Consumers Bancorp, Inc.2018 Annual ReportBancorp Inc.Outside Cover Spread 2018.indd 29/10/2018 11:42:44 AM Financial Highlights
Dollar amounts in thousands, except per share data.
ASSETS
Total cash and cash equivalents
Certificates of deposit in financial institutions
Securities, available-for-sale
Securities, held-to-maturity
Federal bank and other restricted stocks, at cost
Loans held for sale
Total loans
Less allowance for loan losses
Net loans
Other assets
Total assets
LIABILITIES
Deposits:
Non-interest bearing demand
Interest bearing demand
Savings
Time
Total deposits
Short-term borrowings
Federal Home Loan Bank advances
Other liabilities
Total liabilities
SHAREHOLDERS’ EQUITY
Total shareholders’ equity
Total liabilities and shareholders’ equity
June 30, 2018
June 30, 2017
$ 7,772
2,973
144,028
4,024
1,459
1,448
318,509
(3,422)
315,087
25,828
502,619
$
$ 9,912
3,921
142,086
4,259
1,425
1,252
272,867
(3,086)
269,781
25,247
457,883
$
$ 107,919
81,299
162,204
78,541
429,963
$ 102,683
54,123
151,154
66,511
374,471
13,367
11,756
3,772
458,858
23,986
12,320
3,571
414,348
43,761
$ 502,619
43,535
$ 457,883
Cash dividends paid per share
Weighted average number
of common shares outstanding
$ 0.495
$ 0.48
2,726,926
2,724,293
NET INCOME
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Income tax expense
Net income
$
17,557
1,671
15,886
310
15,576
3,391
14,237
4,730
1,149
$ 3,581
$
15,567
1,108
14,459
596
13,863
3,250
13,478
3,635
641
$ 2,994
Basic and diluted earnings per share
$
1.31
$
1.10
Please refer to the annual report on Form 10-K for additional financial information.
Inside Cover Spread 2018 ondo.indd 1
9/10/2018 11:41:33 AM
PRESIDENT’S MESSAGE TO SHAREHOLDERSWhat drives a 30% increase in pretax earnings and a 27% increase in market capitalization? In Consumers National Bank’s case a 10% increase in net interest income; $44.7 million in asset growth; a 227 basis point reduction in the efficiency ratio; and a 121 basis point increase in the loan-to-deposit ratio. In short, Consumers improved performance by growing the asset base, converting a higher percentage of deposits to higher yielding assets; improving asset quality; and performing all of the above in a more efficient manner. It all seems simple, but there must be more. What is driving the growth, efficiency, and asset quality? I think it is our approach and our growing market reputation.Refreshing! This is a word I often hear our business partners, employees and community leaders use to describe Consumers National Bank. After hearing this compliment several times, I began to realize the importance of this branded message and the impact our culture is having on returning banking to when bankers were trusted advisors and people who could make a difference personally, professionally and in the community. We are proud to be known as a refreshing bank and will strive to create shareholder value by fostering an environment where every interaction with Consumers is new, different and invigorating.Consumers’ consultative approach to helping our customers achieve short and long-term goals is centered upon in-market relationship-oriented bankers who are given the flexibility to create financial solutions that surpass expectations and on easy access to customer service and support staff. This structure combined with an ingrained commitment to community at all levels of the organization and accessible bank leadership is making an impact in the market. While it is our nature, this approach stands out as different and is often described as refreshing. It is why our team originated over $110 million in new money in consumer, residential, commercial and agricultural credits during the last fiscal year and why credit pipeline indicators across all markets remain strong.Growth is the only long-term elixir to ever increasing operating costs. To that end, we continue to expand our customer base and the breadth of our market area. In fiscal year 2018, the bank added 1,573 customers, a 9.3% increase in total records. These new customers contributed to a $56 million, or 14.8%, increase in deposits and a $45.6 million, or 16.7%, increase in loan balances.A significant portion of these new relationships are attributed to delivering on the community bank message at a time when larger institutions are abandoning non-metro markets. The success of our Bergholz location, established when a large regional institution abandoned the market, is such an example. The office, which required little capital investment and employs an efficient staffing model, has generated over $15 million in deposit balances. It has also broadened interest in our stock and has proven to be a catalyst for successful business calling efforts throughout Jefferson County and surrounding markets. In fiscal year 2018, we welcomed a business banker with substantial market experience in the east central Ohio, southwest Pennsylvania and northern West Virginia markets.Similarly, Consumers has increased its Minerva customer base by capitalizing on a regional bank’s decision to reduce their commitment to smaller markets. Reaching these displaced customers with Consumers’ message resulted in a 16% increase in deposits in the Minerva iDear Fellow Shareholders:Inside Pages 2018.indd 19/10/2018 11:40:47 AM market. The strong customer retention data in both the Bergholz and Minerva markets indicate that our new customers like our approach.After expanding into Jefferson County in May of 2017, our first full service branch in Summit County will open as this report goes to print. The Fairlawn office will expand on the bank’s Summit County presence that has been cultivated since the Stow LPO opened in 2015. The new facility on Embassy Parkway will better serve our Summit County customers and will facilitate calling efforts in Summit, Cuyahoga, and Medina counties. Our metro market commercial lenders each have extensive experience in Summit County and adjacent markets and our branch banking staff is anchored by Bev Newell, a 22-year Consumers veteran.The photos on the cover and back of this report portray the four components of our business. Committed to serve the residential, retail, agricultural, and industrial customer base, we continue to make investments in each market segment. The investments made over the last few years have contributed to increased loan originations in all areas and have resulted in a more balanced business mix. The retail portion of originations has increased from 25% of total production in calendar 2014 to 45% in the last fiscal quarter. Going forward, we expect to place additional emphasis on consumer lending and plan significant improvements to the online consumer and mortgage loan application and loan decisioning processes.We recognize our employees as our most valuable asset. In an era where competition for talent is increasing, it is refreshing to have human resource professionals who are truly engaged in their mission to make Consumers an employer of choice throughout northeast Ohio. Our ability to attract and retain top tier talent is a direct reflection of our continued commitment to training and developing our people into engaged, productive employees. Bank sponsored mentoring and professional development opportunities coupled with our style of open communication has resulted in an expanded staffing depth chart and an employee turnover ratio that is well below industry norms. Average staff tenure of over 10 years provides consistency in understanding and executing our cultural message.The Board of Directors of Consumers Bancorp contributes their business perspectives and understanding of the local environment and needs to the bank’s short and long-term strategic direction. I thank each of them for their commitment to community banking. I particularly want to thank Jim Hanna for his 13 years of Board service and for the consistent support he has provided the management team. Jim and the Hanna family have been an important part of the bank since our founders started raising capital in 1964. We look forward to a continued association with the Hanna family as Jim continues as an unofficial ambassador for Consumers National Bank.As we crossed the $500 million asset threshold recently, we committed to a strategic plan that redoubles our commitment to creating shareholder value through strategic initiatives that support efficient operations, growth, and asset quality. We will invest in staff and systems that extend our market breadth, increase our brand awareness, provide our growing customer base with state-of-the-art service and technology, and manage the risks associated with new products, developing technology, and growing portfolios. This plan will advance the bank to the next milestone. It is refreshing to know that our staff is up to the challenge and that our shareholders support our mission. Thank you for your support.iiBancorp Inc.Sincerely,Ralph J. Lober, IIPresident and CEOGrowth is the only long-term elixir to ever increasing operating costs. To that end, we continue to expand our customer base and the breadth of our market area.Inside Pages 2018.indd 29/10/2018 11:40:48 AM iiiBancorp Inc.It is with gratitude that I write this letter to fellow shareholders. Consumers National Bank reported excellent performance in 2018, which was the result of a team of talented and committed individuals sharing a strategic vision, positioning the bank for growth and delivering on strategic objectives. Please join me in congratulating the Consumers team!Don’t forget to give yourself a pat on the back as an integral member of the Consumers team. Your investment and faith in Consumers National Bank have allowed us to provide banking services to the local community for over 50 years and to move forward into the future with confidence.Over the years it has been my pleasure to meet and talk with our shareholders. Many of you live within the bank’s service area, working in and supporting the local community. You might work at one of the local businesses, farms or manufacturers that obtained a loan from Consumers or you may live in a home that was financed through Consumers Mortgage Services. A good number of you are Consumers customers and others are employees of the bank. A few of you have been stakeholders since the bank’s beginnings in 1965 and others have continued to hold stock that was passed down to you from a family member. Some of you may have heard from relatives or a friend that the bank was a good investment. Still others purchased stock more recently because you saw that, as a community bank, Consumers makes a difference.As more than one shareholder has told me, there wasn’t much extra cash when they made the decision to invest. They had obligations and families to support. However, those who decided to support local banking have realized strong returns through earnings, dividends and price appreciation. Many have recouped their initial investment many times over. Because we understand the importance of your investment, increasing long-term shareholder value remains the key strategic objective of the Board of Directors and management team.I’m pleased to report increased shareholder value in fiscal year 2018. Consumers earnings per share increased from $1.10 to $1.31 and the market value increased by 26% to $24.00 as of June 30, 2018, equating to a market capitalization of over $65.5 million. In addition, dividends paid during fiscal year 2018 increased to $0.495 compared to $0.48 in fiscal year 2017.In closing, I am grateful for your continued support and ongoing investment in Consumers Bancorp, Inc. Without loyal shareholders we would not exist, and we are grateful for your support. Please join us for the Annual Meeting on October 18th as we congratulate our shareholder, director and friend Jim Hanna who is retiring from the Board of Directors. Lunch is at noon and provides a great opportunity to share your story with other shareholders, wish Jim well and learn more about your community bank.CHAIRMAN’S MESSAGE TO SHAREHOLDERSDear Shareholders:Sincerely,Laurie McClellanChairman of the BoardInside Pages 2018.indd 39/10/2018 11:40:49 AM ivBancorp Inc.Board of DirectorsExecutive ManagementFrom left: Ralph J. Lober, II, President & CEO, Thomas Kishman, Brad Goris, Richard Kiko, Jr., Frank Paden, Laurie McClellan (Chairman), Harry Schmuck, Jr., Philip Mueller, James Hanna, John Furey (Vice Chairman).Not pictured: David JohnsonFrom left: Kim Chuckalovchak, VP, IT Manager, Derek Williams, SVP, Retail Sales & Operations, Suzanne Mikes, VP, Chief Credit Officer, Ralph J. Lober, II, President & CEO, Renee Wood, EVP, Chief Financial Officer, Mariah Crater, Executive Assistant, Scott Dodds, EVP, Senior Loan OfficerInside Pages 2018.indd 49/10/2018 11:40:54 AM UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☒
For the fiscal year ended June 30, 2018
Commission File No. 033-79130
CONSUMERS BANCORP, INC.
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
34-1771400
(I.R.S. Employer Identification No.)
614 East Lincoln Way,
P.O. Box 256, Minerva, Ohio 44657
(330) 868-7701
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant Section 12(b) of the Act: None
Securities registered pursuant Section 12(g) of the Act: Common Shares, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
No
☒
☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
☐
Yes
No
☒
☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
☒
☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
(Do not check if small reporting company)
☒
☐
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
No
☒
Based on the closing sales price on December 31, 2017, the aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant was approximately $41,952,356.
The number of shares outstanding of the Registrant’s common stock, without par value was 2,729,644 at September 12, 2018.
Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement, dated September 12, 2018, for its
2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
ITEM 1—BUSINESS
ITEM 1A—RISK FACTORS
ITEM 1B—UNRESOLVED STAFF COMMENTS
ITEM 2—PROPERTIES
ITEM 3—LEGAL PROCEEDINGS
ITEM 4—MINE SAFETY DISCLOSURES
PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6—SELECTED FINANCIAL DATA
ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A—CONTROLS AND PROCEDURES
ITEM 9B—OTHER INFORMATION
PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11—EXECUTIVE COMPENSATION
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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ITEM 1—BUSINESS
Business
PART I
Consumers Bancorp, Inc. (Corporation) is a bank holding company under the Bank Holding Company Act of 1956, as
amended, and is a registered bank holding company, and was incorporated under the laws of the State of Ohio in 1994. In February
1995, the Corporation acquired all the issued and outstanding capital stock of Consumers National Bank (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.
Since 1965, the Bank’s main office has been serving the Minerva, Ohio, and surrounding areas from its location at 614 East
Lincoln Way, Minerva, Ohio. The Bank’s business involves attracting deposits from businesses and individual customers and using
such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana,
Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank currently has fourteen branch locations and one loan
production office. The Bank also invests in securities consisting primarily of obligations of U.S. government-sponsored entities,
municipal obligations and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
Supervision and Regulation
The Corporation and the Bank are subject to regulation by the Securities and Exchange Commission (SEC), the Board of
Governors of the Federal Reserve System (Federal Reserve Board), the Office of the Comptroller of the Currency (OCC) and other
federal and state regulators. The regulatory framework is intended primarily for the protection of depositors, federal deposit
insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Earnings and dividends
of the Corporation are affected by state and federal laws and regulations and by policies of various regulatory authorities. Changes
in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of the
Corporation and the Bank. The following describes selected federal and state statutory and regulatory provisions that have, or could
have, a material impact on the Corporation. The following discussion of supervision and regulation is qualified in its entirety by
reference to the statutory and regulatory provisions discussed.
