Item 2 – 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 results of operations for the three- and six-month periods ended December 31, 2020, compared to the same period in 2019, and the consolidated balance sheet at December 31, 2020, compared to June 30, 2020. This discussion is designed to provide a more comprehensive review of the operating results and financial condition 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.
Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio (the Corporation), owns all of the issued and outstanding common shares of Consumers National Bank, a bank chartered under the laws of the United States of America (the Bank). The Corporation’s activities have been limited primarily to holding the common shares of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
On December 29, 2020, the Bank entered into a P&A Agreement with CFBank to acquire CFBank’s drive-up branch location in Wellsville, Ohio and CFBank’s branch location in Calcutta, Ohio. As part of this transaction, the Bank will acquire approximately $100 million in deposits attributable to the Branches; $15 million in aggregate principal amount of subordinated debt securities issued by unrelated financial institutions; all performing loans attributable to the Branches which are outstanding at closing (totaling approximately $3.1 million in aggregate principal amount as of November 30, 2020); and up to $13.5 million in aggregate principal amount of single family residential mortgage loans and home equity lines of credit to be identified by the parties prior to the closing principally from CFBank’s Northeast Ohio loan portfolio. In addition, CFBank will provide the opportunity for the Corporation to purchase at par at least $15 million in aggregate principal amount of participation interests in commercial and commercial real estate loans originated by and held in CFBank’s portfolio. The closing of the transactions is subject to regulatory approval and satisfaction of other customary closing conditions and is expected to occur early in the third calendar quarter of 2021.
On January 1, 2020, the Corporation completed the acquisition by merger of Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio.
COVID-19 Pandemic
In response to COVID-19, management is actively pursuing multiple avenues to assist customers during these uncertain times. For commercial borrowers, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) includes key SBA initiatives to assist small businesses. The Paycheck Protection Program (PPP) was designed to provide a direct incentive for small businesses to keep their workers on the payroll. The SBA will forgive loans obtained under this program if the borrower meets payroll and other requirements. A total of $52,539 of PPP loans from the first round of assistance were outstanding as of December 31, 2020. Demand for the second round of the PPP program has been strong and submission of applications began on January 15, 2021. As of February 2, 2021, there were a total of $25,831 of loans funded and an additional $8,263 million submitted and waiting the SBA’s approval as part of the second round of the PPP loan program.
Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as troubled debt restructurings. As of December 31, 2020, 18 borrowers with an outstanding balance of $667 are in payment deferral status under this loan modification program.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
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 on this unsecured line of credit that is linked to a personal checking account, has been redesigned to provide easier access and a lower initial rate. Commercial customers have been encouraged to access available funds on their lines of credit, and we’ve been ready to provide emergency commercial lines of credit to qualified borrowers in order to assist in meeting payroll and other recurring fixed expenses. In response to COVID-19, we provided four emergency lines of credit; however, the lines of credit have since been closed as the borrowers did not need to access the funds.
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. With the holiday surge in COVID-19 cases, the branch lobbies were again closed to the public for walk-in transactions but available to customers to complete paperwork or complex transactions. If the infection rate improves, we expect to reopen branch lobbies during the first calendar quarter of 2021. The Corporation is encouraging virtual meetings and conference calls in place of in-person meetings. Additionally, travel for business has been restricted. The Corporation is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces.
Results of Operations
Three- and Six-Month Periods Ended December 31, 2020 and 2019
Net income for the second quarter of fiscal year 2021 was $2,507, or $0.83 per common share, compared to $1,440, or $0.53 per common share for the three months ended December 31, 2019. The following are key highlights of our results of operations for the three months ended December 31, 2020 compared to the prior fiscal year comparable period:
|
●
|
net interest income increased by $2,062 to $6,858, or 43.0%, in the second quarter of fiscal year 2021 from the same prior year period primarily as a result of an increase in average interest earning assets and a reduction in the cost of funds;
|
|
●
|
a $130 provision for loans loss expense was recorded for the second quarter of fiscal year 2021 compared with $185 for the prior year period;
|
|
●
|
noninterest income increased by $128, or 12.5%, in the second quarter of fiscal year 2021 from the same prior year period primarily as a result of a $104, or 73.2%, increase on gains from the sale of mortgage loans and a $61, or 15.9%, increase in debit card interchange income; and
|
|
●
|
noninterest expenses increased by $896, or 22.8%, in the second quarter of fiscal year 2021 from the same prior year period primarily due to an increase in salaries and employee benefit expenses due to the inclusion of a full quarter of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples, increased incentive accruals, and higher mortgage commissions due to the increase in volume.
