C
M
Y
CM
MY
CY
CMY
K
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, 2011
June 30, 2010
$ 13,828
4,900
91,889
1,186
177,551
(2,101)
175,450
12,887
$ 300,140
$ 64,657
14,829
79,816
88,944
248,246
17,012
7,535
2,023
274,816
$ 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
25,324
$ 300,140
23,716
$ 263,393
Cash dividends paid per share
Weighted average number of shares outstanding
$ 0.41
2,042,874
$ 0.40
2,032,588
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
$ 12,784
1,916
10,868
435
10,433
2,011
9,575
2,869
621
$ 2,248
$ 12,610
2,560
10,050
544
9,506
2,148
9,048
2,606
567
$ 2,039
Basic earnings per share
$ 1.10
$ 1.00
Please refer to the annual report on Form 10-K for additional financial information.
AnnualReportCoverSpread.indd 1
9/12/2011 3:05:34 PM
Dear Fellow Shareholders,
The term “community bank” is frequently tossed
about by politicians and the media, but judging
from the questions I receive the meaning of
the term remains unclear. I believe community
banking is defined by attitude; not size. It is a
business philosophy that permeates all aspects
of an organization; one that combines talented
people, local commitment, thoughtful investment
and superior technology into an unbeatable
package that, when done well, yields superior
financial performance. Community banks meet
the collective needs of their employees, customers,
investors and communities. In short, they are the
banks that strengthen their communities. Let me
elaborate on my definition of a community bank
and why I believe Consumers Bancorp stands out
as one of the best.
I believe community banking is
defined by attitude; not size. It is a
business philosophy that permeates
all aspects of an organization …
Community banks have people at all levels of an
organization who have a stake in the communities
they serve. Consumers Bancorp has 100% local
board representation and local executive and
senior managers making decisions that affect
the region. We have seven commercial lenders
working in specific markets and industries; many
in their home or adopted towns. People cannot just
be local; they must be talented and committed to
their customers. I assure you that the Consumers’
staff and leadership in each department define
both ideas. In community banks, the people make
the biggest difference.
Community bank managers make decisions with
the long-term interest of the bank and customer
at heart. While most retail and commercial
customers have been affected by this economy,
those with practical banking solutions and sincere
banking partnerships will survive. This long-term
outlook has allowed the best community banks to
flourish during the prolonged economic downturn.
Strong credit and investment quality stemming
from years of consistent decisions continue to
have a positive impact on Consumers Bancorp.
Our lenders continue to work with manufacturers,
farmers and organizations to ensure their future
competitiveness and sustainability. The strong
income and asset quality results achieved over the
past three years and documented in these pages
are testament to the appropriateness of this long-
term thinking.
institutions
their employees’
the organizations and
local leadership
Community banks provide
involvement
by supporting
in
that
are important to the long-term viability and
vibrancy of the region. Invariably, community
banks enthusiastically provide financial support
to the same organizations. Again, Consumers
National Bank defines this concept. You will find
Consumers National Bank and its directors and
employees offering support to schools, hospitals,
Text.indd 1
9/12/2011 3:17:48 PM
libraries, Habitat for Humanity, YMCAs, 4-H,
Junior Achievement, bands, athletics, chambers
of commerce, service organizations and economic
development
the
community is a mission we take very seriously.
Strengthening
groups.
Community banks have a local focus. Each
dollar deposited in Consumers National Bank
is available for investment in local individuals,
farms, businesses and organizations. Funds are
not diverted to far-flung businesses or exotic
investment vehicles. Over the past three years,
Consumers National Bank has made $105 million
in loans primarily in Stark, Columbiana and
Carroll counties. These investments spur economic
growth and generate the income used to support
our 119 local employees, fund our commitment to
local organizations, pay local taxes and provide a
return to our 950 local shareholders. In addition,
we fulfill our business needs through local small
businesses that participate in the same cycle.
As the cover of this report portrays, your bank
contributes to all phases of the local economy.
Each dollar deposited in Consumers
National Bank is available for
individuals,
investment
farms, businesses and organizations.
local
in
to
long-time commitment
Knowing that successful community banks and
their customers need technology to compete in
today’s world, they complement the community
bank philosophy with leading edge technology.
this
Consumers’
strategy remains strong. We have long embraced
internet, mobile and text banking, as well as
image solutions and on-
merchant capture,
line account opening. This fiscal year we have
provided our customers with Intuit’s internet
banking and personal financial management
(FinanceWorks)
solutions, Purchase Rewards
programs, new personal payment systems as well
as smart phone and tablet banking applications.
We have expanded cash management capabilities
and payroll services. We look forward to internet
bill pay advances, an upgraded investment services
platform and more insurance initiatives. We also
look toward efficiencies through expanded use of
wireless, “cloud” computing, web and electronic
marketing and social media applications. We will
continue to upgrade our customers’ experiences
and accessibility without compromising the
community bank model.
Community banks are profitable. The mega banks’
focus on short-term profits and their subsequent
near catastrophic collapse is well-chronicled.
Similarly, the headline-capturing failures of
community banks often follow a similar, albeit less
dramatic, reach for growth and profit. Community
banks that hold to the above principles generally
outperform those who stray. Consumers’ model
held and its financial performance over the last
several years is proof that the model remains
viable. Asset growth continued with 2011 earnings
increasing more than ten percent over 2010 and
ii
Text.indd 2
9/12/2011 3:17:49 PM
been created over the last three years.
This is the message we took to the new Hartville
market and the answer I give when asked about
community banking. It is a compelling response that
I am proud to deliver. Please join me in spreading
the message. Your support is vital and appreciated.
I look forward to personally thanking you for your
support at the Annual Shareholders Meeting at
noon on October 26 at the Quarry Golf Club.
Sincerely,
Sincerely,
Ralph J. Lober, II
President and CEO
Consumers Bancorp being included in US Bankers
list of the top 200 community banks in the country
for the second straight year.
Community banks are resilient. The industry has
survived interstate banking, regulation, deregulation,
numerous economic catastrophes and even more
regulation by adhering to its guiding principles.
Much has been written about the new round of
regulatory pressure and requirements being pushed
to banks of all sizes. While the government response
is significant and uneven, the best community
banks will adjust resources where necessary, work
for change where possible and, most importantly,
continue to profitably serve our communities.
Consumers National Bank has the infrastructure,
talent, leadership and discipline to operate in the
new regulatory environment. We look to leverage
our credit, risk, finance, technology and marketing
infrastructure to benefit from reasonable market
opportunities. Our people will again differentiate us.
Over the last three years shareholders’
equity has increased $5.75 million,
or 29% while the corporation paid
out $2.46 million in quarterly
dividends.
Finally, community banks have local shareholders
who care about the future of their “Main Street.”
The best banks reward the long-term vision of
their shareholders with strong equity growth and
consistent dividends. Again, Consumers Bancorp
meets the test. Consumers Bancorp remains
independent with approximately 950 shareholders
including approximately 41 employee shareholders.
Over the last three years shareholders’ equity
has increased $5.75 million, or 29% while the
corporation paid out $2.46 million in quarterly
dividends. The quarterly per share dividend amount
increased by 10 percent in the fourth fiscal quarter of
2011 after remaining stable throughout the banking
crisis. In total, $8.2 million in shareholder value has
Text.indd 3
iii
9/12/2011 3:17:51 PM
Investing In Your Local Economy
“It’s often been said if you really want to know what’s
going on, just follow the money.” This is the opening
line in a recent radio commercial Consumers
National Bank aired to promote how our bank
contributes to the local economy. “ You open a
checking account with us, then a local businessman
needs a loan—he hires employees who need clothes
and food…” continues the commercial explaining
in concrete terms how Consumers transforms
customer deposits into business loans that support
the economic cycle every step of the way. In this
year’s annual report, we are highlighting some
of our customers to illustrate how Consumers is
deeply involved with and invested in the economic
health of the communities we serve.
Small Business and Agriculture
to
According
the U.S. Small Business
Administration, small firms represent 99.7
percent of all employer firms, employ just over
half of all private sector employees, pay 44
percent of total U.S. private payroll, and have
generated 64 percent of net new jobs over the
past 15 years. Agricultural trade also provides
significant contributions to both the agricultural
and non-agricultural sectors of the U.S. economy,
supporting $280.5 billion in economic output
and 1.6 million jobs in 2009, according to the
Agricultural & Applied Economics Association.
Clearly small business and agriculture are
significant drivers of our local economy.
lending capabilities are boosted by
Our
relationships with the U.S. Small Business
Administration—Consumers
an SBA
Preferred Lender that ranked in the top 10 of
all banks in the northern region of Ohio—local
chambers of commerce and development
entities, and various state and federal lending
programs.
is
We can begin our review of the bank’s roll in
the local economic chain by looking at one of
our long-time agriculture customers in the dairy
industry—Sandy Hill Dairy Farm in Columbiana
Dairy cows at Sandy Hill Farm in Winona
County. Bruce and Jennine Woolf and their son
Brad run a successful dairy operation on a 1,200
acre farm that includes 325 dairy cows. They
generate approximately 700,000 pounds of milk
per month and several local jobs. The Woolf ’s
sell their dairy product to local businesses for
processing which generates income for Sandy Hill
Dairy Farm and provides raw materials for the
dairy industry in Columbiana and surrounding
counties. Consumers is proud to have assisted
the Woolf ’s with financing of the operation and
expansion of their business.
Consumers provides financial support to several
types of local agriculture operations, from crops
to poultry and from beef to dairy. We have one of
the area’s only locally-based commercial lenders
who is dedicated to agriculture lending. He
works with agriculture customers to finance real
estate and farm equipment purchases, as well as
building construction. Consumers participates
with the Farm Service Agency (FSA), State of
Ohio AgLink Program, USDA Loan Programs,
and others to bring all the available resources
to the table to facilitate lending to the area’s
agriculture industry. Agriculture loans accounted
for 13.8% of total loans in 2011.
Consumers is an active lender in both small
business and agriculture and is fortunate
that our markets provide a unique blend of
manufacturing and
lending
business is strong—over the past three years,
farming. Our
iv
Text.indd 4
9/12/2011 3:17:53 PM
Consumers has made $105 million in loans
in and around Stark, Columbiana and Carroll
counties—very good performance during a
slow economy. We offer a wide variety of loan
options to assist our commercial customers,
including C & I loans, lines of credit, real estate,
working capital, and more.
