Item7—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, 2022 and 2021. 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. 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;
● changes in consumer spending, borrowing and savings habits;
● declining asset values impacting the underlying value of collateral;
● our ability to attract and retain qualified employees;
● competitive pressures on product pricing and services; and
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, and Wayne counties in Ohio. Its market includes these counties as well as the fourteen contiguous counties in northeast Ohio, western Pennsylvania, and northern West Virginia. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
On July 16, 2021, the Corporation completed the branch acquisition and assumed $104,538 of branch deposits for a 1.75% deposit premium and purchased $15,602 in subordinated debt securities issued by unrelated financial institutions and $19,943 in loans. In relation to the branch acquisition, the Corporation recorded goodwill of $1,616. This transaction qualified as a business combination.
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COVID-19 Pandemic
In response to COVID-19, management actively pursued multiple avenues to assist customers during these uncertain times. For commercial borrowers, the CARES Act included key SBA initiatives to assist small businesses. The PPP loans were designed to provide a direct incentive for small businesses to keep their workers on the payroll. The Bank originated a total of $113,367 of PPP loans during the first and second rounds of assistance. As of June 30, 2022, there were $179 of PPP loans outstanding.
Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program was available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offered principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Interest was deferred but continued to accrue during the deferment period and the maturity date on amortizing loans was 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 were not classified as troubled debt restructurings. As of June 30, 2022, there were no loans in payment deferral status under this loan modification program. This modification program ended as of April 26, 2022.
We have assisted and may continue to assist customers who are experiencing financial hardship due to COVID-19 by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties. The consumer reserve personal line of credit, an unsecured line of credit that is linked to a personal checking account, has been redesigned to provide easier access and a lower initial rate.
Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact that the ongoing economic disruption will have on the Corporation. The Corporation has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. The branch lobbies were closed at various times throughout the pandemic but are now open for normal business. The Corporation is encouraging virtual meetings and conference calls in place of in-person meetings. The Corporation is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.
Comparison of Results of Operations for the Years Ended June30, 2022 andJune30, 2021
Net Income. Net income was $11,192 for fiscal year 2022 compared with $8,988 for fiscal year 2021. The following key factors summarize our results of operations for the year ended June 30, 2022 compared with the same prior year period:
Return on average equity and return on average assets were 16.43% and 1.17%, respectively, for fiscal year 2022 compared with 13.36% and 1.16%, 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.
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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 and average securities include unrealized gains and losses on securities available for sale, while yields are based on average amortized cost.
Taxable equivalent adjustments to net interest 513 419
Net interest income, fully taxable equivalent $ 33,259 $ 27,002
Net interest margin 3.54 % 3.62 %
Taxable equivalent adjustment 0.06 0.05
Net interest margin, fully taxable equivalent 3.60 % 3.67 %
FTE net interest income for fiscal year 2022 was $33,259, an increase of $6,257 or 23.2%, from $27,002 in fiscal year 2021. The Corporation’s tax equivalent net interest margin was 3.60% for fiscal year 2022 and 3.67% for fiscal year 2021. FTE interest income for fiscal year 2022 was $34,673, an increase of $5,771, or 20.0%, from fiscal year 2021, primarily due to a $179,192, or 24.2%, increase in average interest-earning assets from fiscal year 2021. The growth in average interest-earning assets was primarily a result of a $112,149 increase in the average balance of available-for-sale securities and a $46,960, or 8.5%, increase in average loans. Interest income was positively impacted in both the current and prior year periods by the accretion of origination fees from PPP loans that were forgiven during those periods. The PPP loans had an average balance of $17,692 for fiscal year 2022, and during this same period, $2,612 of interest and fee income was recognized on the PPP loans. This compares with an average balance of $63,761 for fiscal year 2021, and the recognition of $2,549 of interest and fee income during fiscal year 2021. The Corporation’s yield on average interest-earning assets was 3.75% for the 2022 fiscal year compared with 3.93% for the same period last year.
Interest expense for fiscal year 2022 was $1,414, a decrease of $486, or 25.6%, from fiscal year 2021. The Corporation’s cost of funds was 0.22% for fiscal year 2022 compared with 0.38% for the same prior year period. The historically low market interest rates that were in place throughout much of fiscal year 2022 had an impact on the rates paid on interest-bearing deposit products. The cost of funds is expected to increase due to the recent increases in short-term market rates.
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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 $ 958,948 $ 771,980
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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 6 1 5 1 17 (16 )
Interest bearing deposits and federal funds sold 24 92 (68 ) 9 144 (135 )
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. The amount of the provision is affected by loan charge-offs, recoveries and changes in specific and general allocations required for the allowance for loan losses. Management considers a number of factors that impact the provision for loan losses, such as 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.
