EDGAR 10-K Filing

Company CIK: 1006830
Filing Year: 2021
Filename: 1006830_10-K_2021_0001437749-21-022257.json

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ITEM 1. BUSINESS
Item 1 - Business
(Dollars in thousands, except per share data)
General
Consumers Bancorp, Inc. (Corporation) is a bank holding company as defined under the Bank Holding Company Act of 1956, as amended (BHCA), and is a registered bank holding company under that act and was incorporated under the laws of the State of Ohio in 1994. In February 1995, the Corporation acquired all the issued and outstanding capital stock of Consumers National Bank (Bank), a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank.
Consumers National Bank is a community-oriented financial institution that offers a wide range of commercial and consumer loan and deposit products, as well as mortgage, financial planning and investment services to individuals, farmers and small and medium sized businesses in our markets. Since 1965, the Bank’s main office has been serving the Minerva, Ohio, and surrounding areas from its location at 614 East Lincoln Way, Minerva, Ohio. The Bank seeks to be the provider of choice for financial solutions to customers who value exceptional personalized service, local decision making, and modern banking technology. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio, Pennsylvania, and West Virginia. As of June 30, 2021, the Bank had 19 full-service branch locations and one loan production office. The Bank also invests in securities consisting primarily of obligations of U.S. government-sponsored entities, municipal obligations and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
On January 1, 2020, the Corporation completed the acquisition by merger of Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) in a stock and cash transaction for an aggregate consideration of approximately $10,405. As a result of the acquisition, the Corporation received loans with an estimated fair value of $55,320, as of the date of the acquisition, and deposits at three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio with an estimated fair value of $60,851, as of the date of the acquisition. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. The financial position and results of operations of Peoples prior to its acquisition date are not included in the Corporations’ financial results for periods prior to the acquisition date.
Supervision and Regulation
The Corporation and the Bank are subject to regulation by the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Office of the Comptroller of the Currency (OCC) and other federal and state regulators. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Earnings and dividends of the Corporation are affected by state and federal laws and regulations and by policies of various regulatory authorities. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of the Corporation and the Bank. The following describes selected federal and state statutory and regulatory provisions that have, or could have, a material impact on the Corporation. The following discussion of supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed.
Regulation of the Corporation
The Bank Holding Company Act: As a bank holding company, the Corporation is subject to regulation under the BHCA, and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require.
The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, subject to certain exceptions, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice. The Federal Reserve Board has extensive enforcement authority over bank holding companies for violations of laws and regulations and unsafe or unsound practices.
Privacy Provisions of Gramm-Leach-Bliley Act: The Gramm-Leach-Bliley Act of 1999 contains extensive provisions on a customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must provide to its customers the institution’s policies and procedures regarding the handling of customers’ non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed, and the customer is given the opportunity to opt out of such disclosure. The Corporation and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.
Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the areas of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Corporation’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that the Corporation’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or omit to state a material fact.
Regulation of the Bank
As a national bank, the Bank is subject to regulation, supervision, and examination by the OCC and by the Federal Deposit Insurance Corporation (FDIC). These examinations are designed primarily for the protection of the depositors of the Bank.
Dividend Restrictions: Dividends from the Bank are the primary source of funds for payment of dividends to the Corporation’s shareholders. There are statutory limits, however, on the amount of dividends the Bank can pay without regulatory approval. Under regulations promulgated by the OCC, the Bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the OCC. The Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations.
FDIC: The FDIC is an independent federal agency, which insures the deposits of federally insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of the Bank are subject to the deposit insurance assessments of the Deposit Insurance Fund of the FDIC. Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institution varies according to regulatory capital levels of the institution and other factors such as supervisory evaluations.
The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.
The Coronavirus Aid, Relief, and Economic Security Act of 2020: In response to the novel COVID-19 pandemic (COVID-19), the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the CARES Act), was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Corporation and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve Board and other federal banking agencies, including those with direct supervisory jurisdiction over the Corporation. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. The Corporation continues to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to COVID-19.
The CARES Act amended the loan program of the U.S. Small Business Administration (SBA), in which the Bank participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (PPP), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of COVID-19, Congress enacted additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19. 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 legislation included provisions for additional stimulus payments to individuals and their dependents, the extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. As a participating lender in the PPP, the Corporation continues to monitor legislative, regulatory, and supervisory developments related thereto.
Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered short-term. Recently, Section 541 of the Consolidated Appropriations Act, 2021, extended this relief to the earlier of 60 days after the end of the national emergency proclamation or January 1, 2022. The Corporation implemented a short-term modification program that offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as troubled debt restructurings.
Current Expected Credit Loss Model: In December 2018, the OCC, the Federal Reserve Board, and the FDIC issued a final rule to address regulatory treatment of credit loss allowances under the current expected credit loss (CECL) model. The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day one adverse effects on regulatory capital that may result from the adoption of the CECL model. The Bank is required to adopt the CECL model by July 1, 2023 since it’s a smaller reporting company.
Risk-Based Capital Requirements: The Federal Reserve Board and the OCC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and national banks, respectively. The Corporation meets the definition of a Small Bank Holding Company and, therefore, was exempt from maintaining consolidated regulatory capital ratios. Instead, regulatory capital ratios only apply at the subsidiary bank level. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the capital base. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. In addition, failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of “brokered deposits.”
Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (CBLR) requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided by average total consolidated assets. In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (ii) have less than $10 billion in average total consolidated assets, (iii) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (iv) not be an advanced approaches banking organization. A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be "well capitalized" under the prompt corrective action rules. The Bank has not elected to be subject to the CBLR.
Unless a community bank qualifies for, and elects to comply with the CBLR beginning on January 1, 2020, national banks are required to maintain the Basel III minimum levels of regulatory capital. The Basel III capital requirements for U.S. banking organizations became effective on January 1, 2015 and were fully phased in by January 1, 2019. Under Basel III, the Bank is required to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a Tier 1 leverage ratio of 4%. Basel III also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which effectively resulted in a minimum common equity Tier 1 capital ratio of 7%, a Tier 1 capital ratio of 8.5%, a total capital ratio of 10.5% and a Tier 1 leverage ratio of 6.5%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a common equity Tier 1 ratio to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
The OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The OCC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios. As of June 30, 2021, the Bank exceeded minimum regulatory capital requirements to be considered well-capitalized.
Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) created many new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (CFPB), and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. Although the CFPB does not have direct supervisory authority over banks with less than $10 billion in assets, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests. The Corporation is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with these regulatory requirements and assess their potential impact on our business.
Interstate Banking and Branching: The Interstate Banking and Branch Efficiency Act of 1995 has eased restrictions on interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision, and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching.
Community Reinvestment Act: The Community Reinvestment Act (CRA) requires depository institutions to assist in meeting the credit needs of their market areas, including low- and moderate-income areas, consistent with safe and sound banking practices. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance and assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution. The Bank’s most recent CRA rating is satisfactory.
USA PATRIOT Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act). The Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial services companies implement additional policies and procedures with respect to additional measures designed to address any or all of the following matters: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.
Cybersecurity: In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack.
In the ordinary course of business, electronic communications and information systems are relied upon to conduct operations, to deliver services to customers and to store sensitive data. The Corporation employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, increasing volume of attacks, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by the Corporation and its customers.
Employees
As of June 30, 2021, the Bank employed 156 full-time and 20 part-time employees. None of the employees are represented by a collective bargaining group. Management considers its relations with employees to be good.
Available Information
The Corporation files annual, quarterly, and current reports, proxy statements, and other information with the SEC. These filings are available to the public over the Internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any document that the Corporation files at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.
The Corporation’s reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are available, free of charge, on our website (www.consumers.bank) as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website. The Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website. A printed copy of any of these documents will be provided to any requesting shareholder.

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ITEM 1A. RISK FACTORS
Item 1A - Risk Factors
Not applicable for Smaller Reporting Companies.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B - Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2 - Properties
The Bank operates nineteen full-service banking facilities and one loan production office (LPO) as noted below:
Location
Address
Owned
Leased
Adena
9 East Main Street, Adena, OH 43901
X
Alliance
610 West State Street, Alliance, Ohio, 44601
X
Bergholz
256 2nd Street, Bergholz, Ohio 43908
X
Brewster
210 Wabash Ave S, Brewster, OH 44613
X
Carrollton
1017 Canton Road NW, Carrollton, Ohio, 44615
X
Dillonvale
44 Smithfield Street, Dillonvale, OH 43917
X
East Canton
440 W. Noble, East Canton, Ohio, 44730
X
Fairlawn
3680 Embassy Parkway Suite B, Fairlawn, Ohio 44333
X
Green
4086 Massillon Road, Green, Ohio 44685
X
Hanoverton
30034 Canal Street, P.O. Box 178, Hanoverton, Ohio, 44423
X
Hartville
1215 W. Maple Street, Hartville, Ohio 44632
X
Jackson-Belden
4026 Dressler Road NW, Canton, Ohio 44718
X
Lisbon
7985 Dickey Drive, Lisbon, Ohio 44432
X
Louisville
1111 N. Chapel Street, Louisville, Ohio 44641
X
Malvern
4070 Alliance Road, Malvern, Ohio 44644
X
Minerva
614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657
X
Mount Pleasant
298 Union Street, Mount Pleasant, OH 43939
X
Salem
141 S. Ellsworth Avenue, P.O. Box 798, Salem, Ohio, 44460
X
Waynesburg
8607 Waynesburg Drive SE, P.O. Box 746, Waynesburg, Ohio, 44688
X
Wooster LPO
146 East Liberty Street, Wooster, Ohio 44691
X
The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. In management’s opinion, all properties owned and operated by the Bank are adequately insured.

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ITEM 3. LEGAL PROCEEDINGS
Item 3 - Legal Proceedings
The Corporation is not a party to any pending material legal or administrative proceedings, other than ordinary routine litigation incidental to the business of the Corporation. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest therein that is adverse to the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the financial position or results of operations of the Corporation.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4 - Mine Safety Disclosures
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5 - Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Corporation had 3,028,100 common shares outstanding on June 30, 2021 with 752 shareholders of record and an estimated 723 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.
The common shares of Consumers Bancorp, Inc. are quoted on the OTCQX® Best Market under the symbol CBKM. The following quoted market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not represent actual transactions. The market prices represent highs and lows reported during the applicable quarterly period.
Quarter Ended
September 30,
December 31,
March 31,
June 30,
High
$ 16.00
$ 19.50
$ 20.00
$ 19.76
Low
14.40
15.50
19.12
19.11
Cash dividends paid per share
0.145
0.145
0.15
0.15
Quarter Ended
September 30,
December 31,
March 31,
June 30,
High
$ 18.73
$ 19.55
$ 20.00
$ 15.05
Low
17.45
17.99
13.00
14.16
Cash dividends paid per share
0.135
0.135
0.135
0.135
Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Corporation’s common shares, these prices may not reflect the prices at which the common shares would trade in an active market.
The Corporation’s management is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent on the Corporation’s future earnings, capital requirements and financial condition. The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. See Note 1 and Note 13 to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for dividend restrictions.
There were no repurchases of the Corporation’s securities during the 2021 fiscal year.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
General
The following is management’s analysis of the Corporation’s financial condition and results of operations as of and for the years ended June 30, 2021 and 2020. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. The COVID-19 pandemic is affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impact on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other risks and uncertainties that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:
●
changes in local, regional and national economic conditions becoming less favorable than we expect, resulting in, among other things, high unemployment rates, a deterioration in credit quality of our assets or debtors being unable to meet their obligations;
●
sustained low market interest rates could result in a decline in the net interest margin and net interest income;
●
changes in the level of non-performing assets and charge-offs;
●
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and insurance) with which we must comply;
●
declining asset values impacting the underlying value of collateral;
●
unanticipated changes in our liquidity position, including, but not limited to, changes in the cost of liquidity and our ability to find alternative funding sources;
●
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
●
changes in consumer spending, borrowing and savings habits;
●
changes in accounting policies, rules and interpretations that may come as a result of COVID-19 or otherwise;
●
our ability to attract and retain qualified employees;
●
competitive pressures on product pricing and services;
●
breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and
●
changes in the reliability of our vendors, internal control systems or information systems.
The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations.
Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all the issued and outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne, and contiguous counties in Ohio, Pennsylvania, and West Virginia. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
On January 1, 2020, the Corporation completed the acquisition by merger of Peoples in a stock and cash transaction for an aggregate consideration of approximately $10,405. As a result of the acquisition, the Corporation received loans with an estimated fair value of $55,320, as of the date of the acquisition, and deposits at three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio with an estimated fair value of $60,851, as of the date of the acquisition. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. The financial position and results of operations of Peoples prior to its acquisition date are not included in the Corporations’ financial results for periods prior to the acquisition date.
COVID-19 Pandemic
In response to COVID-19, management is actively pursuing multiple avenues to assist customers during these uncertain times. For commercial borrowers, the CARES Act includes key SBA initiatives to assist small businesses. The PPP loans were designed to provide a direct incentive for small businesses to keep their workers on the payroll, From the first round of assistance, the Bank originated a total of $68,788 of PPP loans and $6,107 remained outstanding as of June 30, 2021. Under the second round of the PPP program, a total of $44,579 of loans were funded and outstanding as of June 30, 2021.
Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as troubled debt restructurings. As of June 30, 2021, eight borrowers with an outstanding balance of $198 are in payment deferral status under this loan modification program.
We have assisted and may continue to assist customers who are experiencing financial hardship due to COVID-19 by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties. The consumer reserve personal line of credit, an unsecured line of credit that is linked to a personal checking account, has been redesigned to provide easier access and a lower initial rate. Commercial customers have been encouraged to access available funds on their lines of credit, and we have been ready to provide emergency commercial lines of credit to qualified borrowers in order to assist in meeting payroll and other recurring fixed expenses. In response to COVID-19, we provided four emergency lines of credit; however, the lines of credit have since been closed as the borrowers did not need to access the funds.
Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact that the ongoing economic disruption will have on the Corporation. The Corporation has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. The branch lobbies were closed at various times throughout the pandemic but are now open for normal business. The Corporation is encouraging virtual meetings and conference calls in place of in-person meetings. Additionally, travel for business has been restricted. The Corporation is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.
Comparison of Results of Operations for the Years Ended June 30, 2021 and June 30, 2020
Net Income. Net income was $8,988 for fiscal year 2021 compared with $5,527 for fiscal year 2020. The following key factors summarize our results of operations for the year ended June 30, 2021 compared with the same prior year period:
●
net interest income increased by $5,099, or 23.7%, in fiscal year 2021, primarily as a result of a $151,376, or 25.7%, increase in average interest-earning assets, which was primarily due to organic loan growth and the addition of PPP loan receivables;
●
a $850 provision for loan loss expense was recorded during the 2021 fiscal year compared with $1,980 during the 2020 fiscal year. The higher provision recorded in the 2020 fiscal year was primarily the result of the decline in economic conditions triggered by the COVID-19 pandemic;
●
total other income decreased by $237, or 5.0%, in fiscal year 2021, primarily since the prior year period included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and a $355 gain on the sale of securities. These reductions were partially offset by a $316, or 20.1%, increase in debit card interchange income, and a $210, or 38.7%, increase on gains from the sale of mortgage loans; and
●
total other expenses increased by $1,593, or 9.0%, in fiscal year 2021 and includes a full year of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples compared with only six months of these expense being included in the prior year period. In addition, incentive accruals and mortgage commissions also increased during the 2021 fiscal year.
Return on average equity and return on average assets were 13.36% and 1.16%, respectively, for the 2021 fiscal year-to-date period compared with 9.67% and 0.89%, respectively, for the same period last year.
Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. In addition, prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, can significantly affect net interest income. Since the Federal Open Market Committee establishing a near-zero target range for the federal funds rate, earnings could be negatively affected if the interest we receive on loans and securities falls more quickly than interest we pay on deposits and borrowings. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate of 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.
Net Interest Income Year ended June 30,
Net interest income
$ 26,583
$ 21,484
Taxable equivalent adjustments to net interest
Net interest income, fully taxable equivalent
$ 27,002
$ 21,810
Net interest margin
3.62
%
3.67
%
Taxable equivalent adjustment
0.05
0.05
Net interest margin, fully taxable equivalent
3.67
%
3.72
%
FTE net interest income for the 2021 fiscal year was $27,002, an increase of $5,192 or 23.8%, from $21,810 in the 2020 fiscal year. The Corporation’s tax equivalent net interest margin was 3.67% for the year ended June 30, 2021 and was 3.72% for the fiscal year ended 2020. FTE interest income for the 2021 fiscal year was $28,902, an increase of $3,271, or 12.8%, from the 2020 fiscal year, such change primarily a result of a $151,376, or 25.7%, increase in average interest-earning assets from the 2020 fiscal year. The growth in average interest-earning assets was primarily a result of organic loan growth and the addition of PPP loans. Interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. PPP loans had an average balance of $63,761 for the twelve-month period ended June 30, 2021, with a total of $2,549 of interest and fee income recognized during the twelve-month period ended June 30, 2021. As of June 30, 2021, there was a total of $2,449 of unamortized net fees associated with the PPP loans which will be amortized into income over the life of the loans. A reduction in the accretion of origination fees from PPP loans as these loans are forgiven, combined with the significant decline in interest rates, will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 3.93% for the 2021 fiscal year compared with 4.37% for the same period last year.
Interest expense for the 2021 fiscal year was $1,900, a decrease of $1,921, or 50.3%, from the 2020 fiscal year. The Corporation’s cost of funds was 0.38% for the 2021 fiscal year compared with 0.91% for the same prior year period. The decline in short term market interest rates had an impact on the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.
Average Balance Sheet and Net Interest Margin
Average
			Balance
Interest
Yield/
			Rate
Average
			Balance
Interest
Yield/
			Rate
Interest earning assets:
Taxable securities
$ 89,424
$ 1,594
1.82
%
$ 81,609
$ 1,932
2.40
%
Nontaxable securities (1)
70,878
2,148
3.18
61,215
1,914
3.24
Loan receivables (1)
549,890
24,901
4.53
433,948
21,553
4.97
Federal bank and other restricted stocks
2,472
3.07
1,960
3.83
Equity securities
8.42
-
-
-
Interest bearing deposits and federal funds sold
27,831
0.60
10,589
1.48
Total interest earning assets
740,697
28,902
3.93
%
589,321
25,631
4.37
%
Noninterest earning assets
31,283
32,180
Total assets
$ 771,980
$ 621,501
Interest bearing liabilities:
Interest bearing demand
$ 112,801
$
0.13
%
$ 86,418
$
0.50
%
Savings
251,138
0.13
191,119
0.42
Time deposits
102,554
1,133
1.10
118,847
2,259
1.90
Short-term borrowings
8,895
0.10
4,306
1.00
FHLB advances
20,077
1.37
17,630
1.66
Total interest-bearing liabilities
495,465
1,900
0.38
%
418,320
3,821
0.91
%
Noninterest-bearing liabilities
209,262
146,050
Total liabilities
704,727
564,370
Shareholders’ equity
67,253
57,131
Total liabilities and shareholders’ equity
$ 771,980
$ 621,501
Net interest income, interest rate spread (1)
$ 27,002
3.55
%
$ 21,810
3.46
%
Net interest margin (net interest as a percent of average interest earning assets) (1)
3.67
%
3.72
%
Federal tax exemption on non-taxable securities and loans included in interest income
$
$
Average interest earning assets to interest bearing liabilities
149.50
%
140.88
%
(1) Calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%.
The following table presents the changes in the Corporation’s interest income and interest expense resulting from changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities. Changes attributable to both rate and volume that cannot be segregated have been allocated in proportion to the changes due to rate and volume.
INTEREST RATES AND INTEREST DIFFERENTIAL
2021 Compared to 2020
Increase / (Decrease)
2020 Compared to 2019
Increase / (Decrease)
Total
Change
Change
due to
Volume
Change
due to
Rate
Total
Change
Change
due to
Volume
Change
due to
Rate
(In thousands)
Interest earning assets:
Taxable securities
$ (338
)
$
$ (500
)
$ (260
)
$ (176
)
$ (84
)
Nontaxable securities (1)
(35
)
(4
)
(34
)
Loan receivables (2)
3,348
5,376
(2,028
)
4,952
4,845
Federal bank and other restricted stocks
(16
)
(11
)
(32
)
Interest bearing deposits and federal funds sold
(135
)
(37
)
Equity securities
-
-
-
-
Total interest and dividend income
3,271
5,985
(2,714
)
4,741
4,757
(16
)
Interest bearing liabilities:
Interest bearing demand
(279
)
(382
)
(119
)
(147
)
Savings deposits
(466
)
(663
)
(34
)
Time deposits
(1,126
)
(278
)
(848
)
Short-term borrowings
(34
)
(57
)
(8
)
(18
)
FHLB advances
(16
)
(53
)
(27
)
(48
)
Total interest expense
(1,921
)
(2,003
)
(26
)
Net interest income
$ 5,192
$ 5,903
$ (711
)
$ 4,076
$ 4,066
$
(1) Nontaxable income is adjusted to a fully tax equivalent basis utilizing a statutory federal income tax rate of 21.0%.
(2) Non-accrual loan balances are included for purposes of computing the rate and volume effects although interest on these balances has been excluded.
Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses in the Corporation’s loan portfolio that have been incurred at each balance sheet date. Management considers historical loss experience, the present and prospective financial condition of borrowers, the current conditions within the markets where the Corporation originates loans, the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the ultimate collectability of the loan portfolio. In fiscal year 2021, a provision for loan loss expense of $850 was recorded compared with $1,980 in fiscal year 2020. The provision for loan loss expense was higher in fiscal year 2020 primarily due to the deterioration in the economic environment as a result of the impact of COVID-19 and higher loan balances from organic loan growth.
For the 2021 fiscal year, net charge offs of $57 were recorded compared with $90 for the same period last year. The allowance for loan losses as a percentage of loans was 1.14% at June 30, 2021 and 1.05% at June 30, 2020. The loans acquired from the Peoples acquisition were recorded at fair value without a related allowance for loan losses. As of June 30, 2020, the allowance for loan losses as a percentage of total loans, excluding the loans acquired in the Peoples acquisition, was 1.15%.
Non-performing loans were $1,771 as of June 30, 2021 and represented 0.31% of total loans. This compared with $1,226, or 0.23% of total loans at June 30, 2020. Non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors closely monitor these loans and believe the prospect for recovery of principal, less identified specific reserves, are favorable.
Other Income. Total other income decreased by $237, or 5.0%, to $4,466 for the 2021 fiscal year. Other income in the 2020 fiscal year includes $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and net securities gains of $355 compared to net security gains of $14 in fiscal year 2021.
