PART I

 

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. The Bank currently has 18 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. 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. On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The financial position and results of operations of Peoples prior to its acquisition date are not included in Consumers’ 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.

 

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, 2024 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.”

 

 

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. At June 30, 2020, 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 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.

 

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, 2020, the Bank employed 149 full-time and 23 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.consumersbank.com) 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.

 

ITEM 1A—RISK FACTORS

 

Not applicable for Smaller Reporting Companies.

 

ITEM 1B—UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2—PROPERTIES

 

The Bank operates eighteen full-service banking facilities and one loan production office (LPO) as noted below:

 

Location		Address		Owned		Leased
Minerva		614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657		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
Hanoverton		30034 Canal Street, P.O. Box 178, Hanoverton, Ohio, 44423		X
Carrollton		1017 Canton Road NW, Carrollton, Ohio, 44615				X
Alliance		610 West State Street, Alliance, Ohio, 44601				X
Lisbon		7985 Dickey Drive, Lisbon, Ohio 44432		X
Louisville		1111 N. Chapel Street, Louisville, Ohio 44641		X
East Canton		440 W. Noble, East Canton, Ohio, 44730		X
Malvern		4070 Alliance Road, Malvern, Ohio 44644				X
Hartville		1215 W. Maple Street, Hartville, Ohio 44632		X
Jackson-Belden		4026 Dressler Road NW, Canton, Ohio 44718		X
Bergholz		256 2nd Street, Bergholz, Ohio 43908				X
Fairlawn		3680 Embassy Parkway Suite B, Fairlawn, Ohio 44333				X
Brewster		210 Wabash Ave S, Brewster, OH 44613		X
Mount Pleasant		298 Union Street, Mount Pleasant, OH 43939		X
Adena		9 East Main Street, Adena, OH 43901		X
Dillonvale		44 Smithfield Street, Dillonvale, OH 43917		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. 

 

 

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.

 

ITEM 4—MINE SAFETY DISCLOSURES 

 

None.

 

 

PART II  

 

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  

 

The Corporation had 3,015,578 common shares outstanding on June 30, 2020 with 745 shareholders of record and an estimated 681 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, 2019				December 31, 2019				March 31, 2020				June 30, 2020
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

 

 

Quarter Ended		September 30, 2018				December 31, 2018				March 31, 2019				June 30, 2019
High		$	24.00			$	24.14			$	19.50			$	19.25
Low			23.20				16.85				16.85				18.40
Cash dividends paid per share			0.13				0.13				0.13				0.13

 

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 2020 fiscal year.

 

 ITEM 6—SELECTED FINANCIAL DATA 

 

Not applicable for Smaller Reporting Companies.

 

 

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, 2020 and 2019. 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 adversely 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;
	●	changes in the level of non-performing assets and charge-offs;
	●	declining asset values impacting the underlying value of collateral;
	●	rapid fluctuations in market interest rates could result in changes in fair market valuations and net interest income; pricing and liquidity pressures may result;
	●	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 effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;
	●	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;
	●	the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
	●	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;
	●	changes in the reliability of our vendors, internal control systems or information systems;
	●	unanticipated difficulties or expenditures related to the acquisition of Peoples; and
	●	our ability to attract and retain qualified employees.

  

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. 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 Bancorp of Mt. Pleasant, Inc. (Peoples) 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. On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The financial position and results of operations of Peoples prior to its acquisition date are not included in Consumers’ 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 Coronavirus Aid, Relief and Economic Security Act (the CARES Act) includes two key SBA initiatives to assist small businesses. The first SBA program is the Paycheck Protection Program (PPP) that was designed to provide a direct incentive for small businesses to keep their workers on the payroll. The SBA will forgive loans obtained under this program if the borrower keeps all employees on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. A total of $66,606 of PPP loans for 571 customers were outstanding as of June 30, 2020. The second SBA program is the Subsidy for Certain Loan Payments in which the SBA will pay the principal, interest, and any associated fees the borrower owes on certain SBA loans for a six-month period. As of March 31, 2020, the Corporation had $18,285 of SBA loans which are eligible for payment assistance from the SBA. Management has been working with these borrowers to secure the principal and interest payments from the SBA.