Regulation of the Corporation
The Bank Holding Company Act: As a bank holding company, the Corporation is subject to regulation under the Bank
Holding Company Act of 1956, as amended (BHCA), and the examination and reporting requirements of the Federal Reserve Board.
Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board and is required to file periodic
reports regarding its operations and any additional information that the Federal Reserve Board may require.
The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has
determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In
addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring
substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a
bank or merging or consolidating with another bank holding company.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each
subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may
require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the
payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or
unsound practice. The Federal Reserve Board has extensive enforcement authority over bank holding companies for violations of
laws and regulations and unsafe or unsound practices.
Privacy Provisions of Gramm-Leach-Bliley Act: The Gramm-Leach-Bliley Act of 1999 contains extensive provisions on a
customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must provide to its
customers the institution’s policies and procedures regarding the handling of customers’ non-public personal information. Except in
certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that
such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. The Corporation and the
Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.
Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the areas of
financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications
3
by the Corporation’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that the
Corporation’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or omit to state
a material fact.
Regulation of the Bank
As a national bank, Consumers National Bank is subject to regulation, supervision and examination by the OCC and by the
Federal Deposit Insurance Corporation (FDIC). These examinations are designed primarily for the protection of the depositors of
the Bank.
Dividend Restrictions: 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
regulations promulgated by the OCC, the Bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank
may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any calendar
year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding
years, unless the dividend is approved by the OCC. 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.
FDIC: The FDIC is an independent federal agency, which insures the deposits of federally insured banks and savings
associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of the
Bank are subject to the deposit insurance assessments of the Bank Insurance Fund of the FDIC. Under the FDIC’s deposit insurance
assessment system, the assessment rate for any insured institution varies according to regulatory capital levels of the institution and
other factors such as supervisory evaluations.
The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the
insurance fund and may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority
an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable
law, order or condition imposed by the FDIC.
Risk-Based Capital Requirements: The Federal Reserve Board and the OCC employ similar risk-based capital guidelines
in their examination and regulation of bank holding companies and national banks. The Corporation meets the definition of a Small
Bank Holding Company and, therefore, is exempt from consolidated risk-based and leverage capital adequacy guidelines for bank
holding companies. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against the capital base. If capital falls below the minimum levels established
by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities. In addition, failure to satisfy capital guidelines could subject a banking institution to a variety
of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a
prohibition on the acceptance of “brokered deposits.”
The Basel III capital requirements for U.S. banking organizations became effective on January 1, 2015. Under Basel III, the
Bank is required to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio
of 8%, and a Tier 1 leverage ratio of 4%. Basel III also established a “capital conservation buffer” of 2.5% above the new regulatory
minimum capital requirements, which must consist entirely of common equity Tier 1 capital and began being phased in beginning
in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January
2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a
common equity Tier 1 ratio to risk-weighted assets above the minimum but below the conservation buffer will face constraints on
dividends, equity repurchases, and compensation based on the amount of the shortfall.
The OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to
submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC. These powers include,
but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring
prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the
institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring
the dismissal of directors and officers. The OCC’s final supervisory judgment concerning an institution’s capital adequacy could
differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios.
Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios. At June 30, 2018,
the Bank exceeded minimum regulatory capital requirements to be considered well-capitalized.
4
Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Act created many new restrictions and
an expanded framework of regulatory oversight for financial institutions, including depository institutions. The Dodd-Frank Act
centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau
(CFPB), and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws.
The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.
Although the CFPB does not have direct supervisory authority over banks with less than $10 billion in assets, the CFPB has broad
rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority
to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere
with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage
of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or
services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests. The Corporation is closely monitoring all
relevant sections of the Dodd-Frank Act to ensure continued compliance with these regulatory requirements and assess their potential
impact on our business.
Interstate Banking and Branching: The Interstate Banking and Branch Efficiency Act of 1995 has eased restrictions on
interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions
regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision, and
(iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank
branching.
Community Reinvestment Act: The Community Reinvestment Act requires depository institutions to assist in meeting the
credit needs of their market areas, including low- and moderate-income areas, consistent with safe and sound banking practices.
Under this Act, each institution is required to adopt a statement for each of its market areas describing the depository institution’s
efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance and assigned
ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution.
USA Patriot Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act). The Patriot Act is designed to deny terrorists and criminals
the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers,
dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial services companies
implement additional policies and procedures with respect to additional measures designed to address any or all of the following
matters: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency
crimes.
Cybersecurity: In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement
indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that
their risk management processes also address the risk posed by compromised customer credentials, including security measures to
reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a
financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid
recovery, resumption and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial
institution is also expected to develop appropriate processes to enable recovery of data and business operations and address
rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of
cyberattack.
In the ordinary course of business, electronic communications and information systems are relied upon to conduct operations,
to deliver services to customers and to store sensitive data. The Corporation employs a variety of preventative and detective tools to
monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats.
Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving
nature and sophistication of these threats, increasing volume of attacks, as well as due to the expanding use of internet banking,
mobile banking and other technology-based products and services by the Corporation and its customers.
Employees
As of June 30, 2018, the Bank employed 114 full-time and 25 part-time employees. None of the employees are represented
by a collective bargaining group. Management considers its relations with employees to be good.
5
Available Information
The Corporation files annual, quarterly, and current reports, proxy statements, and other information with the SEC. These
filings are available to the public over the Internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any
document that the Corporation files at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549.
Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.
The Corporation’s reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are available, free of charge, on
our website (www.consumersbank.com) as soon as reasonably practicable after such reports are filed with or furnished to the SEC.
The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its
Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial
officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website. The
Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website. A printed copy of
any of these documents will be provided to any requesting shareholder.
ITEM 1A—RISK FACTORS
Not applicable for Smaller Reporting Companies.
ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
ITEM 2—PROPERTIES
The Bank operates fourteen full service banking facilities and one loan production office (LPO) as noted below:
Location
Minerva
Salem
Waynesburg
Hanoverton
Carrollton
Alliance
Lisbon
Louisville
East Canton
Malvern
Hartville
Jackson-Belden
Bergholz
Fairlawn
Wooster LPO
Address
614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657
141 S. Ellsworth Avenue, P.O. Box 798, Salem, Ohio, 44460
8607 Waynesburg Drive SE, P.O. Box 746, Waynesburg, Ohio, 44688
30034 Canal Street, P.O. Box 178, Hanoverton, Ohio, 44423
1017 Canton Road NW, Carrollton, Ohio, 44615
610 West State Street, Alliance, Ohio, 44601
7985 Dickey Drive, Lisbon, Ohio 44432
1111 N. Chapel Street, Louisville, Ohio 44641
440 W. Noble, East Canton, Ohio, 44730
4070 Alliance Road, Malvern, Ohio 44644
1215 W. Maple Street, Hartville, Ohio 44632
4026 Dressler Road NW, Canton, Ohio 44718
256 2nd Street, Bergholz, Ohio 43908
3680 Embassy Parkway Suite B, Fairlawn, Ohio 44333
146 East Liberty Street, Wooster, Ohio 44691
Owned
X
X
X
X
X
X
X
X
X
Leased
X
X
X
X
X
X
The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are
being used. In management’s opinion, all properties owned and operated by the Bank are adequately insured.
ITEM 3—LEGAL PROCEEDINGS
The Corporation is not a party to any pending material legal or administrative proceedings, other than ordinary routine
litigation incidental to the business of the Corporation. Further, there are no material legal proceedings in which any director,
executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest therein that is adverse to
the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the
financial position or results of operations of the Corporation.
ITEM 4—MINE SAFETY DISCLOSURES
None.
6
PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation had 2,729,644 common shares outstanding on June 30, 2018 with 740 shareholders of record and an estimated
504 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for
information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.
The common shares of Consumers Bancorp, Inc. are traded on the over-the-counter bulletin board. The following quoted
market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not represent
actual transactions. The market prices represent highs and lows reported during the applicable quarterly period.
Quarter Ended
High
Low
Cash dividends paid per share
Quarter Ended
High
Low
Cash dividends paid per share
September 30,
2017
December 31,
2017
March 31,
2018
June 30,
2018
$
21.00 $
18.51
0.12
21.85 $
20.26
0.125
21.15 $
20.00
0.125
25.00
20.25
0.125
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
$
16.65 $
15.46
0.12
17.25 $
15.30
0.12
18.75 $
15.85
0.12
19.37
17.75
0.12
Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices
that have been reported. Because of the lack of an established market for the Corporation’s common shares, these prices may not
reflect the prices at which the common shares would trade in an active market.
The Corporation’s management is currently committed to continuing to pay regular cash dividends; however, there can be no
assurance as to future dividends because they are dependent on the Corporation’s future earnings, capital requirements and financial
condition. The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking
regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations,
the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained
net profits of the preceding two years, subject to the capital requirements described above. See Note 1 and Note 11 to the
Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations
for dividend restrictions.
There were no repurchases of the Corporation’s securities during the 2018 fiscal year.
ITEM 6—SELECTED FINANCIAL DATA
Not applicable for Smaller Reporting Companies.
7
ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands, except per share data)
General
The following is management’s analysis of the Corporation’s financial condition and results of operations as of and for the
years ended June 30, 2018 and 2017. 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. In addition, all statements
set forth in future filings by the Corporation with the SEC, or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, that are not historical in nature, including words or phrases such as “will
likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions are intended
to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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.
The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and
uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition
and results of operations.
Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all the issued and
outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of America. The
Corporation’s activities have been limited primarily to holding the common stock of the Bank. The Bank’s business involves
attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and
consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous
counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal
obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
8
●
●
●
●
●
●
●
●
●
●
●
●
●
Comparison of Results of Operations for the Years Ended June 30, 2018 and June 30, 2017
Net Income. Net income was $3,581 for fiscal year 2018 compared with $2,994 for fiscal year 2017. The following key factors
summarize our results of operations for the year ended June 30, 2018 compared with the same prior year period:
net interest income increased by $1,427, or 9.9%, in fiscal year 2018, primarily as a result of an increase in average loans
receivable;
loan loss provision expense in fiscal year 2018 declined by $286 and totaled $310 in 2018 compared with $596 in 2017;
total other income increased by $141, or 4.3% in fiscal year 2018;
total other expenses increased by $759, or 5.6% in fiscal year 2018; and
the enactment of the Tax Cuts and Jobs Act (Tax Act) resulted in a charge to income tax expense of $348 in conjunction
with writing down the Corporation’s net deferred tax assets in fiscal year 2018.
Return on average equity and return on average assets were 8.15% and 0.75%, respectively, for the 2018 fiscal year-to-date
period compared with 6.89% and 0.67%, 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. 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. The federal income tax rate in
effect for the 2018 fiscal year was 27.55% and for the 2017 fiscal year was 34.0%. With the enactment of the Tax Act, the statutory
tax rate was changed in the second quarter of fiscal year 2018 to 27.55% by using a blended rate of the new 21.0% federal rate that
went into effect on January 1, 2018 and the previous federal rate of 34.0%. All average balances are daily average balances. Non-
accruing loans are included in average loan balances.
Net Interest Income Year ended June 30,
Net interest income
Taxable equivalent adjustments to net interest
Net interest income, fully taxable equivalent
Net interest margin
Taxable equivalent adjustment
Net interest margin, fully taxable equivalent
$
$
2018
2017
15,886
543
16,429
$
$
3.55%
0.12
3.67%
14,459
769
15,228
3.51%
0.18
3.69%
FTE net interest income for the 2018 fiscal year was $16,429, an increase of $1,201 or 7.9%, from $15,228 in the 2017 fiscal
year. The Corporation’s tax equivalent net interest margin for the year ended June 30, 2018 was 3.67% and for the year ended 2017
was 3.69%. FTE interest income for the 2018 fiscal year was $18,100, an increase of $1,764, or 10.8%, from $16,336 in the 2017
fiscal year. Growth of $27,647, or 10.3%, in average loans receivable positively impacted interest income as well as an increase in
the yield on average interest-earning assets. Interest expense for the 2018 fiscal year was $1,671, an increase of $563, or 50.8%,
from $1,108 in the 2017 fiscal year. This was mainly the result of an increase in short-term rates impacting the rates paid on savings,
short-term borrowings and time deposits as well as a $27,961, or 9.5%, growth in total interest-bearing liabilities.
