U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
CONSUMERS BANCORP, INC.
(Name of small business issuer in its charter)
OHIO 34-1771400
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
614 East Lincoln Way, P.O. Box 256, Minerva, Ohio 44657
(Address of principal executive offices) (Zip code)
(330) 868-7701
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $10.00 stated value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will 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-KSB or any amendment to this
Form 10-KSB. X
Issuer's revenue for the year ended June 30, 1998 was: $11,006,607
At August 31, 1998, there were issued and outstanding 715,750 of the
Issuer's Common Shares.
The aggregate market value of the Issuer's voting stock held by
nonaffiliates of the Issuer as of August 31, 1998 was $28,391,417.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement dated September 16, 1998,
are incorporated by reference into Item 9. Directors, Executive
Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act; Item 10. Executive Compensation; Item
11. Security Ownership of Certain Beneficial Owners and Management;
and Item 12. Certain Relationships and Related Transactions, of
Part III.
Transitional Small Business Disclosure Form (check one):
Yes No X
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Business
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. On
February 28, 1995, the Corporation acquired all of the common stock
issued by the Bank through a triangular merger. 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 business and individual customer
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.
Supervision and Regulation
Regulation of the Corporation: The Corporation is a registered bank
holding company organized under the laws of the State of Ohio. As
such, the Corporation is subject to the laws of the State of Ohio
and is under the jurisdiction of the Securities Act of 1933, as
amended, and various Securities and Exchange Commission rules and
regulations relating to the offering and sale of its securities.
The Corporation is also subject to regulation under the Bank Holding
Company Act of 1956 as amended. The Federal Reserve Board regulates
bank holding companies and may examine or inspect the books and
records of the Corporation and the Bank.
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.
Regulation of the Bank: 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"). These
regulatory agencies have the authority to examine the books and
records of the Bank, and the Bank is subject to their rules and
regulations. 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.
Employees
As of June 30, 1998, the Bank employed 64 full-time and 21 part-time
employees.
Statistical Disclosure
The following section contains certain financial disclosures related
to the Registrant as required under the Securities and Exchange
Commission's Industry Guide 3, "Statistical Disclosures by Bank
Holding Companies", or a specific reference as to the location of
the required disclosures in the Registrant's 1998 Annual Report to
Shareholders, portions of which are incorporated in this 10-KSB by
reference.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following tables further illustrate the impact on net interest
income from changes in average balances and yields of the
Corporation's assets and liabilities.
<PAGE>
<TABLE>
Average Balance Sheets and Analysis of Net Interest Income
for the Years Ended June 30, (in thousands except percentages)
<CAPTION>
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Assets balance Interest rate balance Interest rate balance Interest rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable securities $ 14,535 $ 950 6.60% $ 18,780 $1,059 5.59% $ 14,131 $ 810 5.73%
Nontaxable securities 2,316 105 6.84 2,261 84 5.66 1,002 52 7.83
Loans receivable 97,542 9,049 9.28 86,244 8,225 9.54 78,393 7,819 9.97
Federal funds sold 5,710 239 4.18 3,376 202 5.98 3,774 224 5.93
------- ------ ------- ------ ------- -----
Total Interest-Earning
Assets 120,103 10,343 8.67 110,661 9,570 8.67 97,300 8,905 9.18
Noninterest-Earning
Assets 9,224 7,650 6,868
-------- ------- ------
Total Assets $129,327 $118,311 $104,168
========= ======== =======
Interest Bearing
Liabilities
NOW $ 9,773 223 2.29 $ 10,230 215 2.10 $ 6,446 216 3.36
Savings 40,854 1,321 3.23 41,626 1,452 3.49 44,150 1,726 3.91
Time Deposits 46,267 2,489 5.38 40,769 2,080 5.10 29,905 1,574 5.26
FHLB advances 3,836 201 5.23 1,600 109 6.83 1,416 91 6.41
--------- ----- ------- ----- ------ -----
Total interest bearing
liabilities 100,730 4,234 4.20 94,225 3,856 4.09 81,917 3,607 4.40
----- ----- -----
Noninterest bearing
liabilities 18,426 15,135 15,005
--------- ------- ------
Total liabilities 119,156 109,360 96,922
Shareholders equity 10,171 8,951 7,246
--------- ------- -----
Total liabilities and
Shareholders equity $129,327 $118,311 $104,168
======= ======= =======
Net interest income,
interest Rate spread $ 6,109 4.47% $5,714 4.58% $5,298 4.78%
====== ===== ======
Net interest margin
(net interest
As a percent of
average interest-
Earning assets 5.09% 5.16% 5.47%
Average interest-
earning assets to
Interest-bearing
liabilities 119.09% 117.63% 118.78%
</TABLE>
<PAGE>
Nonaccruing loans are included in the daily average loan amounts
outstanding. Yields on nontaxable securities have been computed on
a fully tax equivalent basis utilizing a 34% tax rate. The
historical amortized cost average balance of $14,393,156 for 1998
and $18,955,538 for 1997 was used to calculate yields for taxable
securities. The average balance for securities represents the
carrying value of securities. The net yield on interest-earning
assets was computed by dividing net interest income by total
interest-earning assets without the market value adjustment related
to available-for-sale securities.
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 which cannot be segregated have been allocated in
proportion to the changes due to rate and volume.
