.
.
.
Exhibit 13
Financial Highlights
(Dollars in thousands, except per share data)
2003-
2002
June 30, June 30, June 30, Percent
2003 2002 2001 Change
-------------------------------------------------------
Total interest income $ 11,618 $ 13,614 $ 13,949 (14.7)%
Total interest expense 2,681 4,278 5,356 (37.3)
Net income 2,205 2,236 2,047 (1.4)
Assets $ 182,067 $ 184,704 $ 172,272 (1.4)%
Deposits 157,502 160,068 152,696 (1.6)
Loans, net 122,975 123,454 131,250 (.4)
Securities available for sale 25,113 34,122 19,711 (26.4)
Shareholders' equity 17,268 15,820 14,217 9.2
Net income per share $ 1.03 $ 1.04 $ .95 (1.0)%
Cash dividends paid per share .34 .32 .303 6.3
Book value per share 8.05 7.37 6.61 9.2
Weighted average number of shares
outstanding 2,146,281 2,149,597 2,149,395 (0.2)%
1
BUSINESS OF CONSUMERS BANCORP, INC.
FINANCIAL CORPORATION
Consumers Bancorp, Inc. (the "Corporation"), 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 (the "Bank"), a bank chartered under
the laws of the United States. The Corporation's activities have been limited
primarily to holding the common shares of the Bank.
Serving the Minerva, Ohio area since 1965, the Bank's main office is located at
614 E. 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 U.S. government and
government agency obligations, municipal obligations, mortgage-backed securities
and other securities.
As a Bank holding company, the Corporation is subject to regulation, supervision
and examination by the Federal Reserve Bank (the "FRB"). As a nationally
chartered commercial bank, the Bank is subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency (the "OCC").
Deposits in the Bank are insured up to applicable limits by the FDIC. The Bank
is also a member of the Federal Home Loan Bank of Cincinnati (the "FHLB").
The Corporation is not aware of any current recommendations by regulatory
authorities that, if they were to be implemented, would have a material effect
on the Corporation. In addition, the Corporation is not aware of any exposure to
material costs associated with environmental hazardous waste cleanup. Bank loan
procedures require EPA studies be obtained by Bank management prior to approving
any commercial real estate loan with such potential risk.
As of June 30, 2003, the Bank employed 100 full-time and 19 part-time employees.
2
MARKET PRICE OF THE CORPORATION'S
COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Corporation had 2,146,281 common shares outstanding on June 30, 2003 held by
approximately 719 shareholders.
The shares of Common Stock of Consumers Bancorp, Inc. are traded on the
over-the-counter market primarily with brokers in the Corporation's service
area. 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.
September 30, December 31, March 31, June 30,
2002 2002 2003 2003
---------------------------------------------------------------
High $23.62 $22.75 $23.25 $24.83
Low 22.25 22.25 22.25 22.55
Cash Dividends .08 .10 .08 .08
September 30, December 31, March 31, June 30,
2001 2001 2002 2002
---------------------------------------------------------------
High $19.50 $19.33 $20.00 $23.00
Low 19.33 19.33 19.33 20.00
Cash Dividends .073 .09 .077 .08
September 30, December 31, March 31, June 30,
2000 2000 2001 2001
---------------------------------------------------------------
High $18.58 $19.25 $19.50 $19.50
Low 18.25 19.83 18.67 19.00
Cash Dividends .07 .087 .073 .073
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 stock, these prices
may not reflect the prices at which the stock would trade in an active market.
See Note 1 for dividend restrictions.
3
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Consumers Bancorp, Inc.
Minerva, Ohio
We have audited the accompanying consolidated balance sheets of Consumers
Bancorp, Inc. as of June 30, 2003 and 2002 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended June 30, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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
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, 2003 and 2002 and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
Crowe Chizek and Company LLC
Columbus, Ohio
July 29, 2003
4
CONSOLIDATED BALANCE SHEETS
Years ended June 30, 2003 and 2002
(Dollars in thousands, except per share data)
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 8,465 $ 7,851
Federal funds sold 14,335 7,710
Securities available for sale 25,113 34,122
Total loans 124,660 125,122
Less allowance for loan loss (1,685) (1,668)
--------- ---------
Net loans 122,975 123,454
--------- ---------
Cash surrender value life insurance 3,701 3,499
Premises and equipment, net 5,137 5,334
Intangible asset 1,377 1,538
Accrued interest receivable and other assets 964 1,196
--------- ---------
Total assets $ 182,067 $ 184,704
========= =========
LIABILITIES
Deposits
Non-interest bearing demand $ 33,420 $ 31,044
Interest bearing demand 12,324 12,948
Savings 60,886 58,137
Time 50,872 57,939
--------- ---------
Total deposits 157,502 160,068
--------- ---------
Repurchase agreements 4,936 5,133
Federal Home Loan Bank advances 822 2,153
Accrued interest payable and other liabilities 1,539 1,530
--------- ---------
Total liabilities 164,799 168,884
SHAREHOLDERS' EQUITY
Common stock, no par value; 2,500,000
shares authorized; 2,160,000 issued 4,869 4,869
Retained earnings 12,305 10,830
Treasury stock, at cost (13,719
shares at June 30, 2003 and 2002) (204) (204)
Accumulated other comprehensive income 298 325
--------- ---------
Total shareholders' equity 17,268 15,820
--------- ---------
Total liabilities and shareholders'
equity $ 182,067 $ 184,704
========= =========
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
2003 2002 2001
---- ---- ----
INTEREST INCOME
Loans, including fees $ 10,222 $ 12,115 $ 12,400
Federal funds sold 144 188 187
Securities:
Taxable 1,127 1,189 1,250
Tax-exempt 125 122 112
-------- -------- --------
Total interest income 11,618 13,614 13,949
INTEREST EXPENSE
Deposits 2,507 4,064 5,177
Federal Home Loan Bank advances 94 135 116
Other 80 79 63
-------- -------- --------
Total interest expense 2,681 4,278 5,356
Net interest income 8,937 9,336 8,593
Provision for loan losses 414 917 663
-------- -------- --------
Net interest income after provision for loan
losses 8,523 8,419 7,930
OTHER INCOME
Service charges on deposit accounts 1,472 1,126 795
Gain on securities sold - 9 52
Other 786 686 850
Loss on sale of premises and
equipment (199) - -
-------- -------- --------
Total other income 2,059 1,821 1,697
OTHER EXPENSES
Salaries and employee benefits 3,611 3,569 3,455
Occupancy 1,237 1,146 1,186
Directors' fees 203 181 171
Professional fees 335 165 150
Franchise taxes 187 177 141
Printing and supplies 169 200 218
Amortization of intangible 161 161 161
Telephone 200 187 181
Other 1,319 1,222 1,016
-------- -------- --------
Total other expenses 7,422 7,008 6,679
-------- -------- --------
Income before income taxes 3,160 3,232 2,948
Income tax expense 955 996 901
-------- -------- --------
Net income $ 2,205 $ 2,236 $ 2,047