9
●
●
●
●
●
Average Balance Sheet and Net Interest Margin
Interest earning assets:
Taxable securities
Nontaxable Securities (1)
Loans receivable (1)
Interest bearing deposits and federal funds
sold
Total interest earning assets
Noninterest earning assets
Total assets
Interest bearing liabilities:
Interest bearing demand
Savings
Time deposits
Short-term borrowings
FHLB advances
Total interest-bearing liabilities
Noninterest-bearing liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income, interest rate spread
(1)
Net interest margin (net interest as a
percent of average interest earning
assets) (1)
Federal tax exemption on non-taxable
securities and loans included in interest
income
Average interest earning assets to interest
bearing liabilities
Average
Balance
2018
Interest
Yield/
Rate
Average
Balance
2017
Interest
Yield/
Rate
$
83,915 $
60,072
295,095
1,997
1,996
13,956
2.36% $
3.34
4.73
77,291 $
60,036
267,448
1,678
2,176
12,360
151
18,100
115
355
740
240
221
1,671
8,546
447,628
31,449
$ 479,077
$
57,272 $
155,000
71,404
24,422
13,428
321,526
113,595
435,121
43,956
$ 479,077
122
16,336
75
187
530
90
226
1,108
1.77
9,213
4.04% 413,988
29,602
$ 443,590
49,832 $
0.20% $
141,279
0.23
66,761
1.04
21,053
0.98
1.65
14,640
0.52% 293,565
106,578
400,143
43,447
$ 443,590
2.19%
3.68
4.62
1.32
3.96%
0.15%
0.13
0.79
0.43
1.54
0.38%
$
16,429
3.52%
$
15,228
3.58%
3.67%
3.69%
$
543
$
769
139.22%
141.02%
____________
(1)
Calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 27.55% in the 2018 fiscal year and
34.0% in the 2017 fiscal year
10
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
2018 Compared to 2017
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
2017 Compared to 2016
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
$
$
319
(180)
1,596
29
1,764
40
168
210
150
(5)
563
1,201
$
$
183
22
1,302
(9)
1,498
12
20
39
16
(19)
68
1,430
$
$
(In thousands)
$
136
(202)
294
38
266
28
148
171
134
14
495
(229) $
(202) $
70
1,118
5
991
6
65
42
51
42
206
785
$
(168) $
174
1,241
(26)
1,221
3
4
12
—
121
140
1,081
$
(34)
(104)
(123)
31
(230)
3
61
30
51
(79)
66)
(296)
Interest earning assets:
Taxable securities
Nontaxable securities (1)
Loans receivable (2)
Federal funds sold
Total interest income
Interest bearing liabilities:
Interest bearing demand
Savings deposits
Time deposits
Short-term borrowings
FHLB advances
Total interest expense
Net interest income
____________
(1)
Nontaxable income is adjusted to a fully tax equivalent basis utilizing a statutory federal income tax rate of 27.55% in the 2018
fiscal year and 34.0% in the 2017 fiscal year.
Non-accrual loan balances are included for purposes of computing the rate and volume effects although interest on these balances
has been excluded.
(2)
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 provision for loan losses was $310 in fiscal year 2018 compared
to $596 in fiscal year 2017.
For the 2018 fiscal year, net recoveries of $26 were recorded compared with net charge-offs of $1,076 for the same period last
year. Net charge-offs for the 2017 fiscal year were primarily within the commercial real estate portfolio and included a partial charge-
off of $700 for one credit for which a specific valuation allowance was reserved for in the 2016 fiscal year. The Bank is currently
pursuing all legal avenues against the borrowers in an effort to recover a portion of the loss in future periods. The allowance for loan
losses as a percentage of loans was 1.07% at June 30, 2018 and 1.13% at June 30, 2017.
Non-performing loans were $1,090 as of June 30, 2018 and represented 0.34% of total loans. This compared with $1,187, or
0.44% of total loans at June 30, 2017. Non-performing loans have been considered in management’s analysis of the appropriateness
of the allowance for loan losses. Management and the Board of Directors closely monitor these loans and believe the prospect for
recovery of principal, less identified specific reserves, are favorable.
Other Income. Total other income increased by $141, or 4.3%, to $3,391 for the 2018 fiscal year.
Debit card interchange income increased by $172, or 14.8% in 2018 to $1,333; however, debit card processing expenses
increased by $118 over the same period.
Gain on sale of mortgage loans increased by $109, or 42.2%, from the same period last year primarily as a result of an increase
in volume.
These increases were partially offset by a $176 decline in gains from the sale of securities.
Other Expenses. Total other expenses were $14,237 for the year ended June 30, 2018; an increase of $759, or 5.6%, from
$13,478 for the year ended June 30, 2017.
11
Salaries and employee benefit expenses increased by $556, or 7.8%, during the fiscal year ended June 30, 2018 mainly due to
an increase in salary and incentive expenses.
Professional and director fees decreased by $85, or 14.0%, during the 2018 fiscal year from the same period last year primarily
as a result of a decrease in legal and consulting fees.
Loan and collection expenses decreased by $38, or 24.5%, during the 2018 fiscal year from the same period last year primarily
as a result of a reduction in collection expenses.
Marketing and advertising expenses increased by $41, or 15.4%, during the 2018 fiscal year from the same period last year
primarily due to an increase in advertising and promotional campaigns initiated to attract core deposit customers.
Income Tax Expense. Income tax expense totaled $1,149 and $641 and the effective tax rates were 24.3% and 17.6% for the
years ended June 30, 2018 and 2017, respectively. Income tax expense and the effective tax rate was higher in the 2018 fiscal year
period compared to the same prior year period primarily due to the enactment of the Tax Act and increased income before income
taxes. The enactment of the Tax Act required the Corporation to revalue its deferred tax assets and liabilities based upon the lower
enacted federal corporate income tax rate at which the Corporation expects to recognize the benefit. During the three months ended
December 31, 2017 a one-time income tax expense of $348 was recorded in conjunction with writing down its net deferred tax
assets. The Tax Act lowered the federal corporate tax rate beginning on January 1, 2018. As a result, the Corporation utilized a
blended tax rate for its fiscal year ending June 30, 2018. In addition, 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 earnings on bank owned life insurance.
Financial Condition
Total assets at June 30, 2018 were $502,619 compared to $457,883 at June 30, 2017, an increase of $44,736, or 9.8%. The
growth in total assets was mainly attributed to an increase of $45,642, or 16.7%, in total loans. This growth was primarily funded by
an increase in total deposits.
Securities. Total securities increased by $1,707 to $148,052 at June 30, 2018, of which $144,028 were classified as available-
for-sale and $4,024 were classified as held-to-maturity. The securities portfolio is mainly comprised of residential mortgage-backed
securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, state and political
subdivisions and obligations of government-sponsored enterprises.
The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2018 and 2017
and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:
Available-for-sale
June 30, 2018
Obligations of U.S. government-sponsored entities and agencies
Obligations of state and political subdivisions
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
Collateralized mortgage obligations
Pooled trust preferred security
Total available-for-sale securities
Available-for-sale
June 30, 2017
Obligations of U.S. government-sponsored entities and agencies
Obligations of state and political subdivisions
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
Collateralized mortgage obligations
Pooled trust preferred security
Total available-for-sale securities
12
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
16,488
56,964
65,062
1,432
5,973
178
146,097
$
$
6
339
6
—
9
549
909
$
$
(372) $
(713)
(1,660)
(17)
(216)
—
(2,978) $
16,122
56,590
63,408
1,415
5,766
727
144,028
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
12,571
56,824
64,092
1,459
6,310
155
141,411
$
$
90
890
184
—
1
377
1,542
$
$
(74) $
(254)
(438)
(1)
(100)
—
(867) $
12,587
57,460
63,838
1,458
6,211
532
142,086
The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2018 and 2017
and the corresponding gross unrecognized gains and losses:
Held-to-maturity
June 30, 2018
Obligations of state and political subdivisions
Total held-to-maturity securities
Held-to-maturity
June 30, 2017
Obligations of state and political subdivisions
Total held-to-maturity securities
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
4,024 $
4,024 $
24 $
24 $
— $
— $
4,048
4,048
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
4,259 $
4,259 $
73 $
73 $
(3) $
(3) $
4,329
4,329
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average
yields as of June 30, 2018:
Amortized
Cost
Fair
Value
Average
Yield /
Cost
Available-for-sale
Obligations of government-sponsored entities:
Over 1 year through 5 years
Over 5 years through 10 years
Total obligations of government-sponsored entities
Obligations of state and political subdivisions:
3 Months or less
Over 3 months through 1 year
Over 1 year through 5 years
Over 5 years through 10 years
Over 10 years
Total obligations of state and political subdivisions
Mortgage-backed securities - residential:
Over 3 months through 1 year
Over 1 year through 5 years
Over 5 years through 10 years
Total mortgage-backed securities - residential
Mortgage-backed securities - commercial:
Over 1 year through 5 years
Total mortgage-backed securities - commercial
Collateralized mortgage obligations:
Over 3 months through 1 year
Over 1 year through 5 years
Over 5 years through 10 years
Total collateralized mortgage obligations
Pooled trust preferred security
Total available-for-sale securities
Held-to-maturity
Obligations of state and political subdivisions:
Over 5 years through 10 years
Over 10 years
Total held-to-maturity securities
$
9,375 $
7,113
16,488
1,346
1,742
11,412
20,349
22,115
56,964
42,140
22,922
65,062
1,432
1,432
4,068
1,905
5,973
178
146,097 $
9,205
6,917
16,122
1,348
1,749
11,440
20,318
21,735
56,590
40,940
22,468
63,408
1,415
1,415
3,908
1,858
5,766
727
144,028
2.25 %
2.68
2.44
3.83
3.40
2.90
3.27
3.26
3.21
2.18
2.86
2.42
1.97
1.97
1.86
2.89
2.19
32.10
2.75%
Amortized
Cost
Fair
Value
Average
Yield /
Cost
527
3,497
4,024
$
$
527
3,521
4,048
2.91%
2.38
2.45%
$
$
$
13
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. The effective
yield on the pooled trust preferred security was 32.10% due to the other-than-temporary impairment charges taken in prior years
which reduced the amortized cost along with principal and interest payments being received during the 2018 fiscal year.
At June 30, 2018, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities
and agencies, with an aggregate book value which exceeds 10% of shareholders’ equity.
Loans. Loan receivables increased by $45,642 to $318,509 at June 30, 2018 compared to $272,867 at June 30, 2017. Loan
demand increased, particularly in the commercial and commercial real estate segments, principally as a result of increased calling
efforts within and around the surrounding markets of the Bank’s branch locations and the loan production office.
Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential real estate:
Owner occupied
Non-owner occupied
Construction
Consumer loans
Total loans
2018
2017
$
60,953 $
46,336
5,375
182,966
47,683
15,480
1,187
4,865
318,509 $
5,588
157,861
41,581
14,377
1,993
5,131
272,867
$
The following is a schedule of contractual maturities and repayments of 1-4 family residential real estate construction, commercial
and commercial real estate loans, as of June 30, 2018:
Due in one year or less
Due after one year but within five years
Due after five years
Total
$
$
20,860
31,575
198,046
250,481
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, 2018:
Total 1-4 family residential real estate construction, commercial and commercial real
estate loans due after one year
Fixed
Interest Rates
Variable
Interest Rates
$
96,164
$
133,457
Foreign Outstandings. There were no foreign outstandings during the periods presented. There are no concentrations of loans
greater than 10% of total loans, which are not otherwise disclosed as a category of loans.
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, an analysis of impaired loans, past loan loss
experience, current economic conditions, collateral value assumptions for collateral-dependent loans and various other
circumstances which are subject to change over time. Probable incurred losses are estimated by stratifying the total loan portfolio
into pools of homogenous loans by occupancy, collateral type and loan purpose and applying the Bank’s historical loss ratio,
increased for more recent trends in loss experience, to each loan pool. Also, local unemployment rates are monitored and additional
reserves are applied to all loans that are not assigned a specific reserve if there is an increase in the local unemployment rate. Specific
reserves are determined by management’s review of delinquent loans, impaired loans, non-accrual loans, loans classified as
substandard, watch list loans, loans to industries experiencing economic difficulties and other selected large loans. The collectability
of these loans is evaluated after considering the current financial position of the borrower, the estimated market value of the
collateral, guarantees and the Corporation’s collateral position versus other creditors. Judgments, which are necessarily subjective,
as to the probability of loss and the amount of such loss, are formed on these loans, as well as other loans in the aggregate.
14
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, 2018, impaired loans totaled $2,060, of which $1,090 are included in non-accrual loans.
Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.
The following schedule summarizes non-accrual, past due, impaired and restructured loans for the years ended June 30:
Non-accrual loans
Accruing loans past due 90 days or more
Total non-performing loans
Other real estate owned
Total non-performing assets
Impaired loans
Accruing restructured loans
2018
2017
$
$
$
$
$
1,090 $
—
1,090 $
—
1,090 $
2,060 $
971 $
1,187
—
1,187
71
1,258
2,234
1,082
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 acquired by the Corporation as a result of foreclosure, or by deed in lieu of foreclosure, are classified as
“other real estate owned” until they are sold or otherwise disposed of.