 

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, 2020, 270 commercial loans with an outstanding balance of $72,995, 48 mortgage loans with an outstanding balance of $4,632, four home equity lines of credit with an outstanding balance of $227, and 97 consumer loans with an outstanding balance of $1,001 were granted 90 days of payment deferrals. As of August 31, 2020, a second 90 days of payment deferral has been granted for 49 commercial loans with an outstanding balance of $9,341, seven mortgage loans with an outstanding balance of $647 and four consumer loans with an outstanding balance of $44.

 

We are also assisting customers, in certain circumstances, by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties for customers experiencing financial hardship due to COVID-19. The consumer reserve personal line of credit has been redesigned to provide easier access and a lower initial rate on this unsecured line of credit that is linked to a personal checking account. Commercial customers are encouraged to access available funds on their lines of credit and we expect to provide emergency commercial lines of credit to qualified borrowers in order to assist borrowers in meeting payroll and other recurring fixed expenses. As of June 30, 2020, five emergency lines of credit were provided to commercial borrowers with a committed liability of $725.

 

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. Branch lobbies were closed for a six-week period but are now opened for normal business. The Company is encouraging virtual meetings and conference calls in place of in-person meetings, including the annual shareholders meeting which will be held virtually this year. Additionally, travel for business has been restricted. The Company is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces.

  

 

Comparison of Results of Operations for the Years Ended June 30, 2020 and June 30, 2019

 

Net Income. Net income was $5,527 for fiscal year 2020 compared with $5,566 for fiscal year 2019. The following key factors summarize our results of operations for the year ended June 30, 2020 compared with the same prior year period:

 

	●	net interest income increased by $4,095, or 23.5%, in fiscal year 2020, primarily as a result of a $176,848, or 34.6%, increase in average interest-earning assets, which was primarily due to the merger with Peoples and from the addition of PPP loan receivables;
	●	a $1,980 provision for loan loss expense was recorded during the 2020 fiscal year compared with a negative provision for loan loss expense of $440 during the 2019 fiscal year;
	●	total other income increased by $435, or 10.2%, in fiscal year 2020, which includes net securities gains of $355 in fiscal year 2020 compared to $561 in the same prior year period; and
	●	total other expenses increased by $2,250, or 14.5%, in fiscal year 2020 and include $827 of merger related expenses and six months of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples.

 

Return on average equity and return on average assets were 9.67% and 0.89%, respectively, for the 2020 fiscal year-to-date period compared with 11.96% and 1.07%, 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 that 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,		2020				2019
Net interest income		$	21,484			$	17,389
Taxable equivalent adjustments to net interest			326				345
Net interest income, fully taxable equivalent		$	21,810			$	17,734
Net interest margin			3.67	%			3.55	%
Taxable equivalent adjustment			0.05				0.12
Net interest margin, fully taxable equivalent			3.72	%			3.62	%

 

FTE net interest income for the 2020 fiscal year was $21,810, an increase of $4,076 or 23.0%, from $17,734 in the 2019 fiscal year. The Corporation’s tax equivalent net interest margin was 3.72% for the year ended June 30, 2020 and was 3.62% for the fiscal year ended 2019. FTE interest income for the 2020 fiscal year was $25,631, an increase of $4,741, or 22.7%, from the 2019 fiscal year primarily as a result of a $101,153, or 20.7%, increase in average interest-earning assets from the 2019 fiscal year. The growth in average interest-earning assets was primarily a result of the addition of PPP loans, the merger with Peoples and organic loan growth. Interest income includes $644 of interest and fee income that was recognized related to the PPP loans. Interest expense for the 2020 fiscal year was $3,821, an increase of $665, or 21.1%, from the 2019 fiscal year. This increase was mainly due to an increase of $63,872, or 18.0%, in total interest-bearing liabilities as a result of the merger with Peoples. The overall cost of funds increased slightly to 0.91% for the current fiscal year from 0.89% for the prior fiscal year.

