ITEM 1A—RISK FACTORS
Not applicable for Smaller Reporting Companies.
ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
ITEM 2—PROPERTIES
The Bank operates eighteen full-service banking facilities and one loan production office (LPO) as noted below:
Location Address Owned Leased
Minerva 614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657 X
Salem 141 S. Ellsworth Avenue, P.O. Box 798, Salem, Ohio, 44460 X
Waynesburg 8607 Waynesburg Drive SE, P.O. Box 746, Waynesburg, Ohio, 44688 X
Hanoverton 30034 Canal Street, P.O. Box 178, Hanoverton, Ohio, 44423 X
Carrollton 1017 Canton Road NW, Carrollton, Ohio, 44615 X
Alliance 610 West State Street, Alliance, Ohio, 44601 X
Lisbon 7985 Dickey Drive, Lisbon, Ohio 44432 X
Louisville 1111 N. Chapel Street, Louisville, Ohio 44641 X
East Canton 440 W. Noble, East Canton, Ohio, 44730 X
Malvern 4070 Alliance Road, Malvern, Ohio 44644 X
Hartville 1215 W. Maple Street, Hartville, Ohio 44632 X
Jackson-Belden 4026 Dressler Road NW, Canton, Ohio 44718 X
Bergholz 256 2nd Street, Bergholz, Ohio 43908 X
Fairlawn 3680 Embassy Parkway Suite B, Fairlawn, Ohio 44333 X
Brewster 210 Wabash Ave S, Brewster, OH 44613 X
Mount Pleasant 298 Union Street, Mount Pleasant, OH 43939 X
Adena 9 East Main Street, Adena, OH 43901 X
Dillonvale 44 Smithfield Street, Dillonvale, OH 43917 X
Wooster LPO 146 East Liberty Street, Wooster, Ohio 44691 X
The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. In management’s opinion, all properties owned and operated by the Bank are adequately insured.
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ITEM 3—LEGAL PROCEEDINGS
The Corporation is not a party to any pending material legal or administrative proceedings, other than ordinary routine litigation incidental to the business of the Corporation. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest therein that is adverse to the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the financial position or results of operations of the Corporation.
ITEM 4—MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation had 3,015,578 common shares outstanding on June 30, 2020 with 745 shareholders of record and an estimated 681 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.
The common shares of Consumers Bancorp, Inc. are quoted on the OTCQX® Best Market under the symbol CBKM. The following quoted market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not represent actual transactions. The market prices represent highs and lows reported during the applicable quarterly period.
Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Corporation’s common shares, these prices may not reflect the prices at which the common shares would trade in an active market.
The Corporation’s management is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent on the Corporation’s future earnings, capital requirements and financial condition. The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. See Note 1 and Note 13 to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for dividend restrictions.
There were no repurchases of the Corporation’s securities during the 2020 fiscal year.
ITEM 6—SELECTED FINANCIAL DATA
Not applicable for Smaller Reporting Companies.
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ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
General
The following is management’s analysis of the Corporation’s financial condition and results of operations as of and for the years ended June 30, 2020 and 2019. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. The COVID-19 pandemic is adversely affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impact on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other risks and uncertainties that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:
● changes in the level of non-performing assets and charge-offs;
● declining asset values impacting the underlying value of collateral;
● changes in consumer spending, borrowing and savings habits;
● competitive pressures on product pricing and services;
● our ability to attract and retain qualified employees.
The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations.
Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all the issued and outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
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On January 1, 2020, the Corporation completed the acquisition by merger of Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The financial position and results of operations of Peoples prior to its acquisition date are not included in Consumers’ financial results for periods prior to the acquisition date.
COVID-19 Pandemic
In response to COVID-19, management is actively pursuing multiple avenues to assist customers during these uncertain times. For commercial borrowers, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) includes two key SBA initiatives to assist small businesses. The first SBA program is the Paycheck Protection Program (PPP) that was designed to provide a direct incentive for small businesses to keep their workers on the payroll. The SBA will forgive loans obtained under this program if the borrower keeps all employees on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. A total of $66,606 of PPP loans for 571 customers were outstanding as of June 30, 2020. The second SBA program is the Subsidy for Certain Loan Payments in which the SBA will pay the principal, interest, and any associated fees the borrower owes on certain SBA loans for a six-month period. As of March 31, 2020, the Corporation had $18,285 of SBA loans which are eligible for payment assistance from the SBA. Management has been working with these borrowers to secure the principal and interest payments from the SBA.
Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as troubled debt restructurings. As of June 30, 2020, 270 commercial loans with an outstanding balance of $72,995, 48 mortgage loans with an outstanding balance of $4,632, four home equity lines of credit with an outstanding balance of $227, and 97 consumer loans with an outstanding balance of $1,001 were granted 90 days of payment deferrals. As of August 31, 2020, a second 90 days of payment deferral has been granted for 49 commercial loans with an outstanding balance of $9,341, seven mortgage loans with an outstanding balance of $647 and four consumer loans with an outstanding balance of $44.
We are also assisting customers, in certain circumstances, by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties for customers experiencing financial hardship due to COVID-19. The consumer reserve personal line of credit has been redesigned to provide easier access and a lower initial rate on this unsecured line of credit that is linked to a personal checking account. Commercial customers are encouraged to access available funds on their lines of credit and we expect to provide emergency commercial lines of credit to qualified borrowers in order to assist borrowers in meeting payroll and other recurring fixed expenses. As of June 30, 2020, five emergency lines of credit were provided to commercial borrowers with a committed liability of $725.