The Manufacturing Link
Much of the farm products produced locally is
processed locally as well. We can look at another
customer of Consumers to see how our agricultural
customers link to local manufacturers. One of the
oldest dairies in our area is Minerva Dairy in Stark
County. Minerva Dairy has been producing butter,
Batch churned butter at Minerva Dairy
a wide variety of cheeses including Kosher and
their Award-winning Lacey Swiss since 1894.
Under the guidance of owner Phil Mueller and
his son Adam, Minerva Dairy makes 12 million
pounds of cheese and 3 million pounds of batch
churned butter annually. They employ 60 people
which directly supports the local economy. As it
says on their website, “Minerva Dairy is an extension
of our 90 local family-owned dairy farm suppliers.
We believe in the value of our relationships with our
dairy owners/operators.” As a local community
bank, Consumers is a perfect fit for companies like
Minerva Dairy that are dedicated to working with
local farmers and to providing the best products to
the community.
Text.indd 5
Consumers has the accounts and services
that businesses of all sizes need to run their
operations effectively and efficiently. We
expanded our cash management services
enabling companies to more efficiently manage
their money online. Payroll services have been
enhanced to make it easier for businesses to
pay their employees in a variety of ways. We
added a Business Account Specialist to work
exclusively with business customers to ensure
that they are getting the most from their banking
partnership and because person-to-person
relationships are still important to us.
The Wheels of the Cycle
Whether it is hauling raw milk from farm to dairy,
cheese and butter from dairy to grocery stores, or
steel from mills to manufacturers, transportation
plays an important role in the economic cycle.
Consumers is involved in the transportation chain
including
through several trucking customers,
Green Lines Transportation, Inc., a privately owned
business in Carroll County that was established in
1980. Today, with financial assistance and support
from Consumers, owner Roger Bettis has grown
Green Lines into an ISO 9001:2008 certified
company with 120 trucks that ship more than 1.4
Green Lines hauls 1.4 billion pounds of freight annually.
billion pounds of heavy general commodities in
over 39,000 truckloads a year. While Green Lines
operates in several surrounding states as well as locally,
it generates local jobs and tax revenues that support
our local economy and makes our region strong.
v
9/12/2011 3:17:55 PM
People Throughout the Cycle
In the final phase of the economic cycle, people
make purchases to meet their daily needs.
Consumers is present in the final step of the
process as well. First, we support store owners
as
in the case of our customer Horizon
Management, Inc. in Mahoning County, which
operates more than a dozen Save-A-Lot Food
Stores in many of the communities we serve.
Through their neighborhood stores, co-owners
John Kawecki and Henry Nemenz, Jr. provide
residents of small towns with more grocery store
choices. When the big grocery chains close their
doors on small neighborhoods, they leave residents
with fewer shopping options. John and Henry
open Save-A-Lot stores to offer service to local
communities at affordable prices. Their story
Customers begin and end the economic cycle.
is reminiscent of Consumers’ story of opening
a brand new banking facility in East Canton
after the town’s only bank closed in 1999. Both
Horizon Management and Consumers fulfill
the needs of small communities that are not met
by large national or regional companies.
Consumers is present in retail stores every
time a customer writes a check to pay for
groceries, charges gas with a Visa debit card,
or pays a bill through our online banking
service. We facilitate the flow of money
through the economic cycle by giving people
a variety of payment methods to choose from
and by giving businesses a variety of ways to
accept payments from customers. Through
services such as e-Courier remote check
deposit, our customers can deposit checks
into their accounts without leaving their place
of business. For customers with large cash
receipts, our new e-Vault enables them to
receive immediate credit for cash deposited at
their location. All these services make it easier
for businesses and customers to do business
with each other.
People are also the beginning of the economic cycle.
Their individual deposits in checking accounts,
savings accounts, and certificates of deposit supply
the core of the money that Consumers lends
to all of our business customers in the form of
commercial loans and lines of credit. Consumers
is the engine in the local economy that converts
your deposits into loans for local individuals and
businesses. As we say in our radio commercial,
“When you bank with us you are empowering our
community in a major way.”
We are committed to providing customers with
new technology that makes managing their
money easier. As customers depend more
on access to account information over the
internet, on smart phones, through iPads and
other wireless devices, Consumers is meeting
their growing demands. FinanceWorks account
aggregation
facilitates personal financial
management by presenting customers with
an online snapshot of all their accounts and
tracks their expenses, making it easier to
create—and stick to—a budget. Text message
banking enables customers to check their
accounts and receive alerts about balances
and payments. Our mobile app connects
customers directly to online banking where
they can view all their accounts, pay bills,
transfer funds and much more. Our person-to-
person PoP Money service will let customers
transfer funds to anyone by email or text.
vi
Text.indd 6
9/12/2011 3:17:57 PM
Board of Directors
Back row from left: Ralph Lober, II, Harry Schmuck, Jr., David Johnson, James Kiko, Sr., John Tonti
Front row from left: Laurie McClellan (Chairman of the Board), John Furey, Brad Goris, James Hanna, Thomas Kishman
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)
(cid:37)(cid:68)(cid:70)(cid:78)(cid:3)(cid:85)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:79)(cid:72)(cid:73)(cid:87)(cid:29)(cid:3)(cid:51)(cid:75)(cid:76)(cid:79)(cid:79)(cid:76)(cid:83)(cid:3)(cid:54)(cid:88)(cid:68)(cid:85)(cid:72)(cid:93)(cid:15)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:38)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:30)(cid:3)(cid:45)(cid:76)(cid:80)(cid:3)(cid:58)(cid:72)(cid:81)(cid:71)(cid:72)(cid:85)(cid:82)(cid:87)(cid:75)(cid:15)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:37)(cid:85)(cid:68)(cid:81)(cid:70)(cid:75)(cid:3)(cid:36)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:30)(cid:3)
(cid:53)(cid:68)(cid:79)(cid:83)(cid:75)(cid:3)(cid:47)(cid:82)(cid:69)(cid:72)(cid:85)(cid:15)(cid:3)(cid:44)(cid:44)(cid:15)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:9)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:30)(cid:3)(cid:39)(cid:72)(cid:85)(cid:72)(cid:78)(cid:3)(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:86)(cid:15)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:55)(cid:85)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:9)(cid:3)(cid:54)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:30)
(cid:47)(cid:68)(cid:85)(cid:85)(cid:92)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:88)(cid:86)(cid:15)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:47)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)
(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:3)(cid:85)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:79)(cid:72)(cid:73)(cid:87)(cid:29)(cid:3)(cid:51)(cid:68)(cid:87)(cid:3)(cid:58)(cid:82)(cid:82)(cid:71)(cid:15)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:36)(cid:86)(cid:86)(cid:76)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:30)(cid:3)(cid:53)(cid:72)(cid:69)(cid:72)(cid:70)(cid:70)(cid:68)(cid:3)(cid:42)(cid:72)(cid:76)(cid:86)(cid:15)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:39)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:30)(cid:3)(cid:51)(cid:68)(cid:88)(cid:79)(cid:3)(cid:43)(cid:88)(cid:74)(cid:72)(cid:81)(cid:69)(cid:72)(cid:85)(cid:74)(cid:15)(cid:3)(cid:44)(cid:44)(cid:44)(cid:15)(cid:3)
(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:30)(cid:3)(cid:54)(cid:87)(cid:82)(cid:85)(cid:80)(cid:76)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:86)(cid:86)(cid:15)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:53)(cid:76)(cid:86)(cid:78)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:9)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:30)(cid:3)
(cid:53)(cid:72)(cid:81)(cid:72)(cid:72)(cid:3)(cid:58)(cid:82)(cid:82)(cid:71)(cid:15)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)
Text.indd 7
vii
9/12/2011 3:18:01 PM
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, 2011
OR
(cid:133) 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 (cid:133) 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 (cid:133) 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 (cid:133)
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 (cid:133) No (cid:133)
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. (cid:133)
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 (cid:133)
Accelerated filer (cid:133)
Non-accelerated filer (cid:133) 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 (cid:133) No ⌧
Based on the closing sales price on December 31, 2010, the aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $16,279,068.
The number of shares outstanding of the Registrant’s common stock, without par value was 2,049,873 at September 1, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement dated September 16,
2011 for its 2011 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 ................................................................................................................................................................................50
ITEM 9A—CONTROLS AND PROCEDURES ...................................................................................................................................50
ITEM 9B—OTHER INFORMATION...................................................................................................................................................50
PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .............................................................51
ITEM 11—EXECUTIVE COMPENSATION .......................................................................................................................................51
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS ........................................................................................................................................................51
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ..................51
ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES .....................................................................................................51
ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES...........................................................................................51
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, Freddie Mac and
Ginnie Mae.
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 and 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, 2011, 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 legislative developments and assess their potential impact on our business.
Employees
As of June 30, 2011, the Bank employed 96 full-time and 18 part-time employees. None of the employees are represented
by a collective bargaining group. Management considers its relations with employees to be good.
Statistical Disclosure
The following statistical information is included on the indicated pages of this Report:
Average Consolidated Balance Sheet And Net Interest Margin .................................................................
Interest Rates and Interest Differential .......................................................................................................
Carrying Values Of Securities ....................................................................................................................
Maturities And Weighted-Average Yield Of Securities .............................................................................
Loan Types .................................................................................................................................................
Selected Loan Maturities And Interest Sensitivity......................................................................................
Non-accrual, Past Due And Restructured Loans And Other Nonperforming Assets..................................
Potential Problem Loans .............................................................................................................................
Summary Of Loan Loss Experience ...........................................................................................................
Allocation Of Allowance For Loan Losses.................................................................................................
Average Amount And Average Rate Paid On Deposits..............................................................................
Time Deposits Of $100 Thousand Or More................................................................................................
Short-Term Borrowings ..............................................................................................................................
Selected Consolidated Financial Data.........................................................................................................
10
11
13
14
14
15
15
16
16
16
17
17
17 and 42
8
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 eight of the eleven 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:
Hartville 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, 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
1215 W. Maple Street, Hartville, OH 44632
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 2,049,873 common shares outstanding on June 30, 2011 with 693 shareholders of record and an
estimated 236 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,
2010
$ 13.25
10.75
0.10
September 30,
2009
$ 12.70
10.10
0.10
December 31,
2010
$ 13.85
11.25
0.10
December 31,
2009
$ 12.25
9.51
0.10
March 31,
2011
$ 12.50
11.55
0.10
March 31,
2010
$ 12.00
10.65
0.10
June 30,
2011
$ 13.25
11.85
0.11
June 30,
2010
$ 11.90
11.10
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 2011 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, 2011 and 2010. 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, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae and Freddie Mac.
