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, 2019, compared to the same period in 2018, and the consolidated balance sheet at December 31, 2019, compared to June 30, 2019. 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 January 1, 2020, Consumers completed the acquisition by merger of Peoples in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. 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.
Results of Operations
Three- and Six-Month Periods Ended December 31, 2019 and 2018
Net income for the second quarter of fiscal year 2020 was $1,440, or $0.53 per common share, compared to $1,849, or $0.68 per common share for the three months ended December 31, 2018. The following are key highlights of our results of operations for the three months ended December 31, 2019 compared to the prior fiscal year comparable period:
|
●
|
net interest income increased by $422 to $4,796, or by 9.6%, in the second quarter of fiscal year 2020 from the same prior year period;
|
|
●
|
a $185 provision for loans loss expense was recorded in the second quarter of fiscal year 2020 compared with a negative provision for loan loss expense of $775 in the second quarter of fiscal year 2019;
|
|
●
|
noninterest income increased by $81, or 8.6%, in the second quarter of fiscal year 2020 from the same prior year period as a result of increases in service charges on deposit accounts and debit card interchange income; and
|
|
●
|
noninterest expenses increased by $55, or 1.4%, in the second quarter of fiscal year 2020 from the same prior year period.
|
In the first six months of fiscal year 2020, net income was $2,943, or $1.07 per common share, compared to $3,522, or $1.29 per common share for the six months ended December 31, 2018. The following are key highlights of our results of operations for the six months ended December 31, 2019:
|
●
|
net interest income increased by $804 to $9,477, or by 9.3%, in the first six months of fiscal year 2020 from the same prior year period;
|
|
●
|
a provision for loan loss expense of $315 was recorded in the first six months of fiscal year 2020 compared with a negative provision for loan loss expense of $660 during the same prior year period;
|
|
●
|
noninterest income increased by $55, or 2.3%, in the first six months of fiscal year 2020 from the same prior year period and included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Additionally, a $106 gain from the sale or call of securities was recognized during the first six months of fiscal year 2020 compared with a $560 gain for the same prior year period; and
|
|
●
|
noninterest expenses increased by $676, or 8.9%, in the first six months of fiscal year 2020 from the same prior year period and included $322 of expenses associated with the merger between Consumers and Peoples.
|
Return on average equity and return on average assets were 11.03% and 1.04%, respectively, for the first six months of fiscal year 2020 compared to 15.71% and 1.38%, respectively, for the same prior year period.
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
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. 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 2020 and 2019 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 3.62% for the three months ended December 31, 2019, compared with 3.63% for the same period in 2018. FTE net interest income for the three months ended December 31, 2019 increased by $439, or 9.9%, to $4,874 from $4,435 for the same prior year period.
Tax-equivalent interest income for the three months ended December 31, 2019 increased by $732, or 14.3%, from the same prior year period. Interest income was positively impacted by a $55,700, or 11.6%, increase in average interest-earning assets from the same prior year period.
Interest expense for the three months ended December 31, 2019 increased by $293 from the same prior year period. The Corporation’s cost of funds was 1.02% for the three months ended December 31, 2019 compared with 0.79% for the same prior year period.
The Corporation’s net interest margin was 3.62% for the six months ended December 31, 2019, compared with 3.67% for the same period in 2018. FTE net interest income for the six months ended December 31, 2019 increased by $763, or 8.6%, to $9,632 from $8,869 for the same prior year period.
Tax-equivalent interest income for the six months ended December 31, 2019 increased by $1,495, or 14.7%, from the same prior year period. Interest income was positively impacted by a $53,589, or 11.2%, increase in average interest-earning assets from the same prior year period. Additionally, the Corporation’s yield on average interest-earning assets increased to 4.38% for the six months ended December 31, 2019 from 4.20% for the same period last year. The yield on average interest-earning assets was positively impacted by a 0.11% increase in the yield on loans. Additionally, the yield on average interest-earning assets was positively impacted by a change in the earning asset mix with higher yielding loans increasing and lower yielding securities decreasing.
Interest expense for the six months ended December 31, 2019 increased by $732 from the same prior year period. The Corporation’s cost of funds was 1.05% for the six months ended December 31, 2019 compared with 0.74% for the same prior year period. The increase 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.