The Corporation has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. Branch lobbies were closed for a six-week period but are now opened for normal business. The Company is encouraging virtual meetings and conference calls in place of in-person meetings, including the annual shareholders meeting which will be held virtually this year. Additionally, travel for business has been restricted. The Company is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces.
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Comparison of Results of Operations for the Years Ended June 30, 2020 and June 30, 2019
Net Income. Net income was $5,527 for fiscal year 2020 compared with $5,566 for fiscal year 2019. The following key factors summarize our results of operations for the year ended June 30, 2020 compared with the same prior year period:
Return on average equity and return on average assets were 9.67% and 0.89%, respectively, for the 2020 fiscal year-to-date period compared with 11.96% and 1.07%, respectively, for the same period last year.
Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. In addition, prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, can significantly affect net interest income. Since the Federal Open Market Committee establishing a near-zero target range for the federal funds rate, earnings could be negatively affected if the interest we receive on loans and securities falls more quickly that interest we pay on deposits and borrowings. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate of 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.
Taxable equivalent adjustments to net interest 326 345
Net interest income, fully taxable equivalent $ 21,810 $ 17,734
Net interest margin 3.67 % 3.55 %
Taxable equivalent adjustment 0.05 0.12
Net interest margin, fully taxable equivalent 3.72 % 3.62 %
FTE net interest income for the 2020 fiscal year was $21,810, an increase of $4,076 or 23.0%, from $17,734 in the 2019 fiscal year. The Corporation’s tax equivalent net interest margin was 3.72% for the year ended June 30, 2020 and was 3.62% for the fiscal year ended 2019. FTE interest income for the 2020 fiscal year was $25,631, an increase of $4,741, or 22.7%, from the 2019 fiscal year primarily as a result of a $101,153, or 20.7%, increase in average interest-earning assets from the 2019 fiscal year. The growth in average interest-earning assets was primarily a result of the addition of PPP loans, the merger with Peoples and organic loan growth. Interest income includes $644 of interest and fee income that was recognized related to the PPP loans. Interest expense for the 2020 fiscal year was $3,821, an increase of $665, or 21.1%, from the 2019 fiscal year. This increase was mainly due to an increase of $63,872, or 18.0%, in total interest-bearing liabilities as a result of the merger with Peoples. The overall cost of funds increased slightly to 0.91% for the current fiscal year from 0.89% for the prior fiscal year.
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Average Balance Sheet and Net Interest Margin
Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate
Interest earning assets:
Interest bearing liabilities:
Total liabilities and shareholders’ equity $ 621,501 $ 519,073
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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
(In thousands)
Interest earning assets:
Federal bank and other restricted stocks (11 ) 21 (32 ) 5 5 —
Interest bearing deposits and federal funds sold 64 101 (37 ) (58 ) (86 ) 28
Interest bearing liabilities:
Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses in the Corporation’s loan portfolio that have been incurred at each balance sheet date. Management considers historical loss experience, the present and prospective financial condition of borrowers, the current conditions within the markets where the Corporation originates loans, the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the ultimate collectability of the loan portfolio. In fiscal year 2020, a provision for loan loss expense of $1,980 was recorded compared with a negative provision for loan loss expense of $440 in fiscal year 2019. The provision for loan loss expense increased in fiscal year 2020 primarily due to the deterioration in the economic environment as a result of the impact of COVID-19 and higher loan balances from organic loan growth. A negative provision for loan loss expense was recorded in fiscal year 2019 primarily as a result of a full principal recovery of a prior period loan charge-off.
For the 2020 fiscal year, net charge offs of $90 were recorded compared with net recoveries of $806 for the same period last year. Net recoveries for the 2019 fiscal year were primarily within the commercial real estate portfolio and included a full principal recovery of a prior period charge-off. The allowance for loan losses as a percentage of loans was 1.05% at June 30, 2020 and 1.03% at June 30, 2019. The allowance for loan losses as a percent of total loans on June 30, 2020 is not comparable to June 30, 2019 since the loans acquired from Peoples were recorded at fair value without a related allowance for loan losses. As of June 30, 2020, the allowance for loan losses as a percentage of total loans, excluding the loans acquired in the Peoples acquisition, was 1.15%.
Non-performing loans were $1,226 as of June 30, 2020 and represented 0.23% of total loans. This compared with $785, or 0.21% of total loans at June 30, 2019. Non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors closely monitor these loans and believe the prospect for recovery of principal, less identified specific reserves, are favorable.
Other Income. Total other income increased by $435, or 10.2%, to $4,703 for the 2020 fiscal year.
Debit card interchange income increased by $121, or 8.3%, in 2020 to $1,575 primarily as a result of increased debit card usage and an increase in the number of cards issued. Gain on sale of mortgage loans increased by $85, or 18.6%, in 2020 primarily as a result of an increase in volume. Other income in the 2020 fiscal year includes $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and net securities gains of $355 compared to net security gains of $561 in fiscal year 2019. During the 2019 fiscal year, the pooled trust preferred security was sold because of the significant increase in the value of this security resulting in a gain of $593. The Corporation does not own any other security of this type.