Potential Problem Loans. There were no loans, not otherwise identified above, included on management’s watch or troubled
loan lists that management has serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
Management’s watch and troubled loan lists includes loans which management has some doubt as to the borrowers’ ability to comply
with the present repayment terms, loans which management is actively monitoring due to changes in the borrower’s financial
condition and other loans which management wants to more closely monitor due to special circumstances. These loans and their
potential loss exposure have been considered in management’s analysis of the adequacy of the allowance for loan losses.
The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery
and other activity for the years ended June 30:
Allowance for loan losses at beginning of year
Loans charged off:
Commercial
Commercial real estate
1-4 Family residential real estate
Consumer loans
Total charge offs
Recoveries:
Commercial
Commercial real estate
1-4 Family residential real estate
Consumer loans
Total recoveries
Net charge-offs (recoveries)
Provision for loan losses charged to operations
Allowance for loan losses at end of year
3,566
6
1,061
44
37
1,148
1
—
38
33
72
1,076
596
3,086
2018
2017
$
3,086 $
—
4
33
24
61
17
41
14
15
87
(26)
310
3,422 $
$
15
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:
Commercial
Commercial real estate loans
1-4 Family residential real estate
Consumer loans
Total
Allocation of the Allowance for Loan Losses
Allowance
Amount
% of Loan
Type to
Total Loans
Allowance
Amount
% of Loan
Type to
Total Loans
June 30, 2018
June 30, 2017
$
$
586
2,277
499
60
3,422
19.1% $
59.2
20.2
1.5
100.0% $
518
2,038
473
57
3,086
17.0%
59.9
21.2
1.9
100.0%
While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance
for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur.
Funding Sources. Total deposits increased by $55,492, or 14.8%, from $374,471 at June 30, 2017 to $429,963 at June 30,
2018. During the quarter ended June 30, 2018, the nature of some of our public fund deposit account relationships changed. As a
result, $21,163 in public funds previously reported as short-term borrowings are now reported as deposit accounts. If not for this
change, deposits would have increased by $34,329, or 9.2%, for the 12-month period ended June 30, 2018 compared to June 30,
2017. For the fiscal year ended June 30, 2018, interest bearing demand deposits increased by $27,176, or 50.2%, time deposits
increased by $12,030, or 18.1%, savings deposits increased by $11,050, or 7.3% and noninterest-bearing demand deposits increased
by $5,236, or 5.1% from the same prior year period. The increases in noninterest-bearing demand, savings and time deposits is
primarily from business and public fund customer relationships as a result of the continued focus on attracting low cost core deposit
account relationships and from the opening of the new branch location in Jefferson, Ohio.
Short-term borrowings decreased by $10,619, or 44.3%, from $23,986 at June 30, 2017 to $13,367 at June 30, 2018. As
mentioned in the preceding paragraph, short-term borrowings declined primarily as a result of public fund sweep repurchase
agreements that were previously reported as short-term borrowings are now reported as deposit accounts. This decline was partially
offset by an $8,881 increase in federal funds purchased.
The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:
Noninterest-bearing demand deposit
Interest-bearing demand deposit
Savings
Certificates and other time deposits
Total
Years Ended June 30,
2018
2017
Amount
Rate
Amount
Rate
$
$
109,675
57,272
155,000
71,404
393,351
— $
0.20%
0.23
1.04
0.31% $
103,017
49,832
141,279
66,761
360,889
—
0.15%
0.13
0.79
0.22%
The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2018 by time remaining until
maturity:
Maturing in:
Under 3 months
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
$
$
3,090
8,181
7,366
20,786
39,423
See Note 6—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term
borrowings.
16
Capital Resources
Total shareholders’ equity increased by $226 from $43,535 at June 30, 2017 to $43,761 at June 30, 2018. The increase was
primarily the result of $3,581 of net income for the current fiscal year. This increase was partially offset by a net reduction of $2,080
in accumulated other comprehensive income from a shift in unrealized gains on the mark-to-market of available-for-sale securities
to net unrealized losses and cash dividends paid of $1,351.
At June 30, 2018, 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 11-Regulatory Matters to the
Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would cause the
Bank’s capital category to change.
Liquidity
Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions.
The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in
federal funds sold or interest-bearing deposit accounts with other financial institutions.
Net cash inflows from operating activities for the 2018 fiscal year were $5,851 and net cash inflows from financing activities
were $42,958. Net cash outflows from investing activities were $50,949. The major sources of cash were a $55,492 net increase in
deposits and an $18,262 net increase from sales, maturities or principal pay downs on available-for-sale securities. The major uses
of cash were a $45,869 net increase in loans and the $23,878 purchase of available-for-sale securities. Total cash and cash equivalents
were $7,772 as of June 30, 2018 compared to $9,912 at June 30, 2017.
The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family
residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of
fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit.
Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the
prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans
offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either
installment loans having regular monthly payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A
majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and
investments in tax-exempt municipal bonds.
The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees
charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive
pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial
and retail customers have been continuing to turn to community banks. Compared to our peers, the Corporation’s core deposits
consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a low level of 0.52%.
Jumbo time deposits (those with balances of $250 and over) were $23,018 and $14,252 at June 30, 2018 and 2017,
respectively. These deposits are monitored closely by the Bank and typically priced on an individual basis. When these deposits are
from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by
Ohio law. The Corporation has the option to use a fee paid broker to obtain deposits from outside its normal service area as an
additional source of funding. However, these deposits are not relied upon as a primary source of funding.
Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are
statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under these regulations, the amount of
dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of
the preceding two years, subject to the capital requirements described above. Additionally, the Bank may not declare or pay any
dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations. As of June 30,
2018, the Bank could, without prior approval, declare a dividend of approximately $4,448.
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
17
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.
Presented below is a discussion of the accounting policies that management believes are the most important to the portrayal
and understanding of the Corporation’s financial condition and results of operations. These policies require management’s most
difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that 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. Also, see Note 1-Summary of Significant Accounting Policies to the Consolidated
Financial Statements for additional information related to significant accounting policies.
Allowance for Loan Losses. Management periodically reviews the loan portfolio to establish an estimated allowance for loan
losses (allowance) that are probable as of the respective reporting date. Additions to the allowance are charged against earnings for
the period as a provision for loan losses. Actual loan losses are charged against the allowance when management believes the
collection of principal will not occur. Unpaid interest for loans placed on non-accrual status is reversed against current interest
income.
The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb
probable incurred losses. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss
estimates on certain individually reviewed loans, loss estimates for loan groups or pools based on historical loss experience and
general loss estimates based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations
that may affect a borrower’s ability to repay, and current economic and industry conditions, among other things. The allowance is
also subject to periodic examination by regulators whose review includes a determination as to its adequacy to absorb probable
incurred losses.
Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going
credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of
the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan
reviews and risk grading, emerging or changing trends that might not be fully captured in the historical loss experience, and charges
against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent
upon or can be influenced by a variety of factors, including the breadth and depth of experience of lending officers, credit
administration and the loan review staff that periodically review the status of the loan, changing economic and industry conditions,
changes in the financial condition of the borrower, and changes in the value and availability of the underlying collateral and
guarantees.
While we strive to reflect all known risk factors in our evaluations, judgment errors may occur. If different assumptions or
conditions were to prevail, the amount and timing of interest income and loan losses could be materially different. These factors are
most pronounced during economic downturns. Since, as described above, so many factors can affect the amount and timing of losses
on loans, it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to
prevail.
18
Contractual Obligations, Commitments and Contingent Liabilities
The following table presents, as of June 30, 2018, 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.
Certificates of deposit
Short-term borrowings
Federal Home Loan
advances
Salary continuation plan
Operating leases
Deposits without maturity
Note
Reference
5
6
$
2019
37,984
13,367
$
2020
24,575
—
2021
2022
2023
$
$
6,261
—
$
7,528
—
7
8
4
2,056
77
83
—
1,500
146
85
—
1,500
146
78
—
1,700
146
71
—
Thereafter
721
$
—
Total
$
78,541
13,367
—
1,660
—
—
11,756
2,321
382
351,422
1,472
—
5,000
146
65
—
Note 12-Commitments with Off-Balance Sheet Risk to the Consolidated Financial Statements discusses in greater detail other
commitments and contingencies and the various obligations that exist under those agreements. These commitments and
contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.
Off-Balance Sheet Arrangements
At June 30, 2018, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in
derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the
amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts
for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps,
to execute a sound and defensive interest rate risk management policy.
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for Smaller Reporting Companies.
19
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Consumers Bancorp, Inc.
Minerva, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Consumers Bancorp, Inc. (the "Company") as of June 30, 2018
and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows
for each of the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and
the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
Crowe LLP
We have served as the Company’s auditor since 1998.
Cleveland, Ohio
September 12, 2018
20
CONSOLIDATED BALANCE SHEETS
As of June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
2018
2017
ASSETS:
Cash on hand and noninterest-bearing deposits in financial institutions
Federal funds sold and interest-bearing deposits in financial institutions
Total cash and cash equivalents
Certificate of deposits in financial institutions
Securities, available-for-sale
Securities, held-to-maturity (fair value 2018 $4,048 and 2017 $4,329)
Federal bank and other restricted stocks, at cost
Loans held for sale
Total loans
Less allowance for loan losses
Net loans
Cash surrender value of life insurance
Premises and equipment, net
Accrued interest receivable and other assets
Total assets
LIABILITIES:
Deposits:
Noninterest-bearing demand
Interest bearing demand
Savings
Time
Total deposits
Short-term borrowings
Federal Home Loan Bank advances
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingent liabilities (Note 12)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized
Common shares, no par value; 3,500,000 shares authorized; 2,854,133 shares issued as of
June 30, 2018 and 2017
Retained earnings
Treasury stock, at cost (124,489 and 130,606 common shares at June 30, 2018 and 2017,
respectively)
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
$
$
$
7,615
157
7,772
2,973
144,028
4,024
1,459
1,448
318,509
(3,422)
315,087
9,335
13,315
3,178
502,619
107,919
81,299
162,204
78,541
429,963
13,367
11,756
3,772
458,858
—
14,630
32,342
(1,576)
(1,635)
43,761
502,619
$
9,439
473
9,912
3,921
142,086
4,259
1,425
1,252
272,867
(3,086)
269,781
9,065
13,398
2,784
457,883
102,683
54,123
151,154
66,511
374,471
23,986
12,320
3,571
414,348
—
14,630
30,122
(1,662)
445
43,535
457,883
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
2018
2017
Interest income:
Loans, including fees
Federal funds sold and interest-bearing deposits in financial institutions
Securities, taxable
Securities, tax-exempt
Total interest and dividend income
Interest expense:
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income:
Service charges on deposit accounts
Debit card interchange income
Bank owned life insurance income
Gain on sale of mortgage loans
Securities gains, net
Loss on disposition of other real estate owned
Other
Total other income
Other expenses:
Salaries and employee benefits
Occupancy and equipment
Data processing expenses
Professional and director fees
Federal Deposit Insurance Corporation assessments
Franchise taxes
Marketing and advertising
Loan and collection expenses
Telephone and communications
Debit card processing expenses
Other
Total other expenses
Income before income taxes
Income tax expense
Net income
Basic and diluted earnings per share
$
$
$
13,937
151
1,997
1,472
17,557
1,210
240
221
1,671
15,886
310
15,576
1,200
1,333
270
367
33
(2)
190
3,391
7,692
1,867
601
523
168
343
308
117
307
754
1,557
14,237
4,730
1,149
3,581
1.31
$
$
$
12,333
122
1,678
1,434
15,567
792
90
226
1,108
14,459
596
13,863
1,245
1,161
246
258
209
(35)
166
3,250
7,136
1,888
583
608
175
336
267
155
305
636
1,389
13,478
3,635
641
2,994
1.10
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
Net income
Other comprehensive income, net of tax:
Net change in unrealized losses:
Unrealized losses arising during the period
Reclassification adjustment for gains included in income
Net unrealized loss
Income tax effect
Other comprehensive loss
Total comprehensive income
2018
2017
$
3,581
$
2,994
(2,711)
(33)
(2,744)
650
(2,094)
1,487
$
(2,737)
(209)
(2,946)
1,002
(1,944)
1,050
$
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
Common
Shares
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance, June 30, 2016
Net income
Other comprehensive loss
231 Dividend reinvestment plan shares associated
with expired and forfeited restricted stock awards
retired to treasury
Cash dividends declared ($0.48 per share)
Balance, June 30, 2017
Net income
Other comprehensive loss
Reclassification of disproportionate income tax
effects
6,321 shares issued associated with stock awards
204 Dividend reinvestment plan shares associated
with expired and forfeited restricted stock awards
retired to treasury
Cash dividends declared ($0.495 per share)
Balance, June 30, 2018
$
14,630 $
28,432 $
2,994
(1,658) $
2,389 $
(1,944)
$
14,630 $
$
14,630 $
4
(1,308)
30,122 $
3,581
(14)
4
(1,351)
32,342 $
(4)
(1,662) $
445 $
(2,094)
14
90
(4)
(1,576) $
(1,635) $
43,793
2,994
(1,944)
—
(1,308)
43,535
3,581
(2,094)
—
90
—
(1,351)
43,761
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
2018
2017
$
3,581
$
2,994
Depreciation
Securities amortization and accretion, net
Provision for loan losses
(Gain) loss on disposal of fixed assets
Loss on disposition or direct write-down of other real estate owned
Net gain on sale of loans
Deferred income tax expense
Gain on sale of securities
Origination of loans held for sale
Proceeds from loans held for sale
Increase in cash surrender value of life insurance
Change in other assets and other liabilities
Net cash flows from operating activities
Cash flows from investing activities:
Securities available-for-sale:
Purchases
Maturities, calls and principal pay downs
Proceeds from sales of available-for-sale securities
Securities held-to-maturity:
Purchases
Principal pay downs
Net decrease in certificates of deposit with other financial institutions
Purchase of Federal Home Loan Stock
Net increase in loans
Purchase of Bank owned life insurance
Acquisition of premises and equipment
Disposal of premises and equipment
Proceeds from sale of other real estate owned
Net cash flows from investing activities
Cash flows from financing activities:
Net increase in deposit accounts
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Change in short-term borrowings
Dividends paid
Net cash flows from financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
771
963
310
(6)
2
(367)
462
(33)
(22,336)
22,760
(270)
14
5,851
(23,878)
15,618
2,644
—
235
948
(34)
(45,869)
—
(688)
6
69
(50,949)
55,492
2,700
(3,264)
(10,619)
(1,351)
42,958
(2,140)
9,912
7,772
$
781
1,087
596
2
35
(258)
128
(209)
(24,379)
24,775
(246)
73
5,379
(41,752)
21,869
7,342
(1,000)
235
1,985
(29)
(18,120)
(2,000)
(598)
2
7
(32,059)
27,823
19,325
(24,286)
4,857
(1,308)
26,411
(269)
10,181
9,912
$
See accompanying notes to consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc.
(Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank), together referred to as the Corporation. All
significant intercompany transactions have been eliminated in the consolidation.
Nature of Operations: Consumers Bancorp, Inc. is a bank holding company headquartered in Minerva, Ohio that provides,
through its banking subsidiary, a broad array of products and services throughout its primary market area of Carroll, Columbiana,
Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank’s business involves attracting deposits from businesses
and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.
Business Segment Information: The Corporation is engaged in the business of commercial and retail banking, which
accounts for substantially all of its revenues, operating income, and assets. Accordingly, all of its operations are reported in one
segment, banking.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles,
management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual results could differ.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less
than 90 days and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits
in other financial institutions and short-term borrowings. Additional cash flow information was as follows:
Cash paid for interest
Cash paid for Federal income taxes
Non-cash transactions:
Year Ended June 30,
2018
2017
$
$
1,643
730
Transfer from loans to repossessed assets
Transfer from loans held for sale to portfolio
Issuance of treasury stock for stock awards
Expired and forfeited dividend reinvestment plan shares associated with restricted
stock awards that were retired to treasury stock
—
253
90
4
1,108
300
113
342
—
4
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 at June 30, 2018 and 2017 was
$329 and $304, respectively.
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 that the Corporation has the positive intent and ability to hold to maturity.
Available-for-sale securities are those that the Corporation may decide to sell before maturity if needed for liquidity, asset-liability
management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in
other comprehensive income (loss) as a separate component of equity, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities
are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification
method.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis and more frequently
when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers
the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also
assesses whether it intends to sell, or whether it is more likely than not that it will be required to sell, a security in an unrealized loss
position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire
difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet
the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which
must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive
income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the
amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Federal Bank and Other Restricted Stocks: The Bank is a member of the Federal Home Loan Bank (FHLB) system.
Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in
additional amounts. FHLB stock, included with Federal bank and other restricted stocks on the Consolidated Balance Sheet, is
carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value.
Federal Reserve Bank stock is also carried at cost. Since these stocks are viewed as a long-term investment, impairment is based on
ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of
aggregate cost or fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally
sold with servicing rights released. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related
loan sold.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income
is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized
in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued
interest receivable.
Interest income on commercial, commercial real estate and 1-4 family residential loans is discontinued at the time the loan is
90 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later
than 120 days past due. Past due status is determined by the contractual terms of the loan. In all cases, loans are placed on non-
accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to
accrual status when the customer has exhibited the ability to repay and demonstrated this ability over at least a consecutive six-
month period and future payments are reasonably assured.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when funded.
Concentrations of Credit Risk: The Bank grants consumer, real estate and commercial loans primarily to borrowers in
Carroll, Columbiana, Jefferson, Stark, Summit and Wayne counties. Therefore, the Corporation’s exposure to credit risk is
significantly affected by changes in the economy in these counties. Automobiles and other consumer assets, business assets and
residential and commercial real estate secure most loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss
experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be charged-off.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment
record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer loans
and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported,
net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it
is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Troubled debt
restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash
flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to be a collateral dependent
loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the
Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation
over the most recent two-year or three-year period, depending on loan segment. This actual loss experience is supplemented with
economic and other factors based on the risks present for each portfolio segment. These factors include consideration of the
following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards;
other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant
staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The
following portfolio segments have been identified:
Commercial: Commercial loans are made for a wide variety of general business purposes, including financing for equipment,
inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are underwritten
after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Current and
projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed. Commercial loans
are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral
provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans
may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts
receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured
basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio
includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank
operates.
Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment
properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal
amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the
loan or the business conducted on the property securing the loan. 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 non-owner occupied loans.
1-4 Family Residential Real Estate: Residential real estate loans are 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
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Owned: Real estate properties 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, 2018, the Bank had policies with total death benefits
of $19,776 and total cash surrender values of $9,335. As of June 30, 2017, the Bank had policies with total death benefits of $19,728
and total cash surrender values of $9,065. 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.
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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 13 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 the 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, 2017 financial statements to be comparable to the
June 30, 2018 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.
Recently Issued Accounting Pronouncements Not Yet Effective: In May 2014, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU
creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to
transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required
to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods
within those annual periods, beginning after December 15, 2017. Most of the Corporation’s revenue is derived from loans and
financial instruments, which is not part of the scope of this ASU. The adoption of this guidance on July 1, 2018 did not have a
material impact on the Corporation's financial statements; however, the adoption of this standard will result in additional disclosures
beginning with the first quarter of fiscal year 2019 Form 10-Q.
In January 2016, FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities. The main provisions of ASU 2016-01 address the valuation and impairment of certain equity investments
along with simplified disclosures about those investments. For equity securities, the guidance requires equity investments to be
measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 on July 1, 2018 did not have
a material impact on the Corporation's financial statements.
In June 2016, 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, that are SEC filers for fiscal years and
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Management is currently
evaluating the impact of the adoption of this guidance on the Corporation’s consolidated financial statements and are in the midst of
gathering critical data to evaluate the impact. However, it is too early to estimate the impact.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). This ASU will require all organizations that lease assets to
recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative
and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The
new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after
December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this guidance on
the Corporation’s consolidated financial statements and expects to recognize an increase in other assets and other liabilities for the
rights and obligations created by leasing of branch offices. Management also expects minimal impact in the income statement with
respect to occupancy expense related to leases.
In March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on
Purchased Callable Debt Securities. This ASU amends the guidance related to amortization for certain callable debt securities held
at a premium, requiring the premium to be amortized to the earliest call date. The adoption of ASU 2017-08 will not have a material
impact on the Corporation’s financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued in response to the
U.S. federal government enacting the Tax Cuts and Jobs Act of 2017. The ASU will require reclassifying certain income tax effects
from accumulated other comprehensive income to retained earnings. The amount of that reclassification is the difference between
the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate
income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited
directly to other comprehensive income using the newly enacted 21.0% U.S. federal corporate income tax rate, excluding the effect
of any valuation allowance previously charged to income from continuing operations. The new guidance is effective for annual
reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is
permitted. The Corporation adopted this ASU as of March 2018, which resulted in a $14 reclassification between retained earnings
and accumulated other comprehensive income.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2—SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-
maturity at June 30, 2018 and 2017 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated
other comprehensive income (loss) and gross unrecognized gains and losses:
Available-for-sale
June 30, 2018
Obligations of U.S. government-sponsored entities and agencies
Obligations of state and political subdivisions
U.S. Government-sponsored mortgage-backed securities - residential
U.S. Government-sponsored mortgage-backed securities -
commercial
U.S. Government-sponsored collateralized mortgage obligations -
residential
Pooled trust preferred security
Total available-for-sale securities
Held-to-maturity
June 30, 2018
Obligations of state and political subdivisions
Total held-to-maturity securities
Available-for-sale
June 30, 2017
Obligations of U.S. government-sponsored entities and agencies
Obligations of state and political subdivisions
U.S. Government-sponsored mortgage-backed securities - residential
U.S. Government-sponsored mortgage-backed securities -
commercial
U.S. Government-sponsored collateralized mortgage obligations -
residential
Pooled trust preferred security
Total available-for-sale securities
Held-to-maturity
June 30, 2017
Obligations of state and political subdivisions
Total held-to-maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
16,488
56,964
65,062
1,432
5,973
178
146,097
$
$
6
339
6
—
9
549
909
$
$
(372) $
(713)
(1,660)
16,122
56,590
63,408
(17)
1,415
(216)
—
(2,978) $
5,766
727
144,028
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
4,024 $
4,024 $
24 $
24 $
— $
— $
4,048
4,048
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
12,571
56,824
64,092
1,459
6,310
155
141,411
$
$
90
890
184
—
$
(74) $
(254)
(438)
(1)
12,587
57,460
63,838
1,458
1
377
1,542
$
(100)
—
(867) $
6,211
532
142,086
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
4,259 $
4,259 $
73 $
73 $
(3) $
(3) $
4,329
4,329
Proceeds from sales and calls of available-for-sale securities during fiscal year 2018 and fiscal year 2017 were as follows:
Proceeds from sales and calls
Gross realized gains
Gross realized losses
$
2018
2017
2,644 $
40
7
14,255
213
4
The income tax provision related to these net realized gains amounted to $12 in fiscal year 2018 and $71 in fiscal year 2017.
During the first quarter of fiscal year 2019, the pooled trust preferred security was sold for gross proceeds of $771.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair values of debt securities at June 30, 2018 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, collateralized
mortgage obligations and the pooled trust preferred security are shown separately.
Available-for-sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
U.S. Government-sponsored mortgage-backed and related securities
Pooled trust preferred security
Total
Held-to-maturity
Due after five years through ten years
Due after ten years
Total
Amortized
Cost
Fair Value
$
$
$
$
3,087
20,787
27,462
22,115
73,451
72,468
178
146,097
Amortized
Cost
527
3,497
4,024
$
$
$
$
3,097
20,645
27,235
21,735
72,712
70,589
727
144,028
Fair Value
527
3,521
4,048
Securities with a carrying value of approximately $71,673 and $55,932 were pledged at June 30, 2018 and 2017, respectively,
to secure public deposits and commitments as required or permitted by law. At June 30, 2018 and 2017, there were no holdings of
securities of any one issuer, other than the U.S. government and its 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, 2018 and 2017, aggregated
by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
Available-for-sale
June 30, 2018
Obligations of U.S. government-
sponsored entities and agencies
Obligations of states and political
subdivisions
Mortgage-backed securities -
residential
Mortgage-backed securities -
commercial
$
12,400
$
(224) $
2,747
$
(148) $
15,147
$
26,775
31,038
1,415
(369)
(581)
(17)
7,975
(344)
34,750
29,716
(1,079)
60,754
(1,660)
—
—
1,415
(372)
(713)
(17)
(216)
(2,978)
Collateralized mortgage obligations -
residential
Total temporarily impaired
$
—
71,628
$
—
(1,191) $
4,821
45,259
$
(216)
(1,787) $
4,821
116,887
$
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
Available-for-sale
June 30, 2017
Obligations of U.S. government-
sponsored entities and agencies
Obligations of states and political
subdivisions
Mortgage-backed securities -
residential
Mortgage-backed securities -
commercial
Collateralized mortgage obligations -
residential
Total temporarily impaired
Held-to-Maturity
June 30, 2017
Obligations of states and political
subdivisions
Total temporarily impaired
$
$
$
$
4,336
$
(74) $
— $
— $
4,336
$
13,881
42,071
1,458
(241)
(391)
(1)
834
2,805
—
(13)
(47)
—
14,715
44,876
1,458
5,417
67,163
$
(88)
(795) $
654
4,293
$
(12)
(72) $
6,071
71,456
$
(74)
(254)
(438)
(1)
(100)
(867)
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
933
933
$
$
(3) $
(3) $
— $
— $
— $
— $
933
933
$
$
(3)
(3)
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, 2018, the Corporation’s securities portfolio consisted of 264 available-for-sale and three held-to-maturity
securities. There were 189 securities in an unrealized loss position at June 30, 2018, 68 of which were in a continuous loss position
for twelve or more months. The unrealized losses within the securities portfolio were primarily attributed to a change in market rates.