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended December 31,
(In thousands, except percentages)
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
79,160
|
|
|
$
|
480
|
|
|
|
2.43
|
%
|
|
$
|
85,035
|
|
|
$
|
549
|
|
|
|
2.47
|
%
|
Nontaxable securities (1)
|
|
|
61,281
|
|
|
|
475
|
|
|
|
3.17
|
|
|
|
60,213
|
|
|
|
458
|
|
|
|
2.97
|
|
Loans receivable (1)
|
|
|
390,708
|
|
|
|
4,865
|
|
|
|
4.94
|
|
|
|
327,661
|
|
|
|
4,061
|
|
|
|
4.92
|
|
Federal bank and other restricted stocks
|
|
|
1,723
|
|
|
|
20
|
|
|
|
4.61
|
|
|
|
1,459
|
|
|
|
22
|
|
|
|
5.98
|
|
Interest bearing deposits and federal funds sold
|
|
|
3,293
|
|
|
|
16
|
|
|
|
1.93
|
|
|
|
6,097
|
|
|
|
34
|
|
|
|
2.21
|
|
Total interest-earning assets
|
|
|
536,165
|
|
|
|
5,856
|
|
|
|
4.35
|
%
|
|
|
480,465
|
|
|
|
5,124
|
|
|
|
4.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
31,384
|
|
|
|
|
|
|
|
|
|
|
|
31,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
567,549
|
|
|
|
|
|
|
|
|
|
|
$
|
511,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
84,140
|
|
|
$
|
131
|
|
|
|
0.62
|
%
|
|
$
|
83,946
|
|
|
$
|
138
|
|
|
|
0.65
|
%
|
Savings
|
|
|
170,287
|
|
|
|
210
|
|
|
|
0.49
|
|
|
|
162,418
|
|
|
|
176
|
|
|
|
0.43
|
|
Time deposits
|
|
|
111,806
|
|
|
|
569
|
|
|
|
2.02
|
|
|
|
81,896
|
|
|
|
304
|
|
|
|
1.47
|
|
Short-term borrowings
|
|
|
3,915
|
|
|
|
13
|
|
|
|
1.32
|
|
|
|
3,599
|
|
|
|
14
|
|
|
|
1.54
|
|
FHLB advances
|
|
|
12,627
|
|
|
|
59
|
|
|
|
1.85
|
|
|
|
15,462
|
|
|
|
57
|
|
|
|
1.46
|
|
Total interest-bearing liabilities
|
|
|
382,775
|
|
|
|
982
|
|
|
|
1.02
|
%
|
|
|
347,321
|
|
|
|
689
|
|
|
|
0.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking accounts
|
|
|
126,270
|
|
|
|
|
|
|
|
|
|
|
|
115,435
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
4,413
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
513,945
|
|
|
|
|
|
|
|
|
|
|
|
467,169
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
53,604
|
|
|
|
|
|
|
|
|
|
|
|
44,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
567,549
|
|
|
|
|
|
|
|
|
|
|
$
|
511,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, interest rate spread (1)
|
|
|
|
|
|
$
|
4,874
|
|
|
|
3.33
|
%
|
|
|
|
|
|
$
|
4,435
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest as a percent of average interest-earning assets) (1)
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax exemption on non-taxable securities and loans included in interest income
|
|
|
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
140.07
|
%
|
|
|
|
|
|
|
|
|
|
|
138.33
|
%
|
|
|
|
|
|
|
|
|
(1) calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
Average Balance Sheets and Analysis of Net Interest Income for the Six Months Ended December 31,
(In thousands, except percentages)
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
81,399
|
|
|
$
|
990
|
|
|
|
2.43
|
%
|
|
$
|
85,554
|
|
|
$
|
1,075
|
|
|
|
2.42
|
%
|
Nontaxable securities (1)
|
|
|
61,029
|
|
|
|
949
|
|
|
|
3.18
|
|
|
|
59,738
|
|
|
|
964
|
|
|
|
3.17
|
|
Loans receivable (1)
|
|
|
382,035
|
|
|
|
9,628
|
|
|
|
5.00
|
|
|
|
324,927
|
|
|
|
8,014
|
|
|
|
4.89
|
|
Federal bank and other restricted stocks
|
|
|
1,723
|
|
|
|
40
|
|
|
|
4.61
|
|
|
|
1,459
|
|
|
|
44
|
|
|
|
5.98
|
|
Interest bearing deposits and federal funds sold
|
|
|
4,339
|
|
|
|
42
|
|
|
|
1.92
|
|
|
|
5,258
|
|
|
|
57
|
|
|
|
2.15
|
|
Total interest-earning assets
|
|
|
530,525
|
|
|
|
11,649
|
|
|
|
4.38
|
%
|
|
|
476,936
|
|
|
|
10,154
|
|
|
|
4.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
31,107
|
|
|
|
|
|
|
|
|
|
|
|
30,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
561,632
|
|
|
|
|
|
|
|
|
|
|
$
|
507,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
83,316
|
|
|
$
|
276
|
|
|
|
0.66
|
%
|
|
$
|
83,157
|
|
|
$
|
263
|
|
|
|
0.63
|
%
|
Savings
|
|
|
168,234
|
|
|
|
432
|
|
|
|
0.51
|
|
|
|
162,840
|
|
|
|
313
|
|
|
|
0.38
|
|
Time deposits
|
|
|
112,224
|
|
|
|
1,147
|
|
|
|
2.03
|
|
|
|
80,219
|
|
|
|
556
|
|
|
|
1.37
|
|
Short-term borrowings
|
|
|
3,620
|
|
|
|
24
|
|
|
|
1.32
|
|
|
|
3,822
|
|
|
|
28
|
|
|
|
1.45
|
|
FHLB advances
|
|
|
14,003
|
|
|
|
138
|
|
|
|
1.95
|
|
|
|
15,559
|
|
|
|
125
|
|
|
|
1.59
|
|
Total interest-bearing liabilities
|
|
|
381,397
|
|
|
|
2,017
|
|
|
|
1.05
|
%
|
|
|
345,597
|
|
|
|
1,285
|
|
|
|
0.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking accounts
|
|
|
122,263
|
|
|
|
|
|