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Other Expenses. Total other expenses were $17,768 for the year ended June 30, 2020; an increase of $2,250, or 14.5%, from $15,518 for the year ended June 30, 2019.
Salaries and employee benefit expenses increased by $1,227, or 14.7%, during the 2020 fiscal year mainly as a result of six months of expenses associated with the additional staff gained as a result of the merger with Peoples for the three new office locations and increased incentive expenses.
Occupancy and equipment expenses increased by $370, or 17.7%, during the 2020 fiscal year from the same period last year primarily as a result of increased depreciation expense for the Salem branch location since it is expected that this location will be replaced in the spring of 2021. Also, occupancy expenses increased as a result of additional cleaning and protective equipment needed as a result of COVID-19 and from the three new office locations acquired from the merger with Peoples.
Data processing expenses increased by $286, or 46.1% and professional and director fees increased by $228, or 28.5%, during the 2020 fiscal year from the same period last year primarily as a result of system conversion and termination costs, investment banker, legal, accounting and auditing fees associated with the acquisition of Peoples.
Income Tax Expense. Income tax expense totaled $912 and $1,013 and the effective tax rates were 14.2% and 15.4% for the years ended June 30, 2020 and 2019, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in the 2019 and 2020 fiscal years. The effective tax rate differs from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and bank owned life insurance earnings and death benefit.
Financial Condition
Total assets at June 30, 2020 were $740,820 compared with $553,936 at June 30, 2019, an increase of $186,884, or 33.7%. From June 30, 2019, total assets increased by $74,261 due to the acquisition of Peoples and $112,623 due to organic growth. The growth in total assets is mainly attributable to an increase of $173,686, or 47.0%, in total loans which was primarily funded by a $161,181, or 34.1%, increase in total deposits.
Securities. Total securities were $147,459 at June 30, 2020, of which $143,918 were classified as available-for-sale and $3,541 were classified as held-to-maturity. The securities portfolio is mainly comprised of residential mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, obligations of the U.S. Treasury, state and political subdivisions and government-sponsored enterprises.
The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2020 and 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:
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The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2020 and 2019 and the corresponding gross unrecognized gains and losses:
Obligations of state and political subdivisions $ 3,541 $ 327 $ — $ 3,868
Total held-to-maturity securities $ 3,541 $ 327 $ — $ 3,868
Obligations of state and political subdivisions $ 3,786 $ 35 $ — $ 3,821
Total held-to-maturity securities $ 3,786 $ 35 $ — $ 3,821
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2020:
Available-for-sale Amortized Cost Fair Value Average Yield
Obligations of U.S. Treasury:
Obligations of government-sponsored entities:
Total obligations of government-sponsored entities 10,133 10,532 2.30
Obligations of state and political subdivisions:
Total obligations of state and political subdivisions 60,343 63,492 3.39
Mortgage-backed securities - residential:
Mortgage backed securities – commercial:
Total mortgage-backed securities - commercial 8,444 8,497 1.67
Collateralized mortgage obligations:
Total collateralized mortgage obligations 9,712 9,985 2.53
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Held-to-maturity Amortized Cost Fair Value Average Yield
Obligations of state and political subdivisions:
Total held-to-maturity securities $ 3,541 $ 3,868 2.45 %
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.
At June 30, 2020, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, with an aggregate book value which exceeds 10% of shareholders’ equity.
Loans. Loan receivables increased by $173,686 to $542,861 at June 30, 2020 compared to $369,175 at June 30, 2019. As of June 30, 2020, total loans include $48,806 of outstanding loans that were acquired from Peoples and the remaining increase in loans of $124,880, or 33.8%, was as a result of organic loan growth. Included in the organic loan growth is $66,606 of PPP loans that were funded during the fourth quarter of fiscal year 2020.
Commercial loans include $66,606 of PPP loans and the remaining growth in commercial loans was primarily as a result of the Bank’s participation in a third-party residential mortgage warehouse lending program. Loan demand increased, particularly in the commercial real estate and 1-4 family residential real estate segments, principally as a result of increased calling efforts. Consumer loans organic growth was $3,669, or 71.3%, primarily as a result of an increase in direct auto loans as a result of a successful marketing campaign and the expansion of indirect auto lending into the new markets from the Peoples acquisition. Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:
Commercial real estate:
1-4 Family residential real estate:
The following is a schedule of contractual maturities and repayments of 1-4 family residential real estate construction, commercial and commercial real estate loans, as of June 30, 2020:
Due in one year or less $ 57,485
Due after one year but within five years 97,455
The following is a schedule of fixed and variable rate 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2020:
Fixed Interest Rates Variable Interest Rates
Foreign Outstandings. There were no foreign outstandings during the periods presented. There are no concentrations of loans greater than 10% of total loans, which are not otherwise disclosed as a category of loans.
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Allowance for Loan Losses. The allowance for loan losses balance and the provision charged to expense are judgmentally determined by management based upon a periodic review of the loan portfolio for valuation purposes and to determine the adequacy of the allowance for loan losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectability of loans in the portfolio.
Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. As of June 30, 2020, impaired loans totaled $1,923, of which $1,185 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.