A provision for loan loss expense of $735 was recorded in fiscal year 2022 compared with $850 in fiscal year 2021. The loan loss provision expense recorded in fiscal year 2022 was primarily due to the organic growth within the loan portfolio. For fiscal year 2022, net charge offs of $46 were recorded compared with $57 for the same period last year. The allowance for loan losses as a percentage of loans was 1.17% at June 30, 2022 and 1.14% at June 30, 2021. As of June 30, 2021, the allowance for loan losses as a percentage of total loans, excluding the PPP loans, was 1.25%. The decline in the allowance for loan losses as a percentage of total loans excluding the PPP loans was due to the improvement in economic conditions that had been adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations (including booster shots) have created optimism in the community, but some uncertainty remains due to the continued concern over increased infection rates from various variants of COVID-19.
Non-performing loans were $440 as of June 30, 2022 and represented 0.07% of total loans. This compared with $1,771, or 0.31% of total loans at June 30, 2021. Non-performing loans declined primarily due to the full payoff of three loans that had a balance of $949 as of June 30, 2021 that were on non-accrual for an extended period. 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.
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Other Income. Total other income increased by $269, or 6.0%, to $4,735 for fiscal year 2022. Service charges on deposit accounts increased by $240, or 19.7% primarily due to an increase in the number of overdraft charges as overdrafts increased from the lows that were experienced during the pandemic as many eligible individuals received economic stimulus payments and consumers changed their spending habits in 2020 and 2021. Effective March 1, 2022, the Bank made a small reduction to the non-sufficient funds/overdraft fee and eliminated many internal account transfer fees. The Bank may make future reductions to the non-sufficient funds/overdraft fee in response to the industry wide trend of reducing overdraft fees as large banks have announced a reduction in these types of fees in response to regulatory pressure. As a result, service charges on deposit accounts may be negatively impacted in future periods. Debit card interchange income increased by $178, or 9.4%, in fiscal year 2022 to $2,069 primarily as a result of increased debit card usage and an increase in the number of cards issued. Mortgage banking activity decreased by $121, or 16.1%, in fiscal year 2022 because of a decrease in volume due to the increase in mortgage rates.
Other Expenses. Total other expenses were $23,215 for the year ended June 30, 2022; an increase of $3,854, or 19.9%, from $19,361 for the year ended June 30, 2021.
Salaries and employee benefit expenses increased by $2,408, or 22.2%, during fiscal year 2022 primarily due to the addition of staff at three new office locations, the addition of lending staff, and increases in health care costs.
Occupancy and equipment expenses increased by $440, or 17.0%, during fiscal year 2022 from the same period last year primarily due to investments in new technology and computer equipment as well as higher real estate taxes, custodial, building upkeep, maintenance, lease and utility expenses for the additional office locations.
Data processing expenses increased by $67, or 9.2% and FDIC assessments increased by $278, or 92.1%, for fiscal year 2022 from the same prior year period due to the growth in the organization.
Debit card processing expenses increased by $75, or 7.9% primarily as a result of increased debit card usage. The increase in debit card usage is also reflected in debit card interchange income which increased by $178, or 9.4% from the prior year.
Income Tax Expense. Income tax expense totaled $2,339 and $1,850 and the effective tax rates were 17.3% and 17.1% for the fiscal years ended June 30, 2022 and 2021, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in fiscal years 2022 and 2021. 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.
Financial Condition
Total assets at June 30, 2022 were $977,313 compared with $833,804 at June 30, 2021, an increase of $143,509, or 17.2%. The growth in total assets is mainly attributable to an increase of $88,465, or 41.0%, in available-for-sale and held-to-maturity securities and a $45,416, or 8.0%, increase in total loans. These increases were primarily funded by a $159,713, or 22.0%, increase in total deposits and include $104,538 of deposits acquired as part of the branch acquisition. Total shareholders’ equity declined to $53,970 as of June 30, 2022, from $69,900 as of June 30, 2021. The primary reason for the decline in shareholders’ equity was a $25,656 net decrease in accumulated other comprehensive income due to a shift in unrealized gains on the mark-to-market of available-for-sale securities to a net unrealized loss.
Securities. Total securities were $304,221 at June 30, 2022, of which $296,347 were classified as available-for-sale and $7,874 were classified as held-to-maturity. The securities portfolio is mainly comprised of mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, state and political subdivisions and government-sponsored enterprises.
The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2022 and 2021 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, 2022 and 2021 and the corresponding gross unrecognized gains and losses:
Obligations of state and political subdivisions $ 7,874 $ 47 $ (90 ) $ 7,831
Obligations of state and political subdivisions $ 7,996 $ 356 $ — $ 8,352
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2022:
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 28,689 26,265 1.61
Obligations of state and political subdivisions:
Total obligations of state and political subdivisions 105,977 97,357 3.05
Mortgage-backed securities - residential:
Mortgage-backed securities – commercial:
Total mortgage-backed securities - commercial 8,623 7,301 1.99
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Amortized Cost Fair Value Average Yield
Collateralized mortgage obligations:
Other debt securities
Held-to-maturity
Obligations of state and political subdivisions:
Total held-to-maturity securities $ 7,874 $ 7,831 2.38 %
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.