<PAGE>
<TABLE>
INTEREST RATES AND INTEREST DIFFERENTIAL
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase/(Decrease) Increase/(Decrease)
(In thousands)
Change Change Change Change
Total due to due to Total due to due to
Change Volume Rate Change Volume Rate
<S> <C> <C> <C> <C> <C> <C>
Securities
Taxable $(108,644) $ (281,324) $ 172,680 $ 249,466 $ 270,023 $ (20,557)
Nontaxable(1) 20,075 3,167 16,908 32,637 76,160 (43,523)
Loans (2) 824,752 1,053,189 (228,437) 405,068 854,526 (449,458)
Federal funds sold 36,667 110,319 (73,652) (21,807) (23,752) 1,945
-------- --------- ------- ------- -------- ----------
Total interest
income 772,850 885,351 (112,501) 665,364 1,176,957 (511,593)
-------- --------- -------- ------- --------- ----------
Deposits
NOW accounts 9,016 (9,868) 18,884 (2,250) 98,003 (100,253)
Savings deposits (131,168) (26,540) (104,628) (273,716) (94,973) (178,743)
Time deposits 408,980 291,363 117,617 506,126 555,603 (49,477)
FHLB Advances 91,401 122,072 (30,671) 18,428 12,337 6,091
------- --------- ------- ------- ------- ---------
Total interest
expense 378,229 377,027 1,202 248,588 570,970 (322,382)
------- --------- ------- ------- ------- ---------
Net interest
income $ 394,621 $ 508,324 $(113,703) $ 416,776 $ 605,987 $(189,211)
======= ========= ======== ======== ======== =========
<FN>
(1) Nontaxable income is adjusted to a fully tax equivalent
basis utilizing a 34% tax rate.
(2) Nonaccrual loan balances are included for purposes of
computing the rate and volume effects although interest on
these balances has been excluded.
</FN>
</TABLE>
<TABLE>
II. INVESTMENT PORTFOLIO
The following tables summarize the amounts and distribution of the Corporation's securities held
and the weighted average yields as of June 30, 1998:
<CAPTION>
1998
Amortized Fair Average
Cost Value Yield/cost
(Dollars in thousands)
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and Federal
Agency Securities:
3 months or less $ 999 $ 1,000 5.89%
Over 3 months through
1 year 3,009 3,014 5.92
Over 1 year through
5 years 9,104 9,187 6.14
------- -----
Total U.S. Treasury and
Federal Agency
Securities 13,112 13,201 6.07
------- ------
Obligations of States and
Political Subdivisions:
Over 3 months through
1 year 328 329 6.25
Over 1 year through
5 years 1,415 1,438 6.65
Over 5 years through
10 years 623 645 7.27
------- ------
Total Obligations of
States and Political
Subdivisions 2,366 2,412 6.76
------- ------
Corporate bonds:
Over 10 years 136 136 7.55
Mortgage-Backed Securities:
Over 1 year through
5 years 2,260 2,210 6.65
Over 5 years through
10 years 656 645 6.10
----- ------
Total Mortgage-backed
Securities 2,916 2,855 6.32
----- ------
Other equity securities 644 644
----- ------
Total Securities $19,174 $19,248 6.00%
====== ======
</TABLE>
<PAGE>
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 determined on a tax equivalent
basis. Other securities consists of Federal Home Loan Bank and
Independent State Bank stock that bear no stated maturities and do
not reflect principal prepayment assumptions. Available for sale
yields are based on amortized cost balances.
Excluding those holdings of the investment portfolio in U.S.
Treasury securities and other agencies and corporations of the U.S.
government, there were no investments in securities of any one
issuer which exceeded 10% of the consolidated shareholder's equity
of the Registrant at June 30, 1998.
III. LOAN PORTFOLIO
Types of Loans -- Total loans on the balance sheet are comprised of
the following classifications at June 30,
1998 1997 1996 1995 1994
(Dollars in thousands)
Real estate
- mortgage $44,072 $43,919 $45,630 $38,671 $34,846
Real estate
- construction 1,609 2,550 - - -
Commercial
financial
and agricultural 36,449 29,596 23,105 25,506 18,582
Installment
loans to
individuals 13,228 12,796 12,680 12,587 9,454
------- ------ ------ ------- ------
Total loans $95,358 $88,861 $81,415 $76,764 $62,882
======= ====== ====== ======= ======
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following is a schedule of contractual maturities and repayments
excluding residential real estate mortgage and consumer loans, as of
June 30, 1998:
(Dollars in thousands)
Commercial, financial and agricultural
Due in one year or less $ 5,485
Due after one year, but within five years 6,581
Due after five years 24,383
------
Total $36,449
======
The following is a schedule of fixed rate and variable rate
commercial, financial and agricultural loans due after one year
(variable rate loans are those loans with floating or adjustable
interest rates):
(Dollars in thousands)
Fixed Variable
Interest Rates Interest Rates
Total commercial, financial and
agricultural loans due after one year $14,987 $15,977
C. Risk Elements
Nonaccrual, Past Due and Restructured Loans -- The following
schedule summarizes nonaccrual, past due, and restructured loans:
1998 1997 1996 1995 1994
(Dollars in thousands)
Nonaccrual loans $ 43 $213 $93 $204 $222
Accrual loans past
due 90 days 644 110 378 285 90
Restructured loans 0 0 0 0 0
----- ---- ---- ---- ---
Total 687 323 471 489 312
Potential problem loans 0 0 0 0 0
----- ---- ---- ---- ---
Total $687 $323 $471 $489 $312
===== ==== ==== ==== ====
Potential Problem Loans
As shown in the table above, at June 30, 1998, there were no loans
not otherwise identified which are included on Management's watch
list. Management's watch list includes both loans which Management
has some doubt as to the borrowers' ability to comply with the
present repayment terms and loans which management is actively
monitoring due to changes in the borrowers financial condition.
These loans and their potential loss exposure have been considered
in Management's analysis of the adequacy of the allowance for loan
losses.
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.
No material amount of loans that have been classified by regulatory
examiners as loss, substandard, doubtful, or special mention have
been excluded from the amounts disclosed as nonaccrual, past due 90
days or more, restructured, or potential problem loans.
Other Interest Bearing Assets -- As of June 30, 1998, there are no
other interest bearing assets that would be required to be disclosed
under Item III C.1 or 2 if such assets were loans. The Registrant
had no Other Real Estate Owned at June 30, 1998.