The following schedule summarizes non-accrual, past due, impaired and restructured loans for the years ended June 30:
Accruing loans past due 90 days or more 41 —
Total non-performing loans $ 1,226 $ 785
Other real estate and repossessed assets owned 7 —
Total non-performing assets $ 1,233 $ 785
Accruing restructured loans $ 738 $ 404
The non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to bring the loan current. Properties and vehicles acquired by the Corporation as a result of foreclosure or repossession, or by deed in lieu of foreclosure, are classified as “other real estate and repossessed assets owned” until they are sold or otherwise disposed of.
Potential Problem Loans. There were no loans, not otherwise identified above, included on management’s watch or troubled loan lists that management has serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Management’s watch and troubled loan lists includes loans which management has some doubt as to the borrowers’ ability to comply with the present repayment terms, loans which management is actively monitoring due to changes in the borrower’s financial condition and other loans which management wants to more closely monitor due to special circumstances. These loans and their potential loss exposure have been considered in management’s analysis of the adequacy of the allowance for loan losses.
The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the years ended June 30:
Allowance for loan losses at beginning of year $ 3,788 $ 3,422
Loans charged off:
Commercial real estate — 80
1-4 Family residential real estate 6 —
Recoveries:
Commercial real estate 4 875
1-4 Family residential real estate 4 23
Net charge offs (recoveries) 90 (806 )
Provision for loan losses charged to operations 1,980 (440 )
Allowance for loan losses at end of year $ 5,678 $ 3,788
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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
While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is expected as a result of the COVID-19 pandemic. As of June 30, 2020, 270 commercial loans with an outstanding balance of $72,995, 48 mortgage loans with an outstanding balance of $4,632, four home equity lines of credit with an outstanding balance of $227, and 97 consumer loans with an outstanding balance of $1,001 were granted 90 days of payment deferrals. As of August 31, 2020, a second 90 days of payment deferral has been granted for 49 commercial loans with an outstanding balance of $9,341, seven mortgage loans with an outstanding balance of $647 and four consumer loans with an outstanding balance of $44. Management has identified the hospitality industry and religious organizations as the industries that could be most at risk due to the COVID-19 pandemic. As of June 30, 2020, the total balance of loans to the hospitality industry, excluding PPP loans, was $19,736, which includes $2,193 in loans to businesses in the hotel industry. As of June 30, 2020, the total balance of loans to religious organizations, excluding PPP loans, was $8,425, which includes $6,403 in loans to local churches. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Funding Sources. Total deposits increased by $161,181, or 34.1%, from $472,174 at June 30, 2019 to $633,355 at June 30, 2020, of which $100,330, or 21.2%, was related to organic deposit growth. The organic deposit growth was primarily associated with the retention of PPP loan proceeds, consumer economic stimulus payments and a decline in overall consumer spending resulting from the COVID-19 pandemic. For the fiscal year ended June 30, 2020, noninterest-bearing demand deposits increased by $73,994, or 63.7%, savings and money market deposits increased by $66,306, or 40.9%, and interest-bearing demand deposits increased by $17,704, or 21.7%, from the same prior year period.
Short-term borrowings increased by $3,257, or 88.4%, to $6,943 at June 30, 2020 from $3,686 at June 30, 2019. This increase was primarily associated with the retention of PPP loan proceeds in commercial sweep repurchase agreement accounts.
The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:
Years Ended June 30,
Amount Rate Amount Rate
The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2020 by time remaining until maturity:
Maturing in:
See Note 8—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.
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Capital Resources
Total shareholders’ equity increased by $12,074 from $51,166 at June 30, 2019 to $63,240 at June 30, 2020. The primary reason for the increase was the issuance of common shares as part of the consideration in the acquisition of Peoples, which added $5,277 to shareholders’ equity. In addition, the increase in shareholders’ equity included $5,527 of net income for the current fiscal year and an increase of $2,694 in accumulated other comprehensive income from an increase in the unrealized gains in the mark-to-market of available-for-sale securities. These increases were partially offset by cash dividends paid of $1,554. For the 2020 fiscal year, the average equity to average total assets ratio was 9.19% and the dividend payout ratio was 28.1%. For the 2019 fiscal year, the average equity to average total assets ratio was 8.96% and the dividend payout ratio was 25.5%.
At June 30, 2020, management believes the Bank complied with all regulatory capital requirements. Based on the Bank’s computed regulatory capital ratios, the OCC has determined the Bank to be well capitalized under the Federal Deposit Insurance Act as of its latest exam date. The Bank’s actual and required capital amounts are disclosed in Note 13-Regulatory Matters to the Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would cause the Bank’s capital category to change.
Liquidity
Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions. The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in federal funds sold or interest-bearing deposit accounts with other financial institutions.
Net cash inflows from operating activities for the 2020 fiscal year were $5,593 and net cash inflows from financing activities were $107,655. Net cash outflows from investing activities were $113,050. The major sources of cash were a $100,330 net increase in deposits and a $44,330 increase from sales, maturities or principal pay downs on available-for-sale securities. The major uses of cash were a $118,463 net increase in loans and the $36,775 purchase of available-for-sale securities. Total cash and cash equivalents were $9,659 as of June 30, 2020 compared to $9,461 at June 30, 2019.
The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit. Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and investments in tax-exempt municipal bonds.
The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial and retail customers have been continuing to turn to community banks. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a relatively low level of 0.91%.
Jumbo time deposits (those with balances of $250 and over) were $36,747 and $39,034 at June 30, 2020 and 2019, respectively. These deposits are monitored closely by the Bank and typically priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee paid broker to obtain deposits from outside its normal service area as an additional source of funding. However, these deposits are not relied upon as a primary source of funding.
Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Additionally, the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations. As of June 30, 2020, the Bank could, without prior approval, declare a dividend of approximately $5,856.
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Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Corporation are monetary in nature. Therefore, as a financial institution, interest rates have a more significant impact on the Corporation’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity, maturity structure and quality of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels.
Critical Accounting Policies and Use of Significant Estimates
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and management’s discussion and analysis are, to a large degree, dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change. The most significant accounting policies followed by the Corporation are presented in Note 1-Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.
Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. In the event different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Management has identified the following as critical accounting policies:
Allowance for Loan Losses. The determination of the allowance for loan losses involves considerable subjective judgment and estimation by management. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.
Goodwill. The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. The Corporation noted its stock price fell below the carrying value of equity per share and during the fourth quarter of fiscal year 2020 elected to proceed to a quantitative test to compare the Corporation’s fair value with its carrying amount. As of June 30, 2020, the Corporation had $835 in goodwill and the resultant fair value from the quantitative goodwill impairment test was 114% of book value. The estimated fair value of the Corporation was determined by applying weighting factors to the income and market valuation methodologies. In performing its analyses, the Corporation made numerous assumptions with respect to industry performance, business, economic and market conditions, and various other matters, many of which cannot be predicted and are beyond the Corporation's control. Management's financial projections reflect the best currently available estimates and judgments as to the expected future financial performance of the Corporation. However, in the income approach, the most critical assumption is the future earnings of the Corporation and if future earnings are less than what was estimated, goodwill could become impaired during a future period. In addition, the market valuation methodologies utilized by the Corporation employ assumptions that may be anticipated by an acquirer in estimating the fair value of the Corporation. The impairment test of goodwill indicated no impairment existed as of the valuation date. However, it is impossible to know the future impact of the evolving economic conditions related to COVID-19. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.
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Contractual Obligations, Commitments and Contingent Liabilities
The following table presents, as of June 30, 2020, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Deposits without maturity — — — — — — 517,973
Note 14-Commitments with Off-Balance Sheet Risk to the Consolidated Financial Statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. These commitments and contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.
Off-Balance Sheet Arrangements
At June 30, 2020, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for Smaller Reporting Companies.
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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Consumers Bancorp, Inc. (the "Company") as of June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We have served as the Company’s auditor since 1998.
Cleveland, Ohio
September 22, 2020
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CONSOLIDATED BALANCE SHEETS
As of June 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
ASSETS:
Total cash and cash equivalents 9,659 9,461
Certificate of deposits in financial institutions 11,635 1,983
Federal bank and other restricted stocks, at cost 2,472 1,723
Less allowance for loan losses (5,678 ) (3,788 )
Cash surrender value of life insurance 9,442 9,606
Core deposit intangible, net 256 —
Accrued interest receivable and other assets 3,470 2,168
LIABILITIES:
Deposits:
Accrued interest payable and other liabilities 6,121 4,210
Commitments and contingent liabilities (Note 14)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized — —
Accumulated other comprehensive income 4,260 1,566
Total liabilities and shareholders’ equity $ 740,820 $ 553,936
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
Interest income:
Federal bank and other restricted stocks 75 86
Federal funds sold and interest-bearing deposits 157 93
Interest expense:
Short-term borrowings 43 51
Federal Home Loan Bank advances 292 319
Provision for loan losses 1,980 (440 )
Net interest income after provision for loan losses 19,504 17,829
Other income:
Service charges on deposit accounts 1,350 1,264
Debit card interchange income 1,575 1,454
Bank owned life insurance death benefit 324 —
Bank owned life insurance income 265 271
Gain on sale of mortgage loans 543 458
Other expenses:
Salaries and employee benefits 9,582 8,355
Data processing expenses 907 621
Debit card processing expenses 810 765
Professional and director fees 1,027 799
Federal Deposit Insurance Corporation assessments 106 149
Marketing and advertising 475 424
Loan and collection expenses 95 101
Telephone and communications 301 268
Amortization of intangible 14 —
Basic and diluted earnings per share $ 1.92 $ 2.04
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended June 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
Other comprehensive income, net of tax:
Net change in unrealized gains:
Unrealized gains arising during the period 3,766 4,612
Reclassification adjustment for gains included in income (355 ) (561 )
Income tax effect (717 ) (850 )
Total comprehensive income $ 8,221 $ 8,767
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
2,614 shares associated with vested stock awards 26 33 59
Cash dividends declared ($0.52 per share) (1,421 ) (1,421 )
Cash dividends declared ($0.54 per share) (1,554 ) (1,554 )
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash flows from operating activities:
Securities amortization and accretion, net 353 784
Provision for loan losses 1,980 (440 )
Gain on disposal of fixed assets (2 ) (11 )
Net gain on sale of loans (543 ) (458 )
Deferred income tax expense (361 ) 173
Gain on sale of securities (355 ) (561 )
Intangible amortization 14 —
Origination of loans held for sale (38,411 ) (29,473 )
Income from BOLI death benefit (324 ) —
Increase in cash surrender value of life insurance (265 ) (271 )
Change in other assets and other liabilities (167 ) 483
Net cash flows from operating activities 5,593 6,386
Cash flows from investing activities:
Securities available-for-sale:
Maturities, calls and principal pay downs 25,909 19,091
Proceeds from sales of available-for-sale securities 18,421 7,670
Securities held-to-maturity:
Purchase of Federal Home Loan Stock (595 ) (264 )
Acquisition, net of cash received (4,295 ) —
Proceeds from BOLI death benefit 753 —
Acquisition of premises and equipment (497 ) (1,671 )
Disposal of premises and equipment — 45
Proceeds from sale of other real estate and repossessed assets owned 60 —
Net cash flows from investing activities (113,050 ) (46,750 )
Cash flows from financing activities:
Proceeds from Federal Home Loan Bank advances 22,500 13,000
Repayments of Federal Home Loan Bank advances (14,530 ) (2,056 )
Change in short-term borrowings 909 (9,681 )
Increase in cash and cash equivalents 198 1,689
Cash and cash equivalents, beginning of year 9,461 7,772
Cash and cash equivalents, end of year $ 9,659 $ 9,461
Supplemental disclosure of cash flow information:
Cash paid during the period:
Non-cash items:
Transfer from loans to other repossessed assets 7 —
Transfer from loans held for sale to portfolio — 75
Issuance of treasury stock for stock awards 89 59
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
Premises and equipment 818
Core deposit intangible 270
Accrued interest receivable and other assets 140
Total noncash assets acquired 73,428
Liabilities assumed:
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank), together referred to as the Corporation. All significant intercompany transactions have been eliminated in the consolidation.