Loans. Loan receivables increased by $45,416 to $611,843 at June 30, 2022 compared to $566,427 at June 30, 2021. Excluding PPP and acquired loan balances, core organic loan growth was $81,194, or 15.7% for the fiscal year ended June 30, 2022. Commercial loans included PPP loans of $179 and $50,686 as of June 30, 2022 and 2021, respectively. Consumer loans increased by $15,251, or 51.6%, primarily as a result of the expansion of indirect auto lending and an increase in direct auto loans due to successful marketing campaigns. 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 table shows the major classifications of loans, net of deferred fees and costs, which are based on the contractual terms for repayment of principal, that are due in the periods indicated as of June 30, 2022:
Maturing
After one year After five years
Within but within But within After
one year five years Fifteen years Fifteen years Total
Commercial real estate:
1-4 Family residential real estate:
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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, 2022:
Total due after one year: Fixed Interest Rates Variable Interest Rates
Commercial real estate:
1-4 Family residential real estate:
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, 2022, impaired loans totaled $473, of which $431 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.
The following table summarizes non-accrual loans, non-performing assets, impaired and restructured loans, and associated ratios for the years ended June 30:
Accruing loans past due 90 days or more 9 —
Total non-performing loans $ 440 $ 1,771
Other real estate and repossessed assets owned — —
Total non-performing assets $ 440 $ 1,771
Accruing restructured loans $ 42 $ 183
Non-accrual to total loans 0.07 % 0.31 %
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.
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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 $ 6,471 $ 5,678
Loans charged off:
Commercial — 22
1-4 Family residential real estate 41 4
Recoveries:
Commercial 23 —
Commercial real estate 2 4
1-4 Family residential real estate 20 3
Net charge offs 46 57
Provision for loan losses charged to operations 735 850
Allowance for loan losses at end of year $ 7,160 $ 6,471
Ratio of net charge offs to average loans outstanding 0.01 % 0.01 %
ALLL to total loans 1.17 % 1.14 %
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 losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur. While the Corporation has historically experienced strong trends in asset quality, due to the current economic concerns with high inflation and rising interest rates, uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Goodwill: Goodwill was $2,452 as of June 30, 2022 and $836 as of June 30, 2021. In July 2021, goodwill of $1,616 was recorded from the branch acquisition. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed during the year ended June 30, 2022.
Funding Sources. Total deposits increased by $159,713, or 22.0%, from $726,849 at June 30, 2021 to $886,562 at June 30, 2022. Total deposits include $104,538 of deposits acquired as part of the branch acquisition. For the fiscal year ended June 30, 2022, noninterest-bearing demand deposits increased by $28,563, or 12.5%, interest-bearing demand deposits increased by $30,015, or 23.6%, savings and money market deposits increased by $86,293, or 30.5%, and certificates and other time deposits increased by $14,842, or 17.0% from the same prior year period. As current market rates rise, it is anticipated that customers may choose to move funds from savings and money market deposit products to higher yielding certificates of deposits.
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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
Uninsured deposits at June 30, 2022 and 2021 were $266,902 and $229,071, respectively. Uninsured deposits as of June 30, 2022 and 2021 are based on estimates and include portions of FDIC-insured deposit accounts that exceed the insurance limit of $250 thousand per separately insured depositor.
The following table summarizes time deposits issued in amounts of more than $250 thousand as of June 30, 2022 by time remaining until maturity:
Maturing in:
Short-term borrowings increased by $9,092, or 74.5%, to $21,295 at June 30, 2022 from $12,203 at June 30, 2021. This increase was primarily associated with large new deposits from an existing local commercial customer in this sweep repurchase agreement product. See Note 8—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.
Capital Resources
Total shareholders’ equity decreased by $15,930 from $69,900 at June 30, 2021 to $53,970 at June 30, 2022. The primary reason for the decline in shareholders’ equity was a $25,656 net decrease in accumulated other comprehensive income due to a shift in unrealized gains on the mark-to-market of available-for-sale securities to a net unrealized loss and by cash dividends paid of $1,949. These reductions were partially offset by net income of $11,192 for the current fiscal year. For fiscal year 2022, the average equity to average total assets ratio was 7.10% and the dividend payout ratio was 17.4%. For fiscal year 2021, the average equity to average total assets ratio was 8.71% and the dividend payout ratio was 19.9%.
At June 30, 2022, 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.
At June 30, 2022, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in 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.
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.
For fiscal year 2022, net cash inflows from operating activities were $14,947, net cash inflows from financing activities were $52,698 and net cash outflows from investing activities were $65,222. The major sources of cash were net cash received of $66,552 from the branch acquisition, $55,175 net increase in deposits, and a $34,306 increase from sales, maturities, or principal pay downs on available-for-sale securities. The major uses of cash were the $141,210 purchase of available-for-sale securities and a $25,602 net increase in loans. Total cash and cash equivalents were $20,952 as of June 30, 2022 compared to $18,529 at June 30, 2021.
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The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit. Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and investments in tax-exempt municipal bonds.
The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial and retail customers are turning to community banks. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds being at a low level of 0.22% for fiscal year 2022.
Jumbo time deposits (those with balances of $250 and over) were $18,164 and $18,488 at June 30, 2022 and 2021, respectively. These deposits are monitored closely by the Bank and typically priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee paid broker to obtain deposits from outside its normal service area as an additional source of funding. However, these deposits are not relied upon as a primary source of funding and there were no brokered deposits as of June 30, 2022 or 2021.
