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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, 2017

 

Commission File No. 033-79130

 CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

OHIO	34-1771400
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

614 East Lincoln Way,

P.O. Box 256, Minerva, Ohio 44657

(330) 868-7701 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant Section 12(b) of the Act: None

 

Securities registered pursuant Section 12(g) of the Act: Common Shares, no par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐    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), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer☐	Accelerated filer☐
Non-accelerated filer☐ (Do not check if small reporting company)	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 Securities 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, 2016, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $31,272,639.

 

The number of shares outstanding of the Registrant’s common stock, without par value was 2,724,956 at September 13, 2017.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement dated September 21, 2017 for its 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.    

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TABLE OF CONTENTS 

 

PART I
ITEM 1—BUSINESS	3
ITEM 1A—RISK FACTORS	6
ITEM 1B—UNRESOLVED STAFF COMMENTS	6
ITEM 2—PROPERTIES	6
ITEM 3—LEGAL PROCEEDINGS	6
ITEM 4—MINE SAFETY DISCLOSURES	6
PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	7
ITEM 6—SELECTED FINANCIAL DATA	7
ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	8
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	20
ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	52
ITEM 9A—CONTROLS AND PROCEDURES	52
ITEM 9B—OTHER INFORMATION	52
PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	53
ITEM 11—EXECUTIVE COMPENSATION	53
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS	53
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	53
ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES	54
PART IV
ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES	54

  

  

PART I

  

ITEM 1—BUSINESS 

 

Business

 

Consumers Bancorp, Inc. (Corporation), is a bank holding company under the Bank Holding Company Act of 1956, as amended and is a registered bank holding company, and was incorporated under the laws of the State of Ohio in 1994. In February 1995, the Corporation acquired all the issued and outstanding capital stock of Consumers National Bank (Bank), a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank.

 

Since 1965, the Bank’s main office has been serving the Minerva, Ohio area from its location at 614 East Lincoln Way, Minerva, Ohio. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank currently has thirteen branch locations and two loan production offices. The Bank also invests in securities consisting primarily of obligations of U.S. government-sponsored entities, municipal obligations and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

 

Supervision and Regulation

 

The Corporation and the Bank are subject to regulation by the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Office of the Comptroller of the Currency (OCC) and other federal and state regulators.  The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Earnings and dividends of the Corporation are affected by state and federal laws and regulations and by policies of various regulatory authorities. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of the Corporation and the Bank. The following describes selected federal and state statutory and regulatory provisions that have, or could have, a material impact on the Corporation. The following discussion of supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed.

 

Regulation of the Corporation:

 

The Bank Holding Company Act: As a bank holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended (BHCA) and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board and required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require.

 

The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company.

 

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice. The Federal Reserve Board has extensive enforcement authority over bank holding companies for violations of laws and regulations and unsafe or unsound practices.

 

Privacy Provisions of Gramm-Leach-Bliley Act: The Gramm-Leach-Bliley Act of 1999 contains extensive provisions on a customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must provide to its customers the institution’s policies and procedures regarding the handling of customers’ non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. The Corporation and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.

 

Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the area 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, Consumers National Bank is subject to regulation, supervision and examination by the OCC and by the Federal Deposit Insurance Corporation (FDIC). These examinations are designed primarily for the protection of the depositors of the Bank.

 

Dividend Restrictions: Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under regulations promulgated by the OCC, the Bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the OCC. The Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations.

 

FDIC: The FDIC is an independent federal agency, which insures the deposits of federally insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of the Bank are subject to the deposit insurance assessments of the Bank Insurance Fund of the FDIC. Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institution varies according to regulatory capital levels of the institution and other factors such as supervisory evaluations.

 

The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.

 

Risk-Based Capital Requirements: The Federal Reserve Board and the OCC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and national banks. The Corporation meets the definition of a Small Bank Holding Company and, therefore, is exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the capital base. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. In addition, failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of “brokered deposits.”

 

Prior to January 1, 2015, the minimum requirement for the total risk-based capital ratio was 8% and the minimum requirement for the Tier I risk-based capital ratio and Tier I leverage ratio was 4%. On January 1, 2015, new Basel III capital requirements for U.S. banking organizations became effective. Under Basel III, the Bank is required to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a Tier 1 leverage ratio of 4%. Basel III also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and began being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increase by that amount each year until fully implemented in January 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a common equity Tier 1 ratio to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC.  These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The OCC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios. At June 30, 2017, the Bank exceeded minimum regulatory capital requirements to be considered well-capitalized.  

 

  

Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Act created many new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (CFPB), and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. Although the CFPB does not have direct supervisory authority over banks with less than $10 billion in assets, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests. The Corporation is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with these regulatory requirements and assess their potential impact on our business.

 

Interstate Banking and Branching: The Interstate Banking and Branch Efficiency Act of 1995 has eased restrictions on interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision, and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching.

 

Community Reinvestment Act: The Community Reinvestment Act requires depository institutions to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance and assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution.

 

USA Patriot Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) 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 financial services companies to 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.

 

Employees

 

As of June 30, 2017, the Bank employed 110 full-time and 19 part-time employees. None of the employees are represented by a collective bargaining group. Management considers its relations with employees to be good.

 

Statistical Disclosure

 

The following statistical information is included on the indicated pages of this Report:

 

Average Consolidated Balance Sheet And Net Interest Margin	9
Interest Rates and Interest Differential	10
Carrying Values Of Securities	12
Maturities And Weighted-Average Yield Of Securities	13
Loan Types	14
Selected Loan Maturities And Interest Sensitivity	14
Non-accrual, Past Due And Restructured Loans And Other Nonperforming Assets	15
Potential Problem Loans	15
Summary Of Loan Loss Experience	15
Allocation Of Allowance For Loan Losses	16
Average Amount And Average Rate Paid On Deposits	16
Time Deposits Of $100 Thousand Or More	16
Short-Term Borrowings	16 and 41
Selected Consolidated Financial Data	7

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 web site 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.

 

  

Shareholders may request a copy of any of the Corporation’s filings at no cost by writing or e-mailing the Corporation at the following address or e-mail address: Consumers Bancorp, Inc., Attn: Theresa J. Linder, 614 East Lincoln Way, Minerva, Ohio 44657 or e-mail to shareholderrelations@consumersbank.com.

 

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 on its website.

 

ITEM 1A—RISK FACTORS

 

Not applicable for Smaller Reporting Companies.

 

ITEM 1B—UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2—PROPERTIES

 

The Bank operates thirteen full service banking facilities and two loan production offices (LPO) as noted below:

 

Location		Address		Owned		Leased
Minerva		614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657		X
Salem		141 S. Ellsworth Avenue, P.O. Box 798, Salem, Ohio, 44460		X
Waynesburg		8607 Waynesburg Drive SE, P.O. Box 746, Waynesburg, Ohio, 44688		X
Hanoverton		30034 Canal Street, P.O. Box 178, Hanoverton, Ohio, 44423		X
Carrollton		1017 Canton Road NW, Carrollton, Ohio, 44615				X
Alliance		610 West State Street, Alliance, Ohio, 44601				X
Lisbon		7985 Dickey Drive, Lisbon, Ohio 44432		X
Louisville		1111 N. Chapel Street, Louisville, Ohio 44641		X
East Canton		440 W. Noble, East Canton, Ohio, 44730		X
Malvern		4070 Alliance Road, Malvern, Ohio 44644				X
Hartville		1215 W. Maple Street, Hartville, OH 44632		X
Jackson-Belden		4026 Dressler Road NW, Canton, Ohio 44718		X
Bergholz		256 2nd Street, Bergholz, OH 43908				X
Stow LPO		3885 Darrow Road, Stow, Ohio 44224				X
Wooster LPO		146 East Liberty Street, Wooster, Ohio 44691				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 that is adverse to the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the financial position or results of operations of the Corporation.

 

ITEM 4—MINE SAFETY DISCLOSURES 

 

None.

 

 

PART II  

 

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  

 

The Corporation had 2,724,956 common shares outstanding on June 30, 2017 with 748 shareholders of record and an estimated 446 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.

 

The common shares of Consumers Bancorp, Inc. are traded on the over-the-counter bulletin board. The following quoted market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not represent actual transactions. The market prices represent highs and lows reported during the quarterly period.

 

Quarter Ended		September 30, 2016				December 31, 2016				March 31, 2017				June 30, 2017
High		$	16.65			$	17.25			$	18.75			$	19.37
Low			15.46				15.30				15.85				17.75
Cash dividends paid per share			0.12				0.12				0.12				0.12

 

Quarter Ended		September 30, 2015				December 31, 2015				March 31, 2016				June 30, 2016
High		$	18.25			$	18.50			$	18.45			$	17.25
Low			17.15				17.27				16.10				15.67
Cash dividends paid per share			0.12				0.12				0.12				0.12

 

Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Corporation’s common shares, these prices may not reflect the prices at which the common shares would trade in an active market.

 

The Corporation’s management is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent on the Corporation’s future earnings, capital requirements and financial condition. The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. See Note 1 and Note 10 to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operation for dividend restrictions.

 

There were no repurchases of the Corporation’s securities during the 2017 fiscal year.

 

 

ITEM 6—SELECTED FINANCIAL DATA 

 

Not applicable for Smaller Reporting Companies.

 

  

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, 2017 and 2016. 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.

 

Overview

 

Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all of the issued and outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government-sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.

  

Comparison of Results of Operations for the Years Ended June 30, 2017 and June 30, 2016

 

Net Income. Net income was $2,994 for fiscal year 2017 compared with $2,147 for fiscal year 2016. The following key factors summarize our results of operations for the year ended June 30, 2017 compared with the same prior year period:

 

	●	loan loss provision expense in fiscal year 2017 declined by $902 and totaled $596 in 2017 compared with $1,498 in 2016;
	●	net interest income increased by $754, or 5.5%, in fiscal year 2017, primarily as a result of an increase in average loans receivable;
	●	total other income increased by $262, or 8.8% in fiscal year 2017; and
	●	total other expenses increased by $709, or 5.6% in fiscal year 2017.

 

Return on average equity and return on average assets were 6.89% and 0.67%, respectively, for the 2017 fiscal year-to-date period compared with 5.00% and 0.51%, 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. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

 

Net Interest Income Year ended June 30,		2017				2016
Net interest income		$	14,459			$	13,705
Taxable equivalent adjustments to net interest			769				738
Net interest income, fully taxable equivalent		$	15,228			$	14,443
Net interest margin			3.51	%			3.49	%
Taxable equivalent adjustment			0.18				0.20
Net interest margin, fully taxable equivalent			3.69	%			3.69	%

 

FTE net interest income for the 2017 fiscal year was $15,228, an increase of $785 or 5.4%, from $14,443 in the 2016 fiscal year. The Corporation’s tax equivalent net interest margin for the years ended June 30, 2017 and 2016 was 3.69%. FTE interest income for the 2017 fiscal year was $16,336, an increase of $991, or 6.5%, from $15,345 in the 2016 fiscal year. Growth of $26,818, or 11.1%, in average loans receivable positively impacted interest income as well as an increase in the yield on average interest-earning assets. Interest expense for the 2017 fiscal year was $1,108, an increase of $206, or 22.8%, from $902 in the 2016 fiscal year. This was mainly the result of a $15,241, or 5.5%, growth in total interest bearing liabilities and the result of an increase in short-term rates impacting the rates paid on savings, short-term borrowings and time deposits. The Corporation offers an interest-bearing demand checking account product that pays a higher rate of interest to customers who meet certain qualifications, with one of the main qualifications being the frequent use of a debit card. As a result, the average rate paid on the interest-bearing demand checking account product was 0.15% and 0.14% for the 2017 and 2016 fiscal years, respectively.

 

  

Average Balance Sheet and Net Interest Margin

 

		2017												2016
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
Interest earning assets:
Taxable securities		$	77,291			$	1,678				2.19	%		$	85,456			$	1,880				2.23	%
Nontaxable Securities (1)			60,036				2,176				3.68				55,656				2,106				3.86
Loans receivable (1)			267,448				12,360				4.62				240,630				11,242				4.67
Interest bearing deposits and federal funds sold			9,213				122				1.32				11,507				117				1.02
Total interest earning assets			413,988				16,336				3.96	%			393,249				15,345				3.93	%
Non-interest earning assets			29,602												26,943
Total assets		$	443,590											$	420,192
Interest bearing liabilities:
Interest bearing demand		$	49,832			$	75				0.15	%		$	47,643			$	69				0.14	%
Savings			141,279				187				0.13				136,442				122				0.09
Time deposits			66,761				530				0.79				65,225				488				0.75
Short-term borrowings			21,053				90				0.43				21,196				39				0.18
FHLB advances			14,640				226				1.54				7,818				184				2.35
Total interest bearing liabilities			293,565				1,108				0.38	%			278,324				902				0.32	%
Non-interest bearing liabilities			106,578												98,913
Total liabilities			400,143												377,237
Shareholders’ equity			43,447												42,955
Total liabilities and shareholders’ equity		$	443,590											$	420,192
Net interest income, interest rate spread (1)						$	15,228				3.58	%						$	14,443				3.61	%
Net interest margin (net interest as a percent of average interest earning assets) (1)											3.69	%											3.69	%
Federal tax exemption on non-taxable securities and loans included in interest income						$	769											$	738
Average interest earning assets to interest bearing liabilities											141.02	%											141.29	%

____________  

(1)	Calculated on a fully taxable equivalent basis

  

 

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

 

		2017 Compared to 2016 Increase / (Decrease)												2016 Compared to 2015 Increase / (Decrease)
		Total Change				Change due to Volume				Change due to Rate				Total Change				Change due to Volume				Change due to Rate
		(In thousands)
Interest earning assets:
Taxable securities		$	(202	)		$	(168	)		$	(34	)		$	(7	)		$	(2	)		$	(5	)
Nontaxable securities (1)			70				174				(104	)			64				242				(178	)
Loans receivable (2)			1,118				1,241				(123	)			168				599				(431	)
Federal funds sold			5				(26	)			31				44				9				35
Total interest income			991				1,221				(230	)			269				848				(579	)
Interest bearing liabilities:
Interest bearing demand			6				3				3				(2	)			2				(4	)
Savings deposits			65				4				61				12				5				7
Time deposits			42				12				30				(67	)			(26	)			(41	)
Short-term borrowings			51				—				51				8				5				3
FHLB advances			42				121				(79	)			2				17				(15	)
Total interest expense			206				140				66				(47	)			3				(50	)
Net interest income		$	785			$	1,081			$	(296	)		$	316			$	845			$	(529	)

____________ 

(1)	Nontaxable income is adjusted to a fully tax equivalent basis utilizing a 34% tax rate.

(2)	Non-accrual loan balances are included for purposes of computing the rate and volume effects although interest on these balances has been excluded.

 

Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses in the Corporation’s loan portfolio that have been incurred at each balance sheet date. The provision for loan losses was $596 in fiscal year 2017 compared to $1,498 in fiscal year 2016. The provision for loan losses for the 2016 fiscal year was impacted by a specific valuation allowance that was recorded for one commercial real estate credit that was partially charged-off in the 2017 fiscal year.

 

For the 2017 fiscal year, net charge-offs were $1,076, or 0.40% of average total loans compared with $364, or 0.14% of average total loans, for the same period last year. Net charge-offs for the 2017 fiscal year were primarily within the commercial real estate portfolio and included a partial charge-off of $700 for one credit for which a specific valuation allowance was reserved for in the 2016 fiscal year. The Bank is currently pursuing all legal avenues against the borrowers and expects it may result in a recovery of a portion of the loss in future periods. The allowance for loan losses as a percentage of loans was 1.13% at June 30, 2017 and 1.39% at June 30, 2016.

 

Non-performing loans were $1,187 as of June 30, 2017 and represented 0.44% of total loans. This compared with $6,034, or 2.35% of total loans, at June 30, 2016. Non-performing loans declined from June 30, 2016 primarily as a result of the full payoff of one loan relationship with a recorded investment of $2,516 and the receipt of proceeds from the liquidation of collateral and the partial charge-off from another credit that totaled $1,820. 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 $262, or 8.8%, to $3,250 for the 2017 fiscal year.

 

Debit card interchange income increased by $213, or 22.5% in 2017 to $1,161; however, debit card processing expenses increased by $173 over the same period.

 

 

Gain on sale of mortgage loans increased by $72, or 38.7%, from the same period last year primarily as a result of an increase in volume.

 

Bank owned life insurance income increased by $53, or 27.5%, from the same period last year primarily as a result of the earnings on the investment of $2,000 in additional insurance policies.

 

Other Expenses. Total other expenses were $13,478 for the year ended June 30, 2017; an increase of $709, or 5.6%, from $12,769 for the year ended June 30, 2016.

 

Salaries and employee benefit expenses increased $203, or 2.9%, during the fiscal year ended June 30, 2017 mainly due to normal merit increases that went into effect on October 1, 2016.

 

Occupancy and equipment expenses increased by $276, or 17.1%, during the fiscal year ended June 30, 2017 primarily as a result of an increase in building-related expenses associated with the new main branch office and corporate facility in Minerva, Ohio that was completed during the third fiscal quarter of 2016. 

 

Professional and director fees increased by $161, to $608 during the 2017 fiscal year from the same period last year primarily as a result of an increase legal and consulting fees.

 

Loan and collection expenses decreased by $42, to $155 during the 2017 fiscal year from the same period last year primarily as a result of the resolution of two large credits that were classified as non-performing loans.

 

Income Tax Expense. The provision for income taxes totaled $641 and $279 for the years ended June 30, 2017 and 2016, respectively. The effective tax rates were 17.6% and 11.5%, respectively. The effective tax rate differed from the federal statutory rate principally 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, 2017 were $457,883 compared to $430,390 at June 30, 2016, an increase of $27,493, or 6.4%. The growth in total assets was mainly attributed to an increase of $16,589, or 6.5%, in total loans and an increase of $8,717, or 6.5%, in available-for-sale securities. This growth was funded by an increase of $27,823, or 8.0%, in total deposits.

 

Securities. Total securities increased by $9,482 to $146,345 at June 30, 2017, of which $142,086 were classified as available-for-sale and $4,259 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 table summarizes the amortized cost and fair value of available-for-sale securities at June 30, 2017 and 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:

 

Available-for-sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2017
Obligations of U.S. government-sponsored entities and agencies		$	12,571			$	90			$	(74	)		$	12,587
Obligations of state and political subdivisions			56,824				890				(254	)			57,460
Mortgage-backed securities - residential			64,092				184				(438	)			63,838
Mortgage-backed securities - commercial			1,459				—				(1	)			1,458
Collateralized mortgage obligations			6,310				1				(100	)			6,211
Pooled trust preferred security			155				377				—				532
Total available-for-sale securities		$	141,411			$	1,542			$	(867	)		$	142,086

 

Available-for-sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2016
Obligations of U.S. government-sponsored entities and agencies		$	9,682			$	362			$	—			$	10,044
Obligations of state and political subdivisions			53,952				2,010				(8	)			55,954
Mortgage-backed securities - residential			58,702				920				(26	)			59,596
Mortgage-backed securities - commercial			1,485				41				—				1,526
Collateralized mortgage obligations			5,774				49				(3	)			5,820
Pooled trust preferred security			153				276				—				429
Total available-for-sale securities		$	129,748			$	3,658			$	(37	)		$	133,369

 

The following table summarizes the amortized cost and fair value of held-to-maturity securities at June 30, 2017 and 2016 and the corresponding gross unrecognized gains and losses:

 

Held-to-maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
June 30, 2017
Obligations of state and political subdivisions		$	4,259			$	73			$	(3	)		$	4,329
Total held-to-maturity securities		$	4,259			$	73			$	(3	)		$	4,329

 

Held-to-maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
June 30, 2016
Obligations of state and political subdivisions		$	3,494			$	125			$	—			$	3,619
Total held-to-maturity securities		$	3,494			$	125			$	—			$	3,619

  

 

The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2017:

  

		Amortized Cost				Fair Value				Average Yield / Cost
Available-for-sale
Obligations of government-sponsored entities:
Over 3 months through 1 year		$	1,000			$	1,000				2.07	%
Over 1 year through 5 years			5,091				5,171				2.24
Over 5 years through 10 years			6,480				6,416				2.20
Total obligations of government-sponsored entities			12,571				12,587				2.20
Obligations of state and political subdivisions:
Over 3 months through 1 year			552				555				3.67
Over 1 year through 5 years			12,336				12,556				3.57
Over 5 years through 10 years			21,544				21,951				3.73
Over 10 years			22,392				22,398				3.75
Total obligations of state and political subdivisions			56,824				57,460				3.70
Mortgage-backed securities - residential:
Over 3 months through 1 year			224				226				4.17
Over 1 year through 5 years			50,917				50,728				2.08
Over 5 years through 10 years			12,951				12,884				2.50
Total mortgage-backed securities - residential			64,092				63,838				2.17
Mortgage-backed securities - commercial:
Over 1 year through 5 years			1,459				1,458				1.97
Total mortgage-backed securities – commercial			1,459				1,458				1.97
Collateralized mortgage obligations:
Over 3 months through 1 year			221				221				1.63
Over 1 year through 5 years			4,101				4,057				1.88
Over 5 years through 10 years			1,988				1,933				2.13
Total collateralized mortgage obligations			6,310				6,211				1.95
Pooled trust preferred security			155				532				25.04
Total available-for-sale securities		$	141,411			$	142,086				2.80	%

 

		Amortized Cost				Fair Value				Average Yield / Cost
Held-to-maturity
Obligations of state and political subdivisions:
Over 5 years through 10 years		$	601			$	620				3.46	%
Over 10 years			3,658				3,709				2.31
Total held-to-maturity securities		$	4,259			$	4,329				2.47	%

 

The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances. The effective yield on the pooled trust preferred security was 25.04% due to the other-than-temporary impairment charges taken in prior years which reduced the amortized cost along with principal and interest payments being received during the 2017 fiscal year.

 

At June 30, 2017, 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 $16,589 to $272,867 at June 30, 2017 compared to $256,278 at June 30, 2016. Loan demand increased, particularly in the commercial and commercial real estate segments, principally as a result of increased calling efforts within and around the surrounding markets of the Bank’s branch locations and the loan production offices.

 

Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:

 

		2017				2016
Commercial		$	46,336			$	43,156
Commercial real estate:
Construction			5,588				7,755
Other			157,861				152,766
1-4 Family residential real estate:
Owner occupied			41,581				31,091
Non-owner occupied			14,377				14,438
Construction			1,993				1,269
Consumer loans			5,131				5,803
Total loans		$	272,867			$	256,278

 

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, 2017:

 

Due in one year or less		$	8,723
Due after one year but within five years			27,288
Due after five years			175,767
Total		$	211,778

 

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, 2017:

 

		Fixed Interest Rates				Variable Interest Rates
Total 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year		$	79,680			$	123,375

 

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 ownership, collateral type and loan purpose and applying the Bank’s two-year historical loss ratio, increased for more recent trends in loss experience, to each loan pool. Also, the local unemployment rate is monitored and additional reserves are applied to all loans that are not assigned a specific reserve if there is an increase in the local unemployment rate. Specific reserves are determined by management’s review of delinquent loans, impaired loans, non-accrual loans, loans classified as substandard, watch list loans, loans to industries experiencing economic difficulties and other selected large loans. The collectability of these loans is evaluated after considering the current financial position of the borrower, the estimated market value of the collateral, guarantees and the Corporation’s collateral position versus other creditors. Judgments, which are necessarily subjective, as to the probability of loss and the amount of such loss, are formed on these loans, as well as other loans in the aggregate.

 

Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. As of June 30, 2017, impaired loans totaled $2,234, of which $1,152 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:

 

		2017				2016
Non-accrual loans		$	1,187			$	6,034
Accruing loans past due 90 days or more			—				—
Total non-performing loans		$	1,187			$	6,034
Other real estate owned			71				—
Total non-performing assets		$	1,258			$	6,034
Impaired loans		$	2,234			$	6,892
Accruing restructured loans		$	1,082			$	817

 

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 such time as they are sold or otherwise disposed.

 

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:  

 

		2017				2016
Allowance for loan losses at beginning of year		$	3,566			$	2,432
Loans charged off:
Commercial			6				—
Commercial real estate			1,061				4
1-4 Family residential real estate			44				311
Consumer loans			37				80
Total charge offs			1,148				395
Recoveries:
Commercial			1				—
1-4 Family residential real estate			38				10
Consumer loans			33				21
Total recoveries			72				31
Net charge offs			1,076				364
Provision for loan losses charged to operations			596				1,498
Allowance for loan losses at end of year		$	3,086			$	3,566

  

 

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:

 

		Allocation of the Allowance for Loan Losses
		Allowance Amount				% of Loan Type to Total Loans				Allowance Amount				% of Loan Type to Total Loans
		June 30, 2017								June 30, 2016
Commercial		$	518				17.0	%		$	505				16.8	%
Commercial real estate loans			2,038				59.9				2,518				62.6
1-4 Family residential real estate			473				21.2				402				18.3
Consumer loans			57				1.9				141				2.3
Total		$	3,086				100.0	%		$	3,566				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.

 

Cash surrender value of life insurance. Cash surrender value of life insurance increased to $9,065 at June 30, 2017 compared with $6,819 at June 30, 2016 principally as a result of the investment of $2,000 in additional bank owned life insurance policies.

 

Funding Sources. Total deposits increased by $27,823, or 8.0%, from $346,648 at June 30, 2016 to $374,471 at June 30, 2017. For the fiscal year ended June 30, 2017 savings deposits increased by $16,548, or 12.3%, interest bearing demand deposits increased by $5,313, or 10.9% and non-interest bearing demand deposits increased by $4,459, or 4.5% from the same prior year period. The increases in non-interest, savings and interest bearing demand deposits is primarily from the opening of the new branch location in Jefferson, Ohio and from business and public fund customer relationships as a result of the continued focus on attracting low cost core deposit account relationships.

 

The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:

 

		Years Ended June 30,
		2017								2016
		Amount				Rate				Amount				Rate
Non-interest bearing demand deposit		$	103,017				—			$	95,469				—
Interest bearing demand deposit			49,832				0.15	%			47,643				0.14	%
Savings			141,279				0.13				136,442				0.09
Certificates and other time deposits			66,761				0.79				65,225				0.75
Total		$	360,889				0.22	%		$	344,779				0.20	%

 

The following table summarizes time deposits issued in amounts of $100 thousand or more as of June 30, 2017 by time remaining until maturity:

 

Maturing in:
Under 3 months		$	2,457
Over 3 to 6 months			7,206
Over 6 to 12 months			7,844
Over 12 months			10,489
Total		$	27,966

 

See Note 6—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.

 

Capital Resources

 

Total shareholders’ equity decreased by $258 from $43,793 at June 30, 2016 to $43,535 at June 30, 2017. The decrease was primarily the result of a net reduction of $1,944 in accumulated other comprehensive income from a decline in unrealized gains on the mark-to-market of available-for-sale securities and cash dividends paid of $1,308. These decreases were partially offset by net income of $2,994 for the current fiscal year.

 

  

At June 30, 2017, 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 10 of 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 2017 fiscal year were $5,379 and net cash inflows from financing activities were $26,411. Net cash outflows from investing activities were $32,059. The major sources of cash were a $27,823 net increase in deposits and a $29,211 net increase from sales, maturities or principal pay downs on available-for-sale securities. The major uses of cash were the $41,752 purchase of available-for-sale securities and a $18,120 net increase in loans. Total cash and cash equivalents were $9,912 as of June 30, 2017 compared to $10,181 at June 30, 2016.

 

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 line 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 ten 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. The 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 available currently 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. Time deposit interest rates continued to remain low during the 2017 fiscal year. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of non-interest bearing demand deposits resulting in the cost of funds remaining at a low level of 0.38%.

 

Jumbo time deposits (those with balances of $250 thousand and over) were $14,252 and $14,176 at June 30, 2017 and 2016, 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. The Bank had no brokered deposits at June 30, 2017.

 

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, 2017 the Bank could, without prior approval, declare a dividend of approximately $3,612.

 

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 of 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 is 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 of the Consolidated Financial Statements for additional information related to significant accounting policies.

 

Allowance for Loan Losses. Management periodically reviews the loan portfolio in order 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 or not 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.

 

Contractual Obligations, Commitments and Contingent Liabilities

 

The following table presents, as of June 30, 2017, 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.  

 

		Note Reference				2018				2019				2020				2021				2022				Thereafter				Total
Certificates of deposit			5			$	34,935			$	17,962			$	5,948			$	3,789			$	3,172			$	705			$	66,511
Short-term borrowings			6				23,986				—				—				—				—				—				23,986
Federal Home Loan advances			7				570				2,050				1,500				1,500				1,700				5,000				12,320
Salary continuation plan			8				117				141				147				147				147				1,453				2,152
Operating leases			4				97				50				50				25				—				—				222
Deposits without maturity							—				—				—				—				—				—				307,960

  

 

Note 11- 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, 2017, 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, in an effort to execute a sound and defensive interest rate risk management policy.

 

Forward-Looking Statements

 

All statements set forth in this discussion or future filings by the Corporation with the Securities and Exchange Commission, or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, that are not historical in nature, including words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Factors that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:

 

	●	material unforeseen changes in the financial condition or results of Consumers National Bank’s customers;
	●	the economic impact from the oil and gas activity in the region could be less than expected or the timeline for development could be longer than anticipated;
	●	regional and national economic conditions becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality of assets and the underlying value of collateral could prove to be less valuable than otherwise assumed or debtors being unable to meet their obligations;
	●	pricing and liquidity pressures that may result in a rising market rate environment;
	●	competitive pressures on product pricing and services;
	●	rapid fluctuations in market interest rates could result in changes in fair market valuations and net interest income; and
	●	the nature, extent, and timing of government and regulatory actions.

 

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. 

 

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

Not applicable for Smaller Reporting Companies.

 

  

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Consumers Bancorp, Inc.

Minerva, Ohio

 

We have audited the accompanying consolidated balance sheets of Consumers Bancorp, Inc. as of June 30, 2017 and 2016 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Consumers Bancorp, Inc. as of June 30, 2017 and 2016 and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

  

 

 

		/s/ Crowe Horwath LLP
		Crowe Horwath LLP

 

Cleveland, Ohio

September 21, 2017  

 

 

CONSOLIDATED BALANCE SHEETS

As of June 30, 2017 and 2016

(Dollar amounts in thousands, except per share data)

 

		2017				2016
ASSETS:
Cash on hand and noninterest-bearing deposits in financial institutions		$	9,439			$	8,164
Federal funds sold and interest-bearing deposits in financial institutions			473				2,017
Total cash and cash equivalents			9,912				10,181
Certificate of deposits in financial institutions			3,921				5,906
Securities, available-for-sale			142,086				133,369
Securities, held-to-maturity (fair value 2017 $4,329 and 2016 $3,619)			4,259				3,494
Federal bank and other restricted stocks, at cost			1,425				1,396
Loans held for sale			1,252				1,048
Total loans			272,867				256,278
Less allowance for loan losses			(3,086	)			(3,566	)
Net loans			269,781				252,712
Cash surrender value of life insurance			9,065				6,819
Premises and equipment, net			13,398				13,585
Other real estate owned			71				—
Accrued interest receivable and other assets			2,713				1,880
Total assets		$	457,883			$	430,390
LIABILITIES:
Deposits:
Non-interest bearing demand		$	102,683			$	98,224
Interest bearing demand			54,123				48,810
Savings			151,154				134,606
Time			66,511				65,008
Total deposits			374,471				346,648
Short-term borrowings			23,986				19,129
Federal Home Loan Bank advances			12,320				17,281
Accrued interest payable and other liabilities			3,571				3,539
Total liabilities			414,348				386,597
Commitments and contingent liabilities (Note 11)
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, 2017 and 2016			14,630				14,630
Retained earnings			30,122				28,432
Treasury stock, at cost (130,606 and 130,375 common shares at June 30, 2017 and 2016, respectively)			(1,662	)			(1,658	)
Accumulated other comprehensive income			445				2,389
Total shareholders’ equity			43,535				43,793
Total liabilities and shareholders’ equity		$	457,883			$	430,390

  

 

See accompanying notes to consolidated financial statements.  

 

 

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2017 and 2016

(Dollar amounts in thousands, except per share data)

 

		2017				2016
Interest income:
Loans, including fees		$	12,333			$	11,211
Federal funds sold and interest-bearing deposits in financial institutions			122				117
Securities, taxable			1,678				1,880
Securities, tax-exempt			1,434				1,399
Total interest and dividend income			15,567				14,607
Interest expense:
Deposits			792				679
Short-term borrowings			90				39
Federal Home Loan Bank advances			226				184
Total interest expense			1,108				902
Net interest income			14,459				13,705
Provision for loan losses			596				1,498
Net interest income after provision for loan losses			13,863				12,207
Other income:
Service charges on deposit accounts			1,245				1,269
Debit card interchange income			1,161				948
Bank owned life insurance income			246				193
Gain on sale of mortgage loans			258				186
Securities gains, net			209				202
Gain (loss) on disposition or write-down of other real estate owned			(35	)			2
Other			166				188
Total other income			3,250				2,988
Other expenses:
Salaries and employee benefits			7,136				6,933
Occupancy and equipment			1,888				1,612
Data processing expenses			583				578
Professional and director fees			608				447
Federal Deposit Insurance Corporation assessments			175				268
Franchise taxes			336				334
Marketing and advertising			267				302
Loan and collection expenses			155				197
Telephone and communications			305				321
Debit card processing expenses			636				463
Other			1,389				1,314
Total other expenses			13,478				12,769
Income before income taxes			3,635				2,426
Income tax expense			641				279
Net income		$	2,994			$	2,147
Basic and diluted earnings per share		$	1.10			$	0.79

  

 

See accompanying notes to consolidated financial statements.

 

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended June 30, 2017 and 2016

(Dollar amounts in thousands, except per share data)

 

		2017				2016
Net income		$	2,994			$	2,147
Other comprehensive income, net of tax:
Net change in unrealized gains (losses):
Unrealized gains (loss) arising during the period			(2,737	)			2,460
Reclassification adjustment for gains included in income			(209	)			(202	)
Net unrealized gain (loss)			(2,946	)			2,258
Income tax effect			1,002				(768	)
Other comprehensive income (loss)			(1,944	)			1,490
Total comprehensive income		$	1,050			$	3,637

 

 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended June 30, 2017 and 2016

(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, 2015		$	14,630			$	27,589			$	(1,652	)		$	899			$	41,466
Net income							2,147												2,147
Other comprehensive income															1,490				1,490
311 Dividend reinvestment plan shares associated with expired and forfeited restricted stock awards retired to treasury							6				(6	)							—
Cash dividends declared ($0.48 per share)							(1,310	)