Nature of Operations: Consumers Bancorp, Inc. is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, a broad array of products and services throughout its primary market area of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. 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 of its revenues, operating income, and assets. Accordingly, all of 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 Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.
Interest–Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Certificates of Deposit in Financial Institutions: Certificates of deposit in other financial institutions are carried at cost.
Cash Reserves: The Bank is required to maintain cash on hand and noninterest-bearing balances on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance was zero at June 30, 2020 and $456 at June 30, 2019.
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) at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or whether it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Bank and Other Restricted Stocks: The Bank is a member of the Federal Home Loan Bank (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.
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.
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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of 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 adjusted for current factors. 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; 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.
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 loansare 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Real Estate and Repossessed Assets Owned: Real estate properties and other repossessed assets, which are primarily vehicles, acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less costs to sell at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If the fair value declines after acquisition, a valuation allowance is recorded as a charge to income. Operating costs after acquisition are expensed. Gains and losses on disposition are reported as a charge to income.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, generally over the lesser of the remaining term of the lease facility or the estimated economic life of the improvement. Useful lives range from three years for software to thirty-nine and one-half years for buildings.
Cash Surrender Value of Life Insurance: The Bank has purchased single-premium life insurance policies to insure the lives of current and former participants in the salary continuation plan. As of June 30, 2020, the Bank had policies with total death benefits of $19,067 and total cash surrender values of $9,442. As of June 30, 2019, the Bank had policies with total death benefits of $19,806 and total cash surrender values of $9,606. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Tax-exempt income is recognized from the periodic increases in cash surrender value of these policies.
Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. Goodwill is not amortized but is assessed at least annually for impairment. Any such impairment will be recognized in the period identified. The Corporation has selected April 30 as the date to perform the annual impairment test, however based on the current economic conditions related to COVID-19, an interim assessment was completed as of June 30, 2020. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet.
Long-Term Assets: Premises, equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities, which are classified as short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Retirement Plans: The Bank maintains a 401(k) savings and retirement plan covering all eligible employees and matching contributions are expensed as made. Salary continuation plan expense allocates the benefits over years of service.
Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation applies a more likely than not recognition threshold for all tax uncertainties in accordance with U.S. generally accepted accounting principles. A tax position is recognized as a benefit only if it is more likely than not that the position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable upon the vesting of restricted stock awards.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees over the required service period, generally defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Corporation’s common stock at the date of grant. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of equity, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the Corporation’s financial statements.
Fair Value of Financial Instruments: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15 of the Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders.
Reclassifications: Certain reclassifications have been made to the June 30, 2019 financial statements to be comparable to the June 30, 2020 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.
Adoption of New Accounting Standards: In February 2016, FASB issued accounting standards update (ASU) 2016-02, Leases (Topic 842). This ASU requires all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures are required so users can understand more about the nature of an entity’s leasing activities. The new guidance was effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. The Corporation has several lease agreements, such as branch locations, which were previously considered operating leases, and therefore, not recognized on the Corporation’s consolidated condensed statements of financial condition. The new guidance requires these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. As of July 1, 2019, the Corporation adopted ASU 2016-02 using the modified retrospective method. There was no cumulative-effect adjustment to the opening balance of retained earnings for the period of adoption. As of June 30, 2020, the Corporation had contractual operating lease commitments of $473.
Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined in the guidance, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. However, during July 2019, FASB unanimously voted for a proposal to delay this ASU to January 2023 for smaller reporting companies. On October 16, 2019, FASB approved a final ASU delaying the effective date. The new guidance is effective for annual and interim periods beginning after December 15, 2022 for certain entities, including smaller reporting companies. The Corporation is a smaller reporting company.