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule presents an analysis of the allowance for
loan losses, average loan data, and related ratios for the years
ended June 30,
1998 1997 1996 1995 1994
(Dollars in thousands)
Allowance for loan losses
at beginning of year $1,060 $ 950 $900 $740 $600
Loans charged off:
Real estate mortgage 3 0 20 9 0
Real estate construction 0 0 0 0 0
Commercial, financial and
agricultural 5 11 0 7 6
Installment loans to
individuals 70 99 82 101 32
----- ----- --- --- ---
Total charge-offs 78 110 102 117 38
Recoveries:
Real estate mortgage 0 21 3 4 2
Real estate construction 0 0 0 0 0
Commercial, financial and
agricultural 2 9 0 1 8
Installment loans to
individuals 35 54 36 46 32
----- ----- --- ---- ----
Total recoveries 37 84 39 51 42
----- ----- --- ---- ----
Net charge-offs/(recoveries) 41 26 63 66 (4)
Provision for loan loss
charged to operations 126 136 113 226 136
----- ----- --- ---- ---
Allowance for loan losses
at end of year $1,145 $1,060 $950 $900 $740
===== ===== === ==== ===
The allowance for loan losses balance and the provision charged to
expense are judgmentally determined by Management based upon the
periodic review of the loan portfolio, an analysis of impaired
loans, past loan loss experience, economic conditions, anticipated
loan portfolio growth, and various other circumstances which are
subject to change over time. In making this judgment, Management
reviews selected large loans as well as delinquent loans, nonaccrual
loans, problem loans, and loans to industries experiencing economic
difficulties. The collectibility 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.
<PAGE>
<TABLE>
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan
and related ratios:
<CAPTION>
Allocation of the Allowance for Loan Losses
(Dollars in thousands) Percentage Percentage
of Loans of Loans
In Each in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
June 30, 1998 June 30, 1997
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 524 38.2% $ 476 33.3%
Installment loans to individuals 232 13.9 210 14.4
Real Estate 176 47.9 166 52.3
Unallocated 213 - 208 -
----- ----- ----- -----
Total $1,145 100.0% $1,060 100.0%
===== ===== ===== =====
June 30, 1996 June 30, 1995
Commercial, financial and agricultural $ 426 28.4 $ 408 33.2%
Installment loans to individuals 193 15.6 184 16.4
Real Estate 143 56.0 134 50.4
Unallocated 188 - 174 -
----- ----- ----- -----
Total $ 950 100.0% $ 900 100.0%
===== ===== ===== ======
June 30, 1994
Commercial, financial and agricultural $ 332 29.6%
Installment loans to individuals 151 15.0
Real Estate 113 55.4
Unallocated 144 -
----- ------
Total $ 740 100.0%
===== ======
</TABLE>
<PAGE>
At June 30, 1998 there was no loans classified as impaired and
therefore no specific allocations for any loans classified as
impaired. Because Management's analysis of problem loans would have
provided a similar allocation prior to adopting SFAS No. 114, the
adoption of SFAS No. 114 had no impact on the comparability of the
June 30, 1998 allowance for loan loss allocation to prior periods.
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-offs that occur.
V. DEPOSITS
The following is a schedule of average deposit amounts and average
rates paid on each category for the periods included:
Years Ended June 30,
(Dollars in thousands)
1998 1997 1996
Amount Rate Amount Rate Amount Rate
Noninterest
bearing demand
deposit $16,729 $13,758 $13,582
Interest bearing
demand deposits 9,772 2.29% 10,229 2.10% 6,445 3.36%
Savings 40,854 3.23 41,626 3.49 44,150 3.91
Certificates and
other time
deposits 46,267 5.38 40,769 5.10 29,905 5.26
------- ------ -------
Total $113,622 3.55% $106,382 3.52% $94,082 3.74%
======= ======= =======
The following table summarizes time deposits issued in amounts of
$100,000 or more as of June 30, 1998 by time remaining until
maturity:
(Dollars in thousands)
Maturing in:
Under 3 months $1,222
Over 3 to 6 months 1,835
Over 6 to 12 months 407
Over 12 months 3,145
-----
Total $6,609
=====
VI. Return on Equity and Assets
June 30, 1998 June 30, 1997
Return on Average Assets 1.34% 1.45%
Return on Average Equity 17.03% 19.12%
Dividend Payout Ratio 34.30% 32.64%
Average Equity to Average
Assets 7.86% 7.57%
ITEM 2 - DESCRIPTION OF PROPERTY
The Bank owns and maintains the premises in which four of the five
banking facilities are located. The fifth is leased to the Bank
under terms as detailed in the Annual Report to the shareholders and
incorporated herein by reference. The location of each of the
offices is as follows:
Minerva Office: 614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio
44657
Salem Office: 141 S. Ellsworth Ave., P.O. Box 798, Salem, Ohio
44460
Waynesburg Office: 8607 Waynesburg Dr. SE, P.O. Box 746,
Waynesburg, Ohio, 44688
Hanoverton Office: 30034 Canal St., P.O. Box 178, Hanoverton, Ohio,
44423
Carrollton Office: 1017 Canton Rd. NW, P.O. Box 8, Carrollton,
Ohio, 44615
ITEM 3 - LEGAL PROCEEDINGS
Corporation management is aware of no pending or threatened
litigation in which the Corporation or its subsidiary Bank faces
potential loss or exposure which will materially affect the
consolidated financial statements or involves a claim for damages
exceeding ten percent of the assets of the Corporation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this section is incorporated by
reference to the Registrant's Definitive Proxy statement and Notice
of Annual Meeting of Shareholders to be held on September 16, 1998,
("1998 Proxy Statement") filed with the Commission pursuant to
Section 14(A) of the Securities Exchange Act of 1934 and is
incorporated by reference into the form 10-KSB Annual Report.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this section is incorporated by
reference to the information appearing under the caption "Market
Price of the Corporation's Common Shares & Related Shareholder
Matters" located on Page 4 of the 1998 Annual Report to Shareholders
incorporated herein by reference.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appears on pages 24 through 29 of the
Registrant's 1998 Annual Report to Shareholders and is incorporated
herein by reference.
ITEM 7 -- FINANCIAL STATEMENTS
The Registrant's Report of Independent Auditors and Consolidated
Financial Statements and accompanying notes are listed below and are
incorporated herein by reference to Consumers Bancorp, Inc.'s 1998
Annual Report to Shareholders (Exhibit 13, pages 5 through 23).
