2019 Annual Report
Bancorp Inc.
Building Our
Communities
Financial Highlights
Dollar amounts in thousands, except per share data.
Selected Items at Year-End
Financial Condition
Total assets
Securities, available for sale
Loans, net
Deposits
Shareholders’ equity
June 30, 2019
June 30, 2018
$
553,936
$
144,010
365,387
472,174
51,166
Share Information
Book value
$
18.72
$
Cash dividends paid per share
Basic and diluted earnings per share
0.520
2.04
Operations
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Net income
Asset Quality
Net recoveries to average total loans
Non-performing assets to total assets
Allowance for loan losses to total loans
Performance Ratios
Return on average assets
Return on average equity
Net interest margin (fully tax equivalent)
$
17,389
$
(440)
4,268
15,518
5,566
-0.24%
0.14%
1.03%
1.07%
11.96%
3.62%
Please refer to the annual report on Form 10-K for additional financial information.
502,619
144,028
315,087
429,963
43,761
16.03
0.495
1.31
15,886
310
3,391
14,237
3,581
-0.01%
0.22%
1.07%
0.75%
8.15%
3.67%
Financial Highlights
TOTAL DEPOSITS
Total Loans and Deposits
Dollars in millions.
$369.18
$472.17
$318.51
$429.96
$272.87
$256.30
$374.47
$228.50
$346.60
$333.00
Loans
Deposits
$50
$100
$150
$200
$250
NET INCOME
Millions
*Compound Annual Growth Rate
Net Income
Dollars in thousands.
$300
$350
$400
$450
$500
$5,566
$3,581
$2,994
$2,147
$2,958
$500
$1,500
$2,500
$3,500
$4,500
$5,500
Thousands
Please refer to the annual report on Form 10-K for additional financial information.
i
2019
2018
2017
2016
2015
$0
2019
2018
2017
2016
2015
P R E S I D E N T ’ S M E S S A G E T O S H A R E H O L D E R S
Dear Fellow Shareholders:
Building Shareholder Value
We are pleased with Consumers Bancorp’s strong financial
results and the important accomplishments achieved in
the 2019 fiscal year. We realized significant increases in
commercial, residential mortgage, and consumer lending;
expanded our market
territory; announced a strategic
acquisition; further improved asset quality ratios; and set a
corporate earnings record. The headline of our 2019 year-end
earnings release is representative of a great year. Net income
increased by $2.0 million, or 55.4%, to $5.6 million; loan
balances increased by $50.7 million, or 15.9%; total deposits
increased by $42.2 million, or 9.8%; and nonperforming loans
declined to $785,000, or 0.21% of total loans. These results
supported the distribution of over $1.4 million in dividends
to our shareholders. Before I talk about some of the specific
achievements, I want to acknowledge the 145 employees
whose daily commitment to community banking made these
results possible.
Building Franchise Value
As part of our strategic expansion plan, we announced the
signing of a definitive merger agreement with Peoples Bancorp
of Mount Pleasant, Inc., the holding company of The Peoples
National Bank of Mount Pleasant, in June 2019. Since 1903,
Peoples has developed a reputation for outstanding customer
service and community commitment. Mainly serving the tri-
county area of Jefferson, Harrison, and Belmont counties,
Peoples’ customer base extends into neighboring counties in
Ohio, West Virginia, and Pennsylvania. We expect to build on
Peoples’ strong history of outstanding customer service and
community involvement by providing their customers and
markets with additional products, services, and technology.
When closed, we expect this transaction to provide a base
for increased business development initiatives for our local
business bankers throughout the market area. The proposed
merger has gained regulatory approval, is pending approval
by Peoples Bancorp’s shareholders and is expected to close
by December 31, 2019. I look forward to officially welcoming
the Peoples’ staff, customers, and shareholders into the
Consumers’ family.
We also expanded our market area with two de-novo branches
in fiscal year 2019. Opened in September, the Fairlawn branch,
Consumers’ first full-service branch in Summit County,
enables the bank to expand our banking relationships with our
existing Summit County customers and facilitates business
ii
development in Summit, Cuyahoga, and Medina counties. To
date, the Fairlawn branch is responsible for commercial loan
commitments of over $48 million. In March, we turned our
attention to Brewster, Ohio, in western Stark County when
the Village suddenly found itself without a commercial bank.
We acquired the vacated branch building in March and cut
the ribbon on May 20th. The new branch, staffed by seasoned
local bankers who are committed to the Consumers philosophy
of community banking, has received strong support from
Brewster residents and the surrounding community. Together,
Fairlawn and Brewster contributed 40.0% of the deposit
growth realized in fiscal year 2019.
Each of these strategic initiatives has expanded our reach to
adjacent or nearby markets, strengthened our presence in the
respective counties, and filled gaps in our service area. As the
largest bank headquartered in our $23 billion (deposit) six-
county market, Consumers continues to capitalize as larger
banks exit from smaller community markets. We continue to
experience customer growth directly attributed to regional
bank branch closings in Minerva, Bergholz, Carrollton, and
Brewster over the last few years. We expect this trend to
continue. We believe we will continue to create franchise value
by acting quickly as opportunities to attract new customers in
existing or new markets develop.
Building Communities
The community bank economic model of local shareholders;
local deposits; local management and directors; local lending
and investment; local employment and economic growth;
stronger communities; and local dividends is the fundamental
difference between our business model and those of the
large national institutions—our model builds communities.
To that end, our business bankers and credit administration
teams worked together to originate over $93 million in new
Bancorp Inc.
money commercial loans in fiscal year 2019, an increase of
16.35% over fiscal year 2018. The bank’s focus on small
business lending and strong partnership with the Small
Business Administration was, for the third consecutive year,
recognized by the Cleveland District Office of the SBA as the
Top Community Bank Lender.
While this production led to a $39.5 million, or 14.8%, increase
in commercial loan balances, it also put Project Financed
by Consumers National Bank signs across our expanding
market. As illustrated in this annual report, our completed
and outstanding construction commitments provided over $40
million in critical investments that will strengthen businesses
and communities across the region. Consumers’ support
helped an East Canton dairy farming family expand their
barn and install state-of-the-art robotic milking technology.
Our financing commitment helped a Canton dental practice
improve their patient experience, and several community
service organizations in East Liverpool, Clinton, and Malvern
grow their missions. We supported manufacturing customers
as they expanded production lines and increased employment
in Alliance and Salem. We provided the funding for a Jackson
Township housing development; supported developers’
Mass Wales, LLC, Massillon
visions to redevelop underutilized commercial properties in
Canton, Medina, and Canfield; assisted private investment
at the Akron-Canton Airport; and helped local entrepreneurs
expand their business operations in Barberton, Brimfield,
Louisville, and Canfield.
Consumers Mortgage Services originated over 280 residential
mortgages (31% increase over 2018) valued at over $45.5
million (40% increase over 2018). These loans assisted
local families in the purchase or construction of a new home
or refinancing of an existing mortgage. Over $7.8 million
was committed to residential construction loans and our
participation in FHA, VA, and USDA residential lending
programs helped 50 first-time home buyers, veterans, and
buyers
in rural communities achieve homeownership.
Additionally, our bridge loan program helped our customers
act fast in an extraordinarily active housing market. We expect
our Mortgage Services operation to grow as loan originators
are added in new markets, online application capabilities are
improved, and long-term market interest rates remain low.
In fiscal year 2019, we launched several strategic initiatives to
increase our personal installment and consumer lending. We
added management focus on consumer lending, strengthened
and improved the competitiveness of our product line,
increased cross-sell training, and created unique promotions.