======== ======== ========
Basic earnings per share $ 1.03 $ 1.04 $ .95
======== ======== ========
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
Accumulated
Other Total
Common Retained Treasury Comprehensive Shareholders'
Stock Earnings Stock Income (Loss) Equity
----- -------- ----- ------------- ------
Balance, July 1, 2000 $ 4,838 $ 7,887 $ (129) $ (335) $ 12,261
Comprehensive Income:
Net income 2,047 2,047
Unrealized gain on
securities available for sale 521 521
--------
Total comprehensive income 2,568
Cash dividends declared
($.30 per share) (652) (652)
Sale of 1,116 treasury shares 27 13 40
-------- -------- --------- -------- --------
Balance, June 30, 2001 4,865 9,282 (116) 186 14,217
Comprehensive Income:
Net income 2,236 2,236
Unrealized gain on
securities available for sale 139 139
--------
Total comprehensive income 2,375
Cash dividends declared
($.32 per share) (688) (688)
Sale of 300 treasury shares 4 2 6
Purchase of 4,500 treasury shares (90) (90)
-------- -------- --------- -------- --------
Balance, June 30, 2002 4,869 10,830 (204) 325 15,820
Comprehensive Income:
Net income 2,205 2,205
Unrealized loss on
securities available for sale (27) (27)
--------
Total comprehensive income 2,178
Cash dividends declared
($.34 per share) (730) (730)
-------- -------- --------- -------- --------
Balance, June 30, 2003 $ 4,869 $ 12,305 $ (204) $ 298 $ 17,268
======== ======== ========= ======== ========
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,205 $ 2,236 $ 2,047
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 622 581 528
Securities amortization, net 397 46 47
Provision for loan losses 414 917 663
Loss on sale of premises & equipment 199
Gain on sale of other real estate (10)
Deferred income taxes (24) (35) (11)
Gain on sale of securities - (9) (52)
Stock dividend on FHLB stock (36) (44) (51)
Change in
Intangible amortization 161 161 161
Cash surrender value (202) (165) (138)
Accrued interest receivable (255) 89 (61)
Accrued interest payable (137) (355) 183
Other assets and other liabilities (143) (1,279) (1,525)
-------- -------- --------
Net cash from operating activities 3,191 2,143 1,791
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (11,472) (26,065) (4,066)
Sales - 19 217
Maturities and principal pay downs 20,084 11,809 7,163
Net increase in federal funds sold (6,625) (4,710) (3,000)
Net (increase) decrease in loans 906 8,814 (14,062)
Acquisition of premises & equipment (837) (611) (924)
Sale of premises & equipment 191 - -
Purchase of life insurance policies - (365) (725)
-------- -------- --------
Net cash from investing activities 2,247 (11,109) (15,397)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (2,566) 7,372 15,865
Increase in long term FHLB advances - - 1,000
Repayments of FHLB advances (1,331) (100) (1,991)
Change in repurchase agreements (197) 3,691 341
Dividends paid (730) (688) (652)
Sale of treasury stock - 6 40
Purchase of treasury stock - (90) -
-------- -------- --------
Net cash from financing activities (4,824) 10,191 14,603
-------- -------- --------
Change in cash and cash equivalents 614 1,225 997
Cash and cash equivalents, beginning of year 7,851 6,626 5,629
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,465 $ 7,851 $ 6,626
======== ======== ========
See accompanying notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, 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). The Bank has a title company,
Community Title Agency, Inc. as part of its business. All significant
intercompany transactions have been eliminated in the consolidation.
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 it's operations are reported in one segment, banking.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, 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 future results could differ. The allowance for loan
losses, fair values of financial instruments, and status of contingencies are
particularly subject to change.
Cash Reserves: Consumers National Bank is required by the Federal Reserve to
maintain reserves consisting of cash on hand and non-interest bearing balances
on deposit with the Federal Reserve Bank. The required reserve balance at June
30, 2003 and 2002 was $1,186 and $1,181.
Securities: Securities are generally classified into either held to maturity or
available for sale categories. Held-to-maturity securities are those that the
Bank has the positive intent and ability to hold to maturity, and are reported
at amortized cost. Available-for-sale securities are those that the Bank may
decide to sell 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 as a separate component of equity, net of
tax. Securities are written down to fair value when a decline in fair value is
not temporary.
Realized gains or losses on sales are determined based on the amortized cost of
the specific security sold. Amortization of premiums and accretion of discounts
are computed under a system materially consistent with the level yield method
and are recognized as adjustments to interest income. Prepayment activity on
mortgage-backed securities is affected primarily by changes in interest rates.
Yields on mortgage-backed securities are adjusted as prepayments occur through
changes to premium amortization or discount accretion.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Concentrations of Credit Risk: The Bank grants consumer, real estate and
commercial loans primarily to borrowers in Stark, Columbiana and Carroll
counties. Automobiles and other consumer assets, business assets and residential
and commercial real estate secure most loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and probable losses in 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.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loan 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.
Cash Surrender Value of Life Insurance: The Bank has purchased single-premium
life insurance policies to insure the lives of the participants in the salary
continuation plan. As of June 30, 2003, the Bank has total purchased policies of
$2,885 (total death benefit $9,576) with a cash surrender value of $3,701. As of
June 30, 2002, the Bank had total purchased policies of $2,885, (total death
benefit $9,358) with a cash surrender value of $3,499. The amount included in
income (net of policy commissions and mortality costs) was approximately $202,
$165 and $138 for the years ended June 30, 2003, 2002 and 2001.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the assets' useful lives
on an accelerated basis, except for buildings for which the straight-line basis
is used. Useful lives range from three years for software to thirty-nine and
one- half years for buildings.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets: Purchased intangible, core deposit value, is recorded at cost
and amortized over the estimated life. Core deposit value amortization is
straight-line over 12 years. Intangibles are assessed for impairment and written
down as necessary.