Report of Independent Auditors
Consolidated Balance Sheets
June 30, 1998 and 1997
Consolidated Statements of Income
For the two years ended June 30, 1998
Consolidated Statement of Changes in Shareholders' Equity
For the two years ended June 30, 1998
Consolidated Statements of Cash Flows
For the two years ended June 30, 1998
Notes to Consolidated Financial Statements
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Board of Directors of Consumers Bancorp, Inc. on May 8, 1998,
engaged the accounting firm of Crowe, Chizek and Company LLP to
serve as independent accountants for the Corporation for 1998. The
work of S.R. Arner & Co. was concluded. During the two most recent
years and interim period subsequent to May 8, 1998, there have been
no disagreements with S.R. Arner & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure or any reportable events. S.R. Arner & Co's
report on the financial statements for the past two years contained
no adverse opinion or disclaimer or opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principle.
PART III
Information relating to the following items is included in the
Registrant's Definitive Proxy statement and Notice of Annual Meeting
of Shareholders to be held on September 16, 1998, ("1998 Proxy
Statement") filed with the Commission pursuant to Section 14(A) of
the Securities Exchange Act of 1934 and is incorporated by reference
into the form 10-KSB Annual Report.
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
ITEM 10 - EXECUTIVE COMPENSATION
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13 - EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
Reference to
Regulation S-B Prior Filing
Exhibit Exhibit Number
Number Description of Document Attached Hereto
3.1 Amended Articles of Incorporation
of the Corporation *
3.2 Code of Regulations of the Corporation *
4 Form of Shares Certificate of
Common Shares *
13 Annual Report to Shareholders for
the fiscal year
ended June 30, 1998 ***
20 Proxy Statement for the 1998 Annual ***
Meeting of the Shareholders
27 Financial Data Schedule **
* Indicates documents which have been previously filed. All such
previously filed documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-B. Such documents are
available to shareholders without charge upon request.
** The indicated exhibit has been filed as separate pages of the
1998 Form 10-KSB and is available to shareholders upon request.
*** The indicated exhibit was separately filed by the Corporation
and such document is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSUMERS NATIONAL BANK
September 29, 1998 By: /s/ Mark S. Kelly
Date Mark S. Kelly
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of registrant and in the
capacities indicated on September 29, 1998.
Signatures Signatures
/s/ Mark S. Kelly /s/ Laurie Lee McClellan
Mark S. Kelly Laurie Lee McClellan
President and Chief Executive Officer Chairman of the Board and
Director
/s/ J.V. Hanna /s/ Walter J. Young
J.V. Hanna Walter J. Young
Vice President and Director Vice President and Director
/s/ John P. Furey /s/ David W. Johnson
John P. Furey David W. Johnson
Director Director
/s/ James R. Kiko /s/ Thomas M. Kishman
James R. Kiko Thomas M. Kishman
Director Director
/s/ John D. Morris /s/ Harry W. Schmuck
John D. Morris Harry W. Schmuck
Director Director
/s/ Homer R. Unkefer
Homer R. Unkefer
Director
<PAGE>
Exhibit 13. Annual Report to Shareholders for
the fiscal year ended June 30, 1998
<TABLE>
Financial Highlights
<CAPTION>
98 -97
June 30, June 30, % of
1998 1997 Change
<S> <C> <C> <C>
Total interest income $ 10,343,038 $ 9,570,188 8.08%
Total interest expense 4,234,025 3,855,795 9.81%
Net income 1,732,482 1,711,866 1.01%
Assets 131,621,196 118,921,987 10.68%
Deposits 116,722,847 106,248,603 9.86%
Loans, net 93,905,754 87,223,433 7.66%
Securities available for sale 19,247,847 18,402,959 4.60%
Shareholders' equity 10,131,299 8,947,160 13.23%
Net income per share 2.42 2.39 1.26%
Cash dividends paid per share .83 .78 6.41%
Book value per share 14.13 12.48 13.22%
Weighted average number of
shares outstanding 716,808 717,000
</TABLE>
<PAGE>
BUSINESS OF CONSUMERS BANCORP
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. On
February 28, 1995, the Corporation acquired all of the common stock
issued by the Bank through a triangular merger. 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
are located at 614 E. Lincoln Way, Minerva, Ohio. The Bank's
business involves attracting deposits from business and individual
customer 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 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, 1998, the Bank employed 64 full-time and 21 part-time
employees.
MARKET PRICE OF THE CORPORATION'S
COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Corporation had 715,750 common shares outstanding on June 30,
1998, held of record by approximately 652 shareholders.
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
High $25.25 $27.50 $30.00 $42.75
Low 22.67 25.25 27.50 30.00
Cash Dividends .20 .25 .17 .21
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
High $20.75 $21.75 $22.33 $22.67
Low 20.50 20.75 21.75 22.33
Cash Dividends .18 .25 .17 .18
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 above quoted market prices reflect
inter-dealer prices, without adjustments for retail markups,
markdowns, or commissions and may not represent actual transactions.
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.
CHANGE IN ACCOUNTANTS
The Board of Directors of Consumers Bancorp, Inc. on May 8, 1998,
engaged the accounting firm of Crowe, Chizek and Company LLP to
serve as independent accountants for the Corporation for 1998. The
work of S.R. Arner & Co. was terminated. During the two most recent
years and interim period subsequent to May 8, 1998, there have been
no disagreements with S.R. Arner & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure or any reportable events. S.R. Arner & Co.'s
report on the financial statements for the past two years contained
no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Consumers Bancorp, Inc.