 

 

Average Balance Sheet and Net Interest Margin

 

	2020														2019
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
Interest earning assets:
Taxable securities		$	81,609			$	1,932				2.40	%		$	85,837			$	2,192				2.50	%
Nontaxable securities (1)			61,215				1,914				3.24				60,124				1,918				3.19
Loan receivables (1)			433,948				21,553				4.97				336,384				16,601				4.94
Federal bank and other restricted stocks			1,960				75				3.83				1,518				86				5.67
Interest bearing deposits and federal funds sold			10,589				157				1.48				4,305				93				2.16
Total interest earning assets			589,321				25,631				4.37	%			488,168				20,890				4.26	%
Noninterest earning assets			32,180												30,905
Total assets		$	621,501											$	519,073
Interest bearing liabilities:
Interest bearing demand		$	86,418			$	428				0.50	%		$	82,086			$	547				0.67	%
Savings			191,119				799				0.42				161,062				706				0.44
Time deposits			118,847				2,259				1.90				91,291				1,533				1.68
Short-term borrowings			4,306				43				1.00				3,521				51				1.45
FHLB advances			17,630				292				1.66				16,488				319				1.93
Total interest-bearing liabilities			418,320				3,821				0.91	%			354,448				3,156				0.89	%
Noninterest-bearing liabilities			146,050												118,099
Total liabilities			564,370												472,547
Shareholders’ equity			57,131												46,526
Total liabilities and shareholders’ equity		$	621,501											$	519,073
Net interest income, interest rate spread (1)						$	21,810				3.46	%						$	17,734				3.37	%
Net interest margin (net interest as a percent of average interest earning assets) (1)											3.72	%											3.62	%
Federal tax exemption on non-taxable securities and loans included in interest income						$	326											$	345
Average interest earning assets to interest bearing liabilities											140.88	%											137.73	%

 

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(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

 

		2020 Compared to 2019 Increase / (Decrease)												2019 Compared to 2018 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		$	(260	)		$	(176	)		$	(84	)		$	276			$	106			$	170
Nontaxable securities (1)			(4	)			(34	)			30				(78	)			13				(91	)
Loan receivables (2)			4,952				4,845				107				2,645				2,018				627
Federal bank and other restricted stocks			(11	)			21				(32	)			5				5				—
Interest bearing deposits and federal funds sold			64				101				(37	)			(58	)			(86	)			28
Total interest income			4,741				4,757				(16	)			2,790				2,056				734
Interest bearing liabilities:
Interest bearing demand			(119	)			28				(147	)			432				68				364
Savings deposits			93				127				(34	)			351				14				337
Time deposits			726				505				221				793				246				547
Short-term borrowings			(8	)			10				(18	)			(189	)			(268	)			79
FHLB advances			(27	)			21				(48	)			98				55				43
Total interest expense			665				691				(26	)			1,485				115				1,370
Net interest income		$	4,076			$	4,066			$	10			$	1,305			$	1,941			$	(636	)

 

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(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 2020, a provision for loan loss expense of $1,980 was recorded compared with a negative provision for loan loss expense of $440 in fiscal year 2019. The provision for loan loss expense increased 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. A negative provision for loan loss expense was recorded in fiscal year 2019 primarily as a result of a full principal recovery of a prior period loan charge-off.

 

For the 2020 fiscal year, net charge offs of $90 were recorded compared with net recoveries of $806 for the same period last year. Net recoveries for the 2019 fiscal year were primarily within the commercial real estate portfolio and included a full principal recovery of a prior period charge-off. The allowance for loan losses as a percentage of loans was 1.05% at June 30, 2020 and 1.03% at June 30, 2019. The allowance for loan losses as a percent of total loans on June 30, 2020 is not comparable to June 30, 2019 since the loans acquired from Peoples 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 $1,226 as of June 30, 2020 and represented 0.23% of total loans. This compared with $785, or 0.21% of total loans at June 30, 2019. 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 increased by $435, or 10.2%, to $4,703 for the 2020 fiscal year.

