income.

Interest expense. Interest expense decreased $756,000, or 39.1%, to $1.2 million for the three months ended September 30, 2021 from $1.9 million for the same period in 2020. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $746,000 and $10,000, respectively.

Interest expense incurred on deposits decreased $746,000, or 42.6%, to $1.0 million for the three months ended September 30, 2021 compared to $1.8 million for the same period in 2020. The average cost of interest-bearing deposits decreased 45 basis points to 0.55% for the three months ended September 30, 2021, versus 1.00% for the same period in 2020, accounting for an $831,000 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. Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $35.2 million, or 5.1%, to $729.6 million for the three months ended September 30, 2021, compared to $694.4 million for the same period in 2020 resulting in an $85,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $10,000, or 5.5%, to $172,000 for the three months ended September 30, 2021, compared to $182,000 for the same period in 2020. The decrease was primarily the result of a $1.7 million, or 5.2%, decrease in the average balance of borrowed funds to $30.4 million for the three months ended September 30, 2021, compared to $32.1 million for the same period in 2020 resulting in a $9,000 decrease in interest expense. Additionally, the average cost of borrowed funds decreased 1 basis point to 2.25% for the three months ended September 30, 2021, compared to 2.26% for the same period in 2020 resulting in a $1,000 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 three months ended September 30:

(Dollar amounts in thousands)	2021		2020
Interest income per Consolidated Statements of Net Income	$	9,816	$	9,172
Adjustment to fully taxable equivalent basis		61		49
Interest income adjusted to fully taxable equivalent basis (non-GAAP)		9,877		9,221
Interest expense		1,179		1,935
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	8,698	$	7,286

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

(Dollar amounts in thousands)	Three months ended ~~September~~March 3031,
	2021							2020
	2022							2021
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Loans, taxable	$	786,~~294~~277	$	87,~~661~~507		43.3787	%	$	~~804~~783,~~859~~600	$	8,~~334~~154		4.1222	%
Loans, tax exempt		1513,~~423~~093		~~147~~125		3.7988	%		1918,~~338~~270		~~184~~167		3.7971	%
Total loans receivable		~~801~~799,~~717~~370		87,~~808~~632		43.3687	%		~~824~~801,~~197~~870		8,~~518~~321		4.1121	%
Securities, taxable		~~125~~121,~~420~~216		~~652~~695		2.0633	%		6877,~~145~~152		~~414~~501		2.4263	%
Securities, tax exempt		6059,~~993~~238		~~327~~324		2.1322	%		2440,~~910~~831		~~156~~230		2.5029	%
Total securities		~~186~~180,~~413~~454		~~979~~1,019		2.0829	%		93117,~~055~~983		~~570~~731		2.4451	%
Interest-earning deposits with banks		418,~~754~~739		184		0.1719	%		3338,~~905~~302		3931		0.4633	%
Federal bank stocks		5,~~764~~795		7271		4.9697	%		5,~~653~~599		9469		65.6200	%
Total interest-earning cash equivalents		4714,~~518~~534		9075		02.7509	%		3943,~~558~~901		~~133~~100		10.3492	%
Total interest-earning assets		1994,~~035,648~~358		98,~~877~~726		3.7856	%		~~956~~963,~~810~~754		9,~~221~~152		3.8385	%
Cash and due from banks		3,~~533~~407							3,~~672~~360
Other noninterest-earning assets		5864,~~926~~865							60,~~922~~209
Total Assets	$	1,~~098~~062,~~107~~630						$	1,~~021~~027,~~404~~323
Interest-bearing liabilities:
Interest-bearing demand deposits	$	~~564~~550,~~867~~122	$	~~237~~163		0.1712	%	$	~~499~~509,~~891~~051	$	~~714~~368		0.5729	%
Time deposits		~~164~~148,~~698~~438		~~770~~659		1.8580	%		~~194~~184,~~515~~785		~~1,039~~899		21.1397	%
Total interest-bearing deposits		~~729~~698,~~565~~560		~~1,007~~822		0.5548	%		~~694~~693,~~406~~836		1,~~753~~267		10.0074	%
Borrowed funds, short-term		212,~~050~~855		2229		40.3191	%		2,050		22		4.3231	%
Borrowed funds, long-term		2815,~~333~~000		~~150~~76		2.1005	%		30,000		~~160~~157		2.12	%
Total borrowed funds		3027,~~383~~855		~~172~~105		21.2553	%		32,050		~~182~~179		2.26	%
Total interest-bearing liabilities		~~759~~726,~~948~~415		~~1,179~~927		0.6252	%		~~726~~725,~~456~~886		1,~~935~~446		10.0681	%
Noninterest-bearing demand deposits		~~227~~219,~~818~~910		—		—			~~190~~194,~~788~~327		—		—
Funding and cost of funds		~~987~~946,~~766~~325		~~1,179~~927		0.4740	%		~~917~~920,~~244~~213		1,~~935~~446		0.8464	%
Other noninterest-bearing liabilities		1521,~~708~~875							1415,~~908~~562
Total Liabilities		1968,~~003,474~~200							~~932~~935,~~152~~775
Stockholders' Equity		94,~~633~~430							8991,~~252~~548
Total Liabilities and Stockholders' Equity	$	1,~~098~~062,~~107~~630						$	1,~~021~~027,~~404~~323
Net interest income			$	87,~~698~~799						$	7,~~286~~706
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						3.1704	%						23.7704	%
Net interest margin (net interest income as a percentage of average interest-earning assets)						3.3318	%						3.0324	%