Minerva, Ohio
We have audited the accompanying consolidated balance sheet of
Consumers Bancorp, Inc as of June 30, 1998 and the related
consolidated statements of income, changes in shareholders' equity,
and cash flows for the year then ended. 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 audit. The 1997 financial statements were
audited by other auditors whose report dated August 1, 1997
expressed an unqualified opinion
We conducted our audit in accordance with generally accepted
auditing standards. 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 audit provide a
reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Consumers Bancorp, Inc. as of June 30, 1998 and the
consolidated results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
July 31, 1998
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,801,773 $ 5,046,611
Federal funds sold 7,725,000 3,500,000
Securities available for sale 19,247,847 18,402,959
Loans, net 93,905,754 87,223,433
Cash surrender value of life insurance 1,476,149 1,235,868
Premises and equipment, net 2,781,772 2,228,079
Accrued interest and other assets 1,682,901 1,285,037
----------- -----------
Total assets $131,621,196 $118,921,987
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing demand $ 17,713,127 $ 16,093,310
Interest-bearing demand 9,827,883 8,654,283
Savings 42,323,793 42,389,743
Time 46,858,044 39,111,267
----------- -----------
Total deposits 116,722,847 106,248,603
----------- -----------
Federal Home Loan Bank advances 3,112,897 2,595,280
Accrued interest and other liabilities 1,654,153 1,130,944
----------- -----------
121,489,897 109,974,827
SHAREHOLDERS' EQUITY
Common stock, 1998 -$3.33 stated
value, 720,000 shares authorized
and issued; 1997 -$10.00 stated
value, 240,000 shares authorized
and issued 2,400,000 2,400,000
Capital surplus 2,400,000 2,400,000
Retained earnings 5,389,142 4,251,507
Treasury stock, at cost (4,250 and
3,000 shares
at June 30, 1998 and 1997) (107,812) (55,000)
Unrealized gain (loss) on securities
available for sale 49,969 (49,347)
---------- ----------
10,131,299 8,947,160
----------- ----------
Total liabilities and shareholders'
equity $131,621,196 $118,921,987
=========== ===========
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Interest income
Loans, including fees $ 9,049,360 $8,224,608
Federal funds sold 238,722 202,055
Investment and mortgage-backed securities:
Taxable 950,465 1,059,109
Tax-exempt 104,491 84,416
---------- ----------
10,343,038 9,570,188
Interest expense
Deposits 4,033,379 3,746,550
Federal Home Loan Bank advances 200,646 109,245
---------- ----------
4,234,025 3,855,795
Net interest income 6,109,013 5,714,393
Provision for possible loan losses 126,270 136,056
---------- ---------
Net interest income after provision
for possible loan losses 5,982,743 5,578,337
Other income
Service charges on depositors' accounts 398,170 371,389
Other income 266,790 222,706
Gain (loss) on sale of investment
securities (1,391) 3,093
------- --------
663,569 597,188
Other expenses
Salaries and employee benefits 2,110,313 1,943,689
Occupancy 564,071 519,376
Director's fees 195,497 213,926
Professional fees 75,533 155,733
Franchise taxes 156,640 132,400
Printing and supplies 127,654 130,577
Other non-interest expense 746,622 560,258
--------- ---------
3,976,330 3,655,959
--------- ---------
Income before income taxes 2,669,982 2,519,566
Income tax expense 937,500 807,700
--------- ---------
Net income $ 1,732,482 $1,711,866
========= =========
Basic earnings per share $ 2.42 $ 2.39
========= =========
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1998 and 1997
<CAPTION>
Unrealized
gain/(loss) Total
Common Capital Retained Treasury on Shareholders'
Stock Surplus Earnings Stock Securities Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 $2,400,000 $2,400,000 $3,101,291 $ (55,000) $(204,857) $ 7,641,434
Net income - - 1,711,866 - - 1,711,866
Cash dividends declared
($.78 per share) - - (561,650) - - (561,650)
Unrealized gain on
securities available
for sale - - - - 155,510 155,510
--------- ---------- --------- ------- ------- ---------
Balance, June 30, 1997 2,400,000 2,400,000 4,251,507 (55,000) (49,347) 8,947,160
Net income 1,732,482 1,732,482
Cash dividends declared
($.83 per share) (594,847) (594,847)
Purchase of 1,250
treasury shares (52,812) (52,812)
Unrealized gain on
securities available
for sale 99,316 99,316
---------- ---------- ---------- --------- --------- -----------
Balance, June 30, 1998 $2,400,000 $2,400,000 $5,389,142 $(107,812) $ 49,969 $10,131,299
========== ========== ========== ========= ========= ===========
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,732,482 $ 1,711,866
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 273,963 269,556
Securities amortization, net 46,188 77,712
Provision for loan losses 126,270 136,056
Deferred income taxes (60,903) 22,300
(Gain) loss on sale of investment securities 1,391 (3,093)
Stock dividend on FHLB stock (39,100) (30,000)
Change in
Cash surrender value (70,281) (41,313)
Income taxes payable 214,305 (53,992)
Accrued interest receivable (150,263) (49,158)
Accrued interest payable 205,857 201,118
Other assets and other liabilities (130,649) (10,227)
----------- -----------
Net cash from operating activities 2,149,260 2,230,825
----------- -----------
Cash flows from investing activities
Securities available for sale
Purchases (4,832,964) (4,892,475)
Sales 998,928 1,553,350
Maturities and principal paydowns 3,126,983 3,169,658
Net decrease (increase) in federal funds sold (4,225,000) (756,000)
Net increase in loans (6,808,591) (8,025,632)
Acquisition of premises and equipment (827,656) (391,824)
Purchase of life insurance policies (170,000) (455,000)
----------- -----------
Net cash from investing activities (12,738,300) (9,797,923)
----------- -----------
Cash flows from financing activities
Net increase in deposit accounts 10,474,244 8,196,565
Proceeds from FHLB advances 650,000 1,000,000
Repayments of FHLB advances (132,383) (72,227)
Dividends paid (594,847) (561,650)
Purchase of treasury stock (52,812)
---------- ----------
Net cash from financing activities 10,344,202 8,562,688
---------- ----------
Increase (decrease) in cash and cash equivalents (244,838) 995,590
Cash and cash equivalents, beginning of year 5,046,611 4,051,021
----------- ----------
Cash and cash equivalents, end of year $ 4,801,773 $ 5,046,611
============ ==========
</TABLE>
<PAGE>
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of Consumers Bancorp, Inc. (Corporation) and
its wholly-owned subsidiary, Consumers National Bank (Bank). All
significant intercompany transactions have been eliminated in the
consolidation.
Industry 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.