|
|
|
|
|
|
113,556
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
4,300
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
508,731
|
|
|
|
|
|
|
|
|
|
|
|
463,453
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
52,901
|
|
|
|
|
|
|
|
|
|
|
|
44,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
561,632
|
|
|
|
|
|
|
|
|
|
|
$
|
507,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, interest rate spread (1)
|
|
|
|
|
|
$
|
9,632
|
|
|
|
3.33
|
%
|
|
|
|
|
|
$
|
8,869
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest as a percent of average interest-earning assets) (1)
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax exemption on non-taxable securities and loans included in interest income
|
|
|
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
139.10
|
%
|
|
|
|
|
|
|
|
|
|
|
138.00
|
%
|
|
|
|
|
|
|
|
|
(1) calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
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, 2019, the provision for loan losses was $315 compared with a negative provision for loan loss expense of $660 for the same prior year period. Net charge-offs of $8 were recorded during the six-month period ended December 31, 2019 compared with recoveries of $807 collected during the six-month period ended December 31, 2018.
Non-performing loans were $427 as of December 31, 2019 compared with $785 as of June 30, 2019 and $899 as of December 31, 2018. The allowance for loan losses as a percentage of loans was 1.02% at December 31, 2019 and 1.03% at June 30, 2019. The provision for loan losses for the period ended December 31, 2019 was considered sufficient by management for maintaining an appropriate allowance for probable incurred credit losses.
Noninterest Income
Noninterest income increased by $81, or 8.6%, for the second quarter of fiscal year 2020 from the same period last year and $55, or 2.3%, for the first six months of fiscal year 2020 from the same period last year. Noninterest income for the six months ended December 31, 2019 included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Also, noninterest income included a $110 gain on sale of securities compared with a $560 gain for the six months ended December 31, 2018. During the 2019 fiscal year, a pooled trust preferred security was sold due to the significant increase in the value of this security. The Corporation does not own any other securities of this type. In addition, service charges on deposit accounts increased by 15.1%, gains from the sale of mortgage loans increased by 11.7% and debit card interchange income increased by 6.6% for the six-month period ended December 31, 2019 compared with the same prior year period.
Noninterest Expenses
Total noninterest expenses increased by $55, or by 1.4%, for the second quarter of fiscal year 2020 compared with the same period last year and by $676, or 8.9%, for the first six months of fiscal year 2020 from the same period last year. Included in noninterest expenses for the six-month period ended December 31, 2019 are $322 of expenses associated with the merger between Consumers and Peoples. The expenses associated with the merger were primarily legal and consulting fees that were charged to professional and director fees and the system deconversion files that were charged to data processing expenses. Total noninterest expenses were also impacted by increases in salary and incentive expenses. FDIC assessments were positively impacted since the Small Bank Assessment Credits were applied to the current FDIC insurance invoices since the Deposit Insurance Fund reserve ratio was above 1.38%.
Income Taxes
Income tax expense was $261 and $473 for the three- and six-month periods ended December 31, 2019, respectively compared to $364 and $686 for the three- and six-month periods ended December 31, 2018, respectively. The effective tax rates were 15.3% and 13.8% for the three- and six-month periods ended December 31, 2019, respectively compared to 16.4% and 16.3% for the three- and six-month periods ended December 31, 2018, respectively. Income tax expense and the effective tax rates were lower in the 2020 fiscal year primarily due to a higher amount of tax-free income during the three- and six-month periods ended December 31, 2019.
Financial Condition
Total assets at December 31, 2019 were $574,572 compared to $553,936 at June 30, 2019, an increase of $20,636, or an annualized 7.5%.