30 24

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

(Dollar amounts in thousands)	Three months ended ~~September~~March 3031,
	2021 versus 2020
	2022 versus 2021
	Increase (Decrease) due to
	Volume			Rate			Total
Interest income:
Loans	$	(~~237~~26	)	$	~~527~~(663	)	$	~~290~~(689	)
Securities		~~500~~358			(9170	)		~~409~~288
Interest-earning deposits with banks		7(17	)		(2810	)		(2127	)
Federal bank stocks		2			~~(24~~—	)		~~(22~~2	)
Total interest-earning assets		~~272~~317			~~384~~(743	)		~~656~~(426	)
Interest expense:
Interest-bearing deposits		859			(~~831~~454	)		(~~746~~445	)
Borrowed funds, short-term		—36			0(29	)		07
Borrowed funds, long-term		(976	)		(15	)		(1081	)
Total interest-bearing liabilities		76(31	)		(~~832~~488	)		(~~756~~519	)
Net interest income	$	~~196~~348		$	~~1,216~~(255	)	$	~~1,412~~93

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~~March 3031, ~~2021~~2022 and ~~2020~~2021 is as follows:

(Dollar amounts in thousands)	As of or for the three months ended
	September 30,
	March 31,
	2021			2020
	2022			2021
Balance at the beginning of the period	$	910,~~848~~393		$	89,~~159~~580
Provision for loan losses		~~125~~(80	)		~~750~~275
Charge-offs		(6998	)		(80184	)
Recoveries		4553			7614
Balance at the end of the period	$	910,~~949~~268		$	89,~~905~~685
Nonperforming loans	$	34,~~009~~283		$	43,~~062~~634
Nonperforming assets		34,~~033~~309			43,~~179~~657
Nonperforming loans to total loans		0.3853	%		0.4846	%
Nonperforming assets to total assets		0.2841	%		0.4034	%
Allowance for loan losses to total loans		1.2628	%		1.0622	%
Allowance for loan losses to nonperforming loans		~~330~~239.6474	%		~~219~~266.2351	%

Nonperforming loans decreased $452,000, or 13.1%, to $3.0 million at September 30, 2021 from $3.5 million at June 30, 2021. This was primarily due to a $562,000 non-accrual residential mortgage which was 334 days past due at June 30, 2021 and current as of September 30, 2021. 25