As a result, consumer loan production increased by 65% over
fiscal year 2018 and outstanding balances at June 30, 2019
were 31.7% above those reported at June 30, 2018. We look
for continued consumer growth as we increase retail sales
training, implement online application and loan decisioning
technology, and launch new consumer lending products that
meet the unique needs of our markets.
Building Relationships
Funding growth with local core deposits is a vital component
of the community bank model. The opportunities noted above
have resulted in nearly 600 new households, 1,850 new customer
records, and more than 1,500 net new deposit accounts. These
new customers have resulted in a 10.6% increase in debit card
transactions, 1,087 more internet banking users, 847 new users
of our remote deposit products, and a 9.1% increase in deposit
account related income. We are now growing relationships with
over 20,000 customers representing over 14,000 individual
households and businesses. We continue to focus on ensuring
that Consumers is the bank of choice as the financial needs and
goals of each of these customers develop over time.
Building the Future
While 2019 was a great year for Consumers Bancorp, our
staff and management team are focused on the future. We are
not complacent or satisfied with our achievements. We will
be disciplined in implementing long-term initiatives and we
will be flexible enough to capitalize on opportunities. We will
continue to make the investments in people and technology that
are necessary to grow our customer base and your franchise
in a cost-effective manner. We will build our balance sheet in
a manner that is responsive to the volatile rate environment
and we will maintain our focus on credit fundamentals and
portfolio management. Thank you for your support as we
continue our mission to make a difference and our vision to be
the premier community bank in northeast Ohio.
Sincerely,
Ralph J. Lober II
President and CEO
iii
Bancorp Inc.
C H A I R M A N ’ S M E S S A G E T O S H A R E H O L D E R S
Dear Shareholders:
2019 was a year of growth for Consumers National Bank and
Consumers Bancorp, Inc. The bank saw increased market
penetration in our existing markets, geographic expansion
with the addition of two full-service branches in Fairlawn
and Brewster and executed a definitive agreement with
Peoples Bancorp as we plan for expanding our presence
in Jefferson County. Product offerings have grown through
strategic initiatives to support our expanding mortgage
services, consumer lending and multiple customer interfaces.
Consumers is growing stronger as a local community bank
and our community bank philosophy is sought after in
new and existing markets and is filling a void in smaller
communities where bigger banks have exited. The response
was overwhelmingly positive in Brewster as individuals,
local businesses and public entities opened new accounts
and looked to Consumers to fulfill their banking needs. In
Fairlawn, we brought our brand of community banking to
Summit County, successfully competing with larger financial
institutions by offering competitive products and services.
In fiscal year 2019, loans grew by over $50.7 million and
deposits grew by over $42.2 million, as existing customers
affirmed their loyalty to Consumers and new customers saw
the benefits of banking locally.
income. The bank’s mortgage services operation has seen
increases in the number of loans closed as it has expanded
its reach. Improvements in processes, along with adding
new originators, has contributed to this growth and added to
noninterest income for fiscal year 2019.
We are fortunate to have talented and capable employees and
a solid infrastructure to support our expanding operations.
Consumers is committed to safe and sound banking,
accessibility and efficient service. The growth seen in fiscal
year 2019 translated into increased profitability, which is the
kind of news we are pleased to deliver to our existing and
growing shareholder base.
Consumers community banking philosophy makes a
difference for our customers and for our communities. You
too can make a difference by keeping your dollars local. If
you are a current customer of Consumers, you can expand
your relationship by becoming a shareholder or if you are
a current shareholder, by becoming a customer. In closing,
know that we are grateful to our loyal shareholders and
customers and appreciate their contribution to our success in
2019. We look forward to serving you and working together
to grow our community bank.
Product lines and customer interfaces are continually
reviewed and refined to provide our clients competitive
products and delivery options that best meet their needs.
The strategic initiative to grow consumer loans has seen
positive results and will benefit Consumers’ net interest
Sincerely,
Laurie McClellan
Chairman of the Board
iv
Bancorp Inc.
Board of Directors Standing from left: Thomas Kishman, Brad Goris, Richard Kiko, Jr., Frank Paden, David Johnson,
Harry Schmuck, Jr., and Philip Mueller. Seated from left: Ralph Lober II, (President & CEO), Laurie McClellan (Chairman),
and John Furey (Vice Chairman).
Management Group Standing from left: Kim Chuckalovchak, VP, IT Manager, Derek Williams, SVP, Retail Sales &
Operations, Suzanne Mikes, SVP, Chief Credit Officer, and Mariah Crater, Executive Assistant. Seated from left: Renee
Wood, EVP, Chief Financial Officer, Ralph Lober II, President & CEO, and Scott Dodds, EVP, Senior Loan Officer.
v
Building Communities
Pavlak Car Wash, Brimfield
Beacon Farmers Exchange, Medina
Castle Aviation, Green
Community Action Agency, East Liverpool
Creekside Stables, Medina
CTW Development Corporation, Canfield
Enjoy’s Drive-Thru, Louisville
Family Dollar, Canton
Building Relationships
Drs. Henzel & Smith, DDS, Canton
Berkshire Farms, Jackson Township
Metal & Wire Products Co. Inc., Salem
New Destiny Treatment Center, Clinton
Pero Dairy Farm, East Canton
Saint Francis Xavier Church Hall, Malvern
Touch Free Car Wash, Canfield
The Winery at Wolf Creek, Barberton
Consumers National Bank Market Area
Branch Locations By County
Carroll
Carrollton
Malvern
Columbiana
Hanoverton
Lisbon
Salem
Jefferson
Bergholz
Summit Wayne
Fairlawn Wooster
Stark
Alliance
Brewster
East Canton
Hartville
Jackson-Belden
Louisville
Minerva
Waynesburg
viii
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, 2019
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
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ 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),
Yes ☒ No ☐
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically 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
Yes ☒ No ☐
that the registrant was required to submit and post such files).
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 ☐
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth 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, 2018, the aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant was approximately $46,638,402.
The number of shares outstanding of the Registrant’s common stock, without par value was 2,733,845 at September 6, 2019.
Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement, dated September 12, 2019, for its
2019 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
3
6
6
6
6
6
7
7
8
19
20
51
51
51
52
52
52
52
53
53
ITEM 1—BUSINESS
Business
PART I
Consumers Bancorp, Inc. (Corporation) is a bank holding company as defined under the Bank Holding Company Act of 1956,
as amended (BHCA), and is a registered bank holding company under that act, 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 B ank
(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.
Consumers National Bank is a community-oriented financial institution that offers a wide range of commercial and consumer
loan and deposit products, as well as mortgage, financial planning and investment services to individuals, farmers and small and
medium sized businesses in our markets. 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 seeks to be the provider of choice for financial solutions
to customers who value exceptional personalized service, local decision making, and modern banking technology. 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 15 full-service 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 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, subject to certain exceptions, 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
3
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
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, the 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 the
Corporation’s shareholders. There are statutory limits, however, 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, afte r
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 Deposit 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, respectively. The Corporation meets the
definition of a Small Bank Holding Company and, therefore, was exempt from maintaining consolidated regulatory capital ratios.
Instead, regulatory capital ratios only apply at the subsidiary bank level. 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 and were fully phased
in by January 1, 2019. 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 effectively resulted in a minimum
common equity Tier 1 capital ratio of 7%, a Tier 1 capital ratio of 8.5%, a total capital ratio of 10.5% and a Tier 1 leverage ratio of
6.5%. 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.
4
Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios. At June 30, 2019,
the Bank exceeded minimum regulatory capital requirements to be considered well-capitalized.
Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Wall Street Reform and Consumer
Protection Act (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 instit ution’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, 2019, the Bank employed 124 full-time and 20 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 fifteen 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
Brewster
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
210 Wabash Ave S, Brewster, OH 44613
Leased
Owned
X
X
X
X
X
X
X
X
X
X
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 impa ct 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 2,733,845 common shares outstanding on June 30, 2019 with 713 shareholders of record and an estimated
575 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for
information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.