Comparison of Results of Operations for the Years Ended June 30, 2011 and June 30, 2010
Net Income. Net income increased by $209, or 10.3%, from 2010 to 2011. The increase was mainly the result of an
$818, or 8.1%, increase in net interest income that was partially offset by an increase in other expenses of $527, or 5.8%, from
the previous year.
Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and
interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest
income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities.
Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning
assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate.
All average balances are daily average balances. Non-accruing loans are included in average loan balances.
Net Interest Income Year ended June 30,
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......................................................
2011
$ 10,868
445
$ 11,313
4.05%
0.17
4.22%
2010
$ 10,050
388
$ 10,438
4.13%
0.15
4.28%
Net interest income for the year of 2011 was $10,868, an increase of $818, or 8.1%, from $10,050 in the year of 2010.
The Corporation’s tax equivalent net interest margin for the year ended June 30, 2011 was 4.22%, a decrease of 6 basis points
from 2010. Interest income for the year of 2011 was $12,784, an increase of $174, or 1.4%, from $12,610 in the year of 2010.
The increase in interest income was primarily the result of an increase of $25,336, or 10.4%, in average interest-earning assets,
which was partially offset by lower market rates affecting the yield on all interest earning assets. Interest expense for the year
of 2011 was $1,916, a decrease of $644, or 25.2%, from $2,560 in the year of 2010. 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
Average
Balance
2011
Interest
Yield/
Rate
Average
Balance
2010
Interest
Yield/
Rate
Interest earning assets:
Taxable securities ................................................ $ 54,861 $ 1,624
1,314
Nontaxable Securities (1).....................................
10,237
Loans receivable (1) ............................................
Interest bearing deposits and federal funds sold ..
22,463
176,034
15,599
3.02% $ 46,133 $ 1,827 4.03%
1,143 5.98
5.85
9,967 5.96
5.82
61 0.54
54 0.35
19,144
167,142
11,202
Total interest earning assets.................................
Non-interest earning assets ..................................
268,957
12,659
13,229
4.94% 243,621
11,969
12,998 5.35%
Total assets .......................................................... $ 281,616
$ 255,590
Interest bearing liabilities:
NOW.................................................................... $ 14,102 $
Savings.................................................................
Time deposits.......................................................
Short-term borrowings.........................................
FHLB advances ...................................................
71,968
90,863
14,892
7,940
19
151
1,447
45
254
0.13% $ 13,387 $
0.21
1.59
0.30
3.20
59,873
90,297
12,977
8,883
27 0.20%
184 0.31
2,006 2.22
50 0.39
293 3.30
Total interest bearing liabilities ...........................
199,765
1,916
0.96% 185,417
2,560 1.38%
Non-interest bearing liabilities.............................
57,452
Total liabilities .....................................................
Shareholders’ equity ............................................
257,217
24,399
Total liabilities and shareholders’ equity ............. $ 281,616
47,389
232,806
22,784
$ 255,590
Net interest income, interest rate spread (1) ........
$ 11,313
3.98%
$ 10,438 3.97%
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
4.22%
4.28%
$ 445
$ 388
134.64%
131.39%
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
2011 Compared to 2010
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
2010 Compared to 2009
Increase / (Decrease)
Change
due to
Volume
Change
due to
Rate
Total
Change
(In thousands)
(508) $ (359) $
(26)
(251)
(26)
27
(126)
(17)
(475)
Interest earning assets:
Taxable securities ................................................................. $ (203) $
Nontaxable securities (1) ......................................................
Loans receivable (2) .............................................................
Federal funds sold.................................................................
171
270
(7)
$
305
197
521
19
Total interest income ............................................................
Interest bearing liabilities:
NOW accounts......................................................................
Savings deposits ...................................................................
Time deposits........................................................................
Short-term borrowings..........................................................
FHLB advances ....................................................................
Total interest expense ...........................................................
231
1,042
(811)
(8)
(33)
(559)
(5)
(39)
(644)
1
33
12
7
(30)
23
(9)
(66)
(571)
(12)
(9)
(667)
Net interest income ............................................................... $
875
$ 1,019
$
(144) $
(22)
(135)
(639)
(162)
(35)
(993)
518 $
(19) $
47
643
10
(340)
(20)
(769)
(27)
681
(1,156)
6
27
175
(18)
(29)
161
520
(28)
(162)
(814)
(144)
(6)
(1,154)
$
(2)
(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 $435 in fiscal
year 2011 compared to $544 in fiscal year 2010. For 2011, net charge-offs were $610, or 0.34% of total loans compared with
$260, or 0.15% of total loans, for the same period last year. Despite incurring a higher level of net charge-offs in the current
year period, the provision for loan losses decreased compared to the prior year period mainly due to a decline in the level of
non-performing loans and a resulting reduction in the amount of specific allowance allocations. A total of $204 of the 2011 net
charge-offs within in the commercial real estate and 1-4 family residential real estate loan portfolios were related to loans that
had been specifically allocated for within the allowance for loan losses in a prior period when the probable loss had been
identified. Also, general reserves declined as unemployment rates in the Corporation’s primary market area of Stark,
Columbiana and Carroll counties in Ohio have improved over the past 12 months. Non-performing loans were $1,760 as of
June 30, 2011 and represented 0.99% of total loans. This compared with $2,342, or 1.34%, at June 30, 2010. The allowance for
loan losses to total non-performing loans at June 30, 2011 was 119.38% compared with 97.18% at June 30, 2010. Non-
performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses.
Management and the Board of Directors closely monitor these loans and believe the prospect for recovery of principal, less
identified specific reserves, are favorable.
Other Income. Total other income was $2,011 for fiscal year 2011, compared to $2,148 for the same period last year.
Adjusted for security gains, a security impairment charge, and gains or losses from the sale of other real estate owned (OREO),
other income totaled $2,308 for the 2011 fiscal year, compared with $2,393 for the same period last year.
Service charges on deposit accounts decreased by $248, or 16.1%, in 2011 to $1,292 from $1,540 mainly from a decline
in overdraft account fee income due to a new rule issued by the Federal Reserve Board that became effective in August 2010
11
that prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and debit
card transactions, unless a consumer consents to the overdraft service for those types of transactions.
Debit card interchange income increased in 2011 to $644 from $524 from the previous fiscal year due to higher volume
as a result of increased customer usage and an increase in the number of debit cards issued. On July 21, 2010, the Dodd-Frank
Act amended the Electronic Fund Transfer Act 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. Because of the uncertainty as to any future rulemaking by the Federal Reserve, the Corporation cannot provide any
assurance as to the ultimate impact of the Dodd-Frank Act on the amount of interchange income from debit card transactions
reported in future periods.
Bank owned life insurance income increased by $6, or 3.4%, in 2011 to $182 from $176 mainly as a result of an increase
in the cash surrender value of life insurance. In February 2011, $431 of single-premium life insurance was purchased following
the conversion of a term life insurance policy.
Gains recognized on the sale of securities totaled $71 during 2011 and $218 during the same period last year. During
fiscal year 2011, the Corporation sold callable agency securities that were projected to be called within a short period of time
and recognized gains totaling $98. These gains were partially offset by a $27 loss from the sale of a collateralized mortgage
obligation that was underperforming. An other-than-temporary impairment loss of $370 related to a trust preferred security was
recognized during the 2011 fiscal year and a $410 impairment charge related to the same security was recognized during the
2010 fiscal year. As of June 30, 2011, the adjusted amortized cost of this trust preferred security was $202. A discussion of the
impairment loss is included on the following pages under the heading “Financial Condition.”
Other Expenses. Total other expenses were $9,575 for the year ended June 30, 2011; an increase of $527, or 5.8% from
$9,048 for the year ended June 30, 2010.
Salaries and employee benefit expenses increased $393, or 8.9%, during the fiscal year ended June 30, 2011 mainly due
to staff added in fiscal year 2010 in the lending and credit administration functions and due to normal merit increases that went
into effect on July 1, 2010, following the removal of a salary freeze that was in place during the preceding eighteen months.
Occupancy and equipment expenses decreased by $50, or 4.7%, mainly due to the renegotiation of miscellaneous
equipment and service contracts and lower depreciation expense. Occupancy expenses are expected to increase in fiscal year
2012 as a result of the opening of the Hartville, Ohio branch location.
Federal Deposit Insurance Corporation (FDIC) assessments decreased by $26, or 8.3%, compared to the same period last
year mainly due to an industry wide change in the way FDIC insurance assessments are calculated. On April 1, 2011, the
deposit insurance assessment base changed from total domestic deposits to average total assets minus average tangible equity,
pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act.
Marketing and advertising expenses increased by $78, or 52.0%, compared to the same period last year mainly due to an
increase in marketing efforts as a result of the opening of the Hartville, Ohio branch location.
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 $47, or 15.9%, during the 2011 fiscal year mainly due to increased debit
card usage by our customers.
Other expense totaled $1,217 for the year ended June 30, 2011, an increase of $141, or 13.1%, from $1,076 for the year
ended June 30, 2010. The increase was mainly due to one-time security expenses following robberies at two of the
Corporation’s branch locations and additional costs from a new vendor providing enhanced webhosting services and from the
conversion to a new internet banking provider.
Income Tax Expense. The provision for income taxes totaled $621 and $567 for the years ended June 30, 2011 and
2010, respectively. The effective tax rates were 21.6% and 21.8%, 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.
12
Financial Condition
Total assets at June 30, 2011 were $300,140 compared to $263,393 at June 30, 2010, an increase of $36,747, or 14.0%.
The increase in total assets is mainly attributed to an increase in securities of $27,627 and an increase in loans of $3,268. These
increases were primarily funded by an increase of $31,932, or 14.8%, in total deposits.
Securities. Available-for-sale securities increased by $27,627 from $64,262 at June 30, 2010 to $91,889 at June 30,
2011. The securities portfolio is mainly comprised of residential mortgage-backed securities and collateralized mortgage
obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, 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, 2011, 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 (OTTI) model considers the structure and term of the CDO and
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, 2011 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 of $370 and $410 for the fiscal year-to-date periods ended June 30, 2011 and 2010. The accumulated other-
than-temporary impairment loss recognized in earnings was $780 at June 30, 2011 and $410 at June 30, 2010. 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, 2011
Obligations of government sponsored entities...........................................
Obligations of state and political subdivisions ..........................................