Debit card interchange income increased by $316, or 20.1%, in 2021 to $1,891 primarily as a result of increased debit card usage and an increase in the number of cards issued. Gain on sale of mortgage loans increased by $210, or 38.7%, in 2021 primarily as a result of an increase in volume due to refinances as mortgage rates declined. These increases were partially offset by a decline of $130, or 9.6%, in service charges on deposit accounts primarily due to a decline in overdraft charges as many eligible individuals have received Economic Impact Payments and consumer spending habits have changed during the pandemic, resulting in fewer overdrafts.
Other Expenses. Total other expenses were $19,361 for the year ended June 30, 2021; an increase of $1,593, or 9.0%, from $17,768 for the year ended June 30, 2020.
Salaries and employee benefit expenses increased by $1,270, or 13.3%, during the 2021 fiscal year primarily since the 2021 fiscal year includes a full year of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples compared with only six months of these expense being included in the prior year period. In addition, incentive accruals and mortgage commissions also increased during the 2021 fiscal year.
Occupancy and equipment expenses increased by $122, or 4.9%, during the 2021 fiscal year from the same period last year primarily as a result of higher real estate taxes, custodial, building upkeep, maintenance, lease and utility expenses for the additional office locations acquired in the Peoples acquisition and the new leased Green, Ohio office location that opened during the 2021 fiscal year. This was partially offset by lower depreciation expense in the 2021 fiscal year for the Salem branch location since it was expected that this location would be replaced in the spring of 2021.
Data processing expenses decreased by $179, or 19.7% and professional and director fees decreased by $170, or 16.6%, during the 2021 fiscal year from the same period last year primarily since the 2020 fiscal year included system conversion and termination costs, investment banker, legal, accounting and auditing fees associated with the acquisition of Peoples.
FDIC assessments increased by $196, or 184.9%, for the 2021 fiscal year since the Small Bank Assessment Credits were applied to the FDIC insurance invoices during the 2020 fiscal year.
Debit card processing expenses increased by $140, or 17.3% primarily as a result of increased debit card usage. The increase in debit card usage is also reflected in debit card interchange income which increased by $316, or 20.1% from the prior year.
Income Tax Expense. Income tax expense totaled $1,850 and $912 and the effective tax rates were 17.1% and 14.2% for the years ended June 30, 2021 and 2020, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in the 2020 and 2021 fiscal years. The effective tax rate differs from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and bank owned life insurance earnings and death benefit.
Financial Condition
Total assets at June 30, 2021 were $833,804 compared with $740,820 at June 30, 2020, an increase of $92,984, or 12.6%. The growth in total assets is mainly attributable to an increase of $68,297, or 46.3%, in available-for-sale and held-to-maturity securities which was primarily funded by a $93,494, or 14.8%, increase in total deposits.
Securities. Total securities were $215,756 at June 30, 2021, of which $207,760 were classified as available-for-sale and $7,996 were classified as held-to-maturity. The securities portfolio is mainly comprised of mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, state and political subdivisions and government-sponsored enterprises.
The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:
June 30, 2021
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Obligations of U.S. government-sponsored entities and agencies
$ 14,746
$
$ (14 )
$ 15,033
Obligations of state and political subdivisions
73,013
3,561
(75 )
76,499
U.S. Government-sponsored mortgage-backed securities - residential
90,065
1,136
(684 )
90,517
U.S. Government-sponsored mortgage-backed securities - commercial
8,641
-
8,845
U.S. Government-sponsored collateralized mortgage obligations - residential
16,302
(57 )
16,374
Other debt securities
-
(8 )
Total available-for-sale securities
$ 203,267
$ 5,331
$ (838 )
$ 207,760
June 30, 2020
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Treasury
$ 1,248
$
$ -
$ 1,256
Obligations of U.S. government-sponsored entities and agencies
10,133
-
10,532
Obligations of state and political subdivisions
60,343
3,149
-
63,492
U.S. government-sponsored mortgage-backed securities - residential
48,645
1,515
(4
)
50,156
U.S. government-sponsored mortgage-backed securities - commercial
8,444
(2
)
8,497
U.S. government-sponsored collateralized mortgage obligations - residential
9,712
(12
)
9,985
Total available-for-sale securities
$ 138,525
$ 5,411
$ (18
)
$ 143,918
The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2021 and 2020 and the corresponding gross unrecognized gains and losses:
June 30, 2021
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Obligations of state and political subdivisions
$ 7,996
$
$ -
$ 8,352
June 30, 2020
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Obligations of state and political subdivisions
$ 3,541
$
$ -
$ 3,868
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2021:
Available-for-sale
Amortized
Cost
Fair
Value
Average
Yield
Obligations of government-sponsored entities:
Over 3 months through 1 year
$ 2,501
$ 2,534
2.67
%
Over 1 year through 5 years
3,129
3,235
2.06
Over 5 years through 10 years
9,116
9,264
1.63
Total obligations of government-sponsored entities
14,746
15,033
1.90
Obligations of state and political subdivisions:
3 Months or less
4.51
Over 3 months through 1 year
2,866
2,903
3.38
Over 1 year through 5 years
9,217
9,565
3.38
Over 5 years through 10 years
10,679
11,069
3.01
Over 10 years
49,976
52,687
3.08
Total obligations of state and political subdivisions
73,013
76,499
3.13
Mortgage-backed securities - residential:
Over 1 year through 5 years
51,865
52,741
1.67
Over 5 years through 10 years
38,200
37,776
1.42
Total mortgage-backed securities - residential
90,065
90,517
1.56
Mortgage-backed securities - commercial:
Over 5 years through 10 years
2,794
2,855
1.77
Over 10 years
5,847
5,990
2.09
Total mortgage-backed securities - commercial
8,641
8,845
1.99
Collateralized mortgage obligations:
3 months or less
1.86
Over 3 months through 1 year
1,932
1,966
1.52
Over 1 year through 5 years
9,747
9,794
1.48
Over 5 years through 10 years
1,527
1,518
1.39
Over 10 years
2,998
2,998
1.62
Total collateralized mortgage obligations
16,302
16,374
1.50
Other debt securities
Over 5 years through ten years
4.62
Total available-for-sale securities
$ 203,267
$ 207,760
2.17
%
Held-to-maturity
Amortized
Cost
Fair
Value
Average
Yield
Obligations of state and political subdivisions:
Over 1 year through 5 years
$
$
2.89
%
Over 5 years through 10 years
5,367
5,547
1.86
Over 10 years
2,335
2,496
3.13
Total held-to-maturity securities
$ 7,996
$ 8,352
2.27
%
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.
Loans. Loan receivables increased by $23,566 to $566,427 at June 30, 2021 compared to $542,861 at June 30, 2020. Commercial loans include PPP loans of $50,686 and $66,606 as of June 30, 2021 and 2020, respectively, and a third-party residential mortgage warehouse line-of-credit had a zero balance as of June 30, 2021 compared with an outstanding balance of $32,869 as of June 30, 2020. Excluding the declines in the PPP loans and the residential mortgage warehouse line-of-credit, organic loan growth was $72,355, or 16.3%. The increase in the 1-4 family residential real estate portfolio was primarily due to a majority of the mortgage loans originated in the third quarter of fiscal year 2021 being kept within the portfolio rather than being sold to the secondary market. Consumer loans increased by $8,241, or 38.6%, primarily as a result of the expansion of indirect auto lending and an increase in direct auto loans as a result of successful marketing campaigns. Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:
Commercial
$ 109,922
$ 157,029
Commercial real estate:
Construction
10,462
16,190
Other
269,157
228,552
1-4 Family residential real estate:
Owner occupied
119,046
91,006
Non-owner occupied
19,114
19,337
Construction
9,156
9,418
Consumer loans
29,570
21,329
Total loans
$ 566,427
$ 542,861
The following table shows the major classifications of loans, net of deferred fees and costs, which are based on the contractual terms for repayment of principal, that are due in the periods indicated as of June 30, 2021:
Maturing
After one year
After five years
Within
but within
But within
After
one year
five years
Fifteen years
Fifteen years
Total
Commercial
$ 13,458
$ 66,898
$ 28,031
$ 1,535
$ 109,922
Commercial real estate:
Construction
7,983
-
2,270
10,462
Other
11,610
14,757
106,502
136,288
269,157
1-4 Family residential real estate:
Owner occupied
1,202
5,482
32,906
79,456
119,046
Non-owner occupied
1,087
1,392
11,545
5,090
19,114
Construction
1,511
-
7,310
9,156
Consumer loans
18,078
10,570
29,570
Total loans
$ 29,803
$ 114,925
$ 189,554
$ 232,145
$ 566,427
The following is a schedule of fixed and variable rate 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2021:
Fixed
Interest Rates
Variable
Interest Rates
Total 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year
$ 237,875
$ 134,034
Allowance for Loan Losses. The allowance for loan losses balance and the provision charged to expense are judgmentally determined by management based upon a periodic review of the loan portfolio for valuation purposes and to determine the adequacy of the allowance for loan losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectability of loans in the portfolio.
Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. As of June 30, 2021, impaired loans totaled $1,954, of which $1,771 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.
The following table summarizes non-accrual loans, non-performing assets, impaired and restructured loans, and associated ratios for the years ended June 30:
Non-accrual loans
$ 1,771
$ 1,185
Accruing loans past due 90 days or more
-
Total non-performing loans
$ 1,771
$ 1,226
Other real estate and repossessed assets owned
-
Total non-performing assets
$ 1,771
$ 1,233
Impaired loans
$ 1,954
$ 1,923
Accruing restructured loans
$
$
Non-accrual to total loans
0.31
%
0.22
%
ALLL to non-accrual loans
365.39
%
479.16
%
The non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to bring the loan current. Properties and vehicles acquired by the Corporation as a result of foreclosure or repossession, or by deed in lieu of foreclosure, are classified as “other real estate and repossessed assets owned” until they are sold or otherwise disposed of.
The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the years ended June 30:
Allowance for loan losses at beginning of year
$ 5,678
$ 3,788
Loans charged off:
Commercial
-
1-4 Family residential real estate
Consumer loans
Total charge offs
Recoveries:
Commercial real estate
1-4 Family residential real estate
Consumer loans
Total recoveries
Net charge offs
Provision for loan losses charged to operations
1,980
Allowance for loan losses at end of year
$ 6,471
$ 5,678
Ratio of net charge offs to average loans outstanding
0.01
%
0.02
%
ALLL to total loans
1.14
%
1.05
%
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:
Allocation of the Allowance for Loan Losses
Allowance
Amount
% of Loan
Type to
Total Loans
Allowance
Amount
% of Loan
Type to
Total Loans
June 30, 2021
June 30, 2020
Commercial
$
19.4
%
$
28.9
%
Commercial real estate loans
3,949
49.4
3,623
45.1
1-4 Family residential real estate
1,307
26.0
22.1
Consumer loans
5.2
3.9
Total
$ 6,471
100.0
%
$ 5,678
100.0
%
While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur. While the Corporation has historically experienced strong trends in asset quality, as a result of the current situation regarding the COVID-19 pandemic, uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Goodwill: Goodwill remained unchanged at $826 at June 30, 2021 and 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed during the year ended June 30, 2021.
Funding Sources. Total deposits increased by $93,494, or 14.8%, from $633,355 at June 30, 2020 to $726,849 at June 30, 2021. For the fiscal year ended June 30, 2021, noninterest-bearing demand deposits increased by $38,868, or 20.4%, savings and money market deposits increased by $54,194, or 23.7%, and interest-bearing demand deposits increased by $28,274, or 28.5%, from the same prior year period. Certificates and other time deposits decreased by $27,843, or 24.1%, from the same prior year period as customers chose to move funds to savings and money market deposit products due to the low-rate environment.
The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:
Years Ended June 30,
Amount
Rate
Amount
Rate
Noninterest-bearing demand deposit
$ 203,181
-
$ 140,826
-
Interest-bearing demand deposit
112,801
0.13
%
86,418
0.50
%
Savings
251,138
0.13
191,119
0.42
Certificates and other time deposits
102,554
1.10
118,847
1.90
Total
$ 669,674
0.24
%
$ 537,210
0.65
%
The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2021 by time remaining until maturity:
Maturing in:
Under 3 months
$ 8,744
Over 3 to 6 months
7,390
Over 6 to 12 months
11,699
Over 12 months
15,616
Total
$ 43,449
Short-term borrowings increased by $5,260, or 75.8%, to $12,203 at June 30, 2021 from $6,943 at June 30, 2020. This increase was primarily associated with the retention of PPP loan proceeds in commercial sweep repurchase agreement accounts. See Note 8-Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.
Capital Resources
Total shareholders’ equity increased by $6,660 from $63,240 at June 30, 2020 to $69,900 at June 30, 2021. The primary reason for the increase was net income of $8,988 for the current fiscal year which was partially offset by cash dividends paid of $1,785. For the 2021 fiscal year, the average equity to average total assets ratio was 8.71% and the dividend payout ratio was 19.9%. For the 2020 fiscal year, the average equity to average total assets ratio was 9.19% and the dividend payout ratio was 28.1%.
At June 30, 2021, management believes the Bank complied with all regulatory capital requirements. Based on the Bank’s computed regulatory capital ratios, the OCC has determined the Bank to be well capitalized under the Federal Deposit Insurance Act as of its latest exam date. The Bank’s actual and required capital amounts are disclosed in Note 13-Regulatory Matters to the Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would cause the Bank’s capital category to change.
Liquidity
Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions. The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in federal funds sold or interest-bearing deposit accounts with other financial institutions.
Net cash inflows from operating activities for the 2021 fiscal year were $14,013 and net cash inflows from financing activities were $83,858. Net cash outflows from investing activities were $89,001. The major sources of cash were a $93,494 net increase in deposits and a $42,820 increase from sales, maturities, or principal pay downs on available-for-sale securities. The major uses of cash were the $108,168 purchase of available-for-sale securities and a $23,471 net increase in loans. Total cash and cash equivalents were $18,529 as of June 30, 2021 compared to $9,659 at June 30, 2020.
The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit. Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and investments in tax-exempt municipal bonds.
The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial and retail customers are turning to community banks. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a relatively low level of 0.38%.
Jumbo time deposits (those with balances of $250 and over) were $18,488 and $36,747 at June 30, 2021 and 2020, respectively. These deposits are monitored closely by the Bank and typically priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee paid broker to obtain deposits from outside its normal service area as an additional source of funding. However, these deposits are not relied upon as a primary source of funding and there were no brokered deposits as of June 30, 2021 or 2020.
Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Additionally, the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations. As of June 30, 2021, the Bank could, without prior approval, declare a dividend of approximately $8,741.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Corporation are monetary in nature. Therefore, as a financial institution, interest rates have a more significant impact on the Corporation’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity, maturity structure and quality of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels.
Critical Accounting Policies and Use of Significant Estimates
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and management’s discussion and analysis are, to a large degree, dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change. The most significant accounting policies followed by the Corporation are presented in Note 1-Summary of Significant Accounting Policies to the Consolidated Financial Statements. 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. In the event different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Management has identified the following as critical accounting policies:
Allowance for Loan Losses. The determination of the allowance for loan losses involves considerable subjective judgment and estimation by management. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. 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.
Goodwill. The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. As of April 30, 2021, the measurement date, a qualitative assessment was performed to determine whether there is a more likely than not (greater than 50% likelihood) that the fair value of the Corporation was less than its carrying amount. The impairment test of goodwill indicated no impairment existed as of the measurement date. However, it is impossible to know the future impact of the evolving economic conditions related to COVID-19. 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.
Contractual Obligations, Commitments and Contingent Liabilities
The following table presents, as of June 30, 2021, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Note
Reference
Thereafter
Total
Certificates of deposit
$ 56,866
$ 21,554
$ 2,151
$ 3,579
$ 1,415
$ 1,974
$ 87,539
Short-term borrowings
12,203
-
-
-
-
-
12,203
Federal Home Loan advances
1,799
6,567
5,556
4,049
-
18,050
Salary continuation plan
2,464
3,140
Operating leases
-
1,279
Deposits without maturity
-
-
-
-
-
-
639,310
Note 14-Commitments with Off-Balance Sheet Risk to the Consolidated Financial Statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. These commitments and contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.
Off-Balance Sheet Arrangements
At June 30, 2021, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Not applicable for Smaller Reporting Companies.
Item 8 - Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. and subsidiaries (the “Company”) as of June 30, 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Significant Assumptions in General Reserves - Refer to Notes 1 and 4 to the Financial Statements
Critical Audit Matter Description
The allowance for loan losses (allowance) represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience over the estimated loss emergence period adjusted for current factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
We identified the Company’s significant assumptions in general reserves in the allowance for loan losses as a critical audit matter. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the qualitative factors within the allowance included the following, among others:
We obtained an understanding of management’s process for determining the need for qualitative factor adjustments, identifying appropriate factors, and measuring the direction and magnitude of the adjustment.
We evaluated the reasonableness of management's judgments and tests of accuracy of underlying support related to the estimated loss emergence period.
We evaluated the design of controls over the application of management’s qualitative factor methodology in the estimate of general reserves.
We evaluated management's rationale for determining qualitative adjustments was relevant and warranted for each loan segment and assessed the measurement of qualitative factor adjustments applied by management.
Where applicable, we tested the accuracy and completeness of data used by management in the measurement of qualitative factor adjustments or vouched factors to relevant external data sources.
We assessed changes in qualitative factors year-over-year against overall trends in credit quality within the Company and broader trends within the industry and local and national economies to evaluate reasonableness of management’s qualitative factor adjustments.
/s/ Plante & Moran, PLLC
We have served as the Company's auditor since 2020.
Auburn Hills, Michigan
September 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. (the "Company") as of June 30, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We served as the Company's auditor from 1998 to 2020.
Cleveland, Ohio
September 22, 2020
CONSOLIDATED BALANCE SHEETS
As of June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
ASSETS:
Cash on hand and noninterest-bearing deposits in financial institutions
$ 8,902
$ 8,429
Federal funds sold and interest-bearing deposits in financial institutions
9,627
1,230
Total cash and cash equivalents
18,529
9,659
Certificates of deposit in financial institutions
5,825
11,635
Securities, available-for-sale
207,760
143,918
Securities, held-to-maturity (fair value 2021 $8,352 and 2020 $3,868)
7,996
3,541
Equity securities, at fair value
-
Federal bank and other restricted stocks, at cost
2,472
2,472
Loans held for sale
1,457
3,507
Total loans
566,427
542,861
Less allowance for loan losses
(6,471
)
(5,678
)
Net loans
559,956
537,183
Cash surrender value of life insurance
9,702
9,442
Premises and equipment, net
15,793
14,901
Goodwill
Core deposit intangible, net
Accrued interest receivable and other assets
2,825
3,470
Total assets
$ 833,804
$ 740,820
LIABILITIES:
Deposits:
Noninterest-bearing demand
$ 229,102
$ 190,233
Interest bearing demand
127,447
99,173
Savings
282,761
228,567
Time
87,539
115,382
Total deposits
726,849
633,355
Short-term borrowings
12,203
6,943
Federal Home Loan Bank advances
18,050
31,161
Accrued interest payable and other liabilities
6,802
6,121
Total liabilities
763,904
677,580
Commitments and contingent liabilities (Note 14)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized
-
-
Common shares, no par value; 8,500,000 shares authorized; 3,124,053 shares issued as of June 30, 2021 and June 30, 2020
20,011
19,974
Retained earnings
47,663
40,460
Treasury stock, at cost (95,953 and 108,475 common shares at June 30, 2021 and 2020, respectively)
(1,324
)
(1,454
)
Accumulated other comprehensive income
3,550
4,260
Total shareholders’ equity
69,900
63,240
Total liabilities and shareholders’ equity
$ 833,804
$ 740,820
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Interest and dividend income:
Loans, including fees
$ 24,887
$ 21,544
Securities, taxable
1,594
1,932
Securities, tax-exempt
1,743
1,597
Equity securities
-
Federal bank and other restricted stocks
Federal funds sold and interest-bearing deposits
Total interest and dividend income
28,483
25,305
Interest expense:
Deposits
1,615
3,486
Short-term borrowings
Federal Home Loan Bank advances
Total interest expense
1,900
3,821
Net interest income
26,583
21,484
Provision for loan losses
1,980
Net interest income after provision for loan losses
25,733
19,504
Other income:
Service charges on deposit accounts
1,220
1,350
Debit card interchange income
1,891
1,575
Bank owned life insurance death benefit
-
Bank owned life insurance income
Gain on sale of mortgage loans
Securities gains, net
Net change in market value of equity securities
-
Other
Total other income
4,466
4,703
Other expenses:
Salaries and employee benefits
10,852
9,582
Occupancy and equipment
2,588
2,466
Data processing expenses
Debit card processing expenses
Professional and director fees
1,027
Federal Deposit Insurance Corporation assessments
Franchise taxes
Marketing and advertising
Loan and collection expenses
Telephone and communications
Amortization of intangible
Other
1,569
1,582
Total other expenses
19,361
17,768
Income before income taxes
10,838
6,439
Income tax expense
1,850
Net income
$ 8,988
$ 5,527
Basic and diluted earnings per share
$ 2.98
$ 1.92
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Net income
$ 8,988
$ 5,527
Other comprehensive income, net of tax:
Net change in unrealized gains:
Unrealized gains (losses) arising during the period
(886
)
3,766
Reclassification adjustment for gains included in income
(14
)
(355
)
Net unrealized gain (loss)
(900
)
3,411
Income tax effect
(717
)
Other comprehensive income (loss)
(710
)
2,694
Total comprehensive income
$ 8,278
$ 8,221
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Common
Shares
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance, June 30, 2019
$ 14,656
$ 36,487
$ (1,543
)
$ 1,566
$ 51,166
Net income
5,527
5,527
Other comprehensive income
2,694
2,694
269,920 shares issued for the Peoples acquisition
5,277
5,277
11,813 shares associated with vested stock awards
Cash dividends declared ($0.54 per share)
(1,554
)
(1,554
)
Balance, June 30, 2020
$ 19,974
$ 40,460
$ (1,454
)
$ 4,260
$ 63,240
Net income
8,988
8,988
Other comprehensive loss
(710
)
(710
)
12,522 shares associated with vested stock awards
Cash dividends declared ($0.59 per share)
(1,785
)
(1,785
)
Balance, June 30, 2021
$ 20,011
$ 47,663
$ (1,324
)
$ 3,550
$ 69,900
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Cash flows from operating activities:
Net income
$ 8,988
$ 5,527
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation
1,044
Securities amortization and accretion, net
Provision for loan losses
1,980
(Gain) loss on disposal of fixed assets
(2
)
Loss on disposition or direct write-down of other real estate and repossessed assets owned
(1
)
(1
)
Gain on sale of mortgage loans
(753
)
(543
)
Deferred income tax benefit
(320
)
(361
)
Gain on sale of securities
(14
)
(355
)
Net change in market value of equity securities
(24
)
-
Amortization of intangibles
Origination of loans held for sale
(50,694
)
(38,411
)
Proceeds from loans held for sale
53,336
37,104
Income from BOLI death benefit
-
(324
)
Increase in cash surrender value of life insurance
(260
)
(265
)
Change in other assets and other liabilities
1,291
(167
)
Net cash flows from operating activities
14,013
5,593
Cash flows from investing activities:
Securities available-for-sale:
Purchases
(108,168
)
(36,775
)
Maturities, calls and principal pay downs
37,275
25,909
Proceeds from sales of available-for-sale securities
5,545
18,421
Securities held-to-maturity:
Purchases
(4,700
)
-
Principal pay downs
Purchase of equity security
(400
)
-
Net decrease in certificates of deposit with other financial institutions
5,810
2,187
Purchase of Federal Home Loan Stock
-
(595
)
Net increase in loans
(23,471
)
(118,463
)
Acquisition, net of cash received
-
(4,295
)
Proceeds from BOLI death benefit
-
Acquisition of premises and equipment
(1,154
)
(497
)
Proceeds from sale of other real estate and repossessed assets owned
Net cash flows from investing activities
(89,001
)
(113,050
)
Cash flows from financing activities:
Net increase in deposit accounts
93,494
100,330
Proceeds from Federal Home Loan Bank advances
1,300
22,500
Repayments of Federal Home Loan Bank advances
(14,411
)
(14,530
)
Change in short-term borrowings
5,260
Dividends paid
(1,785
)
(1,554
)
Net cash flows from financing activities
83,858
107,655
Increase in cash and cash equivalents
8,870
Cash and cash equivalents, beginning of year
9,659
9,461
Cash and cash equivalents, end of year
$ 18,529
$ 9,659
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest
$ 1,956
$ 3,890
Federal income taxes
2,505
Non-cash items:
Transfer from loans to other repossessed assets
Transfer from loans held for sale to portfolio
-
Issuance of treasury stock for stock awards
Right of use assets obtained in exchange for lease liabilities
-
Acquisition of Peoples:
Consideration paid
-
$ 10,405
Noncash assets acquired:
Certificates of deposit in other financial institutions
-
11,839
Securities, available-for-sale
-
4,051
Federal bank and other restricted stocks, at cost
-
Loans, net
-
55,320
Premises and equipment
-
Goodwill
-
Core deposit intangible
-
Accrued interest receivable and other assets
-
Total noncash assets acquired
-
73,428
Liabilities assumed:
Deposits
-
60,851
Federal funds purchased
-
2,348
Federal Home Loan Bank advances
-
Other liabilities
-
Total liabilities assumed
-
63,856
Net noncash assets acquired
-
9,572
Cash acquired
-
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank), together referred to as the Corporation. All significant intercompany transactions have been eliminated in the consolidation.