Other Real Estate Owned: Real estate properties, other than Company premises,
acquired through, or in lieu of, loan foreclosure are initially recorded at fair
value at the date of acquisition. 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. After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell. Expenses,
gains and losses on disposition, and changes in the valuation allowance are
reported in other expenses. Other real estate owned was $35 at June 30, 2003 and
$0 at June 30, 2002.
Repurchase Agreements: Substantially all repurchase agreement liabilities
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 Company maintains a 401(k) profit sharing plan covering
substantially all employees. Contributions are made and expensed annually.
Income Taxes: The Company 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 bases 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.
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.
Earnings and Dividends Declared per Share: Earnings per common share are
computed based on the weighted average common shares outstanding. The number of
outstanding shares used was 2,146,281, 2,149,597 and 2,149,395 for the years
ended June 30, 2003, 2002 and 2001. The Company's capital structure contains no
dilutive securities.
Statement of Cash Flows: For purposes of reporting cash flows, cash and cash
equivalents include the Company's cash on hand and due from banks. The Company
reports net cash flows for customer loan, deposit, and repurchase agreement
transactions. For the years ended June 30, 2003, 2002 and 2001, the Bank paid
$2,818, $4,633 and $5,173 in interest and $1,086, $1,046, and $635 in income
taxes.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Common Stock Split: On March 13, 2002, the Board of Directors approved a
three-for-one stock split to shareholders of record March 18, 2002. All
references to the number of average common shares and per share amounts for
previous periods have been restated to reflect the stock split.
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.
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,
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. At year-end 2003, approximately $5,148 is
available to pay dividends to the holding company.
Newly Issued But Not Yet Effective Accounting Standards: In the spring of 2003,
the FASB issued two new accounting standards, Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" and Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equities", both of which generally become effective in the
quarter beginning July 1, 2003. Because the Corporation does not have any of
these instruments or is only nominally involved in these instruments, the new
accounting standards will not materially affect the Corporation's operating
results or financial condition.
New accounting standards on asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishments of debt
were issued in 2002. The new accounting standards were adopted in 2003 and do
not have a material impact on the Corporation's financial condition or results
of operations.
Reclassifications: Certain reclassifications have been made to the June 30, 2002
financial statements to be comparable to the June 30, 2003 presentation.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 2 - SECURITIES
Gross Gross
Fair Unrealized Unrealized
JUNE 30, 2003 Value Gains Losses
----- ----- ------
Securities available for sale:
U.S. Treasury and Federal agencies $ 6,439 $ 111
Obligations of states and
political subdivisions 3,303 160
Mortgage-backed securities 14,238 184 $ (8)
Equity securities 1,133 3
------- ------- -------
$25,113 $ 458 $ (8)
======= ======= =======
Gross Gross
Fair Unrealized Unrealized
JUNE 30, 2002 Value Gains Losses
----- ----- ------
Securities available for sale
U.S. Treasury and Federal agencies $11,167 $ 100 --
Obligations of states and
political subdivisions 3,104 73 $ (9)
Mortgage-backed securities 18,806 335 (10)
Equity securities 1,045 3
------- ------- -------
$34,122 $ 511 $ (19)
======= ======= =======
Securities with a carrying value of approximately $16,038 and $11,194 were
pledged at June 30, 2003 and 2002 to secure public deposits and commitments as
required or permitted by law.
Proceeds from sales of all equity and debt securities during 2003, 2002 and 2001
were $0, $19 and $217, respectively. Gross gains were $0, $9 and $52 for the
same periods with no losses recognized for any period.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 2 -SECURITIES (Continued)
The fair values of debt and mortgage-backed securities available for sale at
June 30, 2003 by contractual 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.
Fair Value
----------
Due in one year or less $ 4,802
Due after one year through five years 4,547
Due after five years through ten years 393
----------------
Total 9,742
Mortgage-backed securities 14,238
Equity Securities 1,133
----------------
Total $ 25,113
================
NOTE 3 - LOANS
Major classifications of loans are as follows as of June 30:
2003 2002
---- ----
Real estate - residential mortgage $ 57,497 $ 56,716
Real estate - construction 669 2,107
Commercial, financial and agriculture 58,484 53,535
Consumer 8,240 13,029
--------------- -------------
124,890 125,387
Unearned discount (1) (2)
Deferred loan fees and costs (229) (263)
Allowance for loan losses (1,685) (1,668)
--------------- -------------
$ 122,975 $ 123,454
=============== =============
2003 2002 2001
---- ---- ----
Loans past due over 90 days and still accruing $ 39 $ 552 $ 73
Loans on non-accrual 1,050 829 267
Increase in interest income if loans had been on accrual 100 73 12
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 3 - LOANS (Continued)
The changes in the allowance for loan losses consists of the following for the
years ended June 30:
2003 2002 2001
---- ---- ----
Balance at beginning of year $ 1,668 $ 1,552 $ 1,413
Provision 414 917 663
Charge-offs (603) (935) (645)
Recoveries 206 134 121
------- ------- -------
Balance at end of year $ 1,685 $ 1,668 $ 1,552
======= ======= =======
Impaired Loans:
2003 2002
---- ----
Total impaired loans $ 505 $ 456
Amount of allowance for loan losses allocated 123 -
2003 2002 2001
---- ---- ----
Average of impaired loans during the year $ 480 $ 228 -
Interest income recognized during impairment 4 17 -
Cash-basis interest income recognized - - -
The Bank has granted loans to certain of its executive officers and directors
and their related business interests. A summary of activity during the year
ended June 30, 2003 on related party loans to any one related party is as
follows:
2003 2002
---- ----
Principal balance at beginning of year $ 1,776 $ 1,411
Reclassification 439 -
New loans 55 767
Repayments (683) (402)
------- -------
Principal balance at end of year $ 1,587 $ 1,776
======= =======
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 4 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are as follows as of June 30:
2003 2002
---- ----
Land $ 803 $ 823
Land improvements 351 259
Building and leasehold improvements 3,427 3,500
Furniture, fixture and equipment 4,782 4,356
------------- -------------
9,363 8,938
Accumulated depreciation and
amortization (4,226) (3,604)
------------- -------------
$ 5,137 $ 5,334
============= =============
Depreciation was $622, $581 and $528 for the years ended June 30, 2003, 2002 and
2001, respectively.