Mortgage-backed securities - residential ...................................................
Collateralized mortgage obligations .........................................................
Trust preferred security..............................................................................
$
$
16,185
24,725
29,424
19,856
202
Total securities...........................................................................................
$
90,392
$
June 30, 2010
Obligations of government sponsored entities...........................................
Obligations of state and political subdivisions ..........................................
Mortgage-backed securities - residential ...................................................
Collateralized mortgage obligations .........................................................
Trust preferred security..............................................................................
$
$
10,771
20,073
24,333
7,094
572
Total securities...........................................................................................
$
62,843
$
98 $
584
1,172
74
—
1,928
$
236 $
392
1,279
34
—
1,941
$
(23)
(211)
—
(62)
(135)
(431)
(3)
(218)
—
(151)
(150)
(522)
Fair
Value
$ 16,260
25,098
30,596
19,868
67
$ 91,889
$ 11,004
20,247
25,612
6,977
422
$ 64,262
13
The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted
average yields as of June 30, 2011:
Amortized
Cost
Fair
Value
Average
Yield /
Cost
AVAILABLE-FOR-SALE
Obligations of government sponsored entities:
3 months or less ..................................................................................................................... $
Over 3 months through 1 year ...............................................................................................
Over 1 year through 5 years...................................................................................................
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...................................................................................................
Over 5 years through 10 years ...............................................................................................
Total mortgage-backed securities.......................................................................................
Collateralized mortgage obligations:
3 months or less ..................................................................................................................... $
Over 3 months through 1 year ...............................................................................................
Over 1 year through 5 years...................................................................................................
Total collateralized mortgage obligations..........................................................................
Trust preferred security......................................................................................................
Total securities ..................................................................................................................... $
2,504
2,525
11,156
16,185
1,045
5,818
17,862
24,725
27,983
1,441
29,424
1
575
19,280
19,856
202
90,392
$
2,507
2,554
11,199
16,260
1,091
6,020
17,987
25,098
29,079
1,517
30,596
1.69%
2.10
1.76
1.80
4.86
5.37
6.12
5.89
3.63
4.38
3.67
$
1
578
19,289
19,868
67
$ 91,889
(0.39)
1.09
2.53
2.49
—
3.64%
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 0.39% yield on the collateralized mortgage obligations with a term of 3 months or less 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, 2011, 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 $3,268 to $177,551 at June 30, 2011 compared to $174,283 at June 30, 2010. Loan
demand, particularly in the commercial real estate area and advances on established commercial lines of credit, has been lower
than previous years due to the current economic conditions. Major classifications of loans, net of deferred loan fees and costs,
were as follows as of June 30:
Commercial ........................................................................
Commercial real estate:
Construction ....................................................................
Other ................................................................................
1-4 Family residential real estate:
Owner occupied...............................................................
Non-owner occupied........................................................
Construction ....................................................................
Consumer loans ..................................................................
Total loans ..........................................................................
$ 177,551
14
2011
$ 19,297
2010
$ 14,559
1,049
97,199
34,517
19,047
596
5,846
2,916
99,462
34,448
16,750
328
5,820
$ 174,283
The following is a schedule of contractual maturities and repayments of 1-4 family residential real estate construction,
commercial and commercial real estate loans, as of June 30, 2011:
Due in one year or less .............................................................................................................
Due after one year but within five years ..................................................................................
Due after five years ..................................................................................................................
Total .........................................................................................................................................
$ 11,230
15,795
91,116
$ 118,141
The following is a schedule of fixed and variable rate 1-4 family residential real estate construction, commercial and
commercial real estate loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as
of June 30, 2011:
Fixed
Interest Rates
Variable
Interest Rates
Total 1-4 family residential real estate construction, commercial and commercial
real estate loans due after one year..........................................................................
$44,599
$62,312
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, 2011, impaired loans totaled $2,536, of
which $1,745 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:
2011
2010
Non-accrual loans ..................................................................................... $ 1,760 $ 2,342
Accruing loans past due 90 days or more .................................................
—
Total non-performing loans ...................................................................... $ 1,760 $ 2,342
25
Other real estate owned.............................................................................
Total non-performing assets...................................................................... $ 1,836 $ 2,367
Impaired loans........................................................................................... $ 2,536 $ 2,635
335
Accruing restructured loans ...................................................................... $
—
791 $
76
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, 2011, there was
$76, or three individual properties, classified as other real estate owned.
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:
Commercial ..............................................................................................
Commercial real estate .............................................................................
1-4 Family residential real estate ..............................................................
1-4 Family real estate construction...........................................................
Consumer loans ........................................................................................
Total charge offs.......................................................................................
Recoveries:
Commercial ..............................................................................................
Commercial real estate .............................................................................
1-4 Family residential real estate ..............................................................
1-4 Family real estate construction...........................................................
Consumer loans ........................................................................................
Total recoveries ........................................................................................
Net charge offs..........................................................................................
Provision for loan losses charged to operations........................................
Allowance for loan losses at end of year ..................................................
2011
2010
$ 2,276 $ 1,992
—
182
62
—
117
361
—
6
1
—
94
101
9
510
62
—
116
697
2
19
—
—
66
87
610
435
260
544
$ 2,101 $ 2,276
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:
Allocation of the Allowance for Loan Losses
Allowance
Amount
% of Loan
Type to
Total Loans
Allowance
Amount
% of Loan
Type to
Total Loans
June 30, 2011
June 30, 2010
Commercial ........................................................................................
Commercial real estate loans ..............................................................
1-4 Family residential real estate ........................................................
Consumer loans ..................................................................................
Total....................................................................................................
$
179
882
947
93
$ 2,101
10.9 %
55.3
30.5
3.3
100.0 %
$
183
1,337
653
103
$ 2,276
8.4 %
58.7
29.5
3.4
100.0 %
While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the
allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur.
Cash Surrender Value of Life Insurance. The cash surrender value of life insurance increased by $613 from June 30,
2010, to $5,411 as of June 30, 2011. The increase was mainly due to the purchase of $431 of single-premium life insurance
following the conversion of a term life insurance policy that was originally purchased as a cost recovery component with a
salary continuation agreement that was entered into with an executive officer in August 2008.
16
Funding Sources. Total deposits increased $31,932, or 14.8%, from $216,314 at June 30, 2010 to $248,246 at June 30,
2011. Non-interest bearing deposits increased $16,998, or 35.7%, savings deposits increased $16,112, or 25.3%, and interest-
bearing checking balances increased $1,142, or 8.3%, from June 30, 2010 to June 30, 2011. The increase in deposits reflects a
current trend in the industry where customers are turning to the safety of insured deposits during these uncertain economic
times.
The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:
Years Ended June 30,
2011
Amount
55,499
Non-interest bearing demand deposit .................... $
14,102
Interest bearing demand deposit ............................
71,968
Savings ..................................................................
90,863
Certificates and other time deposits.......................
Total ...................................................................... $ 232,432
Rate
—
0.13%
0.21
1.59
0.70%
2010
Amount
$
45,582
13,387
59,873
90,297
$ 209,139
Rate
—
0.20%
0.31
2.22
1.06%
The following table summarizes time deposits issued in amounts of $100 thousand or more as of June 30, 2011 by time
remaining until maturity:
Maturing in:
3,599
Under 3 months ....................................................................................................................... $
11,672
Over 3 to 6 months ..................................................................................................................
6,956
Over 6 to 12 months ................................................................................................................
Over 12 months .......................................................................................................................
12,480
Total ........................................................................................................................................ $ 34,707
See Note 7—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term
borrowings.
Shareholders’ Equity. Total shareholders’ equity increased by $1,608 from $23,716 at June 30, 2010 to $25,324 at
June 30, 2011. The increase was primarily due to net income of $2,248 for the current fiscal year and cash of $146 received
from the dividend reinvestment and stock purchase program. These increases were partially offset by cash dividends paid of
$837.
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 2011 fiscal year were $4,163 and net cash inflow from financing
activities was $34,405. Net cash outflow from investing activities was $38,546. The major sources of cash were $31,932 net
increase in deposits, $21,112 net increase from sales, maturities or principal pay downs on available-for-sale securities. The
major uses of cash were the $49,803 purchase of securities and a $3,954 net increase in loans. Total cash and cash equivalents
were $13,828 as of June 30, 2011 compared to $13,806 at June 30, 2010.
The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family
residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio consists of three
basic segments: 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 and commercial real estate 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. Consumer 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.
17
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
commercial and retail customers have been turning to community banks in these uncertain times. Time deposit interest rates
continued to decline in the 2011 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 0.96%.
Jumbo time deposits (those with balances of $100 thousand and over) increased from $33,763 at June 30, 2010 to
$34,707 at June 30, 2011. 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 2011 was 4.22% as compared to 4.28% for 2010.
Capital Resources
At June 30, 2011, 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.
18
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 probable incurred losses.
Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-
going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for
repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and
subjectivity of loan reviews and risk grading, emerging or changing trends that might not be fully captured in the historical loss
experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and
assumptions are dependent upon or can be influenced by a variety of factors including the breadth and depth of experience of
lending officers, credit administration and the loan review staff that periodically review the status of the loan, changing
economic and industry conditions, changes in the financial condition of the borrower, and changes in the value and availability
of the underlying collateral and guarantees.
While 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, 2011, 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
2012
$ 49,051
17,012
596
22
115
—
2013
$24,386
—
579
22
105
—
2014
$ 5,987
—
69
22
91
—
2015
$4,248
—
57
22
78
—
2016
$4,504
—
559
22
19
—
Thereafter
768
$
—
5,675
1,053
—
—
Total
$ 88,944
17,012
7,535
1,163
408
159,302
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.
19
Off-Balance Sheet Arrangements
At June 30, 2011, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage
in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than
the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative
contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest
rate swaps, in an effort to execute a sound and defensive interest rate risk management policy.
Forward-Looking Statements
All statements set forth in this discussion or future filings by the Corporation with the Securities and Exchange
Commission, or other public or shareholder communications, or in oral statements made with the approval of an authorized
executive officer, that are not historical in nature, including words or phrases “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, 2011, 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, 2011, 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, 2011 and
2010 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, 2011 and 2010 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 16, 2011
22
CONSOLIDATED BALANCE SHEETS
As of June 30, 2011 and 2010
(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…………………………………..
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...................................................................................................
