CONSUMERS BANCORP: OH / Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-K)
(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, 2021and 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
more favorable than expected, resulting in, among other things, a high unemployment rate
rate, a deterioration in the credit quality of our assets or debtors that cannot
to fulfill their obligations;
? low and sustained market interest rates could lead to lower equity
interest margin and net interest income;
? changes in the level of non-productive assets and write-offs;
? the effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which we must
? the fall in the value of assets impacting the underlying value of the collateral;
? unforeseen changes in our liquidity position, including, but not limited to
to, the evolution of the cost of liquidity and our ability to find alternatives
? the effects and modifications of commercial, monetary and fiscal policies and laws,
including the interest rate policies of the
? changes in consumption, borrowing and saving habits;
? changes in accounting methods, rules and interpretations that may
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 that we do not currently know or that we currently consider to be immaterial may also affect us negatively. If known or unknown risks and uncertainties turn into actual events, these developments could have material adverse effects on our business, financial condition and results of operations.
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, Ohiowith 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 $5,128in 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 $68,788of PPP loans and $6,107remained outstanding as of June 30, 2021. Under the second round of the PPP program, a total of $44,579of loans were funded and outstanding as of June 30, 2021. Additionally, on March 22, 2020the 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 $198are 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 operating results for the years ended
Net Income. Net income was
$8,988for fiscal year 2021 compared with $5,527for fiscal year 2020. The following key factors summarize our results of operations for the year ended June 30, 2021compared 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-bearing assets, mainly due to organic growth in loans and
the addition of PPP loan receivables;
year compared to
recorded in fiscal year 2020 is mainly the result of the drop in
the economic conditions triggered by the COVID-19 pandemic;
? total other income decreased by
since the period of the previous year included
proceeds received from a life insurance claim held by a bank and a
gain on sale of securities. These reductions were partially offset by a
38.7%, increase in capital gains on the sale of mortgage loans; and
? total other expenses increased by
includes a full year of expenses associated with the three new offices
locations and additional staff gained as a result of the merger with Peoples
compared to only six months of these expenses being included in the previous fiscal year
period of one year. In addition, incentive accruals and mortgage commissions
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 Committeeestablishing 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 Net interest adjustments 419 326 Net interest income, fully taxable equivalent
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 $5,192or 23.8%, from $21,810in the 2020 fiscal year. The Corporation's tax equivalent net interest margin was 3.67% for the year ended June 30, 2021and 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 $63,761for the twelve-month period ended June 30, 2021, with a total of $2,549of interest and fee income recognized during the twelve-month period ended June 30, 2021. As of June 30, 2021, there was a total of $2,449of 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 Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Interest earning assets: Taxable securities
$ 89,424 $ 1,5941.82 % $ 81,609 $ 1,9322.40 % 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 $ 621,501Interest bearing liabilities: Interest bearing demand $ 112,801 $ 1490.13 % $ 86,418 $ 4280.50 % 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
liabilities 495,465 1,900 0.38 % 418,320 3,821 0.91 % Noninterest-bearing liabilities 209,262
Total liabilities 704,727
Shareholders' equity 67,253
Total liabilities and shareholders' equity
Net interest income, interest rate spread (1)
$ 27,0023.55 % $ 21,8103.46 % 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 $ 326Average interest earning assets to interest bearing liabilities 149.50 %
(1) Calculated on an equivalent fully taxable basis using a statutory federal 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 2020 Compared to 2019 Increase / (Decrease) Increase / (Decrease) Change Change Change Change Total due to due to Total due to due to Change Volume Rate Change Volume 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) Non-taxable income is adjusted on a fully tax equivalent basis using a
Federal statutory tax rate of 21.0%.
(2) Unaccounted loan balances are included for rate calculation purposes.
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
$850was recorded compared with $1,980in 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 $57were recorded compared with $90for the same period last year. The allowance for loan losses as a percentage of loans was 1.14% at June 30, 2021and 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 $1,771as of June 30, 2021and 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 $4,466for the 2021 fiscal year. Other income in the 2020 fiscal year includes $324of income recognized as a result of proceeds received from a bank owned life insurance policy claim and net securities gains of $355compared to net security gains of $14in fiscal year 2021. Debit card interchange income increased by $316, or 20.1%, in 2021 to $1,891primarily 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 $19,361for the year ended June 30, 2021; an increase of $1,593, or 9.0%, from $17,768for 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, Ohiooffice location that opened during the 2021 fiscal year. This was partially offset by lower depreciation expense in the 2021 fiscal year for the Salembranch location since it was expected that this location would be replaced in the spring of 2021.