NOTE 5 - INTANGIBLE ASSETS
Acquired intangible assets were as follows as of year end:
2003 2002
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- --------------- ----------- ---------------
Amortized intangible assets:
Other customer relationship
intangibles $ 1,927 $ 550 $ 1,927 $ 389
----------- --------------- ----------- ---------------
Total $ 1,927 $ 550 $ 1,927 $ 389
=========== =============== =========== ===============
Aggregated amortization expense was $161, $161 and $161, for 2003, 2002 and
2001.
Estimated amortization expense for each of the next five years:
2004 $ 161
2005 $ 161
2006 $ 161
2007 $ 161
2008 $ 161
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 6 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of $100,
was $7,650 and $11,485 in 2003 and 2002.
Scheduled maturities of time deposits at June 30, 2003 are as follows:
2004 $36,995
2005 6,527
2006 3,804
2007 3,546
2008 -
Thereafter -
-------
$50,872
=======
Related party deposits totaled $1,832 at June 30, 2003.
NOTE 7 - REPURCHASE AGREEMENTS
Repurchase agreements are financing arrangements. Physical control is maintained
for all securities pledged to secure repurchase agreements. Information
concerning repurchase agreements was as follows:
2003 2002
---- ----
Balance at June 30 $ 4,936 $ 5,133
Average balance during the year 4,838 3,185
Maximum month-end balance 5,699 5,296
Average interest rate during the year 1.55% 2.48%
Weighted average rate June 30 1.10 1.95
Repurchase agreements mature daily. The Bank has pledged U.S. Treasury and
agency securities with a carrying value of $7,818 at June 30, 2003, as
collateral for the repurchase agreements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 8 -FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances is as follows:
Interest Balance Balance
Maturity Rate June 30, 2003 June 30, 2002
-------- ---- ------------- -------------
2/14/2003 5.30% $ $ 1,000
1/21/2010 6.10% 346 381
7/1/2010 6.90% 245 398
10/1/2010 7.00% 231 374
------------- ------------
$ 822 $ 2,153
============== =============
Each 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 following table is a
summary of the scheduled principal payments for these advances:
Twelve Months Principal
Ending June 30 Payments
-------------- ---------
2004 $ 94
2005 100
2006 107
2007 114
2008 122
Thereafter 285
----
$822
====
Pursuant to collateral agreements with the FHLB, advances are secured by all
stock invested in the FHLB and certain qualifying first mortgage loans. As of
June 30, 2003, the Bank could borrow a total of $27,647 in advances based on the
amount of FHLB stock owned. Qualifying first mortgage loans available to secure
FHLB advances totaled approximately $47,149 at June 30, 2003.
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 four percent
of the individual compensation. The plan was submitted to and approved by the
Internal Revenue Service. Amounts charged to operations were $80, $81 and $86,
for the years ended June 30, 2003, 2002 and 2001.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)
The Corporation maintains a Salary Continuation Plan (the Plan) to encourage
Bank Executives to remain employees of the Bank. The Plan provides additional
retirement and spousal survivorship benefits for those Executives who have
attained age 40 and have at least five years of service. The Plan provides a
participant or a surviving spouse upon retirement or death with fifteen years of
income payments equal to a percentage of the employee's base pay at the time of
termination. The amount of base pay is limited to the lesser of the preceding
year's annual base salary before termination or the annual base salary at the
inception of the agreement with the employee plus 3.5% annual inflation. Vesting
in the Plan commences at age 50 and is prorated until age 65, however, vesting
is 100% upon the death of the Executive, if they were insurable, otherwise,
benefits cease at death. The benefit amount is determined using an 7.5% discount
factor, compounded monthly. For the years ended June 30, 2003, 2002 and 2001,
approximately $114, $146 and $110 have been charged to expense.
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following for the years ended
June 30:
2003 2002 2001
---- ---- ----
Current income taxes $ 979 $ 1,031 $ 912
Deferred income taxes (24) (35) (11)
-------- -------- --------
$ 955 $ 996 $ 901
======== ======== ========
The net deferred income tax liability consists of the following components at
June 30:
2003 2002
---- ----
Deferred tax assets
Allowance for loan losses $ 428 $ 434
Deferred compensation 293 242
Other 34 23
Deferred tax liabilities
Net unrealized securities gains (154) (167)
Depreciation (343) (295)
Loan fees (167) (195)
FHLB Stock dividends (97) (85)
------------- -------------
Net deferred tax liability $ (6) $ (43)
============ ============
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 10 - INCOME TAXES (Continued)
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:
2003 2002 2001
---- ---- ----
Income taxes computed at the
Tax rate on pretax income $ 1,074 $ 1,099 $ 1,002
Add (subtract) tax effect
Tax exempt income (48) (47) (48)
Cash surrender value income (69) (56) (47)
Other (2) - (6)
------- ----------- -----------
$ 955 $ 996 $ 901
======== ============ ============
NOTE 11 - REGULATORY MATTERS
The Corporation and Bank are 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.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, 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
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 11 - REGULATORY MATTERS (Continued)
At year-end, actual Corporate and Bank capital levels (in millions) and minimum
required levels were:
Minimum Required To
Be Well Capitalized
Minimum Required For Under Prompt
Capital Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
June 30, 2003 Amount Ratio Amount Ratio Amount Ratio
- ------------- ------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $17.0 14.9% $ 9.1 8.0% $11.4 10.0%
Bank 16.8 14.8 9.1 8.0 11.4 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 15.6 13.7 4.6 4.0 6.8 6.0
Bank 15.3 13.5 4.6 4.0 6.8 6.0
Tier 1 capital (to average assets)
Consolidated 15.6 8.6 7.2 4.0 9.0 5.0
Bank 15.3 8.5 7.3 4.0 9.1 5.0
Minimum Required To
Be Well Capitalized
Minimum Required For Under Prompt
Capital Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
June 30, 2002 Amount Ratio Amount Ratio Amount Ratio
- ------------- ------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $15.8 13.2% $ 9.4 8.0% $11.7 10.0%
Bank 15.2 13.1 9.3 8.0 11.6 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 14.0 11.9 4.7 4.0 7.0 6.0
Bank 13.7 11.8 4.6 4.0 7.0 6.0
Tier 1 capital (to average assets)
Consolidated 14.0 7.6 7.3 4.0 9.1 5.0
Bank 13.7 7.5 7.3 4.0 9.1 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.
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
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 12 - COMMITMENTS WITH OFF-BALANCE SHEET RISK (Continued)
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 $4,482 and $10,397 as of June 30, 2003 and 2002. Of the June 30,
2003 commitments, $4,011 carried variable rates of interest ranging from 1.99%
to 6.50% and $471 carried fixed rates of interest ranging from 5.25% to 8.00%.