2011
2010
$
$
5,944
7,884
5,973
7,833
13,828
4,900
91,889
1,186
177,551
(2,101)
175,450
5,411
4,776
89
76
2,535
13,806
980
64,262
1,186
174,283
(2,276)
172,007
4,798
3,581
250
25
2,498
Total assets................................................................................................................................................
$ 300,140
$ 263,393
LIABILITIES:
Deposits:
Non-interest bearing demand..........................................................................................................................
Interest bearing demand..................................................................................................................................
Savings ...........................................................................................................................................................
Time................................................................................................................................................................
Total deposits ............................................................................................................................................
Short-term borrowings....................................................................................................................................
Federal Home Loan Bank advances ...............................................................................................................
Accrued interest payable and other liabilities .................................................................................................
$ 64,657
14,829
79,816
88,944
248,246
17,012
7,535
2,023
$ 47,659
13,687
63,704
91,264
216,314
13,086
8,297
1,980
Total liabilities ..........................................................................................................................................
Commitments and contingent liabilities .........................................................................................................
274,816
—
239,677
—
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 350,000 shares authorized ..............................................................................
Common shares, no par value; 3,500,000 shares authorized; 2,180,315 and 2,168,329 shares issued as
of June 30, 2011 and 2010, respectively ....................................................................................................
Retained earnings ...........................................................................................................................................
Treasury stock, at cost (130,442 common shares at June 30, 2011 and 2010) ...............................................
Accumulated other comprehensive income ....................................................................................................
Total shareholders’ equity.........................................................................................................................
—
—
5,114
20,881
(1,659)
988
25,324
4,968
19,470
(1,659)
937
23,716
Total liabilities and shareholders’ equity ..................................................................................................
$ 300,140
$ 263,393
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2011 and 2010
(Dollar amounts in thousands, except per share data)
2011
2010
Interest income:
Loans, including fees ..................................................................................................... $ 10,212
Federal funds sold and interest-bearing deposits in financial institutions......................
54
Securities:
Taxable.................................................................................................................
Tax-exempt ..........................................................................................................
Total interest income ..................................................................................
1,624
894
12,784
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 ..........................................................
Gain (loss) on disposition or direct write-down of other real estate owned...................
Other ..............................................................................................................................
Total other income ......................................................................................
1,617
45
254
1,916
10,868
435
10,433
1,292
644
182
71
(370)
—
(370)
2
190
2,011
Other expenses:
4,827
Salaries and employee benefits......................................................................................
1,019
Occupancy and equipment.............................................................................................
553
Data processing expenses ..............................................................................................
346
Professional and director fees ........................................................................................
287
Federal Deposit Insurance Corporation assessments .....................................................
242
Franchise taxes...............................................................................................................
228
Marketing and advertising .............................................................................................
121
Loan and collection expenses ........................................................................................
161
Amortization of intangible.............................................................................................
231
Telephone and communications ....................................................................................
343
Debit card processing expenses .....................................................................................
1,217
Other ..............................................................................................................................
9,575
Total other expenses ...................................................................................
2,869
Income before income taxes....................................................................................................
621
Income tax expense .................................................................................................................
Net income.............................................................................................................................. $ 2,248
1.10
Basic earnings per share ....................................................................................................... $
See accompanying notes to consolidated financial statements.
24
$ 9,939
61
1,827
783
12,610
2,217
50
293
2,560
10,050
544
9,506
1,540
524
176
218
(410)
—
(410)
(53)
153
2,148
4,434
1,069
534
370
313
223
150
189
161
233
296
1,076
9,048
2,606
567
$ 2,039
1.00
$
CONSOLIDATED STATEMENTS OF CHANGES IN COMPREHENSIVE INCOME
Years Ended June 30, 2011 and 2010
(Dollar amounts in thousands, except per share data)
2011
2010
Net Income .............................................................................................................................. $ 2,248
$ 2,039
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Other-than-temporarily impaired securities:
Unrealized gains (loss) 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 ...........................................................................................................
(355)
370
15
5
10
134
(71)
63
22
41
66
410
476
162
314
1,151
(218 )
933
317
616
51
Other comprehensive income ..................................................................................................
Total comprehensive income................................................................................................... $ 2,299
930
$ 2,969
See accompanying notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended June 30, 2011 and 2010
(Dollar amounts in thousands, except per share data)
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...............................................
Comprehensive Income:
Net income...................................................................
Other comprehensive income ......................................
Total comprehensive income .......................................
Issuance of 11,986 shares for dividend reinvestment
and stock purchase plan ..........................................
Cash dividends declared ($0.41 per share) ..................
Balance, June 30, 2011...............................................
$ 5,114
Accumulated
Other
Comprehensive
Income
7
$
930
Common
Shares
$ 4,869
Retained
Earnings
$ 18,244
Treasury
Stock
$ (1,659)
2,039
99
(813)
4,968
19,470
(1,659)
937
2,248
51
146
(837)
$ 20,881
$ (1,659)
$ 988
Total
Shareholders’
Equity
$ 21,461
2,039
930
2,969
99
(813)
23,716
2,248
51
2,299
146
(837)
$ 25,324
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2011 and 2010
(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) loss on disposition or direct write-down of other real estate owned .......................
Deferred income taxes........................................................................................................
Gain on sale of securities....................................................................................................
Impairment loss on securities .............................................................................................
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...........................................................................................................
Purchase of Bank owned life insurance..............................................................................
Acquisition of premises and equipment .............................................................................
Proceeds from sale of other real estate owned....................................................................
Net cash flows from investing activities.............................................................................
Cash flows from financing activities:
Net increase in deposit accounts.........................................................................................
Proceeds from FHLB advances ..........................................................................................
Repayments of FHLB advances .........................................................................................
Change in short-term borrowings .......................................................................................
Proceeds from dividend reinvestment and stock purchase plan .........................................
Dividends paid....................................................................................................................
Net cash flows from financing activities ............................................................................
Increase (decrease) in cash and cash equivalents ...............................................................
Cash and cash equivalents, beginning of year ....................................................................
Cash and cash equivalents, end of year ..........................................................................
2011
2010
$
2,248
$
2,039
382
843
435
(2)
81
(71)
370
161
(182)
(37)
(40)
(25)
4,163
(49,803)
15,989
5,123
(3,920)
(3,954)
(431)
(1,577)
27
(38,546)
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)
31,932
1,000
(1,762)
3,926
146
(837)
34,405
22
13,806
$ 13,828
12,263
—
(1,076)
(1,969)
99
(813)
8,504
(5,085)
18,891
$ 13,806
Supplemental noncash disclosures:
Transfers from loans to repossessed assets.........................................................................
$
76
$
220
See accompanying notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011 and 2010
(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 $1,956 and $2,622 for the
years ending June 30, 2011 and 2010, respectively. Cash paid for income taxes was $830 and $785 for the years ending June
30, 2011 and 2010, respectively.
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, 2011 and
2010 was $3,075 and $1,768, 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.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on
securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities
where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific
identification method.
Management evaluates securities for OTTI at least on a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and
duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses
whether it intends to sell, or 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 to credit loss, which must be recognized in the income
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal balance outstanding, deferred loan fees and costs, and an allowance for loan losses. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans
includes accrued interest receivable.
Interest income 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. Therefore, the Corporation’s exposure to credit risk is significantly affected by
changes in the economy in this tri-county area. Automobiles and other consumer assets, business assets and residential and
commercial real estate secure most loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses.
Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on
past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually
classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted
for current factors.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have
been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered
trouble debt restructurings and classified as impaired. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans
that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 restructurings are separately identified for impairment disclosures and are measured at the present value of
estimated future cash flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to
be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that
subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the
allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the
Corporation over the most recent three year period. This actual loss experience is supplemented with other economic factors
based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of
and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in
lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff;
national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The
following portfolio segments have been identified:
Commercial Loans: Commercial loans are made for a wide variety of general business purposes, including financing for
equipment, inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are
underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.
Current and projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed.
Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying
collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing
these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets
such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be
made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of
these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The
commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications
in the areas where the Bank operates.
Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, multi-family investment
properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan
principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property
securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more
adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s
commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the
Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and
evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks
the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Residential real estate: Residential real estate loans are secured by one to four family residential properties and include
both owner occupied, non-owner occupied and home equity loans. Credit approval for residential real estate loans requires
demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of
employment, an established credit record and an appropriately appraised value of the real estate securing the loan that generally
requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real
estate securing the loan. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which
include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a
borrower can have at one time and documentation requirements.
Consumer Loans: The Corporation originates direct and indirect consumer loans, primarily automobile loans, personal
lines of credit, and unsecured consumer loans in its primary market areas. Credit approval for consumer loans requires income
sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for
secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate
mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s
continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded
at fair value less costs to sell at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for as a loan loss. These assets are subsequently
accounted for at lower of cost or fair value less estimated costs to sell. If the fair value declines after acquisition, a valuation
allowance is recorded as a charge to income. Operating costs after acquisition are expensed. Gains and losses on disposition are
reported as a charge to income.
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, 2011, the Bank had policies with total
death benefits of $11,944 and total cash surrender values of $5,411. As of June 30, 2010, the Bank had policies with total death
benefits of $10,328 and total cash surrender values of $4,798. 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 $182,
and $176 for the years ended June 30, 2011 and 2010, 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 per Common 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 2,042,874 and
2,032,588 for the years ended June 30, 2011 and 2010, respectively. The Corporation’s capital structure contains no dilutive
securities.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available-for-sale, which are also recognized as a
separate component of equity, net of tax.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
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, 2011 the Bank could, without
prior approval, declare a dividend of approximately $3,519.
Newly Issued But Not Yet Effective Accounting Standards: In April 2011, the Financial Accounting Standards Board
(FASB) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt
restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and
whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the
Accounting Standards Update (ASU) clarifies that creditors are precluded from using the effective interest method to determine
whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on
other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s
ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment
that is insignificant. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and
should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on
newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual
period beginning on or after June 15, 2011. Management is currently reviewing this guidance to determine the impact, if any, to
the Corporation’s consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve
Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820,
“Fair Value Measurements and Disclosures”; to converge the fair value measurement guidance in U.S. generally accepted
accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair
value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU
2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on
the Corporation’s financial statements.
In June 2011, the FASB issued No. ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of
Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income”, to require that all nonowner changes in
stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but
consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements,
reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or
statements where the components of net income and the components of other comprehensive income are presented. The option
to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was
eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a
significant impact on the Corporation’s financial statements.