|
In the first six months of fiscal year 2021, net income was $4,908, or $1.63 per common share, compared to $2,943, or $1.07 per common share, for the six months ended December 31, 2019. The following are key highlights of our results of operations for the six months ended December 31, 2020:
|
●
|
net interest income increased by $4,075 to $13,552, or by 43.0%, in the first six months of fiscal year 2021 from the same prior year period;
|
|
●
|
a provision for loan loss expense of $260 was recorded in the first six months of fiscal year 2021 compared with a provision for loan loss expense of $315 during the same prior year period;
|
|
●
|
noninterest income decreased by $200 in the first six months of fiscal year 2021 primarily since the prior year period included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and a $110 gain on the sale of securities. These reductions were partially offset by a $205, or 74.0%, increase on gains from the sale of mortgage loans and a $126, or 16.3%, increase in debit card interchange income; and
|
|
●
|
noninterest expenses increased by $1,390, or 16.9%, in the first six months of fiscal year 2021 from the same prior year period primarily due to an increase in salaries and employee benefit expenses due to the inclusion of six months of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples, increased incentive accruals, and higher mortgage commissions due to the increase in volume.
|
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
Return on average equity and return on average assets were 14.83% and 1.31%, respectively, for the six months ended December 31, 2020 compared to 11.03% and 1.04%, respectively, for the same prior year period.
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. As a result of the Federal Open Market Committee established a near-zero target range for the federal funds rate, earnings could be negatively affected if the interest we receive on loans and securities falls more quickly than interest we pay on deposits and borrowings. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total average interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. The federal income tax rate in effect for the 2021 and 2020 fiscal years was 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.
The Corporation’s net interest margin was 3.87% for the three months ended December 31, 2020, compared with 3.62% for the same period in 2019. FTE net interest income for the three months ended December 31, 2020 increased by $2,090, or 42.9%, to $6,964 from $4,874 for the same prior year period.
Tax-equivalent interest income for the three months ended December 31, 2020 increased by $1,667, or 28.5%, from the same prior year period. Interest income was positively impacted by a $182,889, or 34.1%, increase in average interest-earning assets from the same prior year period due to the assets acquired from the Peoples acquisition as well as organic loan growth. Additionally, interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. However, a reduction in the accretion of origination fees from PPP loans as these loans are forgiven and the significant decline in interest rates will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 4.18% for the three months ended December 31, 2020 compared with 4.35% for the same period last year.
Interest expense for the three months ended December 31, 2020 decreased by $423, or 43.1%, from the same prior year period primarily due to a reduction in deposit and borrowing costs as a result of lower market interest rates. The Corporation’s cost of funds was 0.46% for the three months ended December 31, 2020 compared with 1.02% for the same prior year period.
The Corporation’s net interest margin was 3.86% for the six months ended December 31, 2020, compared with 3.62% for the same period in 2019. FTE net interest income for the six months ended December 31, 2020 increased by $4,124, or 42.8%, to $13,756 from $9,632 for the same prior year period.
Tax-equivalent interest income for the six months ended December 31, 2020 increased by $3,318, or 28.5%, from the same prior year period. Interest income was positively impacted by a $182,309, or 34.4%, increase in average interest-earning assets from the same prior year period due to the assets acquired from the Peoples acquisition as well as organic loan growth. Additionally, interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. However, a reduction in the accretion of origination fees from PPP loans as these loans are forgiven and the significant decline in interest rates will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 4.20% for the six months ended December 31, 2020 compared with 4.38% for the same period last year.
