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EX-32.1 - EXHIBIT 32.1 - CONSUMERS BANCORP INC /OH/ex_283009.htm
EX-31.2 - EXHIBIT 31.2 - CONSUMERS BANCORP INC /OH/ex_283008.htm
EX-31.1 - EXHIBIT 31.1 - CONSUMERS BANCORP INC /OH/ex_283007.htm
EX-23.2 - EXHIBIT 23.2 - CONSUMERS BANCORP INC /OH/ex_283006.htm
EX-23.1 - EXHIBIT 23.1 - CONSUMERS BANCORP INC /OH/ex_283005.htm
EX-21 - EXHIBIT 21 - CONSUMERS BANCORP INC /OH/ex_283004.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

   
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended June 30, 2021

 

Commission File No. 033-79130

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

OHIO

34-1771400

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

614 East Lincoln Way,

P.O. Box 256, Minerva, Ohio 44657

(330) 868-7701 

(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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

 

Common Shares, no par value    
(Title of each class) (Trading Symbol(s)) (Name of each exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐    No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐   No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒  No ☐

 

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

Large accelerated filer ☐

Accelerated filer ☐ 

Non-accelerated filer ☐

Smaller reporting company ☒

 

Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.      

 ☐

 

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

 

Based on the closing sales price on December 31, 2020, the aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was approximately $52,392,039.

 

The number of shares outstanding of the Registrant’s common stock, no par value, was 3,028,100 at September 10, 2021.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement, dated September 16, 2021, for its 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 



 

 

 

 

 

TABLE OF CONTENTS

 

PART I.

 
   

Item 1—Business

3

Item 1A—Risk Factors

7

Item 1B—Unresolved Staff Comments

7

Item 2—Properties

7

Item 3—Legal Proceedings

8

Item 4—Mine Safety Disclosures

8

   

PART II.

 
   

Item 5—Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 

9

ITEM 6—[Reserved]

 

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

Item 7A—Quantitative and Qualitative Disclosures About Market Risk

22

Item 8—Financial Statements and Supplementary Data

23

Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

56

Item 9A—Controls and Procedures

56

Item 9B—Other Information

56

   

PART III.

 
   

Item 10—Directors, Executive Officers and Corporate Governance

57

Item 11—Executive Compensation

57

Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

57

Item 13—Certain Relationships and Related Transactions, and Director Independence 

57

Item 14—Principal Accounting Fees and Services

57

   

PART IV.

 
   

Item 15—Exhibit and Financial Statement Schedules

58

Item 16—Form 10-K Summary

58

   

Signatures

 

 

 

 

PART I

 

 

 

Item 1Business 

(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.

 

 

3

 

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.

 

4

 

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.

 

5

 

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.

 

6

 

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.

 

Item 1ARisk Factors

 

Not applicable for Smaller Reporting Companies.

 

Item 1BUnresolved Staff Comments

 

None.

 

Item 2Properties

 

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. 

 

7

 

Item 3Legal 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 4Mine Safety Disclosures 

 

None.

 

8

 

 

PART II

 

Item 5Market for Registrants 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,
2020

   

December 31,
2020

   

March 31,
2021

   

June 30,
2021

 

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,
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  

 

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.

 

9

 

 

Item 7Managements 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.

 

10

 

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.

 

11

 

 

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,

 

2021

   

2020

 

Net interest income

  $ 26,583     $ 21,484  

Taxable equivalent adjustments to net interest

    419       326  

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.

 

12

 

 

Average Balance Sheet and Net Interest Margin

 

    2021     2020  
    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       76       3.07       1,960       75       3.83  

Equity securities

    202       17       8.42                    

Interest bearing deposits and federal funds sold

    27,831       166       0.60       10,589       157       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     $ 149       0.13

%

  $ 86,418     $ 428       0.50

%

Savings

    251,138       333       0.13       191,119       799       0.42  

Time deposits

    102,554       1,133       1.10       118,847       2,259       1.90  

Short-term borrowings

    8,895       9       0.10       4,306       43       1.00  

FHLB advances

    20,077       276       1.37       17,630       292       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

          $ 419                     $ 326          

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%.