Reclassifications: Certain reclassifications have been made to the June 30, 2010 financial statements to be comparable to
the June 30, 2011 presentation.
32
NOTES TO CONSOLIDATED 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, 2011
Obligations of U.S. government-sponsored entities and agencies ........................... $ 16,185
24,725
Obligations of state and political subdivisions ........................................................
29,424
Mortgage-backed securities - residential .................................................................
19,856
Collateralized mortgage obligations ........................................................................
202
Trust preferred security............................................................................................
Total securities......................................................................................................... $ 90,392
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 98
584
1,172
74
—
$1,928
$
$
—
(23) $ 16,260
(211)
25,098
30,596
(62)
19,868
(135)
67
(431) $ 91,889
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
r
$
$
(3) $ 11,004
(218)
20,247
—
25,612
(151)
6,977
(150)
422
(522) $ 64,262
June 30, 2010
Obligations of U.S. government sponsored entities and agencies ........................... $ 10,771
20,073
Obligations of state and political subdivisions ........................................................
24,333
Mortgage-backed securities - residential .................................................................
7,094
Collateralized mortgage obligations ........................................................................
572
Trust preferred security............................................................................................
Total securities......................................................................................................... $ 62,843
$ 236
392
1,279
34
—
$1,941
Proceeds from sales of debt securities during 2011 and 2010 were as follows:
Proceeds from sales
Gross realized gains
Gross realized gains from calls
Gross realized losses
2011
$ 5,123
77
21
27
2010
$ 7,672
219
—
1
The amortized cost and fair values of available-for-sale securities at June 30, 2011 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............................................................................................................ $ 5,029
12,201
Due after one year through five years.....................................................................................
5,818
Due after five years through ten years ....................................................................................
17,862
Due after ten years ..................................................................................................................
Total........................................................................................................................................
Mortgage-backed securities – residential................................................................................
Collateralized mortgage obligations .......................................................................................
Trust preferred security...........................................................................................................
40,910
29,424
19,856
202
Total........................................................................................................................................ $ 90,392
Fair Value
$ 5,061
12,290
6,020
17,987
41,358
30,596
19,868
67
$ 91,889
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with a carrying value of approximately $43,262 and $40,901 were pledged at June 30, 2011 and 2010,
respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2011 and 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.
The following table summarizes the securities with unrealized losses at June 30, 2011 and 2010, aggregated by
investment category and length of time the individual securities have been in a continuous unrealized loss position:
Description of Securities
June 30, 2011
Obligations of U.S. government-sponsored entities ... $
Obligations of states and political subdivisions..........
Collateralized mortgage obligations ...........................
Trust preferred security...............................................
Less than 12 Months
Unrealized
Fair
Loss
Value
12 Months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
3,088 $
3,656
9,665
—
(23) $
(81)
(62)
—
— $
1,221
—
67
— $
(130)
—
(135)
3,088 $
4,877
9,665
67
(23)
(211)
(62)
(135)
(431)
Total temporarily impaired ......................................... $ 16,409 $
(166) $
1,288 $
(265) $ 17,697 $
Less than 12 Months
Unrealized
Fair
Loss
Value
12 Months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
June 30, 2010
Obligations of government-sponsored entities ........... $
Obligations of states and political subdivisions..........
Collateralized mortgage obligations ...........................
Trust preferred security...............................................
764 $
(3) $
5,331
4,763
—
(179)
(151)
—
— $
649
—
422
— $
(39)
—
(150)
764 $
5,980
4,763
422
Total temporarily impaired ......................................... $ 10,858 $
(333) $
1,071 $
(189) $ 11,929 $
(3)
(218)
(151)
(150)
(522)
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, 2011, the Corporation’s security portfolio consisted of $91,889, of which $17,697 were in an unrealized
loss position. The unrealized losses are related to the Corporation’s U.S. government-sponsored entities, obligations of states
and political subdivisions, collateralized mortgage obligations and the trust preferred security, as discussed below:
Collateralized Mortgage Obligations: At June 30, 2011, all of the collateralized mortgage obligations held by the
Corporation were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie
Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to changes in interest rates and illiquidity, and not credit quality, and because the Corporation does not have the intent to sell
nor is it likely that it will be required to sell the securities before their anticipated recovery, the Corporation does not consider
these securities to be other-than-temporarily impaired at June 30, 2011.
Obligations of States and Political Subdivisions: At June 30, 2011, approximately 91.1% of the obligations of states
and political subdivisions held by the Corporation were general obligation bonds and 8.9% 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. The Corporation owns
general obligation warrants issued by Tallapoosa County, Alabama with an amortized cost of $985 and fair value of $865 that
have been in a continuous unrealized loss position for more than 12 months. Standard & Poor’s assigned a credit rating of A
with a stable outlook. An A credit rating is defined as having a strong capacity to meet its financial commitments, but
somewhat susceptible to adverse economic conditions and changes in circumstances. Standard & Poor assigned its rating to
reflect the county’s stable economic base with employment opportunities across the manufacturing, education and healthcare
sectors, strong financial position and low overall debt levels. Tallapoosa County, Alabama has a low debt to assessed ratio of
2.36% and a low per capita debt of $370. Management monitors the financial data of the individual municipalities to ensure
they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the
Corporation will be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value,
which may be maturity, management does not believe there is any other-than-temporary impairment related to these securities
at June 30, 2011.
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, 2011. 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)
$ 202
$
67 $
135
59/95
32.7%
17.0%
—
(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, 2011, 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 and 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.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
According to the June 30, 2011 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 of $370 and
$410 for the fiscal year-to-date periods ended June 30, 2011 and 2010. The accumulated other-than-temporary impairment loss
recognized in earnings was $780 at June 30, 2011 and $410 at June 30, 2010. No other-than-temporary impairment was
recorded in prior years. 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.
NOTE 3—LOANS
Major classifications of loans were as follows as of June 30:
Commercial.....................................................................................................................
Commercial real estate:
Construction.............................................................................................................
Other ........................................................................................................................
1 – 4 Family residential real estate:
Owner occupied .......................................................................................................
Non-owner occupied................................................................................................
Construction.............................................................................................................
Consumer ........................................................................................................................
Subtotal
Less: Deferred loan fees and costs ..................................................................................
Allowance for loan losses ...............................................................................................
Net loans .........................................................................................................................
2011
$ 19,297
2010
$ 14,559
1,057
97,403
2,916
99,761
34,488
19,098
597
5,874
177,814
(263)
(2,101)
$ 175,450
34,428
16,738
328
5,824
174,554
(271)
(2,276)
$ 172,007
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending June 30,
2011:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Commercial
$
183
3
(9)
2
Commercial
Real
Estate
1-4 Family
Residential
Real
Estate
Consumer
Total
$ 1,337
36
(510)
19
$
653
356
(62)
—
$
103
40
(116)
66
$ 2,276
435
(697)
87
Total ending allowance balance
$
179
$
882
$
947
$
93
$ 2,101
The change in the allowance for loan losses consists of the following for the year ended June 30, 2010:
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
36
I
S
T
N
E
M
E
T
A
T
S
L
A
C
N
A
N
I
F
D
E
T
A
D
I
L
O
S
N
O
C
O
T
S
E
T
O
N
s
a
d
o
h
t
e
m
t
n
e
m
r
i
a
p
m
i
n
o
d
e
s
a
b
d
n
a
t
n
e
m
g
e
s
o
i
l
o
f
t
r
o
p
y
b
s
n
a
o
l
n
i
t
n
e
m
t
s
e
v
n
i
d
e
d
r
o
c
e
r
e
h
t
d
n
a
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
e
h
t
n
i
e
c
n
a
l
a
b
e
h
t
s
t
n
e
s
e
r
p
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
.
e
l
b
a
v
i
e
c
e
r
t
s
e
r
e
t
n
i
d
e
u
r
c
c
a
f
o
2
7
4
$
d
n
a
s
e
e
f
n
a
o
l
d
e
r
r
e
f
e
d
t
e
n
f
o
)
3
6
2
(
$
s
i
s
n
a
o
l
n
i
t
n
e
m
t
s
e
v
n
i
d
e
d
r
o
c
e
r
e
h
t
n
i
d
e
d
u
l
c
n
I
.