Of the June 30, 2002 commitments, $4,989 carried variable rates of interest
ranging from 4.75% to 6.75% and $5,408 carried fixed rates of interest ranging
from 6.0% to 12.5%. Since some commitments to make loans expire without being
used, the amount does not necessarily represent future cash commitments.
NOTE 13 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value at June 30, 2003 and 2002,
and the related carrying value of financial instruments:
2003 2002
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
----------- ----------- ------------ ------------
Cash and cash equivalents $ 8,465 $ 8,465 $ 7,851 $ 7,851
Federal funds sold 14,335 14,335 7,710 7,710
Securities available for sale 25,113 25,113 34,122 34,122
Loans, net 122,975 128,228 123,454 124,712
Accrued interest receivable 700 700 955 955
Financial Liabilities
Demand and savings deposits (106,630) (106,630) (102,129) (102,129)
Time deposits (50,872) (51,593) (57,939) (58,761)
Federal Home Loan Bank advances (822) (919) (2,153) (2,217)
Accrued interest payable (308) (308) (445) (445)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. Estimated fair value for cash and due from banks and
federal funds sold is considered to approximate cost. Estimated fair value of
securities is based on quoted market values for the individual securities or
equivalent securities. 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 is
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) is 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 nonaccrual loans is based on recent
appraisals of the collateral or, if appropriate, using
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 13 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS (Continued)
estimated discounted cash flows. Fair value of core deposits, including demand
deposits, savings accounts and certain money market deposits, is the amount
payable on demand. Fair value of fixed-maturity certificates of deposit is
estimated using the rates offered at June 30, 2003 and 2002, for deposits of
similar remaining maturities. Estimated fair value does not include the benefit
that results from low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market. Fair value of accrued interest is
determined to be the carrying amount since these financial instruments generally
represent obligations which are due on demand. The fair value of unrecorded
commitments at June 30, 2003 and 2002, is not material.
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information of Consumers Bancorp. Inc. (parent company only)
follows:
CONDENSED BALANCE SHEETS June 30, 2003 June 30, 2002
------------- -------------
Assets
Cash $ 79 $ 113
Securities 148 128
Investment in subsidiary 17,042 15,579
------------- -------------
Total assets $ 17,269 $ 15,820
============= =============
Liabilities
Other liabilities 1 -
Shareholders' equity $ 17,268 $ 15,820
------------- -------------
Total liabilities & shareholders
equity $ 17,269 $ 15,820
============= =============
Year Ended Year Ended Year Ended
CONDENSED STATEMENTS OF INCOME June 30, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
Cash dividends from subsidiary $ 730 $ 688 $ 772
Other income 6 16 63
Other expense 21 13 18
------------- ------------- -------------
Income before equity in undistributed net
income of subsidiary 715 691 817
Equity in undistributed net income of
subsidiary 1,490 1,545 1,230
------------- ------------- -------------
Net income $ 2,205 $ 2,236 $ 2,047
============= ============= =============
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed financial information of Consumers Bancorp Inc. (parent company only)
follows:
CONDENSED STATEMENTS OF CASH FLOWS Year Year Year
Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
Cash flows from operating activities
Net income $ 2,205 $ 2,236 $ 2,047
Equity in undistributed net income of
subsidiary (1,490) (1,545) (1,230)
Gain on sale of securities - (9) (52)
Change in other liabilities 1 8 -
------- ------- -------
Net cash provided by operating activities 716 690 765
Cash flows from investing activities
Purchase of securities available for sale (20) (21) (180)
Sales of securities available for sale - 10 217
------- ------- -------
Net cash provided by investing activities (20) (11) 37
Cash flows from financing activities
Dividend paid (730) (688) (652)
Sale of treasury stock - 6 40
Purchase of treasury stock - (90) -
------- ------- -------
Net cash used by financing activities (730) (772) (612)
Change in cash and cash equivalents (34) (93) 190
Cash and cash equivalents, beginning of year 113 206 16
------- ------- -------
Cash and cash equivalents, end of year $ 79 $ 113 $ 206
======= ======= =======
NOTE 15 - OTHER COMPREHENSIVE INCOME
2003 2002 2001
Unrealized holding gains and losses on
available-for-sale securities (41) 219 842
Less reclassification adjustments for gains and
losses later recognized in income - (9) (52)
------- ------- -------
Net unrealized gains and losses (41) 210 790
Tax effect 14 (71) (269)
------- ------- -------
Other comprehensive income (loss) $ (27) $ 139 $ 521
======= ======= =======
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
(Dollars in thousand, except per share data)
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings per Share
Income Income Income Basic
- --------------------------------------------------------------------------------------------
2003
First Quarter $ 3,165 $ 2,366 $ 642 $ .30
Second Quarter 2,983 2,259 595 .28
Third Quarter 2,822 2,204 541 .25
Fourth Quarter 2,648 2,108 427 .20
2002
First Quarter 3,564 2,210 523 .24
Second Quarter 3,533 2,367 540 .25
Third Quarter 3,297 2,374 540 .25
Fourth Quarter 3,220 2,385 633 .30
25
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following is management's analysis of the Corporation's financial condition
and results of operations as of and for the year ended June 30, 2003, compared
to prior years. 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2003, JUNE 30,
2002 AND JUNE 30, 2001
NET INCOME. Operating earnings are net income adjusted to exclude the results of
certain significant transactions or events not representative of on going
operations ("non-operating items"). For 2003, Consumers after-tax non-operating
items included a fourth quarter $131,000 after tax loss on sale of the Lisbon,
Ohio bank office. A new office was constructed on Dickey Drive in Lisbon, which
consolidated the Lisbon branch operations from the downtown facility and remote
drive thru facility. "Management believes the loss on the sale of a branch
building to be one-time non-recurring charge and anticipates no recurrence of a
similar charge." Operational efficiencies from the consolidation of reduced
personnel, facility, and data line expense are estimated at $94,000 annually.
- --------------------------------------------------------------------------------
Operating Income
- --------------------------------------------------------------------------------
Year ended June 30, 2003 2002 2001
- --------------------------------------------------------------------------------
Net income $2,205,000 $2,236,000 $2,047,000
Non-operating items 131,000 - -
- --------------------------------------------------------------------------------
Operating earnings $2,336,000 $2,236,000 $2,047,000
================================================================================
The improved operating earnings in 2003 result from the decrease in provision
for loan loss as non-performing loans stabilized, the increase in service
charges on deposit accounts attributable to volume increases in overdraft and
non-sufficient fund fees with the institution of an Overdraft Privilege program
during first quarter. Net income improved in 2002 resulted from improvements in
net interest income, service charge on deposit account, that was offset by
increases in the provision for loan losses and other expenses. The 2001 earnings
increase resulted from growth in total revenue of $2,748,000 or 21.3% while
operating expenses rose $1,025,000 or 18.1% and the provision for losses
increased $216,000.