Use of Estimates: To prepare financial statements in conformity
with 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 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
noninterest-bearing balances on deposit with the Federal Reserve
Bank. The required reserve balance at June 30, 1998 and 1997, was
$1,188,000 and $1,118,000.
Securities: Securities are classified into held to maturity and
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.
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.
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.
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 inherent risks 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, consumer, and credit card 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. No loans were determined to be
impaired, as of and for the years ended June 30, 1998 and 1997.
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, 1998,
the Bank has total purchased policies of $1,340,000 (total death
benefit $3,967,000) with a cash surrender value of $1,476,000. As
of June 30, 1997, the Bank has total purchased policies of
$1,180,000 (total death benefit $3,315,000) with a cash surrender
value of $1,236,000. The amount included in income (net of policy
commissions and mortality costs) was approximately $70,000 and
$41,000 for the years ended June 30, 1998 and 1997.
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.
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. There were no
properties held as other real estate owned at June 30, 1998 and
1997.
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 716,808 and
717,000 for the years ended June 30, 1998 and 1997. The Company's
capital structure contains no dilutive securities. All prior period
per share information has been restated for the effect of the stock
split.
The Company declared a three-for-one stock split during the year
ended June 30, 1998. In conjunction with the stock split the
Company changed the stated value of common stock from $10.00 to
$3.33 and issued 480,000 shares of common stock. As of June 30,
1998 the Company has 720,000 shares of common stock authorized and
issued.
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
transactions and deposit transactions.
For the years ended June 30, 1998 and 1997, the Bank paid $4,028,000
and $3,655,000 in interest and $830,000 and $848,000 in income
taxes.
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.
Reclassifications: Certain reclassifications have been made to the
June 30, 1997 financial statements to be comparable to the June 30,
1998 presentation.
<PAGE>
<TABLE>
NOTE 2 -- SECURITIES
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
June 30, 1998
Securities available
for sale:
U.S. Treasury and
Federal agencies $13,111,936 $ 93,350 $ (3,947) $13,201,339
Obligations of states
and political
subdivisions 2,366,461 49,679 (4,004) 2,412,136
Mortgage-backed
securities 2,915,946 286 (61,395) 2,854,837
Other securities 779,535 779,535
----------- -------- ---------- -----------
$19,173,878 $143,315 $ (69,346) $19,247,847
=========== ======== ========== ===========
June 30, 1997
Securities available
for sale:
U.S. Treasury and
Federal
agencies $13,604,901 $ 25,765 $ (67,276) $13,563,390
Obligations of
states and political
subdivisions 1,953,540 46,421 (146) 1,999,815
Mortgage-backed
securities 2,146,881 896 (76,348) 2,071,429
Other securities 769,984 (1,659) 768,325
----------- -------- ---------- -----------
$18,475,306 $ 73,082 $(145,429) $18,402,959
=========== ======== ========== ===========
</TABLE>
<PAGE>
Securities with a carrying value of approximately $10,630,000 and $10,117,000
were pledged at June
30, 1998 and 1997 to secure public deposits and commitments as required or
permitted by law.
Proceeds from sales of mortgage-backed and debt securities during 1998 and 1997
were $999,000 and
$1,553,000. A loss of $1,391 was recognized for the one investment security
sold during the year
ended June 30, 1998. Gross gains of $3,093 were recognized for the year ended
June 30, 1997.
NOTE 2 --SECURITIES (Continued)
The amortized cost values and fair values of debt and mortgage-backed
securities
available for sale
at June 30, 1998, 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.
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 4,336,035 $ 4,343,195
Due after one year through five years 10,518,902 10,624,882
Due after five years through ten years 623,460 645,398
After ten years 136,235 136,235
----------- -----------
15,614,632 15,749,710
Mortgage-backed securities 2,915,946 2,854,837
Equity securities 643,300 643,300
----------- -----------
$19,173,878 $19,247,847
=========== ===========
NOTE 3 -LOANS
Major classifications of loans are as follows as of June 30:
1998 1997
---- ----
Real estate -mortgage $44,071,799 $43,918,742
Real estate -construction 1,608,887 2,550,438
Commercial, financial and agricultural 36,449,263 29,596,211
Installment loans to individuals 13,228,413 12,795,555
---------- ----------
95,358,362 88,860,946
Unearned discount (112,791) (390,306)
Deferred loan fees (194,817) (187,207)
Allowance for possible loan losses (1,145,000) (1,060,000)
---------- ----------
$93,905,754 $87,223,433
=========== ===========
No loans were determined to be impaired at June 30, 1998 and 1997, nor were
there any such loans
during the years then ended. If interest had been accrued on non-accrual loans,
interest income
would have increased by $13,000 and $7,000 for the years ended June 30, 1998
and 1997.
NOTE 3 -- LOANS (Continued)
The changes in the allowance for possible loan losses consists of the following
for the years ended
June 30:
1998 1997
---- ----
Balance at beginning of year $1,060,000 $ 949,898
Loan charged off (78,246) (110,331)
Recoveries of loans previously charged off 36,976 84,377
Provision 126,270 136,056
---------- ----------
Balance at end of year $1,145,000 $1,060,000
========== ==========
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, 1998
on related party
loans aggregating $60,000 or more to any one related party is as follows:
1998
----
Principal balance at beginning of year $608,130
New loans 399,835
Repayments (453,590)
---------
Principal balance at end of year $554,375
========
NOTE 4 -- PREMISES AND EQUIPMENT
Major classifications of premises and equipment are as follows as of June 30:
1998 1997
---- ----
Premises and equipment, at cost
Land $ 265,668 $ 265,667
Land improvements 159,082 152,346
Buildings and leasehold improvements 1,883,715 1,613,556
Furniture, fixtures, and equipment 2,313,963 1,763,203
--------- ---------
4,622,428 3,794,772
Accumulated depreciation and
amortization (1,840,656) (1,566,693)
---------- ----------
$2,781,772 $2,228,079
========== ==========
NOTE 5 -- DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of
$100,000, was
$11,662,000 and $9,615,000 in 1997 and 1996.
