Investing In People
Lisa Carter
Carter’s Copy Center
Alliance
Rick Blair
Kehl’s Florist & Greenhouses, Inc.
Louisville
Beverlee, Bill, Sarah, Brad & Deborah Palmer
Minerva Bowl
Minerva
Diane & Ron Braucher
RB’s Truck & Trailer
East Canton
2 0 1 0 A n n u a l R e p o r t
Financial Highlights
Dollar amounts in thousands, except per share data
ASSETS
Total cash and cash equivalents
Certificates of deposit in financial institutions
Securities, available-for-sale
Federal bank and other restricted stocks, at cost
Total loans
Less allowance for loan losses
Net loans
Other assets
Total assets
LIABILITIES
Deposits:
Non-interest bearing demand
Interest bearing demand
Savings
Time
Total deposits
Short-term borrowings
Federal Home Loan Bank advances
Other liabilities
Total liabilities
SHAREHOLDERS’ EQUITY
Total shareholders’ equity
Total liabilities and shareholders’ equity
June 30, 2010
June 30, 2009
$ 13,806
980
64,262
1,186
174,283
(2,276)
172,007
11,152
$ 263,393
$ 47,659
13,687
63,704
91,264
216,314
13,086
8,297
1,980
239,677
$ 18,891
2,012
60,775
1,186
160,141
(1,992)
158,149
10,849
$ 251,862
$ 42,855
12,570
58,196
90,430
204,051
15,055
9,373
1,922
230,401
23,716
$ 263,393
21,461
$ 251,862
Cash dividends paid per share
Weighted average number of shares outstanding
$ 0.40
2,032,588
$ 0.40
2,029,558
NET INCOME
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
Net income
$ 12,610
2,560
10,050
544
9,506
2,148
9,048
2,606
567
$ 2,039
$ 13,100
3,553
9,547
579
8,968
2,615
8,987
2,596
569
$ 2,027
Basic earnings per share
$ 1.00
$ 1.00
Please refer to the annual report on Form 10-K for additional financial information.
Dear Shareholders,
2006
2007
2008
2010
2009
I began last year’s shareholder letter discussing the financial
crisis and its effect on Consumers Bancorp and the
communities in which we operate. At that time I wrote
that the recovery will be slow and the business environment
will fundamentally change. Twelve months later, we find
ourselves in roughly the same economic environment.
Although the recession may be technically over, many of
our neighbors are finding the recovery fleeting or non-
existent. Like most community banks, Consumers National
Bank continues to work closely with these businesses and
individuals as they battle through the prolonged economic
downturn.
In that message, I said that the prior two years of
economic turmoil proved the need for community banking
and this organization
Net Income
had the foundation and
commitment to emerge
from the period as an
even stronger financial
During
institution.
the past fiscal year, we
matched prior year
earnings, improved our
non-performing asset
ratio, grew the deposit
base by six percent and,
while large banks continued to shed business credits, our
loan balances increased close to nine percent. While over
118 institutions were taken into FDIC receivership since
January 2010, Consumers National Bank was named
to U.S. Bankers list of The Top 200 Community Banks
and the Best of the Best in Columbiana County by the
readers of Salem News. While others cut local investments,
Consumers National
Total Assets
its
Bank
commitment
to our
markets with continued
support
vital
organizations and with
significant investments
in our Carrollton and
Alliance offices. With
the announcement and
regulatory approval of
our Hartville location
we have taken the first step in our expansion plans. We have
added exciting new products and have continued to upgrade
our delivery system and technologies. As promised, we have
proven our commitment and have emerged stronger.
The Congress and Administration have responded to the
banking crisis with an unprecedented regulatory overhaul.
The 2,300 pages of legislation are expected to result in
23,000 pages of new rules and regulations affecting financial
reaffirmed
of
2008
2007
2006
2009
2010
s
n
o
i
l
l
i
M
2.5
2.0
1.5
1.0
0.5
0.0
s
n
o
i
l
l
i
M
$300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
Ralph J. Lober, II
institutions of all types and sizes. Although community
banks received some benefits from the regulation including
a risk-based change to the FDIC insurance premium
calculation, many provisions
will require product changes
and increased costs to comply
with new rules designed to
reign in credit practices of
non-banks and Wall Street
firms. Working with state
and national organizations,
Consumers National Bank
took part in the debates and,
to the extent possible, helped
reduce the negative impact.
While disappointed in some of the results, we will continue to
work with our trade organizations, congressional delegation
and regulators as they work to interpret and codify the
legislation. Know that Consumers National Bank has the
infrastructure in place to adapt to the new business models
and flourish. We have a strong credit process, excellent
risk management and accounting practices, and innovative
product development that together will serve us well in the
developing environment. We will accept the results, rise to
the challenge, act boldly and become stronger.
Just recently, The Ohio State University’s distinguished
President E. Gordon Gee spoke to Ohio’s Community
Bankers. Two of his comments hit home with me and
captured the essence of Consumers National Bank’s
customers. President Gee noted that the family farm is an
important part of Ohio’s future and that Ohio has some
of the best small business manufacturers in the world.
We can take pride in the fact that Consumers National
Bank continues to work tirelessly to support both of
these important constituencies. Like President Gee, we
understand that the men and women working in the shops
and on the farms will be the ones to lead Ohio and the
nation out of the current economic malaise. We will be
there to help.
It is important to pay tribute to the employees and directors
who together have made the results in this report possible.
I thank each of them for the dedication and support they
have shown over the past year to bring community banking
to our ten markets. I also thank you, our shareholders, for
your support of community-based banking. I look forward
to seeing each of you at the Annual Shareholders Meeting
on October 27th at Courtney’s Banquet Center in Alliance.
Sincerely,
Ralph J. Lober, II
President & Chief Executive Officer
i
Investing In People
Every company has a face. There is the public face that
everyone sees in the form of the company’s name and brand,
such as Consumers National Bank. Then there is the face
of the business owner who is responsible for the success of
the company. These are
the people who we get
to know as customers
at Consumers National
the cover
Bank. On
of this annual report,
we have highlighted
the faces of some of
the business men and
women who represent the people we invest in across the
communities we serve.
We make commercial loan investments in more than just
a company—our loans are investments in the people who
own and run the business and in the employees who operate
them. Although there are many factors that go into providing
a business with financing, we know that there are more than
numbers involved. We take the time to understand the
borrower’s unique situation which serves as the foundation
for creating profitable, long-term business relationships. We
know our lending approach works because by June 30, 2010,
total loans reached $174.3 million, over eight percent higher
than a year earlier and a milestone for your bank.
Our business model of gathering deposits locally and
reinvesting those deposits through loans to local businesses
Total Loans
strength
is
demonstrates
and
community
banking
at its best. It is a model
that avoids the risks that
come with
investing
far beyond our region
and promotes our goal
of
the
communities—and the
people—we serve.
investing
our
in
2008
2007
2006
2010
2009
Measuring Our Success
The last 12 months have seen a number of significant
achievements at Consumers National Bank. To begin with,
2010 marks the bank’s 45th anniversary. Though often taken
for granted, the stability and success of many businesses,
especially financial companies, has been challenged recently.
While some banks have struggled, Consumers National
Bank has succeeded and flourished since it was established
by local business men in 1965. Today, we stand as the largest
community bank in both Stark and Carroll counties and
enjoy a significant presence in Columbiana County.
In its June issue, U.S. Banker magazine listed Consumers
Bancorp, Inc. among the Top 200 Community Banks and
Thrifts ranking it 172nd nationally. Consumers National
s
n
o
i
l
l
i
M
200
180
160
140
120
100
80
60
40
20
0
Bank is one of only nine Ohio banks that made the annual
Top 200 list. The national ranking is based on each bank’s
three-year average return on equity (calendar years 2007,
2008 and 2009). While we are pleased to achieve this
ranking, our challenge and goal is
to consistently increase shareholder
return and to continually be regarded
as one of the best. To accomplish
this, we must take exceptional care
of our customers and cautiously
and efficiently increase assets and
revenues.
Our eastern region branches of
Hanoverton, Lisbon, and Salem
received one of the highest honors a local business can
achieve this summer when Consumers National Bank was
voted Best of the Best Readers Choice 2010 Winner in
the Bank/Financial Institution category by the readers of
the Salem News. Our customers honored us by casting more
votes for us than any other bank received—including seven
larger banking companies.
Another significant achievement in 2010 was reaching an
all-time high in deposits of $216.3 million. Continued growth
in personal and business checking accounts helped account
for this six percent increase in deposits over the previous year.
However, the low interest rate environment will continue to
pose challenges for deposit growth. Increasing commercial
and personal transaction account balances continues to be
an important part of
the bank’s strategic
efforts. Our products
and services will make
the difference.
Total Deposits
$300
225
s
n
o
2010
150
0
M
i
l
l
i
75
2008
2006
2007
2009
Innovative Accounts
and Services
A stagnant economy
and increased banking
regulation combined
to pose challenges for
deposit and income
growth. Management is facing these challenges directly by
continually researching, evaluating, and implementing new
products and services that will help Consumers National
Bank attract and retain customers. In the past year, we have
introduced new deposit accounts and introduced several new
services.
In March, Consumers National Bank partnered with
BancVue Interactive to upgrade the bank’s internet presence
with a new interactive website. The completely redesigned
website at www.ConsumersBank.com makes banking
online faster, friendlier, and easier for customers. The site was
designed with the goal that customers should be able to access
most information within two clicks. Visitors can now open
ii
new deposit accounts and submit loan applications online.
In addition, customers can send secure messages through the
new website which are routed to the individual most likely
to be able to provide a
quick resolution.
in
Launched
conjunction with
the
new website in March,
the new High Yield
Checking account
is
the next step in the
evolution of personal
accounts.
checking
High Yield Checking is suited to customers who prefer a
checking account that rewards them for maintaining high
activity in their checking accounts, such as paying bills
online and making purchases with a debit card. When
customers meet the qualifications, they are rewarded with an
exceptional annual percentage rate of 4.00% on any balance
up to $10,000. Customers benefit from earning a high rate
of interest, plus free Internet Connect online banking, free
online Bill Payment, and free Mobile Banking access.
Dimes To Dollars savings is another innovative account
that drives fee income as well as deposit growth for the bank.
Over 550 accounts have been opened since the November
2009 product launch. Dimes
To Dollars savings accounts
are linked to the customer’s
personal checking account.
When the customer makes a debit card purchase with the
VISA Check Card, the bank rounds up the amount of the
purchase to the next whole dollar amount, and transfers the
amount
in excess of
the purchase from the
checking account to the
high-yield Dimes To
Dollars savings account.
The account addresses
low savings rate
the
crisis by providing an
easy way for customers
to save money in small, manageable increments. The account
also promotes use of the bank’s debit card and online Bill
Payment products.
In June, the bank upgraded its e-Courier Remote Deposit
service to an internet-based version of the original PC-based
software. The e-Courier service enables business customers
who receive significant numbers of payments by check to
deposit the checks directly from their office. The service
enables the bank to more easily market our commercial
deposit services to customers and prospects in a larger
geographic area.
Online banking is a rapidly-growing service nationwide,
with 48 million households managing personal finances
from their computers, and a total of 64 million expected by
2012, according to Online Banking Report. Our customers
want the best. To deliver world-class online banking services,
Consumers National Bank has joined forces with Intuit in
order meet the high expectations of our increasingly tech-
savvy customers. Conversion of our Internet Connect
online banking service to Intuit’s online banking solutions
for personal and business customers is scheduled for early
2011. Online features include instant 24/7 access, a user-
friendly interface, improved quality of service and support,
and superior online financial services that customers can
control. In addition, personal and business customers will
have the option to take advantage of Intuit’s FinanceWorks
financial management tools. FinanceWorks enables personal
customers to manage all their financial accounts in one
place with a single login,
so they can more easily
budget and gain control
over their spending, saving,
Small
investing.
and
Business
FinanceWorks
offers billing, payroll and
tax capabilities
to our
small business customers. All of this results in increased
convenience and autonomy over accounts and financial
transactions for customers.
In October 2009, the bank launched check re-presentment,
a service that automates a business or organization’s
collection of returned dishonored checks. We believe that
this service will prove increasingly valuable as banks react
to new overdraft regulations that will require most banks to
return more checks unpaid.
Branch Optimization and Expansion
Whether through electronic banking channels or face-to-
face interactions, the bank’s primary goal is to be accessible to
all customers. While our online banking usage continues to
grow, customers still enjoy the personal service they receive
from the friendly, knowledgeable staff in our branch offices.
Although electronic transactions continue to increase, a
physical presence
an
remains
important
factor
in the customer’s
choice of financial
providers. Slated
for opening in the
first quarter of
2011, a new office
in Hartville will mark the bank’s eleventh banking location.
The decision to expand into Hartville was the result of a
comprehensive market research project that prioritized
several branching opportunities. The Hartville market aligns
closely with the bank’s existing markets and provides fertile
iii
ground for Consumers National Bank’s community banking
approach to customers. Ground breaking is expected by
September 30 with a grand opening in early 2011.