1
1
0
2
,
0
3
e
n
u
J
f
o
2
3
4
9
6
6
,
1
1
0
1
,
2
9
2
5
,
2
4
9
4
,
5
7
1
$
$
$
3
2
0
,
8
7
1
$
—
3
9
3
9
—
8
6
8
,
5
8
6
8
,
5
$
$
$
$
l
a
t
o
T
r
e
m
u
s
n
o
C
y
l
i
m
a
F
4
-
1
l
a
i
t
n
e
d
i
s
e
R
l
a
e
R
e
t
a
t
s
E
l
a
i
c
r
e
m
m
o
C
l
a
e
R
e
t
a
t
s
E
3
9
2
4
5
6
7
4
9
$
$
6
2
1
6
5
7
2
8
8
2
4
0
,
1
9
7
2
,
3
5
$
5
0
4
,
1
3
9
0
,
7
9
1
2
3
,
4
5
$
8
9
4
,
8
9
$
$
$
$
l
a
i
c
r
e
m
m
o
C
3
1
6
6
1
9
7
1
2
8
4
5
2
,
9
1
6
3
3
,
9
1
$
$
$
$
7
3
:
s
n
a
o
l
o
t
e
l
b
a
t
u
b
i
r
t
t
a
e
c
n
a
l
a
b
e
c
n
a
w
o
l
l
a
g
n
i
d
n
E
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
I
:
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
A
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
e
v
i
t
c
e
l
l
o
C
e
c
n
a
l
a
b
e
c
n
a
w
o
l
l
a
g
n
i
d
n
e
l
a
t
o
T
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
i
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
e
v
i
t
c
e
l
l
o
c
s
n
a
o
L
s
n
a
o
L
:
s
n
a
o
l
n
i
t
n
e
m
t
s
e
v
n
i
d
e
d
r
o
c
e
R
e
c
n
a
l
a
b
s
n
a
o
l
g
n
i
d
n
e
l
a
t
o
T
I
S
T
N
E
M
E
T
A
T
S
L
A
C
N
A
N
I
F
D
E
T
A
D
I
L
O
S
N
O
C
O
T
S
E
T
O
N
s
i
s
a
B
h
s
a
C
t
s
e
r
e
t
n
I
d
e
z
i
n
g
o
c
e
R
t
s
e
r
e
t
n
I
e
m
o
c
n
I
d
e
z
i
n
g
o
c
e
R
e
g
a
r
e
v
A
d
e
d
r
o
c
e
R
t
n
e
m
t
s
e
v
n
I
r
o
f
e
c
n
a
w
o
l
l
A
s
e
s
s
o
L
n
a
o
L
d
e
t
a
c
o
l
l
A
d
e
d
r
o
c
e
R
t
n
e
m
t
s
e
v
n
I
d
i
a
p
n
U
l
a
p
i
c
n
i
r
P
e
c
n
a
l
a
B
—
—
—
8
1
—
—
8
1
$
$
—
—
—
3
2
6
—
9
2
$
$
0
2
2
0
5
1
6
8
3
2
,
1
2
0
3
8
3
7
1
6
8
,
2
$
$
—
—
3
1
6
2
1
3
0
9
2
2
3
4
$
$
8
1
2
1
4
4
6
3
9
9
9
1
3
3
2
7
9
2
5
,
2
$
8
1
3
1
4
4
6
7
9
9
0
2
3
4
2
7
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
:
e
t
a
t
s
e
l
a
e
r
l
a
i
c
r
e
m
m
o
C
l
a
i
c
r
e
m
m
o
C
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
r
e
h
t
O
:
d
e
d
r
o
c
e
r
e
c
n
a
w
o
l
l
a
d
e
t
a
l
e
r
o
n
h
t
i
W
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
:
e
t
a
t
s
e
l
a
e
r
l
a
i
c
r
e
m
m
o
C
l
a
i
c
r
e
m
m
o
C
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
d
e
i
p
u
c
c
o
r
e
n
w
O
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
d
e
i
p
u
c
c
o
r
e
n
w
o
-
n
o
N
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
r
e
h
t
O
:
e
t
a
t
s
e
l
a
e
r
l
a
i
t
n
e
d
i
s
e
r
y
l
i
m
a
F
4
-
1
:
d
e
d
r
o
c
e
r
e
c
n
a
w
o
l
l
a
n
a
h
t
i
W
$
6
3
5
,
2
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
l
a
t
o
T
:
0
1
0
2
,
0
3
e
n
u
J
d
e
d
n
e
r
a
e
y
e
h
t
r
o
f
d
n
a
f
o
s
a
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
i
s
n
a
o
l
o
t
d
e
t
a
l
e
r
n
o
i
t
a
m
r
o
f
n
i
s
t
n
e
s
e
r
p
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
0
1
0
2
7
1
7
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
d
e
t
a
c
o
l
l
a
o
n
h
t
i
w
s
n
a
o
L
8
1
9
,
1
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
d
e
t
a
c
o
l
l
a
h
t
i
w
s
n
a
o
L
5
3
6
,
2
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
s
n
a
o
l
d
e
r
i
a
p
m
i
l
a
t
o
T
3
4
5
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
d
e
t
a
c
o
l
l
a
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
f
o
t
n
u
o
m
A
0
1
0
2
3
2
3
,
2
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
r
a
e
y
e
h
t
g
n
i
r
u
d
s
n
a
o
l
d
e
r
i
a
p
m
i
f
o
e
g
a
r
e
v
A
—
—
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
t
n
e
m
r
i
a
p
m
i
g
n
i
r
u
d
d
e
z
i
n
g
o
c
e
r
e
m
o
c
n
i
t
s
e
r
e
t
n
I
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
d
e
z
i
n
g
o
c
e
r
e
m
o
c
n
i
t
s
e
r
e
t
n
i
s
i
s
a
b
-
h
s
a
C
8
3
:
1
1
0
2
,
0
3
e
n
u
J
d
e
d
n
e
r
a
e
y
e
h
t
r
o
f
d
n
a
f
o
s
a
s
n
a
o
l
f
o
s
s
a
l
c
y
b
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
i
s
n
a
o
l
o
t
d
e
t
a
l
e
r
n
o
i
t
a
m
r
o
f
n
i
s
t
n
e
s
e
r
p
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of
loans as of June 30, 2011:
Commercial
Commercial real estate:
Other
1 – 4 Family residential:
Owner occupied
Non-owner occupied
Consumer
Total
Non-accrual
64
$
754
219
723
—
1,760
$
Loans Past Due
Over 90 Days
Still
Accruing
—
$
—
—
—
—
—
$
The following table presents non-accrual and loans past due over 90 days still on accrual as of June 30, 2010:
2010
Loans on non-accrual........................................................................................................ $ 2,342
—
Loans past due over 90 days and still accruing.................................................................
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of June 30, 2011 by class of loans:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential:
Owner occupied
Non-owner occupied
Construction
Consumer
Total
Days Past Due
30 - 59
Days
60 - 89
Days
$
—
$
1
90 Days or
Greater &
Non-accrual
—
$
Total
Past Due
1
$
Loans Not
Past Due
19,335
$
Total
$ 19,336
—
—
—
—
—
26
26
$
—
242
167
44
—
—
454
$
—
412
23
175
—
—
610
—
654
1,053
96,791
1,053
97,445
190
219
—
26
$ 1,090
34,438
18,877
597
5,842
$ 176,933
34,628
19,096
597
5,868
$ 178,023
$
The above table of past due loans includes the recorded investment in non-accrual loans of $410 in the 60-89 days past due
category and $740 in the loans not past due category.
Troubled Debt Restructurings:
The Corporation allocated $229 and $3 of specific reserves to customers whose loan terms have been modified in troubled debt
restructurings as of June 30, 2011 and 2010. As of June 30, 2011 and 2010, the Corporation had not committed to lend any
additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service
their debt such as: current financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit
risk. This analysis includes loans with a total outstanding loan relationship greater than $100 thousand and non-homogeneous
loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Corporation
uses the following definitions for risk ratings:
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan
or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions,
and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
pass rated loans. Loans listed as not rated are either less than $100,000 or are included in groups of homogeneous loans. As of
June 30, 2011, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of
loans is as follows:
Commercial
Commercial real estate:
Construction
Other
1-4 Family residential real estate:
Owner occupied
Non-owner occupied
Construction
Consumer
Total
Pass
17,469
$
Special
Mention
$
743
Substandard Doubtful
82
$
884
$
868
87,857
5,526
14,549
28
—
$ 126,297
$
76
5,624
305
1,976
—
—
8,724
$
109
2,055
372
1,657
—
—
5,077
$
—
1,405
319
723
—
—
2,529
Not
Rated
158
$
—
504
28,106
191
569
5,868
$ 35,396
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, 2011 of related party loans were as follows:
Principal balance at beginning of year ....................................................................................... $
New loans...................................................................................................................................
Repayments ................................................................................................................................
Principal balance at end of year ................................................................................................. $
2010
1,446
103
(376)
1,173
40
NOTES TO CONSOLIDATED 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.................................................................................................
$
2011
2010
1,174
368
4,174
4,278
9,994
(5,218)
4,776
$
$
953
327
3,433
5,076
9,789
(6,208)
3,581
Depreciation expense was $382 and $430 for the years ended June 30, 2011 and 2010, 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:
2012..............................................................................................................................................
2013..............................................................................................................................................
2014..............................................................................................................................................
2015..............................................................................................................................................
2016..............................................................................................................................................
Thereafter .....................................................................................................................................
115
105
91
78
19
—
$ 408
Rent expense incurred was $111 and $99 during the years ended June 30, 2011 and 2010, respectively.
NOTE 5—INTANGIBLE ASSETS
The following summarizes the original balance and accumulated amortization of core deposit intangible assets at June 30,
2011 and 2010:
Original balance ....................................................................................................
Less: accumulated amortization ............................................................................
Net balance, June 30..............................................................................................
2011
$ 1,927
1,838
89
$
2010
$ 1,927
1,677
$
250
Amortization expense for the years ended June 30, 2011 and 2010 was $161 for each year. Amortization expense is
estimated to be $89 for the year ending June 30, 2012.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6—DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of $100 thousand was $34,707 and $33,763
as of June 30, 2011 and 2010, respectively.
Scheduled maturities of time deposits at June 30, 2011 were as follows:
2012........................................................................................................................................
2013........................................................................................................................................
2014........................................................................................................................................
2015........................................................................................................................................
2016........................................................................................................................................
Thereafter ...............................................................................................................................
$
49,051
24,386
5,987
4,248
4,504
768
$ 88,944
Related party deposits totaled $4,178 as of June 30, 2011 and $4,088 as of June 30, 2010.
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 .....................................................................
2011
$ 17,012
14,892
18,169
0.30%
0.27%
2010
$ 13,086
12,977
14,267
0.39%
0.38%
Repurchase agreements mature daily. The Bank has pledged obligations of government-sponsored entities and mortgage-
backed securities with a carrying value of $18,055 and $14,823 at June 30, 2011 and 2010, respectively, as collateral for the
repurchase agreements. Total interest expense on short-term borrowings was $45 and $50 for the years ended June 30, 2011
and 2010, respectively.
NOTE 8—FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances were as follows:
Advance Type
Maturity
Term
Interest Rate
Balance
June 30, 2011
Balance
June 30, 2010
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, single maturity
Interest-only, single maturity
Interest-only, putable
Principal and interest, mortgage matched
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
10/09/2015
10/12/2017
12/07/2017
04/01/2019
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
42
6.90%
7.00
6.10
3.14
3.09
3.24
3.37
3.50
2.54
1.43
2.07
3.24
4.30
—
$
—
—
—
—
—
500
500
84
500
500
5,000
451
$ 7,535
$
1
3
28
625
500
500
500
500
141
—
—
5,000
499
$ 8,297
NOTES TO CONSOLIDATED 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 quarterly until maturity at the option of the FHLB. The following
table is a summary of the scheduled principal payments for all advances:
Twelve Months Ending June 30
2012...........................................................................................................................................
2013...........................................................................................................................................
2014...........................................................................................................................................
2015...........................................................................................................................................
2016...........................................................................................................................................
Thereafter ..................................................................................................................................
Principal
Payments
$
596
579
69
57
559
5,675
$ 7,535
During fiscal year 2011, the Corporation prepaid two $500 thousand fixed rate single maturity advances and replaced
them with two $500 thousand fixed rate single maturity advances with lower rates. Because the present value of the cash flows
of the new debt including the prepayment penalty was not more than 10% different than the old debt, the transaction is
considered to be an exchange rather than an extinguishment of debt. As such, prepayment penalties totaling $16 were
capitalized and are being amortized over the life of the new debt. Unamortized capitalized prepayment penalties totaled $13 at
June 30, 2011.