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As Nonperforming ofloans ~~September~~increased 30$944, ~~2021~~000, ~~the~~or ~~Corporation’s~~28.3%, ~~classified and criticized assets amounted~~ to $394.3 million, orat March ~~3.6% of total assets~~31, ~~with~~2022 from $303.4 million ~~classified~~at December as31, ~~substandard~~2021. ~~and~~This ~~$8.9~~was ~~million~~primarily ~~identified~~due asto ~~special~~a ~~mention~~$1.8 ~~This~~million ~~compares~~commercial toreal ~~classified~~estate ~~and~~loan ~~criticized~~being ~~assets~~placed ofon ~~$43.0~~nonaccrual ~~million,~~status orduring ~~3.9%~~the ofquarter ~~total~~ended ~~assets~~March 31, ~~with $34~~2022.1 This ~~million~~loan ~~classified~~is assecured ~~substandard~~by ~~and~~a ~~$8.9~~hotel ~~million~~located ~~identified~~in asFayette ~~special~~County, ~~mention~~Pennsylvania and atall ~~June~~related 30furniture, ~~2021.~~fixtures ~~This~~and ~~decrease~~equipment. The ~~was~~hotel ~~primarily~~remains ~~related~~operational; tohowever, ~~the~~cash ~~upgrade~~flow ofhas ~~a $1.9~~been ~~million~~adversely ~~commercial~~impacted ~~real~~by ~~estate~~suppressed ~~loan~~occupancy ~~from~~levels ~~substandard to pass~~ and the ~~repayment~~willingness of ~~$623,000~~the ofguarantors ~~loans~~to ~~from~~support ~~one commercial~~the ~~relationship~~loan is uncertain. ~~Classified~~Ultimately, ~~and criticized assets remain elevated largely~~ due to the ~~impact~~estimated value of ~~COVID-19 on~~ the ~~hospitality loan portfolio. At September 30~~collateral, ~~2021,~~ the Corporation's ~~hotel~~does ~~portfolio~~not ~~totaled~~currently ~~$32.1~~expect ~~million,~~to ofincur ~~which~~a ~~$30.1~~loss ~~million~~on ~~was~~this ~~rated classified or criticized~~loan.

~~The~~ As ~~provision~~of March ~~for loan losses decreased $625~~31,~~000,~~ ~~or 83.3%~~2022, ~~to $125,000~~the ~~for~~Corporation’s ~~the three~~classified ~~months~~and ~~ended~~criticized ~~September~~assets ~~30,~~amounted ~~2021 from~~ to $~~750~~37.3 million,~~000~~ ~~for~~or ~~the~~3.5% ~~same~~of ~~period~~total ~~in 2020.~~assets, ~~The~~with ~~higher~~$28.5 ~~provision~~million ~~for~~classified ~~loan~~as ~~losses~~substandard ~~recorded~~and ~~during~~$8.8 million ~~the~~identified ~~third~~as ~~quarter~~special ofmention. ~~2020~~This ~~was~~compares ~~due~~ to ~~growth~~classified ~~in the residential~~ and ~~consumer~~criticized ~~loan~~assets ~~portfolios~~of $38.2 million, ~~increased~~or ~~risk~~3.6% ~~ratings~~of ~~for~~total ~~loans~~assets, ~~which were granted payment deferrals in connection~~ with ~~COVID-19, an~~$29.4 ~~increase~~million ~~in criticized and~~ classified ~~loans,~~as substandard and an$8.9 million ~~increase~~identified inas ~~the specific~~special ~~pandemic~~mention ~~qualitative~~at December ~~allowance~~31, ~~factor~~2021. ~~Significant~~ ~~uncertainty~~This ~~remains regarding future levels of criticized and classified loans~~$962,000 ~~nonperforming~~decrease ~~loans~~was ~~and~~primarily ~~charge-offs. The~~related ~~Corporation will continue~~ to ~~closely~~principal ~~monitor~~reductions ~~changes~~resulting infrom ~~the~~normal ~~loan~~repayment ~~portfolio and adjust the provision accordingly~~activity.

The provision for loan losses decreased $355,000 to a recovery of $80,000 for the three months ended March 31, 2022 from a $275,000 expense for the same period in 2021. The recovery of provision for loan losses recorded during the first quarter of 2022 was due to a decrease in the amount of specific reserve required on impaired loans and a decrease in the qualitative 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.

~~Table~~ Noninterest income. Noninterest income decreased $45,000, or 4.3%, to $1.0 million for the three months ended March 31, 2022, compared to $1.1 million for the same period in 2021 due to a $105,000 decrease in gains on the sale of ~~Contents~~loans, partially offset by a $75,000 increase in fees and service charges. During the quarter ended March 31, 2021, the Corporation sold $3.2 million of residential mortgages and realized a gain of $102,000, compared to the sale of $1.2 million during quarter ended March 31, 2022 with a realized loss of $3,000. The increase in fees and service charges resuled from an increase in overdraft charges.