Interest expense for the six months ended December 31, 2020 decreased by $806 from the same prior year period. The Corporation’s cost of funds was 0.50% for the six months ended December 31, 2020 compared with 1.05% for the same prior year period. The decline in short term market interest rates had an impact on the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended December 31,
(In thousands, except percentages)
|
|
|
2020
|
|
|
2019
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
74,051
|
|
|
$
|
344
|
|
|
|
1.90
|
%
|
|
$
|
79,160
|
|
|
$
|
480
|
|
|
|
2.43
|
%
|
Nontaxable securities (1)
|
|
|
67,892
|
|
|
|
529
|
|
|
|
3.24
|
|
|
|
61,281
|
|
|
|
475
|
|
|
|
3.17
|
|
Loans receivable (1)
|
|
|
552,897
|
|
|
|
6,587
|
|
|
|
4.73
|
|
|
|
390,708
|
|
|
|
4,865
|
|
|
|
4.94
|
|
Federal bank and other restricted stocks
|
|
|
2,472
|
|
|
|
21
|
|
|
|
3.37
|
|
|
|
1,723
|
|
|
|
20
|
|
|
|
4.61
|
|
Interest bearing deposits and federal funds sold
|
|
|
21,742
|
|
|
|
42
|
|
|
|
0.77
|
|
|
|
3,293
|
|
|
|
16
|
|
|
|
1.93
|
|
Total interest-earning assets
|
|
|
719,054
|
|
|
|
7,523
|
|
|
|
4.18
|
%
|
|
|
536,165
|
|
|
|
5,856
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
30,865
|
|
|
|
|
|
|
|
|
|
|
|
31,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
749,919
|
|
|
|
|
|
|
|
|
|
|
$
|
567,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
107,191
|
|
|
$
|
38
|
|
|
|
0.14
|
%
|
|
$
|
84,140
|
|
|
$
|
131
|
|
|
|
0.62
|
%
|
Savings
|
|
|
235,414
|
|
|
|
84
|
|
|
|
0.14
|
|
|
|
170,287
|
|
|
|
210
|
|
|
|
0.49
|
|
Time deposits
|
|
|
112,543
|
|
|
|
365
|
|
|
|
1.29
|
|
|
|
111,806
|
|
|
|
569
|
|
|
|
2.02
|
|
Short-term borrowings
|
|
|
8,596
|
|
|
|
2
|
|
|
|
0.09
|
|
|
|
3,915
|
|
|
|
13
|
|
|
|
1.32
|
|
FHLB advances
|
|
|
20,006
|
|
|
|
70
|
|
|
|
1.39
|
|
|
|
12,627
|
|
|
|
59
|
|
|
|
1.85
|
|
Total interest-bearing liabilities
|
|
|
483,750
|
|
|
|
559
|
|
|
|
0.46
|
%
|
|
|
382,775
|
|
|
|
982
|
|
|
|
1.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking accounts
|
|
|
193,587
|
|
|
|
|
|
|
|
|
|
|
|
126,270
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,907
|
|
|
|
|
|
|
|
|
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
683,244
|
|
|
|
|
|
|
|
|
|
|
|
513,945
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
66,675
|
|
|
|
|
|
|
|
|
|
|
|
53,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
749,919
|
|
|
|
|
|
|
|
|
|
|
$
|
567,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, interest rate spread (1)
|
|
|
|
|
|
$
|
6,964
|
|
|
|
3.72
|
%
|
|
|
|
|
|
$
|
4,874
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest as a percent of average interest-earning assets) (1)
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax exemption on non-taxable securities and loans included in interest income
|
|
|
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
148.64
|
%
|
|
|
|
|
|
|
|
|
|
|
140.07
|
%
|
|
|
|
|
|
|
|
|
(1) calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
Average Balance Sheets and Analysis of Net Interest Income for the Six Months Ended December 31,
(In thousands, except percentages)
|
|
|
2020
|
|
|
2019
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
76,240
|
|
|
$
|
716
|
|
|
|
1.92
|
%
|
|
$
|
81,399
|
|
|
$
|
990
|
|
|
|
2.43
|
%
|
Nontaxable securities (1)
|
|
|
67,183
|
|
|
|
1,043
|
|
|
|
3.24
|
|
|
|
61,029
|
|
|
|
949
|
|
|
|
3.18
|
|
Loans receivable (1)
|
|
|
548,530
|
|
|
|
13,080
|
|
|
|
4.73
|
|
|
|
382,035
|
|
|
|
9,628
|
|
|
|
5.00
|
|
Federal bank and other restricted stocks
|
|
|
2,472
|
|
|
|
39
|
|
|
|
3.13
|
|
|
|
1,723
|
|
|
|
40
|
|
|
|
4.61
|
|
Interest bearing deposits and federal funds sold
|
|
|
18,409
|
|
|
|
89
|
|
|
|
0.96
|
|
|
|
4,339
|
|
|
|
42
|
|
|
|
1.92
|
|
Total interest-earning assets
|
|
|
712,834
|
|
|
|
14,967
|
|
|
|
4.20
|
%
|
|
|
530,525
|
|
|
|
11,649
|
|
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
30,600
|
|
|
|
|
|
|
|
|
|
|
|
31,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
743,434
|
|
|
|
|
|
|
|
|
|
|
$
|
561,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
104,646
|
|
|
$
|
83
|
|
|
|
0.16
|
%
|
|
$
|
83,316
|
|
|
$
|
276
|
|
|
|
0.66
|
%
|
Savings
|
|
|
231,954
|
|
|
|
189
|
|
|
|
0.16
|
|
|
|
168,234
|
|
|
|
432
|
|
|
|
0.51
|
|