The common shares of Consumers Bancorp, Inc. are quoted on the OTCQX® Best Market under the symbol CBKM. The
following quoted market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and
may not represent actual transactions. The market prices represent highs and lows reported during the applicable quarterly period.
Quarter Ended
High
Low
Cash dividends paid per share
Quarter Ended
High
Low
Cash dividends paid per share
September 30,
2018
December 31,
2018
March 31,
2019
June 30,
2019
$
24.00 $
23.20
0.13
24.14 $
16.85
0.13
19.50 $
16.85
0.13
19.25
18.40
0.13
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
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 1 2 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 2019 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, 2019 and 2018. 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. These forward-looking statements
may include: management plans relating to the proposed merger between Consumers and Peoples (the Transaction); the expected
timing of the completion of the Transaction; the ability to complete the Transaction; the ability of Peoples to obtain shareholder
approval for the Transaction; statements of the plans and objectives of management for future operations, products or services,
including the execution of integration plans; statements about the benefits of the Transaction; statements of expectation or belief;
projections related to certain financial metrics; and statements of assumptions underlying any of the foregoing. 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 statemen ts. 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
8
attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and
consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous
counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal
obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.
On June 14, 2019, Consumers entered into an Agreement and Plan of Merger (Merger Agreement) with Peoples Bancorp of
Mt. Pleasant, Inc. (Peoples) and its wholly-owned subsidiary, The Peoples National Bank of Mount Pleasant. On June 30, 2019,
Peoples had approximately $75 million in total assets, $53.1 million in loans and $65.7 million in deposits at its three banking centers
located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The transaction is expected to be completed in the second quarter of fiscal year 2020,
pending the approval of shareholders of Peoples and the completion of other customary closing conditions. All necessary regulatory
approvals have been received.
Comparison of Results of Operations for the Years Ended June 30, 2019 and June 30, 2018
Net Income. Net income was $5,566 for fiscal year 2019 compared with $3,581 for fiscal year 2018. The following key factors
summarize our results of operations for the year ended June 30, 2019 compared with the same prior year period:
●
●
●
●
net interest income increased by $1,503, or 9.5%, in fiscal year 2019, primarily as a result of an increase in average loan
receivables;
a negative provision for loan loss expense of $440 was recorded during the 2019 fiscal year compared with a $310 provision
for loan loss expense during the 2018 fiscal year;
total other income increased by $877, or 25.9%, in fiscal year 2019, which includes net securities gains of $561 in fiscal
year 2019 compared to $33 in the same prior year period; and
total other expenses increased by $1,281, or 9.0%, in fiscal year 2019.
Return on average equity and return on average assets were 11.96% and 1.07%, respectively, for the 2019 fiscal year-to-date
period compared with 8.15% and 0.75%, 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 2019 fiscal year was 21.00% and for the 2018 fiscal year was 27.55%. 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
$
$
2019
2018
17,389
345
17,734
$
$
3.55%
0.12
3.62%
15,886
543
16,429
3.55%
0.12
3.67%
FTE net interest income for the 2019 fiscal year was $17,734, an increase of $1,305 or 7.9%, from $16,429 in the 2018 fiscal
year. The Corporation’s tax equivalent net interest margin for the year ended June 30, 2019 was 3.62% and for the year ended 2018
was 3.67%. FTE interest income for the 2019 fiscal year was $20,890, an increase of $2,790, or 15.4%, from $18,100 in the 2018
fiscal year. Growth of $41,289, or 14.0%, in average loan receivables positively impacted interest income as well as an increase in
the yield on average interest-earning assets. Interest expense for the 2019 fiscal year was $3,156, an increase of $1,485 from $1,671
in the 2018 fiscal year. This was mainly the result of an increase in short-term rates impacting the rates paid on all interest-bearing
liabilities as well as a $32,922, or 10.2%, growth in total interest-bearing liabilities.
9
Average Balance Sheet and Net Interest Margin
Interest earning assets:
Taxable securities
Nontaxable Securities (1)
Loan receivables (1)
Federal bank and other restricted stocks
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
2019
Interest
Yield/
Rate
Average
Balance
2018
Interest
Yield/
Rate
2,192
1,918
16,601
86
93
20,890
547
706
1,533
51
319
3,156
85,837 $
60,124
336,384
1,518
4,305
488,168
30,905
519,073
82,086 $
161,062
91,291
3,521
16,488
354,448
118,099
472,547
46,526
519,073
$
17,734
1,916
1,996
13,956
81
151
18,100
115
355
740
240
221
1,671
82,481 $
60,072
295,095
1,434
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
$ 16,429
2.50% $
3.19
4.94
5.67
2.16
4.26%
$
0.67% $
0.44
1.68
1.45
1.93
0.89%
$
3.37%
3.62%
2.30%
3.34
4.73
5.65
1.77
4.04%
0.20%
0.23
1.04
0.98
1.65
0.52%
3.52%
3.67%
$
345
$
543
137.73%
139.22%
____________
(1)
Calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0% in the 2019 fiscal year and
27.55% in the 2018 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
2019 Compared to 2018
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
2018 Compared to 2017
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
(In thousands)
$
$
276
(78)
2,645
5
(58)
2,790
432
351
793
(189)
98
1,485
1,305
$
$
106
13
2,018
5
(86)
2,056
68
14
246
(268)
55
115
1,941
$
$
$
170
(91)
627
—
28
734
364
337
547
79
43
1,370
(636) $
$
309
(180)
1,596
10
29
1,764
40
168
210
150
(5
563
1,201
$
178
22
1,302
2
(9)
1,495
12
20
39
16
(19)
68
1,430
$
$
131
(202)
294
8
38
269
28
148
171
134
14
495
(229)
Interest earning assets:
Taxable securities
Nontaxable securities (1)
Loan receivables (2)
Federal bank and other restricted stocks
Interest bearing deposits and 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 21.0% in the 2019
fiscal year and 27.55% in the 2018 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. Management considers historical loss experience, the present and
prospective financial condition of borrowers, the current conditions within the markets where the Corporation originates loans, the
status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the ultimate collectability
of the loan portfolio. A negative provision for loan loss expense of $440 was recorded in fiscal year 2019 primarily as the result of
a full principal recovery of a prior period loan charge-off. This compares with a $310 provision for loan loss expense in fiscal year
2018.
For the 2019 fiscal year, net recoveries of $806 were recorded compared with net recoveries of $26 for the same period last
year. Net recoveries for the 2019 fiscal year were primarily within the commercial real estate portfolio and included a full principal
recovery of a prior period charge-off. The allowance for loan losses as a percentage of loans was 1.03% at June 30, 2019 and 1.07%
at June 30, 2018.
Non-performing loans were $785 as of June 30, 2019 and represented 0.21% of total loans. This compared with $1,090, or
0.34% of total loans at June 30, 2018. 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 $877, or 25.9%, to $4,268 for the 2019 fiscal year.
Debit card interchange income increased by $121, or 9.1%, in 2019 to $1,454 primarily as a result of increased debit card
usage. Gain on sale of mortgage loans increased by $91, or 24.8%, in 2019 primarily as a result of an increase in volume. Net
securities gains in fiscal year 2019 totaled $561 compared to $33 in fiscal year 2018. During the 2019 fiscal year, the pooled trust
preferred security was sold because of the significant increase in the value of this security resulting in a gain of $593. The Corporation
does not own any other security of this type.
11
Other Expenses. Total other expenses were $15,518 for the year ended June 30, 2019; an increase of $1,281, or 9.0%, from
$14,237 for the year ended June 30, 2018.