Noninterest ~~income~~expense. Noninterest ~~income~~expense increased $~~208~~59,000, or 181.30%, to $15.39 million for the three months ended ~~September~~March 3031, ~~2021,~~2022 from ~~compared to~~ $15.18 million for the same period in 2021. The ~~2020 due~~increase towas ~~increases~~primarily inattributable ~~gains~~to ona ~~the sale of securities~~$212,000 ~~other~~increase ~~income~~in ~~and~~professional fees ~~and service charges of $170~~,~~000,~~ ~~$51,000 and $18,000, respectively,~~ partially offset by a ~~decrease in gains on the sale of loans of~~ $30130,000. ~~During~~decrease ~~the~~in ~~quarter~~compensation ~~ended September 30, 2021, the Corporation sold $4.4 million of primarily low yielding mortgage-backed securities~~ and ~~realized~~ abenefits ~~net gain of $170,000~~expense. The ~~sale~~increase ~~proceeds~~in ~~were~~professional ~~utilized~~fees toresulted ~~repay~~from aacquisition ~~$5.0~~related ~~million~~financial ~~Federal~~advisor ~~Home~~and ~~Loan~~legal ~~Bank (FHLB) term advance~~costs. The ~~increase~~decrease in ~~other~~compensation ~~income was primarily due to an increase in interchange fee income~~ and ~~the~~benefits ~~increase~~expense ~~in fees and service charges~~ was primarily ~~due~~related to ana ~~increase~~decrease in ~~overdraft~~commissions ~~charges,~~paid ~~both resulting from easing pandemic restrictions leading~~ to anmortgage ~~increase~~loan ~~in consumer spending~~originators.

~~Noninterest~~ Provision ~~expense~~for income taxes. ~~Noninterest~~ ~~expense~~The provision for income taxes increased $~~306~~77,000, or 517.65%, to $~~5.8 million~~518,000 for the three months ended ~~September~~March 3031, ~~2021~~2022 ~~from~~compared ~~$5.4 million for the same period in 2020. The increase was primarily attributable~~ to ~~increases in other noninterest expense, professional fees, compensation and benefits expense and intangible amortization expense of~~ $~~191~~441,000, ~~$57,000,~~for ~~$56,000 and $27,000, respectively. The increase in other noninterest expense primarily related to prepayment penalties of $173,000 incurred during~~ the ~~quarter~~same ~~ended~~period ~~September 30,~~ in 2021 as a result of the ~~aforementioned~~increase ~~early~~in ~~repayment~~net ofincome ~~FHLB~~before ~~debt~~provision for income taxes.

Provision for income taxes. The provision for income taxes increased $350,000, or 91.1%, to $734,000 for the three months ended September 30, 2021 compared to $384,000 for the same period in 2020 as a result of the increase in net income before provision for income taxes.

Comparison of Results for the Nine Months Ended September 30, 2021 and 2020

General. Net income available to common stockholders increased $3.2 million, or 76.3%, to $7.4 million for the nine months ended September 30, 2021 from $4.2 million for the same period in 2020. This increase resulted from a $2.7 million increase in net interest income and a $2.0 million decrease in the provision for loan losses, partially offset by a $65,000 decrease in noninterest income and increases in noninterest expense and the provision for income taxes of $706,000 and $679,000, respectively.

Net interest income. Tax equivalent net interest income increased $2.7 million, or 12.8%, to $23.7 million for the nine months ended September 30, 2021 from $21.0 million for the nine months ended September 30, 2020. This increase was attributed to a decrease in interest expense of $2.3 million and an increase in tax equivalent interest income of $405,000.

Interest income. Tax equivalent interest income increased $405,000, or 1.5%, to $27.7 million for the nine months ended September 30, 2021 from $27.3 million for the same period in 2020. This increase was attributed to a $603,000 increase in interest on securities, partially offset by decreases in interest on interest-earning deposits with banks, dividends on federal bank stocks and interest on loans of $74,000, $69,000 and $55,000, respectively.

Tax equivalent interest earned on securities increased $603,000, or 30.2%, to $2.6 million for the nine months ended September 30, 2021 compared to $2.0 million for the same period in 2020. The average balance of securities increased $49.5 million, or 47.6%, accounting for an $860,000 increase in interest income. Partially offsetting this favorable variance, the average yield on securities decreased by 30 basis points to 2.26% for the nine months ended September 30, 2021 versus 2.56% for the same period in 2020 causing a $257,000 decrease in interest income.