Time deposits
|
|
|
113,680
|
|
|
|
792
|
|
|
|
1.38
|
|
|
|
112,224
|
|
|
|
1,147
|
|
|
|
2.03
|
|
Short-term borrowings
|
|
|
8,238
|
|
|
|
6
|
|
|
|
0.14
|
|
|
|
3,620
|
|
|
|
24
|
|
|
|
1.32
|
|
FHLB advances
|
|
|
22,059
|
|
|
|
141
|
|
|
|
1.27
|
|
|
|
14,003
|
|
|
|
138
|
|
|
|
1.95
|
|
Total interest-bearing liabilities
|
|
|
480,577
|
|
|
|
1,211
|
|
|
|
0.50
|
%
|
|
|
381,397
|
|
|
|
2,017
|
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking accounts
|
|
|
191,360
|
|
|
|
|
|
|
|
|
|
|
|
122,263
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,851
|
|
|
|
|
|
|
|
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
677,788
|
|
|
|
|
|
|
|
|
|
|
|
508,731
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
65,646
|
|
|
|
|
|
|
|
|
|
|
|
52,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
743,434
|
|
|
|
|
|
|
|
|
|
|
$
|
561,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, interest rate spread (1)
|
|
|
|
|
|
$
|
13,756
|
|
|
|
3.70
|
%
|
|
|
|
|
|
$
|
9,632
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest as a percent of average interest-earning assets) (1)
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax exemption on non-taxable securities and loans included in interest income
|
|
|
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
148.33
|
%
|
|
|
|
|
|
|
|
|
|
|
139.10
|
%
|
|
|
|
|
|
|
|
|
(1) calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 incurred credit losses in the Bank’s loan portfolio that have been incurred at each balance sheet date. For the six-month period ended December 31, 2020, the provision for loan losses was $260 compared with $315 for the same prior year period. Net charge-offs of $26 were recorded during the six-month period ended December 31, 2020 compared with $8 during the six-month period ended December 31, 2019.
Non-performing loans were $1,940 as of December 31, 2020 compared with $1,226 as of June 30, 2020 and $427 as of December 31, 2019. Non-performing loans to total loans were 0.35% at December 31, 2020 and 0.23% at June 30, 2020. Non-accrual loans have primarily increased within the 1-4 family owner occupied loan category in part due to the COVID-19 pandemic impact on certain borrowers.
The allowance for loan losses as a percentage of loans was 1.06% at December 31, 2020 and 1.05% at June 30, 2020. As of December 31, 2020, the ALLL as a percentage of total loans excluding PPP loans was 1.17%. During the second quarter of fiscal year 2021, there was a significant decline in loans classified as substandard due to the full payoff of a large loan relationship that was in this category. Uncertainty remains regarding future levels of criticized and classified loans, non-performing loans and charge-offs, but some deterioration is expected as a result of the COVID-19 pandemic. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Noninterest Income
Noninterest income increased by $128 for the second quarter of fiscal year 2021 from the same period last year primarily due to a $104, or 73.2%, increase in gains from the sale of mortgage loans and a $61, or 15.9%, increase in debit card interchange income. Debit card interchange income increased as a result of increased debit card usage and an increase in the number of cards issued. These increases were partially offset by a decline of $46, or 12.8%, in service charges on deposit accounts primarily due to a decline in overdraft charges as the COVID-19 pandemic dramatically impacted consumer spending habits and increased NSF and overdraft fee waivers as we assist customers who have been impacted by COVID-19.
Noninterest income decreased by $200 for the six-month period ended December 31, 2020 from the same period last year primarily since the prior year period included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and a $110 gain on the sale of securities. These reductions were partially offset by a $205, or 74.0%, increase on gains from the sale of mortgage loans and a $126, or 16.3%, increase in debit card interchange income, that were partially offset by a decline of $112, or 15.3%, in service charges on deposit accounts. Gains from the sale of mortgage loans have been positively impacted by record low mortgage rates in 2020 helping increase the volume of loans sold.