Salaries and employee benefit expenses increased by $663, or 8.6%, during the fiscal year ended June 30, 2019 mainly due to
increases in salary and incentive expenses. Professional and director fees increased by $276, or 52.8%, during the 2019 fiscal year
from the same period last year primarily as a result of $174 in legal and consulting fees associated with the expected acquisition of
Peoples Bancorp of Mt. Pleasant, Inc. As part of the proposed acquisition, expenses related to system conversion costs, contract
termination fees, legal fees, employee severance costs, accounting and auditing fees and other acquisition costs are expected in the
2020 fiscal year. Marketing and advertising expenses increased by $116, or 37.7%, during the 2019 fiscal year from the same period
last year primarily due to an increase in advertising and promotional campaigns initiated to attract core deposit customers and the
opening of our new Fairlawn, Ohio and Brewster, Ohio offices.
Income Tax Expense. Income tax expense totaled $1,013 and $1,149 and the effective tax rates were 15.4% and 24.3% for
the years ended June 30, 2019 and 2018, respectively. Income tax expense and the effective tax rate was higher in the 2018 fiscal
year period compared to the 2019 fiscal year primarily due to the enactment of the Tax Act. Income tax expense was calculated
utilizing a statutory federal income tax rate of 21.0% in the 2019 fiscal year and 27.55% in the 2018 fiscal year. Also, the enactment
of the Tax Act in the 2018 fiscal year 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 2018 fiscal year, a
one-time income tax expense of $348 was recorded in conjunction with writing down its net deferred tax assets. 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, 2019 were $553,936 compared with $502,619 at June 30, 2018, an increase of $51,317, or 10.2%. The
growth in total assets was mainly attributed to an increase of $50,666, or 15.9%, in total loans. This growth was primarily funded by
a $42.211, or 9.8%, increase in total deposits.
Securities. Total securities decreased by $256 to $147,796 at June 30, 2019, of which $144,010 were classified as available-
for-sale and $3,786 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, 2019 and 2018
and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:
Available-for-sale
June 30, 2019
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 collateralized mortgage obligations -
residential
Total available-for-sale securities
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
12
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
19,227
56,405
56,309
10,087
142,028
$
$
287
1,557
450
198
2,492
$
$
(1) $
(33)
(448)
19,513
57,929
56,311
(28)
(510) $
10,257
144,010
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
The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2019 and 2018
and the corresponding gross unrecognized gains and losses:
Held-to-maturity
June 30, 2019
Obligations of state and political subdivisions
Total held-to-maturity securities
Held-to-maturity
June 30, 2018
Obligations of state and political subdivisions
Total held-to-maturity securities
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
3,786 $
3,786 $
35 $
35 $
— $
— $
3,821
3,821
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
4,024 $
4,024 $
24 $
24 $
— $
— $
4,048
4,048
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average
yields as of June 30, 2019:
Available-for-sale
Obligations of government-sponsored entities:
3 Months or less
Over 3 months through 1 year
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
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
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
13
Amortized
Cost
Fair
Value
Average
Yield /
Cost
$
5,351
2,739
7,497
3,640
19,227
755
628
8,203
18,134
28,683
56,404
28,512
27,797
56,309
889
8,251
947
10,087
142,028 $
5,460
2,745
7,587
3,721
19,513
755
631
8,382
18,460
29,701
57,929
28,310
28,001
56,311
901
8,414
942
10,257
144,010
2.96%
2.38
2.37
2.49
2.56
4.12
3.27
3.49
3.09
3.59
3.42
2.20
2.90
2.55
2.41
2.71
2.31
2.64
2.90%
Amortized
Cost
Fair
Value
Average
Yield /
Cost
451
3,335
3,786
$
$
471
3,350
3,821
2.86%
2.37
2.43%
$
$
$
$
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields
considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-
exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.
At June 30, 2019, 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 $50,666 to $369,175 at June 30, 2019 compared to $318,509 at June 30, 2018. Loan
demand increased, particularly in the commercial, commercial real estate and 1-4 family residential real estate segments, principally
as a result of increased calling efforts within and around the Bank’s markets. Commercial loans also increased as a result of the
Bank’s participation in a third-party residential mortgage warehouse lending program.
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
2019
2018
$
80,424 $
60,953
16,034
194,839
56,289
14,481
1,959
5,149
369,175 $
5,375
182,966
47,683
15,480
1,187
4,865
318,509
$
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, 2019:
Due in one year or less
Due after one year but within five years
Due after five years
Total
$
$
43,298
34,659
215,299
293,256
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, 2019:
Total 1-4 family residential real estate construction, commercial and commercial real
estate loans due after one year
Fixed
Interest Rates
Variable
Interest Rates
$
124,931
$
125,027
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 t he
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 acco rding to
the original terms of the loan. As of June 30, 2019, impaired loans totaled $1,189, of which $785 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
2019
2018
$
$
$
$
$
785 $
—
785 $
—
785 $
1,189 $
404 $
1,090
—
1,090
—
1,090
2,060
971
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 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 recoveries
Provision for loan losses charged to operations
Allowance for loan losses at end of year
2019
2018
$
3,422
$
3,086
80
—
36
116
—
875
23
24
922
(806)
(440)
3,788
$
4
33
24
61
17
41
14
15
87
(26)
310
3,422
$
Ratio of net recoveries to average loans outstanding
(0.24)%
(0.01)%
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, 2019
June 30, 2018
$
$
660
2,575
494
59
3,788
21.8% $
57.1
19.7
1.4
100.0% $
586
2,277
499
60
3,422
19.1%
59.2
20.2
1.5
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 $42,211, or 9.8%, from $429,963 at June 30, 2018 to $472,174 at June 30, 2019.
For the fiscal year ended June 30, 2019, time deposits increased by $33,664, or 42.9%, and noninterest-bearing demand deposits
increased by $8,320, or 7.7%, from the same prior year period. In 2019, the increase in deposit rates resulted in funds moving from
lower yielding savings and money market accounts into higher yielding certificate of deposits. The overall increase in 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 locations in Fairlawn, Ohio and Brewster, Ohio.
Short-term borrowings decreased by $10,619 from $13,367 at June 30, 2018 to $3,686 at June 30, 2019. This decline was
primarily the result of an $8,881 decrease 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,
2019
2018
Amount
Rate
Amount
Rate
$
$
113,761
82,086
161,062
91,291
448,200
— $
0.67%
0.44
1.68
0.62% $
109,675
57,272
155,000
71,404
393,351
—
0.20%
0.23
1.04
0.31%
The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2019 by time remaining until
maturity:
Maturing in:
Under 3 months
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
$
$
14,178
25,346
8,850
15,315
63,689
See Note 7—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term
borrowings.
16
Capital Resources
Total shareholders’ equity increased by $7,405 from $43,761 at June 30, 2018 to $51,166 at June 30, 2019. The increase was
primarily the result of $5,566 of net income for the current fiscal year and a net increase of $3,201 in accumulated other
comprehensive income from a shift in unrealized losses on the mark-to-market of available-for-sale securities to net unrealized gains.
These increases were partially offset by cash dividends paid of $1,421. For the 2019 fiscal year, the average equity to average total
assets ratio was 8.96% and the dividend payout ratio was 25.5%. For the 2018 fiscal year, the average equity to average total assets
ratio was 9.18% and the dividend payout ratio was 37.7%.
At June 30, 2019, 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 12-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 2019 fiscal year were $6,386 and net cash inflows from financing activities
were $42,053. Net cash outflows from investing activities were $46,750. The major sources of cash were a $42,211 net increase in
deposits and an $26,761 net increase from sales, maturities or principal pay downs on available-for-sale securities. The major uses
of cash were a $49,935 net increase in loans and the $22,914 purchase of available-for-sale securities. Total cash and cash equivalents
were $9,461 as of June 30, 2019 compared to $7,772 at June 30, 2018.