Total loans increased by $27,218, or an annualized 14.7%, from $369,175 at June 30, 2019 to $396,393 at December 31, 2019. The growth in the loan portfolio was primarily related to growth within the commercial real estate and 1-4 family residential real estate segments to borrowers within the Bank’s primary market area. The loan growth was primarily funded by an increase of $15,471, or an annualized 6.6%, in total deposits.
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets and respective ratios as of the dates indicated.
|
|
December 31,
2019
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Non-accrual loans
|
|
$
|
427
|
|
|
$
|
785
|
|
|
$
|
899
|
|
Loans past due over 90 days and still accruing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total non-performing loans
|
|
|
427
|
|
|
|
785
|
|
|
|
899
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total non-performing assets
|
|
$
|
427
|
|
|
$
|
785
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.11
|
%
|
|
|
0.21
|
%
|
|
|
0.27
|
%
|
Allowance for loan losses to total non-performing loans
|
|
|
959.02
|
%
|
|
|
482.55
|
%
|
|
|
397.00
|
%
|
As of December 31, 2019, impaired loans totaled $1,059, of which $427 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 insure the soundness of the portfolio, as well as to provide funding for loan demand as needed.
For the six months ended December 31, 2019, net cash inflow from operating activities was $2,214, net cash outflows from investing activities was $14,163 and net cash inflows from financing activities was $16,516. A major source of cash was a $15,471 increase in deposits and $18,012 from sales, maturities, calls or principal pay downs on available-for-sale securities. A major use of cash was a $27,226 increase in loans. Total cash and cash equivalents were $14,028 as of December 31, 2019, compared to $9,461 at June 30, 2019 and $9,749 at December 31, 2018.
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 $487,645 at December 31, 2019 compared with $472,174 at June 30, 2019.
To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At December 31, 2019, advances from the FHLB of Cincinnati totaled $24,300 compared with $22,700 at June 30, 2019. As of December 31, 2019, the Bank had the ability to borrow an additional $21,983 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 $3,870 at December 31, 2019 and $3,686 at June 30, 2019.
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
Jumbo time deposits (those with balances of $250 and over) totaled $37,969 at December 31, 2019 and $39,034 at June 30, 2019. 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 $88,524 at December 31, 2019 and $86,265 at June 30, 2019.
Capital Resources
Total shareholders’ equity increased to $54,036 as of December 31, 2019 from $51,166 as of June 30, 2019. The increase was primarily the result of net income of $2,943 for the first six months of fiscal year 2020 and $536 in accumulated other comprehensive income from an increase in the unrealized gains in the mark-to-market of available-for-sale securities. These increases were partially offset by cash dividends paid of $739.
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.
As of December 31, 2019, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 11.51% and the leverage and total capital ratios were 8.89% and 12.45%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 11.68% and leverage and total risk-based capital ratios of 8.88% and 12.60%, respectively, as of June 30, 2019. 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, 2019 that would cause the Bank’s capital category to change.
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
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 as a critical accounting policy and an understanding of this policy 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), note four (Loans) and Management’s Discussion and Analysis of Financial Condition and Results of Operation (Critical Accounting Policies and Use of Significant Estimates) of the 2019 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, 2019.
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. These statements include statements relating to the merger of Peoples Bancorp with and into Consumers, unanticipated difficulties or expenditures relating to the transaction; legal proceedings, including those that may be instituted against Consumers, its board of directors, its executive officers and others; disruptions of current plans and operations caused by the merger and the resulting integration of Peoples Bancorp with Consumers; potential difficulties in employee retention due to the merger; any failure to meet expected cost savings, synergies and other financial and strategic benefits in connection with the merger within anticipated time frames or at all; the response of customers, suppliers and business partners to the merger; and risks related to diverting management’s attention from Consumers’ ongoing business operations. 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. Factors 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 a deterioration in credit quality of our loan assets, among other things;
|
|
●
|
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
|
|
●
|
inflation, interest rate, securities market and monetary fluctuations;
|
|
●
|
changes in the level of non-performing assets and charge-offs;
|
|
●
|
declining asset values impacting the underlying value of collateral;
|
|
●
|
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;
|
|
●
|
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;
|
|
●
|
our ability to attract and retain qualified employees;
|
|
●
|
changes in accounting policies, rules and interpretations;
|
|
●
|
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; and
|
|
●
|
changes in consumer spending, borrowing and savings habits.
|
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
While the list of factors presented here is, and the Risk Factors starting on page 16 of the registration statement on Form S-4/A filed with the SEC on September 4, 2019 related to the merger of Consumers/Peoples are, considered representative no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.
CONSUMERS BANCORP, INC.