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, 2022, the Bank could, without prior approval, declare a dividend of approximately $14,695.
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:
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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 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 the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.
Goodwill. The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required, and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. As of April 30, 2022, the measurement date, a qualitative assessment was performed to determine whether there is a more likely than not (greater than 50% likelihood) that the fair value of the Corporation was less than its carrying amount. The qualitative impairment test of goodwill indicated no impairment existed as of the measurement date. However, it is impossible to know the future impact of the evolving economic conditions. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.
Contractual Obligations, Commitments and Contingent Liabilities
The following table presents, as of June 30, 2022, 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 — — — — — — 784,181
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.
Item7A— Quantitative and Qualitative Disclosures About Market Risk
Not applicable for Smaller Reporting Companies.
22
Item8— Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. and subsidiaries (the “Company”) as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Significant Assumptions in General Reserves - Refer to Notes 1 and 4 to the Financial Statements
Critical Audit Matter Description
The allowance for loan losses (allowance) represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
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We identified the Company’s significant assumptions in general reserves in the allowance for loan losses as a critical audit matter. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the qualitative factors within the allowance included the following, among others:
/s/ Plante & Moran, PLLC
We have served as the Company's auditor since 2020.
Auburn Hills, Michigan
September 15, 2022
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CONSOLIDATED BALANCE SHEETS
As of June 30, 2022 and 2021
(Dollar amounts in thousands, except per share data)
ASSETS:
Certificates of deposit in financial institutions 3,781 5,825
Equity securities, at fair value 400 424
Federal bank and other restricted stocks, at cost 2,525 2,472
Less allowance for loan losses (7,160 ) (6,471 )
Cash surrender value of life insurance 9,959 9,702
Core deposit intangible, net 470 229
Accrued interest receivable and other assets 10,184 2,825
LIABILITIES:
Deposits:
Accrued interest payable and other liabilities 7,230 6,802
Commitments and contingent liabilities (Note 14)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized — —
Accumulated other comprehensive income (loss) (22,106 ) 3,550
Total liabilities and shareholders’ equity $ 977,313 $ 833,804
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2022 and 2021
(Dollar amounts in thousands, except per share data)
Interest and dividend income:
Equity securities 33 17
Federal bank and other restricted stocks 82 76
Federal funds sold and interest-bearing deposits 190 166
Interest expense:
Short-term borrowings 47 9
Federal Home Loan Bank advances 245 276
Provision for loan losses 735 850
Net interest income after provision for loan losses 32,011 25,733
Other income:
Service charges on deposit accounts 1,460 1,220
Debit card interchange income 2,069 1,891
Bank owned life insurance income 257 260
Mortgage banking activity 632 753
Securities gains, net 6 14
Net change in market value of equity securities (24 ) 24
Other expenses:
Data processing expenses 795 728
Debit card processing expenses 1,025 950
Professional and director fees 878 857
Federal Deposit Insurance Corporation assessments 580 302
Marketing and advertising 663 522
Loan and collection expenses 174 142
Telephone and communications 375 344
Amortization of intangible 54 27
Basic and diluted earnings per share $ 3.68 $ 2.98
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended June 30, 2022 and 2021
(Dollar amounts in thousands, except per share data)
Other comprehensive income (loss), net of tax:
Net change in unrealized gains:
Unrealized losses arising during the period (32,469 ) (886 )
Reclassification adjustment for gains included in income (6 ) (14 )
Other comprehensive loss (25,656 ) (710 )
Total comprehensive income (loss) $ (14,464 ) $ 8,278
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2022 and 2021
(Dollar amounts in thousands, except per share data)
Other comprehensive loss — — — (710 ) (710 )
Cash dividends declared ($0.59 per share) — (1,785 ) — — (1,785 )
Cash dividends declared ($0.64 per share) — (1,949 ) — — (1,949 )
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2022 and 2021
(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 1,449 621
Provision for loan losses 735 850
Loss on disposal of fixed assets 6 26
Mortgage banking activity (632 ) (753 )
Deferred income tax expense (benefit) 146 (320 )
Gain on sale of securities (6 ) (14 )
Net change in market value of equity securities 24 (24 )
Amortization of intangibles 54 27
Origination of loans held for sale (45,758 ) (50,694 )
Increase in cash surrender value of life insurance (257 ) (260 )
Change in other assets and other liabilities 316 1,291
Net cash flows from operating activities 14,947 14,013
Cash flows from investing activities:
Securities available-for-sale:
Maturities, calls and principal pay downs 31,584 37,275
Proceeds from sales of available-for-sale securities 2,722 5,545
Securities held-to-maturity:
Purchase of equity security — (400 )
Purchase of Federal Reserve Bank stock, at cost (53 ) —
Acquisition, net of cash received 66,552 —
Acquisition of premises and equipment (1,477 ) (1,154 )
Disposal of premises and equipment 18 —
Proceeds from sale of other real estate and repossessed assets owned 78 17
Net cash flows from investing activities (65,222 ) (89,001 )
Cash flows from financing activities:
Proceeds from Federal Home Loan Bank advances — 1,300
Repayments of Federal Home Loan Bank advances (9,794 ) (14,411 )
Change in short-term borrowings 9,092 5,260
Proceeds from dividend reinvestment and stock purchase plan 174 —
Net cash flows from financing activities 52,698 83,858
Increase in cash and cash equivalents 2,423 8,870
Cash and cash equivalents, beginning of year 18,529 9,659
Cash and cash equivalents, end of year $ 20,952 $ 18,529
Supplemental disclosure of cash flow information:
Cash paid during the period:
Non-cash items:
Transfer from loans to other repossessed assets 83 9
Transfer from loans held for sale to portfolio — 161
Issuance of treasury stock for stock awards 309 167
Branch acquisition:
Noncash assets acquired:
Securities, available-for-sale 15,602 —
Premises and equipment 413 —
Core deposit intangible 295 —
Accrued interest receivable and other assets 216 —
Total noncash assets acquired 38,085 —
Liabilities assumed:
Other liabilities 99 —
Total liabilities assumed 104,637
Net noncash liabilities assumed (66,552 ) —
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022 and 2021
(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 and Wayne counties in Ohio. Its market includes these counties as well as the fourteen contiguous counties in northeast Ohio, western Pennsylvania, and northern West Virginia. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.