The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family
residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of
fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit.
Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the
prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans
offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either
installment loans having regular monthly payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A
majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and
investments in tax-exempt municipal bonds.
The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees
charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive
pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial
and retail customers have been continuing to turn to community banks. Compared to our peers, the Corporation’s core deposits
consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a relatively low
level of 0.89%.
Jumbo time deposits (those with balances of $250 and over) were $39,034 and $23,018 at June 30, 2019 and 2018,
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,
2019, the Bank could, without prior approval, declare a dividend of approximately $7,286.
17
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted
accounting principles, which require the measurement of financial position and results of operations primarily in terms of historical
dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial
companies, virtually all the assets and liabilities of the Corporation are monetary in nature. Therefore, as a financial institution,
interest rates have a more significant impact on the Corporation’s performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity,
maturity structure and quality of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance
levels.
Critical Accounting Policies and Use of Significant Estimates
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements,
accompanying notes to the Consolidated Financial Statements and management’s discussion and analysis are, to a large degree,
dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments,
estimates and uncertainties that are susceptible to change.
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, 2019, 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
6
7
$
2020
69,401
3,686
$
2021
29,840
—
2022
2023
2024
$
$
7,396
—
$
4,873
—
8
9
5
13,000
146
85
—
1,500
146
78
—
1,700
146
71
—
—
146
53
—
Thereafter
180
$
—
Total
$ 112,205
3,686
—
1,749
—
—
22,700
2,475
299
359,969
515
—
6,500
142
12
—
Note 13-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, 2019, 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, 2019
and 2018, 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, 2019 and 2018, 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, 2019
20
CONSOLIDATED BALANCE SHEETS
As of June 30, 2019 and 2018
(Dollar amounts in thousands, except per share data)
2019
2018
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 2019 $3,821 and 2018 $4,048)
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 13)
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, 2019 and 2018
Retained earnings
Treasury stock, at cost (120,288 and 124,489 common shares at June 30, 2019 and 2018,
respectively)
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
$
$
$
9,322
139
9,461
1,983
144,010
3,786
1,723
1,657
369,175
(3,788)
365,387
9,606
14,155
2,168
553,936
116,239
81,469
162,261
112,205
472,174
3,686
22,700
4,210
502,770
—
14,656
36,487
(1,543)
1,566
51,166
553,936
$
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
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2019 and 2018
(Dollar amounts in thousands, except per share data)
2019
2018
Interest income:
Loans, including fees
Securities, taxable
Securities, tax-exempt
Federal bank and other restricted stocks
Federal funds sold and interest-bearing deposits
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
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
$
$
$
16,590
2,192
1,584
86
93
20,545
2,786
51
319
3,156
17,389
(440)
17,829
1,264
1,454
271
458
561
260
4,268
8,355
2,096
621
799
149
361
424
101
268
765
1,579
15,518
6,579
1,013
5,566
2.04
$
$
$
13,937
1,916
1,472
81
151
17,557
1,210
240
221
1,671
15,886
310
15,576
1,200
1,333
270
367
33
188
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
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended June 30, 2019 and 2018
(Dollar amounts in thousands, except per share data)
Net income
Other comprehensive income, net of tax:
Net change in unrealized gains (losses):
Unrealized gains (losses) arising during the period
Reclassification adjustment for gains included in income
Net unrealized gain (loss)
Income tax effect
Other comprehensive income (loss)
Total comprehensive income
2019
2018
$
5,566
$
3,581
4,612
(561)
4,051
(850)
3,201
8,767
$
(2,711)
(33)
(2,744)
650
(2,094)
1,487
$
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2019 and 2018
(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, 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
Net income
Other comprehensive income
2,614 shares associated with vested stock awards
Cash dividends declared ($0.52 per share)
Balance, June 30, 2019
$
14,630 $
30,122 $
3,581
(1,662) $
445 $
(2,094)
14
90
(4)
(1,576) $
(1,635) $
3,201
33
(1,543) $
1,566 $
(14)
4
(1,351)
32,342 $
5,566
(1,421)
36,487 $
$
14,630 $
26
$
14,656 $
43,535
3,581
(2,094)
—
90
—
(1,351)
43,761
5,566
3,201
59
(1,421)
51,166
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2019 and 2018
(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:
2019
2018
$
5,566
$
3,581
Depreciation
Securities amortization and accretion, net
Provision for loan losses
Gain 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:
Principal pay downs
Net decrease in certificates of deposit with other financial institutions
Purchase of Federal Home Loan Stock
Net increase in loans
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
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
797
784
(440)
(11)
—
(458)
173
(561)
(29,473)
29,797
(271)
483
6,386
(22,914)
19,091
7,670
238
990
(264)
(49,935)
(1,671)
45
—
(46,750)
42,211
13,000
(2,056)
(9,681)
(1,421)
42,053
1,689
7,772
9,461
$
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
$
See accompanying notes to consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 and 2018
(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,
2019
2018
$
$
3,092
820
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
—
75
59
—
1,643
730
—
253
90
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, 2019 and 2018 was
$456 and $329, 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 the Corporation has the positive intent and ability to hold to maturity. Available-
for-sale securities are those the Corporation may decide to sell before maturity if needed for liquidity, asset -liability management,
or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in other
comprehensive income (loss) as a separate component of equity, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities
are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification
method.
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 los s
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 collatera l 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 underwritte n
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 loan s
may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts
receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured
basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio
includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank
operates.
Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment
properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal
amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the
loan, the business conducted on the property securing the loan or, in the case of loans to farmers, management and operation of the
farm. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This
diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management
monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management
tracks the level of owner-occupied commercial real estate loans versus nonowner-occupied loans.
1-4 Family Residential Real Estate: Residential real estate 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 require s 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, 2019, the Bank had policies with total death benefits
of $19,806 and total cash surrender values of $9,606. As of June 30, 2018, the Bank had policies with total death benefits of $19,776
and total cash surrender values of $9,335. 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 rel ated 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 14 of the Consolidated Financial Statements. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other
factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could
significantly affect these estimates.
Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by
the Bank to the holding company or by the holding company to shareholders.
Reclassifications: Certain reclassifications have been made to the June 30, 2018 financial statements to be comparable to the
June 30, 2019 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.
Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, Financial Accounting Standards Board
(FASB) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit
losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under
current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss
has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize
an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of
amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit
loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance
in ASU 2016-13 is effective for “public business entities,” as defined in the guidance, that are SEC filers for fiscal years and for
interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. However, during July 2019, FASB
unanimously voted for a proposal to delay this ASU to January 2023 for smaller reporting companies. While there is a thirty-day
comment period starting in August, the proposed delay is widely expected to be adopted. Management is currently evaluating the
impact of the adoption of this guidance on the Corporation’s consolidated financial statements and is 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. The Corporation has several lease agreements, such as branch locations, which are
currently considered operating leases, and therefore, not recognized on the Corporation’s consolidated condensed statements o f
financial condition. The Corporation expects the new guidance to require these lease agreements to now be recognized on the
consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. Therefore, the
Corporation’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Corporation’s
consolidated condensed statements of financial condition, along with our regulatory capital ratios. The definition of a lease and the
cash flows required to be evaluated will change. Upon adoption of ASU 2016-02 on July 1, 2019, the Corporation expects to
recognize right-of-use assets and related lease liabilities totaling approximately $582.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2—ACQUISITION
On June 14, 2019, Consumers entered into a Merger Agreement with Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) and its
wholly-owned subsidiary, The Peoples National Bank of Mount Pleasant. Each Peoples shareholder will receive 63.16 common shares
of Consumers common stock or $1,200.00 in cash, subject to total consideration being paid 50% in Consumers common share and 50%
cash as provided in the Merger Agreement. Based on Consumers’ 20 day average closing price of $19.07 on June 13, 2019, the aggregate
implied transaction value was approximately $10.3 million. On June 30, 2019, Peoples had approximately $75 million in total assets, $53.1
million in loans and $65.7 million in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The
transaction is expected to be completed in the second quarter of fiscal year 2020, pending the approval of shareholders of Peoples and the
completion of other customary closing conditions. All necessary regulatory approvals have been received.