Two of our offices, Carrollton and Alliance, are currently in
the process of renovation. Inside both offices, customer privacy
will be enhanced with new customer service and investment
representative
work
spaces. Centrally located
waiting areas will be
established with ample
seating and
improved
lighting. New carpet,
wall paper and paint will
provide a fresh look to
the interiors. A second
drive-thru lane will be added at both locations and the drive-
up ATMs will be relocated for improved accessibility. The
facade and entrance at Carrollton has been updated in the
colonial Williamsburg style. These investments reflect our
commitment to and our success in these markets.
Investing in Our People
We realize that our success is directly related to our ability
to personally deliver our message and execute on our service
promise. Accomplishing both requires an all-star sales,
support and operations staff. We have what it takes. The
bank has seven Business Development Officers, including
one dedicated agriculture lender. In addition, the importance
of commercial deposits and services is reflected by adding
staff
to
dedicated
the commercial sales
effort. These Business
Development Officers
give
Consumers
National Bank an edge
on the competition by
enabling us to react
to customers,
faster
more
provide
personalized service, and offer more customized solutions
than regional banks can provide. Consumers National Bank’s
combination of state-of-the-art electronic banking services
and staff of knowledgeable, engaged employees ensures that
we can provide unparalleled accessibility to information and
exceptional customer service that will give us a competitive
advantage and satisfy the needs of our customers.
Board of Directors
Standing from left:
John Tonti
James Kiko, Sr.
Harry Schmuck, Jr.
Thomas Kishman
John Furey
James Hanna.
Seated from left:
Ralph J. Lober, II
David Johnson
Laurie McClellan (Chairman of the Board).
Executive Management
Left to right:
Rebecca Geis, Vice President, Deposit Operations
Stormie Gross, Senior Vice President, Risk Management
and Compliance Officer
Phillip Suarez, Executive Vice President/Chief Credit Officer
Renee Wood, Senior Vice President/Chief Financial Officer
Paul Hugenberg, III, Senior Vice President/Chief Information
Officer
Larry Marcus, Senior Vice President/Senior Lending Officer
Ralph J. Lober, II, President & Chief Executive Officer
Pat Wood, Executive Assistant
Not pictured:
Jim Wenderoth, Vice President, Branch Administration.
iv
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2010
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 033-79130
CONSUMERS BANCORP, INC.
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
34-1771400
(I.R.S. Employer Identification No.)
614 East Lincoln Way,
P.O. Box 256, Minerva, Ohio 44657
(330) 868-7701
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant Section 12(b) of the Act: None
Securities registered pursuant Section 12(g) of the Act: Common Shares, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes 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 (§ 229.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if small reporting company)
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, 2009, the aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $14,643,618.
The number of shares outstanding of the Registrant’s common stock, without par value was 2,037,887 at September 1, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement dated September 22,
2010 for its 2010 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 .......................................................................................................................................................................... 7
ITEM 3—LEGAL PROCEEDINGS ........................................................................................................................................................ 7
ITEM 4—REMOVED AND RESERVED ............................................................................................................................................... 7
PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES ....................................................................................................................................... 8
ITEM 6—SELECTED FINANCIAL DATA ........................................................................................................................................... 8
ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................................................................................................................................. 9
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................................... 20
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................................................................................... 21
ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ................................................................................................................................................................................ 45
ITEM 9A—CONTROLS AND PROCEDURES ................................................................................................................................... 45
ITEM 9B—OTHER INFORMATION ................................................................................................................................................... 45
PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ............................................................. 46
ITEM 11—EXECUTIVE COMPENSATION ....................................................................................................................................... 46
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS ........................................................................................................................................................ 46
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE .................. 46
ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES ...................................................................................................... 46
ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ........................................................................................... 46
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, incorporated under the laws of the State of Ohio. In February 1995, the
Corporation acquired all the issued and outstanding capital stock of Consumers National Bank (Bank), a bank chartered under
the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock
of the Bank.
Since 1965, the Bank’s main office has been serving the Minerva, Ohio area from its location at 614 East Lincoln Way,
Minerva, Ohio. The Bank’s business involves attracting deposits from businesses and individual customers and using such
deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Stark, Columbiana,
Carroll and contiguous counties in Ohio. 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 and Freddie Mac.
Supervision and Regulation
The Corporation is supervised by the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the
Bank is subject to supervision, regulation and periodic examination by the Office of the Comptroller of the Currency
(OCC). Earnings 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 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 Board of
Governors of the Federal Reserve System (Federal Reserve Board). Under the BHCA, the Corporation is subject to periodic
examination by the Federal Reserve Board and required to file periodic reports regarding its operations and any additional
information that the Federal Reserve Board may require.
The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve
Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those
activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board
prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of
the voting shares of a bank or merging or consolidating with another bank holding company.
Privacy Provisions of Gramm-Leach-Bliley Act: The Gramm-Leach-Bliley Act of 1999 contains extensive provisions
on a customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must
provide to its customers the institution’s policies and procedures regarding the handling of customers’ non-public personal
information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the
institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such
disclosure. The Corporation and the Bank are also subject to certain state laws that deal with the use and distribution of non-
public personal information.
Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the area
of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written
certifications by the Corporation’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest
that the Corporation’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or
omit to state a material fact.
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 institutions 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.
FHLB: The Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB), which is a privately
capitalized, government sponsored enterprise that expands housing and economic development opportunities throughout the
nation by providing loans and other banking services to community-based financial institutions.
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. As of the fiscal year-end 2010,
the Corporation met the definition of a Small Bank Holding Company and, therefore was exempt from consolidated risk-based
and coverage 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.”
Under regulations adopted under these provisions, for an institution to be well capitalized it must have a total risk-based
capital ratio of at least 10%, a Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at least 5% and not be
subject to any specific capital order or directive. 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, 2010, the Bank was in compliance with all
regulatory capital requirements.
4
Interstate Banking and Branching: The Interstate Banking and Branch Efficiency Act of 1995 has eased restrictions on
interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions
regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision
and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows
interstate bank branching.
Community Reinvestment Act: The Community Reinvestment Act requires depository institutions to assist in meeting
the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking
practices. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depository
institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance
and assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an
institution.
USA Patriot Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001 (Patriot Act). The Patriot Act is designed to deny
terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for
depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates
financial services companies to implement additional policies and procedures with respect to additional measures designed to
address any or all of the following matters: money laundering, terrorist financing, identifying and reporting suspicious activities
and currency transactions, and currency crimes.
Recent Legislation Impacting the Financial Services Industry:
Dodd-Frank Act: On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall
Street Reform and Consumer Protection Act” (Dodd-Frank Act) was signed into law. The Dodd-Frank Act implements far-
reaching changes across the financial regulatory landscape, including provisions that, among other things, will:
• Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial
Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer
financial laws.
• Require the Office of the Comptroller of the Currency to seek to make its capital requirements for national
banks, countercyclical so that capital requirements increase in times of economic expansion and decrease in
times of economic contraction.
• Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated
assets less tangible capital, eliminate the ceiling of the Deposit Insurance Fund (DIF) and increase the floor of
the DIF, which generally will reduce the level of assessments for institutions with assets below $10 billion and
increase the level of assessments for institutions with assets in excess of $10 billion.
•
Implement corporate governance revisions, including with regard to executive compensation and proxy access
by shareholders, which apply to all public companies, not just financial institutions.
• Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities
Investor Protection Corporation protection from $100 thousand to $250 thousand and provide unlimited federal
deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured
depository institutions.
• Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository
institutions to pay interest on business transaction and other accounts effective one year after the bill was signed
into law.
• Amend the Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority
to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers
having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and
proportional to the actual cost of a transaction to the issuer.
• Make permanent SOX 404 (B) exemption regarding auditor attestation requirements for companies with less
than $75 million in market capitalization.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult
to anticipate the overall financial impact on the Corporation, its customers or the financial industry more generally. Provisions
in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could
5
increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. We will
continue to monitor all legislative developments and assess their potential impact on our business.
Employees
As of June 30, 2010, the Bank employed 92 full-time and 17 part-time employees. None of the employees are represented
by a collective bargaining group. Management considers its relations with employees to be good.
Statistical Disclosure
The following statistical information is included on the indicated pages of this Report:
10
Average Consolidated Balance Sheet And Net Interest Margin .................................................................
11
Interest Rates and Interest Differential .......................................................................................................
13
Carrying Values Of Securities ....................................................................................................................
14
Maturities And Weighted-Average Yield Of Securities .............................................................................
14
Loan Types .................................................................................................................................................
15
Selected Loan Maturities And Interest Sensitivity ......................................................................................
15
Non-accrual, Past Due And Restructured Loans And Other Nonperforming Assets ..................................
16
Potential Problem Loans .............................................................................................................................
16
Summary Of Loan Loss Experience ...........................................................................................................
16
Allocation Of Allowance For Loan Losses .................................................................................................
17
Average Amount And Average Rate Paid On Deposits..............................................................................
17
Time Deposits Of $100 Thousand Or More................................................................................................
Short-Term Borrowings .............................................................................................................................. 17 and 37
8
Selected Consolidated Financial Data .........................................................................................................
Available Information
The Corporation files annual, quarterly, and current reports, proxy statements, and other information with the SEC. These
filings are available to the public over the Internet at the SEC’s web site at www.sec.gov. Shareholders may also read and copy
any document that the Corporation files at the SEC’s public reference room located at 100 F Street, NE, Washington, DC
20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Shareholders may request a copy of any of the Corporation’s filings at no cost by writing or e-mailing the Corporation at
the following address or e-mail address: Consumers Bancorp, Inc., Attn: Theresa J. Linder, 614 East Lincoln Way, Minerva,
Ohio 44657 or e-mail to shareholderrelations@consumersbank.com.
The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the corporation,
and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal
financial officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website
(www.consumersbank.com). Copies of either of the Code of Ethics Policies are also available in print to shareholders upon
request, addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The
Corporation intends to post amendments to or waivers from its Code of Ethics on its website.
ITEM 1A—RISK FACTORS
Not applicable for Smaller Reporting Companies.
ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
6
ITEM 2—PROPERTIES
The Bank owns and maintains the premises in which seven of the ten banking facilities are located, and leases offices in
Carrollton, Alliance and Malvern. The location of each of the currently operating offices is as follows:
Minerva Office:
Salem Office:
Waynesburg Office:
Hanoverton Office:
Carrollton Office:
Alliance Office:
Lisbon Office:
Louisville Office:
East Canton Office:
Malvern Office:
614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657
141 S. Ellsworth Ave., P.O. Box 798, Salem, Ohio, 44460
8607 Waynesburg Dr. SE, P.O. Box 746, Waynesburg, Ohio, 44423
30034 Canal St., P.O. Box 178, Hanoverton, Ohio, 44423
1017 Canton Rd. NW, P.O. Box 8, Carrollton, Ohio, 44615
610 West State St., Alliance, Ohio, 44601
7985 Dickey Dr., Lisbon, Ohio 44432
1111 N. Chapel St., Louisville, Ohio 44641
440 W. Noble, East Canton, Ohio, 44730
4070 Alliance Rd., Malvern, Ohio 44644
In the opinion of management, the properties listed above are adequate for their present uses and the Bank’s business
requirements and are adequately covered by insurance.
ITEM 3—LEGAL PROCEEDINGS
The Corporation is not a party to any pending material legal or administrative proceedings, other than ordinary routine
litigation incidental to the business of the Corporation. Further, there are no material legal proceedings in which any director,
executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest that is adverse to the
Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the
financial position or results of operations of the Corporation.
ITEM 4—REMOVED AND RESERVED
7
PART II
ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation had 2,037,887 common shares outstanding on June 30, 2010 with 690 shareholders of record and an
estimated 241 additional beneficial holders whose stock was held in nominee name.
The common shares of Consumers Bancorp, Inc. are traded on the over-the-counter bulletin board. The following quoted
market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not
represent actual transactions. The market prices represent highs and lows reported during the quarterly period.
Quarter Ended
High ...............................................................
Low ...............................................................
Cash dividends paid per share .......................
Quarter Ended
High ...............................................................
Low ...............................................................
Cash dividends paid per share .......................
September 30,
2009
$ 12.70
10.10
0.10
September 30,
2008
$ 13.50
11.55
0.10
December 31,
2009
$ 12.25
9.51
0.10
December 31,
2008
$ 13.70
11.25
0.10
March 31,
2010
$ 12.00
10.65
0.10
March 31,
2009
$ 13.00
11.75
0.10
June 30,
2010
$ 11.90
11.10
0.10
June 30,
2009
$ 12.70
11.75
0.10
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 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 for dividend restrictions.
The Corporation has no compensation plans under which equity securities are authorized for issuance. There were no
repurchases of the Corporation’s securities during the 2010 fiscal year.
ITEM 6—SELECTED FINANCIAL DATA
Not applicable for Smaller Reporting Companies.
8
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, 2010 and 2009. This discussion is designed to provide a more comprehensive review of the operating
results and financial position than could be obtained from an examination of the financial statements alone. This analysis
should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data
included elsewhere in this report.
Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all of the
issued and outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of
America. The Corporation’s activities have been limited primarily to holding the common stock of the Bank. The Bank’s
business involves attracting deposits from businesses and individual customers and using such deposits to originate
commercial, mortgage and consumer loans in its market area, consisting primarily of Stark, Columbiana, Carroll and
contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government sponsored entities,
municipal obligations and mortgage-backed securities issued by Fannie Mae and Freddie Mac.