 

Debit card interchange income increased by $121, or 8.3%, in 2020 to $1,575 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 $85, or 18.6%, in 2020 primarily as a result of an increase in volume. 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 $561 in fiscal year 2019. During the 2019 fiscal year, the pooled trust preferred security was sold because of the significant increase in the value of this security resulting in a gain of $593. The Corporation does not own any other security of this type.

 

 

Other Expenses. Total other expenses were $17,768 for the year ended June 30, 2020; an increase of $2,250, or 14.5%, from $15,518 for the year ended June 30, 2019.

 

Salaries and employee benefit expenses increased by $1,227, or 14.7%, during the 2020 fiscal year mainly as a result of six months of expenses associated with the additional staff gained as a result of the merger with Peoples for the three new office locations and increased incentive expenses.

 

Occupancy and equipment expenses increased by $370, or 17.7%, during the 2020 fiscal year from the same period last year primarily as a result of increased depreciation expense for the Salem branch location since it is expected that this location will be replaced in the spring of 2021. Also, occupancy expenses increased as a result of additional cleaning and protective equipment needed as a result of COVID-19 and from the three new office locations acquired from the merger with Peoples.

 

Data processing expenses increased by $286, or 46.1% and professional and director fees increased by $228, or 28.5%, during the 2020 fiscal year from the same period last year primarily as a result of system conversion and termination costs, investment banker, legal, accounting and auditing fees associated with the acquisition of Peoples.

 

Income Tax Expense. Income tax expense totaled $912 and $1,013 and the effective tax rates were 14.2% and 15.4% for the years ended June 30, 2020 and 2019, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in the 2019 and 2020 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, 2020 were $740,820 compared with $553,936 at June 30, 2019, an increase of $186,884, or 33.7%. From June 30, 2019, total assets increased by $74,261 due to the acquisition of Peoples and $112,623 due to organic growth. The growth in total assets is mainly attributable to an increase of $173,686, or 47.0%, in total loans which was primarily funded by a $161,181, or 34.1%, increase in total deposits.

 

Securities. Total securities were $147,459 at June 30, 2020, of which $143,918 were classified as available-for-sale and $3,541 were classified as held-to-maturity. The securities portfolio is mainly comprised of residential mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, obligations of the U.S. Treasury, 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, 2020 and 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:

 

June 30, 2020 Available-for-sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Treasury		$	1,248			$	8			$	—			$	1,256
Obligations of U.S. government-sponsored entities and agencies			10,133				399				—				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				55				(2	)			8,497
U.S. government-sponsored collateralized mortgage obligations - residential			9,712				285				(12	)			9,985
Total available-for-sale securities		$	138,525			$	5,411			$	(18	)		$	143,918

 

 

June 30, 2019 Available-for-sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Obligations of U.S. government-sponsored entities and agencies		$	19,227			$	287			$	(1	)		$	19,513
Obligations of state and political subdivisions			56,405				1,557				(33	)			57,929
U.S. government-sponsored mortgage-backed securities - residential			56,309				450				(448	)			56,311
U.S. government-sponsored collateralized mortgage obligations - residential			10,087				198				(28	)			10,257
Total available-for-sale securities		$	142,028			$	2,492			$	(510	)		$	144,010

 

 The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2020 and 2019 and the corresponding gross unrecognized gains and losses:

 

June 30, 2020 Held-to-maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
Obligations of state and political subdivisions		$	3,541			$	327			$	—			$	3,868
Total held-to-maturity securities		$	3,541			$	327			$	—			$	3,868

 

June 30, 2019 Held-to-maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
Obligations of state and political subdivisions		$	3,786			$	35			$	—			$	3,821
Total held-to-maturity securities		$	3,786			$	35			$	—			$	3,821

 

The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2020: 

 

Available-for-sale		Amortized Cost				Fair Value				Average Yield
Obligations of U.S. Treasury:
3 Months or less		$	500			$	501				1.67	%
Over 3 months through 1 year			748				755				1.66
Total Obligations of U.S. Treasury			1,248				1,256				1.66
Obligations of government-sponsored entities:
Over 3 months through 1 year			1,998				2,014				2.09
Over 1 year through 5 years			6,246				6,512				2.32
Over 5 years through 10 years			1,889				2,006				2.44
Total obligations of government-sponsored entities			10,133				10,532				2.30
Obligations of state and political subdivisions:
Over 3 months through 1 year			2,615				2,635				3.24
Over 1 year through 5 years			10,796				11,149				3.23
Over 5 years through 10 years			14,168				14,741				3.23
Over 10 years			32,764				34,967				3.49
Total obligations of state and political subdivisions			60,343				63,492				3.39
Mortgage-backed securities - residential:
Over 1 year through 5 years			43,105				44,458				2.37
Over 5 years through 10 years			5,540				5,698				2.60
Total mortgage-backed securities - residential			48,645				50,156				2.40
Mortgage backed securities – commercial:
Over 3 months through 1 year			1,995				1,999				1.06
Over 1 year through 5 years			3,930				3,979				1.69
Over 5 years through 10 years			1,501				1,501				1.90
Over 10 years			1,018				1,018				2.49
Total mortgage-backed securities - commercial			8,444				8,497				1.67
Collateralized mortgage obligations:
Over 3 months through 1 year			2,465				2,496				1.85
Over 1 year through 5 years			7,247				7,489				2.76
Total collateralized mortgage obligations			9,712				9,985				2.53
Total available-for-sale securities		$	138,525			$	143,918				2.68	%

 

 

Held-to-maturity		Amortized Cost				Fair Value				Average Yield
Obligations of state and political subdivisions:
Over 5 years through 10 years		$	373			$	398				2.88	%
Over 10 years			3,168				3,470				2.40
Total held-to-maturity securities		$	3,541			$	3,868				2.45	%

 

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.

 

At June 30, 2020, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, with an aggregate book value which exceeds 10% of shareholders’ equity.

 

Loans. Loan receivables increased by $173,686 to $542,861 at June 30, 2020 compared to $369,175 at June 30, 2019. As of June 30, 2020, total loans include $48,806 of outstanding loans that were acquired from Peoples and the remaining increase in loans of $124,880, or 33.8%, was as a result of organic loan growth. Included in the organic loan growth is $66,606 of PPP loans that were funded during the fourth quarter of fiscal year 2020.

 

Commercial loans include $66,606 of PPP loans and the remaining growth in commercial loans was primarily as a result of the Bank’s participation in a third-party residential mortgage warehouse lending program. Loan demand increased, particularly in the commercial real estate and 1-4 family residential real estate segments, principally as a result of increased calling efforts. Consumer loans organic growth was $3,669, or 71.3%, primarily as a result of an increase in direct auto loans as a result of a successful marketing campaign and the expansion of indirect auto lending into the new markets from the Peoples acquisition. Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:

 

		2020				2019
Commercial		$	157,029			$	80,424
Commercial real estate:
Construction			16,190				16,034
Other			228,552				194,839
1-4 Family residential real estate:
Owner occupied			91,006				56,289
Non-owner occupied			19,337				14,481
Construction			9,418				1,959
Consumer loans			21,329				5,149
Total loans		$	542,861			$	369,175

 

The following is a schedule of contractual maturities and repayments of 1-4 family residential real estate construction, commercial and commercial real estate loans, as of June 30, 2020:

 

Due in one year or less		$	57,485
Due after one year but within five years			97,455
Due after five years			256,249
Total		$	411,189

 

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, 2020:

 

		Fixed Interest Rates				Variable Interest Rates
Total 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year		$	226,846			$	126,858

 

Foreign Outstandings. There were no foreign outstandings during the periods presented. There are no concentrations of loans greater than 10% of total loans, which are not otherwise disclosed as a category of loans.

 

 

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, 2020, impaired loans totaled $1,923, of which $1,185 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.  