NOTE 3—SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-
maturity at June 30, 2019 and 2018 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, 2019
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 collateralized mortgage obligations -
residential
Total available-for-sale securities
Held-to-maturity
June 30, 2019
Obligations of state and political subdivisions
Total held-to-maturity securities
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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
19,227
56,405
56,309
10,087
142,028
$
$
287
1,557
450
198
2,492
$
$
(1) $
(33)
(448)
19,513
57,929
56,311
(28)
(510) $
10,257
144,010
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$
$
3,786 $
3,786 $
35 $
35 $
— $
— $
3,821
3,821
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
Proceeds from sales of available-for-sale securities during fiscal year 2019 and fiscal year 2018 were as follows:
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from sales
Gross realized gains
Gross realized losses
$
2019
2018
7,670 $
606
45
2,644
40
7
The income tax provision related to these net realized gains amounted to $118 in fiscal year 2019 and $12 in fiscal year 2018.
The amortized cost and fair values of debt securities at June 30, 2019 by expected maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized
mortgage obligations are shown separately.
Available-for-sale
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
Total
Held-to-maturity
Due after five years through ten years
Due after ten years
Total
Amortized
Cost
Fair Value
$
$
$
$
9,473
15,700
21,774
28,685
75,632
66,396
142,028
Amortized
Cost
451
3,335
3,786
$
$
$
$
9,592
15,969
22,179
29,702
77,442
66,568
144,010
Fair Value
471
3,350
3,821
Securities with a carrying value of approximately $72,600 and $71,673 were pledged at June 30, 2019 and 2018, respectively,
to secure public deposits and commitments as required or permitted by law. At June 30, 2019 and 2018, there were no holdings of
securities of any one issuer, other than obligations of U.S. government-sponsored entities and agencies, with an aggregate book
value greater than 10% of shareholders’ equity.
The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2019 and 2018, aggregated
by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Available-for-sale
June 30, 2019
Obligations of U.S. government-
sponsored entities and agencies
Obligations of states and political
subdivisions
Mortgage-backed securities -
residential
Collateralized mortgage obligations -
residential
Total temporarily impaired
$
$
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
— $
— $
998
$
(1) $
998
$
—
—
—
— $
—
—
5,201
36,362
(33)
(448)
5,201
36,362
—
— $
3,277
45,838
$
(28)
(510) $
3,277
45,838
$
(1)
(33)
(448)
(28)
(510)
32
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
$
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
(17)
(372)
(713)
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
Collateralized mortgage obligations -
residential
Total temporarily impaired
$
—
71,628
$
—
(1,191) $
4,821
45,259
$
(216)
(1,787) $
4,821
116,887
$
(216)
(2,978)
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 und er
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, 2019, the Corporation’s securities portfolio consisted of 251 available-for-sale and three held-to-maturity
securities. There were 71 available-for-sale securities in an unrealized loss position at June 30, 2019, all of which were in a
continuous loss position for twelve or more months. There were no held-to-maturity securities in an unrealized loss position at June
30, 2019. The unrealized losses within the securities portfolio were primarily attributed to a change in market rates. At June 30,
2019, all the mortgage-backed securities and collateralized mortgage obligations held by the Corporation were issued by U.S.
government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed
its commitment to support. Also, management monitors the financial condition of the individual municipal securities to ensure they
meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the Corporation will
be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity,
management does not believe there is any OTTI related to these securities at June 30, 2019. Also, there was no OTTI recognized at
June 30, 2018.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4—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
2019
2018
$
80,453
$
60,995
16,120
195,269
55,941
14,517
1,931
5,150
369,381
(206)
(3,788)
365,387
$
5,394
183,383
47,433
15,516
1,171
4,873
318,765
(256)
(3,422)
315,087
$
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2019:
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
$
$
586
74
—
—
660
$
$
2,277
(498)
(80)
876
2,575
$
$
499
(28)
—
23
494
$
$
60
12
(36)
23
59
$
$
3,422
(440)
(116)
922
3,788
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended 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
34
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, 2019. Included in the recorded investment in loans is $891 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
$
$
$
$
$
2
658
$
7
2,568
— $
494
— $
59
9
3,779
660
$
2,575
$
494
$
59
$
3,788
174
$
658
$
357
$
— $
1,189
80,413
210,709
72,591
5,164
368,877
80,587
$
211,367
$
72,948
$
5,164
$
370,066
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
35
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, 2019:
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for
Loan Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Recognized
$
— $
— $
— $
86
$
6
$
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:
580
124
297
436
93
264
Other
Commercial
Total
221
173
1,395
$
222
174
1,189
$
$
—
—
—
7
2
9
1,051
97
279
226
44
1,783
$
$
28
—
—
14
2
50
$
6
28
—
—
14
2
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, 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
36
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, 2019 and 2018:
Commercial real estate:
Other
1 – 4 Family residential:
Owner occupied
Non-owner occupied
Total
June 30, 2019
June 30, 2018
Loans Past
Due
Over 90 Days
Still
Accruing
Non-accrual
Loans Past
Due
Over 90 Days
Still
Accruing
Non-accrual
$
$
436 $
85
264
785 $
— $
—
—
— $
702 $
90
298
1,090 $
—
—
—
—
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectivel y
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, 2019 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
$
— $
— $
— $
— $
80,587
$
80,587
—
199
40
—
—
1
240
$
$
—
—
—
—
—
—
— $
—
—
80
—
—
—
80
$
—
199
120
—
—
1
320
$
16,075
195,093
56,347
14,518
1,963
5,163
369,746
$
16,075
195,292
56,467
14,518
1,963
5,164
370,066
The above table of past due loans includes the recorded investment in non-accrual loans of $198 in the 30-59 days, $80 in the 90
days or greater category and $507 in the loans not past due category.
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.
37
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, 2019 and 2018, the Corporation had $725 and $1,269, respectively, of loans classified as TDRs which are included in
impaired loans above. At June 30, 2019 and 2018, the Corporation had $9 and $29, respectively, of specific reserves allocated to
these loans.
During the fiscal year ended June 30, 2019, the terms of certain loans were modified as a troubled debt restructuring. The
modification of the terms of such loans included a combination of forgiveness of a portion of the principal amount owed, which
resulted in a reduction in the monthly payment amount, an extension of the maturity date and the extension of additional credit to
provide operating funds. As of June 30, 2019, the Corporation had not committed to lend any additional funds to customers with
outstanding loans that were classified as troubled debt restructurings. The following table presents loans by class modified as
troubled debt restructurings that occurred during the year ended June 30, 2019:
Commercial
Commercial real estate:
Other
Total
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
1 $
1
2 $
38 $
161
199 $
176
59
235
The troubled debt restructuring described above increased the allowance for loan losses and resulted in a charge -off of $80 during
the twelve months ended June 30, 2019.
During the fiscal year ended June 30, 2018, 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, 2018:
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 completed in the 2018 fiscal year described above did not increase the allowance for loan losses or
result in any charge-offs. As of June 30, 2018, 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.