NOTE 2—ACQUISITION
On June 14, 2019, the Corporation entered into an Agreement and Plan of Merger with Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) and its wholly owned subsidiary, The Peoples National Bank of Mount Pleasant (Peoples Bank). On January 1, 2020, Consumers completed the acquisition by merger of Peoples in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. Immediately following the merger, Peoples Bank, was merged into the Corporation’s banking subsidiary, Consumers National Bank.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The assets and liabilities of Peoples were recorded on the Corporation’s Balance Sheet at their estimated fair values as of January 1, 2020, the acquisition date, and Peoples’ results of operations are included in the Corporation’s Consolidated Statements of Income beginning on that date.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of Peoples. Core deposit intangible will be amortized over ten years on a straight-line basis. Goodwill will not be amortized, but instead will be evaluated for impairment.
Consideration Paid $ 10,405
Net assets acquired:
Cash and cash equivalents $ 833
Certificates of deposit in other financial institutions 11,839
Securities, available-for-sale 4,051
Federal bank and other restricted stocks, at cost 154
Premises and equipment 818
Core deposit intangible 270
Accrued interest receivable and other assets 140
Noninterest-bearing deposits (11,979 )
Interest-bearing deposits (48,872 )
Federal funds purchased (2,348 )
Federal Home Loan Bank advances (491 )
Other liabilities (166 )
Total net assets acquired 9,569
The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgement in accounting for the acquisition. The fair value of loans was estimated using discounted contractual cash flows. The book balance of the loans at the time of the acquisition was $55,273 before considering Peoples’ allowance for loan losses, which was not carried over. The fair value disclosed above reflects a credit-related adjustment of $(890) and an adjustment for other factors of $937. Loans evidencing credit deterioration since origination, purchased credit impaired loans, included in loans receivable were immaterial. Acquisition costs of $827 pre-tax, or $680 after-tax, were recorded for the twelve-month period ended June 30, 2020. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3—SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at June 30, 2020 and 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:
Obligations of U.S. Treasury $ 1,248 $ 8 $ — $ 1,256
Obligations of state and political subdivisions $ 3,541 $ 327 $ — $ 3,868
Total held-to-maturity securities $ 3,541 $ 327 $ — $ 3,868
Obligations of state and political subdivisions $ 3,786 $ 35 $ — $ 3,821
Total held-to-maturity securities $ 3,786 $ 35 $ — $ 3,821
Proceeds from sales of available-for-sale securities during fiscal year 2020 and fiscal year 2019 were as follows:
Gross realized losses — 45
The income tax provision related to these net realized gains amounted to $74 in fiscal year 2020 and $118 in fiscal year 2019.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair values of debt securities at June 30, 2020 by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations are shown separately.
Available-for-sale Amortized Cost Fair Value
Due after one year through five years 17,042 17,661
Due after five years through ten years 16,057 16,748
U.S. Government-sponsored mortgage-backed and related securities 66,801 68,638
Held-to-maturity Amortized Cost Fair Value
Due after five years through ten years $ 373 $ 398
Securities with a carrying value of approximately $69,048 and $72,600 were pledged at June 30, 2020 and 2019, respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2020 and 2019, there were no holdings of securities of any one issuer, other than obligations of U.S. government-sponsored entities and agencies, with an aggregate book value greater than 10% of shareholders’ equity.
The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2020 and 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Less than 12 Months 12 Months or more Total
Mortgage-backed securities – residential $ — $ — $ 625 $ (4 ) $ 625 $ (4 )
Mortgage-backed securities – commercial 1,806 (2 ) — — 1,806 (2 )
Collateralized mortgage obligations - residential 1,700 (12 ) — — 1,700 (12 )
Less than 12 Months 12 Months or more Total
Obligations of states and political subdivisions — — 5,201 (33 ) 5,201 (33 )
Collateralized mortgage obligations – residential — — 3,277 (28 ) 3,277 (28 )
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
As of June 30, 2020, the Corporation’s securities portfolio consisted of 255 available-for-sale and three held-to-maturity securities. There were four available-for-sale securities in an unrealized loss position at June 30, 2020, one of which was in a continuous loss position for twelve or more months. There were no held-to-maturity securities in an unrealized loss position at June 30, 2020. The unrealized losses within the mortgage-backed and collateralized mortgage obligation securities portfolios in fiscal year 2020 were primarily attributed to higher than expected prepayments and uncertainty in prepayment behavior was likely affecting the market values. At June 30, 2020, all the mortgage-backed securities and collateralized mortgage obligations held by the Corporation were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Also, management monitors the financial condition of the individual municipal securities to ensure they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the Corporation will be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity, management does not believe there is any OTTI related to these securities at June 30, 2020. Also, there was no OTTI recognized at June 30, 2019.
NOTE 4—LOANS
Major classifications of loans were as follows as of June 30:
Commercial real estate:
1 – 4 Family residential real estate:
Net deferred loan fees and costs (1,612 ) (206 )
Allowance for loan losses (5,678 ) (3,788 )
The above table includes $66,606 of PPP loans in the commercial loan category. The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2020:
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
Loans charged-off — — (6 ) (140 ) (146 )
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2019:
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
Loans charged-off — (80 ) — (36 ) (116 )
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020. Included in the recorded investment in loans is $1,936 of accrued interest receivable.
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 28 $ 6 $ — $ — $ 34
Acquired loans collectively evaluated for impairment — 103 94 — 197
Recorded investment in loans:
Loans individually evaluated for impairment $ 179 $ 1,045 $ 699 $ — $ 1,923
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2019. Included in the recorded investment in loans is $891 of accrued interest receivable.