Data processing costs have decreased by
FDICassessments increased by $196, or 184.9%, for the 2021 fiscal year since the Small Bank Assessment Credits were applied to the FDICinsurance 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 $1,850and $912and the effective tax rates were 17.1% and 14.2% for the years ended June 30, 2021and 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, 2021were $833,804compared with $740,820at 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 $215,756at June 30, 2021, of which $207,760were classified as available-for-sale and $7,996were 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, 2021and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss: Gross Gross June 30, 2021 Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Losses Value Obligations of U.S.government-sponsored entities and agencies $ 14,746 $ 301 $ (14 ) $ 15,033Obligations 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 titles available for sale
Gross Gross June 30, 2020 Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Losses Value U.S. Treasury
$ 1,248$ 8 $ - $ 1,256Obligations 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 titles available for sale
The following tables summarize the amortized cost and fair value of securities held until
Gross Gross June 30, 2021 Amortized Unrecognized Unrecognized Fair Held-to-maturity Cost Gains Losses Value Obligations of state and political subdivisions
$ 7,996$ 356 $ - $ 8,352Gross Gross June 30, 2020 Amortized Unrecognized Unrecognized Fair Held-to-maturity Cost Gains Losses Value Obligations of state and political subdivisions $ 3,541$ 327 $ - $ 3,868
The following tables summarize the amounts and distribution of the Company’s securities held as well as the weighted average returns at
Amortized Fair Average Available-for-sale Cost Value Yield Obligations of government-sponsored entities: Over 3 months through 1 year
$ 2,501 $ 2,5342.67 % 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 $ 207,7602.17 % 16
Amortized Fair Average Held-to-maturity Cost Value Yield Obligations of state and political subdivisions: Over 1 year through 5 years
$ 294 $ 3092.89 % 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 $ 8,3522.27 % 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 $23,566to $566,427at June 30, 2021compared to $542,861at June 30, 2020. Commercial loans include PPP loans of $50,686and $66,606as of June 30, 2021and 2020, respectively, and a third-party residential mortgage warehouse line-of-credit had a zero balance as of June 30, 2021compared with an outstanding balance of $32,869as 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 $ 157,029Commercial 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 presents the main classifications of loans, net of commissions and deferred charges, which are based on the contractual terms of principal repayment, which are due in the periods indicated from
Maturing After one After five year years Within but within But within After Fifteen one year five years years Fifteen years Total Commercial
$ 13,458 $ 66,898 $ 28,031$ 1,535 $ 109,922Commercial 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 $ 566,427The 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 Variable Interest Rates Interest Rates Total 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year $ 237,875 $ 134,03417
-------------------------------------------------------------------------------- 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 $1,771are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.
The following table summarizes unrecognized loans, non-performing assets, impaired and restructured loans and associated ratios for the years ended.
2021 2020 Non-accrual loans
$ 1,771 $ 1,185Accruing loans past due 90 days or more - 41 Total non-performing loans $ 1,771 $ 1,226Other real estate and repossessed assets owned - 7 Total non-performing assets $ 1,771 $ 1,233Impaired loans $ 1,954 $ 1,923Accruing restructured loans $ 183 $ 738Non-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 Company’s experience with loan losses and provides a breakdown of write-off, collection and other activities for the years ended.
Provision for loan losses at the start of the year
Write-off loans: Commercial
22 - 1-4 Family residential real estate 4 6 Consumer loans 122 140 Total charge offs 148 146
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 $ 5,678Ratio of net charge offs to average loans outstanding 0.01 % 0.02 % ALLL to total loans 1.14 % 1.05 % 18
The following table shows the breakdown of the allowance for loan losses allocated by type of loan and the related ratios:
Allocation of the Allowance for Loan Losses % of Loan % of Loan Allowance Type to Allowance Type to Amount Total Loans Amount Total Loans June 30, 2021 June 30, 2020 Commercial
$ 90419.4 % $ 94728.9 % 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 $ 6,471100.0 % $ 5,678100.0 % 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: Goodwillremained unchanged at $826at June 30, 2021and 2020. Goodwillrepresents 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. Goodwillis 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 $633,355at June 30, 2020to $726,849at 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.
Here is a table of the average deposit amounts and average rates paid on each category for the periods included:
Years Ended June 30, 2021 2020 Amount Rate Amount Rate
Demand deposit not bearing interest
Interest-bearing sight deposit 112,801 0.13% 86,418
0.50 % Savings 251,138 0.13 191,119
Certificates and other term deposits 102,554 1.10 118,847
$ 669,6740.24 % $ 537,2100.65 %
The following table summarizes the term deposits issued for amounts of
Maturing in: Under 3 months
$ 8,744Over 3 to 6 months 7,390 Over 6 to 12 months 11,699 Over 12 months 15,616 Total $ 43,449Short-term borrowings increased by $5,260, or 75.8%, to $12,203at June 30, 2021from $6,943at 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
$6,660from $63,240at June 30, 2020to $69,900at June 30, 2021. The primary reason for the increase was net income of $8,988for 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 $14,013and 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 $93,494net increase in deposits and a $42,820increase from sales, maturities, or principal pay downs on available-for-sale securities. The major uses of cash were the $108,168purchase of available-for-sale securities and a $23,471net increase in loans. Total cash and cash equivalents were $18,529as of June 30, 2021compared to $9,659at 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 Treasuryindex, 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 with varying maturities. The majority of the Bank’s securities are held in bonds of
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
$250and over) were $18,488and $36,747at June 30, 2021and 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 Ohiolaw. 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, 2021or 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 price changes
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 $ 87,539Short-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 provisions
June 30, 2021, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation's investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.
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