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.

 

 

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.  

 

 

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.

 

 

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.

 

 

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

 

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.

 

 

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.

  

 

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.

 

 

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

  

 

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.

 

 

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

 

 

 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	%

 

 

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.

 

 

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

  

 

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.

 

 

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.  

 

 

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.

 

 

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.

 

 

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  

 

 

CONSOLIDATED BALANCE SHEETS

As of June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.  

 

 

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

  

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

   

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  

 

None.  

 

ITEM 9A—CONTROLS AND PROCEDURES  

 

Evaluation of Disclosure Controls and Procedures

 

With the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934) was performed, as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

The management of Consumers Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018 based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in 2013. Based on that assessment, we have concluded that, as of June 30, 2018, our internal control over financial reporting is effective based on those criteria.

 

This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this annual report.

 

Changes In Internal Control Over Financial Reporting

 

There were no changes in the Corporation’s internal controls over financial reporting that occurred during the fourth quarter of fiscal year 2018 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over financial reporting.

 

 

ITEM 9B—OTHER INFORMATION  

 

None.  

 

 

PART III

 

ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  

 

The information required by this item is set forth in the Corporation’s Proxy Statement dated September 12, 2018, under the captions “Election of Directors,” “Directors and Executive Officers,” “The Board of Directors and its Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.

 

The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website (www.consumersbank.com). Copies of either of the Code of Ethics Policies are also available in print to shareholders upon request, addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website.  

 

ITEM 11—EXECUTIVE COMPENSATION  

 

The information required by this item is set forth in the Corporation’s Proxy Statement dated September 12, 2018 under the captions “Director Compensation,” “Executive Compensation,” “Defined Contribution Plan,” “Outstanding Equity Awards at Fiscal Year-End,” and “Salary Continuation Program,” and is incorporated herein by reference.  

 

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

Equity Compensation Plan Information

 

The following table sets forth information about common stock authorized for issuance, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, as of June 30, 2018. Additional information regarding stock-based compensation plans is presented in Note 8 - Employee Benefit Plans to the Consolidated Financial Statements located elsewhere in this report.

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants, and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities issuable under outstanding options, warrants and rights)
Plans approved by shareholders			—				—				92,988
Plans not approved by shareholders			—				—				—
Total			—				—				92,988

 

The remaining information required by this item is set forth in the Corporation’s Proxy Statement, dated September 12, 2018, under the caption “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.  

 

ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  

 

The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 12, 2018, under the caption “Certain Transactions and Relationships and Legal Proceedings,” and is incorporated herein by reference.

 

 

ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES 

 

The information required by this item is set forth in the Corporation’s Proxy Statement, dated September 12, 2018, under the caption “Principal Accounting Fees and Services,” and is incorporated herein by reference.

 

PART IV

 

ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES

  

(a)	The following documents are filed as part of this report:

 

(1)

The report of independent registered accounting firm and the consolidated financial statements appearing in Item 8.

  

(2)

Financial statement schedules are omitted as they are not required or are not applicable, or the required information is included in the financial statements.

 

(3)

The exhibits required by this item are listed in the Exhibit Index of this Form 10-K.

  

(b)	The exhibits to this Form 10-K begin on page 55 of this report.

 

(c)	See Item 15(a)(2) above.

 

 

EXHIBIT INDEX

 

Exhibit Number		Description of Document
3.1		Amended and Restated Articles of Incorporation of the Corporation. Reference is made to Form 10-K (File No. 033-79130) of the Corporation filed September 22, 2010, which is incorporated herein by reference.
3.2		Amended and Restated Code of Regulations of the Corporation. Reference is made to Form 10-K (File No. 033-79130) of the Corporation filed September 15, 2008, which is incorporated herein by reference.
4		Form of Certificate of Common Shares. Reference is made to Form 10-KSB (File No. 033-79130) of the Corporation filed September 30, 2002, which is incorporated herein by reference.
10.1		Amendment No. 3, October 3, 2016 to the Salary Continuation agreement entered into with Mr. Lober on February 11, 2011. Reference is made to Form 10-Q of the Corporation filed February 14, 2017, which is incorporated herein by reference.
10.2		Salary Continuation agreement entered into with Mr. Dodds on November 4, 2016. Reference is made to Form 8-K of the Corporation filed November 9, 2016, which is incorporated herein by reference.
10.3		Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23, 2005. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed February 14, 2006, which is incorporated herein by reference.
10.6		2011 Amendment and Restatement of Salary Continuation agreement entered into with Mr. Lober on February 11, 2011. Reference is made to Form 10-Q (File No. 033-79130) of the Corporation filed February 11, 2011, which is incorporated herein by reference.
10.8		Consumers Bancorp 2010 Omnibus Incentive Plan Form of Restricted Stock Award Agreement. Reference is made to Form 8-K (File No. 033-79130) of the Corporation filed September 16, 2011, which is incorporated herein by reference.
10.9		Salary Continuation Agreement with Ms. Wood on December 30, 2015. Reference is made to Form 8-K of the Corporation filed on December 30, 2015, which is incorporated herein by reference.
10.10		First Amendment dated June 13, 2018, to Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23, 2005. Reference is made to Form 8-K (File No. 033-79130) of the Corporation filed June 15, 2018, which is incorporated herein by reference.
11		Computation of Earnings per Share. Reference is made to this Annual Report on Form 10-K Note 15 to the Consolidated Financial Statements, which is incorporated herein by reference.
21		Subsidiaries of Consumers Bancorp, Inc. Filed with this Annual Report on Form 10-K.
23		Consent of Crowe LLP
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following material from Consumers Bancorp, Inc.’s Form 10-K Report for the year ended June 30, 2018, formatted in XBRL (Extensible Business Reporting Language) includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Income, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statement of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to Consolidated Financial Statements.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CONSUMERS BANCORP, INC.
Date: September 12, 2018	By:	/s/ Ralph J. Lober, II
		President and Chief Executive Officer (principal executive officer)
	By:	/s/ Renee K. Wood
		Chief Financial Officer and Treasurer (principal financial officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 12, 2018.

 

Signatures		Signatures
/s/ Laurie L. McClellan		/s/ Ralph J. Lober, II
Laurie L. McClellan Chairman of the Board of Directors		Ralph J. Lober, II President, Chief Executive Officer and Director (principal executive officer)
/s/ Renee K. Wood		/s/ John P. Furey
Renee K. Wood Chief Financial Officer and Treasurer (principal financial officer)		John P. Furey Director
/s/ Bradley Goris		/s/ James V. Hanna
Bradley Goris Director		James V. Hanna Director
/s/ David W. Johnson		/s/ Richard T. Kiko, Jr.
David W. Johnson Director		Richard T. Kiko, Jr. Director
/s/ Thomas M. Kishman		/s/ Phillip R. Mueller
Thomas M. Kishman Director		Phillip R. Mueller Director
/s/ Frank L. Paden		/s/ Harry W. Schmuck, Jr.
Frank L. Paden Director		Harry W. Schmuck, Jr. Director

  

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