Comparison of Results of Operations for the Years Ended June 30, 2010 and June 30, 2009
Net Income. Net income increased by $12, or 0.6%, from 2009 to 2010. The increase was mainly the result of a $503, or
5.3%, increase in the net interest income that was partially offset by an other-than-temporary impairment charge of $410 related
to a trust preferred security.
Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and
interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest
income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities.
Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning
assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate.
All average balances are daily average balances. Non-accruing loans are included in average loan balances.
Net Interest Income Year ended June 30,
Net interest income .............................................................................................
Taxable equivalent adjustments to net interest ...................................................
Net interest income, fully taxable equivalent .....................................................
Net interest margin .............................................................................................
Taxable equivalent adjustment ...........................................................................
Net interest margin, fully taxable equivalent ......................................................
2010
$ 10,050
388
$ 10,438
2009
$ 9,547
373
$ 9,920
4.13%
0.15
4.28%
4.15%
0.16
4.31%
Net interest income for the year of 2010 was $10,050, an increase of $503, or 5.3%, from $9,547 in the year of 2009. The
Corporation’s tax equivalent net interest margin for the year ended June 30, 2010 was 4.28%, a decrease of 3 basis points from
2009. Interest income for the year of 2010 was $12,610, a decrease of $490, or 3.7%, from $13,100 in the year of 2009. This
decline was mainly the result of lower market rates affecting the yield on all interest earning assets, which was partially offset
by a $13,697 increase in average interest earning assets. Interest expense for the year of 2010 was $2,560, a decrease of $993,
or 27.9%, from $3,553 in the year of 2009. This decrease was mainly the result of lower market rates affecting the rates paid on
all interest-bearing deposit accounts and borrowings.
9
Average Balance Sheet and Net Interest Margin
2010
2009
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Interest earning assets:
Taxable securities ................................................
Nontaxable Securities (1).....................................
Loans receivable (1) ............................................
Interest bearing deposits and federal funds sold ..
Total interest earning assets .................................
Non-interest earning assets ..................................
Total assets ..........................................................
Interest bearing liabilities:
NOW ....................................................................
Savings.................................................................
Time deposits .......................................................
Short-term borrowings .........................................
FHLB advances ...................................................
Total interest bearing liabilities ...........................
Non-interest bearing liabilities .............................
Total liabilities .....................................................
Shareholders’ equity ............................................
Total liabilities and shareholders’ equity .............
$ 46,133 $ 1,827
1,143
9,967
61
19,144
167,142
11,202
243,621 12,998
11,969
$ 255,590
$ 13,387 $
59,873
90,297
12,977
8,883
185,417
47,389
232,806
22,784
$ 255,590
27
184
2,006
50
293
2,560
4.03% $ 45,600 $ 2,186
5.98
1,116
17,688
156,787 10,093
5.96
0.54
9,849
78
5.35% 229,924 13,473
12,708
$ 242,632
4.78%
6.09
6.44
0.79
5.86%
0.20% $ 11,699 $
0.31
2.22
0.39
3.30
54,912
84,382
14,327
9,748
49
319
2,645
212
328
0.42%
0.58
3.13
1.48
3.36
3,553
2.03%
1.38% 175,068
47,095
222,163
20,469
$ 242,632
Net interest income, interest rate spread (1) ........
$ 10,438
3.97%
$ 9,920
3.83%
Net interest margin (net interest as a percent of
average interest earning assets) (1) .................
Federal tax exemption on non-taxable securities
and loans included in interest income
Average interest earning assets to interest
bearing liabilities .............................................
(1) Calculated on a fully taxable equivalent basis
4.28%
4.31%
$ 388
$ 373
131.39%
131.33%
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
2010 Compared to 2009
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
2009 Compared to 2008
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
(In thousands)
Interest earning assets:
Taxable securities ................................................................. $ (359) $
Nontaxable securities (1) ......................................................
Loans receivable (2) .............................................................
Federal funds sold .................................................................
Total interest income ............................................................
Interest bearing liabilities:
NOW accounts ......................................................................
Savings deposits ...................................................................
Time deposits ........................................................................
Short-term borrowings ..........................................................
FHLB advances ....................................................................
Total interest expense ...........................................................
Net interest income ............................................................... $
(22)
(135)
(639)
(162)
(35)
(993)
518 $
27
(126)
(17)
(475)
(19) $
47
643
10
681
(340) $
(20)
(769)
(27)
(1,156)
298 $
92
(688)
(33)
(331)
397 $ (99)
74
18
(1,427)
739
(119)
86
(1,627)
1,296
6
27
175
(18)
(29)
161
520 $
(28)
(162)
(814)
(144)
(6)
(1,154)
(2) $
6
(172)
(731)
(174)
(4)
(1,075)
744 $
—
6
(226)
54
(1,050)
319
(270)
96
(49)
45
(1,595)
520
776 $ (32)
(1) Nontaxable income is adjusted to a fully tax equivalent basis utilizing a 34% tax rate.
(2) Non-accrual loan balances are included for purposes of computing the rate and volume effects although interest on these
balances has been excluded.
Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the
allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses in the
Corporation’s loan portfolio that have been incurred at each balance sheet date. The provision for loan losses was $544 in fiscal
year 2010 compared to $579 in fiscal year 2009. The lower provision for loan losses in 2010 resulted mainly from a decrease in
net charge-offs. For 2010, net charge-offs were $260, or 0.15% of total loans, and were mainly within the commercial loan
portfolio. This compares with $296, or 0.18% of total loans, for the same period last year.
Non-performing loans as a percentage of total loans decreased from 1.75% as of June 30, 2009 to 1.34% as of June 30,
2010. The decrease in non-performing loans was primarily due to the payoff of a loan that was past due 90 days or more as of
June 30, 2009. 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 are closely monitoring these loans and believe that the prospects for
recovery of principal, less identified specific reserves, are good.
Other Income. Total other income was $2,148 for fiscal year 2010, compared to $2,615 for the same period last year.
Adjusted for security gains, losses from the sale of other real estate owned (OREO), and a security impairment charge, other
income totaled $2,393 for the 2010 fiscal year, compared with $2,430 for the same period last year. Service charges on deposit
accounts decreased by $131, or 7.8%, in 2010 to $1,540 from $1,671 mainly from a decline in overdraft account fee income.
Debit card interchange income increased in 2010 to $524 from $447 from the previous fiscal year due to higher volume as a
result of increased customer usage and an increase in a number of debit cards issued.
Gains recognized on the sale of securities totaled $218 during 2010 and $185 during the same period last year. A loss of
$53 on the sale of OREO acquired through loan foreclosures and an other-than-temporary impairment loss of $410 related to a
trust preferred security were recognized during the 2010 fiscal year. A discussion of the impairment loss is included on the
following pages under the heading “Financial Condition.”
11
Other Expenses. Total other expenses were $9,048 for the year ended June 30, 2010; an increase of $61, or 0.7% from
$8,987 for the year ended June 30, 2009.
Salaries and employee benefit expenses increased $162, or 3.8%, during the fiscal year ended June 30, 2010 mainly due
to an increase in salary continuation benefit expense and incentive expenses. The salary continuation benefit expense increased
since a reduction to this expense of approximately $140 was recognized during fiscal year 2009 as a result of the departure of
the previous chief executive officer. These increases were partially offset by a reduction in overtime wages, the implementation
of a ten percent reduction in hours for non-exempt personnel and a salary freeze for exempt personnel that was implemented in
the third quarter of fiscal year 2009 and continued through the end of fiscal year 2010.
Occupancy and equipment expenses decreased by $13, or 1.2%, mainly due to lower depreciation expense associated
with furniture, fixtures and equipment.
Federal Deposit Insurance Corporation (FDIC) assessments decreased by $15, or 4.6%, compared to the same period last
year. In fiscal year 2010, FDIC expense was lower as compared to fiscal 2009 when the Corporation paid a one-time special
assessment of $114 that was charged to all banks based on asset size. The reduction from the one-time special assessment was
partially offset by an industry wide deposit insurance rate increase that went into effect on January 1, 2009 and as a result of a
higher level of total deposits, the assessment base upon which FDIC insurance assessments are calculated.
The amortization of the intangible is directly related to the core deposit purchase premium of the Lisbon, Ohio branch
that was purchased in January 2000.
Debit card processing expenses increased by $23, or 8.4%, during the 2010 fiscal year mainly due to increased debit card
usage by our customers.
Other expense totaled $1,226 for the year ended June 30, 2010, a decrease of $42, or 3.3%, from $1,268 for the year
ended June 30, 2009. The decline was mainly due to the renegotiation and non-renewal of miscellaneous contracts and other
cost containment efforts related to travel, transportation and office related expenses.
Income Tax Expense. The provision for income taxes totaled $567 and $569 for the years ended June 30, 2010 and
2009, respectively. The effective tax rates were 21.8% and 21.9%, respectively. The effective tax rate differed from the federal
statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions, loans and
earnings on bank owned life insurance.
Financial Condition
Total assets at June 30, 2010 were $263,393 compared to $251,862 at June 30, 2009, an increase of $11,531, or 4.6%.
The increase in total assets is mainly attributed to an increase in loans of $14,142, or 8.8%. This increase was offset by a
decline in federal funds sold and interest-bearing deposits in financial institutions of $5,097.
Securities. Available-for-sale securities increased by $3,487 from $60,775 at June 30, 2009 to $64,262 at June 30, 2010.
The securities portfolio is mainly comprised of residential mortgage-backed securities and collateralized mortgage obligations
issued by Fannie Mae and Freddie Mac, obligations of government sponsored enterprises and state and political subdivisions.
Within the securities portfolio, the Corporation owns a trust preferred security, which represents collateralized debt
obligations (CDOs) issued by other financial and insurance companies. The security is part of a pool of issuers that support a
more senior tranche of securities. Due to the illiquidity in the market, it is unlikely the Corporation would be able to recover its
investment in this security if the Corporation sold the security at this time.
Due to an increase in principal and/or interest deferrals by the issuers of the underlying securities, the cash interest
payments for the trust preferred security are being deferred. On June 30, 2010, the lowest credit rating on this security was
Fitch’s rating of C, which is defined as highly speculative. The issuers in this security are primarily banks, bank holding
companies and a limited number of insurance companies. The investment security is evaluated using a model to compare the
present value of expected cash flows to prior periods expected cash flows to determine if there has been an adverse change in
cash flows during the period. The discount rate used to calculate the cash flows is the coupon rate of the security, based on the
forward LIBOR curve. The other-than-temporary impairment model considers the structure and term of the CDO along with
the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes
and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of
12
the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and
any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust
preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no
recoveries on defaults and all interest payment deferrals are treated as defaults with an assumed recovery rate of 15% on
deferrals. In addition we use the model to “stress” the CDO, which includes assumptions more severe than current and
projected conditions, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully
support repayment of the Corporation’s note class. According to the June 30, 2010 analysis, the expected cash flows were
below the recorded amortized cost of the trust preferred security. Therefore, management determined it was appropriate to
record an other-than-temporary impairment loss from this security of $410 during the 2010 fiscal year-to-date period. The
recorded impairment is attributable to credit deterioration experienced by the Trust Preferred Security. Management has
reviewed this security and these conclusions with an independent third party. If there is further deterioration in the underlying
collateral of this security, other-than-temporary impairments may also occur in future periods.
The following table sets forth certain information regarding the amortized cost and fair value of the Corporation’s
securities at the dates indicated.
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
June 30, 2010
Obligations of government sponsored entities ........................................... $
Obligations of state and political subdivisions ..........................................
Mortgage-backed securities - residential ...................................................
Collateralized mortgage obligations .........................................................
Trust preferred security..............................................................................
Total securities ........................................................................................... $
June 30, 2009
Obligations of government sponsored entities ........................................... $
Obligations of state and political subdivisions ..........................................
Mortgage-backed securities - residential ...................................................
Collateralized mortgage obligations .........................................................
Trust preferred security..............................................................................
Total securities ........................................................................................... $
10,771 $
20,073
24,333
7,094
572
62,843 $
14,278 $
18,171
26,342
992
982
60,765 $
236 $
392
1,279
34
—
1,941
$
385 $
62
785
25
—
1,257
$
(3)
(218)
—
(151)
(150)
(522)
(1)
(608)
—
(12)
(626)
(1,247)
Fair
Value
$ 11,004
20,247
25,612
6,977
422
$ 64,262
$ 14,662
17,625
27,127
1,005
356
$ 60,775
13
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted
average yields as of June 30, 2010:
Amortized
Cost
Fair
Value
Average
Yield /
Cost
AVAILABLE-FOR-SALE
Obligations of government sponsored entities:
3 months or less ..................................................................................................................... $
979
Over 3 months through 1 year ............................................................................................... 3,923
Over 1 year through 5 years ...................................................................................................
5,869
10,771
Total obligations of government sponsored entities ..........................................................
Obligations of state and political subdivisions:
Over 1 year through 5 years ...................................................................................................
Over 5 years through 10 years ...............................................................................................
Over 10 years .........................................................................................................................
Total obligations of state and political subdivisions .........................................................
Mortgage-backed securities - residential:
Over 1 year through 5 years ...................................................................................................
Total mortgage-backed securities .......................................................................................
Collateralized mortgage obligations:
Over 3 months through 1 year ...............................................................................................