Noninterest Expenses
Total noninterest expenses increased by $896, or 22.85%, for the second quarter of fiscal year 2021 compared with the same period last year. Noninterest expenses for the three-month period ended December 31, 2020 include expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples that closed on January 1, 2020. In addition, incentive accruals and mortgage commissions also increased during the second quarter of fiscal year 2021. Professional fees of $59 associated with the announced planned purchase of two branch locations in Columbiana County, Ohio were recognized during the three-month period ended December 31, 2020.
Total noninterest expenses increased by $1,390, or 16.9%, for the six-month period ended December 31, 2020 compared with the same period last year. Salaries and employee benefit expenses increased by $1,071, or 24.5%, due to the inclusion of six months of expenses in fiscal year 2021 associated with the three new office locations and additional staff gained as a result of the merger with Peoples, increased incentive accruals, and higher mortgage commissions due to the increase in volume. Data processing expenses declined by $164, or 31.2%, because fiscal year 2020 included expenses for system deconversion files related to the merger with Peoples. Also, FDIC assessments increased by $150 for the current year-to-date period since the Small Bank Assessment Credits were applied to the FDIC insurance invoices for the six-month period ended December 31, 2019.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
Income Taxes
Income tax expense was $543 and $1,048 for the three- and six-month periods ended December 31, 2020, respectively, compared to $261 and $473 for the three- and six-month periods ended December 31, 2019, respectively. The effective tax rate was 17.8% and 17.6% for the three- and six-month periods ended December 31, 2020, respectively, compared with 15.3% and 13.8% for the three- and six-month periods ended December 31, 2019, respectively. The effective tax rates differed from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and bank owned life insurance earnings and death benefit.
Financial Condition
Total assets as of December 31, 2020 were $754,060 compared to $740,820 at June 30, 2020, an increase of $13,240, or an annualized 3.5%.
Total loans increased by $14,396, or an annualized 5.3%, from $542,861 as of June 30, 2020 to $557,257 as of December 31, 2020. As of December 31, 2020, total loans included $52,539 of PPP loans, a decline of $14,067, or 21.1%, from June 30, 2020.
As of December 31, 2020, total deposits increased by $15,007, or an annualized 4.7%, from June 30, 2020. The Corporation has been able to maintain a favorable deposit mix, with 29.9% in noninterest-bearing deposits, 16.2% in interest bearing demand deposits, 37.3% in savings and money market deposits, and 16.6% in time deposits.
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets and select ratios as of the dates indicated.
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Non-accrual loans
|
|
$
|
1,940
|
|
|
$
|
1,185
|
|
|
$
|
427
|
|
Loans past due over 90 days and still accruing
|
|
|
—
|
|
|
|
41
|
|
|
|
—
|
|
Total non-performing loans
|
|
|
1,940
|
|
|
|
1,226
|
|
|
|
427
|
|
Other repossessed assets
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
Total non-performing assets
|
|
$
|
1,940
|
|
|
$
|
1,233
|
|
|
$
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.35
|
%
|
|
|
0.23
|
%
|
|
|
0.11
|
%
|
Allowance for loan losses to total non-performing loans
|
|
|
304.74
|
%
|
|
|
463.13
|
%
|
|
|
959.02
|
%
|
As of December 31, 2020, impaired loans totaled $2,343, of which $1,938 are included in non-accrual loans. 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. Impaired loans and 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 are closely monitoring these loans and believe that the prospects for recovery of principal and interest, less identified specific reserves, are favorable.
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
Liquidity
The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of our customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances of industry or market stress. Cash is used to fund loans, purchase investments, fund the maturity of liabilities, and, at times, to fund deposit outflows and operating activities. The Corporation’s principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts from securities; borrowings; and operations. Management considers the asset position of the Corporation to be sufficiently liquid to meet normal operating needs and conditions. The Corporation’s earning assets are mainly comprised of loans and investment securities. Management continually strives to obtain the best mix of loans and investments to both maximize yield and ensure the soundness of the portfolio, as well as to provide funding for loan demand as needed.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
For the six months ended December 31, 2020, net cash inflow from operating activities was $5,706, net cash outflows from investing activities was $13,705 and net cash inflows from financing activities was $7,385. A major source of cash was a $15,007 increase in deposits and $20,304 from maturities, calls or principal pay downs on available-for-sale securities. A major use of cash was $24,975 purchases of available-for-sale securities and a $14,431 increase in loans. Total cash and cash equivalents were $9,045 as of December 31, 2020, compared to $9,659 at June 30, 2020 and $14,028 at December 31, 2019.