 

13

 

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

)

  $ 162     $ (500

)

  $ (260

)

  $ (176

)

  $ (84

)

Nontaxable securities (1)

    234       269       (35

)

    (4

)

    (34

)

    30  

Loan receivables (2)

    3,348       5,376       (2,028

)

    4,952       4,845       107  

Federal bank and other restricted stocks

    1       17       (16

)

    (11

)

    21       (32

)

Interest bearing deposits and federal funds sold

    9       144       (135

)

    64       101       (37

)

Equity securities

    17       17                          

Total interest and dividend income

    3,271       5,985       (2,714

)

    4,741       4,757       (16

)

Interest bearing liabilities:

                                               

Interest bearing demand

    (279

)

    103       (382

)

    (119

)

    28       (147

)

Savings deposits

    (466

)

    197       (663

)

    93       127       (34

)

Time deposits

    (1,126

)

    (278

)

    (848

)

    726       505       221  

Short-term borrowings

    (34

)

    23       (57

)

    (8

)

    10       (18

)

FHLB advances

    (16

)

    37       (53

)

    (27

)

    21       (48

)

Total interest expense

    (1,921

)

    82       (2,003

)

    665       691       (26

)

Net interest income

  $ 5,192     $ 5,903     $ (711

)

  $ 4,076     $ 4,066     $ 10  

 


(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.

 

14

 

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     $ 301     $ (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       204             8,845  

U.S. Government-sponsored collateralized mortgage obligations – residential

    16,302       129       (57 )     16,374  

Other debt securities

    500             (8 )     492  

Total available-for-sale securities

  $ 203,267     $ 5,331     $ (838 )   $ 207,760  

 

15

 

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  

 

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     $ 356     $     $ 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     $ 327     $     $ 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

    275       275       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

    98       98       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

    500       492       4.62  

Total available-for-sale securities

  $ 203,267     $ 207,760       2.17

%

 

16

 

Held-to-maturity

 

Amortized
Cost

   

Fair
Value

   

Average
Yield

 

Obligations of state and political subdivisions:

                       

Over 1 year through 5 years

  $ 294     $ 309       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:

 

   

2021

   

2020

 

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

    209       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       335             7,310       9,156  

Consumer loans

    726       18,078       10,570       196       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  

 

17

 

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:

 

   

2021

   

2020

 

Non-accrual loans

  $ 1,771     $ 1,185  

Accruing loans past due 90 days or more

          41  

Total non-performing loans

  $ 1,771     $ 1,226  

Other real estate and repossessed assets owned

          7  

Total non-performing assets

  $ 1,771     $ 1,233  

Impaired loans

  $ 1,954     $ 1,923  

Accruing restructured loans

  $ 183     $ 738  

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:   

 

   

2021

   

2020

 

Allowance for loan losses at beginning of year

  $ 5,678     $ 3,788  

Loans charged off:

               

Commercial

    22        

1-4 Family residential real estate

    4       6  

Consumer loans

    122       140  

Total charge offs

    148       146  

Recoveries:

               

Commercial real estate

    4       4  

1-4 Family residential real estate

    3       4  

Consumer loans

    84       48  

Total recoveries

    91       56  

Net charge offs

    57       90  

Provision for loan losses charged to operations

    850       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

%

 

18

 

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

  $ 904       19.4

%

  $ 947       28.9

%

Commercial real estate loans

    3,949       49.4       3,623       45.1  

1-4 Family residential real estate

    1,307       26.0       989       22.1  

Consumer loans

    311       5.2       119       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,

 
   

2021

   

2020

 
   

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.

 

19

 

 

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.

 

20

 

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.