Business Segment Information: The Corporation is engaged in the business of commercial and retail banking, which accounts for substantially all its revenues, operating income, and assets. Accordingly, all its operations are reported in one segment, banking.
Acquisition: At the date of acquisition the Corporation records the assets and liabilities of acquired companies on the Consolidated Balance Sheet at their fair value. The results of operations for acquired companies are included in the Corporation’s Consolidated Statements of Income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Income during the periods incurred.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.
Interest–Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Certificates of Deposit in Financial Institutions: Certificates of deposit in other financial institutions are carried at cost.
Cash Reserves: The Bank is required to maintain cash on hand and noninterest-bearing balances on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance was zero at June 30, 2022 and 2021.
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 and collateralized mortgage obligations where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Corporation has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management mayconsider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Corporation intends to sell the security, or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI will be recognized in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security. If a security is determined to be other-than-temporarily impaired, but the Corporation does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Equity Securities: Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Federal Bank and Other Restricted Stocks: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock, included with Federal bank and other restricted stocks on the Consolidated Balance Sheet, is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Federal Reserve Bank stock is also carried at cost. Since these stocks are viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Changes in the fair values of these derivatives are included in net gains on sales of loans.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.
Interest income on commercial, commercial real estate and 1-4 family residential loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is determined by the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the customer has exhibited the ability to repay and demonstrated this ability over at least a consecutive six-month period and future payments are reasonably assured.
During the 2020 and 2021 fiscal year, the Corporation funded PPP loans to provide liquidity to small businesses because of the COVID-19 pandemic. The loans are guaranteed by the SBA and are forgivable by the SBA if certain criteria are met. The Corporation originated PPP loans totaling $113,367 during the first and second rounds of assistance. PPP processing fees received from the SBA were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. Approximately $2,435 and $1,911 of fees from the SBA were recognized in interest income in the 2022 and 2021 fiscal years, respectively. As of June 30, 2022, there were $12 of unamortized net deferred fees related to the PPP loans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when funded.
Concentrations of Credit Risk: The Bank grants consumer, real estate, and commercial loans primarily to borrowers in Carroll, Columbiana, Jefferson, Stark, Summit and Wayne counties. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economy in these counties. Automobiles and other consumer assets, business assets and residential and commercial real estate secure most loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors based on the risks present for each portfolio segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the most recent three-year period, depending on loan segment. This actual loss experience is supplemented with economic and other factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:
Commercial: Commercial loans are made for a wide variety of general business purposes, including financing for equipment, inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Current and projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank operates.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan, the business conducted on the property securing the loan or, in the case of loans to farmers, management and operation of the farm. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus nonowner-occupied loans.
1-4 Family Residential Real Estate: Residential real estate 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.
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 30,2022, the Bank had policies with total death benefits of $19,128 and total cash surrender values of $9,959. As of June 30,2021, the Bank had policies with total death benefits of $19,107 and total cash surrender values of $9,702. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Tax-exempt income is recognized from the periodic increases in cash surrender value of these policies.
Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. Goodwill is not amortized but is assessed at least annually for impairment. Any such impairment will be recognized in the period identified. The Corporation has selected April 30 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Assets: Premises, equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities, which are classified as short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Retirement Plans: The Bank maintains a 401(k) savings and retirement plan covering all eligible employees and matching contributions are expensed as made. Salary continuation plan expense allocates the benefits over years of service.
Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation applies a more likely than not recognition threshold for all tax uncertainties in accordance with U.S. generally accepted accounting principles. A tax position is recognized as a benefit only if it is more likely than not that the position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable upon the vesting of restricted stock awards.
Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees over the required service period, generally defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Corporation’s common stock at the date of grant. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of equity, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the Corporation’s financial statements.
Fair Value of Financial Instruments: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15 of the Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders.