38
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 cur rent
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, conditio ns, 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, 2019, 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
$
74,393 $
4,942 $
1,012 $
— $
16,075
179,952
2,245
13,413
—
32
286,110 $
$
—
8,071
—
205
—
—
13,218 $
—
5,337
24
318
—
—
6,691 $
—
436
5
263
—
—
704 $
240
—
1,496
54,193
319
1,963
5,132
63,343
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:
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
$
59,214 $
288 $
1,162 $
— $
5,386
172,471
2,577
14,025
8
93
253,774 $
$
—
7,061
—
195
—
—
7,544 $
39
—
1,878
27
417
—
—
3,484 $
—
702
11
298
—
—
1,011 $
415
—
1,255
45,214
579
1,182
4,783
53,428
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5—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
2019
2018
1,511
344
13,013
5,872
20,740
(6,585)
14,155
$
$
1,469
344
12,636
5,164
19,613
(6,298)
13,315
$
$
Depreciation expense was $797 and $771 for the years ended June 30, 2019 and 2018, respectively.
The Corporation is obligated under non-cancelable operating leases for branch properties and equipment. Rent expense incurred
was $159 during each of the years ended June 30, 2019 and 2018. The approximate minimum annual rentals and commitments under
these leases with remaining terms in excess of one year, before considering renewal options that generally are present, were as
follows:
Twelve Months Ending June 30
2020
2021
2022
2023
Thereafter
Total
NOTE 6—DEPOSITS
$
$
109
106
96
79
22
412
The aggregate amount of time deposits that meet or exceed the FDIC Insurance limit of $250 were $39,034 and $23,018 as of
June 30, 2019 and 2018, respectively. Scheduled maturities of time deposits at June 30, 2019 were as follows:
Twelve Months Ending June 30
2020
2021
2022
2023
2024
Thereafter
$
$
69,401
29,840
7,396
4,873
515
180
112,205
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7—SHORT-TERM BORROWINGS
Short-term borrowings consisted of repurchase agreements and federal fund purchased. Information concerning all short-term
borrowings at June 30, 2019 and 2018, 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
$
2019
2018
$
3,686
3,521
3,975
1.45%
1.39%
13,367
24,422
28,621
0.98%
1.02%
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, 2019 and 2018 are presented in the following table:
U.S. government-sponsored entities and agencies pledged
Residential mortgage-backed securities pledged
Total pledged
Repurchase agreements
$
$
$
998 $
3,938
4,936 $
3,686 $
—
5,294
5,294
4,486
Overnight and Continuous
2019
2018
Total interest expense on short-term borrowings was $51 and $240 for the years ended June 30, 2019 and 2018, respectively.
NOTE 8—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, 2019
June 30, 2018
Fixed rate,
amortizing
Fixed rate
Variable rate
—%
1.18
2.56
—% $
1.97
2.56
—
11,200
11,500
—% $
1.59
2.56
56
11,700
—
4.30%
1.46
—
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
2020
2021
2022
2023
Thereafter
Total
Principal
Payments
13,000
1,500
1,700
—
6,500
22,700
$
$
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 $61,812 and $53,572 of first mortgage and
multi-family loans under a blanket lien arrangement at June 30, 2019 and 2018, respectively. Based on this collateral and the
Corporation’s holdings of FHLB stock, the Bank was eligible to borrow up to a total of $23,283 in additional advances at June 30,
2019.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9—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 $236 and $206 for the years ended June 30, 2019 and 2018,
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 $2,475 as of June 30, 2019 and $2,321 as of
June 30, 2018 and is included in other liabilities. For purposes of calculating the present value of future benefits, the discount rate
in effect at June 30, 2019 and 2018 was 4.5%. For the years ended June 30, 2019 and 2018, $230 and $225, respectively, have been
charged to expense in connection with the SCP. Distributions to participants were $76 and $56 for the years ended June 30, 2019
and 2018, 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. Awards are made at the end of the measurement
period of certain specified performance targets once those performance targets as established by the Compensation Committee are
achieved. Some awards, primarily the awards made to directors, vest on the date of grant. Other awards, primarily the awards made
to executive management, 25% vest on the grant date, which is the end of the performance period, with the remaining vesting 25%
per year over a three-year period. Restricted stock awards provide the holder with full voting rights and dividends during the vesting
period. Cash dividends are reinvested into shares of stock and are subject to the same restrictions and vesting as the initial award.
All dividends are forfeitable in the event the shares do not vest. The fair value of the restricted stock awards, which is used to measure
compensation expense, is the closing market price of the Corporation’s common stock on the date of the grant a nd compensation
expense is recognized over the vesting period of the awards.
The following table summarizes the status of the restricted stock awards:
Outstanding at June 30, 2018
Granted
Vested
Non-vested at June 30, 2019
Restricted Stock
Awards
Weighted-
Average
Grant Date Fair
Value Per Share
21.00
23.40
22.77
22.49
2,062 $
4,201
(2,614)
3,649 $
There was $74 in expense recognized in the 2019 fiscal year and $101 in expense recognized in the 2018 fiscal year in connection
with the restricted stock awards. As of June 30, 2019, there was $57 of total unrecognized compensation expense related to non-
vested shares and the expense is expected to be recognized over the next three years.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10—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 was 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 21.0% in the 2019 fiscal year
and 27.55% in the 2018 fiscal year:
Current income taxes
Deferred income tax expense
Change in corporate tax rate
Total income tax expense
2019
2018
$
$
840 $
173
—
1,013 $
687
114
348
1,149
The reduction of the corporate tax rate required the Corporation to revalue its deferred tax assets and liabilities during the 2018
fiscal year based on the lower federal tax rate of 21.0%. As a result of the new legislation, during the 2018 fiscal year, 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
Deferred income
Non-accrual loan interest income
Other
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 (liability)
2019
2018
$
$
701
616
—
55
50
7
—
1,429
(645)
(278)
(102)
(42)
(416)
(1,483)
$
(54) $
632
514
164
68
42
—
435
1,855
(489)
(238)
(102)
(56)
—
(885)
970
The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate of 21.0%
for 2019 and 27.55% for 2018 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 non-deductible expenses
Total income tax expense
2019
2018
$
$
1,382 $
(319)
(57)
(28)
—
35
1,013 $
1,303
(408)
(75)
(27)
348
8
1,149
The effective tax rate was 15.4% for the year ended June 30, 2019 compared to 24.3% for the year ended June 30, 2018. At June
30, 2019 and June 30, 2018, the Corporation had no unrecognized tax benefits recorded. The Corporation does not expect the total
amount of unrecognized tax benefits to significantly increase within the next twelve months. There were no interest or penalties
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded for the years ended June 30, 2019 and 2018 and there were no amounts accrued for interest and penalties at June 30, 2019
and 2018.
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 2015.
NOTE 11—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, 2019 of related party loans were as follows:
Principal balance, July 1
New loans, net of refinancing
Repayments
Changes due to changes in related parties
Principal balance, June 30
$
$
11,138
687
(1,195)
(68)
10,562
Deposits from executive officers, directors and their affiliates totaled $3,800 at June 30, 2019 and $5,897 at June 30, 2018.
NOTE 12—REGULATORY MATTERS
Banks and bank holding companies are 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.
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 repre sent
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 2019 and 2018, the Corporation met the definition of a Small Bank Holding Company and, therefore, was
exempt from maintaining consolidated regulatory capital ratios. Instead, regulatory capital ratios only apply at the subsidiary bank
level. The Basel III Capital Rules became effective for the Bank on January 1, 2015 and certain provisions were subject to a phase-
in period. The implementation of the capital conservation buffer was phased in from 0.625% on January 1, 2016 to 2.5% on
January 1, 2019. The capital conservation buffer for 2019 was 2.50% and for 2018 was 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. Management believes as of June 30, 2019, the Bank met all capital adequacy requirements to which
it was subject.