At June 30, 2018, all the mortgage-backed securities and collateralized mortgage obligations held by the Corporation were issued
by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has
affirmed its commitment to support. Also, management monitors the financial condition of the individual municipal securities to
ensure they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely that 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, 2018. Also, there was
no OTTI recognized at June 30, 2017.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3—LOANS
Major classifications of loans were as follows as of June 30:
Commercial
Commercial real estate:
Construction
Other
1 – 4 Family residential real estate:
Owner occupied
Non-owner occupied
Construction
Consumer
Subtotal
Net Deferred loan fees and costs
Allowance for loan losses
Net loans
2018
2017
$
60,995
$
46,380
5,394
183,383
47,433
15,516
1,171
4,873
318,765
(256)
(3,422)
315,087
$
5,604
158,225
41,411
14,415
1,988
5,138
273,161
(294)
(3,086)
269,781
$
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending June 30, 2018:
Commercial
Real
Estate
1-4 Family
Residential
Real
Estate
Commercial
Consumer
Total
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Total ending allowance balance
$
$
518
51
—
17
586
$
$
2,038
202
(4)
41
2,277
$
$
473
45
(33)
14
499
$
$
57
12
(24)
15
60
$
$
3,086
310
(61)
87
3,422
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending June 30, 2017:
Commercial
Real
Estate
1-4 Family
Residential
Real
Estate
Commercial
Consumer
Total
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Total ending allowance balance
$
$
505
18
(6)
1
518
$
$
2,518
581
(1,061)
—
2,038
$
$
402
77
(44)
38
473
$
$
141
(80)
(37)
33
57
$
$
3,566
596
(1,148)
72
3,086
35
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, 2018. Included in the recorded investment in loans is $732 of accrued interest
receivable.
Commercial
Real
Estate
1-4 Family
Residential
Real
Estate
Commercial
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to
loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Recorded investment in loans:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Total ending loans balance
$
$
$
$
— $
586
$
29
2,248
— $
499
— $
60
29
3,393
586
$
2,277
$
499
$
60
$
3,422
100
$
1,562
$
398
$
— $
2,060
60,979
187,191
64,135
4,876
317,181
61,079
$
188,753
$
64,533
$
4,876
$
319,241
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, 2017. Included in the recorded investment in loans is $581 of accrued interest
receivable.
Commercial
Real
Estate
1-4 Family
Residential
Real
Estate
Commercial
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to
loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Recorded investment in loans:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Total ending loans balance
$
$
$
$
— $
518
$
42
1,996
$
2
471
— $
57
44
3,042
518
$
2,038
$
473
$
57
$
3,086
444
$
1,587
$
203
$
— $
2,234
45,993
162,176
57,901
5,144
271,214
46,437
$
163,763
$
58,104
$
5,144
$
273,448
36
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, 2018:
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for
Loan Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Recognized
With no related allowance recorded:
Commercial
Commercial real estate:
Other
1-4 Family residential real
estate:
Owner occupied
Non-owner occupied
With an allowance recorded:
Commercial real estate:
Other
Total
$
100
$
100
$
— $
111
$
5
$
1,330
1,330
101
297
101
297
231
2,059
$
232
2,060
$
$
—
—
—
29
29
1,102
71
314
285
1,883
$
$
17
—
—
28
50
$
5
17
—
—
28
50
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, 2017:
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for
Loan Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Recognized
With no related allowance recorded:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential real
estate:
Owner occupied
Non-owner occupied
With an allowance recorded:
Commercial real estate:
Other
1-4 Family residential real
estate:
Owner occupied
Total
$
482
$
444
$
— $
207
$
80
$
—
1,928
—
1,039
104
—
548
103
—
548
99
3,161
$
100
2,234
$
$
—
—
—
—
42
2
44
87
951
119
183
1,884
6
105
—
—
21
120
3,551
$
$
6
218
$
80
6
105
—
—
21
6
218
37
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, 2018 and 2017:
June 30, 2018
June 30, 2017
Commercial
Commercial real estate:
Other
1 – 4 Family residential:
Owner occupied
Non-owner occupied
Total
Loans Past
Due
Over 90 Days
Still
Accruing
Non-accrual
$
— $
Non-accrual
368
— $
702
90
298
1,090
$
$
—
—
—
— $
729
90
—
1,187
Loans Past
Due
Over 90 Days
Still
Accruing
$
$
—
—
—
—
—
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, 2018 by class of loans:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential:
Owner occupied
Non-owner occupied
Construction
Consumer
Total
30 - 59
Days
Days Past Due
60 - 89
Days
90 Days or
Greater
Total
Past Due
Loans Not
Past Due
Total
$
— $
— $
— $
— $
61,079
$
61,079
—
238
11
—
—
7
256
$
$
—
—
—
—
—
—
— $
—
—
80
—
—
—
80
$
—
238
91
—
—
7
336
$
5,386
183,129
47,738
15,514
1,190
4,869
318,905
$
5,386
183,367
47,829
15,514
1,190
4,876
319,241
The above table of past due loans includes the recorded investment in non-accrual loans of $249 in the 30-59 days, $80 in the 90
days or greater category and $761 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, 2017 by class of loans:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential:
Owner occupied
Non-owner occupied
Construction
Consumer
Total
30 - 59
Days
Days Past Due
60 - 89
Days
90 Days or
Greater
Total
Past Due
Loans Not
Past Due
Total
$
— $
— $
35 $
35
$
46,402
$
46,437
—
—
13
—
—
22
35 $
—
—
—
—
—
—
— $
—
130
74
—
—
—
239 $
—
130
87
—
—
22
274
$
5,596
158,037
41,605
14,416
1,996
5,122
273,174
$
5,596
158,167
41,692
14,416
1,996
5,144
273,448
$
The above table of past due loans includes the recorded investment in non-accrual loans of $239 in the 90 days or greater category
and $948 in the loans not past due category.
38
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. A modified loan is
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.
At June 30, 2018 and 2017, the Corporation had $1,269 and $1,740, respectively, of loans classified as TDRs which are included in
impaired loans above. At June 30, 2018 and 2017, the Corporation had $29 and $33, respectively, of specific reserves allocated to
these loans.
There were no loan modifications completed during the 2018 fiscal year that were classified as troubled debt restructurings. As of
June 30, 2018, the Corporation had committed to lend an additional $174 to customers with outstanding loans that were classified
as troubled debt restructurings.
During the fiscal year ended June 30, 2017, the terms of certain loans were modified as troubled debt restructurings. The modification
of the terms of such loans included a combination of an extension of the maturity date and the extension of additional credit to
provide operating funds. The following table presents loans by class modified as troubled debt restructurings that occurred during
the year ended June 30, 2017:
Commercial
Commercial real estate:
Other
Total
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
2 $
1
3 $
518 $
512
1,030 $
518
512
1,030
The troubled debt restructurings described above did not increase the allowance for loan losses or result in any charge-offs during
the twelve months ended June 30, 2017. As of June 30, 2017, the Corporation had committed to lend an additional $175 as part of
the restructurings described above. There were no loans classified as troubled debt restructurings that were modified within the last
twelve months for which there was a payment default.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their
debt such as: current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This
analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial
and commercial real estate loans. This analysis is performed on a monthly basis. The Corporation uses the following definitions for
risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass
rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are
evaluated based on delinquency status, which was discussed previously.
As of June 30, 2018, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of
loans is as follows:
Pass
Special
Mention
Substandard
Doubtful
Not
Rated
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential real estate:
Owner occupied
Non-owner occupied
Construction
Consumer
Total
$
59,214 $
288 $
1,162 $
— $
5,386
172,471
2,577
14,025
8
93
253,774 $
$
—
7,061
—
195
—
—
7,544 $
—
1,878
27
417
—
—
3,484 $
—
702
11
298
—
—
1,011 $
415
—
1,255
45,214
579
1,182
4,783
53,428
As of June 30, 2017, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of
loans is as follows:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential real estate:
Owner occupied
Non-owner occupied
Construction
Consumer
Total
Pass
Special
Mention
Substandard
Doubtful
Not
Rated
$
44,435 $
907 $
642 $
— $
4,514
150,460
2,668
13,633
1,223
145
217,078 $
$
1,035
5,110
—
210
—
—
7,262 $
40
—
1,566
11
261
—
—
2,480 $
4
470
30
187
—
—
691 $
453
43
561
38,983
125
773
4,999
45,937
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4—PREMISES AND EQUIPMENT
Major classifications of premises and equipment were as follows as of June 30:
Land
Land improvements
Building and leasehold improvements
Furniture, fixture and equipment
Total premises and equipment
Accumulated depreciation and amortization
Premises and equipment, net
2018
2017
$
$
1,469
344
12,636
5,164
19,613
(6,298)
13,315
$
$
1,469
340
12,180
5,023
19,012
(5,614)
13,398
Depreciation expense was $771 and $781 for the years ended June 30, 2018 and 2017, respectively.
The Corporation is obligated under non-cancelable operating leases for facilities and equipment. The approximate minimum
annual rentals and commitments under these non-cancelable agreements and leases with remaining terms in excess of one year are
as follows:
Twelve Months Ending June 30
2019
2020
2021
2022
Thereafter
Total
$
$
83
85
78
71
65
382
Rent expense incurred was $159 and $158 during the years ended June 30, 2018 and 2017, respectively.
NOTE 5—DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of $250 was $23,018 and $14,252 as of June 30,
2018 and 2017, respectively.
Scheduled maturities of time deposits at June 30, 2018 were as follows:
Twelve Months Ending June 30
2019
2020
2021
2022
2023
Thereafter
$
$
37,984
24,575
6,261
7,528
1,472
721
78,541
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6—SHORT-TERM BORROWINGS
Short-term borrowings consisted of repurchase agreements and federal fund purchased. Information concerning all short-term
borrowings at June 30, 2018 and 2017, maturing in less than one year is summarized as follows:
Balance at June 30
Average balance during the year
Maximum month-end balance
Average interest rate during the year
Weighted average rate, June 30
$
2018
2017
$
13,367
24,422
28,621
0.98%
1.02%
23,986
21,053
28,073
0.43%
0.82%
Securities sold under agreements to repurchase are utilized to facilitate the needs of our customers. Physical control is maintained
for all securities pledged to secure repurchase agreements. Securities available-for-sale pledged for repurchase agreements as of
June 30, 2018 and 2017 are presented in the following table:
U.S. government-sponsored entities and agencies pledged
Residential mortgage-backed securities pledged
Collateralized mortgage obligations pledged
Total pledged
Repurchase agreements
$
$
$
Overnight and Continuous
2018
2017
— $
5,294
—
5,294 $
4,486 $
2,015
20,923
2,355
25,293
23,986
Total interest expense on short-term borrowings was $240 and $90 for the years ended June 30, 2018 and 2017, respectively.
NOTE 7—FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances were as follows:
Stated Interest Rate
Range
Advance Type
From
To
Amount
Weighted
Average
Rate
Weighted
Average
Rate
Amount
June 30, 2018
June 30, 2017
Fixed-rate,
amortizing
Fixed-rate
4.30%
1.16
4.30% $
1.78
56
11,700
4.30% $
1.46
120
12,200
4.30%
1.47
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:
Twelve Months Ending June 30
2019
2020
2021
2022
Thereafter
Total
Principal
Payments
2,056
1,500
1,500
1,700
5,000
11,756
$
$
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 $53,572 and $49,023 of first mortgage and
multi-family loans under a blanket lien arrangement at June 30, 2018 and 2017, respectively. Based on this collateral and the
Corporation’s holdings of FHLB stock, the Bank was eligible to borrow up to a total of $14,892 in additional advances at June 30,
2018.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8—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 $206 and $190 for the years ended June 30, 2018 and 2017,
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 $2,321 as of June 30, 2018 and $2,152 as of
June 30, 2017 and is included in other liabilities. For purposes of calculating the present value of future benefits, the discount rate
in effect at June 30, 2018 and 2017 was 4.5%. For the years ended June 30, 2018 and 2017, $225 and $196, respectively, have been
charged to expense in connection with the SCP. Distributions to participants were $56 and $64 for the years ending June 30, 2018
and 2017, respectively.
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 2010 Plan is intended to attract, retain and motivate talented employees and
compensate outside directors for their service to the Corporation. The 2010 Plan has been 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.
Under the 2010 Plan, the Corporation may 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 is 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. If certain specified performance targets as
established by the Compensation Committee are achieved, awards vest at the end of the measurement period of the specified
performance targets and on each anniversary date of the award 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. Restricted
stock awarded during the period presented vest under a graduated schedule over a three-year period.