Reclassifications: Certain reclassifications have been made to the June 30,2021 financial statements to be comparable to the June 30,2022 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined in the guidance, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. However, during July 2019, FASB unanimously voted for a proposal to delay this ASU to January 2023 for smaller reporting companies. On October 16, 2019, FASB approved a final ASU delaying the effective date. The new guidance is effective for annual and interim periods beginning after December 15, 2022 for certain entities, including smaller reporting companies. The Corporation is a smaller reporting company. The Corporation is currently evaluating the impact of adopting this new guidance on the consolidated financial statements, current systems and processes. At this time, the Corporation is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Corporation is planning to adopt this new guidance within the time frame noted above.
In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The ASU is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR, or other reference rates that may be discontinued, and provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria. The ASU also provides for a one-time sale and/or transfer to available-for-sale or trading to be made for held-to-maturity (HTM) debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. The ASU requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. The Corporation does not expect ASU 2020-04 to have a material impact on its financial statements and disclosures.
NOTE 2—ACQUISITION
On July 16, 2021, the Corporation completed its acquisition of two branches located in Calcutta and Wellsville, Ohio from CFBank, National Association. In connection with the branch acquisition, the Corporation assumed $104,538 in branch deposits for a deposit premium of 1.75%. In addition, the Corporation acquired $15,602 of subordinated debt securities issued by unrelated financial institutions and $19,943 of loans. This transaction qualifies as a business combination.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by the Corporation at the date of acquisition. The 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.
Assets acquired:
Cash and cash equivalents $ 515
Securities, available-for-sale 15,602
Premises and equipment 413
Core deposit intangible 295
Accrued interest receivable 216
Total assets acquired 36,984
Liabilities assumed:
Noninterest-bearing deposits 10,535
Interest-bearing deposits 94,003
Other liabilities 99
Total liabilities assumed 104,637
Fair value of net liabilities assumed (67,653 )
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $20,325. The fair value disclosed above reflects a credit-related adjustment of $(388) and an adjustment for other factors of $6. Loans evidencing credit deterioration since origination, purchased credit impaired loans, included in loans receivable were immaterial. Acquisition costs of $144 pre-tax, or $118 after-tax, were recorded during fiscal year 2022 and $106 pre-tax, or $90 after-tax, were recorded during fiscal year 2021. 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.
NOTE 3—SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2022 and 2021 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 state and political subdivisions $ 7,874 $ 47 $ (90 ) $ 7,831
Other debt securities 500 — (8 ) 492
Obligations of state and political subdivisions $ 7,996 $ 356 $ — $ 8,352
Proceeds from sales of available-for-sale securities during fiscal year 2022 and fiscal year 2021 were as follows:
Gross realized gains 8 44
Gross realized losses (2 ) (30 )
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision related to these net realized gains amounted to $1 in fiscal year 2022 and $3 in fiscal year 2021.
The amortized cost and fair values of debt securities at June 30,2022 by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations are shown separately.
Available-for-sale Amortized Cost Fair Value
Due in one year or less $ 850 $ 851
Due after one year through five years 37,415 36,266
Due after five years through ten years 47,877 44,894
U.S. Government-sponsored mortgage-backed and related securities 163,387 147,663
Held-to-maturity Amortized Cost Fair Value
Due after one year through five years $ 212 $ 212
Due after five years through ten years 4,212 3,522
Securities with a carrying value of approximately $126,679 and $96,970 were pledged at June 30, 2022 and 2021, respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2022 and 2021, 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, 2022 and 2021, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Less than 12 Months 12 Months or more Total
Available-for-sale
Less than 12 Months 12 Months or more Total
Held-to-maturity
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less than 12 Months 12 Months or more Total
Available-for-sale
Obligations of state and political subdivisions 7,398 (75 ) — — 7,398 (75 )
Collateralized mortgage obligations – residential 492 (8 ) — — 492 (8 )
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities.
In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
As of June 30, 2022, the Corporation’s securities portfolio consisted of 436 available-for-sale and four held-to-maturity securities. There were 387 available-for-sale securities in an unrealized loss position at June 30, 2022, 29 of which were in a continuous loss position for twelve or more months. There was one held-to-maturity security in an unrealized loss position at June 30, 2022. The unrealized losses within the available-for-sale and held-to-maturity security portfolios in fiscal year 2022 was primarily attributed to a change in rates. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities. Also, management monitors the financial condition of the individual municipal securities to ensure they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the Corporation will be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity, management does not believe there is any OTTI related to these securities at June 30, 2022. Also, there was no OTTI recognized at June 30, 2021.
As of June 30, 2022, the Corporation owned equity securities with an amortized cost of $400. The following table presents the net unrealized gains and losses on equity securities recognized in earnings for the twelve months ended June 30, 2022 and 2021. There were no realized gains or losses on the sale of equity securities during the periods presented.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 276 (2,253 )
Allowance for loan losses (7,160 ) (6,471 )
The commercial loan category in the above table includes PPP loans of $179 as of June 30, 2022 and $50,686 as of June 30, 2021.