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 2 $ 7 $ — $ — $ 9
Recorded investment in loans:
Loans individually evaluated for impairment $ 174 $ 658 $ 357 $ — $ 1,189
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2020:
Unpaid Allowance for Average Interest Cash Basis
Principal Recorded Loan Losses Recorded Income Interest
Balance Investment Allocated Investment Recognized Recognized
With no related allowance recorded:
Commercial $ — $ — $ — $ 4 $ — $ —
Commercial real estate:
1-4 Family residential real estate:
With an allowance recorded:
Commercial real estate:
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2019:
Unpaid Allowance for Average Interest Cash Basis
Principal Recorded Loan Losses Recorded Income Interest
Balance Investment Allocated Investment Recognized Recognized
With no related allowance recorded:
Commercial $ — $ — $ — $ 86 $ 6 $ 6
Commercial real estate:
1-4 Family residential real estate:
With an allowance recorded:
Commercial real estate:
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2020 and 2019:
Loans Past Due Loans Past Due
Over 90 Days Over 90 Days
Still Still
Non-accrual Accruing Non-accrual Accruing
Commercial $ 21 $ — $ — $ —
Commercial real estate:
1 – 4 Family residential:
Consumer — 12 — —
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 by class of loans:
Days Past Due
Days Days Greater Past Due Past Due Total
Commercial real estate:
1-4 Family residential:
The above table of past due loans includes the recorded investment in non-accrual loans of $2 in the 60-89 days, $792 in the 90 days or greater category and $391 in the loans not past due category.
The following table presents the aging of the recorded investment in past due loans as of June 30, 2019 by class of loans:
Days Past Due
Days Days Greater Past Due Past Due Total
Commercial real estate:
1-4 Family residential:
The above table of past due loans includes the recorded investment in non-accrual loans of $198 in the 30-59 days, $80 in the 90 days or greater category and $507 in the loans not past due category.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Troubled Debt Restructurings (TDR):
The Corporation has certain loans that have been modified in order to maximize collection of loan balances that are classified as TDRs. A modified loan is usually classified as a TDR if, for economic reasons, management grants a concession to the original terms and conditions of the loan to a borrower who is experiencing financial difficulties that it would not have otherwise considered. In response to COVID-19, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by the virus. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as TDRs. As of June 30, 2020, there were 419 loans with an outstanding balance of $78,855, or 14.5% of total loans, that were granted 90 days of payment deferrals under the loan modification program that was adopted in response to COVID-19 that are not classified as TDRs.
At June 30, 2020 and 2019, the Corporation had $974 and $725, respectively, of loans classified as TDRs which are included in impaired loans above. At June 30, 2020 and 2019, the Corporation had $12 and $9, respectively, of specific reserves allocated to these loans.
During the fiscal year ended June 30, 2020, the terms of one loan was modified as a troubled debt restructuring by extending the maturity date. As of June 30, 2020, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2020:
Pre-Modification Post-Modification
Number of Outstanding Recorded Outstanding Recorded
Loans Investment Investment
1-4 Family residential:
The troubled debt restructuring described above did not result in any charge-off nor did it increase the allowance for loan losses during the twelve months ended June 30, 2020.
During the fiscal year ended June 30, 2019, the terms of certain loans were modified as a troubled debt restructuring. The modification of the terms of such loans included a combination of forgiveness of a portion of the principal amount owed, which resulted in a reduction in the monthly payment amount, an extension of the maturity date and the extension of additional credit to provide operating funds. As of June 30, 2019, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2019:
Pre-Modification Post-Modification
Number of Outstanding Recorded Outstanding Recorded
Loans Investment Investment
Commercial real estate:
The troubled debt restructuring described above increased the allowance for loan losses and resulted in a charge-off of $80 during the twelve months ended June 30, 2019.
There were no loans classified as troubled debt restructurings that were modified within the last twelve months for which there was a payment default.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Corporation uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which was discussed previously.
As of June 30, 2020, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special Not
Pass Mention Substandard Doubtful Rated
Commercial real estate:
Construction 16,241 — — — —
1-4 Family residential real estate:
As of June 30, 2019, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special Not
Pass Mention Substandard Doubtful Rated
Commercial real estate:
Construction 16,075 — — — —
1-4 Family residential real estate:
Construction — — — — 1,963
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5—PREMISES AND EQUIPMENT
Major classifications of premises and equipment were as follows as of June 30:
Furniture, fixture and equipment 6,333 5,872
Accumulated depreciation and amortization (7,575 ) (6,585 )
Depreciation expense was $1,044 and $797 for the years ended June 30, 2020 and 2019, respectively.
Effective July 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of June 30, 2020, the Corporation leased real estate for six office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to September 1, 2028, including extension periods. Lease agreements for four locations have a lease term of 12 months or less and are therefore considered short-term leases and are exempt from Topic 842. The weighted average remaining life of the lease term for the leases with a term over 12 months was 51.92 months as of June 30, 2020.
Costs associated with operating leases accounted for under Topic 842 were $109 for the twelve-month period ended June 30, 2020. The costs of short-term leases were $87 for the twelve-month period ended June 30, 2020. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, were $473 as of June 30, 2020.
Total estimated rental commitments for the operating leases within the scope of Topic 842 were as follows as of June 30, 2020:
Period Ending June 30