Over 1 year through 5 years ...................................................................................................
Total collateralized mortgage obligations ..........................................................................
Trust preferred security ......................................................................................................
Total securities ..................................................................................................................... $
1,046
6,048
7,094
572
62,843
495
4,327
15,251
20,073
24,333
24,333
$
1,009
4,006
5,989
11,004
530
4,310
15,407
20,247
25,612
25,612
5.28%
3.76
2.81
3.38
5.69%
5.25
6.24
6.01
4.57
4.57
1,025
5,952
6,977
422
$ 64,262
(1.68)
2.40
1.80
—
4.47%
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective
interest rates 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 negative 1.68% yield on the collateralized mortgage obligations with a term over 3 months through 1 year
was a result of unexpectedly high prepayment speeds increasing the premium amortization due to the prolonged historically
low mortgage rates. The yield on the trust preferred security is zero since the cash interest payments for this security are being
deferred.
At June 30, 2010, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies
and corporations, with an aggregate book value which exceeds 10% of shareholders’ equity.
Loans. Loan receivables increased by $14,142 to $174,283 at June 30, 2010 compared to $160,141 at June 30, 2009,
with the commercial, financial and agriculture loan portfolio increasing by $15,629. The increase in loan receivables is mainly
attributable to more customers turning to community banks as an alternative to super regional institutions and due to fewer loan
payoffs from customers’ refinancing.
Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:
Real estate—mortgage ........................................................ $ 51,198
Real estate—construction ...................................................
3,244
Commercial, financial and agricultural ..............................
114,021
Installment loans to individuals ..........................................
5,820
Total Loans ......................................................................... $ 174,283
2010
2009
$ 49,116
6,907
98,392
5,726
$ 160,141
14
The following is a schedule of contractual maturities and repayments of real estate construction, commercial, financial
and agricultural loans, as of June 30, 2010:
Due in one year or less .............................................................................................................
Due after one year but within five years ..................................................................................
Due after five years ..................................................................................................................
Total .........................................................................................................................................
$ 10,802
14,038
92,425
$ 117,265
The following is a schedule of fixed and variable rate real estate construction, commercial, financial and agricultural
loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2010:
Fixed
Interest Rates
Variable
Interest Rates
Total real estate construction, commercial, financial and agricultural
loans due after one year ...........................................................................................
$27,480
$78,983
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 losses are estimated by stratifying the total loan portfolio into
pools of homogenous loans by ownership, collateral type and loan purpose and applying the Bank’s three year historical loss
ratio, increased for more recent trends in loss experience, to each loan pool. Also, the local unemployment rate is monitored
and additional reserves are applied to all loans that are not assigned a specific reserve if there is an increase in the local
unemployment rate. Specific reserves are determined by management’s review of delinquent loans, impaired loans, non-accrual
loans, loans classified as substandard, watch list loans, loans to industries experiencing economic difficulties and other selected
large loans. The collectability of these loans is evaluated after considering the current financial position of the borrower, the
estimated market value of the collateral, guarantees and the Corporation’s collateral position versus other creditors. Judgments,
which are necessarily subjective, as to the probability of loss and the amount of such loss, are formed on these loans, as well as
other loans in the aggregate.
Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current
status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest
is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal
from non-accrual status. Commercial and commercial real estate loans are classified as impaired if management determines that
full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. If a loan is
impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated
for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest
amounts will be collected according to the original terms of the loan. As of June 30, 2010, impaired loans totaled $2,635, of
which $2,300 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:
2009
Non-accrual loans ..................................................................................... $ 2,342
$ 2,476
Accruing loans past due 90 days or more ................................................. —
328
Total non-performing loans ...................................................................... $ 2,342
$ 2,804
Other real estate owned .............................................................................
181
25
Total non-performing assets ..................................................................... $ 2,367 $ 2,985
Impaired Loans ......................................................................................... $ 2,635
$ 2,231
147
335
Accruing restructured loans ...................................................................... $
$
2010
15
The non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to
bring the loan current. Properties acquired by the Corporation as a result of foreclosure, or by deed in lieu of foreclosure, are
classified as “other real estate owned” until such time as they are sold or otherwise disposed. As of June 30, 2010, there was
$25, or two individual properties, classified as other real estate owned. Subsequent to June 30, 2010, one of the properties has
been sold for an amount slightly above the recorded value.
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
borrowers financial condition and other loans which management wants to more closely monitor due to special circumstances.
These loans and their potential loss exposure have been considered in management’s analysis of the adequacy of the allowance
for loan losses.
The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off,
recovery and other activity for the years ended June 30:
Allowance for loan losses at beginning of year ........................................
Loans charged off:
Real estate mortgage .................................................................................
Real estate construction ............................................................................
Commercial, financial and agricultural ....................................................
Installment loans to individuals ................................................................
Total charge offs .......................................................................................
Recoveries:
Real estate mortgage .................................................................................
Real estate construction ............................................................................
Commercial, financial and agricultural ....................................................
Installment loans to individuals ................................................................
Total recoveries ........................................................................................
Net charge offs..........................................................................................
Provision for loan losses charged to operations ........................................
Allowance for loan losses at end of year ..................................................
2010
2009
$ 1,992 $ 1,709
62
—
182
117
361
241
—
20
139
400
1
—
6
94
101
260
544
12
—
6
86
104
296
579
$ 2,276 $ 1,992
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
Commercial, financial and agricultural ...............................................
Installment loans to individuals ...........................................................
Real estate ............................................................................................
Total .....................................................................................................
$ 1,520
103
653
$ 2,276
65.4 %
3.4
31.2
100.0 %
June 30, 2010
June 30, 2009
$ 1,065
227
700
$ 1,992
61.4 %
3.6
35.0
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 $12,263, or 6.0%, from $204,051 at June 30, 2009 to $216,314 at June 30,
2010. Non-interest bearing deposits increased $4,804, or 11.2%, savings deposits increased $5,508, or 9.5%, and interest-
bearing checking balances increased $1,117, or 8.9%, from June 30, 2009 to June 30, 2010. We believe commercial and retail
customers are turning to community banks in these uncertain times and this trend is reflected in the increase in the deposit
balances.
16
The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:
Non-interest bearing demand deposit ....................
Interest bearing demand deposit ............................
Savings ..................................................................
Certificates and other time deposits .......................
Total ......................................................................
Years Ended June 30,
2010
$
Amount
45,582
13,387
59,873
90,297
$ 209,139
Rate
—
0.20%
0.31
2.22
1.06%
2009
Amount
$
45,089
11,699
54,912
84,382
$ 196,082
Rate
—
0.42%
0.58
3.13
1.54%
The following table summarizes time deposits issued in amounts of $100 thousand or more as of June 30, 2010 by time
remaining until maturity:
Maturing in:
Under 3 months ....................................................................................................................... $
1,863
Over 3 to 6 months ..................................................................................................................
10,893
Over 6 to 12 months ................................................................................................................
13,770
Over 12 months .......................................................................................................................
7,238
Total ........................................................................................................................................ $ 33,764
See Note 7—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term
borrowings.
Shareholders’ Equity. Total shareholders’ equity increased by $2,255 from $21,461 at June 30, 2009 to $23,716 at
June 30, 2010. The increase was primarily due to net income of $2,039 for the current fiscal year and an increase of $930 in the
unrealized gain on the mark-to-market of available-for-sale securities. This increase was partially offset by cash dividends paid
of $813.
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 on a daily basis.
Net cash inflow from operating activities for the 2010 fiscal year were $2,615 and net cash inflow from financing
activities was $8,504. Net cash outflow from investing activities was $16,204. The major sources of cash were $12,263 net
increase in deposits, $24,628 net increase from sales, maturities or principal pay downs on available-for-sale securities. The
major uses of cash were the $27,330 purchase of securities and a $14,622 net increase in loans. Total cash and cash equivalents
was $13,806 as of June 30, 2010 compared to $18,891 at June 30, 2009.
The Bank groups its loan portfolio into three major categories: real estate loans; commercial, financial and agricultural
loans; and consumer loans. The Bank’s real estate loan portfolio consists of three basic segments: conventional mortgage loans
having fixed rates for terms not longer than fifteen years, variable rate home equity line of credit loans and fixed rate loans
having maturity or renewal dates that are less than the scheduled amortization period. Commercial, financial and agricultural
loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or T-bill and fixed rate
notes having maturities of generally not greater than five years. Personal loans offered by the Bank are generally written for
periods of up to five years, based on the nature of the collateral. These may be either installment loans having regular monthly
payments or demand type loans for short periods of time.
Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. The
majority of the Bank’s securities are held in obligations of U.S. Government sponsored entities, mortgage-backed securities,
and investments in tax free municipal bonds.
The Bank offers several forms of deposit products to its customers. The rates offered by the Bank and the fees charged
for them are competitive with others available currently in the market area. While the Bank continues to be under competitive
pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many
17
commercial and retail customers have been turning to community banks in these uncertain times. Time deposit interest rates
continued to decline in the 2010 fiscal year. Compared to our peers, the Corporation’s core deposits consist of a large
percentage of non-interest bearing demand deposits resulting in the cost of funds remaining at a low level of 1.38%.
Jumbo time deposits (those with balances of $100 thousand and over) increased from $31,007 at June 30, 2009 to
$33,764 at June 30, 2010. 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 and the Bank can foresee no dependence on these types of deposits in the near term.
The net interest margin is monitored on a monthly basis. It is the Bank’s goal to maintain the net interest margin at 4.0%
or greater. The net interest margin on a tax equivalent basis for 2010 was 4.28% as compared to 4.31% for 2009.
Capital Resources
At June 30, 2010, 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 of the
Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would
cause the Bank’s capital category to change.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted
accounting principles, which require the measurement of financial position and results of operations primarily in terms of
historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of the Corporation are monetary in nature. Therefore,
interest rates have a more significant impact on a financial institution’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 policy that management believes is the most important to the portrayal
and understanding of the Corporation’s financial condition and results of operations. This policy requires management’s most
difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions
or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial
condition or results of operations is a reasonable likelihood. Also, see Note 1 of the Consolidated Financial Statements for
additional information related to significant accounting policies.
Allowance for Loan Losses. Management periodically reviews the loan portfolio in order to establish an estimated
allowance for loan losses (allowance) that are probable as of the respective reporting date. Additions to the allowance are
charged against earnings for the period as a provision for loan losses. Actual loan losses are charged against the allowance
when management believes that the collection of principal will not occur. Unpaid interest for loans that are placed on non-
accrual status is reversed against current interest income.
The allowance is regularly reviewed by management to determine whether or not the amount is considered adequate to
absorb probable incurred losses. If not, an additional provision is made to increase the allowance. This evaluation includes
specific loss estimates on certain individually reviewed loans, loss estimates for loan groups or pools that are based on
historical loss experience and general loss estimates that are 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 potential losses.
18
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 the Corporation strives to reflect all known risk factors in its 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.
Valuation of Securities and Other-Than-Temporary Impairment (OTTI). The fair value of available-for-sale
securities is estimated using relevant market information and other assumptions. Fair value measurements are classified within
one of three levels in a valuation hierarchy based upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date. 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.
Securities are reviewed at least quarterly for indicators of other-than-temporary impairment. This determination requires
significant judgment. In estimating other-than-temporary impairment, management evaluates: the length of time and extent the
fair value has been less than cost, the expected cash flows of the security, the financial condition and near term prospects of the
issuer, and whether the Corporation has the intent to sell the security or the likelihood the Corporation will be required to sell
the security at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity. A decline in
value that is considered to be credit-related other-than-temporary is recorded as a loss within other income in the consolidated
statements of income.
Contractual Obligations, Commitments and Contingent Liabilities
The following table presents, as of June 30, 2010, the Corporation’s significant fixed and determinable contractual
obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not
include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the
referenced note to the consolidated financial statements.
Certificates of deposit ....................
Short-term borrowings ...................
Federal Home Loan Advances .......
Salary continuation plan ................
Operating leases .............................
Deposits without maturity ..............
Note
Reference
6
7
8
9
4
2013
2011
$ 61,784
2012
$14,470
2014
$ 7,916 $2,400
2015
$3,259
13,086 — — — —
57
1,268
22
22
74
114
— — — — —
579
22
104
69
22
90
22
114
1,089
Thereafter
$ 1,435
—
5,235
892
17
—
Total
$ 91,264
13,086
8,297
1,002
513
125,050
Note 12 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, 2010, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage
in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than
the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative
contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest
rate swaps, in an effort to execute a sound and defensive interest rate risk management policy.
19
Forward-Looking Statements
All statements set forth in this discussion or future filings by the Corporation with the Securities and Exchange
Commission, or other public or shareholder communications, or in oral statements made with the approval of an authorized
executive officer, that are not historical in nature, including words or phrases “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:
•
regional and national economic conditions becoming less favorable than expected, resulting in, among other things, a
deterioration in credit quality of assets and the underlying value of collateral could prove to be less valuable than
otherwise assumed;
the nature, extent, and timing of government and regulatory actions;
•
• material unforeseen changes in the financial condition or results of the Bank’s customers;
•
•
•
changes in levels of market interest rates which could reduce anticipated or actual margins;
competitive pressures on product pricing and services; and
a continued deterioration in market conditions causing debtors to be unable to meet their obligations.