The Bank offers several types of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with the rates and fees charged by other banks for similar deposit products currently available in the market area. Deposits totaled $648,362 at December 31, 2020 compared with $633,355 at June 30, 2020.
To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At December 31, 2020, advances from the FHLB of Cincinnati totaled $18,083 compared with $31,161 at June 30, 2020. As of December 31, 2020, the Bank had the ability to borrow an additional $41,561 from the FHLB of Cincinnati based on a blanket pledge of qualifying first mortgage and multi-family loans. The Corporation considers the FHLB of Cincinnati to be a reliable source of liquidity funding, secondary to its deposit base.
Short-term borrowings consisted of repurchase agreements, which are financing arrangements that mature daily, and federal funds purchased from correspondent banks. The Bank pledges securities as collateral for the repurchase agreements. Short-term borrowings totaled $13,275 at December 31, 2020 and $6,943 at June 30, 2020.
Jumbo time deposits (those with balances of $250 and over) totaled $33,418 as of December 31, 2020 and $36,747 as of June 30, 2020. These deposits are monitored closely by the Corporation and are mainly 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. The Corporation, however, does not rely upon these deposits as a primary source of funding. Although management monitors interest rates on an ongoing basis, a quarterly rate sensitivity report is used to determine the effect of interest rate changes on the financial statements. In the opinion of management, enough assets or liabilities could be repriced over the near term (up to three years) to compensate for such changes. The spread on interest rates, or the difference between the average earning assets and the average interest-bearing liabilities, is monitored quarterly.
Off-Balance Sheet Arrangements
In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Since commitments to extend credit have a fixed expiration date or other termination clause, some commitments will expire without being drawn upon and the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments and collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $108,614 as of December 31, 2020 and $101,026 as of June 30, 2020.
Capital Resources
Total shareholders’ equity increased to $67,708 as of December 31, 2020 from $63,240 as of June 30, 2020. The primary reason for the increase in shareholders’ equity was from net income of $4,908 for the first six months of fiscal year 2021 which was partially offset by cash dividends paid of $876.
The Bank is subject to various regulatory capital requirements administered by federal regulatory agencies. Capital adequacy guidelines and prompt corrective-action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Corporation’s financial statements.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
As of December 31, 2020, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 11.65% and the leverage and total risk-based capital ratios were 8.29% and 12.77%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 11.55% and leverage and total risk-based capital ratios of 8.04% and 12.69%, respectively, as of June 30, 2020. The Bank exceeded minimum regulatory capital requirements to be considered well-capitalized for both periods. Management is not aware of any matters occurring subsequent to December 31, 2020 that would cause the Bank’s capital category to change.
Critical Accounting Policies
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 of Financial Condition and Results of Operations 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 Corporation has identified the appropriateness of the allowance for loan losses and the evaluation of goodwill for impairment as critical accounting policies and an understanding of these policies is necessary to understand the financial statements. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note one (Summary of Significant Accounting Policies - Allowance for Loan Losses and Goodwill and Other Intangible Assets), Note four (Loans), Note six (Goodwill and Intangible Assets) and Management’s Discussion and Analysis of Financial Condition and Results of Operation (Critical Accounting Policies and Use of Significant Estimates) of the 2020 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since June 30, 2020.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. The COVID-19 pandemic is affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impact on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other risks and uncertainties that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:
|
●
|
changes in local, regional and national economic conditions becoming less favorable than we expect, resulting in, among other things, high unemployment rates, a deterioration in credit quality of our assets or debtors being unable to meet their obligations;
|
|
●
|
changes in the level of non-performing assets and charge-offs;
|
|
●
|
declining asset values impacting the underlying value of collateral;
|
|
●
|
sustained low market interest rates could result in a decline in the net interest margin and net interest income;
|
|
●
|
unanticipated changes in our liquidity position, including, but not limited to, changes in the cost of liquidity and our ability to find alternative funding sources;
|
|
●
|
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;
|
|
●
|
changes in consumer spending, borrowing and savings habits;
|
|
●
|
changes in accounting policies, rules and interpretations that may come as a result of COVID-19 or otherwise;
|
|
●
|
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
|
|
●
|
competitive pressures on product pricing and services;
|
|
●
|
breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;
|
|
●
|
changes in the reliability of our vendors, internal control systems or information systems; and
|
|
●
|
our ability to attract and retain qualified employees.
|