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 $39,180 and $36,211 of first mortgage loans under a
blanket lien arrangement at June 30, 2011 and 2010, respectively. Based on this collateral and the Corporation’s holdings of
FHLB stock, the Bank is eligible to borrow up to a total of $19,027 in advances at June 30, 2011.
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 $115 and $109, for the years ended June 30, 2011 and 2010, 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, 2011 was 5.25%. The accrued liability for the salary continuation plan was $1,163 as of June 30, 2011 and
$1,002 as of June 30, 2010. For the years ended June 30, 2011 and 2010, approximately $183 and $166, respectively, have been
charged to expense in connection with the Plan. Distributions to participants were $22 for both of the years ending June 30,
2011 and 2010, respectively.
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) .............................................................
2011
2010
$
$
540 $
81
621 $
883
(316)
567
43
NOTES TO CONSOLIDATED 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...........................................................................................
Deferred tax liabilities:
Depreciation........................................................................................................
Loan fees.............................................................................................................
Prepaid expenses.................................................................................................
FHLB stock dividends ........................................................................................
Net unrealized securities gain .............................................................................
2011
2010
520 $
413
265
122
18
—
47
1,385
610
354
139
111
19
6
49
1,288
(270)
(202)
(113)
(165)
(509)
(135)
(184)
(88)
(165)
(483)
Gross deferred tax liabilities....................................................................................
(1,259)
(1,055)
Net deferred asset .................................................................................................... $
126 $
233
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 ........................................................................................................................
2011
$ 975
(304)
(62)
12
$ 621
2010
$ 886
(270)
(60)
11
$ 567
At June 30, 2011 and June 30, 2010, 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, 2011 and 2010 and there were no amounts accrued for interest and
penalties at June 30, 2011 and 2010.
The Corporation and the Bank are subject to U.S. federal income tax as an income-based tax and a capital-based
franchise tax in the state of Ohio. The Corporation and the Bank are no longer subject to examination by taxing authorities for
years before 2007.
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, 2011, 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
44
NOTES TO CONSOLIDATED 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 2011, 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 2011
and 2010, 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, 2011
Total capital (to risk weighted assets)
Bank.....................................................................................
Tier 1 capital (to risk weighted assets)
Bank.....................................................................................
Tier 1 capital (to average assets)
Bank.....................................................................................
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.....................................................................................
$ 26.3
14.0% $ 15.0
8.0%
$ 18.8
10.0%
22.2
11.8
22.2
7.5
7.5
11.8
4.0
4.0
11.3
14.8
6.0
5.0
$ 24.7
13.4% $ 14.8
8.0%
$ 18.5
10.0%
20.4
11.1
20.4
7.8
7.4
10.5
4.0
4.0
11.1
13.1
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,
2011 the Bank could, without prior approval, declare a dividend of approximately $3,519.
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 $27,528 and $23,435 as of June 30, 2011 and 2010, respectively. Of the June 30,
2011 commitments, $25,119 carried variable rates of interest ranging from 2.00% to 7.25% and $2,409 carried fixed rates of
interest ranging from 2.75% to 7.75%. 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%. Financial standby letters of credit
were $579 and $477 as of June 30, 2011 and 2010, respectively. In addition, commitments to extend credit of $7,759 and
$6,333 as of June 30, 2011 and 2010, 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.
45
NOTES TO CONSOLIDATED 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). For securities where quoted market prices are not available, fair
values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market
prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators
(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. These appraisals may use 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 independent 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.
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, 2011 Using
Balance at
June 30, 2011
Level 1
Level 2
Level 3
$ —
—
—
—
—
$ 16,260
25,098
30,596
19,868
—
$ —
—
—
—
67
$ 16,260
25,098
30,596
19,868
67
46
NOTES TO CONSOLIDATED 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, 2010 Using
Level 1
Level 2
Level 3
$ —
—
—
—
—
$ 11,004
20,247
25,612
6,977
—
$ —
—
—
—
422
Balance at
June 30, 2010
$ 11,004
20,247
25,612
6,977
422
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, 2011 and 2010:
Beginning balance
Realized losses included in other income
Change in fair value included in other comprehensive income
Ending balance, June 30
Trust Preferred Security
2011
$ 422
(370)
15
$ 67
2010
$ 356
(410)
476
$ 422
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Impaired loans:
Commercial
Commercial real estate:
Other
1-4 Family:
Owner occupied
Non-owner occupied
Assets:
Impaired loans
Other real estate owned, net
Fair Value Measurements at
June 30, 2011 Using
Balance at
June 30, 2011
Level 1
Level 2
Level 3
$ 51
$ —
$ —
$ 51
871
317
434
—
—
—
—
—
—
871
317
434
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
Impaired loans, which are generally measured for impairment using the fair value of the collateral for collateral
dependent loans, had a principal balance of $2,105, with a valuation allowance of $432 at June 30, 2011, resulting in an
additional provision for loan losses of $272 being recorded for the twelve month period ended June 30, 2011. As of June 30,
2010, impaired loans with a principal balance of $1,918, with a valuation allowance of $543, resulting in an additional
provision for loan losses of $344 being recorded for the twelve month period ended June 30, 2010.
There were no other real estate owned being carried at fair value as of June 30, 2011. 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 was 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.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The following table shows the estimated fair value at June 30, 2011 and 2010, 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.....................................................................
2011
2010
Carrying
Amount
$ 13,828
4,900
91,889
175,450
980
(159,302)
(88,944)
(17,012)
(7,535)
(82)
Estimated
Fair
Value
$ 13,828
4,900
91,889
174,182
980
(159,302)
(89,725)
(17,012)
(7,884)
(82)
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)
For purposes of the above disclosures of estimated fair value, the following assumptions were used. Estimated fair value
for cash and cash equivalents, certificates of deposits in other financial institutions, 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, 2011.
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,
2011 and 2010, 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, 2011 and 2010 for similar financing. The fair value of unrecorded commitments at June 30, 2011 and 2010
was not material.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14—PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information of Consumers Bancorp. Inc. (parent company only) follows:
June 30,
2011
June 30,
2010
Condensed Balance Sheets
Assets
25
Cash ........................................................................................................................................... $
2,000
Subordinated debenture receivable from subsidiary ..................................................................
92
Other assets................................................................................................................................
23,254
Investment in subsidiary ............................................................................................................
Total assets ................................................................................................................................ $ 25,371
Liabilities
47
Other liabilities .......................................................................................................................... $
25,324
Shareholders’ equity ..................................................................................................................
Total liabilities & shareholders’ equity...................................................................................... $ 25,371
$
114
2,000
94
21,577
$ 23,785
$
69
23,716
$ 23,785
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..................................................................................................................
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 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 ..............................................................................
Year Ended
June 30, 2011
Year Ended
June 30, 2010
$
650
160
197
613
(9)
622
1,626
$ 2,248
$
700
160
188
672
(5)
677
1,362
$ 2,039
Year Ended
June 30, 2011
Year Ended
June 30, 2010
$ 2,248
(1,626 )
(20 )
602
(837 )
146
(691 )
(89 )
114
25
$
$ 2,039
(1,362 )
25
702
(813 )
99
(714 )
(12 )
126
$ 114
49
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, 2011, 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, 2011 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 2011 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.
50
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 16, 2011 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 16, 2011 under
the captions “Director Compensation,” “Executive Compensation,” “Defined Contribution Plan,” “Salary Continuation
Program,” “Noncompetition Agreement,” “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 SHAREHOLDER MATTERS
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 16, 2011 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 16, 2011 under
the caption “Certain Transactions and Relationships,” and is incorporated herein by reference.
ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth in the Corporation’s Proxy Statement dated September 16, 2011 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 53 of this report.
(c) See Item 15(a)(2) above.
51
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 16, 2011
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 16, 2011.
Signatures
Signatures
/s/ Laurie L. McClellan
Laurie L. McClellan
Chairman of the Board of Directors
/s/ Ralph J. Lober, II
Ralph J. Lober, II
President, Chief Executive Officer and Director
/s/ John P. Furey
John P. Furey
Director
/s/ Bradley Goris
Bradley Goris
Director
/s/ James R. Kiko, Sr.
James R. Kiko, Sr.
Director
/s/ Harry W. Schmuck, Jr.
Harry W. Schmuck, Jr.
Director
/s/ James V. Hanna
James V. Hanna
Director
/s/ David W. Johnson
David W. Johnson
Director
/s/ Thomas M. Kishman
Thomas M. Kishman
Director
/s/ John E. Tonti
John E. Tonti
Director
52
Exhibit Number
3.1
Description of Document
Amended and Restated Articles of Incorporation of the Corporation. Reference is made to Form 10-K of the
Corporation filed September 22, 2010, which is incorporated herein by reference.
EXHIBIT INDEX
3.2
4
10.3
10.6
10.7
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.
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.
2011 Amendment and Restatement of Salary Continuation agreement entered into with Mr. Lober on February
11, 2011. Reference is made to Form 10-Q of the Corporation filed February 11, 2011, which is incorporated
herein by reference.
Form Noncompetition agreement entered into with Ms. Wood on February 11, 2011. Reference is made to
Form 10-Q of the Corporation filed February 11, 2011, 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.
53
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
Greig McDonald
Community Banc Investments, Inc.
26 East Main Street
New Concord, Ohio 43762
740-826-7601
800-224-1013
Thomas L. Dooley
Boenning & Scattergood
9916 Brewster Lane
Powell, Ohio 43065
614-203-2996
866-326-8113
Robert S. McCulloch
Hunter Associates
194 East State Street
P.O. Box 1300
Salem, Ohio 44460
800-203-6593
Common Stock Listing
Consumers Bancorp, Inc. common stock trades on the
OTC Bulletin Board under the symbol CBKM.OB. The
CUSIP is 210509105. As of June 30, 2011, there were
2,049,873 shares outstanding with 693 shareholders
of record and an estimated 236 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.
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 2011 annual meeting of shareholders will be held
on Wednesday, October 26, 2011, at 12:00 p.m. at The
Quarry Golf Club, 5650 Quarry Lake Drive, Canton,
Ohio, 44730.
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, 2011, 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
Our 2011 annual report was printed
and shipped by our customer Davis
Graphic Communication Solutions
in Summit County, Ohio.
AnnualReportCoverSpread.indd 2
9/12/2011 3:05:35 PM
C
M
Y
CM
MY
CY
CMY
K