The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or
unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our
business, financial condition and results of operations.
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for Smaller Reporting Companies.
20
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT ON THE CORPORATION`S INTERNAL CONTROL OVER FINANCIAL
REPORTING
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 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. Internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are made
only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management of Consumers Bancorp, Inc., including the Chief Executive Officer and the Chief Financial Officer, has
assessed the Corporation’s internal control over financial reporting as of June 30, 2010, based on criteria for effective internal
control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that the
Corporation’s internal control over financial reporting was effective as of June 30, 2010, based on the specified criteria.
This annual report does not include an attestation report of the Corporation’s independent registered public accounting
firm regarding internal control over financial reporting because management’s report was not subject to attestation by the
Corporation’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the
Corporation to provide only management’s report.
Ralph J. Lober, II
Chief Executive Officer
Renee K. Wood
Chief Financial Officer & Treasurer
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Consumers Bancorp, Inc.
Minerva, Ohio
We have audited the accompanying consolidated balance sheets of Consumers Bancorp, Inc. as of June 30, 2010 and
2009 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash
flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Corporation is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Consumers Bancorp, Inc. as of June 30, 2010 and 2009 and the results of its operations and its cash flows for the
years then ended, in conformity with U. S. generally accepted accounting principles.
Crowe Horwath LLP
Cleveland, Ohio
September 22, 2010
22
CONSUMERS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
As of June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
ASSETS:
Cash on hand and noninterest-bearing deposits in financial institutions ........................................................ $
Federal funds sold and interest-bearing deposits in financial institutions…………………………………..
5,973 $
7,833
5,961
12,930
2010
2009
Total cash and cash equivalents ................................................................................................................
Certificate of deposits in financial institutions ...............................................................................................
Securities, available-for-sale ...........................................................................................................................
Federal bank and other restricted stocks, at cost .............................................................................................
Total loans ......................................................................................................................................................
Less allowance for loan losses ........................................................................................................................
Net loans ...................................................................................................................................................
Cash surrender value of life insurance ............................................................................................................
Premises and equipment, net ..........................................................................................................................
Intangible assets, net .......................................................................................................................................
Other real estate owned ..................................................................................................................................
Accrued interest receivable and other assets ..................................................................................................
18,891
2,012
60,775
1,186
160,141
(1,992)
158,149
4,622
3,776
411
181
1,859
Total assets ................................................................................................................................................ $ 263,393 $ 251,862
13,806
980
64,262
1,186
174,283
(2,276)
172,007
4,798
3,581
250
25
2,498
LIABILITIES:
Deposits:
Non-interest bearing demand .......................................................................................................................... $ 47,659 $ 42,855
Interest bearing demand ..................................................................................................................................
12,570
Savings ...........................................................................................................................................................
58,196
Time ................................................................................................................................................................
90,430
Total deposits ............................................................................................................................................
204,051
Short-term borrowings ....................................................................................................................................
15,055
Federal Home Loan Bank advances ...............................................................................................................
9,373
Accrued interest payable and other liabilities .................................................................................................
1,922
Total liabilities ..........................................................................................................................................
230,401
—
Commitments and contingent liabilities .........................................................................................................
13,687
63,704
91,264
216,314
13,086
8,297
1,980
239,677
—
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized ..............................................................................
Common shares, no par value; 3,500,000 shares authorized; 2,168,329 and 2,160,000 shares issued as of
4,869
June 30, 2010 and 2009, respectively ........................................................................................................
Retained earnings ...........................................................................................................................................
18,244
Treasury stock, at cost (130,442 common shares at June 30, 2010 and 2009) ...............................................
(1,659)
Accumulated other comprehensive income ....................................................................................................
7
Total shareholders’ equity .........................................................................................................................
21,461
Total liabilities and shareholders’ equity .................................................................................................. $ 263,393 $ 251,862
4,968
19,470
(1,659)
937
23,716
—
—
See accompanying notes to consolidated financial statements.
23
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
2010
2009
Interest income:
Loans, including fees ..................................................................................................... $ 9,939
Federal funds sold and interest-bearing deposits in financial institutions ......................
61
Securities:
Taxable .................................................................................................................
Tax-exempt ..........................................................................................................
Total interest income ..................................................................................
1,827
783
12,610
Interest expense:
Deposits .........................................................................................................................
Short-term borrowings ...................................................................................................
Federal Home Loan Bank advances...............................................................................
Total interest expense .................................................................................
Net interest income ..................................................................................................................
Provision for loan losses..........................................................................................................
Net interest income after provision for loan losses .................................................................
Other income:
Service charges on deposit accounts ..............................................................................
Debit card interchange income ......................................................................................
Bank owned life insurance income ................................................................................
Securities gains, net .......................................................................................................
Other-than-temporary loss
Total impairment loss ....................................................................................................
Loss recognized in other comprehensive income ..........................................................
Net impairment loss recognized in earnings ..........................................................
Loss on disposition or direct write-down of other real estate owned .............................
Other ..............................................................................................................................
Total other income ......................................................................................
2,217
50
293
2,560
10,050
544
9,506
1,540
524
176
218
(410)
—
(410)
(53)
153
2,148
$ 10,065
78
2,186
771
13,100
3,013
212
328
3,553
9,547
579
8,968
1,671
447
170
185
—
—
—
—
142
2,615
Other expenses:
Salaries and employee benefits ......................................................................................
4,434
Occupancy and equipment .............................................................................................
1,069
Data processing expenses ..............................................................................................
534
Professional and director fees ........................................................................................
370
Federal Deposit Insurance Corporation assessments .....................................................
313
Franchise taxes ...............................................................................................................
223
Loan and collection expenses ........................................................................................
189
Amortization of intangible .............................................................................................
161
Telephone and communications ....................................................................................
233
Debit card processing expenses .....................................................................................
296
Other ..............................................................................................................................
1,226
Total other expenses ...................................................................................
9,048
Income before income taxes ....................................................................................................
2,606
Income tax expense .................................................................................................................
567
Net income .............................................................................................................................. $ 2,039
1.00
Basic earnings per share ....................................................................................................... $
4,272
1,082
538
392
328
217
217
161
239
273
1,268
8,987
2,596
569
$ 2,027
1.00
$
See accompanying notes to consolidated financial statements.
24
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMPREHENSIVE INCOME
Years Ended June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
2010
2009
Net Income .............................................................................................................................. $ 2,039
$ 2,027
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Other-than-temporarily impaired securities:
Unrealized gains on other-than-temporarily impaired securities ...................................
Reclassification adjustment for losses included in income ............................................
Net unrealized gain ........................................................................................................
Income tax effect ...........................................................................................................
Available-for-sale securities which are not other-than-temporarily impaired:
Unrealized gains arising during the period ....................................................................
Reclassification adjustment for gains included in income .............................................
Net unrealized gain .......................................................................................................
Income tax effect ...........................................................................................................
66
410
476
162
314
1,151
(218)
933
317
616
—
—
—
—
—
1,207
(185)
1,022
347
675
Other comprehensive income ..................................................................................................
930
Total comprehensive income ................................................................................................... $ 2,969
675
$ 2,702
See accompanying notes to consolidated financial statements.
25
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
Common
Shares
Balance, June 30, 2008............................................... $ 4,869
Comprehensive Income:
Net income ...................................................................
Other comprehensive income ......................................
Total comprehensive income .......................................
Cash dividends declared ($0.40 per share) ..................
Balance, June 30, 2009...............................................
Comprehensive Income:
Net income ...................................................................
Other comprehensive income ......................................
Total comprehensive income .......................................
Issuance of 8,329 shares for dividend reinvestment
and stock purchase plan ..........................................
Cash dividends declared ($0.40 per share) ..................
Balance, June 30, 2010............................................... $ 4,968
4,869
99
Accumulated
Other
Comprehensive
Income
$ (668)
675
Retained
Earnings
$ 17,029
Treasury
Stock
$ (1,659)
2,027
(812)
18,244
2,039
(1,659)
7
930
(813)
$ 19,470
$ (1,659)
$ 937
Total
Shareholders’
Equity
$ 19,571
2,027
675
2,702
(812)
21,461
2,039
930
2,969
99
(813)
$ 23,716
See accompanying notes to consolidated financial statements.
26
2010
2009
2,039
$
2,027
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
Cash flows from operating activities:
Net income ......................................................................................................................... $
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation .......................................................................................................................
Securities amortization and accretion, net ..........................................................................
Provision for loan losses .....................................................................................................
Gain on disposal of premises ..............................................................................................
Loss on disposition or direct write-down of other real estate owned .................................
Deferred income taxes ........................................................................................................
Gain on sale of securities ....................................................................................................
Impairment loss on securities .............................................................................................
Stock dividend on FHLB stock ..........................................................................................
Intangible amortization .......................................................................................................
Increase in cash surrender value of life insurance ..............................................................
Change in:
Accrued interest receivable ................................................................................................
Accrued interest payable ....................................................................................................
Other assets and other liabilities .........................................................................................
Net cash flows from operating activities ............................................................................
Cash flows from investing activities:
Securities available-for-sale
Purchases ............................................................................................................................
Maturities, calls and principal pay downs ..........................................................................
Proceeds from sales of available for sale securities ............................................................
Net (increase)/decrease in certificates of deposit with other financial institutions .............
Net increase in loans ...........................................................................................................
Acquisition of premises and equipment .............................................................................
Proceeds from sale/disposal of premises ............................................................................
Proceeds from sale of other real estate owned ....................................................................
Improvement to other real estate owned .............................................................................
Net cash flows from investing activities .............................................................................
430
431
544
—
53
(316)
(218)
410
—
161
(176)
95
(62)
(776)
2,615
(27,330)
16,956
7,672
1,032
(14,622)
(235)
—
323
—
(16,204)
Cash flows from financing activities:
Net increase in deposit accounts .........................................................................................
12,263
Repayments of FHLB advances .........................................................................................
(1,076)
Change in short-term borrowings .......................................................................................
(1,969)
Proceeds from dividend reinvestment and stock purchase plan .........................................
99
Dividends paid ....................................................................................................................
(813)
Net cash flows from financing activities ............................................................................
8,504
Increase (decrease) in cash and cash equivalents ...............................................................
(5,085)
Cash and cash equivalents, beginning of year ....................................................................
18,891
Cash and cash equivalents, end of year .......................................................................... $ 13,806
455
73
579
(4)
—
(105)
(185)
—
(13)
161
(170)
44
(72)
(280)
2,510
(25,934)
12,070
13,436
(2,012)
(8,286)
(210)
7
24
(6)
(10,911)
15,207
(1,228)
3,163
—
(812)
16,330
7,929
10,962
$ 18,891
Supplemental noncash disclosures:
Transfers from loans to repossessed assets ......................................................................... $
220
$
199
See accompanying notes to consolidated financial statements.
27
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, dollar amounts are in thousands, except per share data.
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 Stark,
Columbiana, Carroll 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: Consumers Bancorp, Inc. is a bank holding company 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. The allowance for
loan losses, fair values of financial instruments, and determination of other-than-temporary impairment of securities are
particularly subject to change.
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. Cash paid for interest was $2,622 and $3,625 for the
years ending June 30, 2010 and 2009. Cash paid for income taxes was $785 and $725 for the years ending June 30, 2010 and
2009.
Interest–Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions
mature within one year and are carried at cost.
Cash Reserves: The Bank is required to maintain cash on hand and non-interest bearing balances on deposit with the
Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance at June 30, 2010 and
2009 was $1,768 and $1,897, 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 as a separate component of equity, net of tax. Federal bank and other restricted
stocks, such as Federal Home Loan Bank stock, are carried at cost.
Realized gains or losses on securities sold are determined based on the amortized cost of the specific security sold.
Interest and dividends on securities, including amortization of premiums and accretion of discounts computed under a system
materially consistent with the level-yield method, are recognized as interest income. Prepayment activity on mortgage-backed
securities is affected primarily by changes in interest rates. Yields on mortgage-backed securities are adjusted as prepayments
occur through changes to premium amortization or discount accretion.
Management evaluates securities for OTTI at least on a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation. Management assesses whether it intends to sell, or 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 these criteria
is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities
that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related
28
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
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.
Federal Home Loan Bank (FHLB) stock: The Bank is a member of the 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 in 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. Since this stock is 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: Loans are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for
loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs
over the loan term. Interest income on mortgage and commercial 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 90 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 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
Stark, Columbiana and Carroll 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 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.
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 and for which the borrower is experiencing financial difficulties, are considered trouble debt restructurings and
classified as impaired. Impairment is evaluated in total 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 restructures are measured at the present value of estimated future cash flows using the
loans’s effective interest rate at inception.
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. If the fair value declines after
29
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
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.
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, 2010, the Bank had policies with total
death benefits of $10,328 and total cash surrender values of $4,798. As of June 30, 2009, the Bank had policies with total death
benefits of $10,225 and total cash surrender values of $4,622. 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 changes 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. The amount included in income (net of policy commissions and mortality costs) was $176,
and $170 for the years ended June 30, 2010 and 2009, respectively.
Intangible Assets: Core deposit intangible is recorded at cost and is amortized over an estimated life of 12 years on a
straight line method. Intangibles are assessed annually for impairment and written down as necessary.
Long-term Assets: Premises and equipment, core deposit and other intangible assets 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.