Scheduled maturities of time deposits at June 30, 1998 are as follows:
Year ended June 30, 1999 $28,927,000
Year ended June 30, 2000 16,258,000
Year ended June 30, 2001 1,668,000
Thereafter 5,000
-----------
$46,858,000
===========
Included in time deposits at June 30, 1998, is a $1,000,000 brokered time
deposit at a rate of
5.55% maturing on February 12, 2001. Related party deposits totaled $1,490,000
at June 30, 1998.
NOTE 6 -- FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances at June 30, 1998 is as
follows:
Interest Balance
Maturity Rate June 30, 1998
-------- -------- ----------------
7/1/2000 6.50% $ 962,764
10/1/2000 6.16% 632,042
7/1/2010 6.90% 526,202
10/1/2010 7.00% 489,146
12/1/2010 6.10% 502,743
----------
$3,112,897
==========
The following table is a summary of the scheduled principal payments for these
advances:
Twelve Months Principal
Ending June 30, Payments
- --------------- --------
1999 $ 154,071
2000 164,431
2001 975,466
2002 666,397
2003 107,618
Thereafter 1,044,914
----------
$3,112,897
==========
NOTE 6 -- FEDERAL HOME LOAN BANK ADVANCES (Continued)
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, 1998, the Bank
could borrow a
total of $9,962,000 in cash management advances based on the amount of of FHLB
stock owned.
Qualifying first mortgage loans pledged to secure FHLB advances totaled
approximately $4,669,000
at June 30, 1998.
NOTE 7 -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
and approved by the Internal Revenue Service. Amounts charged to operations
were $54,000 and
$51,000, for the years ended June 30, 1998 and 1997.
During September 1995, the Board of Directors adopted a Salary Continuation
Plan
(the Plan) to
encourage Bank Executives (Assistant Vice-Presidents and above) 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 70% 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.
Plan benefits are
reduced for primary social security benefits, other Bank benefit programs, and
the maximum
annuitized benefits from Bank contributions made under the Bank's 401(k) plan
, which assumes that
the Executive had been contributing an amount sufficient to maximize the Bank's
matching provisions
of the 401(k) plan. 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 a 8.5% discount factor,
compounded monthly. For
the years ended June 30, 1998 and 1997, approximately $41,000 and $49,000,
have been charged to
expense.
NOTE 8 -- INCOME TAXES
The provision for income taxes consists of the following for the years ended
June 30:
1998 1997
---- ----
Current incomes taxes $998,403 $785,400
Deferred income taxes (60,903) 22,300
-------- --------
$937,500 $807,700
======== ========
The deferred income taxes consist of the following for the years ended June 30:
1998 1997
---- ----
Deferred tax assets
Allowance for possible loan losses $336,205 $307,700
Net unrealized securities loss 23,000
Salary continuation plan 49,062 25,100
Accrued expenses 12,745
------- -------
398,012 355,800
Deferred tax liabilities
Depreciation (55,686) (52,300)
Loan fees (38,923) (38,000)
Net unrealized securities gain (25,149)
------- -------
(119,758) (90,300)
Net deferred tax asset $278,254 $265,500
======== ========
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:
1998 1997
---- ----
Income taxes computed at the
Tax rate on pretax income $907,794 $839,600
Add (subtract) tax effect of
Tax exempt income (43,774) (32,600)
Amortization of goodwill 3,400 3,390
Other 70,080 (2,690)
-------- -------
$937,500 $807,700
======= =======
NOTE 9 -- 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.
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. The minimum requirements are:
Capital to risk-
weighted assets Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
<PAGE>
<TABLE>
At year-end, actual Bank capital levels (in millions)
and minimum required levels were:
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Total capital
(to risk weighted
assets) $11.15 12.76% $6.99 8.00% $8.74 10.00%
Tier 1 capital
(to risk weighted
assets) $10.05 11.51% $3.49 4.00% $5.24 6.00%
------ ------ ----- ----- ----- ------
Tier 1 capital
(to average assets) $10.05 8.16% $4.93 4.00% $6.16 5.00%
June 30, 1997
Total capital
(to risk weighted
assets) $ 9.98 12.17% $6.56 8.00% $8.20 10.00%
Tier 1 capital
(to risk weighted
assets) $ 8.95 10.92% $3.28 4.00% $4.92 6.00%
Tier 1 capital
(to average assets) $ 8.95 7.70% $3.28 4.00% $5.66 5.00%
</TABLE>
<PAGE>
NOTE 9 -- REGULATORY MATTERS (Continued)
At June 30, 1998, the Bank was categorized as well capitalized.
There are no conditions or events since June 30, 1998, that
management believes may have changed the Bank's category.
Dividends paid by the Bank are the primary source of funds available
to the Corporation for payment of dividends to shareholders and for
other working capital needs. Applicable state statutes and
regulations impose restrictions on the amount of dividends that may
be declared by the Bank. Dividends, which may be paid by the Bank
to the Corporation without obtaining prior approval from bank
regulatory agencies, approximated $3,375,000 at June 30, 1998. The
Corporation may not pay dividends more than retained earnings.
NOTE 10 -- 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 $7,402,000 and
$11,994,000 as of June 30, 1998 and 1997. Of the June 30, 1998
commitments, $5,357,000 carried adjustable rates of interest
ranging from 8.50% to 18.00% and $2,045,000 carried fixed rates of
interest ranging from 5.40% to 13.00%. Since some commitments to
make loans expire without being used, the amount does not
necessarily represent future cash commitments.
<PAGE>
<TABLE>
NOTE 11 -- FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value at
June 30, 1998 and 1997, and the related carrying value
of financial instruments:
<CAPTION>
1998 1997
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets;
Cash and cash equivalents $ 4,802,000 $ 4,802,000 $ 5,047,000 $ 5,047,000
Federal funds sold 7,725,000 7,725,000 3,500,000 3,500,000
Securities available for sale 19,248,000 19,248,000 18,403,000 18,403,000
Loans, net 93,906,000 93,331,000 87,223,000 87,034,000
Cash surrender value of
life insurance 1,476,000 1,476,000 1,236,000 1,236,000
Accrued interest receivable 901,000 901,000 751,000 751,000
Financial liabilities
Demand and savings deposits (69,865,000) (69,865,000) (67,137,000) (67,137,000)
Time deposits (46,858,000) (47,212,000) (39,111,000) (39,585,000)
Federal Home Loan Bank
advance (3,113,000) (2,973,000) (2,595,000) (2,271,000)
Accrued interest payable (1,123,000) (1,123,000) (917,000) (917,000)
</TABLE>
<PAGE>
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 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, 1998 and 1997, 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, 1998 and 1997, is not material.