NET INTEREST INCOME Net interest income for the year of 2003 was $8,937,000, a
decrease of $399,000 or 4.3% from $9,336,000 in the year of 2002, but an
increase of $344,000 from 2001. Net interest income, the difference between
interest income earned on interest-earning assets and interest expense incurred
on interest-bearing liabilities, is the most significant 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. Average earning assets decreased .5% from the 2002, with average
loans, decreasing 5.7% from last year due in part to accelerated mortgage
refinancings within the banking industry and the Bank's exit from sub-prime
consumer loan lending. Average interest bearing liabilities decreased 4.0% from
2002. The Corporation's net interest margin for the year ended June 30, 2003 was
5.42%, a decrease of 21 basis points from 2002 and a decrease of 27 basis points
from 2001. The decline in interest rates as well as increased refinancings at
lower rates in 2003 caused the interest margin to decline. Even with the decline
the Corporation's net interest margin remains higher than average since the
Corporation maintains a Commercial mortgage portfolio.
- --------------------------------------------------------------------------------------------------------------
Net Interest Income
- --------------------------------------------------------------------------------------------------------------
Year ended June 30, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Net interest income $ 8,937,000 $ 9,336,000 $ 8,593,000
Taxable equivalent adjustments to net interest 84,000 80,000 73,000
- --------------------------------------------------------------------------------------------------------------
Net interest income, fully taxable equivalent $ 9,021,000 $ 9,416,000 $ 8,676,000
Net interest margin 5.37% 5.58% 5.64%
Taxable equivalent adjustment .05 .05 .05
- --------------------------------------------------------------------------------------------------------------
Net interest margin, fully taxable equivalent 5.42% 5.63% 5.69%
==============================================================================================================
26
THREE-YEAR AVERAGE BALANCE SHEET AND NET INTEREST MARGIN
- --------------------------------------------------------
(In thousands except percentages)
2003 2002 2001
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
Taxable securities $ 27,627 $ 1,127 4.08% $ 23,124 $ 1,189 5.14% $ 19,472 $ 1,250 6.42%
Nontaxable
securities(1) 3,042 191 6.28 2,663 186 6.98 2,359 169 7.19
Loans receivable(1) 124,893 10,235 8.20 132,502 12,131 9.16 126,348 12,426 9.83
Federal funds sold 10,904 144 1.32 8,998 188 2.09 3,366 187 5.56
--------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest Earning Assets 166,466 11,697 7.03 167,287 13,694 8.19 151,545 14,032 9.26
Non-interest Earning Assets 15,877 15,358 15,531
--------- ---------- ----------
Total Assets $ 182,343 $ 182,645 $ 167,076
========= ========== ==========
Interest bearing liabilities
NOW $ 13,202 $ 128 .97% $ 12,593 $ 181 1.44% $ 12,037 $ 205 1.70%
Savings 59,282 548 . 92 55,692 913 1.64 51,318 1,512 2.95
Time deposits 53,019 1,831 3.45 63,729 2,970 4.66 60,242 3,460 5.74
Repurchase agreements 4,838 75 1.55 3,185 79 2.48 1,170 63 5.38
FHLB advances 1,563 94 6.01 2,208 135 6.11 1,917 116 6.05
--------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest bearing
liabilities 131,904 2,676 2.03 137,407 4,278 3.11 126,684 5,356 4.23
Non-interest bearing
liabilities 33,617 30,180 27,041
--------- ---------- ----------
Total liabilities 165,521 167,587 153,725
Shareholders' equity 16,822 15,058 13,351
--------- ---------- ----------
Total liabilities and
Shareholders' equity $ 182,343 $ 182,645 $ 167,076
========= ========== ==========
Net interest income, interest
rate spread(1) $ 9,021 5.00% $ 9,416 5.08% $ 8,676 5.03%
Net interest margin (net
interest as a percent
of average interest
earning assets(1) 5.42% 5.63% 5.69%
Average interest earning
assets to interest bearing
liabilities 126.20% 121.75% 119.62%
(1) calculated on a fully taxable equivalent basis
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 inherent in the Corporation's
loan portfolio, which have been incurred at each balance sheet date. The
provision for loan losses decreased $503,000 or 54.9% to $414,000 in the fiscal
year 2003 compared to $917,000 in fiscal year 2002 and $663,000 in fiscal year
2001. The decreased provision for loan losses in fiscal year 2003 was
attributable to stabilization of the loan portfolio and the decline in net
charge-offs. Net charge-offs were $397,000 or 0.32% of average loans during the
twelve months ended June 30, 2003, compared to $801,000 or 0.60% for the same
period in 2002 and $524,000 or .41% for the same period in 2001.
27
PROVISION FOR LOAN LOSSES (Continued)
June 30, June 30, June 30,
2003 2002 2001
------ ------ ------
Allowance for loan losses as a percentage of loans 1.35% 1.33% 1.18%
Allowance for loan losses as percentage of non-performing assets 149.91% 120.78% 435.96%
The continuing weak economy was reflected as the allowance for loan losses as a
percentage of non-performing loans at June 30, 2003 increased compared to June
30, 2002 and 2001 as a result of non-performing loans increasing from $340,000
at June 30, 2001 to $1,381,000 at June 30, 2002 to $1,089,000 at June 30, 2003.
OTHER INCOME. Other income primarily includes service charges on deposits and
other miscellaneous income. Other income of $2,059,000 for the year ended June
30, 2003 represented an increase of $238,000 or 13.1% over the $1,821,000 of
other income for the year ended June 30, 2002 and an increase of $362,000 or
21.5% over the $1,697,000 of other income for the year ended June 30, 2001. The
increase was due primarily to an increase in fee income from the introduction of
the Overdraft Privilege Program coupled with an increase in the amount of
deposits as well as increases in the cash surrender value of life insurance.