The following table presents actual and required capital ratios as of June 30, 2019 and June 30, 2018 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, 2019
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
48.0
48.0
51.8
48.0
11.68% $
11.68
12.60
8.88
18.5
24.6
32.9
21.6
4.50% $
6.00
8.00
4.00
26.7
32.9
41.1
27.0
6.50%
8.00
10.00
5.00
44
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, 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
(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 sinc e
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, 2019 the Bank could, without prior
approval, declare a dividend of approximately $7,286.
NOTE 13—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 $83,702 and $62,764 as of June 30, 2019 and 2018, respectively. Of the June 30, 2019
commitments, $67,722 carried variable rates and $15,980 carried fixed rates of interest ranging from 3.50% to 6.75% with maturity
dates from July 2019 to July 2050. 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. Financial standby letters of credit
were $2,563 as of June 30, 2019 and $1,090 as of June 30, 2018. In addition, commitments to extend credit of $8,840 and $8,493 as
of June 30, 2019 and 2018, 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 14—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
45
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
Collateralized mortgage obligations
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, 2019
$
19,513
57,929
56,311
10,257
Balance at
June 30, 2018
$
16,122
56,590
63,408
1,415
5,766
727
$
$
Fair Value Measurements at
June 30, 2019 Using
Level 1
Level 2
Level 3
— $
—
—
—
$
19,513
57,929
56,311
10,257
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
—
—
—
—
—
—
—
—
—
—
There were no transfers between Level 1 and Level 2 during the 2019 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 fa ir 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 availa ble.
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.
46
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, 2019 are summarized below:
Impaired loans:
Commercial Real Estate - Other
Fair Value Measurements at
June 30, 2019 Using
Balance at
June 30, 2019
Level 1
Level 2
Level 3
$
59 $
— $
— $
59
Impaired loans, measured for impairment using the fair value of the collateral, had a recorded investment of $59, with no valuation
allowance at June 30, 2019. The resulting impact to the provision for loan losses was an increase of $80 for the twelve months ended
June 30, 2019. 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.
There was no other real estate owned at June 30, 2019 and 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, 2019:
Impaired loans:
Commercial Real Estate – Other
$
Settlement
Agreement
59
N/A
0.0%
0.0%
Fair Value
Valuation
Technique
Unobservable
Inputs
Range
Weighted
Average
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:
2019
2018
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents
$
9,461
$
9,461
$
7,772
$
7,772
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
1,983
1,687
1,607
3,821
366,911
359,969
112,841
3,686
22,596
132
2,973
1,448
1,404
4,024
315,087
351,422
78,541
13,367
11,756
68
2,976
1,474
1,404
4,048
311,642
351,422
78,332
13,367
11,146
68
1,983
1,657
1,607
3,786
365,387
359,969
112,205
3,686
22,700
132
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15—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
Change in other assets and liabilities
Net cash flows from operating 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
June 30,
2019
June 30,
2018
$
$
$
$
$
$
$
38
1,646
75
49,545
51,304
138
51,166
51,304
Year Ended
June 30, 2019
1,620
40
408
1,252
(49)
1,301
4,265
5,566
8,767
$
$
$
$
$
$
$
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
Year Ended
June 30, 2019
Year Ended
June 30, 2018
$
$
5,566
(4,265)
(10)
63
1,354
(1,421)
59
(1,362)
(8)
46
38
$
$
3,581
(2,312)
(10)
12
1,271
(1,351)
90
(1,261)
10)
36
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16–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 1,103
shares of restricted stock that were anti-dilutive for the year ending June 30, 2019. There were 1,828 shares of restricted stock that
were anti-dilutive for the year ending June 30, 2018. 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,
2019
2018
5,566 $
2,731,247
2.04 $
3,581
2,726,926
1.31
5,566 $
2,731,247
—
2,731,247
2.04 $
3,581
2,726,926
—
2,726,926
1.31
$
$
$
$
NOTE 17–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, 2019 and June 30, 2018, were as follows:
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
Unrealized holding gain on available-for-sale
securities arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net current period other comprehensive income
Balance as of June 30, 2019
$
$
$
(a) Securities gain, net
(b) Income tax expense
Pretax
Tax
Effect
After-tax
675
$
(230) $
445
Affected Line
Item
in Consolidated
Statements of
Income
638
12
650
14
434
$
(968)
118
(850)
(416) $
(2,073)
(21)
(2,094)
14
(1,635)
3,644
(443)
3,201
1,566
(a)(b)
(a)(b)
(2,711)
(33)
(2,744)
—
(2,069) $
4,612
(561)
4,051
1,982
$
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – REVENUE RECOGNITION
On July 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent
ASUs that modified Topic 606. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life
insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits
and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the
Corporation's revenue from contracts with customers is recognized within noninterest income.
Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance
and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees,
are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account
maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over
which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overd raft occurs.
Service charges on deposits are withdrawn from the customer's account balance.
Interchange income: The Corporation earns interchange income from cardholder transactions conducted through the various payment
networks. Interchange income from cardholder transactions represent a percentage of the underlying transaction value and are
recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees is
processed through noninterest income.
The following table presents the Corporation's sources of noninterest income for the year ended June 30, 2019 and 2018.
Noninterest income
In scope of Topic 606:
Service charges on deposit accounts
Debit card interchange income
Other income
Noninterest income (in scope of Topic 606)
Noninterest income (out-of-scope of Topic 606)
Total noninterest income
For the year Ended June 30,
2019
2018
$
$
1,264 $
1,454
260
2,978 $
1,290
4,268 $
1,200
1,333
188
2,721
670
3,391
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.
50
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2019 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, 2019, 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 2019 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over
financial reporting.
ITEM 9B—OTHER INFORMATION
None.
51
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, 2019, under the
captions “Election of Directors,” “Directors and Executive Officers,” “The Board of Directors and its Committees,” “Delinquent
Section 16(a) Reports,” 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, 2019 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,
2019. Additional information regarding stock-based compensation plans is presented in Note 9 - 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)
88,787
—
88,787
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, 2019,
under the caption “Security Ownership of Certain Beneficial Owners,” 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, 2019, under the
caption “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.
52
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, 2019, 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 54 of this report.
(c)
See Item 15(a)(2) above.
53
EXHIBIT INDEX
Exhibit Number Description of Document
2.1
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
Agreement and Plan of Merger by and among Consumers Bancorp, Inc., Consumers National Bank, Peoples
Bancorp of Mt. Pleasant, Inc., and The Peoples National Bank of Mount Pleasant, dated June 14, 2019. Reference
is made to the Registration Statement on S-4 (File No. 333-233306) filed on August 15, 2019.
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 16 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, 2019,
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.
54
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, 2019
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, 2019.
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/ 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
/s/ John P. Furey
John P. Furey
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
55
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 505005
Louisville, KY 40233-5005
(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, 2019, there were
2,733,845 shares outstanding with 713 shareholders
of record and an estimated 575 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 a participating broker.
Shareholder Relations
shareholderrelations@consumersbank.com
Website
www.consumersbancorp.com
Annual Meeting
The 2019 annual meeting of shareholders will be held at
12:00 p.m. on Thursday, October 17, 2019, at Hartville
Kitchen, 1015 Edison Street NW, 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, 2019, 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, P.O. Box 256, Minerva, Ohio
44657. An electronic version is also available on our
website at www.consumersbancorp.com.
Directors Emeriti
James V. Hanna
James R. Kiko, Sr.
John E. Tonti
Our 2019 annual report was
printed by our customer Davis
Graphic Communication Solutions
in Summit County, Ohio.
Bancorp Inc.
614 E. Lincoln Way, Minerva, Ohio 44657
ConsumersBank.com