Tax equivalent interest earned on loans receivable decreased $55,000 to $24.8 million for the nine months ended September 30, 2021 compared to $24.9 million for the same period in 2020. This decrease resulted from a 13 basis point decrease in the average yield on loans to 4.15% for the nine months ended September 30, 2021, versus 4.28% for the same period in 2020. The average yield was impacted by the 150 basis point decline in the Wall Street Journal Prime Rate in March 2020 which resulted in a decrease in interest rates on variable rate loans linked to that index. This unfavorable yield variance accounted for a $789,000 decrease in interest income. Partially offsetting this unfavorable variance, average loans increased $23.3 million, or 3.0%, accounting for a $734,000 increase in interest income. Interest income recognized on the PPP loans was $2.3 million for the nine months ended September 30, 2021, compared to $654,000 for the same period in 2020. The accretion of purchase accounting adjustments on acquired loans mitigated the yield decrease by approximately 3 basis points.

Dividends on federal bank stocks decreased $69,000, or 24.0%, to $218,000 for the nine months ended September 30, 2021 from $287,000 for the same period in 2020. This decrease was primarily due to a decrease of 116 basis points in the average yield to 5.09% for the nine months ended September 30, 2021, versus 6.25% for the same period in 2020, accounting for a $51,000 decrease in interest income. Also, the average balance of federal bank stocks decreased $412,000, or 6.7%, accounting for an $18,000 decrease in interest income.

Interest earned on deposits with banks decreased $74,000, or 47.4%, to $82,000 for the nine months ended September 30, 2021 compared to $156,000 for the same period in 2020. This decrease resulted from a 52 basis point decrease in the average yield on these balances to 0.23% for the nine months ended September 30, 2021, versus 0.75% for the same period in 2020, accounting for a $146,000 decrease in interest income. Partially offsetting this unfavorable variance, average interest-earning cash balances increased $19.7 million, accounting for a $72,000 increase in interest income.

Interest expense. Interest expense decreased $2.3 million, or 36.3%, to $4.0 million for the nine months ended September 30, 2021 from $6.3 million for the same period in 2020. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $2.1 million and $182,000, respectively.

Interest expense incurred on deposits decreased $2.1 million, or 37.6%, to $3.5 million for the nine months ended September 30, 2021 compared to $5.6 million for the same period in 2020. The average cost of interest-bearing deposits decreased 48 basis points to 0.65% for the nine months ended September 30, 2021, versus 1.13% for the same period in 2020, accounting for a $2.5 million 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. Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $52.2 million, or 7.9%, to $715.4 million for the nine months ended September 30, 2021, compared to $663.2 million for the same period in 2020 causing a $411,000 increase in interest expense.

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Interest expense incurred on borrowed funds decreased $182,000, or 25.5%, to $532,000 for the nine months ended September 30, 2021, compared to $714,000 for the same period in 2020. The decrease was primarily the result of a decrease in the average balance of borrowed funds of $11.0 million, or 25.9%, to $31.5 million for the nine months ended September 30, 2021 from $42.5 million for the same period in 2020 resulting in a $207,000 decrease in interest expense. Partially offsetting this reduction, the cost of borrowed funds increased 2 basis points to 2.26% for the nine months ended September 30, 2021, compared to 2.24% for the same period in 2020 causing a $25,000 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 nine months ended September 30:

(Dollar amounts in thousands)	2021		2020
Interest income per Consolidated Statements of Net Income	$	27,527	$	27,156
Adjustment to fully taxable equivalent basis		171		137
Interest income adjusted to fully taxable equivalent basis (non-GAAP)		27,698		27,293
Interest expense		4,020		6,308
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	23,678	$	20,985