Nature of Operations: Consumers Bancorp, Inc. is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, a broad array of products and services throughout its primary market area of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne, and contiguous counties in Ohio, Pennsylvania, and West Virginia. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.
Business Segment Information: The Corporation is engaged in the business of commercial and retail banking, which accounts for substantially all its revenues, operating income, and assets. Accordingly, all its operations are reported in one segment, banking.
Acquisition: At the date of acquisition the Corporation records the assets and liabilities of acquired companies on the Consolidated Balance Sheet at their fair value. The results of operations for acquired companies are included in the Corporation’s Consolidated Statements of Income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Income during the periods incurred.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.
Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Certificates of Deposit in Financial Institutions: Certificates of deposit in other financial institutions are carried at cost.
Cash Reserves: The Bank is required to maintain cash on hand and noninterest-bearing balances on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance was zero at June 30, 2021 and 2020.
Securities: Securities are generally classified into either held-to-maturity or available-for-sale categories. Held-to-maturity securities are carried at amortized cost and are those the Corporation has the positive intent and ability to hold to maturity. Available-for-sale securities are those the Corporation may decide to sell before maturity if needed for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in other comprehensive income (loss) as a separate component of equity, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Corporation has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Corporation intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI will be recognized in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security. If a security is determined to be other-than-temporarily impaired, but the Corporation does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Equity Securities: Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Federal Bank and Other Restricted Stocks: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock, included with Federal bank and other restricted stocks on the Consolidated Balance Sheet, is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Federal Reserve Bank stock is also carried at cost. Since these stocks are viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Changes in the fair values of these derivatives are included in net gains on sales of loans.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.
Interest income on commercial, commercial real estate and 1-4 family residential loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is determined by the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the customer has exhibited the ability to repay and demonstrated this ability over at least a consecutive six-month period and future payments are reasonably assured.
During the 2021 fiscal year, the Corporation funded PPP loans to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and are forgivable by the SBA if certain criteria are met. The Corporation originated PPP loans totaling $46,761 during the 2021 fiscal year. PPP processing fees received from the SBA were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. Approximately $1,911of fees from the SBA were recognized in interest income in the 2021 fiscal year and there were $2,449 of unamortized net deferred fees as of June 30, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when funded.
Concentrations of Credit Risk: The Bank grants consumer, real estate, and commercial loans primarily to borrowers in Carroll, Columbiana, Jefferson, Stark, Summit and Wayne counties. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economy in these counties. Automobiles and other consumer assets, business assets and residential and commercial real estate secure most loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience over the estimated loss emergence period adjusted for current factors based on the risks present for each portfolio segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the most recent three-year period, depending on loan segment. This actual loss experience is supplemented with economic and other factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:
Commercial: Commercial loans are made for a wide variety of general business purposes, including financing for equipment, inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Current and projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank operates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan, the business conducted on the property securing the loan or, in the case of loans to farmers, management and operation of the farm. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus nonowner-occupied loans.
1-4 Family Residential Real Estate: Residential real estate loans are secured by one to four family residential properties and include both owner occupied, non-owner occupied and home equity loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, an established credit record and an appropriately appraised value of the real estate securing the loan that generally requires that the residential real estate loan amount be no more than 85% of the purchase price or the appraised value of the real estate securing the loan unless the borrower provides private mortgage insurance.
Consumer: The Corporation originates direct and indirect consumer loans, primarily automobile loans, personal lines of credit, and unsecured consumer loans in its primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
Other Real Estate and Repossessed Assets Owned: Real estate properties and other repossessed assets, which are primarily vehicles, acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less costs to sell at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If the fair value declines after acquisition, a valuation allowance is recorded as a charge to income. Operating costs after acquisition are expensed. Gains and losses on disposition are reported as a charge to income.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, generally over the lesser of the remaining term of the lease facility or the estimated economic life of the improvement. Useful lives range from three years for software to thirty-nine and one-half years for buildings.
Cash Surrender Value of Life Insurance: The Bank has purchased single-premium life insurance policies to insure the lives of current and former participants in the salary continuation plan. As of June 30, 2021, the Bank had policies with total death benefits of $19,107 and total cash surrender values of $9,702. As of June 30, 2020, the Bank had policies with total death benefits of $19,067 and total cash surrender values of $9,442. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Tax-exempt income is recognized from the periodic increases in cash surrender value of these policies.
Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. Goodwill is not amortized but is assessed at least annually for impairment. Any such impairment will be recognized in the period identified. The Corporation has selected April 30 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Assets: Premises, equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities, which are classified as short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Retirement Plans: The Bank maintains a 401(k) savings and retirement plan covering all eligible employees and matching contributions are expensed as made. Salary continuation plan expense allocates the benefits over years of service.
Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation applies a more likely than not recognition threshold for all tax uncertainties in accordance with U.S. generally accepted accounting principles. A tax position is recognized as a benefit only if it is more likely than not that the position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable upon the vesting of restricted stock awards.
Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees over the required service period, generally defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Corporation’s common stock at the date of grant. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of equity, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the Corporation’s financial statements.
Fair Value of Financial Instruments: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15 of the Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders.
Reclassifications: Certain reclassifications have been made to the June 30, 2020 financial statements to be comparable to the June 30, 2021 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.
Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined in the guidance, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. However, during July 2019, FASB unanimously voted for a proposal to delay this ASU to January 2023 for smaller reporting companies. On October 16, 2019, FASB approved a final ASU delaying the effective date. The new guidance is effective for annual and interim periods beginning after December 15, 2022 for certain entities, including smaller reporting companies. The Corporation is a smaller reporting company. The Corporation is currently evaluating the impact of adopting this new guidance on the consolidated financial statements, current systems and processes. At this time, the Corporation is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Corporation is planning to adopt this new guidance within the time frame noted above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The ASU is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR, or other reference rates that may be discontinued, and provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria. The ASU also provides for a one-time sale and/or transfer to available-for-sale or trading to be made for held-to-maturity (HTM) debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. The ASU requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. The Corporation does not expect ASU 2020-04 to have a material impact on its financial statements and disclosures.
NOTE 2-ACQUISITION
On July 16, 2021, the Corporation completed its acquisition of two branches (Branches) from CFBank, National Association (CFBank) located in Calcutta and Wellsville, Ohio. In connection with the acquisition, CFBank transferred to the Bank the land, buildings and other associated assets of the Branches; $104 million in deposits attributable to the Branches; $15 million in aggregate principal amount of subordinated debt securities issued by unrelated financial institutions; $13 million of loans attributable to the Branches and other single family residential mortgage loans and home equity lines of credit from CFBank’s Northeast Ohio loan portfolio. In addition, the Bank purchased $7.7 million in aggregate principal amount of participation interests in commercial and commercial real estate loans originated by and held in CFBank’s portfolio. An additional $7.3 million in participation interests is expected to be purchased by the Bank by December 31, 2021. As consideration for the Branches, the Bank paid CFBank the net book value of the land, building and associated assets of the Branches; a deposit premium equal to 1.75% of the average daily deposits of the Branches for the 30 days preceding the closing; and the par value of the subordinated debt securities and loans acquired by the Bank.
On January 1, 2020, the Corporation completed the acquisition by merger of Peoples and its wholly owned subsidiary, The Peoples National Bank of Mount Pleasant (Peoples Bank) in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. As of the date of acquisition of Peoples, the estimated fair value of loans received was $55,320 and the estimated fair value of deposits assumed was $60,851. Acquisition costs of $827 pre-tax, or $680 after-tax, were expensed during the twelve-month period ended June 30, 2020. The transaction created $836 of goodwill, none of which is deductible for tax purposes.
NOTE 3-SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
June 30, 2021
Obligations of U.S. government-sponsored entities and agencies
$ 14,746
$
$ (14
)
$ 15,033
Obligations of state and political subdivisions
73,013
3,561
(75
)
76,499
U.S. Government-sponsored mortgage-backed securities - residential
90,065
1,136
(684
)
90,517
U.S. Government-sponsored mortgage-backed securities - commercial
8,641
-
8,845
U.S. Government-sponsored collateralized mortgage obligations - residential
16,302
(57
)
16,374
Other debt securities
-
(8
)
Total available-for-sale securities
$ 203,267
$ 5,331
$ (838
)
$ 207,760
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
June 30, 2021
Obligations of state and political subdivisions
$ 7,996
$
$ -
$ 8,352
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
June 30, 2020
Obligations of U.S. Treasury
$ 1,248
$
$ -
$ 1,256
Obligations of U.S. government-sponsored entities and agencies
10,133
-
10,532
Obligations of state and political subdivisions
60,343
3,149
-
63,492
U.S. Government-sponsored mortgage-backed securities - residential
48,645
1,515
(4
)
50,156
U.S. Government-sponsored mortgage-backed securities - commercial
8,444
(2
)
8,497
U.S. Government-sponsored collateralized mortgage obligations - residential
9,712
(12
)
9,985
Total available-for-sale securities
$ 138,525
$ 5,411
$ (18
)
$ 143,918
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
June 30, 2020
Obligations of state and political subdivisions
$ 3,541
$
$ -
$ 3,868
Proceeds from sales of available-for-sale securities during fiscal year 2021 and fiscal year 2020 were as follows:
Proceeds from sales
$ 5,545
$ 18,421
Gross realized gains
Gross realized losses
(30
)
-
The income tax provision related to these net realized gains amounted to $3 in fiscal year 2021 and $74 in fiscal year 2020.
The amortized cost and fair values of debt securities at June 30, 2021 by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations are shown separately.
Available-for-sale
Amortized
Cost
Fair Value
Due in one year or less
$ 5,642
$ 5,712
Due after one year through five years
12,346
12,800
Due after five years through ten years
20,295
20,824
Due after ten years
49,976
52,688
Total
88,259
92,024
U.S. Government-sponsored mortgage-backed and related securities
115,008
115,736
Total
$ 203,267
$ 207,760
Held-to-maturity
Amortized
Cost
Fair Value
Due after one year through five years
$
$
Due after five years through ten years
5,367
5,547
Due after ten years
2,335
2,496
Total
$ 7,996
$ 8,352
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with a carrying value of approximately $96,970 and $69,048 were pledged at June 30, 2021 and 2020, respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2021 and 2020, there were no holdings of securities of any one issuer, other than obligations of U.S. government-sponsored entities and agencies, with an aggregate book value greater than 10% of shareholders’ equity.
The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2021 and 2020, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Less than 12 Months
12 Months or more
Total
Available-for-sale
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
June 30, 2021
Obligations of U.S. government-sponsored entities and agencies
$ 2,003
$ (14
)
$ -
$ -
$ 2,003
$ (14
)
Obligations of state and political subdivisions
7,398
(75
)
-
-
7,398
(75
)
Mortgage-backed securities - residential
42,378
(684
)
-
-
42,378
(684
)
Collateralized mortgage obligations - residential
7,707
(56
)
(1
)
8,259
(57
)
Other
(8
)
-
-
(8
)
Total temporarily impaired
$ 59,978
$ (837
)
$
$ (1
)
$ 60,530
$ (838
)
Less than 12 Months
12 Months or more
Total
Available-for-sale
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
June 30, 2020
Mortgage-backed securities - residential
$ -
$ -
$
$ (4
)
$
$ (4
)
Mortgage-backed securities - commercial
1,806
(2
)
-
-
1,806
(2
)
Collateralized mortgage obligations - residential
1,700
(12
)
-
-
1,700
(12
)
Total temporarily impaired
$ 3,506
$ (14
)
$
$ (4
)
$ 4,131
$ (18
)
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities.
In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (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 entity 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. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
As of June 30, 2021, the Corporation’s securities portfolio consisted of 312 available-for-sale and four held-to-maturity securities. There were 48 available-for-sale securities in an unrealized loss position at June 30, 2021, one of which was in a continuous loss position for twelve or more months. There were no held-to-maturity securities in an unrealized loss position at June 30, 2021. The unrealized losses within the available-for-sale securities portfolio in the 2021 fiscal year was primarily attributed to a change in rates. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities. Also, management monitors the financial condition of the individual municipal securities to ensure they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the Corporation will be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity, management does not believe there is any OTTI related to these securities at June 30, 2021. Also, there was no OTTI recognized at June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2021, the Corporation owned equity securities with an amortized cost of $400. The following table presents the net unrealized gains and losses on equity securities recognized in earnings for the twelve months ended June 30, 2021 and 2020. There were no realized gains or losses on the sale of equity securities during the periods presented. The Corporation did not own any equity securities as of June 30, 2020.
Unrealized gains recognized on equity securities held at the end of the period
$
$ -
NOTE 4-LOANS
Major classifications of loans were as follows as of June 30:
Commercial
$ 112,337
$ 158,667
Commercial real estate:
Construction
10,525
16,235
Other
269,679
229,029
1 - 4 Family residential real estate:
Owner occupied
118,269
90,494
Non-owner occupied
19,151
19,370
Construction
9,073
9,344
Consumer
29,646
21,334
Subtotal
568,680
544,473
Net deferred loan fees and costs
(2,253
)
(1,612
)
Allowance for loan losses
(6,471
)
(5,678
)
Net loans
$ 559,956
$ 537,183
The commercial loan category in the above table includes PPP loans of $50,686 as of June 30, 2021 and $66,606 as of June 30, 2020 and a mortgage loan warehouse line of credit to another financial institution with a zero outstanding balance as of June 30, 2021 and $32,869 as of June 30, 2020. The outstanding balance of the warehouse line of credit can fluctuate significantly based on the other financial institution’s funding needs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2021:
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Beginning balance
$
$ 3,623
$
$
$ 5,678
Provision for loan losses
(21
)
Loans charged-off
(22
)
-
(4
)
(122
)
(148
)
Recoveries
-
Total ending allowance balance
$
$ 3,949
$ 1,307
$
$ 6,471
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2020:
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Beginning balance
$
$ 2,575
$
$
$ 3,788
Provision for loan losses
1,044
1,980
Loans charged-off
-
-
(6
)
(140
)
(146
)
Recoveries
-
Total ending allowance balance
$
$ 3,623
$
$
$ 5,678
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2021. Included in the recorded investment in loans is $1,184 of accrued interest receivable.
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
$
$ -
$
$ -
$
Acquired loans collectively evaluated for impairment
-
-
Originated loans collectively evaluated for impairment
3,866
1,227
6,307
Total ending allowance balance
$
$ 3,949
$ 1,307
$
$ 6,471
Recorded investment in loans:
Loans individually evaluated for impairment
$
$
$
$ -
$ 1,954
Acquired loans collectively evaluated for impairment
6,542
21,363
6,488
35,227
Originated loans collectively evaluated for impairment
109,016
272,563
125,689
23,162
530,430
Total ending loans balance
$ 110,287
$ 280,026
$ 147,648
$ 29,650
$ 567,611
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020. Included in the recorded investment in loans is $1,936 of accrued interest receivable.
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
$
$
$ -
$ -
$
Acquired loans collectively evaluated for impairment
-
-
Originated loans collectively evaluated for impairment
3,514
5,447
Total ending allowance balance
$
$ 3,623
$
$
$ 5,678
Recorded investment in loans:
Loans individually evaluated for impairment
$
$ 1,045
$
$ -
$ 1,923
Acquired loans collectively evaluated for impairment
1,095
8,072
27,252
12,550
48,969
Originated loans collectively evaluated for impairment
156,054
236,840
92,168
8,843
493,905
Total ending loans balance
$ 157,328
$ 245,957
$ 120,119
$ 21,393
$ 544,797
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2021:
Unpaid
Allowance
for
Average
Interest
Cash Basis
Principal
Recorded
Loan Losses
Recorded
Income
Interest
Balance
Investment
Allocated
Investment
Recognized
Recognized
With no related allowance recorded:
Commercial
$
$
$ -
$
$ -
$ -
Commercial real estate:
Other
1,062
-
1-4 Family residential real estate:
Owner occupied
-
Non-owner occupied
-
-
-
With an allowance recorded:
Commercial
Commercial real estate:
Other
-
-
-
1-4 Family residential real estate:
Owner occupied
-
-
Total
$ 2,320
$ 1,954
$
$ 2,096
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2020:
Unpaid
Allowance
for
Average
Interest
Cash Basis
Principal
Recorded
Loan Losses
Recorded
Income
Interest
Balance
Investment
Allocated
Investment
Recognized
Recognized
With no related allowance recorded:
Commercial
$ -
$ -
$ -
$
$ -
$ -
Commercial real estate:
Other
-
1-4 Family residential real estate:
Owner occupied
-
Non-owner occupied
-
-
-
With an allowance recorded:
Commercial
Commercial real estate:
Other
Total
$ 2,195
$ 1,923
$
$ 1,274
$
$
The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2021 and 2020:
June 30, 2021
June 30, 2020
Loans Past
Due
Loans Past
Due
Over 90 Days
Over 90 Days
Still
Still
Non-accrual
Accruing
Non-accrual
Accruing
Commercial
$
$ -
$
$ -
Commercial real estate:
Other
-
-
1 - 4 Family residential:
Owner occupied
-
Non-owner occupied
-
-
Consumer
-
-
-
Total
$ 1,771
$ -
$ 1,185
$
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of June 30, 2021 by class of loans:
Days Past Due
30 -59
60 - 89
90 Days or
Total
Loans Not
Days
Days
Greater
Past Due
Past Due
Total
Commercial
$ -
$ -
$ -
$ -
$ 110,287
$ 110,287
Commercial real estate:
Construction
-
-
-
-
10,478
10,478
Other
-
268,744
269,548
1-4 Family residential:
Owner occupied
-
118,937
119,331
Non-owner occupied
-
-
-
-
19,148
19,148
Construction
-
-
-
-
9,169
9,169
Consumer
-
29,544
29,650
Total
$
$
$
$ 1,304
$ 566,307
$ 567,611
The above table of past due loans includes the recorded investment in non-accrual loans of $994 in the 90 days or greater category and $777 in the loans not past due category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 by class of loans:
Days Past Due
30 -59
60 - 89
90 Days or
Total
Loans Not
Days
Days
Greater
Past Due
Past Due
Total
Commercial
$ -
$ -
$
$
$ 157,307
$ 157,328
Commercial real estate:
Construction
-
-
-
-
16,241
16,241
Other
-
229,086
229,716
1-4 Family residential:
Owner occupied
-
-
91,102
91,274
Non-owner occupied
-
-
-
-
19,410
19,410
Construction
-
-
-
-
9,435
9,435
Consumer
21,205
21,393
Total
$
$
$
$ 1,011
$ 543,786
$ 544,797
The above table of past due loans includes the recorded investment in non-accrual loans of $2 in the 60-89 days, $792 in the 90 days or greater category and $391 in the loans not past due category.
Troubled Debt Restructurings (TDR):
The Corporation has certain loans that have been modified in order to maximize collection of loan balances that are classified as TDRs. A modified loan is usually classified as a TDR if, for economic reasons, management grants a concession to the original terms and conditions of the loan to a borrower who is experiencing financial difficulties that it would not have otherwise considered. In response to COVID-19, on March 22, 2020, the Corporation adopted a loan modification program to assist borrowers impacted by the virus. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as TDRs. As of June 30, 2021, eight borrowers with an aggregate outstanding balance of $198 are in payment deferral status under this loan modification program that are not classified as TDRs.
On June 30, 2021 and 2020, the Corporation had $688 and $974, respectively, of loans classified as TDRs which are included in impaired loans above. On June 30, 2021 and 2020, the Corporation had $4 and $12, respectively, of specific reserves allocated to these loans. For the year ended June 30, 2021, there were no loans modified that were classified as a troubled debt restructuring.