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2022:
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
Loans charged-off — — (41 ) (132 ) (173 )
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2021:
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2022. Included in the recorded investment in loans is $1,214 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 $ — $ — $ — $ — $ —
Acquired loans collectively evaluated for impairment 1 62 85 — 148
Recorded investment in loans:
Loans individually evaluated for impairment $ 276 $ 42 $ 155 $ — $ 473
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2021. Included in the recorded investment in loans is $1,184 of accrued interest receivable.
Commercial Residential
Real Real
Commercial Estate Estate Consumer Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 1 $ — $ 3 $ — $ 4
Acquired loans collectively evaluated for impairment — 83 77 — 160
Recorded investment in loans:
Loans individually evaluated for impairment $ 437 $ 921 $ 596 $ — $ 1,954
40
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, 2022:
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 real estate:
1-4 Family residential real estate:
With an allowance recorded:
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2021:
Unpaid Allowance for Average Interest Cash Basis
Principal Recorded Loan Losses Recorded Income Interest
Balance Investment Allocated Investment Recognized Recognized
With no related allowance recorded:
Commercial real estate:
1-4 Family residential real estate:
With an allowance recorded:
Commercial real estate:
1-4 Family residential real estate:
41
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, 2022 and 2021:
Loans Past Due Loans Past Due
Over 90 Days Over 90 Days
Still Still
Non-accrual Accruing Non-accrual Accruing
Commercial real estate:
1 – 4 Family residential:
Consumer — — — —
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, 2022 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 $27 in the 90 days or greater category and $404 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, 2021 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 $994 in the 90 days or greater category and $777 in the loans not past due category.
42
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 was available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offered principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers were eligible for an additional 90 days of payment deferrals if situations warranted a need for an extension. Interest was deferred but continued to accrue during the deferment period and the maturity date on amortizing loans was 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 were not classified as TDRs. As of June 30, 2022, there were no loans in payment deferral status under this loan modification program. This modification program ended April 26, 2022.
On June 30, 2022, the Corporation had $318 of loans classified as TDRs and there were no specific reserves allocated to these loans. On June 30, 2021, the Corporation had $688 of loans classified as TDRs with $4 of specific reserves allocated to these loans. TDRs are also included as impaired loans that are listed above. For the years ended June 30, 2022 and 2021, there were no loans modified that were classified as a troubled debt restructuring.
There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the twelve-month periods ended June 30, 2022 and 2021. A loan is considered in payment default once it is 90 days contractually past due under the modified terms.
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed monthly. The Corporation uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which was discussed previously.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2022, 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 15,138 — — — —
1-4 Family residential real estate:
As of June 30, 2021, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:
Special Not
Pass Mention Substandard Doubtful Rated
Commercial real estate:
Construction 10,478 — — — —
1-4 Family residential real estate:
NOTE 5—PREMISES AND EQUIPMENT
Major classifications of premises and equipment were as follows as of June 30:
Furniture, fixture and equipment 7,206 6,616
Accumulated depreciation and amortization (8,296 ) (8,329 )
Depreciation expense was $991 and $940 for the years ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, the Corporation leased real estate for seven office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to May 31, 2035, including extension periods. Lease agreements for three locations have a lease term of 12 months or less and are therefore considered short-term leases. Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion. The majority of renewals to extend the lease terms are included in our right-of-use assets and lease liabilities as they are reasonably certain of exercise. As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments. The weighted average remaining life of the lease term for the leases with a term over 12 months was 75.81 months as of June 30, 2022 and the weighted-average discount rate was 1.78%.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for all the operating leases was $228 and $205 for the twelve-month periods ended June 30, 2022 and 2021, respectively. The right-of-use asset, included in premises and equipment, and the lease liability, included in other liabilities, were $1,029 and $1,177 as of June 30, 2022 and 2021, respectively.
Total estimated rental commitments for the operating leases with a term over 12 months were as follows as of June 30, 2022:
Period Ending June 30
NOTE 6– GOODWILL AND ACQUIRED INTANGIBLE ASSETS
The change in goodwill was as follows:
Acquired goodwill 1,616 —
The following table summarizes the Corporation’s acquired intangible assets as of June 30, 2022 and 2021.
Goodwill and the core deposit intangible assets resulted from the acquisition of Peoples Bancorp of Mt. Pleasant, Inc. that was completed on January 1, 2020, and the branch acquisition that was completed on July 16, 2021. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the asset might be impaired. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. For the goodwill impairment analysis, the Corporation is the only reporting unit. Management performed a qualitative impairment test of the Corporation’s goodwill during the fourth quarter of the 2022 fiscal year. Based on this test, management concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the only intangible asset on the Corporation’s balance sheet with an indefinite life.
The core deposit intangible asset is amortized on a straight-line basis over ten years. The Corporation recorded intangible amortization expense of $54 in 2022 and $27 in 2021. The intangible amortization expense is expected to be $57 per year for each of the next five fiscal years and $185 thereafter.