 

The following schedule summarizes non-accrual, past due, impaired and restructured loans for the years ended June 30:

 

		2020				2019
Non-accrual loans		$	1,185			$	785
Accruing loans past due 90 days or more			41				—
Total non-performing loans		$	1,226			$	785
Other real estate and repossessed assets owned			7				—
Total non-performing assets		$	1,233			$	785
Impaired loans		$	1,923			$	1,189
Accruing restructured loans		$	738			$	404

 

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.

 

Potential Problem Loans. There were no loans, not otherwise identified above, included on management’s watch or troubled loan lists that management has serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Management’s watch and troubled loan lists includes loans which management has some doubt as to the borrowers’ ability to comply with the present repayment terms, loans which management is actively monitoring due to changes in the borrower’s financial condition and other loans which management wants to more closely monitor due to special circumstances. These loans and their potential loss exposure have been considered in management’s analysis of the adequacy of the allowance for loan losses.

 

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:   

 

		2020				2019
Allowance for loan losses at beginning of year		$	3,788			$	3,422
Loans charged off:
Commercial real estate			—				80
1-4 Family residential real estate			6				—
Consumer loans			140				36
Total charge offs			146				116
Recoveries:
Commercial real estate			4				875
1-4 Family residential real estate			4				23
Consumer loans			48				24
Total recoveries			56				922
Net charge offs (recoveries)			90				(806	)
Provision for loan losses charged to operations			1,980				(440	)
Allowance for loan losses at end of year		$	5,678			$	3,788
Ratio of net charge offs (recoveries) to average loans outstanding			0.02	%			(0.24	)%

 

 

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, 2020								June 30, 2019
Commercial		$	947				28.9	%		$	660				21.8	%
Commercial real estate loans			3,623				45.1				2,575				57.1
1-4 Family residential real estate			989				22.1				494				19.7
Consumer loans			119				3.9				59				1.4
Total		$	5,678				100.0	%		$	3,788				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. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is expected as a result of the COVID-19 pandemic. As of June 30, 2020, 270 commercial loans with an outstanding balance of $72,995, 48 mortgage loans with an outstanding balance of $4,632, four home equity lines of credit with an outstanding balance of $227, and 97 consumer loans with an outstanding balance of $1,001 were granted 90 days of payment deferrals. As of August 31, 2020, a second 90 days of payment deferral has been granted for 49 commercial loans with an outstanding balance of $9,341, seven mortgage loans with an outstanding balance of $647 and four consumer loans with an outstanding balance of $44. Management has identified the hospitality industry and religious organizations as the industries that could be most at risk due to the COVID-19 pandemic. As of June 30, 2020, the total balance of loans to the hospitality industry, excluding PPP loans, was $19,736, which includes $2,193 in loans to businesses in the hotel industry. As of June 30, 2020, the total balance of loans to religious organizations, excluding PPP loans, was $8,425, which includes $6,403 in loans to local churches. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

 

Funding Sources. Total deposits increased by $161,181, or 34.1%, from $472,174 at June 30, 2019 to $633,355 at June 30, 2020, of which $100,330, or 21.2%, was related to organic deposit growth. The organic deposit growth was primarily associated with the retention of PPP loan proceeds, consumer economic stimulus payments and a decline in overall consumer spending resulting from the COVID-19 pandemic. For the fiscal year ended June 30, 2020, noninterest-bearing demand deposits increased by $73,994, or 63.7%, savings and money market deposits increased by $66,306, or 40.9%, and interest-bearing demand deposits increased by $17,704, or 21.7%, from the same prior year period.

 

Short-term borrowings increased by $3,257, or 88.4%, to $6,943 at June 30, 2020 from $3,686 at June 30, 2019. This increase was primarily associated with the retention of PPP loan proceeds in commercial sweep repurchase agreement accounts.

 

The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:

 

		Years Ended June 30,
		2020								2019
		Amount				Rate				Amount				Rate
Noninterest-bearing demand deposit		$	140,826				—			$	113,761				—
Interest-bearing demand deposit			86,418				0.50	%			82,086				0.67	%
Savings			191,119				0.42				161,062				0.44
Certificates and other time deposits			118,847				1.90				91,291				1.68
Total		$	537,210				0.65	%		$	448,200				0.62	%

 

The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2020 by time remaining until maturity:

 

Maturing in:
Under 3 months		$	6,921
Over 3 to 6 months			15,957
Over 6 to 12 months			27,741
Over 12 months			15,567
Total		$	66,186

 

See Note 8—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.