During the fiscal year ended June 30, 2020, the terms of one loan was modified as a troubled debt restructuring by extending the maturity date. As of June 30, 2020, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2020:
Pre-Modification
Post-Modification
Number of
Outstanding
Recorded
Outstanding
Recorded
Loans
Investment
Investment
1-4 Family residential:
Owner occupied
$
$
Total
$
$
The troubled debt restructuring described above did not result in any charge-off nor did it increase the allowance for loan losses during the twelve months ended June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the twelve-month periods ended June 30, 2021 and 2020. A loan is considered in payment default once it is 90 days contractually past due under the modified terms.
Credit Quality Indicators:
The Corporation 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. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed monthly. The Corporation uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which was discussed previously.
As of June 30, 2021, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special
Not
Pass
Mention
Substandard
Doubtful
Rated
Commercial
$ 109,118
$
$
$
$
Commercial real estate:
Construction
10,478
-
-
-
-
Other
259,327
3,700
4,718
1-4 Family residential real estate:
Owner occupied
1,715
-
117,218
Non-owner occupied
18,312
Construction
1,849
-
-
-
7,320
Consumer
-
-
-
28,956
Total
$ 401,493
$ 4,143
$ 5,230
$ 1,771
$ 154,974
As of June 30, 2020, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special
Not
Pass
Mention
Substandard
Doubtful
Rated
Commercial
$ 152,911
$
$ 3,979
$
$
Commercial real estate:
Construction
16,241
-
-
-
-
Other
220,311
1,469
5,378
1,773
1-4 Family residential real estate:
Owner occupied
2,419
-
-
88,521
Non-owner occupied
18,435
Construction
3,234
-
-
-
6,201
Consumer
-
-
-
21,240
Total
$ 413,704
$ 1,798
$ 9,914
$ 1,042
$ 118,339
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-PREMISES AND EQUIPMENT
Major classifications of premises and equipment were as follows as of June 30:
Land
$ 1,603
$ 1,603
Land improvements
Building and leasehold improvements
15,522
14,191
Furniture, fixture and equipment
6,616
6,333
Total premises and equipment
24,122
22,476
Accumulated depreciation and amortization
(8,329
)
(7,575
)
Premises and equipment, net
$ 15,793
$ 14,901
Depreciation expense was $940 and $1,044 for the years ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, the Corporation leased real estate for seven office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to May 31, 2035, including extension periods. Lease agreements for three locations have a lease term of 12 months or less and are therefore considered short-term leases. The weighted average remaining life of the lease term for the leases with a term over 12 months was 87.68 months as of June 30, 2021.
Rent expense for all the operating leases was $205 and $196 for the twelve-month periods ended June 30, 2021 and 2020, respectively. The right-of-use asset, included in premises and equipment, and the lease liability, included in other liabilities, were $1,177 and $473 as of June 30, 2021 and 2020, respectively.
Total estimated rental commitments for the operating leases with a term over 12 months were as follows as of June 30, 2021:
Period Ending June 30
$
Thereafter
Total
$ 1,279
NOTE 6 - GOODWILL AND ACQUIRED INTANGIBLE ASSETS
The change in goodwill was as follows:
Beginning of year
$
$ -
Acquired goodwill
-
Ending balance as of June 30,
$
$
The following table summarizes the Corporation’s acquired intangible assets as of June 30, 2021 and 2020.
June 30, 2021
June 30, 2020
Gross Carrying
Amount
Accumulated Amortization
Gross Carrying
Amount
Accumulated Amortization
Core deposit intangible
$
$
$
$
Goodwill and the core deposit intangible assets resulted from the acquisition of Peoples that was completed on January 1, 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the asset might be impaired. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. For the goodwill impairment analysis, the Corporation is the only reporting unit. Management performed a qualitative impairment test of the Corporation’s goodwill during the fourth quarter of the 2021 fiscal year. Based on this test, management concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the only intangible asset on the Corporation’s balance sheet with an indefinite life.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The core deposit intangible asset is amortized on a straight-line basis over ten years. The Corporation recorded intangible amortization expense of $27 in 2021 and $14 in 2020. The intangible amortization expense for the core deposit intangible asset recorded as of June 30, 2021 is expected to be $27 per year for each of the next five fiscal years and $94 thereafter. The core deposit intangible asset that will be recorded for the two branches that were purchased and closed on July 16, 2021 will impact these numbers.
NOTE 7-DEPOSITS
Interest-bearing deposits as of June 30, 2021 and 2020 were as follows:
Demand
$ 127,447
$ 99,173
Savings and money market
282,761
228,567
Time:
$250 and over
18,488
36,747
Other
69,051
78,635
Total
$ 497,747
$ 443,122
Scheduled maturities of time deposits at June 30, 2021 were as follows:
Twelve Months Ending June 30
$ 56,866
21,554
2,151
3,579
1,415
Thereafter
1,974
$ 87,539
As of June 30, 2021, FHLB public unit deposit standby letters of credit of $7,000 were issued to collateralize public fund deposits.
NOTE 8-SHORT-TERM BORROWINGS
Short-term borrowings consisted of repurchase agreements and federal funds purchased. Information concerning all short-term borrowings at June 30, 2021 and 2020, maturing in less than one year is summarized as follows:
Balance at June 30
$ 12,203
$ 6,943
Average balance during the year
8,895
4,306
Maximum month-end balance
13,275
7,705
Average interest rate during the year
0.10
%
1.00
%
Weighted average rate, June 30
0.05
%
0.25
%
Securities sold under agreements to repurchase are utilized to facilitate the needs of our customers. Physical control is maintained for all securities pledged to secure repurchase agreements. Securities available-for-sale pledged for repurchase agreements as of June 30, 2021 and 2020 are presented in the following table:
Overnight and Continuous
U.S. government-sponsored entities and agencies pledged
$
$ 1,031
Residential mortgage-backed securities pledged
6,493
2,720
Commercial mortgage-backed securities
6,042
3,288
Total pledged
$ 13,302
$ 7,039
Repurchase agreements
$ 12,203
$ 6,943
Total interest expense on short-term borrowings was $9 and $43 for the years ended June 30, 2021 and 2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances were as follows:
June 30, 2021
June 30, 2020
Stated Interest Rate
Range
Weighted
Average
Weighted
Average
Advance Type
From
To
Amount
Rate
Amount
Rate
Fixed rate, amortizing
1.37
%
1.37
%
$
1.37
%
$
1.37
%
Fixed rate
0.90
1.97
17,700
1.40
24,200
1.59
Variable rate
-
-
-
-
6,500
0.26
Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the difference between the contract rate on the advance and the current rate on a comparable new advance. The following table is a summary of the scheduled principal payments for all advances:
Twelve Months Ending June 30
Principal
Payments
$ 1,799
6,567
5,556
Thereafter
4,049
Total
$ 18,050
Pursuant to collateral agreements with the FHLB, advances are secured by all the stock invested in the FHLB and certain qualifying first mortgage and multi-family loans. The advances were collateralized by $127,703 and $92,056 of first mortgage and multi-family loans under a blanket lien arrangement at June 30, 2021 and 2020, respectively. Based on this collateral and the Corporation’s holdings of FHLB stock, the Bank was eligible to borrow up to a total of $65,491 in additional advances at June 30, 2021.
NOTE 10-EMPLOYEE BENEFIT PLANS
The Bank maintains a 401(k) savings and retirement plan that permits eligible employees to make before- or after-tax contributions to the plan, subject to the dollar limits from Internal Revenue Service regulations. The Bank matches 100% of the employee’s voluntary contributions to the plan based on the amount of each participant’s contributions up to a maximum of 4% of eligible compensation. All regular full-time and part-time employees who complete six months of service and are at least 21 years of age are eligible to participate. Amounts charged to operations were $321 and $282 for the years ended June 30, 2021 and 2020, respectively.
The Bank maintains a nonqualified Salary Continuation Plan (SCP) to reward and encourage certain Bank executives to remain employees of the Bank. The SCP is considered an unfunded plan for tax and Employee Retirement Income Security Act (ERISA) purposes and all obligations arising under the SCP are payable from the general assets of the Corporation. The estimated present value of future benefits to be paid to certain current and former executives totaled $3,140 as of June 30, 2021 and $2,695 as of June 30, 2020 and is included in other liabilities. For purposes of calculating the present value of future benefits, a discount rate of 3.0% was in effect at June 30, 2021 and 4.0% was in effect at June 30, 2020. For the years ended June 30, 2021 and 2020, $530 and $305, respectively, have been charged to expense in connection with the SCP. Distributions to participants were $85 for each year ended June 30, 2021 and 2020.
The 2010 Omnibus Incentive Plan (2010 Plan) is a nonqualified share-based compensation plan. The 2010 Plan was established to promote alignment between key employees’ performance and the Corporation’s shareholder interests by motivating performance through the award of stock-based compensation. The 2010 Plan is intended to attract, retain and motivate talented employees and compensate outside directors for their service to the Corporation. The 2010 Plan has been approved by the Corporation’s shareholders. The Compensation Committee of the Corporation’s Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award contract.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the 2010 Plan, the Corporation may grant, among other things, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, or any combination thereof to any employee and outside director. Each award is evidenced by an award agreement that specifies the number of shares awarded, the vesting period, the performance requirements, and such other provisions as the Compensation Committee determines. Upon a change-in-control of the Corporation, as defined in the 2010 Plan, all outstanding awards immediately vest.
The Corporation has granted restricted stock awards to certain employees and directors. Restricted stock awards are issued at no cost to the recipient and can be settled only in shares at the end of the vesting period. Awards are made at the end of the measurement period of certain specified performance targets once those performance targets as established by the Compensation Committee are achieved. Some awards, primarily the awards made to directors, vest on the date of grant. For other awards, primarily the awards made to executive management, 25% vest on the grant date, which is the end of the performance period, with the remaining vesting 25% per year over a three-year period. Restricted stock awards provide the holder with full voting rights and dividends during the vesting period. Cash dividends are reinvested into shares of stock and are subject to the same restrictions and vesting as the initial award. All dividends are forfeitable in the event the shares do not vest. The fair value of the restricted stock awards, which is used to measure compensation expense, is the closing market price of the Corporation’s common stock on the date of the grant and compensation expense is recognized over the vesting period of the awards.
The following table summarizes the status of the restricted stock awards:
Restricted Stock
Awards
Weighted-
Average
Grant Date Fair
Value Per Share
Outstanding at June 30, 2020
8,686
$ 19.31
Granted
12,522
15.70
Vested
(9,747
)
17.22
Non-vested at June 30, 2021
11,461
$ 17.14
There was $168 in expense recognized in the 2021 fiscal year and $159 in expense recognized in the 2020 fiscal year in connection with the restricted stock awards. As of June 30, 2021, there was $125 of total unrecognized compensation expense related to non-vested shares and the expense is expected to be recognized over the next three years.
NOTE 11-INCOME TAXES
The provision for income taxes consisted of the following for the years ended June 30, calculated utilizing a statutory federal income tax rate of 21.0%:
Current income taxes
$ 2,170
$ 1,273
Deferred income tax benefit
(320
)
(361
)
Total income tax expense
$ 1,850
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred income tax asset consisted of the following components at June 30:
Deferred tax assets:
Allowance for loan losses
$ 1,317
$ 1,119
Deferred compensation
Deferred income
Non-accrual loan interest income
Other
Gross deferred tax asset
2,300
1,938
Deferred tax liabilities:
Depreciation
(718
)
(742
)
Loan fees
(498
)
(402
)
FHLB stock dividends
(102
)
(102
)
Prepaid expenses
(56
)
(72
)
Intangible assets
(88
)
(102
)
Net unrealized securities gain
(944
)
(1,132
)
Gross deferred tax liabilities
(2,406
)
(2,552
)
Net deferred liability
$ (106
)
$ (614
)
The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate of 21.0% to income before taxes consisted of the following for the years ended June 30:
Income taxes computed at the statutory rate on pretax income
$ 2,276
$ 1,352
Tax exempt income
(360
)
(317
)
Cash surrender value income and death benefit
(55
)
(124
)
Tax credit
(22
)
(25
)
Other non-deductible expenses
Total income tax expense
$ 1,850
$
The effective tax rate was 17.1% for the year ended June 30, 2021 compared to 14.2% for the year ended June 30, 2020. At June 30, 2021 and June 30, 2020, the Corporation had no unrecognized tax benefits recorded. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. There were no interest or penalties recorded for the years ended June 30, 2021 and 2020 and there were no amounts accrued for interest and penalties at June 30, 2021 and 2020.
The Corporation and the Bank are subject to U.S. federal income tax as an income-based tax and a capital-based franchise tax in the State of Ohio. The Corporation and the Bank are no longer subject to examination by taxing authorities for years before 2017.
NOTE 12-RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain executive officers, directors, and their affiliates. A summary of activity during the year ended June 30, 2021 of related party loans were as follows:
Principal balance, July 1
$ 5,354
New loans, net of refinancing
Repayments
(635
)
Changes due to changes in related parties
(2,444
)
Principal balance, June 30
$ 2,336
Deposits from executive officers, directors and their affiliates totaled $5,500 at June 30, 2021 and $4,332 at June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and 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 about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including 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 plans for capital restoration are required.
As of fiscal year-end 2021 and 2020, the Corporation met the definition of a Small Bank Holding Company and, therefore, was exempt from maintaining consolidated regulatory capital ratios. Instead, regulatory capital ratios only apply at the subsidiary bank level. The Basel III Capital Rules became effective for the Bank on January 1, 2015 and certain provisions were subject to a phase-in period. The implementation of the capital conservation buffer was phased in from 0.625% on January 1, 2016 to 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2021, the Bank met all capital adequacy requirements to which it was subject.
The following table presents actual and required capital ratios as of June 30, 2021 and June 30, 2020 for the Bank:
Actual
Minimum Capital
Required - Basel III
(1)
Minimum Required
To Be Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2021
Common equity Tier 1 to risk-weighted assets
$ 64.7
11.87
%
$ 24.5
4.50
%
$ 35.4
6.50
%
Tier 1 capital to risk weighted assets
64.7
11.87
32.7
6.00
43.6
8.00
Total capital to risk weighted assets
71.2
13.06
43.6
8.00
54.5
10.00
Tier 1 capital to average assets
64.7
7.83
33.1
4.00
41.3
5.00
Actual
Minimum Capital
Required -
Basel III (1)
Minimum Required
To Be Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2020
Common equity Tier 1 to risk-weighted assets
$ 57.6
11.55
%
$ 22.4
4.50
%
$ 32.4
6.50
%
Tier 1 capital to risk weighted assets
57.6
11.55
29.9
6.00
39.9
8.00
Total capital to risk weighted assets
63.2
12.69
39.9
8.00
49.8
10.00
Tier 1 capital to average assets
57.6
8.04
28.7
4.00
35.8
5.00
(1)
These amounts exclude the capital conservation buffer.
As of the latest regulatory examination, the Bank was categorized as well capitalized. There are no conditions or events since that examination that management believes may have changed the Bank’s category.
The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. As of June 30, 2021 the Bank could, without prior approval, declare a dividend of approximately $8,741.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-COMMITMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments are agreements to lend to customers providing that there are no violations of any condition established in the contract. Commitments to extend credit have a fixed expiration date or other termination clause. These instruments involve elements of credit and interest rate risk more than the amount recognized in the statements of financial position. The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.
The Bank evaluates each customer’s credit on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. The amount of commitments to extend credit and the exposure to credit loss for non-performance by the customer (before considering collateral) was $118,284 and $98,923 as of June 30, 2021 and 2020, respectively. Of the June 30, 2021 commitments, $93,030 carried variable rates and $25,254 carried fixed rates of interest ranging from 2.99% to 6.75% with maturity dates from July 2021 to July 2052. Of the June 30, 2020 commitments, $75,614 carried variable rates and $23,309 carried fixed rates of interest ranging from 3.25% to 6.75% with maturity dates from September 2020 to August 2051. Financial standby letters of credit were $1,015 and $2,103 as of June 30, 2021 and 2020, respectively. In addition, commitments to extend credit of $10,634 and $10,323 as of June 30, 2021 and 2020, respectively, were available to checking account customers related to the overdraft protection program. Since some loan commitments expire without being used, the amount does not necessarily represent future cash commitments.
NOTE 15-FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
Securities available-for-sale and equity securities: When available, the fair values of available-for-sale and equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other unobservable inputs (Level 3 inputs).
Assets and liabilities measured at fair value on a recurring basis are summarized below, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Fair Value Measurements at
June 30, 2021 Using
Assets:
Balance at
June 30, 2021
Level 1
Level 2
Level 3
Obligations of U.S. government-sponsored entities and agencies
$ 15,033
-
$ 15,033
-
Obligations of states and political subdivisions
76,499
-
76,499
-
U.S. government-sponsored mortgage-backed securities - residential
90,517
-
90,517
-
U.S. government-sponsored mortgage-backed securities - commercial
8,845
-
8,845
-
U.S. government-sponsored collateralized mortgage obligations
16,374
-
16,374
-
Other debt securities
-
-
Equity securities
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements at
June 30, 2020 Using
Assets:
Balance at
June 30, 2020
Level 1
Level 2
Level 3
Obligations of U.S. Treasury
$ 1,256
$ -
$ 1,256
$ -
Obligations of U.S. government-sponsored entities and agencies
10,532
-
10,532
-
Obligations of states and political subdivisions
63,492
-
63,492
-
U.S. government-sponsored mortgage-backed securities - residential
50,156
-
50,156
-
U.S. government-sponsored mortgage-backed securities - commercial
8,497
-
8,497
-
U.S. government-sponsored collateralized mortgage obligations
9,985
-
9,985
-
There were no transfers between Level 1 and Level 2 during the 2021 or the 2020 fiscal year.
Certain assets and liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Assets and liabilities measured at fair value on a non-recurring basis include the following:
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 specific allocations of the allowance for loan losses or are charged down to their fair value. For collateral dependent loans, fair value is commonly based on recent 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 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.
Other Real Estate and Repossessed Assets Owned: Assets acquired through or instead of loan 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. Real estate owned properties and other repossessed assets, which are primarily vehicles, are evaluated on a quarterly basis for additional impairment and adjusted accordingly. There was no other real estate owned or other repossessed assets being carried at fair value as of June 30, 2021 or June 30, 2020.
There were no assets measured at fair value on a non-recurring basis at June 30, 2021 or 2020 and there was no impact to the provision for loan losses for the twelve months ended June 30, 2021 or 2020.
The following table shows the estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents
$ 18,529
$ 18,529
$ 9,659
$ 9,659
Level 2 inputs:
Certificates of deposit in other financial institutions
5,825
5,955
11,635
11,889
Loans held for sale
1,457
1,488
3,507
3,566
Accrued interest receivable
2,077
2,077
2,646
2,646
Level 3 inputs:
Securities held-to-maturity
7,996
8,352
3,541
3,868
Loans, net
559,956
560,208
537,183
548,247
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits
639,310
639,310
517,973
517,973
Time deposits
87,539
88,147
115,382
116,238
Short-term borrowings
12,203
12,203
6,943
6,943
Federal Home Loan Bank advances
18,050
18,247
31,161
31,571
Accrued interest payable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16-PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial information of Consumers Bancorp. Inc. (parent company only) follows:
June 30,
June 30,
Condensed Balance Sheets
Cash
$
$
Equity securities, at fair value
-
Other assets
Investment in subsidiary
69,267
62,853
Total assets
$ 69,955
$ 63,385
Other liabilities
$
$
Shareholders’ equity
69,900
63,240
Total liabilities & shareholders’ equity
$ 69,955
$ 63,385
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Condensed Statements of Income and Comprehensive Income
Cash dividends from Bank subsidiary
$ 2,050
$ 6,120
Other income
Other expense
1,050
Income before income taxes and equity in undistributed net income of subsidiary
1,815
5,095
Income tax benefit
(49
)
(189
)
Income before equity in undistributed net income of Bank subsidiary
1,864
5,284
Equity in undistributed net income of subsidiary
7,124
Net income
$ 8,988
$ 5,527
Comprehensive income
$ 8,278
$ 8,221
Condensed Statements of Cash Flows
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Cash flows from operating activities:
Net income
$ 8,988
$ 5,527
Equity in undistributed net income of Bank subsidiary
(7,124
)
(243
)
Securities amortization and accretion, net
-
(8
)
Change in other assets and liabilities
(158
)
Net cash flows from operating activities
1,986
5,118
Cash flows from investing activities:
Purchase of equity securities
(400
)
-
Proceeds from sale of available-for-sale securities
-
1,654
Acquisition
-
(5,128
)
Net cash flows from investing activities
(400
)
(3,474
)
Cash flows from financing activities:
Dividend paid
(1,785
)
(1,554
)
Issuance of treasury stock for stock awards
Net cash flows from financing activities
(1,618
)
(1,424
)
Change in cash and cash equivalents
(32
)
Beginning cash and cash equivalents
Ending cash and cash equivalents
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17-EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. There were 1,711 shares of restricted stock that were anti-dilutive for the year ending June 30, 2021. There were 1,655 shares of restricted stock that were anti-dilutive for the year ending June 30, 2020. The following table details the calculation of basic and diluted earnings per share:
For the year Ended June 30,
Basic:
Net income available to common shareholders
$ 8,988
$ 5,527
Weighted average common shares outstanding
3,019,118
2,874,234
Basic income per share
$ 2.98
$ 1.92
Diluted:
Net income available to common shareholders
$ 8,988
$ 5,527
Weighted average common shares outstanding
3,019,118
2,874,234
Dilutive effect of restricted stock
-
-
Total common shares and dilutive potential common shares
3,019,118
2,874,234
Dilutive income per share
$ 2.98
$ 1.92
NOTE 18-ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income related to unrealized gains (losses) on available-for-sale securities for the periods ended June 30, 2021 and June 30, 2020, were as follows:
Pretax
Tax
Effect
After-tax
Affected Line
Item
in Consolidated
Statements of
Income
Balance as of June 30, 2019
$ 1,982
$ (416
)
$ 1,566
Unrealized holding gain on available-for-sale securities arising during the period
3,766
(791
)
2,975
Amounts reclassified from accumulated other comprehensive income
(355
)
(281
)
(a)(b)
Net current period other comprehensive income
3,411
(717
)
2,694
Balance as of June 30, 2020
$ 5,393
$ (1,133
)
$ 4,260
Unrealized holding loss on available-for-sale securities arising during the period
$ (886
)
$
$ (699
)
Amounts reclassified from accumulated other comprehensive income
(14
)
(11
)
(a)(b)
Net current period other comprehensive loss
(900
)
(710
)
Balance as of June 30, 2021
$ 4,493
$ (943
)
$ 3,550
(a) Securities gain, net
(b) Income tax expense
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - REVENUE RECOGNITION
On July 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All the Corporation's revenue from contracts with customers is recognized within noninterest income.
Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.
Interchange income: The Corporation earns interchange income from cardholder transactions conducted through the various payment networks. Interchange income from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees is processed through noninterest income.
The following table presents the Corporation's sources of noninterest income for the year ended June 30, 2021 and 2020.
For the year Ended June 30,
Noninterest income
In scope of Topic 606:
Service charges on deposit accounts
$ 1,220
$ 1,350
Debit card interchange income
1,891
1,575
Other income
Noninterest income (in scope of Topic 606)
3,415
3,216
Noninterest income (out-of-scope of Topic 606)
1,051
1,487
Total noninterest income
$ 4,466
$ 4,703
Note 20 - COVID-19
In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, and has spread around the world, resulting in business and social disruption. The coronavirus was declared a Pandemic by the World Health Organization on March 11, 2020. The operations and business results of the Corporation could be materially adversely affected. The extent to which the coronavirus may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others. As a result of the economic shutdown engineered to slow down the spread of COVID-19, the ability of our customers to make payments on loans could be adversely impacted, resulting in elevated loan losses and an increase in the Corporation’s allowance for loan losses.
Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934) was performed, as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of Consumers Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2021 based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in 2013. Based on that assessment, we have concluded that, as of June 30, 2021, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this annual report.
Changes In Internal Control Over Financial Reporting
There were no changes in the Corporation’s internal controls over financial reporting that occurred during the fourth quarter of fiscal year 2021 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over financial reporting.
Item 9B - Other Information
None.
PART III
Item 10 - Directors, Executive Officers and Corporate Governance
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 16, 2021, under the captions “Election of Directors,” “Directors and Executive Officers,” “The Board of Directors and its Committees,” “Delinquent Section 16(a) Reports,” and “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.
The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Governance Documents of the Corporation’s website (www.consumers.bank). Copies of either of the Code of Ethics Policies are also available in print to shareholders upon request, addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website.
Item 11 - Executive Compensation
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 16, 2021 under the captions “Director Compensation,” “Executive Compensation,” “Defined Contribution Plan,” “Outstanding Equity Awards at Fiscal Year-End,” and “Salary Continuation Program,” and is incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information about common stock authorized for issuance, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, as of June 30, 2021. Additional information regarding stock-based compensation plans is presented in Note 10 - Employee Benefit Plans to the Consolidated Financial Statements located elsewhere in this report.
Plan Category
Number of securities
to
be issued upon
exercise of
outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining
available for future issuance
under
equity compensation plans
(excluding
securities issuable under
outstanding
options, warrants and rights)
Plans approved by shareholders
-
-
64,452
Plans not approved by shareholders
-
-
-
Total
-
-
64,452
The remaining information required by this item is set forth in the Corporation’s Proxy Statement, dated September 16, 2021, under the caption “Security Ownership of Certain Beneficial Owners,” and is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 16, 2021, under the caption “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.
Item 14 - Principal Accounting Fees and Services
The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 16, 2021, under the caption “Principal Accounting Fees and Services,” and is incorporated herein by reference.
PART IV
Item 15 - Exhibit and Financial Statement Schedules
(a)
The following documents are filed as part of this report:
(1)
The report of independent registered accounting firm and the consolidated financial statements appearing in Item 8.
(2)
Financial statement schedules are omitted as they are not required or are not applicable, or the required information is included in the financial statements.
(3)
The exhibits required by this item are listed in the Exhibit Index of this Form 10-K.
(b)
The exhibits to this Form 10-K begin on page 59 of this report.
(c)
See Item 15(a)(2) above.
Item 16 - Form 10-K Summary
Not applicable.
EXHIBIT INDEX
Exhibit Number
Description of Document
2.1
Agreement and Plan of Merger by and among Consumers Bancorp, Inc., Consumers National Bank, Peoples Bancorp of Mt. Pleasant, Inc., and The Peoples National Bank of Mount Pleasant, dated June 14, 2019. Reference is made to the Registration Statement on S-4 (File No. 333-233306) filed on August 15, 2019.
3.1
Amended and Restated Articles of Incorporation of the Corporation. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed November 8, 2019, which is incorporated herein by reference.
3.2
Amended and Restated Code of Regulations of the Corporation. Reference is made to Form 10-K (File No. 033-79130) of the Corporation filed September 15, 2008, which is incorporated herein by reference.
Form of Certificate of Common Shares. Reference is made to Form 10-KSB (File No. 033-79130) of the Corporation filed September 30, 2002, which is incorporated herein by reference.
4.1
Description of Securities of Consumers Bancorp, Inc. Reference is made to Form 10-K of the Corporation filed September 23, 2020, which is incorporated herein by reference.
10.3
Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23, 2005. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed February 14, 2006, which is incorporated herein by reference.
10.8
Consumers Bancorp 2010 Omnibus Incentive Plan Form of Restricted Stock Award Agreement. Reference is made to Form 8-K (File No. 033-79130) of the Corporation filed September 16, 2011, which is incorporated herein by reference.
10.10
First Amendment dated June 13, 2018, to Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23, 2005. Reference is made to Form 8-K (File No. 033-79130) of the Corporation filed June 15, 2018, which is incorporated herein by reference.
10.11
Form of Salary Continuation Agreement. Reference is made to Form 8-K (File No. 033-79130) of the Corporation filed December 29, 2020, which is incorporated herein by reference.
10.12
Branch Purchase and Assumption Agreement entered into with CFBank National Association on December 29, 2020. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed February 12, 2021, which is incorporated herein by reference.
Subsidiaries of Consumers Bancorp, Inc. Filed with this Annual Report on Form 10-K.
23.1
Consent of Plante & Moran, PLLC
23.2
Consent of Crowe LLP
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following material from Consumers Bancorp, Inc.’s Form 10-K Report for the year ended June 30, 2021, formatted in XBRL (Extensible Business Reporting Language) includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Income, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statement of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CONSUMERS BANCORP, INC.
Date: September 16, 2021
By:
/s/ Ralph J. Lober, II
President and Chief Executive Officer
(principal executive officer)
By:
/s/ Renee K. Wood
Chief Financial Officer and Treasurer
(principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 16, 2021.
Signatures
Signatures
/s/ Laurie L. McClellan
/s/ Ralph J. Lober, II
Laurie L. McClellan
Chairman of the Board of Directors
Ralph J. Lober, II
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Renee K. Wood
/s/ John P. Furey
Renee K. Wood
Chief Financial Officer and Treasurer
(principal financial officer)
John P. Furey
Director
/s/ Bradley Goris
/s/ Richard T. Kiko, Jr.
Bradley Goris
Director
Richard T. Kiko, Jr.
Director
/s/ Shawna L’Italien
/s/ Frank L. Paden
Shawna L’Italien
Director
Frank L. Paden
Director
/s/ John W. Parkinson
/s/ Harry W. Schmuck, Jr.
John W. Parkinson
Director
Harry W. Schmuck, Jr.
Director
/s/ Michael A. Wheeler
Michael A. Wheeler
Director

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
General
The following is management’s analysis of the Corporation’s financial condition and results of operations as of and for the years ended June 30, 2021 and 2020. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. The COVID-19 pandemic is affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impact on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other risks and uncertainties that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:
●
changes in local, regional and national economic conditions becoming less favorable than we expect, resulting in, among other things, high unemployment rates, a deterioration in credit quality of our assets or debtors being unable to meet their obligations;
●
sustained low market interest rates could result in a decline in the net interest margin and net interest income;
●
changes in the level of non-performing assets and charge-offs;
●
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and insurance) with which we must comply;
●
declining asset values impacting the underlying value of collateral;
●
unanticipated changes in our liquidity position, including, but not limited to, changes in the cost of liquidity and our ability to find alternative funding sources;
●
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
●
changes in consumer spending, borrowing and savings habits;
●
changes in accounting policies, rules and interpretations that may come as a result of COVID-19 or otherwise;
●
our ability to attract and retain qualified employees;
●
competitive pressures on product pricing and services;
●
breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and
●
changes in the reliability of our vendors, internal control systems or information systems.
The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations.
Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all the issued and outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne, and contiguous counties in Ohio, Pennsylvania, and West Virginia. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
On January 1, 2020, the Corporation completed the acquisition by merger of Peoples in a stock and cash transaction for an aggregate consideration of approximately $10,405. As a result of the acquisition, the Corporation received loans with an estimated fair value of $55,320, as of the date of the acquisition, and deposits at three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio with an estimated fair value of $60,851, as of the date of the acquisition. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. The financial position and results of operations of Peoples prior to its acquisition date are not included in the Corporations’ financial results for periods prior to the acquisition date.
COVID-19 Pandemic
In response to COVID-19, management is actively pursuing multiple avenues to assist customers during these uncertain times. For commercial borrowers, the CARES Act includes key SBA initiatives to assist small businesses. The PPP loans were designed to provide a direct incentive for small businesses to keep their workers on the payroll, From the first round of assistance, the Bank originated a total of $68,788 of PPP loans and $6,107 remained outstanding as of June 30, 2021. Under the second round of the PPP program, a total of $44,579 of loans were funded and outstanding as of June 30, 2021.
Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as troubled debt restructurings. As of June 30, 2021, eight borrowers with an outstanding balance of $198 are in payment deferral status under this loan modification program.
We have assisted and may continue to assist customers who are experiencing financial hardship due to COVID-19 by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties. The consumer reserve personal line of credit, an unsecured line of credit that is linked to a personal checking account, has been redesigned to provide easier access and a lower initial rate. Commercial customers have been encouraged to access available funds on their lines of credit, and we have been ready to provide emergency commercial lines of credit to qualified borrowers in order to assist in meeting payroll and other recurring fixed expenses. In response to COVID-19, we provided four emergency lines of credit; however, the lines of credit have since been closed as the borrowers did not need to access the funds.
Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact that the ongoing economic disruption will have on the Corporation. The Corporation has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. The branch lobbies were closed at various times throughout the pandemic but are now open for normal business. The Corporation is encouraging virtual meetings and conference calls in place of in-person meetings. Additionally, travel for business has been restricted. The Corporation is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.
Comparison of Results of Operations for the Years Ended June 30, 2021 and June 30, 2020
Net Income. Net income was $8,988 for fiscal year 2021 compared with $5,527 for fiscal year 2020. The following key factors summarize our results of operations for the year ended June 30, 2021 compared with the same prior year period:
●
net interest income increased by $5,099, or 23.7%, in fiscal year 2021, primarily as a result of a $151,376, or 25.7%, increase in average interest-earning assets, which was primarily due to organic loan growth and the addition of PPP loan receivables;
●
a $850 provision for loan loss expense was recorded during the 2021 fiscal year compared with $1,980 during the 2020 fiscal year. The higher provision recorded in the 2020 fiscal year was primarily the result of the decline in economic conditions triggered by the COVID-19 pandemic;
●
total other income decreased by $237, or 5.0%, in fiscal year 2021, primarily since the prior year period included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and a $355 gain on the sale of securities. These reductions were partially offset by a $316, or 20.1%, increase in debit card interchange income, and a $210, or 38.7%, increase on gains from the sale of mortgage loans; and
●
total other expenses increased by $1,593, or 9.0%, in fiscal year 2021 and includes a full year of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples compared with only six months of these expense being included in the prior year period. In addition, incentive accruals and mortgage commissions also increased during the 2021 fiscal year.
Return on average equity and return on average assets were 13.36% and 1.16%, respectively, for the 2021 fiscal year-to-date period compared with 9.67% and 0.89%, respectively, for the same period last year.
Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. In addition, prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, can significantly affect net interest income. Since the Federal Open Market Committee establishing a near-zero target range for the federal funds rate, earnings could be negatively affected if the interest we receive on loans and securities falls more quickly than interest we pay on deposits and borrowings. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate of 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.
Net Interest Income Year ended June 30,
Net interest income
$ 26,583
$ 21,484
Taxable equivalent adjustments to net interest
Net interest income, fully taxable equivalent
$ 27,002
$ 21,810
Net interest margin
3.62
%
3.67
%
Taxable equivalent adjustment
0.05
0.05
Net interest margin, fully taxable equivalent
3.67
%
3.72
%
FTE net interest income for the 2021 fiscal year was $27,002, an increase of $5,192 or 23.8%, from $21,810 in the 2020 fiscal year. The Corporation’s tax equivalent net interest margin was 3.67% for the year ended June 30, 2021 and was 3.72% for the fiscal year ended 2020. FTE interest income for the 2021 fiscal year was $28,902, an increase of $3,271, or 12.8%, from the 2020 fiscal year, such change primarily a result of a $151,376, or 25.7%, increase in average interest-earning assets from the 2020 fiscal year. The growth in average interest-earning assets was primarily a result of organic loan growth and the addition of PPP loans. Interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. PPP loans had an average balance of $63,761 for the twelve-month period ended June 30, 2021, with a total of $2,549 of interest and fee income recognized during the twelve-month period ended June 30, 2021. As of June 30, 2021, there was a total of $2,449 of unamortized net fees associated with the PPP loans which will be amortized into income over the life of the loans. A reduction in the accretion of origination fees from PPP loans as these loans are forgiven, combined with the significant decline in interest rates, will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 3.93% for the 2021 fiscal year compared with 4.37% for the same period last year.
Interest expense for the 2021 fiscal year was $1,900, a decrease of $1,921, or 50.3%, from the 2020 fiscal year. The Corporation’s cost of funds was 0.38% for the 2021 fiscal year compared with 0.91% for the same prior year period. The decline in short term market interest rates had an impact on the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.
Average Balance Sheet and Net Interest Margin
Average
			Balance
Interest
Yield/
			Rate
Average
			Balance
Interest
Yield/
			Rate
Interest earning assets:
Taxable securities
$ 89,424
$ 1,594
1.82
%
$ 81,609
$ 1,932
2.40
%
Nontaxable securities (1)
70,878
2,148
3.18
61,215
1,914
3.24
Loan receivables (1)
549,890
24,901
4.53
433,948
21,553
4.97
Federal bank and other restricted stocks
2,472
3.07
1,960
3.83
Equity securities
8.42
-
-
-
Interest bearing deposits and federal funds sold
27,831
0.60
10,589
1.48
Total interest earning assets
740,697
28,902
3.93
%
589,321
25,631
4.37
%
Noninterest earning assets
31,283
32,180
Total assets
$ 771,980
$ 621,501
Interest bearing liabilities:
Interest bearing demand
$ 112,801
$
0.13
%
$ 86,418
$
0.50
%
Savings
251,138
0.13
191,119
0.42
Time deposits
102,554
1,133
1.10
118,847
2,259
1.90
Short-term borrowings
8,895
0.10
4,306
1.00
FHLB advances
20,077
1.37
17,630
1.66
Total interest-bearing liabilities
495,465
1,900
0.38
%
418,320
3,821
0.91
%
Noninterest-bearing liabilities
209,262
146,050
Total liabilities
704,727
564,370
Shareholders’ equity
67,253
57,131
Total liabilities and shareholders’ equity
$ 771,980
$ 621,501
Net interest income, interest rate spread (1)
$ 27,002
3.55
%
$ 21,810
3.46
%
Net interest margin (net interest as a percent of average interest earning assets) (1)
3.67
%
3.72
%
Federal tax exemption on non-taxable securities and loans included in interest income
$
$
Average interest earning assets to interest bearing liabilities
149.50
%
140.88
%
(1) Calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%.
The following table presents the changes in the Corporation’s interest income and interest expense resulting from changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities. Changes attributable to both rate and volume that cannot be segregated have been allocated in proportion to the changes due to rate and volume.
INTEREST RATES AND INTEREST DIFFERENTIAL
2021 Compared to 2020
Increase / (Decrease)
2020 Compared to 2019
Increase / (Decrease)
Total
Change
Change
due to
Volume
Change
due to
Rate
Total
Change
Change
due to
Volume
Change
due to
Rate
(In thousands)
Interest earning assets:
Taxable securities
$ (338
)
$
$ (500
)
$ (260
)
$ (176
)
$ (84
)
Nontaxable securities (1)
(35
)
(4
)
(34
)
Loan receivables (2)
3,348
5,376
(2,028
)
4,952
4,845
Federal bank and other restricted stocks
(16
)
(11
)
(32
)
Interest bearing deposits and federal funds sold
(135
)
(37
)
Equity securities
-
-
-
-
Total interest and dividend income
3,271
5,985
(2,714
)
4,741
4,757
(16
)
Interest bearing liabilities:
Interest bearing demand
(279
)
(382
)
(119
)
(147
)
Savings deposits
(466
)
(663
)
(34
)
Time deposits
(1,126
)
(278
)
(848
)
Short-term borrowings
(34
)
(57
)
(8
)
(18
)
FHLB advances
(16
)
(53
)
(27
)
(48
)
Total interest expense
(1,921
)
(2,003
)
(26
)
Net interest income
$ 5,192
$ 5,903
$ (711
)
$ 4,076
$ 4,066
$
(1) Nontaxable income is adjusted to a fully tax equivalent basis utilizing a statutory federal income tax rate of 21.0%.
(2) Non-accrual loan balances are included for purposes of computing the rate and volume effects although interest on these balances has been excluded.
Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses in the Corporation’s loan portfolio that have been incurred at each balance sheet date. Management considers historical loss experience, the present and prospective financial condition of borrowers, the current conditions within the markets where the Corporation originates loans, the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the ultimate collectability of the loan portfolio. In fiscal year 2021, a provision for loan loss expense of $850 was recorded compared with $1,980 in fiscal year 2020. The provision for loan loss expense was higher in fiscal year 2020 primarily due to the deterioration in the economic environment as a result of the impact of COVID-19 and higher loan balances from organic loan growth.
For the 2021 fiscal year, net charge offs of $57 were recorded compared with $90 for the same period last year. The allowance for loan losses as a percentage of loans was 1.14% at June 30, 2021 and 1.05% at June 30, 2020. The loans acquired from the Peoples acquisition were recorded at fair value without a related allowance for loan losses. As of June 30, 2020, the allowance for loan losses as a percentage of total loans, excluding the loans acquired in the Peoples acquisition, was 1.15%.
Non-performing loans were $1,771 as of June 30, 2021 and represented 0.31% of total loans. This compared with $1,226, or 0.23% of total loans at June 30, 2020. Non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors closely monitor these loans and believe the prospect for recovery of principal, less identified specific reserves, are favorable.
Other Income. Total other income decreased by $237, or 5.0%, to $4,466 for the 2021 fiscal year. Other income in the 2020 fiscal year includes $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and net securities gains of $355 compared to net security gains of $14 in fiscal year 2021.
Debit card interchange income increased by $316, or 20.1%, in 2021 to $1,891 primarily as a result of increased debit card usage and an increase in the number of cards issued. Gain on sale of mortgage loans increased by $210, or 38.7%, in 2021 primarily as a result of an increase in volume due to refinances as mortgage rates declined. These increases were partially offset by a decline of $130, or 9.6%, in service charges on deposit accounts primarily due to a decline in overdraft charges as many eligible individuals have received Economic Impact Payments and consumer spending habits have changed during the pandemic, resulting in fewer overdrafts.
Other Expenses. Total other expenses were $19,361 for the year ended June 30, 2021; an increase of $1,593, or 9.0%, from $17,768 for the year ended June 30, 2020.
Salaries and employee benefit expenses increased by $1,270, or 13.3%, during the 2021 fiscal year primarily since the 2021 fiscal year includes a full year of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples compared with only six months of these expense being included in the prior year period. In addition, incentive accruals and mortgage commissions also increased during the 2021 fiscal year.
Occupancy and equipment expenses increased by $122, or 4.9%, during the 2021 fiscal year from the same period last year primarily as a result of higher real estate taxes, custodial, building upkeep, maintenance, lease and utility expenses for the additional office locations acquired in the Peoples acquisition and the new leased Green, Ohio office location that opened during the 2021 fiscal year. This was partially offset by lower depreciation expense in the 2021 fiscal year for the Salem branch location since it was expected that this location would be replaced in the spring of 2021.
Data processing expenses decreased by $179, or 19.7% and professional and director fees decreased by $170, or 16.6%, during the 2021 fiscal year from the same period last year primarily since the 2020 fiscal year included system conversion and termination costs, investment banker, legal, accounting and auditing fees associated with the acquisition of Peoples.
FDIC assessments increased by $196, or 184.9%, for the 2021 fiscal year since the Small Bank Assessment Credits were applied to the FDIC insurance invoices during the 2020 fiscal year.
Debit card processing expenses increased by $140, or 17.3% primarily as a result of increased debit card usage. The increase in debit card usage is also reflected in debit card interchange income which increased by $316, or 20.1% from the prior year.
Income Tax Expense. Income tax expense totaled $1,850 and $912 and the effective tax rates were 17.1% and 14.2% for the years ended June 30, 2021 and 2020, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in the 2020 and 2021 fiscal years. The effective tax rate differs from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and bank owned life insurance earnings and death benefit.
Financial Condition
Total assets at June 30, 2021 were $833,804 compared with $740,820 at June 30, 2020, an increase of $92,984, or 12.6%. The growth in total assets is mainly attributable to an increase of $68,297, or 46.3%, in available-for-sale and held-to-maturity securities which was primarily funded by a $93,494, or 14.8%, increase in total deposits.
Securities. Total securities were $215,756 at June 30, 2021, of which $207,760 were classified as available-for-sale and $7,996 were classified as held-to-maturity. The securities portfolio is mainly comprised of mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, state and political subdivisions and government-sponsored enterprises.