NOTE 7—DEPOSITS
Interest-bearing deposits as of June 30, 2022 and 2021 were as follows:
Time:
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of time deposits at June 30,2022 were as follows:
Twelve Months Ending June 30
NOTE 8—SHORT-TERM BORROWINGS
Short-term borrowings consisted of repurchase agreements and a line of credit for the Corporation. Information concerning all short-term borrowings at June 30,2022 and 2021, maturing in less than one year is summarized as follows:
Average interest rate during the year 0.36 % 0.10 %
Weighted average rate, June 30 0.61 % 0.05 %
In fiscal year 2022, the Corporation acquired an unsecured $5,000 line of credit to provide capital support to the Bank and for other general corporate purposes. As of June 30, 2022, the outstanding balance on the line of credit was $1,270. Repurchase agreements are financing arrangements that mature daily and are used to facilitate the needs of our customers. Physical control of all the securities is maintained for all securities pledged to secure repurchase agreements. Securities available-for-sale pledged for repurchase agreements as of June 30, 2022 and 2021 are presented in the following table:
Overnight and Continuous
U.S. government-sponsored entities and agencies pledged $ 3,331 $ 767
Residential mortgage-backed securities pledged 11,954 6,493
Commercial mortgage-backed securities 6,682 6,042
Total interest expense on short-term borrowings was $47 and $9 for the years ended June 30, 2022 and 2021, respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9—FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances were as follows:
Stated Interest Rate Range Weighted Average Weighted Average
Advance Type From To Amount Rate Amount Rate
Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the difference between the contract rate on the advance and the current rate on a comparable new advance. The following table is a summary of the scheduled principal payments for all advances as of June 30, 2022:
Twelve Months Ending June 30 Principal Payments
Pursuant to collateral agreements with the FHLB, advances are secured by all the stock invested in the FHLB and certain qualifying first mortgage and multi-family loans. The advances were collateralized by $152,868 and $127,703 of first mortgage and multi-family loans under a blanket lien arrangement at June 30, 2022 and 2021, respectively. Based on this collateral and the Corporation’s holdings of FHLB stock, the Bank was eligible to borrow up to a total of $96,548 in additional advances at June 30, 2022.
NOTE 10—EMPLOYEE BENEFIT PLANS
The Bank maintains a 401(k) savings and retirement plan that permits eligible employees to make before- or after-tax contributions to the plan, subject to the dollar limits from Internal Revenue Service regulations. The Bank matches 100% of the employee’s voluntary contributions to the plan based on the amount of each participant’s contributions up to a maximum of 4% of eligible compensation. All regular full-time and part-time employees who complete six months of service and are at least 21 years of age are eligible to participate. Amounts charged to operations were $364 and $321 for the years ended June 30, 2022 and 2021, respectively.
The Bank maintains a nonqualified Salary Continuation Plan (SCP) to reward and encourage certain Bank executives to remain employees of the Bank. The SCP is considered an unfunded plan for tax and Employee Retirement Income Security Act (ERISA) purposes and all obligations arising under the SCP are payable from the general assets of the Corporation. The estimated present value of future benefits to be paid to certain current and former executives totaled $3,564 as of June 30,2022 and $3,140 as of June 30,2021 and is included in other liabilities. For purposes of calculating the present value of future benefits, a discount rate of 3.0% was in effect at June 30, 2022 and 2021. For the years ended June 30, 2022 and 2021, $534 and $530, respectively, have been charged to expense in connection with the SCP. Distributions to participants were $110 for the fiscal year ended June 30, 2022 and $85 for the fiscal year ended June 30, 2021.
The 2010 Omnibus Incentive Plan (2010 Plan) is a nonqualified share-based compensation plan. The 2010 Plan was established to promote alignment between key employees’ performance and the Corporation’s shareholder interests by motivating performance through the award of stock-based compensation. The purpose of the 2010 Plan was to attract, retain, and motivate talented employees and compensate outside directors for their service to the Corporation. The 2010 Plan was approved by the Corporation’s shareholders. The Compensation Committee of the Corporation’s Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award contract.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the 2010 Plan, the Corporation could grant, among other things, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, or any combination thereof to any employee and outside director. Each award was evidenced by an award agreement that specifies the number of shares awarded, the vesting period, the performance requirements, and such other provisions as the Compensation Committee determines. Upon a change-in-control of the Corporation, as defined in the 2010 Plan, all outstanding awards immediately vest.
The Corporation has granted restricted stock awards to certain employees and directors. Restricted stock awards are issued at no cost to the recipient and can be settled only in shares at the end of the vesting period. Awards are made at the end of the measurement period of certain specified performance targets once those performance targets as established by the Compensation Committee are achieved. Some awards, primarily the awards made to directors, vest on the date of grant. For other awards, primarily the awards made to executive management, 25% vest on the grant date, which is the end of the performance period, with the remaining vesting 25% per year over a three-year period. Restricted stock awards provide the holder with full voting rights and dividends during the vesting period. Cash dividends are reinvested into shares of stock and are subject to the same restrictions and vesting as the initial award. All dividends are forfeitable in the event the shares do not vest. The fair value of the restricted stock awards, which is used to measure compensation expense, is the closing market price of the Corporation’s common stock on the date of the grant and compensation expense is recognized over the vesting period of the awards.
The following table summarizes the status of the restricted stock awards: