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EX-32.1 - EXHIBIT 32.1 - CONSUMERS BANCORP INC /OH/ex_123635.htm
EX-31.2 - EXHIBIT 31.2 - CONSUMERS BANCORP INC /OH/ex_123634.htm
EX-31.1 - EXHIBIT 31.1 - CONSUMERS BANCORP INC /OH/ex_123633.htm
EX-23 - EXHIBIT 23 - CONSUMERS BANCORP INC /OH/ex_123632.htm
EX-21 - EXHIBIT 21 - CONSUMERS BANCORP INC /OH/ex_123631.htm
 

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended June 30, 2018

 

Commission File No. 033-79130

 CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 OHIO

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, 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 ☐

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 Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No ☒

 

Based on the closing sales price on December 31, 2017, the aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was approximately $41,952,356.

 

The number of shares outstanding of the Registrant’s common stock, without par value was 2,729,644 at September 12, 2018.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement, dated September 12, 2018, for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 



 

 

 

 

 

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

 

Supervision and Regulation

 

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

 

Regulation of the Corporation

 

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

 

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

 

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

 

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

 

Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the areas of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications 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.

 

3

 

 

Regulation of the Bank

 

As a national bank, Consumers National Bank is subject to regulation, supervision and examination by the OCC and by the Federal Deposit Insurance Corporation (FDIC). These examinations are designed primarily for the protection of the depositors of the Bank.

 

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

 

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

 

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

 

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

 

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

 

The OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC.  These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The OCC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios. At June 30, 2018, the Bank exceeded minimum regulatory capital requirements to be considered well-capitalized.  

 

4

 

 

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

 

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

 

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

 

USA Patriot Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act). The Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial services companies implement additional policies and procedures with respect to additional measures designed to address any or all of the following matters: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.

 

Cybersecurity: In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack.

 

In the ordinary course of business, electronic communications and information systems are relied upon to conduct operations, to deliver services to customers and to store sensitive data. The Corporation employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, increasing volume of attacks, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by the Corporation and its customers.

 

Employees

 

As of June 30, 2018, the Bank employed 114 full-time and 25 part-time employees. None of the employees are represented by a collective bargaining group. Management considers its relations with employees to be good.

 

5

 

 

Available Information 

 

The Corporation files annual, quarterly, and current reports, proxy statements, and other information with the SEC. These filings are available to the public over the Internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any document that the Corporation files at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

The Corporation’s reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are available, free of charge, on our website (www.consumersbank.com) as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website. The Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website. A printed copy of any of these documents will be provided to any requesting shareholder.

 

ITEM 1A—RISK FACTORS

 

Not applicable for Smaller Reporting Companies.

 

ITEM 1B—UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2—PROPERTIES

 

The Bank operates fourteen full service banking facilities and one loan production office (LPO) as noted below:

 

Location

  

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, Ohio 44632

  

X

  

  

Jackson-Belden

  

4026 Dressler Road NW, Canton, Ohio 44718

  

X

  

  

Bergholz

  

256 2nd Street, Bergholz, Ohio 43908

  

  

  

X

Fairlawn

  

3680 Embassy Parkway Suite B, Fairlawn, Ohio 44333

  

  

  

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 therein that is adverse to the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the financial position or results of operations of the Corporation.

 

ITEM 4—MINE SAFETY DISCLOSURES 

 

None.

 

6

 

 

PART II  

 

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

 

The Corporation had 2,729,644 common shares outstanding on June 30, 2018 with 740 shareholders of record and an estimated 504 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.

 

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

 

Quarter Ended

 

September 30,
2017

   

December 31,
2017

   

March 31,
2018

   

June 30,
2018

 

High

  $ 21.00     $ 21.85     $ 21.15     $ 25.00  

Low

    18.51       20.26       20.00       20.25  

Cash dividends paid per share

    0.12       0.125       0.125       0.125  

 

Quarter Ended

 

September 30,
201
6

   

December 31,
201
6

   

March 31,
201
7

   

June 30,
201
7

 

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  

 

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

 

The Corporation’s management is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent on the Corporation’s future earnings, capital requirements and financial condition. The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. See Note 1 and Note 11 to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for dividend restrictions.

 

There were no repurchases of the Corporation’s securities during the 2018 fiscal year.

 

 

ITEM 6—SELECTED FINANCIAL DATA 

 

Not applicable for Smaller Reporting Companies.

 

7

 

 

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

(Dollars in thousands, except per share data)

 

General

 

The following is management’s analysis of the Corporation’s financial condition and results of operations as of and for the years ended June 30, 2018 and 2017. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

 

Forward-Looking Statements

 

Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, all statements set forth in future filings by the Corporation with the SEC, or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, that are not historical in nature, including words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Factors that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:

 

 

changes in local, regional and national economic conditions becoming less favorable than we expect, resulting in a deterioration in credit quality of our loan assets, among other things;

 

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

 

inflation, interest rate, securities market and monetary fluctuations;

 

changes in the level of non-performing assets and charge-offs;

 

declining asset values impacting the underlying value of collateral;

 

the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;

 

competitive pressures on product pricing and services;

 

breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;

 

changes in the reliability of our vendors, internal control systems or information systems;

 

our ability to attract and retain qualified employees;

 

changes in accounting policies, rules and interpretations;

 

unanticipated changes in our liquidity position, including, but not limited to, changes in the cost of liquidity and our ability to find alternative funding sources; and

 

changes in consumer spending, borrowing and savings habits.

  

The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations. 

 

Overview

 

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

  

8

 

 

Comparison of Results of Operations for the Years Ended June 30, 2018 and June 30, 2017

 

Net Income. Net income was $3,581 for fiscal year 2018 compared with $2,994 for fiscal year 2017. The following key factors summarize our results of operations for the year ended June 30, 2018 compared with the same prior year period:

 

 

net interest income increased by $1,427, or 9.9%, in fiscal year 2018, primarily as a result of an increase in average loans receivable;

 

loan loss provision expense in fiscal year 2018 declined by $286 and totaled $310 in 2018 compared with $596 in 2017;

 

total other income increased by $141, or 4.3% in fiscal year 2018;

 

total other expenses increased by $759, or 5.6% in fiscal year 2018; and

 

the enactment of the Tax Cuts and Jobs Act (Tax Act) resulted in a charge to income tax expense of $348 in conjunction with writing down the Corporation’s net deferred tax assets in fiscal year 2018.

 

Return on average equity and return on average assets were 8.15% and 0.75%, respectively, for the 2018 fiscal year-to-date period compared with 6.89% and 0.67%, respectively, for the same period last year.

 

Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. The federal income tax rate in effect for the 2018 fiscal year was 27.55% and for the 2017 fiscal year was 34.0%. With the enactment of the Tax Act, the statutory tax rate was changed in the second quarter of fiscal year 2018 to 27.55% by using a blended rate of the new 21.0% federal rate that went into effect on January 1, 2018 and the previous federal rate of 34.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

 

Net Interest Income Year ended June 30,

 

2018

   

2017

 

Net interest income

  $ 15,886     $ 14,459  

Taxable equivalent adjustments to net interest

    543       769  

Net interest income, fully taxable equivalent

  $ 16,429     $ 15,228  

Net interest margin

    3.55

%

    3.51

%

Taxable equivalent adjustment

    0.12       0.18  

Net interest margin, fully taxable equivalent

    3.67

%

    3.69

%

 

FTE net interest income for the 2018 fiscal year was $16,429, an increase of $1,201 or 7.9%, from $15,228 in the 2017 fiscal year. The Corporation’s tax equivalent net interest margin for the year ended June 30, 2018 was 3.67% and for the year ended 2017 was 3.69%. FTE interest income for the 2018 fiscal year was $18,100, an increase of $1,764, or 10.8%, from $16,336 in the 2017 fiscal year. Growth of $27,647, or 10.3%, in average loans receivable positively impacted interest income as well as an increase in the yield on average interest-earning assets. Interest expense for the 2018 fiscal year was $1,671, an increase of $563, or 50.8%, from $1,108 in the 2017 fiscal year. This was mainly the result of an increase in short-term rates impacting the rates paid on savings, short-term borrowings and time deposits as well as a $27,961, or 9.5%, growth in total interest-bearing liabilities.

 

9

 

 

Average Balance Sheet and Net Interest Margin

 

   

2018

   

2017

 
   

Average
Balance

   

Interest

   

Yield/
Rate

   

Average
Balance

   

Interest

   

Yield/
Rate

 

Interest earning assets:

                                               

Taxable securities

  $ 83,915     $ 1,997       2.36

%

  $ 77,291     $ 1,678       2.19

%

Nontaxable Securities (1)

    60,072       1,996       3.34       60,036       2,176       3.68  

Loans receivable (1)

    295,095       13,956       4.73       267,448       12,360       4.62  

Interest bearing deposits and federal funds sold

    8,546       151       1.77       9,213       122       1.32  

Total interest earning assets

    447,628       18,100       4.04

%

    413,988       16,336       3.96

%

Noninterest earning assets

    31,449                       29,602                  

Total assets

  $ 479,077                     $ 443,590                  

Interest bearing liabilities:

                                               

Interest bearing demand

  $ 57,272     $ 115       0.20

%

  $ 49,832     $ 75       0.15

%

Savings

    155,000       355       0.23       141,279       187       0.13  

Time deposits

    71,404       740       1.04       66,761       530       0.79  

Short-term borrowings

    24,422       240       0.98       21,053       90       0.43  

FHLB advances

    13,428       221       1.65       14,640       226       1.54  

Total interest-bearing liabilities

    321,526       1,671       0.52

%

    293,565       1,108       0.38

%

Noninterest-bearing liabilities

    113,595                       106,578                  

Total liabilities

    435,121                       400,143                  

Shareholders’ equity

    43,956                       43,447                  

Total liabilities and shareholders’ equity

  $ 479,077                     $ 443,590                  

Net interest income, interest rate spread (1)

          $ 16,429       3.52

%

          $ 15,228       3.58

%

Net interest margin (net interest as a percent of average interest earning assets) (1)

                    3.67

%

                    3.69

%

Federal tax exemption on non-taxable securities and loans included in interest income

          $ 543                     $ 769          

Average interest earning assets to interest bearing liabilities

                    139.22

%

                    141.02

%

____________  

(1)

Calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 27.55% in the 2018 fiscal year and 34.0% in the 2017 fiscal year 

  

10

 

 

The following table presents the changes in the Corporation’s interest income and interest expense resulting from changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities. Changes attributable to both rate and volume that cannot be segregated have been allocated in proportion to the changes due to rate and volume.

 

INTEREST RATES AND INTEREST DIFFERENTIAL

 

   

2018 Compared to 2017
Increase / (Decrease)

   

2017 Compared to 2016

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

  $ 319     $ 183     $ 136     $ (202

)

  $ (168

)

  $ (34

)

Nontaxable securities (1)

    (180

)

    22       (202

)

    70       174       (104

)

Loans receivable (2)

    1,596       1,302       294       1,118       1,241       (123

)

Federal funds sold

    29       (9

)

    38       5       (26

)

    31  

Total interest income

    1,764       1,498       266       991       1,221       (230

)

Interest bearing liabilities:

                                               

Interest bearing demand

    40       12       28       6       3       3  

Savings deposits

    168       20       148       65       4       61  

Time deposits

    210       39       171       42       12       30  

Short-term borrowings

    150       16       134       51             51  

FHLB advances

    (5

)

    (19

)

    14       42       121       (79

)

Total interest expense

    563       68       495       206       140       66

 

Net interest income

  $ 1,201     $ 1,430     $ (229

)

  $ 785     $ 1,081     $ (296

)

____________  

(1)

Nontaxable income is adjusted to a fully tax equivalent basis utilizing a statutory federal income tax rate of 27.55% in the 2018 fiscal year and 34.0% in the 2017 fiscal year.

(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 $310 in fiscal year 2018 compared to $596 in fiscal year 2017.

 

For the 2018 fiscal year, net recoveries of $26 were recorded compared with net charge-offs of $1,076 for the same period last year. Net charge-offs for the 2017 fiscal year were primarily within the commercial real estate portfolio and included a partial charge-off of $700 for one credit for which a specific valuation allowance was reserved for in the 2016 fiscal year. The Bank is currently pursuing all legal avenues against the borrowers in an effort to recover a portion of the loss in future periods. The allowance for loan losses as a percentage of loans was 1.07% at June 30, 2018 and 1.13% at June 30, 2017.

 

Non-performing loans were $1,090 as of June 30, 2018 and represented 0.34% of total loans. This compared with $1,187, or 0.44% of total loans at June 30, 2017. Non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors closely monitor these loans and believe the prospect for recovery of principal, less identified specific reserves, are favorable.

 

Other Income. Total other income increased by $141, or 4.3%, to $3,391 for the 2018 fiscal year.

 

Debit card interchange income increased by $172, or 14.8% in 2018 to $1,333; however, debit card processing expenses increased by $118 over the same period.

 

Gain on sale of mortgage loans increased by $109, or 42.2%, from the same period last year primarily as a result of an increase in volume.

 

These increases were partially offset by a $176 decline in gains from the sale of securities.

 

Other Expenses. Total other expenses were $14,237 for the year ended June 30, 2018; an increase of $759, or 5.6%, from $13,478 for the year ended June 30, 2017.

 

11

 

 

Salaries and employee benefit expenses increased by $556, or 7.8%, during the fiscal year ended June 30, 2018 mainly due to an increase in salary and incentive expenses.

 

Professional and director fees decreased by $85, or 14.0%, during the 2018 fiscal year from the same period last year primarily as a result of a decrease in legal and consulting fees.

 

Loan and collection expenses decreased by $38, or 24.5%, during the 2018 fiscal year from the same period last year primarily as a result of a reduction in collection expenses.

 

Marketing and advertising expenses increased by $41, or 15.4%, during the 2018 fiscal year from the same period last year primarily due to an increase in advertising and promotional campaigns initiated to attract core deposit customers.

 

Income Tax Expense. Income tax expense totaled $1,149 and $641 and the effective tax rates were 24.3% and 17.6% for the years ended June 30, 2018 and 2017, respectively. Income tax expense and the effective tax rate was higher in the 2018 fiscal year period compared to the same prior year period primarily due to the enactment of the Tax Act and increased income before income taxes. The enactment of the Tax Act required the Corporation to revalue its deferred tax assets and liabilities based upon the lower enacted federal corporate income tax rate at which the Corporation expects to recognize the benefit. During the three months ended December 31, 2017 a one-time income tax expense of $348 was recorded in conjunction with writing down its net deferred tax assets. The Tax Act lowered the federal corporate tax rate beginning on January 1, 2018. As a result, the Corporation utilized a blended tax rate for its fiscal year ending June 30, 2018. In addition, the effective tax rate differs from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and earnings on bank owned life insurance.

 

Financial Condition

 

Total assets at June 30, 2018 were $502,619 compared to $457,883 at June 30, 2017, an increase of $44,736, or 9.8%. The growth in total assets was mainly attributed to an increase of $45,642, or 16.7%, in total loans. This growth was primarily funded by an increase in total deposits.

 

Securities. Total securities increased by $1,707 to $148,052 at June 30, 2018, of which $144,028 were classified as available-for-sale and $4,024 were classified as held-to-maturity. The securities portfolio is mainly comprised of residential mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, state and political subdivisions and obligations of government-sponsored enterprises.

 

The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2018 and 2017 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:

 

Available-for-sale

 

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair
Value

 

June 30, 2018

                               

Obligations of U.S. government-sponsored entities and agencies

  $ 16,488     $ 6     $ (372

)

  $ 16,122  

Obligations of state and political subdivisions

    56,964       339       (713

)

    56,590  

Mortgage-backed securities - residential

    65,062       6       (1,660

)

    63,408  

Mortgage-backed securities - commercial

    1,432             (17

)

    1,415  

Collateralized mortgage obligations

    5,973       9       (216

)

    5,766  

Pooled trust preferred security

    178       549             727  

Total available-for-sale securities

  $ 146,097     $ 909     $ (2,978

)

  $ 144,028  

 

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  

 

12

 

 

 The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2018 and 2017 and the corresponding gross unrecognized gains and losses:

 

Held-to-maturity

 

Amortized
Cost

   

Gross
Unrecognized

Gains

   

Gross
Unrecognized
Losses

   

Fair
Value

 

June 30, 2018

                               

Obligations of state and political subdivisions

  $ 4,024     $ 24     $     $ 4,048  

Total held-to-maturity securities

  $ 4,024     $ 24     $     $ 4,048  

 

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  

 

The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2018:

  

   

Amortized
Cost

   

Fair
Value

   

Average
Yield /
Cost

 

Available-for-sale

                       

Obligations of government-sponsored entities:

                       

Over 1 year through 5 years

  $ 9,375     $ 9,205       2.25

%

Over 5 years through 10 years

    7,113       6,917       2.68  

Total obligations of government-sponsored entities

    16,488       16,122       2.44  

Obligations of state and political subdivisions:

                       

3 Months or less

    1,346       1,348       3.83  

Over 3 months through 1 year

    1,742       1,749       3.40  

Over 1 year through 5 years

    11,412       11,440       2.90  

Over 5 years through 10 years

    20,349       20,318       3.27  

Over 10 years

    22,115       21,735       3.26  

Total obligations of state and political subdivisions

    56,964       56,590       3.21  

Mortgage-backed securities - residential:

                       

Over 3 months through 1 year

                       

Over 1 year through 5 years

    42,140       40,940       2.18  

Over 5 years through 10 years

    22,922       22,468       2.86  

Total mortgage-backed securities - residential

    65,062       63,408       2.42  

Mortgage-backed securities - commercial:

                       

Over 1 year through 5 years

    1,432       1,415       1.97  

Total mortgage-backed securities - commercial

    1,432       1,415       1.97  

Collateralized mortgage obligations:

                       

Over 3 months through 1 year

                       

Over 1 year through 5 years

    4,068       3,908       1.86  

Over 5 years through 10 years

    1,905       1,858       2.89  

Total collateralized mortgage obligations

    5,973       5,766       2.19  

Pooled trust preferred security

    178       727       32.10  

Total available-for-sale securities

  $ 146,097     $ 144,028       2.75

%

 

   

Amortized
Cost

   

Fair
Value

   

Average
Yield /
Cost

 

Held-to-maturity

                       

Obligations of state and political subdivisions:

                       

Over 5 years through 10 years

  $ 527     $ 527       2.91

%

Over 10 years

    3,497       3,521       2.38  

Total held-to-maturity securities

  $ 4,024     $ 4,048       2.45

%

 

13

 

 

The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances. The effective yield on the pooled trust preferred security was 32.10% due to the other-than-temporary impairment charges taken in prior years which reduced the amortized cost along with principal and interest payments being received during the 2018 fiscal year.

 

At June 30, 2018, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, with an aggregate book value which exceeds 10% of shareholders’ equity.

 

Loans. Loan receivables increased by $45,642 to $318,509 at June 30, 2018 compared to $272,867 at June 30, 2017. Loan demand increased, particularly in the commercial and commercial real estate segments, principally as a result of increased calling efforts within and around the surrounding markets of the Bank’s branch locations and the loan production office.

 

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

 

   

2018

   

2017

 

Commercial

  $ 60,953     $ 46,336  

Commercial real estate:

               

Construction

    5,375       5,588  

Other

    182,966       157,861  

1-4 Family residential real estate:

               

Owner occupied

    47,683       41,581  

Non-owner occupied

    15,480       14,377  

Construction

    1,187       1,993  

Consumer loans

    4,865       5,131  

Total loans

  $ 318,509     $ 272,867  

 

The following is a schedule of contractual maturities and repayments of 1-4 family residential real estate construction, commercial and commercial real estate loans, as of June 30, 2018:

 

Due in one year or less

  $ 20,860  

Due after one year but within five years

    31,575  

Due after five years

    198,046  

Total

  $ 250,481  

 

The following is a schedule of fixed and variable rate 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2018:

 

   

Fixed
Interest Rates

   

Variable
Interest Rates

 

Total 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year

  $ 96,164     $ 133,457  

 

Foreign Outstandings. There were no foreign outstandings during the periods presented. There are no concentrations of loans greater than 10% of total loans, which are not otherwise disclosed as a category of loans.

 

Allowance for Loan Losses. The allowance for loan losses balance and the provision charged to expense are judgmentally determined by management based upon a periodic review of the loan portfolio, an analysis of impaired loans, past loan loss experience, current economic conditions, collateral value assumptions for collateral-dependent loans and various other circumstances which are subject to change over time. Probable incurred losses are estimated by stratifying the total loan portfolio into pools of homogenous loans by occupancy, collateral type and loan purpose and applying the Bank’s historical loss ratio, increased for more recent trends in loss experience, to each loan pool. Also, local unemployment rates are monitored and additional reserves are applied to all loans that are not assigned a specific reserve if there is an increase in the local unemployment rate. Specific reserves are determined by management’s review of delinquent loans, impaired loans, non-accrual loans, loans classified as substandard, watch list loans, loans to industries experiencing economic difficulties and other selected large loans. The collectability of these loans is evaluated after considering the current financial position of the borrower, the estimated market value of the collateral, guarantees and the Corporation’s collateral position versus other creditors. Judgments, which are necessarily subjective, as to the probability of loss and the amount of such loss, are formed on these loans, as well as other loans in the aggregate.

 

14

 

 

Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. As of June 30, 2018, impaired loans totaled $2,060, of which $1,090 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.  

 

The following schedule summarizes non-accrual, past due, impaired and restructured loans for the years ended June 30:

 

   

2018

   

2017

 

Non-accrual loans

  $ 1,090     $ 1,187  

Accruing loans past due 90 days or more

           

Total non-performing loans

  $ 1,090     $ 1,187  

Other real estate owned

          71  

Total non-performing assets

  $ 1,090     $ 1,258  

Impaired loans

  $ 2,060     $ 2,234  

Accruing restructured loans

  $ 971     $ 1,082  

 

The non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to bring the loan current. Properties acquired by the Corporation as a result of foreclosure, or by deed in lieu of foreclosure, are classified as “other real estate owned” until they are sold or otherwise disposed of.

 

Potential Problem Loans. There were no loans, not otherwise identified above, included on management’s watch or troubled loan lists that management has serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Management’s watch and troubled loan lists includes loans which management has some doubt as to the borrowers’ ability to comply with the present repayment terms, loans which management is actively monitoring due to changes in the borrower’s financial condition and other loans which management wants to more closely monitor due to special circumstances. These loans and their potential loss exposure have been considered in management’s analysis of the adequacy of the allowance for loan losses.

 

The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the years ended June 30:  

 

   

2018

   

2017

 

Allowance for loan losses at beginning of year

  $ 3,086     $ 3,566  

Loans charged off:

               

Commercial

          6  

Commercial real estate

    4       1,061  

1-4 Family residential real estate

    33       44  

Consumer loans

    24       37  

Total charge offs

    61       1,148  

Recoveries:

               

Commercial

    17       1  

Commercial real estate

    41        

1-4 Family residential real estate

    14       38  

Consumer loans

    15       33  

Total recoveries

    87       72  

Net charge-offs (recoveries)

    (26

)

    1,076  

Provision for loan losses charged to operations

    310       596  

Allowance for loan losses at end of year

  $ 3,422     $ 3,086  

  

15

 

 

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, 2018

   

June 30, 2017

 

Commercial

  $ 586       19.1

%

  $ 518       17.0

%

Commercial real estate loans

    2,277       59.2       2,038       59.9  

1-4 Family residential real estate

    499       20.2       473       21.2  

Consumer loans

    60       1.5       57       1.9  

Total

  $ 3,422       100.0

%

  $ 3,086       100.0

%

 

While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur.

 

Funding Sources. Total deposits increased by $55,492, or 14.8%, from $374,471 at June 30, 2017 to $429,963 at June 30, 2018. During the quarter ended June 30, 2018, the nature of some of our public fund deposit account relationships changed. As a result, $21,163 in public funds previously reported as short-term borrowings are now reported as deposit accounts. If not for this change, deposits would have increased by $34,329, or 9.2%, for the 12-month period ended June 30, 2018 compared to June 30, 2017. For the fiscal year ended June 30, 2018, interest bearing demand deposits increased by $27,176, or 50.2%, time deposits increased by $12,030, or 18.1%, savings deposits increased by $11,050, or 7.3% and noninterest-bearing demand deposits increased by $5,236, or 5.1% from the same prior year period. The increases in noninterest-bearing demand, savings and time deposits is primarily from business and public fund customer relationships as a result of the continued focus on attracting low cost core deposit account relationships and from the opening of the new branch location in Jefferson, Ohio.

 

Short-term borrowings decreased by $10,619, or 44.3%, from $23,986 at June 30, 2017 to $13,367 at June 30, 2018. As mentioned in the preceding paragraph, short-term borrowings declined primarily as a result of public fund sweep repurchase agreements that were previously reported as short-term borrowings are now reported as deposit accounts. This decline was partially offset by an $8,881 increase in federal funds purchased.

 

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

 

   

Years Ended June 30,

 
   

2018

   

2017

 
   

Amount

   

Rate

   

Amount

   

Rate

 

Noninterest-bearing demand deposit

  $ 109,675           $ 103,017        

Interest-bearing demand deposit

    57,272       0.20

%

    49,832       0.15

%

Savings

    155,000       0.23       141,279       0.13  

Certificates and other time deposits

    71,404       1.04       66,761       0.79  

Total

  $ 393,351       0.31

%

  $ 360,889       0.22

%

 

The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2018 by time remaining until maturity:

 

Maturing in:

       

Under 3 months

  $ 3,090  

Over 3 to 6 months

    8,181  

Over 6 to 12 months

    7,366  

Over 12 months

    20,786  

Total

  $ 39,423  

 

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

 

16

 

 

Capital Resources

 

Total shareholders’ equity increased by $226 from $43,535 at June 30, 2017 to $43,761 at June 30, 2018. The increase was primarily the result of $3,581 of net income for the current fiscal year. This increase was partially offset by a net reduction of $2,080 in accumulated other comprehensive income from a shift in unrealized gains on the mark-to-market of available-for-sale securities to net unrealized losses and cash dividends paid of $1,351.

 

At June 30, 2018, management believes the Bank complied with all regulatory capital requirements. Based on the Bank’s computed regulatory capital ratios, the OCC has determined the Bank to be well capitalized under the Federal Deposit Insurance Act as of its latest exam date. The Bank’s actual and required capital amounts are disclosed in Note 11-Regulatory Matters to the Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would cause the Bank’s capital category to change.

 

Liquidity 

 

Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions. The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in federal funds sold or interest-bearing deposit accounts with other financial institutions.

 

Net cash inflows from operating activities for the 2018 fiscal year were $5,851 and net cash inflows from financing activities were $42,958. Net cash outflows from investing activities were $50,949. The major sources of cash were a $55,492 net increase in deposits and an $18,262 net increase from sales, maturities or principal pay downs on available-for-sale securities. The major uses of cash were a $45,869 net increase in loans and the $23,878 purchase of available-for-sale securities. Total cash and cash equivalents were $7,772 as of June 30, 2018 compared to $9,912 at June 30, 2017.

 

The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit. Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.

 

Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and investments in tax-exempt municipal bonds.

 

The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial and retail customers have been continuing to turn to community banks. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a low level of 0.52%.

 

Jumbo time deposits (those with balances of $250 and over) were $23,018 and $14,252 at June 30, 2018 and 2017, respectively. These deposits are monitored closely by the Bank and typically priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee paid broker to obtain deposits from outside its normal service area as an additional source of funding. However, these deposits are not relied upon as a primary source of funding.

 

Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Additionally, the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations. As of June 30, 2018, the Bank could, without prior approval, declare a dividend of approximately $4,448.

 

Impact of Inflation and Changing Prices

 

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial 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.  

 

17

 

 

Critical Accounting Policies and Use of Significant Estimates

 

The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and management’s discussion and analysis are, to a large degree, dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.

 

Presented below is a discussion of the accounting policies that management believes are the most important to the portrayal and understanding of the Corporation’s financial condition and results of operations. These policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Also, see Note 1-Summary of Significant Accounting Policies to the Consolidated Financial Statements for additional information related to significant accounting policies.

 

Allowance for Loan Losses. Management periodically reviews the loan portfolio to establish an estimated allowance for loan losses (allowance) that are probable as of the respective reporting date. Additions to the allowance are charged against earnings for the period as a provision for loan losses. Actual loan losses are charged against the allowance when management believes the collection of principal will not occur. Unpaid interest for loans placed on non-accrual status is reversed against current interest income.

 

The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable incurred losses. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, loss estimates for loan groups or pools based on historical loss experience and general loss estimates based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other things. The allowance is also subject to periodic examination by regulators whose review includes a determination as to its adequacy to absorb probable incurred losses.

 

Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk grading, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors, including the breadth and depth of experience of lending officers, credit administration and the loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower, and changes in the value and availability of the underlying collateral and guarantees.

 

While we strive to reflect all known risk factors in our evaluations, judgment errors may occur. If different assumptions or conditions were to prevail, the amount and timing of interest income and loan losses could be materially different. These factors are most pronounced during economic downturns. Since, as described above, so many factors can affect the amount and timing of losses on loans, it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to prevail.

 

18

 

 

Contractual Obligations, Commitments and Contingent Liabilities 

 

The following table presents, as of June 30, 2018, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.  

 

   

Note
Reference

   

2019

   

2020

   

2021

   

2022

   

2023

   

Thereafter

   

Total

 

Certificates of deposit

    5     $ 37,984     $ 24,575     $ 6,261     $ 7,528     $ 1,472     $ 721     $ 78,541  

Short-term borrowings

    6       13,367                                     13,367  

Federal Home Loan advances

    7       2,056       1,500       1,500       1,700       5,000             11,756  

Salary continuation plan

    8       77       146       146       146       146       1,660       2,321  

Operating leases

    4       83       85       78       71       65             382  

Deposits without maturity

                                                351,422  

 

Note 12-Commitments with Off-Balance Sheet Risk to the Consolidated Financial Statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. These commitments and contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.

 

Off-Balance Sheet Arrangements 

 

At June 30, 2018, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.

 

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

Not applicable for Smaller Reporting Companies.

 

19

 

 

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Shareholders and the Board of Directors of Consumers Bancorp, Inc.

Minerva, Ohio

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Consumers Bancorp, Inc. (the "Company") as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

  

 

 

/s/ Crowe LLP

 

Crowe LLP

 

We have served as the Company’s auditor since 1998.

 

Cleveland, Ohio

September 12, 2018  

 

20

 

 

 

CONSOLIDATED BALANCE SHEETS

As of June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

2018

   

2017

 

ASSETS:

               

Cash on hand and noninterest-bearing deposits in financial institutions

  $ 7,615     $ 9,439  

Federal funds sold and interest-bearing deposits in financial institutions

    157       473  

Total cash and cash equivalents

    7,772       9,912  

Certificate of deposits in financial institutions

    2,973       3,921  

Securities, available-for-sale

    144,028       142,086  

Securities, held-to-maturity (fair value 2018 $4,048 and 2017 $4,329)

    4,024       4,259  

Federal bank and other restricted stocks, at cost

    1,459       1,425  

Loans held for sale

    1,448       1,252  

Total loans

    318,509       272,867  

Less allowance for loan losses

    (3,422

)

    (3,086

)

Net loans

    315,087       269,781  

Cash surrender value of life insurance

    9,335       9,065  

Premises and equipment, net

    13,315       13,398  

Accrued interest receivable and other assets

    3,178       2,784  

Total assets

  $ 502,619     $ 457,883  
                 

LIABILITIES:

               

Deposits:

               

Noninterest-bearing demand

  $ 107,919     $ 102,683  

Interest bearing demand

    81,299       54,123  

Savings

    162,204       151,154  

Time

    78,541       66,511  

Total deposits

    429,963       374,471  

Short-term borrowings

    13,367       23,986  

Federal Home Loan Bank advances

    11,756       12,320  

Accrued interest payable and other liabilities

    3,772       3,571  

Total liabilities

    458,858       414,348  

Commitments and contingent liabilities (Note 12)

               
                 

SHAREHOLDERS’ EQUITY:

               

Preferred stock, no par value; 350,000 shares authorized

           

Common shares, no par value; 3,500,000 shares authorized; 2,854,133 shares issued as of June 30, 2018 and 2017

    14,630       14,630  

Retained earnings

    32,342       30,122  

Treasury stock, at cost (124,489 and 130,606 common shares at June 30, 2018 and 2017, respectively)

    (1,576

)

    (1,662

)

Accumulated other comprehensive income (loss)

    (1,635

)

    445  

Total shareholders’ equity

    43,761       43,535  

Total liabilities and shareholders’ equity

  $ 502,619     $ 457,883  

 

See accompanying notes to consolidated financial statements.  

 

21

 

 

 

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

2018

   

2017

 

Interest income:

               

Loans, including fees

  $ 13,937     $ 12,333  

Federal funds sold and interest-bearing deposits in financial institutions

    151       122  

Securities, taxable

    1,997       1,678  

Securities, tax-exempt

    1,472       1,434  

Total interest and dividend income

    17,557       15,567  

Interest expense:

               

Deposits

    1,210       792  

Short-term borrowings

    240       90  

Federal Home Loan Bank advances

    221       226  

Total interest expense

    1,671       1,108  

Net interest income

    15,886       14,459  

Provision for loan losses

    310       596  

Net interest income after provision for loan losses

    15,576       13,863  
                 

Other income:

               

Service charges on deposit accounts

    1,200       1,245  

Debit card interchange income

    1,333       1,161  

Bank owned life insurance income

    270       246  

Gain on sale of mortgage loans

    367       258  

Securities gains, net

    33       209  

Loss on disposition of other real estate owned

    (2

)

    (35

)

Other

    190       166  

Total other income

    3,391       3,250  
                 

Other expenses:

               

Salaries and employee benefits

    7,692       7,136  

Occupancy and equipment

    1,867       1,888  

Data processing expenses

    601       583  

Professional and director fees

    523       608  

Federal Deposit Insurance Corporation assessments

    168       175  

Franchise taxes

    343       336  

Marketing and advertising

    308       267  

Loan and collection expenses

    117       155  

Telephone and communications

    307       305  

Debit card processing expenses

    754       636  

Other

    1,557       1,389  

Total other expenses

    14,237       13,478  

Income before income taxes

    4,730       3,635  

Income tax expense

    1,149       641  

Net income

  $ 3,581     $ 2,994  

Basic and diluted earnings per share

  $ 1.31     $ 1.10  

  

See accompanying notes to consolidated financial statements.

 

22

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

2018

   

2017

 
                 

Net income

  $ 3,581     $ 2,994  
                 

Other comprehensive income, net of tax:

               

Net change in unrealized losses:

               

Unrealized losses arising during the period

    (2,711

)

    (2,737

)

Reclassification adjustment for gains included in income

    (33

)

    (209

)

Net unrealized loss

    (2,744

)

    (2,946

)

Income tax effect

    650       1,002  

Other comprehensive loss

    (2,094

)

    (1,944

)

Total comprehensive income

  $ 1,487     $ 1,050  

   

See accompanying notes to consolidated financial statements.

 

23

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

Common
Shares

   

Retained
Earnings

   

Treasury
Stock

   

Accumulated
Other
Comprehensive
Income (Loss)

   

Total
Shareholders’
Equity

 

Balance, June 30, 2016

  $ 14,630     $ 28,432     $ (1,658

)

  $ 2,389     $ 43,793  

Net income

            2,994                       2,994  

Other comprehensive loss

                            (1,944

)

    (1,944

)

231 Dividend reinvestment plan shares associated with expired and forfeited restricted stock awards retired to treasury

            4       (4

)

             

Cash dividends declared ($0.48 per share)

            (1,308

)

                    (1,308

)

Balance, June 30, 2017

  $ 14,630     $ 30,122     $ (1,662

)

  $ 445     $ 43,535  

Net income

            3,581                       3,581  

Other comprehensive loss

                            (2,094

)

    (2,094

)

Reclassification of disproportionate income tax effects

            (14

)

            14        

6,321 shares issued associated with stock awards

                    90               90  

204 Dividend reinvestment plan shares associated with expired and forfeited restricted stock awards retired to treasury

            4       (4

)

             

Cash dividends declared ($0.495 per share)

            (1,351

)

                    (1,351

)

Balance, June 30, 2018

  $ 14,630     $ 32,342     $ (1,576

)

  $ (1,635

)

  $ 43,761  

   

See accompanying notes to consolidated financial statements.

 

24

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

2018

   

2017

 

Cash flows from operating activities:

               

Net income

  $ 3,581     $ 2,994  

Adjustments to reconcile net income to net cash flows from operating activities:

               

Depreciation

    771       781  

Securities amortization and accretion, net

    963       1,087  

Provision for loan losses

    310       596  

(Gain) loss on disposal of fixed assets

    (6

)

    2  

Loss on disposition or direct write-down of other real estate owned

    2       35  

Net gain on sale of loans

    (367

)

    (258

)

Deferred income tax expense

    462       128  

Gain on sale of securities

    (33

)

    (209

)

Origination of loans held for sale

    (22,336

)

    (24,379

)

Proceeds from loans held for sale

    22,760       24,775  

Increase in cash surrender value of life insurance

    (270

)

    (246

)

Change in other assets and other liabilities

    14       73  

Net cash flows from operating activities

    5,851       5,379  
                 

Cash flows from investing activities:

               

Securities available-for-sale:

               

Purchases

    (23,878

)

    (41,752

)

Maturities, calls and principal pay downs

    15,618       21,869  

Proceeds from sales of available-for-sale securities

    2,644       7,342  

Securities held-to-maturity:

               

Purchases

          (1,000

)

Principal pay downs

    235       235  

Net decrease in certificates of deposit with other financial institutions

    948       1,985  

Purchase of Federal Home Loan Stock

    (34

)

    (29

)

Net increase in loans

    (45,869

)

    (18,120

)

Purchase of Bank owned life insurance

          (2,000

)

Acquisition of premises and equipment

    (688

)

    (598

)

Disposal of premises and equipment

    6       2  

Proceeds from sale of other real estate owned

    69       7  

Net cash flows from investing activities

    (50,949

)

    (32,059

)

                 

Cash flows from financing activities:

               

Net increase in deposit accounts

    55,492       27,823  

Proceeds from Federal Home Loan Bank advances

    2,700       19,325  

Repayments of Federal Home Loan Bank advances

    (3,264

)

    (24,286

)

Change in short-term borrowings

    (10,619

)

    4,857  

Dividends paid

    (1,351

)

    (1,308

)

Net cash flows from financing activities

    42,958       26,411  

Decrease in cash and cash equivalents

    (2,140

)

    (269

)

Cash and cash equivalents, beginning of year

    9,912       10,181  

Cash and cash equivalents, end of year

  $ 7,772     $ 9,912  

 

See accompanying notes to consolidated financial statements.

 

25

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  

Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank), together referred to as the Corporation. All significant intercompany transactions have been eliminated in the consolidation.

 

Nature of Operations: Consumers Bancorp, Inc. is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, a broad array of products and services throughout its primary market area of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.

 

Business Segment Information: The Corporation is engaged in the business of commercial and retail banking, which accounts for substantially all of its revenues, operating income, and assets. Accordingly, all of its operations are reported in one segment, banking.

 

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days and federal funds sold.  Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings. Additional cash flow information was as follows:

 

   

Year Ended June 30,

 
   

2018

   

2017

 

Cash paid for interest

  $ 1,643     $ 1,108  

Cash paid for Federal income taxes

    730       300  

Non-cash transactions:

               

Transfer from loans to repossessed assets

          113  

Transfer from loans held for sale to portfolio

    253       342  

Issuance of treasury stock for stock awards

    90        

Expired and forfeited dividend reinvestment plan shares associated with restricted stock awards that were retired to treasury stock

    4       4  

 

Interest–Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

 

Certificates of Deposit in Financial Institutions: Certificates of deposit in other financial institutions are carried at cost.

 

Cash Reserves: The Bank is required to maintain cash on hand and noninterest-bearing balances on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance at June 30, 2018 and 2017 was $329 and $304, respectively.

 

Securities: Securities are generally classified into either held-to-maturity or available-for-sale categories. Held-to-maturity securities are carried at amortized cost and are those that the Corporation has the positive intent and ability to hold to maturity. Available-for-sale securities are those that the Corporation may decide to sell before maturity if needed for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in other comprehensive income (loss) as a separate component of equity, net of tax.

 

Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or whether it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

 

Federal Bank and Other Restricted Stocks: The Bank is a member of the Federal Home Loan Bank (FHLB) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock, included with Federal bank and other restricted stocks on the Consolidated Balance Sheet, is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Federal Reserve Bank stock is also carried at cost. Since these stocks are viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

 

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

 

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.

 

Interest income on commercial, commercial real estate and 1-4 family residential loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is determined by the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the customer has exhibited the ability to repay and demonstrated this ability over at least a consecutive six-month period and future payments are reasonably assured.

 

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when funded.

 

Concentrations of Credit Risk: The Bank grants consumer, real estate and commercial loans primarily to borrowers in Carroll, Columbiana, Jefferson, Stark, Summit and Wayne counties. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economy in these counties. Automobiles and other consumer assets, business assets and residential and commercial real estate secure most loans.

 

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

 

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the most recent two-year or three-year period, depending on loan segment. This actual loss experience is supplemented with economic and other factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:

 

Commercial: Commercial loans are made for a wide variety of general business purposes, including financing for equipment, inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Current and projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank operates.

 

Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 

1-4 Family Residential Real Estate: Residential real estate loans are secured by one to four family residential properties and include both owner occupied, non-owner occupied and home equity loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, an established credit record and an appropriately appraised value of the real estate securing the loan that generally requires that the residential real estate loan amount be no more than 85% of the purchase price or the appraised value of the real estate securing the loan unless the borrower provides private mortgage insurance.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Consumer: The Corporation originates direct and indirect consumer loans, primarily automobile loans, personal lines of credit, and unsecured consumer loans in its primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.

 

Other Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less costs to sell at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If the fair value declines after acquisition, a valuation allowance is recorded as a charge to income. Operating costs after acquisition are expensed. Gains and losses on disposition are reported as a charge to income.

 

Transfers of Financial Assets:  Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, generally over the lesser of the remaining term of the lease facility or the estimated economic life of the improvement. Useful lives range from three years for software to thirty-nine and one-half years for buildings.

 

Cash Surrender Value of Life Insurance: The Bank has purchased single-premium life insurance policies to insure the lives of current and former participants in the salary continuation plan. As of June 30, 2018, the Bank had policies with total death benefits of $19,776 and total cash surrender values of $9,335. As of June 30, 2017, the Bank had policies with total death benefits of $19,728 and total cash surrender values of $9,065. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Tax-exempt income is recognized from the periodic increases in cash surrender value of these policies.

 

Long-Term Assets: Premises, equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

 

Repurchase Agreements: Substantially all repurchase agreement liabilities, which are classified as short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

 

Retirement Plans: The Bank maintains a 401(k) savings and retirement plan covering all eligible employees and matching contributions are expensed as made. Salary continuation plan expense allocates the benefits over years of service.

 

Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation applies a more likely than not recognition threshold for all tax uncertainties in accordance with U.S. generally accepted accounting principles. A tax position is recognized as a benefit only if it is more likely than not that the position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense. 

 

29

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable upon the vesting of restricted stock awards.

 

Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees over the required service period, generally defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Corporation’s common stock at the date of grant. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of equity, net of tax.

 

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the Corporation’s financial statements.

 

Fair Value of Financial Instruments: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 13 of the Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders.

 

Reclassifications: Certain reclassifications have been made to the June 30, 2017 financial statements to be comparable to the June 30, 2018 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.

 

Recently Issued Accounting Pronouncements Not Yet Effective: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Most of the Corporation’s revenue is derived from loans and financial instruments, which is not part of the scope of this ASU. The adoption of this guidance on July 1, 2018 did not have a material impact on the Corporation's financial statements; however, the adoption of this standard will result in additional disclosures beginning with the first quarter of fiscal year 2019 Form 10-Q.

 

In January 2016, FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The main provisions of ASU 2016-01 address the valuation and impairment of certain equity investments along with simplified disclosures about those investments. For equity securities, the guidance requires equity investments to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 on July 1, 2018 did not have a material impact on the Corporation's financial statements.

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this guidance on the Corporation’s consolidated financial statements and are in the midst of gathering critical data to evaluate the impact. However, it is too early to estimate the impact.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). This ASU will require all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this guidance on the Corporation’s consolidated financial statements and expects to recognize an increase in other assets and other liabilities for the rights and obligations created by leasing of branch offices. Management also expects minimal impact in the income statement with respect to occupancy expense related to leases.

 

In March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. This ASU amends the guidance related to amortization for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The adoption of ASU 2017-08 will not have a material impact on the Corporation’s financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued in response to the U.S. federal government enacting the Tax Cuts and Jobs Act of 2017. The ASU will require reclassifying certain income tax effects from accumulated other comprehensive income to retained earnings. The amount of that reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted 21.0% U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Corporation adopted this ASU as of March 2018, which resulted in a $14 reclassification between retained earnings and accumulated other comprehensive income.