The following table summarizes the status of the restricted stock awards:
Outstanding at June 30, 2017
Granted
Vested
Expired
Non-vested at June 30, 2018
Restricted Stock
Awards
Weighted-
Average
Grant Date Fair
Value Per Share
15.75
21.00
21.00
15.75
21.00
1,429 $
6,321
(4,259)
(1,429)
2,062 $
There was $101 in expense recognized in the 2018 fiscal year in connection with the restricted stock awards. There was no
expense recognized in the 2017 fiscal year in connection with the restricted stock awards since grants scheduled to vest expired due
to not meeting the performance target. As of June 30, 2018, there was $43 of total unrecognized compensation expense related to
non-vested shares and the expense is expected to be recognized over the next two years.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9—INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (Tax Act). The Tax Act significantly revised the future ongoing U.S. corporate income tax structure by, among other things,
decreasing U.S. corporate income tax rates to 21.0% from a maximum of 35.0%. As the Corporation has a June 30 fiscal year-end,
the lower corporate income tax rate will be phased in, resulting in a blended U.S. statutory federal rate of approximately 27.55% for
the Corporation's fiscal year ending June 30, 2018, and 21.0% for subsequent fiscal years. The provision for income taxes consisted
of the following for the years ended June 30, calculated utilizing a statutory federal income tax rate of 27.55% in the 2018 fiscal year
and 34.0% in the 2017 fiscal year:
Current income taxes
Deferred income tax expense
Change in corporate tax rate
Total income tax expense
2018
2017
$
$
687 $
114
348
1,149 $
513
128
—
641
The reduction of the corporate tax rate required the Corporation to revalue its deferred tax assets and liabilities based on the lower
federal tax rate of 21.0%. As a result of the new legislation, during the quarter ended December 31, 2017, the Corporation recorded
a charge to income tax expense of $348 in conjunction with writing down its net deferred tax assets. The net deferred income tax
asset consisted of the following components at June 30:
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Recognized loss on impairment of security
AMT credit carryforward
Deferred income
Other real estate owned write down
Non-accrual loan interest income
Net unrealized securities loss
Gross deferred tax asset
Deferred tax liabilities:
Depreciation
Loan fees
FHLB stock dividends
Prepaid expenses
Net unrealized securities gain
Gross deferred tax liabilities
Net deferred asset
2018
2017
632 $
514
164
—
68
—
42
435
1,855
(489)
(238)
(102)
(56)
—
(885)
970 $
919
771
265
220
131
10
58
—
2,374
(788)
(320)
(166)
(89)
(229)
(1,592)
782
$
$
The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate of
27.55% for 2018 and 34% for 2017 to income before taxes consisted of the following for the years ended June 30:
Income taxes computed at the statutory rate on pretax income
Tax exempt income
Cash surrender value income
Tax credit
Change in corporate tax rate
Other
Total income tax expense
2018
2017
$
$
1,303 $
(408)
(75)
(27)
348
8
1,149 $
1,236
(498)
(83)
(25)
—
11
641
The effective tax rate was 24.3% for the year ended June 30, 2018 compared to 17.6% for the year ended June 30, 2017. At June
30, 2018 and June 30, 2017, the Corporation had no unrecognized tax benefits recorded. The Corporation does not expect the total
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount of unrecognized tax benefits to significantly increase within the next twelve months. There were no interest or penalties
recorded for the years ended June 30, 2018 and 2017 and there were no amounts accrued for interest and penalties at June 30, 2018
and 2017.
The Corporation and the Bank are subject to U.S. federal income tax as an income-based tax and a capital-based franchise tax in
the State of Ohio. The Corporation and the Bank are no longer subject to examination by taxing authorities for years before 2014.
NOTE 10—RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and their affiliates. A
summary of activity during the year ended June 30, 2018 of related party loans were as follows:
Principal balance, July 1
New loans
Repayments
Principal balance, June 30
$
$
9,487
3,786
(2,135)
11,138
Deposits from executive officers, directors and their affiliates totaled $5,897 at June 30, 2018 and $4,828 at June 30, 2017.
NOTE 11—REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal banking 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. Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
Management believes as of June 30, 2018, the Bank has met all capital adequacy requirements to which it is subject.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized,
capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
As of fiscal year-end 2018 and 2017, the Corporation met the definition of a small bank holding company and, therefore, was
exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies. The Basel III Capital
Rules became effective for the Bank on January 1, 2015 and certain provisions are subject to a phase-in period. The implementation
of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period
(increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The capital conservation buffer
for 2018 is 1.875%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation
buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The net
unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
The following table presents actual and required capital ratios as of June 30, 2018 and June 30, 2017 for the Bank:
Actual
Minimum Capital
Required – Basel III
(1)
Minimum Required
To Be Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2018
Common equity Tier 1 to risk-weighted
assets
Tier 1 capital to risk weighted assets
Total Capital to risk weighted assets
Tier 1 capital to average assets
$
43.7
43.7
47.1
43.7
12.20% $
12.20
13.15
8.74
16.1
21.5
28.7
20.0
4.50% $
6.00
8.00
4.00
23.3
28.7
35.8
25.0
6.50%
8.00
10.00
5.00
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual
Minimum Capital
Required -
Basel III (1)
Minimum Required
To Be Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2017
Common equity Tier 1 to risk-weighted
assets Bank
Tier 1 capital to risk weighted assets
Total Capital to risk weighted assets
Tier 1 capital to average assets
$
41.4
41.4
44.5
41.4
13.21% $
13.21
14.20
9.06
18.0
22.7
29.0
18.3
4.50% $
6.00
8.00
4.00
20.4
25.1
31.4
22.9
6.50%
8.00
10.00
5.00
(1) These amounts exclude the capital conservation buffer.
As of the latest regulatory examination, the Bank was categorized as well capitalized. There are no conditions or events since
that examination that management believes may have changed the Bank’s category.
The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations
limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount
of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits
of the preceding two years, subject to the capital requirements described above. As of June 30, 2018 the Bank could, without prior
approval, declare a dividend of approximately $4,448.
NOTE 12—COMMITMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to commitments to extend credit in the normal course of business to meet the financing needs of its
customers. Commitments are agreements to lend to customers providing that there are no violations of any condition established in
the contract. Commitments to extend credit have a fixed expiration date or other termination clause. These instruments involve
elements of credit and interest rate risk more than the amount recognized in the statements of financial position. The Bank uses the
same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.
The Bank evaluates each customer’s credit on a case-by-case basis. The amount of collateral obtained is based on
management’s credit evaluation of the customer. The amount of commitments to extend credit and the exposure to credit loss for
non-performance by the customer was $62,764 and $53,029 as of June 30, 2018 and 2017, respectively. Of the June 30, 2018
commitments, $53,082 carried variable rates and $9,682 carried fixed rates of interest ranging from 3.375% to 6.50% with maturity
dates from August 2018 to June 2048. Of the June 30, 2017 commitments, $41,167 carried variable rates and $11,862 carried fixed
rates of interest ranging from 2.45% to 6.50%. Financial standby letters of credit were $1,090 as of June 30, 2018 and $713 as of
June 30, 2017. In addition, commitments to extend credit of $8,493 and $8,121 as of June 30, 2018 and 2017, respectively, were
available to checking account customers related to the overdraft protection program. Since some loan commitments expire without
being used, the amount does not necessarily represent future cash commitments.
NOTE 13—FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access
as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
Securities available-for-sale: When available, the fair values of available-for-sale securities are determined by obtaining
quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not
available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other unobservable
inputs (Level 3 inputs).
Assets and liabilities measured at fair value on a recurring basis are summarized below, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair value:
Assets:
Securities available-for-sale:
Obligations of government-sponsored entities
Obligations of states and political subdivisions
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
Collateralized mortgage obligations
Pooled trust preferred security
Securities available-for-sale:
Obligations of government-sponsored entities
Obligations of states and political subdivisions
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
Collateralized mortgage obligations
Pooled trust preferred security
Balance at
June 30, 2018
$
16,122
56,590
63,408
1,415
5,766
727
Balance at
June 30, 2017
$
12,587
57,460
63,838
1,458
6,211
532
$
$
Fair Value Measurements at
June 30, 2018 Using
Level 1
Level 2
Level 3
— $
—
—
—
—
—
$
16,122
56,590
63,408
1,415
5,766
727
Fair Value Measurements at
June 30, 2017 Using
Level 1
Level 2
Level 3
— $
—
—
—
—
—
$
12,587
57,460
63,838
1,458
6,211
532
—
—
—
—
—
—
—
—
—
—
—
—
There were no transfers between Level 1 and Level 2 during the 2017 or the 2018 fiscal year.
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets and
financial liabilities measured at fair value on a non-recurring basis include the following:
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans
carried at fair value generally receive specific allocations of the allowance for loan losses or are charged down to their fair value.
For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely
made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.
Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs
to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less
estimated costs to sell. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted
accordingly.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no financial assets measured at fair value on a non-recurring basis at June 30, 2018. Financial assets and financial
liabilities measured at fair value on a non-recurring basis at June 30, 2017 are summarized below:
Impaired loans:
Commercial Real Estate - Other
Other Real Estate Owned:
1-4 Family residential real estate
Fair Value Measurements at
June 30, 2017 Using
Balance at
June 30, 2017
Level 1
Level 2
Level 3
$
$
130 $
71 $
— $
— $
— $
— $
130
71
There were no impaired loans measured at fair value on a non-recurring basis at June 30, 2018 and the resulting impact to the
provision for loan losses was a decrease of $17 being recorded for the twelve months ended June 30, 2018. Impaired loans, measured
for impairment using the fair value of the collateral, had a recorded investment of $130, with no valuation allowance at June 30,
2017. The resulting impact to the provision for loan losses was an increase of $314 being recorded for the year ended June 30, 2017.
Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $71,
which was made up of the outstanding balance of $103, net of a valuation allowance of $32 at June 30, 2017, resulting in a provision
for other real estate owned losses of $32 for the year ended June 30, 2017. There was no other real estate owned at June 30, 2018.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at
fair value on a non-recurring basis at June 30, 2017:
Impaired loans:
Commercial Real Estate – Other
Other Real Estate Owned:
1-4 Family residential real estate
Fair Value
Valuation
Technique
Unobservable
Inputs
Range
Weighted
Average
$
$
130 Bid Indication
71 Bid Indication
N/A
N/A
0.0%
0.0%
0.0%
0.0%
The following table shows the estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s
consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair
value:
2018
2017
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents
$
7,772
$
7,772
$
9,912
$
9,912
Level 2 inputs:
Certificates of deposits in other financial
institutions
Loans held for sale
Accrued interest receivable
Level 3 inputs:
Securities held-to-maturity
Loans, net
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits
Time deposits
Short-term borrowings
Federal Home Loan Bank advances
Accrued interest payable
2,976
1,474
1,404
4,048
311,642
351,422
78,332
13,367
11,146
68
3,921
1,252
1,212
4,259
269,781
307,960
66,511
23,986
12,320
40
3,927
1,286
1,212
4,329
266,041
307,960
66,535
23,986
12,054
40
2,973
1,448
1,404
4,024
315,087
351,422
78,541
13,367
11,756
68
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumptions used to estimate fair value are described as follows:
Cash and cash equivalents: The carrying value of cash, deposits in other financial institutions and federal funds sold were
considered to approximate fair value resulting in a Level 1 classification.
Certificates of deposits in other financial institutions: Fair value of certificates of deposits in other financial institutions was
estimated using current rates for deposits of similar remaining maturities resulting in a Level 2 classification.
Accrued interest receivable and payable, demand and savings deposits and short-term borrowings: The carrying value of
accrued interest receivable and payable, demand and savings deposits and short-term borrowings were considered to approximate
fair value due to their short-term duration resulting in a Level 2 classification.
Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party
investors resulting in a Level 2 classification.
Loans: Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans that
reprice at least annually and for fixed rate commercial loans with maturities of six months or less which possess normal risk
characteristics, carrying value was determined to be fair value. Fair value of other types of loans (including adjustable rate loans
which reprice less frequently than annually and fixed rate term loans or loans which possess higher risk characteristics) was estimated
by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings
and for similar anticipated maturities resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do
not necessarily represent an exit price.
Securities held-to-maturity: The held-to-maturity securities are general obligation and revenue bonds issued by local
municipalities. The fair value of these securities are calculated using a spread to the applicable municipal fair market curve resulting
in a Level 3 classification.
Time deposits: Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at June 30, 2018 and 2017
for deposits of similar remaining maturities, resulting in Level 2 classification. Estimated fair value does not include the benefit that
results from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
Federal Home Loan Bank advances: Fair value of Federal Home Loan Bank advances was estimated using current rates at June
30, 2018 and 2017 for similar financing resulting in a Level 2 classification.
Federal bank and other restricted stocks, at cost: Federal bank and other restricted stocks include stock acquired for regulatory
purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock that are accounted for at cost due to restrictions
placed on their transferability, and, therefore, are not subject to the fair value disclosure requirements.