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)	Nine months ended September 30,
	2021							2020
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-earning assets:
Loans, taxable	$	783,272	$	24,338		4.15	%	$	756,817	$	24,290		4.29	%
Loans, tax exempt		16,476		463		3.76	%		19,671		566		3.84	%
Total loans receivable		799,748		24,801		4.15	%		776,488		24,856		4.28	%
Securities, taxable		103,474		1,775		2.29	%		85,633		1,636		2.55	%
Securities, tax exempt		49,940		822		2.20	%		18,306		358		2.61	%
Total securities		153,414		2,597		2.26	%		103,939		1,994		2.56	%
Interest-earning deposits with banks		47,581		82		0.23	%		27,858		156		0.75	%
Federal bank stocks		5,724		218		5.09	%		6,136		287		6.25	%
Total interest-earning cash equivalents		53,305		300		0.75	%		33,994		443		1.74	%
Total interest-earning assets		1,006,467		27,698		3.68	%		914,421		27,293		3.99	%
Cash and due from banks		3,457							3,545
Other noninterest-earning assets		59,757							61,551
Total Assets	$	1,069,681						$	979,517
Interest-bearing liabilities:
Interest-bearing demand deposits	$	538,582	$	925		0.23	%	$	457,579	$	2,272		0.66	%
Time deposits		176,834		2,563		1.94	%		205,634		3,322		2.16	%
Total interest-bearing deposits		715,416		3,488		0.65	%		663,213		5,594		1.13	%
Borrowed funds, short-term		2,050		66		4.31	%		4,383		109		3.31	%
Borrowed funds, long-term		29,451		466		2.12	%		38,132		605		2.12	%
Total borrowed funds		31,501		532		2.26	%		42,515		714		2.24	%
Total interest-bearing liabilities		746,917		4,020		0.72	%		705,728		6,308		1.19	%
Noninterest-bearing demand deposits		214,628		—		—			171,341		—		—
Funding and cost of funds		961,545		4,020		0.56	%		877,069		6,308		0.96	%
Other noninterest-bearing liabilities		15,424							14,270
Total Liabilities		976,969							891,339
Stockholders' Equity		92,712							88,178
Total Liabilities and Stockholders' Equity	$	1,069,681						$	979,517
Net interest income			$	23,678						$	20,985
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						2.96	%						2.79	%
Net interest margin (net interest income as a percentage of average interest-earning assets)						3.15	%						3.07	%

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

(Dollar amounts in thousands)	Nine months ended September 30,
	2021 versus 2020
	Increase (Decrease) due to
	Volume			Rate			Total
Interest income:
Loans	$	734		$	(789	)	$	(55	)
Securities		860			(257	)		603
Interest-earning deposits with banks		72			(146	)		(74	)
Federal bank stocks		(18	)		(51	)		(69	)
Total interest-earning assets		1,648			(1,243	)		405
Interest expense:
Interest-bearing deposits		411			(2,517	)		(2,106	)
Borrowed funds, short-term		(69	)		26			(43	)
Borrowed funds, long-term		(138	)		(1	)		(139	)
Total interest-bearing liabilities		204			(2,492	)		(2,288	)
Net interest income	$	1,444		$	1,249		$	2,693

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

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Information pertaining to the allowance for loan losses and nonperforming assets for the nine months ended September 30, 2021 and 2020 is as follows:

(Dollar amounts in thousands)	As of or for the nine months ended
	September 30,
	2021			2020
Balance at the beginning of the period	$	9,580		$	6,556
Provision for loan losses		650			2,642
Charge-offs		(347	)		(404	)
Recoveries		66			111
Balance at the end of the period	$	9,949		$	8,905
Nonperforming loans	$	3,009		$	4,062
Nonperforming assets		3,033			4,179
Nonperforming loans to total loans		0.38	%		0.48	%
Nonperforming assets to total assets		0.28	%		0.40	%
Allowance for loan losses to total loans		1.26	%		1.06	%
Allowance for loan losses to nonperforming loans		330.64	%		219.23	%

Nonperforming loans decreased $1.1 million, or 26.6% to $3.0 million at September 30, 2021 from $4.1 million at December 31, 2020. This was primarily due to two residential mortgage loans totaling $635,000 removed from non-accrual status and the repayment of two commercial real estate loans and three residential mortgage loan totaling $160,000 and $271,000, respectively.

As of September 30, 2021, the Corporation’s classified and criticized assets amounted to $39.3 million, or 3.6% of total assets, with $30.4 million classified as substandard and $8.9 million identified as special mention. This compares to classified and criticized assets of $44.4 million, or 4.3% of total assets, with $22.7 million classified as substandard and $21.7 million identified as special mention at December 31, 2020. This $5.1 million decrease was primarily related to the upgrade of one $1.9 million commercial real estate loan from substandard to pass, the repayment of eight commercial real estate loans totaling $1.0 million, the sale of $800,000 in loans from one commercial relationship and the repayment of three commercial business loans totaling $670,000. Classified and criticized assets remain elevated largely due to the impact of COVID-19 on the hospitality loan portfolio. At September 30, 2021 the Corporation's hotel portfolio totaled $32.1 million, of which $30.1 million was rated classified or criticized.