 

 

Capital Resources

 

Total shareholders’ equity increased by $12,074 from $51,166 at June 30, 2019 to $63,240 at June 30, 2020. The primary reason for the increase was the issuance of common shares as part of the consideration in the acquisition of Peoples, which added $5,277 to shareholders’ equity. In addition, the increase in shareholders’ equity included $5,527 of net income for the current fiscal year and an increase of $2,694 in accumulated other comprehensive income from an increase in the unrealized gains in the mark-to-market of available-for-sale securities. These increases were partially offset by cash dividends paid of $1,554. For the 2020 fiscal year, the average equity to average total assets ratio was 9.19% and the dividend payout ratio was 28.1%. For the 2019 fiscal year, the average equity to average total assets ratio was 8.96% and the dividend payout ratio was 25.5%.

 

At June 30, 2020, 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 2020 fiscal year were $5,593 and net cash inflows from financing activities were $107,655. Net cash outflows from investing activities were $113,050. The major sources of cash were a $100,330 net increase in deposits and a $44,330 increase from sales, maturities or principal pay downs on available-for-sale securities. The major uses of cash were a $118,463 net increase in loans and the $36,775 purchase of available-for-sale securities. Total cash and cash equivalents were $9,659 as of June 30, 2020 compared to $9,461 at June 30, 2019.

 

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 have been continuing to turn 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 0.91%.

 

Jumbo time deposits (those with balances of $250 and over) were $36,747 and $39,034 at June 30, 2020 and 2019, 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.

 

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, 2020, the Bank could, without prior approval, declare a dividend of approximately $5,856.

 

 

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. The Corporation noted its stock price fell below the carrying value of equity per share and during the fourth quarter of fiscal year 2020 elected to proceed to a quantitative test to compare the Corporation’s fair value with its carrying amount. As of June 30, 2020, the Corporation had $835 in goodwill and the resultant fair value from the quantitative goodwill impairment test was 114% of book value. The estimated fair value of the Corporation was determined by applying weighting factors to the income and market valuation methodologies. In performing its analyses, the Corporation made numerous assumptions with respect to industry performance, business, economic and market conditions, and various other matters, many of which cannot be predicted and are beyond the Corporation's control. Management's financial projections reflect the best currently available estimates and judgments as to the expected future financial performance of the Corporation. However, in the income approach, the most critical assumption is the future earnings of the Corporation and if future earnings are less than what was estimated, goodwill could become impaired during a future period. In addition, the market valuation methodologies utilized by the Corporation employ assumptions that may be anticipated by an acquirer in estimating the fair value of the Corporation.  The impairment test of goodwill indicated no impairment existed as of the valuation 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, 2020, 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				2021				2022				2023				2024				2025				Thereafter				Total
Certificates of deposit			7			$	85,856			$	18,178			$	7,394			$	1,471			$	1,487			$	996			$	115,382
Short-term borrowings			8				6,943				—				—				—				—				—				6,943
Federal Home Loan advances			9				13,116				1,794				79				6,567				9,605				—				31,161
Salary continuation plan			10				146				146				146				142				141				1,974				2,695
Operating leases			5				105				95				76				51				146				—				473
Deposits without maturity							—				—				—				—				—				—				517,973

 

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, 2020, 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 sheets of Consumers Bancorp, Inc. (the "Company") as of June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years 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 2019, and the results of its operations and its cash flows of the years 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 audits 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 audits 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.

 

 

  

 

 

/s/ Crowe LLP
Crowe LLP

 

We have served as the Company’s auditor since 1998.

 

Cleveland, Ohio

September 22, 2020  

 

 

CONSOLIDATED BALANCE SHEETS

As of June 30, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.  

 

 

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

  

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended June 30, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

   

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended June 30, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

 

   

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019

(Dollar amounts in thousands, except per share data)