The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:
June 30, 2021
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Obligations of U.S. government-sponsored entities and agencies
$ 14,746
$
$ (14 )
$ 15,033
Obligations of state and political subdivisions
73,013
3,561
(75 )
76,499
U.S. Government-sponsored mortgage-backed securities - residential
90,065
1,136
(684 )
90,517
U.S. Government-sponsored mortgage-backed securities - commercial
8,641
-
8,845
U.S. Government-sponsored collateralized mortgage obligations - residential
16,302
(57 )
16,374
Other debt securities
-
(8 )
Total available-for-sale securities
$ 203,267
$ 5,331
$ (838 )
$ 207,760
June 30, 2020
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Treasury
$ 1,248
$
$ -
$ 1,256
Obligations of U.S. government-sponsored entities and agencies
10,133
-
10,532
Obligations of state and political subdivisions
60,343
3,149
-
63,492
U.S. government-sponsored mortgage-backed securities - residential
48,645
1,515
(4
)
50,156
U.S. government-sponsored mortgage-backed securities - commercial
8,444
(2
)
8,497
U.S. government-sponsored collateralized mortgage obligations - residential
9,712
(12
)
9,985
Total available-for-sale securities
$ 138,525
$ 5,411
$ (18
)
$ 143,918
The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2021 and 2020 and the corresponding gross unrecognized gains and losses:
June 30, 2021
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Obligations of state and political subdivisions
$ 7,996
$
$ -
$ 8,352
June 30, 2020
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Obligations of state and political subdivisions
$ 3,541
$
$ -
$ 3,868
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2021:
Available-for-sale
Amortized
Cost
Fair
Value
Average
Yield
Obligations of government-sponsored entities:
Over 3 months through 1 year
$ 2,501
$ 2,534
2.67
%
Over 1 year through 5 years
3,129
3,235
2.06
Over 5 years through 10 years
9,116
9,264
1.63
Total obligations of government-sponsored entities
14,746
15,033
1.90
Obligations of state and political subdivisions:
3 Months or less
4.51
Over 3 months through 1 year
2,866
2,903
3.38
Over 1 year through 5 years
9,217
9,565
3.38
Over 5 years through 10 years
10,679
11,069
3.01
Over 10 years
49,976
52,687
3.08
Total obligations of state and political subdivisions
73,013
76,499
3.13
Mortgage-backed securities - residential:
Over 1 year through 5 years
51,865
52,741
1.67
Over 5 years through 10 years
38,200
37,776
1.42
Total mortgage-backed securities - residential
90,065
90,517
1.56
Mortgage-backed securities - commercial:
Over 5 years through 10 years
2,794
2,855
1.77
Over 10 years
5,847
5,990
2.09
Total mortgage-backed securities - commercial
8,641
8,845
1.99
Collateralized mortgage obligations:
3 months or less
1.86
Over 3 months through 1 year
1,932
1,966
1.52
Over 1 year through 5 years
9,747
9,794
1.48
Over 5 years through 10 years
1,527
1,518
1.39
Over 10 years
2,998
2,998
1.62
Total collateralized mortgage obligations
16,302
16,374
1.50
Other debt securities
Over 5 years through ten years
4.62
Total available-for-sale securities
$ 203,267
$ 207,760
2.17
%
Held-to-maturity
Amortized
Cost
Fair
Value
Average
Yield
Obligations of state and political subdivisions:
Over 1 year through 5 years
$
$
2.89
%
Over 5 years through 10 years
5,367
5,547
1.86
Over 10 years
2,335
2,496
3.13
Total held-to-maturity securities
$ 7,996
$ 8,352
2.27
%
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.
Loans. Loan receivables increased by $23,566 to $566,427 at June 30, 2021 compared to $542,861 at June 30, 2020. Commercial loans include PPP loans of $50,686 and $66,606 as of June 30, 2021 and 2020, respectively, and a third-party residential mortgage warehouse line-of-credit had a zero balance as of June 30, 2021 compared with an outstanding balance of $32,869 as of June 30, 2020. Excluding the declines in the PPP loans and the residential mortgage warehouse line-of-credit, organic loan growth was $72,355, or 16.3%. The increase in the 1-4 family residential real estate portfolio was primarily due to a majority of the mortgage loans originated in the third quarter of fiscal year 2021 being kept within the portfolio rather than being sold to the secondary market. Consumer loans increased by $8,241, or 38.6%, primarily as a result of the expansion of indirect auto lending and an increase in direct auto loans as a result of successful marketing campaigns. Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:
Commercial
$ 109,922
$ 157,029
Commercial real estate:
Construction
10,462
16,190
Other
269,157
228,552
1-4 Family residential real estate:
Owner occupied
119,046
91,006
Non-owner occupied
19,114
19,337
Construction
9,156
9,418
Consumer loans
29,570
21,329
Total loans
$ 566,427
$ 542,861
The following table shows the major classifications of loans, net of deferred fees and costs, which are based on the contractual terms for repayment of principal, that are due in the periods indicated as of June 30, 2021:
Maturing
After one year
After five years
Within
but within
But within
After
one year
five years
Fifteen years
Fifteen years
Total
Commercial
$ 13,458
$ 66,898
$ 28,031
$ 1,535
$ 109,922
Commercial real estate:
Construction
7,983
-
2,270
10,462
Other
11,610
14,757
106,502
136,288
269,157
1-4 Family residential real estate:
Owner occupied
1,202
5,482
32,906
79,456
119,046
Non-owner occupied
1,087
1,392
11,545
5,090
19,114
Construction
1,511
-
7,310
9,156
Consumer loans
18,078
10,570
29,570
Total loans
$ 29,803
$ 114,925
$ 189,554
$ 232,145
$ 566,427
The following is a schedule of fixed and variable rate 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2021:
Fixed
Interest Rates
Variable
Interest Rates
Total 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year
$ 237,875
$ 134,034
Allowance for Loan Losses. The allowance for loan losses balance and the provision charged to expense are judgmentally determined by management based upon a periodic review of the loan portfolio for valuation purposes and to determine the adequacy of the allowance for loan losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectability of loans in the portfolio.
Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. As of June 30, 2021, impaired loans totaled $1,954, of which $1,771 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.
The following table summarizes non-accrual loans, non-performing assets, impaired and restructured loans, and associated ratios for the years ended June 30:
Non-accrual loans
$ 1,771
$ 1,185
Accruing loans past due 90 days or more
-
Total non-performing loans
$ 1,771
$ 1,226
Other real estate and repossessed assets owned
-
Total non-performing assets
$ 1,771
$ 1,233
Impaired loans
$ 1,954
$ 1,923
Accruing restructured loans
$
$
Non-accrual to total loans
0.31
%
0.22
%
ALLL to non-accrual loans
365.39
%
479.16
%
The non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to bring the loan current. Properties and vehicles acquired by the Corporation as a result of foreclosure or repossession, or by deed in lieu of foreclosure, are classified as “other real estate and repossessed assets owned” until they are sold or otherwise disposed of.
The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the years ended June 30:
Allowance for loan losses at beginning of year
$ 5,678
$ 3,788
Loans charged off:
Commercial
-
1-4 Family residential real estate
Consumer loans
Total charge offs
Recoveries:
Commercial real estate
1-4 Family residential real estate
Consumer loans
Total recoveries
Net charge offs
Provision for loan losses charged to operations
1,980
Allowance for loan losses at end of year
$ 6,471
$ 5,678
Ratio of net charge offs to average loans outstanding
0.01
%
0.02
%
ALLL to total loans
1.14
%
1.05
%
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:
Allocation of the Allowance for Loan Losses
Allowance
Amount
% of Loan
Type to
Total Loans
Allowance
Amount
% of Loan
Type to
Total Loans
June 30, 2021
June 30, 2020
Commercial
$
19.4
%
$
28.9
%
Commercial real estate loans
3,949
49.4
3,623
45.1
1-4 Family residential real estate
1,307
26.0
22.1
Consumer loans
5.2
3.9
Total
$ 6,471
100.0
%
$ 5,678
100.0
%
While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur. While the Corporation has historically experienced strong trends in asset quality, as a result of the current situation regarding the COVID-19 pandemic, uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Goodwill: Goodwill remained unchanged at $826 at June 30, 2021 and 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed during the year ended June 30, 2021.
Funding Sources. Total deposits increased by $93,494, or 14.8%, from $633,355 at June 30, 2020 to $726,849 at June 30, 2021. For the fiscal year ended June 30, 2021, noninterest-bearing demand deposits increased by $38,868, or 20.4%, savings and money market deposits increased by $54,194, or 23.7%, and interest-bearing demand deposits increased by $28,274, or 28.5%, from the same prior year period. Certificates and other time deposits decreased by $27,843, or 24.1%, from the same prior year period as customers chose to move funds to savings and money market deposit products due to the low-rate environment.
The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:
Years Ended June 30,
Amount
Rate
Amount
Rate
Noninterest-bearing demand deposit
$ 203,181
-
$ 140,826
-
Interest-bearing demand deposit
112,801
0.13
%
86,418
0.50
%
Savings
251,138
0.13
191,119
0.42
Certificates and other time deposits
102,554
1.10
118,847
1.90
Total
$ 669,674
0.24
%
$ 537,210
0.65
%
The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2021 by time remaining until maturity:
Maturing in:
Under 3 months
$ 8,744
Over 3 to 6 months
7,390
Over 6 to 12 months
11,699
Over 12 months
15,616
Total
$ 43,449
Short-term borrowings increased by $5,260, or 75.8%, to $12,203 at June 30, 2021 from $6,943 at June 30, 2020. This increase was primarily associated with the retention of PPP loan proceeds in commercial sweep repurchase agreement accounts. See Note 8-Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.
Capital Resources
Total shareholders’ equity increased by $6,660 from $63,240 at June 30, 2020 to $69,900 at June 30, 2021. The primary reason for the increase was net income of $8,988 for the current fiscal year which was partially offset by cash dividends paid of $1,785. For the 2021 fiscal year, the average equity to average total assets ratio was 8.71% and the dividend payout ratio was 19.9%. For the 2020 fiscal year, the average equity to average total assets ratio was 9.19% and the dividend payout ratio was 28.1%.
At June 30, 2021, management believes the Bank complied with all regulatory capital requirements. Based on the Bank’s computed regulatory capital ratios, the OCC has determined the Bank to be well capitalized under the Federal Deposit Insurance Act as of its latest exam date. The Bank’s actual and required capital amounts are disclosed in Note 13-Regulatory Matters to the Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would cause the Bank’s capital category to change.
Liquidity
Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions. The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in federal funds sold or interest-bearing deposit accounts with other financial institutions.
Net cash inflows from operating activities for the 2021 fiscal year were $14,013 and net cash inflows from financing activities were $83,858. Net cash outflows from investing activities were $89,001. The major sources of cash were a $93,494 net increase in deposits and a $42,820 increase from sales, maturities, or principal pay downs on available-for-sale securities. The major uses of cash were the $108,168 purchase of available-for-sale securities and a $23,471 net increase in loans. Total cash and cash equivalents were $18,529 as of June 30, 2021 compared to $9,659 at June 30, 2020.
The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit. Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and investments in tax-exempt municipal bonds.
The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial and retail customers are turning to community banks. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a relatively low level of 0.38%.
Jumbo time deposits (those with balances of $250 and over) were $18,488 and $36,747 at June 30, 2021 and 2020, respectively. These deposits are monitored closely by the Bank and typically priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee paid broker to obtain deposits from outside its normal service area as an additional source of funding. However, these deposits are not relied upon as a primary source of funding and there were no brokered deposits as of June 30, 2021 or 2020.
Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Additionally, the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations. As of June 30, 2021, the Bank could, without prior approval, declare a dividend of approximately $8,741.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Corporation are monetary in nature. Therefore, as a financial institution, interest rates have a more significant impact on the Corporation’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity, maturity structure and quality of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels.
Critical Accounting Policies and Use of Significant Estimates
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and management’s discussion and analysis are, to a large degree, dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change. The most significant accounting policies followed by the Corporation are presented in Note 1-Summary of Significant Accounting Policies to the Consolidated Financial Statements. 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. In the event different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Management has identified the following as critical accounting policies:
Allowance for Loan Losses. The determination of the allowance for loan losses involves considerable subjective judgment and estimation by management. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. 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.
Goodwill. The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. As of April 30, 2021, the measurement date, a qualitative assessment was performed to determine whether there is a more likely than not (greater than 50% likelihood) that the fair value of the Corporation was less than its carrying amount. The impairment test of goodwill indicated no impairment existed as of the measurement date. However, it is impossible to know the future impact of the evolving economic conditions related to COVID-19. 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.
Contractual Obligations, Commitments and Contingent Liabilities
The following table presents, as of June 30, 2021, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Note
Reference
Thereafter
Total
Certificates of deposit
$ 56,866
$ 21,554
$ 2,151
$ 3,579
$ 1,415
$ 1,974
$ 87,539
Short-term borrowings
12,203
-
-
-
-
-
12,203
Federal Home Loan advances
1,799
6,567
5,556
4,049
-
18,050
Salary continuation plan
2,464
3,140
Operating leases
-
1,279
Deposits without maturity
-
-
-
-
-
-
639,310
Note 14-Commitments with Off-Balance Sheet Risk to the Consolidated Financial Statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. These commitments and contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.
Off-Balance Sheet Arrangements
At June 30, 2021, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Not applicable for Smaller Reporting Companies.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 - Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. and subsidiaries (the “Company”) as of June 30, 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Significant Assumptions in General Reserves - Refer to Notes 1 and 4 to the Financial Statements
Critical Audit Matter Description
The allowance for loan losses (allowance) represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience over the estimated loss emergence period adjusted for current factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
We identified the Company’s significant assumptions in general reserves in the allowance for loan losses as a critical audit matter. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the qualitative factors within the allowance included the following, among others:
We obtained an understanding of management’s process for determining the need for qualitative factor adjustments, identifying appropriate factors, and measuring the direction and magnitude of the adjustment.
We evaluated the reasonableness of management's judgments and tests of accuracy of underlying support related to the estimated loss emergence period.
We evaluated the design of controls over the application of management’s qualitative factor methodology in the estimate of general reserves.
We evaluated management's rationale for determining qualitative adjustments was relevant and warranted for each loan segment and assessed the measurement of qualitative factor adjustments applied by management.
Where applicable, we tested the accuracy and completeness of data used by management in the measurement of qualitative factor adjustments or vouched factors to relevant external data sources.
We assessed changes in qualitative factors year-over-year against overall trends in credit quality within the Company and broader trends within the industry and local and national economies to evaluate reasonableness of management’s qualitative factor adjustments.
/s/ Plante & Moran, PLLC
We have served as the Company's auditor since 2020.
Auburn Hills, Michigan
September 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. (the "Company") as of June 30, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We served as the Company's auditor from 1998 to 2020.
Cleveland, Ohio
September 22, 2020
CONSOLIDATED BALANCE SHEETS
As of June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
ASSETS:
Cash on hand and noninterest-bearing deposits in financial institutions
$ 8,902
$ 8,429
Federal funds sold and interest-bearing deposits in financial institutions
9,627
1,230
Total cash and cash equivalents
18,529
9,659
Certificates of deposit in financial institutions
5,825
11,635
Securities, available-for-sale
207,760
143,918
Securities, held-to-maturity (fair value 2021 $8,352 and 2020 $3,868)
7,996
3,541
Equity securities, at fair value
-
Federal bank and other restricted stocks, at cost
2,472
2,472
Loans held for sale
1,457
3,507
Total loans
566,427
542,861
Less allowance for loan losses
(6,471
)
(5,678
)
Net loans
559,956
537,183
Cash surrender value of life insurance
9,702
9,442
Premises and equipment, net
15,793
14,901
Goodwill
Core deposit intangible, net
Accrued interest receivable and other assets
2,825
3,470
Total assets
$ 833,804
$ 740,820
LIABILITIES:
Deposits:
Noninterest-bearing demand
$ 229,102
$ 190,233
Interest bearing demand
127,447
99,173
Savings
282,761
228,567
Time
87,539
115,382
Total deposits
726,849
633,355
Short-term borrowings
12,203
6,943
Federal Home Loan Bank advances
18,050
31,161
Accrued interest payable and other liabilities
6,802
6,121
Total liabilities
763,904
677,580
Commitments and contingent liabilities (Note 14)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized
-
-
Common shares, no par value; 8,500,000 shares authorized; 3,124,053 shares issued as of June 30, 2021 and June 30, 2020
20,011
19,974
Retained earnings
47,663
40,460
Treasury stock, at cost (95,953 and 108,475 common shares at June 30, 2021 and 2020, respectively)
(1,324
)
(1,454
)
Accumulated other comprehensive income
3,550
4,260
Total shareholders’ equity
69,900
63,240
Total liabilities and shareholders’ equity
$ 833,804
$ 740,820
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Interest and dividend income:
Loans, including fees
$ 24,887
$ 21,544
Securities, taxable
1,594
1,932
Securities, tax-exempt
1,743
1,597
Equity securities
-
Federal bank and other restricted stocks
Federal funds sold and interest-bearing deposits
Total interest and dividend income
28,483
25,305
Interest expense:
Deposits
1,615
3,486
Short-term borrowings
Federal Home Loan Bank advances
Total interest expense
1,900
3,821
Net interest income
26,583
21,484
Provision for loan losses
1,980
Net interest income after provision for loan losses
25,733
19,504
Other income:
Service charges on deposit accounts
1,220
1,350
Debit card interchange income
1,891
1,575
Bank owned life insurance death benefit
-
Bank owned life insurance income
Gain on sale of mortgage loans
Securities gains, net
Net change in market value of equity securities
-
Other
Total other income
4,466
4,703
Other expenses:
Salaries and employee benefits
10,852
9,582
Occupancy and equipment
2,588
2,466
Data processing expenses
Debit card processing expenses
Professional and director fees
1,027
Federal Deposit Insurance Corporation assessments
Franchise taxes
Marketing and advertising
Loan and collection expenses
Telephone and communications
Amortization of intangible
Other
1,569
1,582
Total other expenses
19,361
17,768
Income before income taxes
10,838
6,439
Income tax expense
1,850
Net income
$ 8,988
$ 5,527
Basic and diluted earnings per share
$ 2.98
$ 1.92
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Net income
$ 8,988
$ 5,527
Other comprehensive income, net of tax:
Net change in unrealized gains:
Unrealized gains (losses) arising during the period
(886
)
3,766
Reclassification adjustment for gains included in income
(14
)
(355
)
Net unrealized gain (loss)
(900
)
3,411
Income tax effect
(717
)
Other comprehensive income (loss)
(710
)
2,694
Total comprehensive income
$ 8,278
$ 8,221
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Common
Shares
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance, June 30, 2019
$ 14,656
$ 36,487
$ (1,543
)
$ 1,566
$ 51,166
Net income
5,527
5,527
Other comprehensive income
2,694
2,694
269,920 shares issued for the Peoples acquisition
5,277
5,277
11,813 shares associated with vested stock awards
Cash dividends declared ($0.54 per share)
(1,554
)
(1,554
)
Balance, June 30, 2020
$ 19,974
$ 40,460
$ (1,454
)
$ 4,260
$ 63,240
Net income
8,988
8,988
Other comprehensive loss
(710
)
(710
)
12,522 shares associated with vested stock awards
Cash dividends declared ($0.59 per share)
(1,785
)
(1,785
)
Balance, June 30, 2021
$ 20,011
$ 47,663
$ (1,324
)
$ 3,550
$ 69,900
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Cash flows from operating activities:
Net income
$ 8,988
$ 5,527
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation
1,044
Securities amortization and accretion, net
Provision for loan losses
1,980
(Gain) loss on disposal of fixed assets
(2
)
Loss on disposition or direct write-down of other real estate and repossessed assets owned
(1
)
(1
)
Gain on sale of mortgage loans
(753
)
(543
)
Deferred income tax benefit
(320
)
(361
)
Gain on sale of securities
(14
)
(355
)
Net change in market value of equity securities
(24
)
-
Amortization of intangibles
Origination of loans held for sale
(50,694
)
(38,411
)
Proceeds from loans held for sale
53,336
37,104
Income from BOLI death benefit
-
(324
)
Increase in cash surrender value of life insurance
(260
)
(265
)
Change in other assets and other liabilities
1,291
(167
)
Net cash flows from operating activities
14,013
5,593
Cash flows from investing activities:
Securities available-for-sale:
Purchases
(108,168
)
(36,775
)
Maturities, calls and principal pay downs
37,275
25,909
Proceeds from sales of available-for-sale securities
5,545
18,421
Securities held-to-maturity:
Purchases
(4,700
)
-
Principal pay downs
Purchase of equity security
(400
)
-
Net decrease in certificates of deposit with other financial institutions
5,810
2,187
Purchase of Federal Home Loan Stock
-
(595
)
Net increase in loans
(23,471
)
(118,463
)
Acquisition, net of cash received
-
(4,295
)
Proceeds from BOLI death benefit
-
Acquisition of premises and equipment
(1,154
)
(497
)
Proceeds from sale of other real estate and repossessed assets owned
Net cash flows from investing activities
(89,001
)
(113,050
)
Cash flows from financing activities:
Net increase in deposit accounts
93,494
100,330
Proceeds from Federal Home Loan Bank advances
1,300
22,500
Repayments of Federal Home Loan Bank advances
(14,411
)
(14,530
)
Change in short-term borrowings
5,260
Dividends paid
(1,785
)
(1,554
)
Net cash flows from financing activities
83,858
107,655
Increase in cash and cash equivalents
8,870
Cash and cash equivalents, beginning of year
9,659
9,461
Cash and cash equivalents, end of year
$ 18,529
$ 9,659
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest
$ 1,956
$ 3,890
Federal income taxes
2,505
Non-cash items:
Transfer from loans to other repossessed assets
Transfer from loans held for sale to portfolio
-
Issuance of treasury stock for stock awards
Right of use assets obtained in exchange for lease liabilities
-
Acquisition of Peoples:
Consideration paid
-
$ 10,405
Noncash assets acquired:
Certificates of deposit in other financial institutions
-
11,839
Securities, available-for-sale
-
4,051
Federal bank and other restricted stocks, at cost
-
Loans, net
-
55,320
Premises and equipment
-
Goodwill
-
Core deposit intangible
-
Accrued interest receivable and other assets
-
Total noncash assets acquired
-
73,428
Liabilities assumed:
Deposits
-
60,851
Federal funds purchased
-
2,348
Federal Home Loan Bank advances
-
Other liabilities
-
Total liabilities assumed
-
63,856
Net noncash assets acquired
-
9,572
Cash acquired
-
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank), together referred to as the Corporation. All significant intercompany transactions have been eliminated in the consolidation.
Nature of Operations: Consumers Bancorp, Inc. is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, a broad array of products and services throughout its primary market area of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne, and contiguous counties in Ohio, Pennsylvania, and West Virginia. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.
Business Segment Information: The Corporation is engaged in the business of commercial and retail banking, which accounts for substantially all its revenues, operating income, and assets. Accordingly, all its operations are reported in one segment, banking.
Acquisition: At the date of acquisition the Corporation records the assets and liabilities of acquired companies on the Consolidated Balance Sheet at their fair value. The results of operations for acquired companies are included in the Corporation’s Consolidated Statements of Income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Income during the periods incurred.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.
Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Certificates of Deposit in Financial Institutions: Certificates of deposit in other financial institutions are carried at cost.
Cash Reserves: The Bank is required to maintain cash on hand and noninterest-bearing balances on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance was zero at June 30, 2021 and 2020.
Securities: Securities are generally classified into either held-to-maturity or available-for-sale categories. Held-to-maturity securities are carried at amortized cost and are those the Corporation has the positive intent and ability to hold to maturity. Available-for-sale securities are those the Corporation may decide to sell before maturity if needed for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in other comprehensive income (loss) as a separate component of equity, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Corporation has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Corporation intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI will be recognized in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security. If a security is determined to be other-than-temporarily impaired, but the Corporation does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Equity Securities: Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Federal Bank and Other Restricted Stocks: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock, included with Federal bank and other restricted stocks on the Consolidated Balance Sheet, is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Federal Reserve Bank stock is also carried at cost. Since these stocks are viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Changes in the fair values of these derivatives are included in net gains on sales of loans.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.
Interest income on commercial, commercial real estate and 1-4 family residential loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is determined by the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the customer has exhibited the ability to repay and demonstrated this ability over at least a consecutive six-month period and future payments are reasonably assured.
During the 2021 fiscal year, the Corporation funded PPP loans to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and are forgivable by the SBA if certain criteria are met. The Corporation originated PPP loans totaling $46,761 during the 2021 fiscal year. PPP processing fees received from the SBA were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. Approximately $1,911of fees from the SBA were recognized in interest income in the 2021 fiscal year and there were $2,449 of unamortized net deferred fees as of June 30, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when funded.
Concentrations of Credit Risk: The Bank grants consumer, real estate, and commercial loans primarily to borrowers in Carroll, Columbiana, Jefferson, Stark, Summit and Wayne counties. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economy in these counties. Automobiles and other consumer assets, business assets and residential and commercial real estate secure most loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience over the estimated loss emergence period adjusted for current factors based on the risks present for each portfolio segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the most recent three-year period, depending on loan segment. This actual loss experience is supplemented with economic and other factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:
Commercial: Commercial loans are made for a wide variety of general business purposes, including financing for equipment, inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Current and projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank operates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan, the business conducted on the property securing the loan or, in the case of loans to farmers, management and operation of the farm. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus nonowner-occupied loans.
1-4 Family Residential Real Estate: Residential real estate loans are secured by one to four family residential properties and include both owner occupied, non-owner occupied and home equity loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, an established credit record and an appropriately appraised value of the real estate securing the loan that generally requires that the residential real estate loan amount be no more than 85% of the purchase price or the appraised value of the real estate securing the loan unless the borrower provides private mortgage insurance.
Consumer: The Corporation originates direct and indirect consumer loans, primarily automobile loans, personal lines of credit, and unsecured consumer loans in its primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
Other Real Estate and Repossessed Assets Owned: Real estate properties and other repossessed assets, which are primarily vehicles, acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less costs to sell at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If the fair value declines after acquisition, a valuation allowance is recorded as a charge to income. Operating costs after acquisition are expensed. Gains and losses on disposition are reported as a charge to income.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, generally over the lesser of the remaining term of the lease facility or the estimated economic life of the improvement. Useful lives range from three years for software to thirty-nine and one-half years for buildings.
Cash Surrender Value of Life Insurance: The Bank has purchased single-premium life insurance policies to insure the lives of current and former participants in the salary continuation plan. As of June 30, 2021, the Bank had policies with total death benefits of $19,107 and total cash surrender values of $9,702. As of June 30, 2020, the Bank had policies with total death benefits of $19,067 and total cash surrender values of $9,442. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Tax-exempt income is recognized from the periodic increases in cash surrender value of these policies.
Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. Goodwill is not amortized but is assessed at least annually for impairment. Any such impairment will be recognized in the period identified. The Corporation has selected April 30 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Assets: Premises, equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities, which are classified as short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Retirement Plans: The Bank maintains a 401(k) savings and retirement plan covering all eligible employees and matching contributions are expensed as made. Salary continuation plan expense allocates the benefits over years of service.
Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation applies a more likely than not recognition threshold for all tax uncertainties in accordance with U.S. generally accepted accounting principles. A tax position is recognized as a benefit only if it is more likely than not that the position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable upon the vesting of restricted stock awards.
Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees over the required service period, generally defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Corporation’s common stock at the date of grant. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of equity, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the Corporation’s financial statements.
Fair Value of Financial Instruments: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15 of the Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders.
Reclassifications: Certain reclassifications have been made to the June 30, 2020 financial statements to be comparable to the June 30, 2021 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.
Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined in the guidance, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. However, during July 2019, FASB unanimously voted for a proposal to delay this ASU to January 2023 for smaller reporting companies. On October 16, 2019, FASB approved a final ASU delaying the effective date. The new guidance is effective for annual and interim periods beginning after December 15, 2022 for certain entities, including smaller reporting companies. The Corporation is a smaller reporting company. The Corporation is currently evaluating the impact of adopting this new guidance on the consolidated financial statements, current systems and processes. At this time, the Corporation is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Corporation is planning to adopt this new guidance within the time frame noted above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The ASU is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR, or other reference rates that may be discontinued, and provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria. The ASU also provides for a one-time sale and/or transfer to available-for-sale or trading to be made for held-to-maturity (HTM) debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. The ASU requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. The Corporation does not expect ASU 2020-04 to have a material impact on its financial statements and disclosures.
NOTE 2-ACQUISITION
On July 16, 2021, the Corporation completed its acquisition of two branches (Branches) from CFBank, National Association (CFBank) located in Calcutta and Wellsville, Ohio. In connection with the acquisition, CFBank transferred to the Bank the land, buildings and other associated assets of the Branches; $104 million in deposits attributable to the Branches; $15 million in aggregate principal amount of subordinated debt securities issued by unrelated financial institutions; $13 million of loans attributable to the Branches and other single family residential mortgage loans and home equity lines of credit from CFBank’s Northeast Ohio loan portfolio. In addition, the Bank purchased $7.7 million in aggregate principal amount of participation interests in commercial and commercial real estate loans originated by and held in CFBank’s portfolio. An additional $7.3 million in participation interests is expected to be purchased by the Bank by December 31, 2021. As consideration for the Branches, the Bank paid CFBank the net book value of the land, building and associated assets of the Branches; a deposit premium equal to 1.75% of the average daily deposits of the Branches for the 30 days preceding the closing; and the par value of the subordinated debt securities and loans acquired by the Bank.
On January 1, 2020, the Corporation completed the acquisition by merger of Peoples and its wholly owned subsidiary, The Peoples National Bank of Mount Pleasant (Peoples Bank) in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. As of the date of acquisition of Peoples, the estimated fair value of loans received was $55,320 and the estimated fair value of deposits assumed was $60,851. Acquisition costs of $827 pre-tax, or $680 after-tax, were expensed during the twelve-month period ended June 30, 2020. The transaction created $836 of goodwill, none of which is deductible for tax purposes.
NOTE 3-SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
June 30, 2021
Obligations of U.S. government-sponsored entities and agencies
$ 14,746
$
$ (14
)
$ 15,033
Obligations of state and political subdivisions
73,013
3,561
(75
)
76,499
U.S. Government-sponsored mortgage-backed securities - residential
90,065
1,136
(684
)
90,517
U.S. Government-sponsored mortgage-backed securities - commercial
8,641
-
8,845
U.S. Government-sponsored collateralized mortgage obligations - residential
16,302
(57
)
16,374
Other debt securities
-
(8
)
Total available-for-sale securities
$ 203,267
$ 5,331
$ (838
)
$ 207,760
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
June 30, 2021
Obligations of state and political subdivisions
$ 7,996
$
$ -
$ 8,352
Available-for-sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
June 30, 2020
Obligations of U.S. Treasury
$ 1,248
$
$ -
$ 1,256
Obligations of U.S. government-sponsored entities and agencies
10,133
-
10,532
Obligations of state and political subdivisions
60,343
3,149
-
63,492
U.S. Government-sponsored mortgage-backed securities - residential
48,645
1,515
(4
)
50,156
U.S. Government-sponsored mortgage-backed securities - commercial
8,444
(2
)
8,497
U.S. Government-sponsored collateralized mortgage obligations - residential
9,712
(12
)
9,985
Total available-for-sale securities
$ 138,525
$ 5,411
$ (18
)
$ 143,918
Held-to-maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
June 30, 2020
Obligations of state and political subdivisions
$ 3,541
$
$ -
$ 3,868
Proceeds from sales of available-for-sale securities during fiscal year 2021 and fiscal year 2020 were as follows:
Proceeds from sales
$ 5,545
$ 18,421
Gross realized gains
Gross realized losses
(30
)
-
The income tax provision related to these net realized gains amounted to $3 in fiscal year 2021 and $74 in fiscal year 2020.
The amortized cost and fair values of debt securities at June 30, 2021 by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations are shown separately.
Available-for-sale
Amortized
Cost
Fair Value
Due in one year or less
$ 5,642
$ 5,712
Due after one year through five years
12,346
12,800
Due after five years through ten years
20,295
20,824
Due after ten years
49,976
52,688
Total
88,259
92,024
U.S. Government-sponsored mortgage-backed and related securities
115,008
115,736
Total
$ 203,267
$ 207,760
Held-to-maturity
Amortized
Cost
Fair Value
Due after one year through five years
$
$
Due after five years through ten years
5,367
5,547
Due after ten years
2,335
2,496
Total
$ 7,996
$ 8,352
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with a carrying value of approximately $96,970 and $69,048 were pledged at June 30, 2021 and 2020, respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2021 and 2020, there were no holdings of securities of any one issuer, other than obligations of U.S. government-sponsored entities and agencies, with an aggregate book value greater than 10% of shareholders’ equity.
The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2021 and 2020, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Less than 12 Months
12 Months or more
Total
Available-for-sale
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
June 30, 2021
Obligations of U.S. government-sponsored entities and agencies
$ 2,003
$ (14
)
$ -
$ -
$ 2,003
$ (14
)
Obligations of state and political subdivisions
7,398
(75
)
-
-
7,398
(75
)
Mortgage-backed securities - residential
42,378
(684
)
-
-
42,378
(684
)
Collateralized mortgage obligations - residential
7,707
(56
)
(1
)
8,259
(57
)
Other
(8
)
-
-
(8
)
Total temporarily impaired
$ 59,978
$ (837
)
$
$ (1
)
$ 60,530
$ (838
)
Less than 12 Months
12 Months or more
Total
Available-for-sale
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
June 30, 2020
Mortgage-backed securities - residential
$ -
$ -
$
$ (4
)
$
$ (4
)
Mortgage-backed securities - commercial
1,806
(2
)
-
-
1,806
(2
)
Collateralized mortgage obligations - residential
1,700
(12
)
-
-
1,700
(12
)
Total temporarily impaired
$ 3,506
$ (14
)
$
$ (4
)
$ 4,131
$ (18
)
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities.
In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (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 entity 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. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
As of June 30, 2021, the Corporation’s securities portfolio consisted of 312 available-for-sale and four held-to-maturity securities. There were 48 available-for-sale securities in an unrealized loss position at June 30, 2021, one of which was in a continuous loss position for twelve or more months. There were no held-to-maturity securities in an unrealized loss position at June 30, 2021. The unrealized losses within the available-for-sale securities portfolio in the 2021 fiscal year was primarily attributed to a change in rates. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities. Also, management monitors the financial condition of the individual municipal securities to ensure they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the Corporation will be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity, management does not believe there is any OTTI related to these securities at June 30, 2021. Also, there was no OTTI recognized at June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2021, the Corporation owned equity securities with an amortized cost of $400. The following table presents the net unrealized gains and losses on equity securities recognized in earnings for the twelve months ended June 30, 2021 and 2020. There were no realized gains or losses on the sale of equity securities during the periods presented. The Corporation did not own any equity securities as of June 30, 2020.
Unrealized gains recognized on equity securities held at the end of the period
$
$ -
NOTE 4-LOANS
Major classifications of loans were as follows as of June 30:
Commercial
$ 112,337
$ 158,667
Commercial real estate:
Construction
10,525
16,235
Other
269,679
229,029
1 - 4 Family residential real estate:
Owner occupied
118,269
90,494
Non-owner occupied
19,151
19,370
Construction
9,073
9,344
Consumer
29,646
21,334
Subtotal
568,680
544,473
Net deferred loan fees and costs
(2,253
)
(1,612
)
Allowance for loan losses
(6,471
)
(5,678
)
Net loans
$ 559,956
$ 537,183
The commercial loan category in the above table includes PPP loans of $50,686 as of June 30, 2021 and $66,606 as of June 30, 2020 and a mortgage loan warehouse line of credit to another financial institution with a zero outstanding balance as of June 30, 2021 and $32,869 as of June 30, 2020. The outstanding balance of the warehouse line of credit can fluctuate significantly based on the other financial institution’s funding needs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2021:
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Beginning balance
$
$ 3,623
$
$
$ 5,678
Provision for loan losses
(21
)
Loans charged-off
(22
)
-
(4
)
(122
)
(148
)
Recoveries
-
Total ending allowance balance
$
$ 3,949
$ 1,307
$
$ 6,471
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2020:
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Beginning balance
$
$ 2,575
$
$
$ 3,788
Provision for loan losses
1,044
1,980
Loans charged-off
-
-
(6
)
(140
)
(146
)
Recoveries
-
Total ending allowance balance
$
$ 3,623
$
$
$ 5,678
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2021. Included in the recorded investment in loans is $1,184 of accrued interest receivable.
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
$
$ -
$
$ -
$
Acquired loans collectively evaluated for impairment
-
-
Originated loans collectively evaluated for impairment
3,866
1,227
6,307
Total ending allowance balance
$
$ 3,949
$ 1,307
$
$ 6,471
Recorded investment in loans:
Loans individually evaluated for impairment
$
$
$
$ -
$ 1,954
Acquired loans collectively evaluated for impairment
6,542
21,363
6,488
35,227
Originated loans collectively evaluated for impairment
109,016
272,563
125,689
23,162
530,430
Total ending loans balance
$ 110,287
$ 280,026
$ 147,648
$ 29,650
$ 567,611
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020. Included in the recorded investment in loans is $1,936 of accrued interest receivable.
1-4 Family
Commercial
Residential
Real
Real
Commercial
Estate
Estate
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
$
$
$ -
$ -
$
Acquired loans collectively evaluated for impairment
-
-
Originated loans collectively evaluated for impairment
3,514
5,447
Total ending allowance balance
$
$ 3,623
$
$
$ 5,678
Recorded investment in loans:
Loans individually evaluated for impairment
$
$ 1,045
$
$ -
$ 1,923
Acquired loans collectively evaluated for impairment
1,095
8,072
27,252
12,550
48,969
Originated loans collectively evaluated for impairment
156,054
236,840
92,168
8,843
493,905
Total ending loans balance
$ 157,328
$ 245,957
$ 120,119
$ 21,393
$ 544,797
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2021:
Unpaid
Allowance
for
Average
Interest
Cash Basis
Principal
Recorded
Loan Losses
Recorded
Income
Interest
Balance
Investment
Allocated
Investment
Recognized
Recognized
With no related allowance recorded:
Commercial
$
$
$ -
$
$ -
$ -
Commercial real estate:
Other
1,062
-
1-4 Family residential real estate:
Owner occupied
-
Non-owner occupied
-
-
-
With an allowance recorded:
Commercial
Commercial real estate:
Other
-
-
-
1-4 Family residential real estate:
Owner occupied
-
-
Total
$ 2,320
$ 1,954
$
$ 2,096
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2020:
Unpaid
Allowance
for
Average
Interest
Cash Basis
Principal
Recorded
Loan Losses
Recorded
Income
Interest
Balance
Investment
Allocated
Investment
Recognized
Recognized
With no related allowance recorded:
Commercial
$ -
$ -
$ -
$
$ -
$ -
Commercial real estate:
Other
-
1-4 Family residential real estate:
Owner occupied
-
Non-owner occupied
-
-
-
With an allowance recorded:
Commercial
Commercial real estate:
Other
Total
$ 2,195
$ 1,923
$
$ 1,274
$
$
The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2021 and 2020:
June 30, 2021
June 30, 2020
Loans Past
Due
Loans Past
Due
Over 90 Days
Over 90 Days
Still
Still
Non-accrual
Accruing
Non-accrual
Accruing
Commercial
$
$ -
$
$ -
Commercial real estate:
Other
-
-
1 - 4 Family residential:
Owner occupied
-
Non-owner occupied
-
-
Consumer
-
-
-
Total
$ 1,771
$ -
$ 1,185
$
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of June 30, 2021 by class of loans:
Days Past Due
30 -59
60 - 89
90 Days or
Total
Loans Not
Days
Days
Greater
Past Due
Past Due
Total
Commercial
$ -
$ -
$ -
$ -
$ 110,287
$ 110,287
Commercial real estate:
Construction
-
-
-
-
10,478
10,478
Other
-
268,744
269,548
1-4 Family residential:
Owner occupied
-
118,937
119,331
Non-owner occupied
-
-
-
-
19,148
19,148
Construction
-
-
-
-
9,169
9,169
Consumer
-
29,544
29,650
Total
$
$
$
$ 1,304
$ 566,307
$ 567,611
The above table of past due loans includes the recorded investment in non-accrual loans of $994 in the 90 days or greater category and $777 in the loans not past due category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 by class of loans:
Days Past Due
30 -59
60 - 89
90 Days or
Total
Loans Not
Days
Days
Greater
Past Due
Past Due
Total
Commercial
$ -
$ -
$
$
$ 157,307
$ 157,328
Commercial real estate:
Construction
-
-
-
-
16,241
16,241
Other
-
229,086
229,716
1-4 Family residential:
Owner occupied
-
-
91,102
91,274
Non-owner occupied
-
-
-
-
19,410
19,410
Construction
-
-
-
-
9,435
9,435
Consumer
21,205
21,393
Total
$
$
$
$ 1,011
$ 543,786
$ 544,797
The above table of past due loans includes the recorded investment in non-accrual loans of $2 in the 60-89 days, $792 in the 90 days or greater category and $391 in the loans not past due category.
Troubled Debt Restructurings (TDR):
The Corporation has certain loans that have been modified in order to maximize collection of loan balances that are classified as TDRs. A modified loan is usually classified as a TDR if, for economic reasons, management grants a concession to the original terms and conditions of the loan to a borrower who is experiencing financial difficulties that it would not have otherwise considered. In response to COVID-19, on March 22, 2020, the Corporation adopted a loan modification program to assist borrowers impacted by the virus. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as TDRs. As of June 30, 2021, eight borrowers with an aggregate outstanding balance of $198 are in payment deferral status under this loan modification program that are not classified as TDRs.
On June 30, 2021 and 2020, the Corporation had $688 and $974, respectively, of loans classified as TDRs which are included in impaired loans above. On June 30, 2021 and 2020, the Corporation had $4 and $12, respectively, of specific reserves allocated to these loans. For the year ended June 30, 2021, there were no loans modified that were classified as a troubled debt restructuring.
During the fiscal year ended June 30, 2020, the terms of one loan was modified as a troubled debt restructuring by extending the maturity date. As of June 30, 2020, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2020:
Pre-Modification
Post-Modification
Number of
Outstanding
Recorded
Outstanding
Recorded
Loans
Investment
Investment
1-4 Family residential:
Owner occupied
$
$
Total
$
$
The troubled debt restructuring described above did not result in any charge-off nor did it increase the allowance for loan losses during the twelve months ended June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the twelve-month periods ended June 30, 2021 and 2020. A loan is considered in payment default once it is 90 days contractually past due under the modified terms.
Credit Quality Indicators:
The Corporation 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. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed monthly. The Corporation uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which was discussed previously.
As of June 30, 2021, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special
Not
Pass
Mention
Substandard
Doubtful
Rated
Commercial
$ 109,118
$
$
$
$
Commercial real estate:
Construction
10,478
-
-
-
-
Other
259,327
3,700
4,718
1-4 Family residential real estate:
Owner occupied
1,715
-
117,218
Non-owner occupied
18,312
Construction
1,849
-
-
-
7,320
Consumer
-
-
-
28,956
Total
$ 401,493
$ 4,143
$ 5,230
$ 1,771
$ 154,974
As of June 30, 2020, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special
Not
Pass
Mention
Substandard
Doubtful
Rated
Commercial
$ 152,911
$
$ 3,979
$
$
Commercial real estate:
Construction
16,241
-
-
-
-
Other
220,311
1,469
5,378
1,773
1-4 Family residential real estate:
Owner occupied
2,419
-
-
88,521
Non-owner occupied
18,435
Construction
3,234
-
-
-
6,201
Consumer
-
-
-
21,240
Total
$ 413,704
$ 1,798
$ 9,914
$ 1,042
$ 118,339
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-PREMISES AND EQUIPMENT
Major classifications of premises and equipment were as follows as of June 30:
Land
$ 1,603
$ 1,603
Land improvements
Building and leasehold improvements
15,522
14,191
Furniture, fixture and equipment
6,616
6,333
Total premises and equipment
24,122
22,476
Accumulated depreciation and amortization
(8,329
)
(7,575
)
Premises and equipment, net
$ 15,793
$ 14,901
Depreciation expense was $940 and $1,044 for the years ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, the Corporation leased real estate for seven office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to May 31, 2035, including extension periods. Lease agreements for three locations have a lease term of 12 months or less and are therefore considered short-term leases. The weighted average remaining life of the lease term for the leases with a term over 12 months was 87.68 months as of June 30, 2021.
Rent expense for all the operating leases was $205 and $196 for the twelve-month periods ended June 30, 2021 and 2020, respectively. The right-of-use asset, included in premises and equipment, and the lease liability, included in other liabilities, were $1,177 and $473 as of June 30, 2021 and 2020, respectively.
Total estimated rental commitments for the operating leases with a term over 12 months were as follows as of June 30, 2021:
Period Ending June 30
$
Thereafter
Total
$ 1,279
NOTE 6 - GOODWILL AND ACQUIRED INTANGIBLE ASSETS
The change in goodwill was as follows:
Beginning of year
$
$ -
Acquired goodwill
-
Ending balance as of June 30,
$
$
The following table summarizes the Corporation’s acquired intangible assets as of June 30, 2021 and 2020.