Off-balance sheet commitments: The Corporation’s lending commitments have variable interest rates and “escape” clauses if the
customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the above
table.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14—PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial information of Consumers Bancorp. Inc. (parent company only) follows:
Condensed Balance Sheets
Assets
Cash
Securities, available-for-sale
Other assets
Investment in subsidiary
Total assets
Liabilities
Other liabilities
Shareholders’ equity
Total liabilities & shareholders’ equity
Condensed Statements of Income and Comprehensive Income
Cash dividends from Bank subsidiary
Other income
Other expense
Income before income taxes and equity in undistributed net income of subsidiary
Income tax benefit
Income before equity in undistributed net income of Bank subsidiary
Equity in undistributed net income of subsidiary
Net income
Comprehensive income
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income
Equity in undistributed net income of Bank subsidiary
Securities amortization and accretion, net
Gain on sale of securities
Change in other assets and liabilities
Net cash flows from operating activities
Cash flows from investing activities
Proceeds from the sale of available-for-sale securities
Net cash flows from investing activities
Cash flows from financing activities
Dividend paid
Issuance of treasury stock for stock awards
Net cash flows from financing activities
Change in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
50
June 30,
2018
June 30,
2017
$
$
$
$
$
$
$
46
1,622
73
42,089
43,830
69
43,761
43,830
Year Ended
June 30, 2018
1,400
39
222
1,217
(52)
1,269
2,312
3,581
1,487
$
$
$
$
$
$
$
36
1,651
61
41,843
43,591
56
43,535
43,591
Year Ended
June 30, 2017
1,065
51
213
903
(53)
956
2,038
2,994
1,050
Year Ended
June 30, 2018
Year Ended
June 30, 2017
$
$
$
3,581
(2,312)
(10)
—
12
1,271
—
—
(1,351)
90
(1,261)
10
36
46
$
2,994
(2,038)
(10)
(11)
6
941
357
357
(1,308)
—
(1,308)
(10)
46
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15–EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period
and is equal to net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per
share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include
the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. There were 1,828
shares of restricted stock that were anti-dilutive for the year ending June 30, 2018. There were no equity instruments that were anti-
dilutive for the year ending June 30, 2017. The following table details the calculation of basic and diluted earnings per share:
Basic:
Net income available to common shareholders
Weighted average common shares outstanding
Basic income per share
Diluted:
Net income available to common shareholders
Weighted average common shares outstanding
Dilutive effect of restricted stock
Total common shares and dilutive potential common shares
Dilutive income per share
For the year Ended June 30,
2018
2017
3,581 $
2,726,926
1.31 $
2,994
2,724,293
1.10
3,581 $
2,726,926
—
2,726,926
1.31 $
2,994
2,724,293
32
2,724,325
1.10
$
$
$
$
NOTE 16–ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income related to unrealized gains and losses on available-for-sale securities for the
periods ended June 30, 2018 and June 30, 2017, were as follows:
Pretax
Tax
Effect
After-tax
$
3,621
$
(1,232) $
(2,737)
(209)
(2,946)
675
(2,711)
$
(33)
(2,744)
—
(2,069) $
$
$
931
71
1,002
(230) $
638
12
650
14
434 $
2,389
(1,806)
(138)
(1,944)
445
(2,073)
(21)
(2,094)
14
(1,635)
Affected Line
Item
in Consolidated
Statements of
Income
(a)(b)
(a)(b)
Balance as of June 30, 2016
Unrealized holding loss on available-for-sale
securities arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net current period other comprehensive loss
Balance as of June 30, 2017
Unrealized holding loss on available-for-sale
securities arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net current period other comprehensive loss
Reclassification of disproportional tax effect
Balance as of June 30, 2018
(a) Securities gain, net
(b) Income tax expense
51
ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A—CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, an
evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as defined under Rule 13a-15(e) of the
Securities Exchange Act of 1934) was performed, as of the end of the period covered by this Annual Report on Form 10-K. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and
procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of Consumers Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by the board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018 based on the criteria
for effective internal control over financial reporting established in “Internal Control-Integrated Framework,” issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission in 2013. Based on that assessment, we have
concluded that, as of June 30, 2018, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public
accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this annual report.
Changes In Internal Control Over Financial Reporting
There were no changes in the Corporation’s internal controls over financial reporting that occurred during the fourth quarter of
fiscal year 2018 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over
financial reporting.
ITEM 9B—OTHER INFORMATION
None.
52
PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 12, 2018, under the
captions “Election of Directors,” “Directors and Executive Officers,” “The Board of Directors and its Committees,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” and “Certain Transactions and Relationships and Legal Proceedings,” and is
incorporated herein by reference.
The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and
its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial
officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website
(www.consumersbank.com). Copies of either of the Code of Ethics Policies are also available in print to shareholders upon request,
addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The Corporation
intends to post amendments to or waivers from either of its Code of Ethics Policies on its website.
ITEM 11—EXECUTIVE COMPENSATION
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 12, 2018 under the
captions “Director Compensation,” “Executive Compensation,” “Defined Contribution Plan,” “Outstanding Equity Awards at Fiscal
Year-End,” and “Salary Continuation Program,” and is incorporated herein by reference.
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Equity Compensation Plan Information
The following table sets forth information about common stock authorized for issuance, segregated between stock-based
compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, as of June 30,
2018. Additional information regarding stock-based compensation plans is presented in Note 8 - Employee Benefit Plans to the
Consolidated Financial Statements located elsewhere in this report.
Number of securities
to
be issued upon
exercise of
outstanding options,
warrants, and rights
—
—
—
Weighted-average
exercise price of
outstanding options,
warrants and rights
—
—
—
Number of securities
remaining
available for future issuance
under
equity compensation plans
(excluding
securities issuable under
outstanding
options, warrants and rights)
92,988
—
92,988
Plan Category
Plans approved by shareholders
Plans not approved by shareholders
Total
The remaining information required by this item is set forth in the Corporation’s Proxy Statement, dated September 12, 2018,
under the caption “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 12, 2018, under the
caption “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.
53
ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 12, 2018, under the
caption “Principal Accounting Fees and Services,” and is incorporated herein by reference.
ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this report:
PART IV
(1) The report of independent registered accounting firm and the consolidated financial statements appearing in Item 8.
(2) Financial statement schedules are omitted as they are not required or are not applicable, or the required information is
included in the financial statements.
(3) The exhibits required by this item are listed in the Exhibit Index of this Form 10-K.
(b)
The exhibits to this Form 10-K begin on page 55 of this report.
(c)
See Item 15(a)(2) above.
54
EXHIBIT INDEX
Exhibit Number Description of Document
3.1
3.2
4
10.1
10.2
10.3
10.6
10.8
10.9
10.10
11
21
23
31.1
31.2
32.1
101
Amended and Restated Articles of Incorporation of the Corporation. Reference is made to Form 10-K (File No.
033-79130) of the Corporation filed September 22, 2010, which is incorporated herein by reference.
Amended and Restated Code of Regulations of the Corporation. Reference is made to Form 10-K (File No. 033-
79130) of the Corporation filed September 15, 2008, which is incorporated herein by reference.
Form of Certificate of Common Shares. Reference is made to Form 10-KSB (File No. 033-79130) of the
Corporation filed September 30, 2002, which is incorporated herein by reference.
Amendment No. 3, October 3, 2016 to the Salary Continuation agreement entered into with Mr. Lober on February
11, 2011. Reference is made to Form 10-Q of the Corporation filed February 14, 2017, which is incorporated herein
by reference.
Salary Continuation agreement entered into with Mr. Dodds on November 4, 2016. Reference is made to Form 8-
K of the Corporation filed November 9, 2016, which is incorporated herein by reference.
Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23,
2005. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed February 14, 2006, which is
incorporated herein by reference.
2011 Amendment and Restatement of Salary Continuation agreement entered into with Mr. Lober on February 11,
2011. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed February 11, 2011, which is
incorporated herein by reference.
Consumers Bancorp 2010 Omnibus Incentive Plan Form of Restricted Stock Award Agreement. Reference is made
to Form 8-K (File No. 033-79130) of the Corporation filed September 16, 2011, which is incorporated herein by
reference.
Salary Continuation Agreement with Ms. Wood on December 30, 2015. Reference is made to Form 8-K of the
Corporation filed on December 30, 2015, which is incorporated herein by reference.
First Amendment dated June 13, 2018, to Lease Agreement entered into between Furey Holdings, LLC and
Consumers National Bank on December 23, 2005. Reference is made to Form 8-K (File No. 033-79130) of the
Corporation filed June 15, 2018, which is incorporated herein by reference.
Computation of Earnings per Share. Reference is made to this Annual Report on Form 10-K Note 15 to the
Consolidated Financial Statements, which is incorporated herein by reference.
Subsidiaries of Consumers Bancorp, Inc. Filed with this Annual Report on Form 10-K.
Consent of Crowe LLP
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following material from Consumers Bancorp, Inc.’s Form 10-K Report for the year ended June 30, 2018,
formatted in XBRL (Extensible Business Reporting Language) includes: (1) Consolidated Balance Sheets, (2)
Consolidated Statements of Income, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated
Statement of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to
Consolidated Financial Statements.
55
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 12, 2018
CONSUMERS BANCORP, INC.
By:
By:
/s/ Ralph J. Lober, II
President and Chief Executive Officer
(principal executive officer)
/s/ Renee K. Wood
Chief Financial Officer and Treasurer
(principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on September 12, 2018.
Signatures
Signatures
/s/ Laurie L. McClellan
Laurie L. McClellan
Chairman of the Board of Directors
/s/ Ralph J. Lober, II
Ralph J. Lober, II
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Renee K. Wood
Renee K. Wood
Chief Financial Officer and Treasurer
(principal financial officer)
/s/ Bradley Goris
Bradley Goris
Director
/s/ David W. Johnson
David W. Johnson
Director
/s/ Thomas M. Kishman
Thomas M. Kishman
Director
/s/ Frank L. Paden
Frank L. Paden
Director
/s/ John P. Furey
John P. Furey
Director
/s/ James V. Hanna
James V. Hanna
Director
/s/ Richard T. Kiko, Jr.
Richard T. Kiko, Jr.
Director
/s/ Phillip R. Mueller
Phillip R. Mueller
Director
/s/ Harry W. Schmuck, Jr.
Harry W. Schmuck, Jr.
Director
56
General Information
Independent Registered Public Accounting Firm
Crowe LLP
600 Superior Avenue, Ste. 902
Cleveland, Ohio 44114
Legal Counsel
Squire Patton Boggs (US) LLP
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
(216) 479-8500
Stock Transfer Agent and Registrar
Computershare Shareholder Services
PO Box 30170
College Station, TX 77842-3170
(800) 522-6645
Market Maker
Thomas L. Dooley
Nick Bicking
D.A. Davidson & Co.
5050 Blazer Parkway, Suite 103
Dublin, OH 43017
(614) 710-7061
(800) 394-9230
Common Stock Listing
Consumers Bancorp, Inc. common stock trades on the
OTCQB Bulletin Board under the symbol CBKM. The
CUSIP is 210509105. As of June 30, 2018, there were
2,729,644 shares outstanding with 740 shareholders
of record and an estimated 504 additional beneficial
holders whose stock was held in nominee name.
Dividend Reinvestment and Stock Purchase Plan
Existing holders of common stock may elect to have all
or a portion of cash dividends automatically invested
in additional shares of common stock without payment
of any brokerage or service charge. Additionally,
shareholders may elect to purchase shares of common
stock with optional cash payments of $100 to $5,000 per
quarter without payment of any brokerage commission
or service charge. Shareholders should contact
Computershare to execute these convenient options at
www-us.computershare.com or (800) 368-5948 or a
participating broker.
Dividend Payments
Subject to the approval of the Board of Directors,
quarterly cash dividends are typically paid on or about
the 15th day of September, December, March, and
June.
Direct Deposit of Cash Dividends
Shareholders may elect to have their cash dividends
deposited directly into their savings or checking
account. Shareholders should contact Computershare
Shareholder Services at www-us.computershare.com
or (800) 368-5948 or participating broker.
Shareholder Relations
shareholderrelations@consumersbank.com
Website
www.consumersbancorp.com
Annual Meeting
The 2018 annual meeting of shareholders will be held on
Thursday, October 18, 2018, at 12:00 p.m. at Hartville
Kitchen at 1015 Edison St., Hartville, OH 44632.
Annual Report on Form 10-K
A copy of the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2018, as filed
with the Securities and Exchange Commission, will
be furnished without charge to shareholders upon
written request to Theresa J. Linder, Corporate
Secretary at 614 East Lincoln Way, Minerva, Ohio
44657. An electronic version is also available on our
website at www.consumersbancorp.com.
Directors Emeriti
James R. Kiko, Sr.
John E. Tonti
Our 2018 annual report was
printed by our customer Davis
Graphic Communication Solutions
in Summit County, Ohio.
Inside Cover Spread 2018 ondo.indd 2
9/10/2018 11:41:34 AM
Bancorp Inc.Outside Cover Spread 2018.indd 19/10/2018 11:42:41 AM