Third party fees received for the origination of long-term mortgages increased
$96,000 from June 30, 2002 and $115,000 from June 30, 2001 as compared to June
30, 2003. Customers purchased new homes or refinanced existing mortgage debt due
to the availability of long term fixed rate mortgage loans on the secondary
market. Management has elected not to make long term fixed rate mortgage loans
and has entered into an arrangement whereby it assists third parties by taking
loan applications and completing certain loan documents for which it is paid a
fee. The arrangement allows the Corporation to meet its customers' needs by
offering an opportunity to obtain long-term fixed rate financing on a primary
residence and is a source of additional non-interest income. There were no gains
on sales of securities in 2003 as compared to $9,000 in 2002 and $52,000 in
2001, a result of the Corporation selling bank equities acquired in 2000.
A non-recurring loss of $199,000 was recognized on the sale of the downtown
Lisbon, Ohio branch office during 2003. A new branch office was built on Dickey
Drive in Lisbon, allowing the closure of the downtown branch and offsite
drive-thru unit. Due to the reduction in costs of rental space, utilities, data
lines, and reduction in personnel in the combination of the two former locations
to the new facility, the Corporation estimates an annual savings of $94,000,
taking 25 months to recoup the loss in operational savings.
OTHER EXPENSE. Other expense totaled $7,422,000 for the year ended June 30,
2003, an increase of $414,000 or 5.9% from $7,008,000 for the year ended June
30, 2002, which had increased by $329,000 or 4.9% from $6,679,000 for the year
ended June 30, 2001.
Salary and benefits expense increased $42,000 or 1.2% during the fiscal year
ending June 30, 2003 and increased $114,000 or 3.3% during the fiscal year
ending June 30, 2002. The increases are the result of normal, annual merit
increases and the addition of new employees during the fiscal year ending June
30, 2002. The increase in occupancy expense was primarily due to the
depreciation and maintenance associated with the branch expansion. The
amortization of the intangible is directly related to the purchase premium of
the Lisbon, Ohio branch.
Professional fees were impacted by increased expenses to support corporate
governance issues and the payment of overdraft privilege fees to the originating
vendor.
INCOME TAX EXPENSE
The change in income tax expense is primarily attributable to the decrease in
income before income taxes and the change in the after tax effect of tax-exempt
income and other items. The provision for income taxes totaled $955,000 for the
year ended June 30, 2003 compared to $996,000 for the year ended June 30, 2002,
a decrease of $41,000. The effective tax rates were 30.2% and 30.8% for years
ended June 30, 2003 and 2002, respectively.
The provision for income taxes totaled $901,000 for the year ended June 30, 2001
with an effective tax rates of 30.6% for the year ended June 30, 2001.
28
FINANCIAL CONDITION
Total assets at June 30, 2003 were $182,067,000 compared to $184,704,000 at June
30, 2002, a decrease of $2,637,000 or 1.4%. The decrease in total assets was
primarily within securities available for sale, which decreased $9,009,000 while
federal funds sold increased $6,625,000. Decreases in securities available for
sale were concentrated in government agency collateralized mortgage obligations
with an average life of three years, due to rapid prepayment speeds in a low
interest rate environment. Funding the increase federal funds sold was provided
by the decrease in securities in 2003. Net loans receivable decreased $479,000
from $123,454,000 at June 30, 2002 to $122,975,000 at June 30, 2003. Consumer
loans decreased $4,789,000 or 36.8% as automobile loans have been affected by
the auto manufacturers' offerings of zero percent or highly discounted rates
through their financing subsidiaries.
Total deposits decreased $2,566,000 from $160,068,000 at June 30, 2002 to
$157,502,000 at June 30, 2003. Savings deposits increased $2,749,000 or 4.7% as
depositors found shelter from the declining stock market and low interest rate
environment. Time accounts decreased by $7,067,000, or 12.2%. Non-interest
bearing deposits increased 7.7% from June 30, 2002 to June 30, 2003, a result of
offering service charge free checking.
Total shareholders' equity increased $1,448,000 from $15,820,000 at June 30,
2002 to $17,268,000 at June 30, 2003. The increase is primarily due to net
income of $2,205,000, which was partially offset by cash dividends of $730,000,
and a decline of $27,000 of accumulated other comprehensive income.
June 30, June 30,
2003 2002
---------- ----------
Non-accrual loans $1,050,000 $ 829,000
Loans past due over 90 days and still accruing 39,000 552,000
---------- ----------
Total non-performing loans 1,089,000 1,381,000
Other real estate owned 35,000 -
---------- ----------
Total non-performing assets $1,124,000 $1,381,000
========== ==========
Non-performing loans to total loans .87% 1.10%
Allowance for loan losses to total non-performing loans 149.91% 120.78%
Loans 90 days or more past due and not on non-accrual to
accruing to total loans .03 .44
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 investment securities, with any excess funds
placed in federal funds sold on a daily basis.
The Bank groups its loan portfolio into four major categories: real estate
loans, commercial, financial and agricultural loans, and consumer loans. The
Bank's real estate loan portfolio consists of three basic segments: conventional
mortgage loans having fixed rates for terms not longer than fifteen years,
variable rate home equity line of credit loans and fixed rate loans having
maturity or renewal dates that are less than the scheduled amortization period.
Real estate loan growth has decreased through the past year after several years
of slow growth due to a decline in interest rates. Competition is very heavy in
the Bank's market for these types of loans, both from local and national
lenders. The Bank became affiliated with third parties which allow the Bank to
offer attractive mortgage loan options to its customers. Commercial, financial
and agricultural loans are comprised of both variable rate notes subject to
daily interest rate changes based on the prime rate, and fixed rate notes having
maturities of generally not greater than five years. These loans have shown
increase during the past year, with outstanding balances rising by $4,949,000 or
9.2%. The personal loans offered by the Bank are generally written for periods
of up to five years, based on the nature of the collateral. These may be either
installment loans having regular monthly payments or demand type loans for short
periods of time.
29
LIQUIDITY (Continued)
Funds not allocated to the Bank's loan portfolio are invested in various
securities having diverse maturity schedules. The majority of the Bank's
investments are held in U.S. Treasury securities or other securities issued by
U.S. Government agencies, mortgage-backed securities, and to a lesser extent,
investments in tax free municipal bonds. Tax equivalent yields for securities
decreased to 4.30% on a tax equivalent basis for the year ended June 30, 2003 as
compared to 5.33% for the year ended June 30, 2002.
The Bank offers several forms of deposit programs 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. Time deposit interest rates have
declined during the year. Rates continue to come under competitive pressures in
the Bank's market area as financial institutions attempt to attract and keep new
deposits to fund growth. Interest rates on demand deposits and savings deposits
continue to be at levels as low as have been seen in many years. As a result,
the trend for new deposit growth appears to be primarily in either
non-interest-bearing demand deposits or savings deposits.