The provision for loan losses decreased $2.0 million, or 75.4%, to $650,000 for the nine months ended September 30, 2021 from $2.6 million for the same period in 2020. The higher provision for loan losses recorded during the first nine months of 2020 was due to growth in the residential and consumer loan portfolios, increased risk ratings for loans which were granted payment deferrals in connection with COVID-19, an increase in criticized and classified loans, and an increase in the specific pandemic qualitative allowance factor. 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 $65,000, or 1.8%, to $3.5 million for the nine months ended September 30, 2021, compared to $3.5 million for the same period in 2020 due to decreases in gains on the sale of securities and fees and service charges of $434,000 and $59,000, respectively, partially offset by increases in other income and gains on the sale of loans of $253,000 and $172,000, respectively. During the nine months ended September 30, 2021, the Corporation sold $4.6 million of primarily low yielding mortgage-backed securities and realized a net gain of $201,000. The sale proceeds were used to repay a $5.0 million FHLB term advance. During the nine months ended September 30, 2020, the Corporation sold a total of $39.4 million of low-yielding mortgage-backed and collateralized mortgage obligation securities and realized a net gain of $635,000. The sale proceeds were used to repay $15.0 million in FHLB term advances and purchase higher yielding municipal securities. The increase in other income was primarily related to an increase in interchange fee income resulting from easing pandemic restrictions leading to an increase in consumer spending. During the nine months ended September 30, 2021, the Corporation sold $13.5 million of residential mortgage loans to the FHLB and realized a net gain of $353,000, compared to sales of $4.1 million and a net gain of $181,000 recognized during the same period in 2020.

Noninterest expense. Noninterest expense increased $706,000, or 4.3%, to $17.3 million for the nine months ended September 30, 2021 from $16.6 million for the same period in 2020. The increase was primarily attributable to increases in compensation and benefits expense, professional fees, FDIC insurance expense, other noninterest expense, premises and equipment expense and intangible asset amortization expense of $260,000, $189,000, $97,000, $92,000, $46,000 and $22,000, respectively.

Provision for income taxes. The provision for income taxes increased $679,000, or 76.1%, to $1.6 million for the nine months ended September 30, 2021 compared to $892,000 for the same period in 2020 as a result of the increase in net income before provision for income taxes.

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LIQUIDITY

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and sold or maturing securities. During the three ~~nine~~ months ended ~~September~~March 3031, ~~2021~~2022, the Corporation used its sources of funds primarily to fund ~~the~~additional ~~purchase of securities~~loans. As of ~~September~~March 3031, ~~2021~~2022, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $~~127~~129.2 8 million, and standby letters of credit totaling $~~538~~444,000, net of collateral maintained by the Bank.

At ~~September~~March 3031, ~~2021~~2022, time deposits amounted to $~~155~~143.7 million, or 1615.4% of the Corporation’s total consolidated deposits, including approximately $4555.31 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~~March 3031, ~~2021~~2022, the Corporation had borrowed funds of $2718.1 million consisting of $2515.0 million of long-term FHLB advances, ~~and~~ $2.1 million outstanding on a line of credit with a correspondent bank and $1.0 million of overnight borrowed funds. At ~~September~~March 3031, ~~2021~~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 $~~248~~251.25 million.

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

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CRITICAL ACCOUNTING POLICIES

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

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~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~~ecomnic environment and financial markets, including the Corporation's market capitalization, represented ~~and~~an interim impairment indicator requiring continued evaluation. Because of the economic uncertainty ~~surronding~~surrounding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of goodwill as of November 30, ~~2020~~2021. Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired as of November 30, ~~2020~~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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving ~~mortgage~~loan prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation’s assets and liabilities to interest rate changes. As of ~~September~~March 3031, ~~2021~~2022, the Corporation’s interest-earning assets maturing or repricing within one year totaled $~~380~~279.7 2 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $~~128~~134.3 9 million, providing an excess of interest-earning assets over interest-bearing liabilities of $~~252~~144.4 3 million. At ~~September~~March 3031, ~~2021~~2022, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was ~~296~~207.80%.

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~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~~March 3031, ~~2021~~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.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a)	Not applicable.

(b)	Not applicable.

Item 6. Exhibits

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

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Signatures

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

	EMCLAIRE FINANCIAL CORP
Date: November 10, 2021	By:	/s/ William C. Marsh
Date: May 6, 2022	By:	/s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer
Date: November 10, 2021	By:	/s/ Amanda L. Engles
Date: May 6, 2022	By:	/s/ Amanda L. Engles
	Amanda L. Engles
	Chief Financial Officer
	Treasurer

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Filing Compare · EMCLAIRE FINANCIAL CORP