Profit Sharing Plan: The Bank maintains a 401(k) profit sharing plan covering all eligible employees. Matching
contributions are made and expensed annually.
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 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.
Earnings and Dividends Declared per Share: Earnings per common share is net income divided by the weighted
average common shares outstanding during the period. The weighted average number of common shares outstanding was
2,032,588 and 2,029,558 for the years ended June 30, 2010 and 2009, respectively. The Corporation’s capital structure contains
no dilutive securities.
Comprehensive Income (loss): Comprehensive income (loss) consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale.
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 financial statements.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors,
30
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
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. As of June 30, 2010 the Bank could, without
prior approval, declare a dividend of approximately $3,288.
Adoption of New Accounting Standards: ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) -
Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value
measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value
hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair
value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of
the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the
fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further
clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major
category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and
(ii) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair
value hierarchy. The new disclosures and clarifications of existing disclosures about Level 1 and Level 2 securities are effective
for interim and annual reporting periods beginning after December 15, 2009. The disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The early adoption of this update did not have a material
effect on the Corporation’s results of operations or financial position. See Note 13 – Fair Value.
Newly Issued But Not Yet Effective Accounting Standards: Accounting Standards Update (ASU) No. 2009-16,
“Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.” ASU 2009-16 amends prior accounting
guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates
the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new
authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU
2009-16 will be effective for the Corporation on July 1, 2010 and the effect of adopting this new guidance is not expected to
have a significant impact on the Corporation’s financial statements.
On July 21, 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the
credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the
credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed
by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented
by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled
debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management
uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual
reporting periods after December 15, 2010. The Corporation will include these disclosures in the notes to the financial
statements upon adoption of this ASU.
Reclassifications: Certain reclassifications have been made to the June 30, 2009 financial statements to be comparable to
the June 30, 2010 presentation.
31
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 2—SECURITIES
The following table sets forth certain information regarding the amortized cost and fair value of the Corporation’s
available-for-sale securities at the dates indicated.
Description of Securities
June 30, 2010
Obligations of U.S. government-sponsored entities and agencies ...........................
Obligations of state and political subdivisions ........................................................
Mortgage-backed securities - residential .................................................................
Collateralized mortgage obligations ........................................................................
Trust preferred security ............................................................................................
Total securities .........................................................................................................
June 30, 2009
Obligations of U.S. government sponsored entities and agencies ...........................
Obligations of state and political subdivisions ........................................................
Mortgage-backed securities - residential .................................................................
Collateralized mortgage obligations ........................................................................
Trust preferred security ............................................................................................
Total securities .........................................................................................................
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 10,771
20,073
24,333
7,094
572
$ 62,843
$ 236
392
1,279
34
—
$1,941
$
$
—
(218)
(3) $ 11,004
20,247
25,612
(151)
6,977
(150)
422
(522) $ 64,262
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
r
$ 14,278
18,171
26,342
992
982
$ 60,765
$ 385
62
785
25
—
$1,257
$
(608)
—
(12)
(626)
(1) $ 14,662
17,625
27,127
1,005
356
$ (1,247) $ 60,775
Proceeds from sales and calls of all equity and debt securities during 2010 and 2009 were as follows:
Proceeds from sales
Gross realized gains
Gross realized losses
2010
$ 7,672
219
1
2009
$ 13,436
238
53
The amortized cost and fair values of available-for-sale securities at June 30, 2010 by expected maturity are shown
below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-
backed securities, collateralized mortgage obligations and the trust preferred security are shown separately.
Amortized
Cost
Due in one year or less ............................................................................................................ $ 4,902
Due after one year through five years .....................................................................................
6,363
Due after five years through ten years ....................................................................................
4,327
Due after ten years .................................................................................................................. 15,252
Total ........................................................................................................................................ 30,844
Mortgage-backed securities – residential ................................................................................ 24,333
Collateralized mortgage obligations .......................................................................................
7,094
Trust preferred security ...........................................................................................................
572
Total ........................................................................................................................................ $ 62,843
Fair Value
$ 5,015
6,520
4,310
15,406
31,251
25,612
6,977
422
$ 64,262
Securities with a carrying value of approximately $40,901 and $39,901 were pledged at June 30, 2010 and 2009,
respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2010, there were no
holdings of securities of any one issuer, other than the U.S. government and its agencies, with an aggregate book value greater
than 10% of shareholders’ equity. At June 30, 2009, available-for-sale securities included municipal securities issued by
32
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
Farmersville Texas school district that are insured by Permanent School Fund Guarantee with an aggregate book value of
$2,175, or 10.1%, of shareholders’ equity.
The following table summarizes the securities with unrealized losses at June 30, 2010 and 2009, aggregated by
investment category and length of time the individual securities have been in a continuous unrealized loss position:
Less than 12 Months
Unrealized
Fair
Loss
Value
12 Months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
Description of Securities
June 30, 2010
Obligations of U.S. government-sponsored entities ... $
764 $
Obligations of states and political subdivisions ..........
5,331
4,763
Collateralized mortgage obligations ...........................
Trust preferred security...............................................
—
Total temporarily impaired ......................................... $ 10,858 $
(3) $
(179)
(151)
—
(333) $
— $
649
—
422
1,071 $
764 $
5,980
4,763
422
— $
(39)
—
(150)
(189) $ 11,929 $
(3)
(218)
(151)
(150)
(522)
Less than 12 Months
Unrealized
Fair
Loss
Value
12 Months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
June 30, 2009
Obligations of government sponsored entities ............ $
Obligations of states and political subdivisions ..........
Collateralized mortgage obligations ...........................
Trust preferred security...............................................
Total temporarily impaired ......................................... $
532 $
8,425
—
—
8,957 $
(1) $
(267)
—
—
(268) $
— $
4,277
135
356
4,768 $
532 $
12,702
135
356
— $
(341)
(12)
(626)
(979) $ 13,725 $
(1)
(608)
(12)
(626)
(1,247)
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently
when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating
the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated
for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities. However, the trust
preferred security is evaluated using the model outlined in FASB ASC Topic 325, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized
Financial Assets.
In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of
time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the
issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to
sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The
assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based
on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by ASC Topic 325. Under the ASC Topic 325
model, the present value of the remaining cash flows as estimated at the preceding evaluation date are compared to the current
expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining
expected future cash flows. The analysis of the trust preferred security falls within the scope of ASC Topic 325.
As of June 30, 2010, the Corporation’s security portfolio consisted of $64,262, of which $11,929 were in an unrealized
loss position. The majority of unrealized losses are related to the Corporation’s obligations of states and political subdivisions,
collateralized mortgage obligations and the trust preferred security, as discussed below:
Collateralized Mortgage Obligations: At June 30, 2010, approximately 98.6% of the collateralized mortgage
obligations held by the Corporation were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae
and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value
is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Corporation does not have the
intent to sell these collateralized mortgage obligations and it is likely that it will not be required to sell the securities before
33
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30,
2010.
Obligations of States and Political Subdivisions: At June 30, 2010, approximately 89.1% of the obligations of states
and political subdivisions held by the Corporation were general obligation bonds and 10.9% were revenue bonds. The decline
in fair value of these securities is mainly attributable to temporary illiquidity and the turmoil within the municipal bond
insurance industry, not credit quality. The recent credit concerns within the municipal bond insurance industry have reduced the
liquidity of these securities and, as a result, have caused a decline in the value for some municipal securities. Management
monitors the financial data of the individual municipalities to insure they meet minimum credit standards. Therefore, since the
Corporation does not intend to sell these securities and it is not likely the Corporation will be required to sell these securities at
an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity, management does not believe
there is any other-than-temporary impairment related to these securities at June 30, 2010.
Trust Preferred Security: The Corporation owns a trust preferred security, which represents collateralized debt
obligations (CDOs) issued by other financial and insurance companies. The following table summarizes the relevant
characteristics of the pooled-trust-preferred security at June 30, 2010. The security is part of a pool of issuers that support a
more senior tranche of securities. Due to the illiquidity in the market, it is unlikely the Corporation would be able to recover its
investment in this security if the Corporation sold the security at this time.
Par
Value
Deal Name
Pre Tsl XXII (1) $ 982
Book
Value
Fair
Value
Unrealized
Loss
# of Issuers
Currently
Performing/
Remaining
Actual
Deferrals and
Defaults as a
% of Original
Collateral
Expected
Defaults as a
% of
Remaining
Collateral
Excess
Subordination
(2)
$ 572
$ 422 $
150
67/98
28.5%
13.3%
—
(1) Security was determined to have other-than-temporary impairment. As such, the book value is net of recorded credit
impairment.
(2) Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the
security can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by: (a)
determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from
this default breakage percentage both total current and expected future default percentages.
Due to an increase in principal and/or interest deferrals by the issuers of the underlying securities, the cash interest
payments for the trust preferred security are being deferred. On June 30, 2010, the lowest credit rating on this security was
Fitch’s rating of C, which is defined as highly speculative. The issuers in this security are primarily banks, bank holding
companies and a limited number of insurance companies. The investment security is evaluated using a model to compare the
present value of expected cash flows to prior periods expected cash flows to determine if there has been an adverse change in
cash flows during the period. The discount rate used to calculate the cash flows is the coupon rate of the security, based on the
forward LIBOR curve. The OTTI model considers the structure and term of the CDO along with the financial condition of the
underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the
timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note
classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market
information including announcements of interest payment deferrals or defaults of underlying trust preferred securities.
Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults
and all interest payment deferrals are treated as defaults with an assumed recovery rate of 15% on deferrals. In addition we use
the model to “stress” the CDO, or make assumptions more severe than expected activity, to determine the degree to which
assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class.
According to the June 30, 2010 analysis, the expected cash flows were below the recorded amortized cost of the trust preferred
security. Therefore, management determined it was appropriate to record an other-than-temporary impairment loss from this
security of $410 during the 2010 fiscal year-to-date period. Management has reviewed this security and these conclusions with
an independent third party. If there is further deterioration in the underlying collateral of this security, other-than-temporary
impairments may also occur in future periods.
34
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 3—LOANS
Major classifications of loans were as follows as of June 30:
Real estate—mortgage ....................................................................................................
Real estate—construction ...............................................................................................
Commercial, financial and agricultural ...........................................................................
Installment loans to individuals ......................................................................................
Deferred loan fees and costs ...........................................................................................
Allowance for loan losses ...............................................................................................
Net loans .........................................................................................................................
2010
$ 51,166
3,244
114,320
5,824
174,554
(271)
(2,276)
$ 172,007
2009
$ 49,130
6,907
98,636
5,724
160,397
(256)
(1,992)
$ 158,149
The changes in the allowance for loan losses consists of the following for the years ended June 30:
Balance at beginning of year ............................................................................
Provision for loan losses ...................................................................................
Loans charged-off .............................................................................................
Recoveries ........................................................................................................
Balance at end of year ......................................................................................
2010
$ 1,992
544
(361)
101
$ 2,276
2009
$ 1,709
579
(400)
104
$ 1,992
Impaired loans were as follows as of June 30:
Loans with no allocated allowance for loan losses ......................................................
Loans with allocated allowance for loan losses ..........................................................
Total impaired loans ....................................................................................................
Amount of allowance for loan losses allocated ...........................................................
2010
$ 717
1,918
$ 2,635
543
2010
Average of impaired loans during the year ............................................................... $ 2,323
Interest income recognized during impairment .........................................................
—
Cash-basis interest income recognized .....................................................................
—
2009
$ —
2,231
$ 2,231
344
2009
$ 1,854
42
42
Included in impaired loans were $806 of loans for which the Corporation has modified the repayment terms during fiscal
year 2010 and are considered trouble debt restructurings. There were no troubled debt restructurings in fiscal year 2009.
Nonperforming loans were as follows:
Loans past due over 90 days and still accruing .................................................................
Loans on non-accrual ........................................................................................................
Increase in interest income if loans had been on accrual ..................................................
2010
$ —
2,342
165
$
2009
328
2,476
175
The Bank has granted loans to certain of its executive officers, directors and their affiliates. A summary of activity during
the year ended June 30, 2010 of related party loans were as follows:
Principal balance at beginning of year ....................................................................................... $
New loans ...................................................................................................................................
Repayments ................................................................................................................................
Principal balance at end of year ................................................................................................. $
2010
1,809
111
(474)
1,446
35
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 4—PREMISES AND EQUIPMENT
Major classifications of premises and equipment were as follows as of June 30:
Land ...................................................................................................................................... $
Land improvements ..............................................................................................................
Building and leasehold improvements ..................................................................................
Furniture, fixture and equipment ..........................................................................................
Total premises and equipment ..............................................................................................
Accumulated depreciation and amortization .........................................................................
Premises and equipment, net ................................................................................................. $
953
327
3,433
5,076
9,789
(6,208)
3,581
$
$
953
327
3,298
5,060
9,638
(5,862)
3,776
2010
2009
Depreciation was $430 and $455 for the years ended June 30, 2010 and 2009, respectively.
The Corporation is obligated under non-cancelable operating leases for facilities and equipment. The approximate
minimum annual rentals and commitments under these non-cancelable agreements and leases with remaining terms in excess of
one year are as follows:
2011 ..............................................................................................................................................
2012 ..............................................................................................................................................