Jumbo time deposits (those with balances of $100,000 and over) decreased from
$11,485,000 at June 30, 2002 to $7,650,000 at June 30, 2003. These deposits are
monitored closely by the Bank, priced on an individual basis, and often matched
with a corresponding investment instrument. The Bank has on occasion used a fee
paid broker to obtain these types of funds from outside its normal service area
as another alternative for its funding needs. The bank had no brokered deposits
at June 30, 2003. These deposits are not relied as a primary source of funding
however, and the Bank can foresee no dependence on these types of deposits for
the near term.
The net interest margin is monitored monthly. 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 2003 was 5.42% as compared to 5.63% for 2002 and 5.73% in
2001.
CAPITAL RESOURCES
At June 30, 2003, management believes the Bank complied with all regulatory
capital requirements. Based on the Bank's computed regulatory capital ratios,
the Office of the Controller of the Currency 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 ON INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, 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.
FORWARD LOOKING STATEMENTS
When used 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, the 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"
30
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Corporation wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changed in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the
Corporation's financial performance and could cause the Corporation's actual
results for future periods to differ materially from those anticipated or
projected.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities, which would
have such effect if implemented.
CRITICAL ACCOUNTING POLICIES
The financial condition and results of operations for Consumers 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 Company's accounting policies. The selection and
application of these accounting policies involve judgments, estimates and
uncertainties that are susceptible to change.
Presented below are discussions of those accounting policies that management
believes are the most important (Critical Accounting Policies) to the portrayal
and understanding of the Company's financial condition and results of
operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of
materially different financial condition or results of operations is a
reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial
Statements.
ALLOWANCE FOR ESTIMATED LOSSES
Management periodically reviews the loan and lease portfolio in order to
establish an estimated allowance for loan and lease 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 and lease losses
(Provision). Actual loan and lease losses are charged against (reduce) the
Allowance when management believes that the collection of principal will not
occur. Unpaid interest attributable to prior years for loans that are placed on
Non-Accrual Status is also charged against the Allowance. Unpaid interest for
the current year for loans that are placed on Non-Accrual Status is reversed
against the interest income previously recognized. Subsequent recoveries of
amounts previously charged to the Allowance, if any, are credited to (increase)
the Allowance.
The Allowance is regularly reviewed by management to determine whether or not
the amount is considered adequate to absorb probable losses. If not, an
additional provision is made to increase the Allowance. This evaluation includes
specific loss estimates on certain individually reviewed loans, statistical loss
estimates for loan groups or pools that are based on historical loss experience
and general loss estimates that are based upon the size, quality, and
concentration characteristics of the various loan portfolios, adverse situations
that may affect a borrower's ability to repay, and current economic and industry
conditions, among other things. The Allowance is also subject to periodic
examination by regulators whose review includes a determination as to its
adequacy to absorb potential losses.
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 gradings, 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
31
ALLOWANCE FOR ESTIMATED LOSSES (Continued)
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 Company 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 and lease 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 and leases it is difficult to predict, with any degree
of certainty, the affect on income if different conditions or assumptions were
to prevail.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank measures interest-rate risk from the perspectives of earnings at risk
and value at risk. The primary purpose of both the loan and investment
portfolios is the generation of income, but if credit risk is the principal
focus of risk analysis in the loan portfolio, interest-rate risk is the
principal focus in the investment portfolio. Because of the greater liquidity of
the investment portfolio, it is the vehicle for managing interest-rate risk in
the entire balance sheet. The Bank manages interest rate risk position using
simulation analysis of net interest income and net income over a two-year
period. The Bank also calculates the effect of an instantaneous change in market
interest rates on the economic value of equity or net portfolio value. Once
these analyses are complete, management reviews the results, with an emphasis on
the income-simulation results for purposes of managing interest-rate risk. The
rate sensitivity position is managed to avoid wide swings in net interest
margins. Measurement and identification of current and potential interest rate
risk exposures is conducted quarterly, with reporting and monitoring also
occurring quarterly. The Bank applies interest rate shocks to its financial
instruments up and down 50, 100, 150, and 200 basis points.
The following table presents an analysis of the potential sensitivity of the
Bank's annual net interest income and present value of the Bank's financial
instruments to sudden and sustained increase of 200 basis points and 100 basis
points decrease change in market interest rates:
Maximum Change
One Year Net interest Income Change 2004 Guidelines
- ----------------------------------- ---- ----------
+200 Basis Points 0% (16)%
- -100 Basis Points 0% (16)%
Net Present Value of Equity Change
- ----------------------------------
+200 Basis Points (19)% (20)%
- -100 Basis Points 9% (20)%
The projected volatility of net interest income to a +200 and -100 basis points
change for all quarterly models during 2002 and 2003 fall within the Board of
Directors guidelines for net interest income change. Net present value of equity
change "value at risk" is monitored by Management and has been addressed by
reducing the maturity within the investment portfolio as consumers reduced time
maturities within the deposit portfolio.
32
GENERAL INFORMATION
EXTERNAL INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Crowe Chizek and Company LLC
One Columbus
10 West Broad Street
Columbus, OH 43215
TRANSFER AGENT AND REGISTRAR
Consumers Bancorp, Inc.
c/o Theresa J. Linder, Corporate Secretary
614 East Lincoln Way
Minerva, Ohio 44657
MARKET MAKERS
McDonald & Company Securities, Inc. Sweney Cartwright & Co.
Unizan Bank Plaza 17 South High Street
200 Market Ave. South, Suite 410 Suite 300
Canton, Ohio 44702 Columbus, Ohio 43215
800-962-0537 800-334-7481
Parker/Hunter Incorporated
340 East State Street
P.O. Box 620
Salem, Ohio 44460
800-624-1965
SHAREHOLDER RELATIONS
shareholderrelations@consumersbank.com
ANNUAL MEETING
The 2003 annual meeting of stockholders will be held on October 15, 2003 at 9:00
AM at the main office of Consumers National Bank, 614 East Lincoln Way, Minerva,
Ohio 44657.
ANNUAL REPORT ON FORM 10-K
A copy of the Bank's Annual Report on Form 10-K for the fiscal year ended June
30, 2003 as filed with the Securities and Exchange Commission will be furnished
without charge to stockholders upon written request to Theresa J. Linder,
Corporate Secretary.
33