June 30, 2021
June 30, 2020
Gross Carrying
Amount
Accumulated Amortization
Gross Carrying
Amount
Accumulated Amortization
Core deposit intangible
$
$
$
$
Goodwill and the core deposit intangible assets resulted from the acquisition of Peoples that was completed on January 1, 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the asset might be impaired. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. For the goodwill impairment analysis, the Corporation is the only reporting unit. Management performed a qualitative impairment test of the Corporation’s goodwill during the fourth quarter of the 2021 fiscal year. Based on this test, management concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the only intangible asset on the Corporation’s balance sheet with an indefinite life.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The core deposit intangible asset is amortized on a straight-line basis over ten years. The Corporation recorded intangible amortization expense of $27 in 2021 and $14 in 2020. The intangible amortization expense for the core deposit intangible asset recorded as of June 30, 2021 is expected to be $27 per year for each of the next five fiscal years and $94 thereafter. The core deposit intangible asset that will be recorded for the two branches that were purchased and closed on July 16, 2021 will impact these numbers.
NOTE 7-DEPOSITS
Interest-bearing deposits as of June 30, 2021 and 2020 were as follows:
Demand
$ 127,447
$ 99,173
Savings and money market
282,761
228,567
Time:
$250 and over
18,488
36,747
Other
69,051
78,635
Total
$ 497,747
$ 443,122
Scheduled maturities of time deposits at June 30, 2021 were as follows:
Twelve Months Ending June 30
$ 56,866
21,554
2,151
3,579
1,415
Thereafter
1,974
$ 87,539
As of June 30, 2021, FHLB public unit deposit standby letters of credit of $7,000 were issued to collateralize public fund deposits.
NOTE 8-SHORT-TERM BORROWINGS
Short-term borrowings consisted of repurchase agreements and federal funds purchased. Information concerning all short-term borrowings at June 30, 2021 and 2020, maturing in less than one year is summarized as follows:
Balance at June 30
$ 12,203
$ 6,943
Average balance during the year
8,895
4,306
Maximum month-end balance
13,275
7,705
Average interest rate during the year
0.10
%
1.00
%
Weighted average rate, June 30
0.05
%
0.25
%
Securities sold under agreements to repurchase are utilized to facilitate the needs of our customers. Physical control is maintained for all securities pledged to secure repurchase agreements. Securities available-for-sale pledged for repurchase agreements as of June 30, 2021 and 2020 are presented in the following table:
Overnight and Continuous
U.S. government-sponsored entities and agencies pledged
$
$ 1,031
Residential mortgage-backed securities pledged
6,493
2,720
Commercial mortgage-backed securities
6,042
3,288
Total pledged
$ 13,302
$ 7,039
Repurchase agreements
$ 12,203
$ 6,943
Total interest expense on short-term borrowings was $9 and $43 for the years ended June 30, 2021 and 2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances were as follows:
June 30, 2021
June 30, 2020
Stated Interest Rate
Range
Weighted
Average
Weighted
Average
Advance Type
From
To
Amount
Rate
Amount
Rate
Fixed rate, amortizing
1.37
%
1.37
%
$
1.37
%
$
1.37
%
Fixed rate
0.90
1.97
17,700
1.40
24,200
1.59
Variable rate
-
-
-
-
6,500
0.26
Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the difference between the contract rate on the advance and the current rate on a comparable new advance. The following table is a summary of the scheduled principal payments for all advances:
Twelve Months Ending June 30
Principal
Payments
$ 1,799
6,567
5,556
Thereafter
4,049
Total
$ 18,050
Pursuant to collateral agreements with the FHLB, advances are secured by all the stock invested in the FHLB and certain qualifying first mortgage and multi-family loans. The advances were collateralized by $127,703 and $92,056 of first mortgage and multi-family loans under a blanket lien arrangement at June 30, 2021 and 2020, respectively. Based on this collateral and the Corporation’s holdings of FHLB stock, the Bank was eligible to borrow up to a total of $65,491 in additional advances at June 30, 2021.
NOTE 10-EMPLOYEE BENEFIT PLANS
The Bank maintains a 401(k) savings and retirement plan that permits eligible employees to make before- or after-tax contributions to the plan, subject to the dollar limits from Internal Revenue Service regulations. The Bank matches 100% of the employee’s voluntary contributions to the plan based on the amount of each participant’s contributions up to a maximum of 4% of eligible compensation. All regular full-time and part-time employees who complete six months of service and are at least 21 years of age are eligible to participate. Amounts charged to operations were $321 and $282 for the years ended June 30, 2021 and 2020, respectively.
The Bank maintains a nonqualified Salary Continuation Plan (SCP) to reward and encourage certain Bank executives to remain employees of the Bank. The SCP is considered an unfunded plan for tax and Employee Retirement Income Security Act (ERISA) purposes and all obligations arising under the SCP are payable from the general assets of the Corporation. The estimated present value of future benefits to be paid to certain current and former executives totaled $3,140 as of June 30, 2021 and $2,695 as of June 30, 2020 and is included in other liabilities. For purposes of calculating the present value of future benefits, a discount rate of 3.0% was in effect at June 30, 2021 and 4.0% was in effect at June 30, 2020. For the years ended June 30, 2021 and 2020, $530 and $305, respectively, have been charged to expense in connection with the SCP. Distributions to participants were $85 for each year ended June 30, 2021 and 2020.
The 2010 Omnibus Incentive Plan (2010 Plan) is a nonqualified share-based compensation plan. The 2010 Plan was established to promote alignment between key employees’ performance and the Corporation’s shareholder interests by motivating performance through the award of stock-based compensation. The 2010 Plan is intended to attract, retain and motivate talented employees and compensate outside directors for their service to the Corporation. The 2010 Plan has been approved by the Corporation’s shareholders. The Compensation Committee of the Corporation’s Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award contract.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the 2010 Plan, the Corporation may grant, among other things, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, or any combination thereof to any employee and outside director. Each award is evidenced by an award agreement that specifies the number of shares awarded, the vesting period, the performance requirements, and such other provisions as the Compensation Committee determines. Upon a change-in-control of the Corporation, as defined in the 2010 Plan, all outstanding awards immediately vest.
The Corporation has granted restricted stock awards to certain employees and directors. Restricted stock awards are issued at no cost to the recipient and can be settled only in shares at the end of the vesting period. Awards are made at the end of the measurement period of certain specified performance targets once those performance targets as established by the Compensation Committee are achieved. Some awards, primarily the awards made to directors, vest on the date of grant. For other awards, primarily the awards made to executive management, 25% vest on the grant date, which is the end of the performance period, with the remaining vesting 25% per year over a three-year period. Restricted stock awards provide the holder with full voting rights and dividends during the vesting period. Cash dividends are reinvested into shares of stock and are subject to the same restrictions and vesting as the initial award. All dividends are forfeitable in the event the shares do not vest. The fair value of the restricted stock awards, which is used to measure compensation expense, is the closing market price of the Corporation’s common stock on the date of the grant and compensation expense is recognized over the vesting period of the awards.
The following table summarizes the status of the restricted stock awards:
Restricted Stock
Awards
Weighted-
Average
Grant Date Fair
Value Per Share
Outstanding at June 30, 2020
8,686
$ 19.31
Granted
12,522
15.70
Vested
(9,747
)
17.22
Non-vested at June 30, 2021
11,461
$ 17.14
There was $168 in expense recognized in the 2021 fiscal year and $159 in expense recognized in the 2020 fiscal year in connection with the restricted stock awards. As of June 30, 2021, there was $125 of total unrecognized compensation expense related to non-vested shares and the expense is expected to be recognized over the next three years.
NOTE 11-INCOME TAXES
The provision for income taxes consisted of the following for the years ended June 30, calculated utilizing a statutory federal income tax rate of 21.0%:
Current income taxes
$ 2,170
$ 1,273
Deferred income tax benefit
(320
)
(361
)
Total income tax expense
$ 1,850
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred income tax asset consisted of the following components at June 30:
Deferred tax assets:
Allowance for loan losses
$ 1,317
$ 1,119
Deferred compensation
Deferred income
Non-accrual loan interest income
Other
Gross deferred tax asset
2,300
1,938
Deferred tax liabilities:
Depreciation
(718
)
(742
)
Loan fees
(498
)
(402
)
FHLB stock dividends
(102
)
(102
)
Prepaid expenses
(56
)
(72
)
Intangible assets
(88
)
(102
)
Net unrealized securities gain
(944
)
(1,132
)
Gross deferred tax liabilities
(2,406
)
(2,552
)
Net deferred liability
$ (106
)
$ (614
)
The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate of 21.0% to income before taxes consisted of the following for the years ended June 30:
Income taxes computed at the statutory rate on pretax income
$ 2,276
$ 1,352
Tax exempt income
(360
)
(317
)
Cash surrender value income and death benefit
(55
)
(124
)
Tax credit
(22
)
(25
)
Other non-deductible expenses
Total income tax expense
$ 1,850
$
The effective tax rate was 17.1% for the year ended June 30, 2021 compared to 14.2% for the year ended June 30, 2020. At June 30, 2021 and June 30, 2020, the Corporation had no unrecognized tax benefits recorded. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. There were no interest or penalties recorded for the years ended June 30, 2021 and 2020 and there were no amounts accrued for interest and penalties at June 30, 2021 and 2020.
The Corporation and the Bank are subject to U.S. federal income tax as an income-based tax and a capital-based franchise tax in the State of Ohio. The Corporation and the Bank are no longer subject to examination by taxing authorities for years before 2017.
NOTE 12-RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain executive officers, directors, and their affiliates. A summary of activity during the year ended June 30, 2021 of related party loans were as follows:
Principal balance, July 1
$ 5,354
New loans, net of refinancing
Repayments
(635
)
Changes due to changes in related parties
(2,444
)
Principal balance, June 30
$ 2,336
Deposits from executive officers, directors and their affiliates totaled $5,500 at June 30, 2021 and $4,332 at June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and 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 about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including 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 plans for capital restoration are required.
As of fiscal year-end 2021 and 2020, the Corporation met the definition of a Small Bank Holding Company and, therefore, was exempt from maintaining consolidated regulatory capital ratios. Instead, regulatory capital ratios only apply at the subsidiary bank level. The Basel III Capital Rules became effective for the Bank on January 1, 2015 and certain provisions were subject to a phase-in period. The implementation of the capital conservation buffer was phased in from 0.625% on January 1, 2016 to 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2021, the Bank met all capital adequacy requirements to which it was subject.
The following table presents actual and required capital ratios as of June 30, 2021 and June 30, 2020 for the Bank:
Actual
Minimum Capital
Required - Basel III
(1)
Minimum Required
To Be Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2021
Common equity Tier 1 to risk-weighted assets
$ 64.7
11.87
%
$ 24.5
4.50
%
$ 35.4
6.50
%
Tier 1 capital to risk weighted assets
64.7
11.87
32.7
6.00
43.6
8.00
Total capital to risk weighted assets
71.2
13.06
43.6
8.00
54.5
10.00
Tier 1 capital to average assets
64.7
7.83
33.1
4.00
41.3
5.00
Actual
Minimum Capital
Required -
Basel III (1)
Minimum Required
To Be Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2020
Common equity Tier 1 to risk-weighted assets
$ 57.6
11.55
%
$ 22.4
4.50
%
$ 32.4
6.50
%
Tier 1 capital to risk weighted assets
57.6
11.55
29.9
6.00
39.9
8.00
Total capital to risk weighted assets
63.2
12.69
39.9
8.00
49.8
10.00
Tier 1 capital to average assets
57.6
8.04
28.7
4.00
35.8
5.00
(1)
These amounts exclude the capital conservation buffer.
As of the latest regulatory examination, the Bank was categorized as well capitalized. There are no conditions or events since that examination that management believes may have changed the Bank’s category.
The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. As of June 30, 2021 the Bank could, without prior approval, declare a dividend of approximately $8,741.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-COMMITMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments are agreements to lend to customers providing that there are no violations of any condition established in the contract. Commitments to extend credit have a fixed expiration date or other termination clause. These instruments involve elements of credit and interest rate risk more than the amount recognized in the statements of financial position. The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.
The Bank evaluates each customer’s credit on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. The amount of commitments to extend credit and the exposure to credit loss for non-performance by the customer (before considering collateral) was $118,284 and $98,923 as of June 30, 2021 and 2020, respectively. Of the June 30, 2021 commitments, $93,030 carried variable rates and $25,254 carried fixed rates of interest ranging from 2.99% to 6.75% with maturity dates from July 2021 to July 2052. Of the June 30, 2020 commitments, $75,614 carried variable rates and $23,309 carried fixed rates of interest ranging from 3.25% to 6.75% with maturity dates from September 2020 to August 2051. Financial standby letters of credit were $1,015 and $2,103 as of June 30, 2021 and 2020, respectively. In addition, commitments to extend credit of $10,634 and $10,323 as of June 30, 2021 and 2020, respectively, were available to checking account customers related to the overdraft protection program. Since some loan commitments expire without being used, the amount does not necessarily represent future cash commitments.
NOTE 15-FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
Securities available-for-sale and equity securities: When available, the fair values of available-for-sale and equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other unobservable inputs (Level 3 inputs).
Assets and liabilities measured at fair value on a recurring basis are summarized below, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Fair Value Measurements at
June 30, 2021 Using
Assets:
Balance at
June 30, 2021
Level 1
Level 2
Level 3
Obligations of U.S. government-sponsored entities and agencies
$ 15,033
-
$ 15,033
-
Obligations of states and political subdivisions
76,499
-
76,499
-
U.S. government-sponsored mortgage-backed securities - residential
90,517
-
90,517
-
U.S. government-sponsored mortgage-backed securities - commercial
8,845
-
8,845
-
U.S. government-sponsored collateralized mortgage obligations
16,374
-
16,374
-
Other debt securities
-
-
Equity securities
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements at
June 30, 2020 Using
Assets:
Balance at
June 30, 2020
Level 1
Level 2
Level 3
Obligations of U.S. Treasury
$ 1,256
$ -
$ 1,256
$ -
Obligations of U.S. government-sponsored entities and agencies
10,532
-
10,532
-
Obligations of states and political subdivisions
63,492
-
63,492
-
U.S. government-sponsored mortgage-backed securities - residential
50,156
-
50,156
-
U.S. government-sponsored mortgage-backed securities - commercial
8,497
-
8,497
-
U.S. government-sponsored collateralized mortgage obligations
9,985
-
9,985
-
There were no transfers between Level 1 and Level 2 during the 2021 or the 2020 fiscal year.
Certain assets and liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Assets and liabilities measured at fair value on a non-recurring basis include the following:
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 specific allocations of the allowance for loan losses or are charged down to their fair value. For collateral dependent loans, fair value is commonly based on recent 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 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.
Other Real Estate and Repossessed Assets Owned: Assets acquired through or instead of loan 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. Real estate owned properties and other repossessed assets, which are primarily vehicles, are evaluated on a quarterly basis for additional impairment and adjusted accordingly. There was no other real estate owned or other repossessed assets being carried at fair value as of June 30, 2021 or June 30, 2020.
There were no assets measured at fair value on a non-recurring basis at June 30, 2021 or 2020 and there was no impact to the provision for loan losses for the twelve months ended June 30, 2021 or 2020.
The following table shows the estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents
$ 18,529
$ 18,529
$ 9,659
$ 9,659
Level 2 inputs:
Certificates of deposit in other financial institutions
5,825
5,955
11,635
11,889
Loans held for sale
1,457
1,488
3,507
3,566
Accrued interest receivable
2,077
2,077
2,646
2,646
Level 3 inputs:
Securities held-to-maturity
7,996
8,352
3,541
3,868
Loans, net
559,956
560,208
537,183
548,247
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits
639,310
639,310
517,973
517,973
Time deposits
87,539
88,147
115,382
116,238
Short-term borrowings
12,203
12,203
6,943
6,943
Federal Home Loan Bank advances
18,050
18,247
31,161
31,571
Accrued interest payable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16-PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial information of Consumers Bancorp. Inc. (parent company only) follows:
June 30,
June 30,
Condensed Balance Sheets
Cash
$
$
Equity securities, at fair value
-
Other assets
Investment in subsidiary
69,267
62,853
Total assets
$ 69,955
$ 63,385
Other liabilities
$
$
Shareholders’ equity
69,900
63,240
Total liabilities & shareholders’ equity
$ 69,955
$ 63,385
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Condensed Statements of Income and Comprehensive Income
Cash dividends from Bank subsidiary
$ 2,050
$ 6,120
Other income
Other expense
1,050
Income before income taxes and equity in undistributed net income of subsidiary
1,815
5,095
Income tax benefit
(49
)
(189
)
Income before equity in undistributed net income of Bank subsidiary
1,864
5,284
Equity in undistributed net income of subsidiary
7,124
Net income
$ 8,988
$ 5,527
Comprehensive income
$ 8,278
$ 8,221
Condensed Statements of Cash Flows
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Cash flows from operating activities:
Net income
$ 8,988
$ 5,527
Equity in undistributed net income of Bank subsidiary
(7,124
)
(243
)
Securities amortization and accretion, net
-
(8
)
Change in other assets and liabilities
(158
)
Net cash flows from operating activities
1,986
5,118
Cash flows from investing activities:
Purchase of equity securities
(400
)
-
Proceeds from sale of available-for-sale securities
-
1,654
Acquisition
-
(5,128
)
Net cash flows from investing activities
(400
)
(3,474
)
Cash flows from financing activities:
Dividend paid
(1,785
)
(1,554
)
Issuance of treasury stock for stock awards
Net cash flows from financing activities
(1,618
)
(1,424
)
Change in cash and cash equivalents
(32
)
Beginning cash and cash equivalents
Ending cash and cash equivalents
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17-EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. There were 1,711 shares of restricted stock that were anti-dilutive for the year ending June 30, 2021. There were 1,655 shares of restricted stock that were anti-dilutive for the year ending June 30, 2020. The following table details the calculation of basic and diluted earnings per share:
For the year Ended June 30,
Basic:
Net income available to common shareholders
$ 8,988
$ 5,527
Weighted average common shares outstanding
3,019,118
2,874,234
Basic income per share
$ 2.98
$ 1.92
Diluted:
Net income available to common shareholders
$ 8,988
$ 5,527
Weighted average common shares outstanding
3,019,118
2,874,234
Dilutive effect of restricted stock
-
-
Total common shares and dilutive potential common shares
3,019,118
2,874,234
Dilutive income per share
$ 2.98
$ 1.92
NOTE 18-ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income related to unrealized gains (losses) on available-for-sale securities for the periods ended June 30, 2021 and June 30, 2020, were as follows:
Pretax
Tax
Effect
After-tax
Affected Line
Item
in Consolidated
Statements of
Income
Balance as of June 30, 2019
$ 1,982
$ (416
)
$ 1,566
Unrealized holding gain on available-for-sale securities arising during the period
3,766
(791
)
2,975
Amounts reclassified from accumulated other comprehensive income
(355
)
(281
)
(a)(b)
Net current period other comprehensive income
3,411
(717
)
2,694
Balance as of June 30, 2020
$ 5,393
$ (1,133
)
$ 4,260
Unrealized holding loss on available-for-sale securities arising during the period
$ (886
)
$
$ (699
)
Amounts reclassified from accumulated other comprehensive income
(14
)
(11
)
(a)(b)
Net current period other comprehensive loss
(900
)
(710
)
Balance as of June 30, 2021
$ 4,493
$ (943
)
$ 3,550
(a) Securities gain, net
(b) Income tax expense
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - REVENUE RECOGNITION
On July 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All the Corporation's revenue from contracts with customers is recognized within noninterest income.
Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.
Interchange income: The Corporation earns interchange income from cardholder transactions conducted through the various payment networks. Interchange income from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees is processed through noninterest income.
The following table presents the Corporation's sources of noninterest income for the year ended June 30, 2021 and 2020.
For the year Ended June 30,
Noninterest income
In scope of Topic 606:
Service charges on deposit accounts
$ 1,220
$ 1,350
Debit card interchange income
1,891
1,575
Other income
Noninterest income (in scope of Topic 606)
3,415
3,216
Noninterest income (out-of-scope of Topic 606)
1,051
1,487
Total noninterest income
$ 4,466
$ 4,703
Note 20 - COVID-19
In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, and has spread around the world, resulting in business and social disruption. The coronavirus was declared a Pandemic by the World Health Organization on March 11, 2020. The operations and business results of the Corporation could be materially adversely affected. The extent to which the coronavirus may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others. As a result of the economic shutdown engineered to slow down the spread of COVID-19, the ability of our customers to make payments on loans could be adversely impacted, resulting in elevated loan losses and an increase in the Corporation’s allowance for loan losses.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934) was performed, as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of Consumers Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2021 based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in 2013. Based on that assessment, we have concluded that, as of June 30, 2021, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this annual report.
Changes In Internal Control Over Financial Reporting
There were no changes in the Corporation’s internal controls over financial reporting that occurred during the fourth quarter of fiscal year 2021 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B - Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10 - Directors, Executive Officers and Corporate Governance
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 16, 2021, under the captions “Election of Directors,” “Directors and Executive Officers,” “The Board of Directors and its Committees,” “Delinquent Section 16(a) Reports,” and “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.
The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Governance Documents of the Corporation’s website (www.consumers.bank). Copies of either of the Code of Ethics Policies are also available in print to shareholders upon request, addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11 - Executive Compensation
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 16, 2021 under the captions “Director Compensation,” “Executive Compensation,” “Defined Contribution Plan,” “Outstanding Equity Awards at Fiscal Year-End,” and “Salary Continuation Program,” and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information about common stock authorized for issuance, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, as of June 30, 2021. Additional information regarding stock-based compensation plans is presented in Note 10 - Employee Benefit Plans to the Consolidated Financial Statements located elsewhere in this report.
Plan Category
Number of securities
to
be issued upon
exercise of
outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining
available for future issuance
under
equity compensation plans
(excluding
securities issuable under
outstanding
options, warrants and rights)
Plans approved by shareholders
-
-
64,452
Plans not approved by shareholders
-
-
-
Total
-
-
64,452
The remaining information required by this item is set forth in the Corporation’s Proxy Statement, dated September 16, 2021, under the caption “Security Ownership of Certain Beneficial Owners,” and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 - Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 16, 2021, under the caption “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14 - Principal Accounting Fees and Services
The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 16, 2021, under the caption “Principal Accounting Fees and Services,” and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15 - Exhibit and Financial Statement Schedules
(a)
The following documents are filed as part of this report:
(1)
The report of independent registered accounting firm and the consolidated financial statements appearing in Item 8.
(2)
Financial statement schedules are omitted as they are not required or are not applicable, or the required information is included in the financial statements.
(3)
The exhibits required by this item are listed in the Exhibit Index of this Form 10-K.
(b)
The exhibits to this Form 10-K begin on page 59 of this report.
(c)
See Item 15(a)(2) above.