2013 ..............................................................................................................................................
2014 ..............................................................................................................................................
2015 ..............................................................................................................................................
Thereafter .....................................................................................................................................
114
114
104
90
74
17
$ 513
Rent expense incurred was $99 and $96 during the fiscal years ended June 30, 2010 and 2009, respectively.
NOTE 5—INTANGIBLE ASSETS
The following summarizes the original balance and accumulated amortization of core deposit intangible assets at June 30,
2010 and 2009:
Original balance ....................................................................................................
Less: accumulated amortization ............................................................................
Net balance, June 30..............................................................................................
2010
$ 1,927
1,677
250
$
2009
$ 1,927
1,516
411
$
Amortization expense for the years ended June 30, 2010 and 2009 was $161 for each year. Amortization expense is
estimated to be $161 for the fiscal year ending June 30, 2011 and $89 for the fiscal year ending June 30, 2012.
36
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 6—DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of $100 thousand was $33,764 and $31,007
as of June 30, 2010 and 2009, respectively.
Scheduled maturities of time deposits at June 30, 2010 were as follows:
2011 ........................................................................................................................................
2012 ........................................................................................................................................
2013 ........................................................................................................................................
2014 ........................................................................................................................................
2015 ........................................................................................................................................
Thereafter ...............................................................................................................................
$
61,784
14,470
7,916
2,400
3,259
1,435
$ 91,264
Related party deposits totaled $4,088 as of June 30, 2009 and $3,700 as of June 30, 2009.
NOTE 7—SHORT-TERM BORROWINGS
Short-term borrowings consisted of repurchase agreements. Repurchase agreements are financing arrangements. Physical
control is maintained for all securities pledged to secure repurchase agreements. Information concerning all short-term
borrowings at June 30, maturing in less than one year is summarized as follows:
Balance at June 30 ........................................................................................
Average balance during the year ...................................................................
Maximum month-end balance ......................................................................
Average interest rate during the year ............................................................
Weighted average rate June 30 .....................................................................
2010
$ 13,086
12,977
14,267
0.39%
0.38%
2009
$ 15,055
14,327
16,183
1.48%
0.50%
Repurchase agreements mature daily. The Bank has pledged obligations of government-sponsored entities and mortgage-
backed securities with a carrying value of $14,823 and $15,730 at June 30, 2010 and 2009, respectively, as collateral for the
repurchase agreements. Total interest expense on short-term borrowings was $50 and $212 for the years ended June 30, 2010
and 2009, respectively.
NOTE 8—FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances were as follows:
Advance Type
Interest-only, single maturity
Interest-only, single maturity
Principal and interest, mortgage matched
Principal and interest, mortgage matched
Principal and interest, mortgage matched
Interest-only, single maturity
Interest-only, single maturity
Interest-only, single maturity
Interest-only, single maturity
Interest-only, single maturity
Principal and interest, mortgage matched
Interest-only, putable
Principal and interest, mortgage matched
Maturity
01/15/2010
01/28/2010
07/01/2010
10/01/2010
12/01/2010
01/18/2011
01/24/2011
07/22/2011
01/24/2012
07/24/2012
04/01/2014
12/07/2017
04/01/2019
Term
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Interest Rate
2.96
2.92
6.90
7.00
6.10
3.14
3.09
3.24
3.37
3.50
2.54
3.24
4.30
Balance
June 30, 2010
$ —
—
1
3
28
625
500
500
500
500
141
5,000
499
$ 8,297
Balance
June 30, 2009
$ 625
250
13
15
82
625
500
500
500
500
219
5,000
544
$ 9,373
37
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the
difference between the contract rate on the advance and the current rate on the new advance. The $5 million putable advance
with the maturity date of December 7, 2017 can be called, at the option of the FHLB, on December 7, 2010 and then quarterly
thereafter until maturity. The following table is a summary of the scheduled principal payments for all advances:
Twelve Months Ending June 30
2011 ...........................................................................................................................................
2012 ...........................................................................................................................................
2013 ...........................................................................................................................................
2014 ...........................................................................................................................................
2015 ...........................................................................................................................................
Thereafter ..................................................................................................................................
Principal
Payments
$ 1,268
1,089
579
69
57
5,235
$ 8,297
Pursuant to collateral agreements with the FHLB, advances are secured by all the stock invested in the FHLB and certain
qualifying first mortgage loans. The advances were collateralized by $36,211 and $33,209 of first mortgage loans under a
blanket lien arrangement at June 30, 2010 and 2009, respectively. Based on this collateral and the Corporation’s holdings of
FHLB stock, the Bank is eligible to borrow up to a total of $16,676 in advances at June 30, 2010.
NOTE 9—EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) savings and retirement plan available for substantially all eligible employees. Under the plan, the
Bank is required to match each participant’s voluntary contribution to the plan but not to exceed 4% of the individual’s
compensation. Amounts charged to operations were $109 and $111, for the years ended June 30, 2010 and 2009, respectively.
The Bank has adopted a Salary Continuation Plan (the Plan) to encourage Bank executives to remain employees of the
Bank. The Plan provides such executives (and, in the event of the executive’s death, surviving beneficiary) with 180 months of
salary continuation payments equal to a certain percentage of an executive’s average compensation, as defined within each
agreement, for the three full calendar years prior to Normal Retirement Age. For purposes of the Plan, “Normal Retirement
Age” means the executive’s 65th birthday. Vesting under the Plan commences at age 50 and is prorated until age 65. If an
executive dies during active service, the executive’s beneficiary is entitled to the Normal Retirement Benefit. The executive can
become fully vested in the Accrual Balance upon termination of employment following a disability or a change in control of the
Bank. For purposes of the Plan, “Accrual Balance” means the liability that should be accrued by the Corporation for the
Corporation’s obligation to the executive under the Plan. For purposes of calculating the Accrual Balance, the discount rate in
effect at June 30, 2010 was 5.5%. The accrued liability for the salary continuation plan was $1,002 as of June 30, 2010 and
$857 as of June 30, 2009. For the years ended June 30, 2010 and 2009, approximately $166 and $4, respectively, have been
charged to expense in connection with the Plan. Distributions to participants were $22 and $20 for the years ending June 30,
2010 and 2009, respectively. The salary continuation benefit accrual and expense for fiscal 2009 was reduced by approximately
$140 as a result of the departure of the previous chief executive officer.
NOTE 10—INCOME TAXES
The provision for income taxes consists of the following for the years ended June 30:
Current income taxes................................................................................
Deferred income taxes (benefits) .............................................................
2010
2009
$
$
883 $
(316)
567 $
674
(105)
569
38
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
The net deferred income tax asset consists of the following components at June 30:
Deferred tax assets:
Allowance for loan losses ................................................................................... $
Deferred compensation .......................................................................................
Recognized loss on impairment of security ........................................................
Intangibles ...........................................................................................................
OREO deferred gain ...........................................................................................
OREO valuation allowance .................................................................................
Nonaccrual loan interest income .........................................................................
Gross deferred tax asset ...........................................................................................
2010
2009
610
354
139
111
19
6
49
1,288
$
514
310
—
100
20
—
30
974
Deferred tax liabilities:
Depreciation ........................................................................................................
Loan fees .............................................................................................................
Prepaid expenses .................................................................................................
FHLB stock dividends ........................................................................................
Net unrealized securities gain .............................................................................
(135)
(184)
(88)
(165)
(483)
Gross deferred tax liabilities ...................................................................................
Net deferred asset .................................................................................................... $
(1,055)
233
$
(166)
(162)
(81)
(165)
(4)
(578)
396
The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate
of 34% to statutory income before taxes consists of the following for the years ended June 30:
Income taxes computed at the statutory rate on pretax income ................................
Tax exempt income ..................................................................................................
Cash surrender value income ...................................................................................
Other ........................................................................................................................
2010
$ 886
(270)
(60)
11
$ 567
2009
$ 883
(266)
(58)
10
$ 569
At June 30, 2010 and June 30, 2009, the Corporation had no unrecognized tax benefits recorded. The Corporation does
not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. There were no
interest or penalties recorded for the years ended June 30, 2010 and 2009 and there were no amounts accrued for interest and
penalties at June 30, 2010 and 2009.
The Corporation and the Bank are subject to U.S. federal income tax as an income-based tax and a capital-based
franchise tax, respectively, in the state of Ohio. The Corporation and the Bank are no longer subject to examination by taxing
authorities for years before 2006.
NOTE 11—REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective-action regulations involve quantitative measures of assets, liabilities, and certain off-balance-
sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect
on the financial statements. Management believes as of June 30, 2010, the Bank has met all capital adequacy requirements to
which it is subject.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized,
under-capitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If
39
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are
required.
As of fiscal year-end 2010, the Corporation met the definition of a small bank holding company and, therefore, was
exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies. At year-end 2010
and 2009, actual Bank capital levels (in millions) and minimum required levels were as follows:
Actual
Amount
Ratio
Minimum Required
For Capital
Adequacy Purposes
Ratio
Amount
Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio
Amount
June 30, 2010
Total capital (to risk weighted assets)
Bank .....................................................................................
Tier 1 capital (to risk weighted assets)
Bank .....................................................................................
Tier 1 capital (to average assets)
Bank .....................................................................................
June 30, 2009
Total capital (to risk weighted assets)
Bank .....................................................................................
Tier 1 capital (to risk weighted assets)
Bank .....................................................................................
Tier 1 capital (to average assets)
Bank .....................................................................................
$ 24.7 13.4%
$ 14.8
8.0%
$ 18.5
10.0%
20.4 11.1
7.4
4.0
20.4
7.8
10.5
4.0
11.1
13.1
6.0
5.0
$ 22.9 12.7%
$ 14.4
8.0%
$ 18.0
10.0%
18.9 10.5
7.2
4.0
18.9
7.6
9.9
4.0
10.8
12.4
6.0
5.0
As of the latest regulatory examination, the Bank was categorized as well capitalized. There are no conditions or events
since that examination that management believes may have changed the Bank’s category.
The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking
regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these
regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined
with the retained net profits of the preceding two years, subject to the capital requirements described above. As of June 30,
2010 the Bank could, without prior approval, declare a dividend of approximately $3,288.
NOTE 12—COMMITMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to commitments to extend credit in the normal course of business to meet the financing needs of its
customers. Commitments are agreements to lend to customers providing there are no violations of any condition established in
the contract. Commitments to extend credit have a fixed expiration date or other termination clause. These instruments involve
elements of credit and interest rate risk more than the amount recognized in the statements of financial position. The Bank uses
the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.
The Bank evaluates each customer’s credit on a case by case basis. The amount of collateral obtained is based on
management’s credit evaluation of the customer. The amount of commitments to extend credit and the exposure to credit loss
for non-performance by the customer was $23,435 and $25,350 as of June 30, 2010 and 2009, respectively. Of the June 30,
2010 commitments, $22,690 carried variable rates of interest ranging from 2.00% to 10.00% and $745 carried fixed rates of
interest ranging from 2.25% to 8.12%. Of the June 30, 2009 commitments, $21,737 carried variable rates of interest ranging
from 2.00% to 10.00% and $3,613 carried fixed rates of interest ranging from 3.25% to 8.00%. Financial standby letters of
credit were $477 and $498 As of June 30, 2010 and 2009, respectively. In addition, commitments to extend credit of $6,333
and $6,253 as of June 30, 2010 and 2009, respectively, were available to checking account customers related to the overdraft
protection program. Since some loan commitments expire without being used, the amount does not necessarily represent future
cash commitments.
40
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 13—FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability. Valuation techniques include use of discounted cash flow models and
similar techniques.
The Corporation used the following methods and significant assumptions to estimate the fair value of items:
Securities: When available, the fair values of available-for-sale securities are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs). If quoted market prices are not available, fair values are estimated
using matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark
quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available,
fair values are estimated using a discounted cash flow model and market liquidity premium (Level 3 inputs). Discounted cash
flows are calculated using spread to the swap and LIBOR curves. Rating agency and industry research reports as well as
defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Federal bank and other restricted stocks includes stock acquired for regulatory purposes, such as Federal Home Loan
Bank stock and Federal Reserve Bank stock that are accounted for at cost due to restrictions placed on their transferability; and
therefore, are not subject to the fair value disclosure requirements.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally
based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches
including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers
to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and
typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties
classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair
values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the
carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Assets:
Obligations of government-sponsored entities
Obligations of states and political subdivisions
Mortgage-backed securities - residential
Collateralized mortgage obligations
Trust preferred security
Fair Value Measurements at
June 30, 2010 Using
Balance at
June 30, 2010
Level 1
Level 2
Level 3
$ —
—
—
—
—
$ 11,004
20,247
25,612
6,977
—
$ —
—
—
—
422
$ 11,004
20,247
25,612
6,977
422
41
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
Assets:
Obligations of government sponsored entities
Obligations of states and political subdivisions
Mortgage-backed securities - residential
Collateralized mortgage obligations
Trust preferred security
Fair Value Measurements at
June 30, 2009 Using
Level 1
Level 2
Level 3
$ —
—
—
—
—
$ 14,662
17,625
27,127
1,005
—
$ —
—
—
—
356
Balance at
June 30, 2009
$ 14,662
17,625
27,127
1,005
356
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the years ended June 30, 2010 and 2009:
Beginning balance
Realized losses included in other income
Change in fair value included in other comprehensive income
Ending balance, June 30
Trust Preferred Security
2010
$ 356
(410)
476
$ 422
2009
$ 741
—
(385
)
$ 356
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Assets:
Impaired loans
Other real estate owned, net
Assets:
Impaired loans
Fair Value Measurements at
June 30, 2010 Using
Balance at
June 30, 2010
Level 1
Level 2
Level 3
$ 1,375
5
$ —
—
$ —
—
$ 1,375
5
Fair Value Measurements at
June 30, 2009 Using
Balance at
June 30, 2009
Level 1
Level 2
Level 3
$ 1,887
$ —
$ —
$ 1,887
Impaired loans, which are generally measured for impairment using the fair value of the collateral for collateral
dependant loans, had a principal balance of $1,918, with a valuation allowance of $543 at June 30, 2010, resulting in an
additional provision for loan losses of $344 being recorded for the twelve month period ended June 30, 2010. As of June 30,
2009, impaired loans with a principal balance of $2,231, with a valuation allowance of $344, resulting in an additional
provision for loan losses of $295 being recorded for the twelve month period ended June 30, 2009.