 

21

 

 

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

   

2022

   

2023

   

2024

   

2025

   

2026

   

Thereafter

   

Total

 

Certificates of deposit

    7     $ 56,866     $ 21,554     $ 2,151     $ 3,579     $ 1,415     $ 1,974     $ 87,539  

Short-term borrowings

    8       12,203                                     12,203  

Federal Home Loan advances

    9       1,799       79       6,567       5,556       4,049             18,050  

Salary continuation plan

    10       106       146       142       141       141       2,464       3,140  

Operating leases

    5       167       167       146       114       685             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.

 

22

 

 

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.  

 

23

 

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         

 

24

 

 

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

 

25

 

 

 

CONSOLIDATED BALANCE SHEETS

As of June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

 

   

2021

   

2020

 

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

    424        

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

    836       836  

Core deposit intangible, net

    229       256  

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.  

 

26

 

 

 

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

 

   

2021

   

2020

 

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

    17        

Federal bank and other restricted stocks

    76       75  

Federal funds sold and interest-bearing deposits

    166       157  

Total interest and dividend income

    28,483       25,305  

Interest expense:

               

Deposits

    1,615       3,486  

Short-term borrowings

    9       43  

Federal Home Loan Bank advances

    276       292  

Total interest expense

    1,900       3,821  

Net interest income

    26,583       21,484  

Provision for loan losses

    850       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

          324  

Bank owned life insurance income

    260       265  

Gain on sale of mortgage loans

    753       543  

Securities gains, net

    14       355  

Net change in market value of equity securities

    24        

Other

    304       291  

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

    728       907  

Debit card processing expenses

    950       810  

Professional and director fees

    857       1,027  

Federal Deposit Insurance Corporation assessments

    302       106  

Franchise taxes

    480       403  

Marketing and advertising

    522       475  

Loan and collection expenses

    142       95  

Telephone and communications

    344       301  

Amortization of intangible

    27       14  

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       912  

Net income

  $ 8,988     $ 5,527  

Basic and diluted earnings per share

  $ 2.98     $ 1.92  

 

See accompanying notes to consolidated financial statements.  

 

27

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

 

   

2021

   

2020

 
                 

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

    190       (717

)

Other comprehensive income (loss)

    (710

)

    2,694  

Total comprehensive income

  $ 8,278     $ 8,221  

 

See accompanying notes to consolidated financial statements.

 

28

 

 

 

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

    41               89               130  

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

    37               130               167  

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.

 

29

 
 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

 

   

2021

   

2020

 

Cash flows from operating activities:

               

Net income

  $ 8,988     $ 5,527  

Adjustments to reconcile net income to net cash flows from operating activities:

               

Depreciation

    940       1,044  

Securities amortization and accretion, net

    621       353  

Provision for loan losses

    850       1,980  

(Gain) loss on disposal of fixed assets

    26       (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

    27       14  

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

    245       245  

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

          753  

Acquisition of premises and equipment

    (1,154

)

    (497

)

Proceeds from sale of other real estate and repossessed assets owned

    17       60  

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       909  

Dividends paid

    (1,785

)

    (1,554

)

Net cash flows from financing activities

    83,858       107,655  

Increase in cash and cash equivalents

    8,870       198  

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       675  

Non-cash items:

               

Transfer from loans to other repossessed assets

    9       7  

Transfer from loans held for sale to portfolio

    161        

Issuance of treasury stock for stock awards

    167       89  

Right of use assets obtained in exchange for lease liabilities

          582  

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

          154  

Loans, net

          55,320  

Premises and equipment

          818  

Goodwill

          836  

Core deposit intangible

          270  

Accrued interest receivable and other assets

          140  

Total noncash assets acquired

          73,428  

Liabilities assumed:

               

Deposits

          60,851  

Federal funds purchased

          2,348  

Federal Home Loan Bank advances

          491  

Other liabilities

          166  

Total liabilities assumed

          63,856  

Net noncash assets acquired

          9,572  

Cash acquired

          833  

 

See accompanying notes to consolidated financial statements.

 

30

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

 

 

NOTE 1SUMMARY 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.  

 

InterestBearing 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.

 

31

 

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.

 

32

 

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.

 

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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 f