Other real estate owned which is measured at the lower of carrying or fair value less costs to sell, had a net carrying
amount of $5, which is made up of the outstanding balance of $22, net of a valuation allowance of $17 at June 30, 2010,
resulting in a write-down of $17 for the year ended June 30, 2010.
42
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The following table shows the estimated fair value at June 30, 2010 and 2009, and the related carrying value of financial
instruments:
Financial Assets:
Cash and cash equivalents ..................................................................
Certificates of deposits in other financial institutions .........................
Securities available-for-sale ................................................................
Loans, net ...........................................................................................
Accrued interest receivable .................................................................
Financial Liabilities:
Demand and savings deposits .............................................................
Time deposits ......................................................................................
Short-term borrowings ........................................................................
Federal Home Loan Bank advances ...................................................
Accrued interest payable .....................................................................
2010
2009
Carrying
Amount
$ 13,806
980
64,262
172,007
943
(125,050)
(91,264)
(13,086)
(8,297)
(122)
Estimated
Fair
Value
$ 13,806
980
64,262
167,577
943
(125,050)
(91,926)
(13,086)
(8,681)
(122)
Carrying
Amount
$ 18,891
2,012
60,775
158,149
1,038
(113,621)
(90,430)
(15,055)
(9,373)
(184)
Estimated
Fair
Value
$ 18,891
2,012
60,775
154,542
1,038
(113,621)
(91,593)
(15,055)
(9,841)
(184)
For purposes of the above disclosures of estimated fair value, the following assumptions were used. Estimated fair value
for cash and cash equivalents, accrued interest receivable and payable, demand and savings deposits and short term borrowings
were considered to approximate carrying value for instruments that reprice frequently and fully. Fair value for loans was
estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans that reprice at least annually and
for fixed rate commercial loans with maturities of six months or less which possess normal risk characteristics, carrying value
was determined to be fair value. Fair value of other types of loans (including adjustable rate loans which reprice less frequently
than annually and fixed rate term loans or loans which possess higher risk characteristics) was estimated by discounting future
cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar
anticipated maturities. Fair value for impaired loans was based on recent appraisals of the collateral or, if appropriate, using
estimated discounted cash flows. The Corporation has not considered market illiquidity in estimating the fair value of loans due
to uncertain and inconsistent market pricing being experienced on June 30, 2010.
Fair value of core deposits, including demand deposits, savings accounts and certain money market deposits, was the
amount payable on demand. Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at June 30,
2010 and 2009, for deposits of similar remaining maturities. Estimated fair value does not include the benefit that result from
low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. Fair value of short-
term borrowings and accrued interest was determined to be the carrying amounts since these financial instruments generally
represent obligations that are due on demand. Fair value of Federal Home Loan Bank advances was estimated using current
rates at June 30, 2010 and 2009 for similar financing. The fair value of unrecorded commitments at June 30, 2010 and 2009
was not material.
43
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 14—PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information of Consumers Bancorp. Inc. (parent company only) follows:
Condensed Balance Sheets
Assets
Cash ...........................................................................................................................................
Subordinated debenture receivable from subsidiary ..................................................................
Other assets ................................................................................................................................
Investment in subsidiary ............................................................................................................
Total assets.................................................................................................................................
Liabilities
Other liabilities ..........................................................................................................................
Shareholders’ equity ..................................................................................................................
Total liabilities & shareholders’ equity ......................................................................................
Condensed Statements of Income
Cash dividends from subsidiary ..................................................................................
Other income ..............................................................................................................
Other expense .............................................................................................................
Income before income taxes and equity in undistributed net income of subsidiary ...
Income tax benefit ......................................................................................................
Income before equity in undistributed net income of subsidiary ................................
Equity in undistributed net income of subsidiary .......................................................
Net income ..................................................................................................................
June 30,
2010
June 30,
2009
$
114
2,000
94
21,577
$ 23,785
$
126
2,000
98
19,285
$ 21,509
$
69
23,716
$ 23,785
$
48
21,461
$ 21,509
Year Ended
June 30, 2010
Year Ended
June 30, 2009
$
700
160
188
672
(5)
677
1,362
$ 2,039
$ 800
160
177
783
(2)
785
1,242
$ 2,027
Year Ended
June 30, 2010
Year Ended
June 30, 2009
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income .................................................................................................................
Equity in undistributed net income of Bank subsidiary .............................................
Change in other assets and liabilities .........................................................................
Net cash flows from operating activities .................................................................
Cash flows from investing activities
Acquisition of premises and equipment .....................................................................
Net cash flows from investing activities .................................................................
Cash flows from financing activities
Dividend paid .............................................................................................................
Proceeds from dividend reinvestment and stock purchase plan .................................
Net cash flows from financing activities .................................................................
Change in cash and cash equivalents .........................................................................
Beginning cash and cash equivalents .........................................................................
Ending cash and cash equivalents ..............................................................................
$ 2,039
(1,362 )
25
702
—
—
(813 )
99
(714 )
(12 )
126
$ 114
$ 2,027
(1,242 )
(19 )
766
(5 )
(5 )
(812 )
—
(812 )
(51 )
177
$ 126
44
ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A—CONTROLS AND PROCEDURES
The management of the Corporation is responsible for establishing and maintaining effective disclosure controls and
procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (Act). As of June 30, 2010, an evaluation
was performed under the supervision and with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and
procedures. Based on that evaluation, management concluded that the Corporation’s disclosure controls and procedures as of
June 30, 2010 were effective in ensuring that information required to be disclosed by the Corporation in the reports that it files
or submits under the Act were recorded, processed, summarized and reported within the time period required by the Securities
and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the management,
including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. There were no changes in the Corporation’s internal controls over financial reporting that occurred during
the fourth quarter of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect the
Corporation’s internal controls over financial reporting. The Report of Management on the Company’s Internal Controls Over
Financial Reporting appears on page 21.
ITEM 9B—OTHER INFORMATION
None.
45
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 22, 2010 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 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 share owners 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 its Code of Ethics on its website.
ITEM 11—EXECUTIVE COMPENSATION
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 22, 2010 under
the captions “Director Compensation,” “Executive Compensation,” “Defined Contribution Plan,” “Salary Continuation
Program,” “Change of Control Agreements,” “Compensation Committee Report,” and “Compensation Committee Interlock
and Insider Participation,” and is incorporated herein by reference.
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 22, 2010 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 22, 2010 under
the caption “Certain Transactions and Relationships,” 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 22, 2010 under
the caption “Principal Accountant Fees and Services,” and is incorporated herein by reference.
ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(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 48 of this report.
(c) See Item 15(a)(2) above.
46
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 22, 2010
CONSUMERS BANCORP, INC.
By:
By:
/S/ RALPH J. LOBER, II
President and Chief Executive Officer
/S/ RENEE K. WOOD
Chief Financial Officer and Treasurer
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 22, 2010.
Signatures
Signatures
/S/ LAURIE L. MCCLELLAN
Laurie L. McClellan
Chairman of the Board of Directors
/S/ JOHN P. FUREY
John P. Furey
Director
/S/ DAVID W. JOHNSON
David W. Johnson
Director
/S/ THOMAS M. KISHMAN
Thomas M. Kishman
Director
/S/ HARRY W. SCHMUCK, JR.
Harry W. Schmuck, Jr.
Director
/S/ RALPH J. LOBER, II
Ralph J. Lober
President, Chief Executive Officer and Director
/S/ JAMES V. HANNA
James V. Hanna
Director
/S/ JAMES R. KIKO, SR.
James R. Kiko, Sr.
Director
/S/ JOHN E. TONTI
John E. Tonti
Director
47
Exhibit Number
3.1
Description of Document
Amended and Restated Articles of Incorporation of the Corporation.
EXHIBIT INDEX
3.2
4
10.2
10.3
10.5
11
21
23
31.1
31.2
32.1
Amended and Restated Code of Regulations of the Corporation. Reference is made to Form 10-K of the
Corporation filed September 15, 2008, which is incorporated herein by reference.
Form of Certificate of Common Shares. Reference is made to Form 10-KSB of the Corporation filed
September 26, 2002, which is incorporated herein by reference.
Form of Change of Control. Reference is made to Form 10-K of the Corporation filed September 15, 2005,
which is incorporated herein by reference.
Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23,
2005. Reference is made to Form 10-Q of the Corporation filed February 14, 2006, which is incorporated
herein by reference.
Salary Continuation agreement entered into with Mr. Lober on August 29, 2008. Reference is made to Form
10-K of the Corporation filed September 15, 2008, which is incorporated herein by reference.
Computation of Earnings per Share. Reference is made to this Annual Report on Form 10-K Note 1 to the
Consolidated Financial Statements, which is incorporated herein by reference.
Subsidiaries of Consumers Bancorp, Inc. Filed with this Annual Report on Form 10-K.
Consent of Crowe Horwath LLP
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
48
Dividend Payments
Subject to the approval of the Board of Directors,
quarterly cash dividends are typically paid on or about
the 15th day of September, December, March, and
June.
Direct Deposit of Cash Dividends
Shareholders may elect to have their cash dividends
deposited directly into their savings or checking
account. Shareholders should contact Registrar and
Transfer Company to execute this convenient option at
www.rtco.com or 800-368-5948.
Shareholder Relations
shareholderrelations@consumersbank.com
Website
www.consumersbancorp.com
Annual Meeting
The 2010 annual meeting of shareholders will be
held on Wednesday, October 27, 2010, at 4:00 p.m.
at Courtney’s Banquet Center, 981 E. State Street,
Alliance, Ohio 44601.
Annual Report on Form 10-K
A copy of the Company’s Annual Report on Form 10-K
for the fiscal year ended June 30, 2010, as filed with
the Securities and Exchange Commission, will be
furnished without charge to shareholders upon written
request to Theresa J. Linder, Corporate Secretary. An
electronic version is also available on our website at
www.consumersbancorp.com.
Directors Emeriti
Homer Unkefer
Walter Young
In Memoriam
Paul Bortz–1930 to 2010
25 years as Director
General Information
External Independent Certified Public Accountants
Crowe Horwath LLP
600 Superior Avenue, Ste. 902
Cleveland, Ohio 44114
General Counsel
Squire, Sanders & Dempsey LLP
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Stock Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
1-800-368-5948
Market Makers
Thomas L. Dooley
Boenning & Scattergood
9916 Brewster Lane
Powell, Ohio 43065
614-203-2996
866-326-8113
Greig McDonald
Community Banc Investments, Inc.
26 East Main Street
New Concord, Ohio 43762
740-826-7601
800-224-1013
Rob McCullough
Janney Montgomery Scott LLC
340 East State Street
Salem, Ohio 44460
330-337-7801
800-624-1965
Common Stock Listing
Consumers Bancorp, Inc. common stock trades on the
OTC Bulletin Board under the symbol CBKM.OB. As of
June 30, 2010, there were 2,037,887 shares outstanding
with 690 shareholders of record and an estimated 241
additional beneficial holders whose stock was held in
nominee name.
Dividend Reinvestment and Stock Purchase Plan
Existing holders of common stock may elect to have all
or a portion of cash dividends automatically invested
in additional shares of common stock without payment
of any brokerage or service charge. Additionally,
shareholders may elect
to purchase shares of
common stock with optional cash payments of $100 to
$5,000 per quarter without payment of any brokerage
commission or service charge. Shareholders should
contact Registrar and Transfer Company to execute
these convenient options at www.rtco.com or 800-368-
5948.
Our Community Offices
Coming in Spring 2011
Hartville
1215 W. Maple Street
alliance
610 W. State Street
330-823-8178
carrollton
1017 Canton Road NW
330-627-3523
east canton
440 W. Noble Street
330-488-0577
Hanoverton
30034 Canal Street
330-223-1534
lisbon
7985 Dickey Drive
330-424-7271
louisville
1111 N. Chapel Street
330-875-4349
Malvern
4070 Alliance Road NW
330-863-2641
Minerva
614 E. Lincoln Way
330-868-7701
saleM
141 S. Ellsworth Avenue
330-332-0377
Waynesburg
8607 Waynesburg Drive SE
330-866-5557
2 0 1 0 A n n u A l R e p o R t