While the estimates of fair value are based on management's judgment
of the most appropriate factors, no assurance can be made that were
the Bank to have disposed of such items at June 30, 1998 and 1997,
estimated fair values would necessarily have been achieved at these
dates, since market values may differ depending on various
circumstances. Estimated fair values at, June 30, 1998 and 1997,
should not necessarily be considered to apply at subsequent dates.
Other assets and liabilities of the Bank may have value but are not
included in the above disclosures. In addition, nonfinancial
instruments typically not recognized in these financial statements
nevertheless may have value, but are not included in the above
disclosures. These include, among other items, the estimated
earnings power of core deposit accounts, the value of a trained work
force, customer goodwill and similar items.
NOTE 12 -- PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information of Consumers Bancorp. Inc. (parent
company only) follows:
<PAGE>
Condensed Balance Sheets
June 30, 1998 June 30, 1997
------------- -------------
Assets
Organizational fee, net of
amortization $ 14,720 $ 23,535
Investment in subsidiary 10,116,579 8,923,625
----------- ----------
$10,131,299 $8,947,160
=========== ==========
Shareholders' equity $10,131,299 $8,947,160
=========== ==========
Condensed Statements of Income
Cash dividends from subsidiary $ 647,659 $ 561,650
Amortization expense 8,815 8,781
---------- ----------
Income before equity in
undistributed
net income of subsidiary 638,844 552,869
Equity in undistributed net income
of subsidiary 1,093,638 1,158,997
---------- ----------
Net income $1,732,482 $1,711,866
========== ==========
NOTE 12 -- PARENT COMPANY FINANCIAL STATEMENTS (Continued)
June 30, 1998 June 30, 1997
------------- -------------
Condensed Statements of Cash Flows
Cash flows from operating
activities
Net income $ 1,732,482 $ 1,711,866
Equity in undistributed
net income of subsidiary (1,093,638) (1,158,997)
Amortization of organizational fees 8,815 8,781
------------ ----------
Net cash provided by operating
activities 647,659 561,650
Cash flows from financing activities
Cash dividends (594,847) (561,650)
Purchase of treasury stock (52,812)
------------ ----------
Net cash used by financing
activities (647,659) (561,650)
Change in cash and cash equivalents -0- -0-
------------ -----------
Cash and cash equivalents, end of
year $ -0- $ -0-
============ ============
Management's 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, 1998, 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, 1998
and June 30, 1997
Net Income. The Corporation earned net income of $1,732,482 for the
year ended June 30, 1998 compared to $1,711,866 for the year ended
June 30, 1997. The increase was primarily due to an increase in net
interest income and other income partially offset by an increase in
the other expense and income tax expense.
Net Interest Income. Net interest income totaled $6,109,013 for the
year ended June 30, 1998 compared to $5,714,393 for the year ended
June 30, 1997, an increase of $394,620, or 6.91%. The increase
was primarily due to the increase in interest and fees on loans due
to increases in average loans outstanding and an increase in the
yield on loans, partially offset by increases in interest expense
due to an increase in average interest bearing liabilities during
the year.
Interest and fees on loans increased $824,752, or 10.03%, from
$8,224,608 for the year ended June 30, 1997 to $9,049,360 for the
year ended June 30, 1998. The increase in interest income was due
to higher average loans outstanding and an increase in the average
yield earned on loans.
Interest earned on taxable and tax-exempt securities totaled
$1,054,956 for the year ended June 30, 1998 compared to $1,143,525
for the year ended June 30, 1997. The decrease was primarily the
result of lower average balances of securities, due to maturities,
which was used to fund loan growth. Interest income on fed funds
sold increased 18.15% for the year ended June 30, 1998, due to an
increase in the average outstandings. During the latter part of the
year, as loan growth slowed and deposit balances increased, excess
funds were maintained in short term investments such as fed funds
sold and are gradually being invested in various securities as
opportunities arise, with consideration given to future funding
needs.
Interest paid on deposits decreased $286,829 or 7.66% for the year
ended June 30, 1998 compared to the year ended June 30, 1997. The
increase was primarily a result of the increase in average interest-bearing
deposits during the year and was partially offset by a
decline in interest rates.
Interest paid on FHLB Advances totaled $200,646 for the year ended
June 30, 1998 compared to $109,245 for the year ended June 30, 1997.
The change was a result of an decrease in the average level of
borrowings from 1997 to 1998 as well as an increase in the cost of
borrowings.
Provision for Loan Losses. The Corporation maintains an allowance
for loan losses in an amount which, in management's judgment, is
adequate to absorb reasonably foreseeable losses inherent in the
loan portfolio. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is
dependent upon a variety of factors, including the performance of
the Corporation's loan portfolio, the economy, changes in real
estate values and interest rates and the view of the regulatory
authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the
allowance for loan losses after net charge-offs have been deducted
to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio. The amount of the
provision is based on management's monthly review of the loan
portfolio and consideration of such factors as historical loss
experience, economic conditions, changes in the size and composition
of the loan portfolio and specific borrower considerations,
including the ability to repay the loan and the estimated value of
the underlying collateral.
The provision for loan losses for the year ended June 30, 1998
totaled $126,270 compared to $136,056 for the year ended June 30,
1997, a decrease of $9,786, or 7.19%. The allowance for loan losses
totaled $1,145,000, or 1.20% of total loans receivable at June 30,
1998, compared with $1,060,000, or 1.19% of total loans receivable
at June 30, 1997. The reduction in the provision is reflective of
the fact that the Corporation has not experienced significant net
charge-offs in any period presented. Notwithstanding the charge-off
history, management believes it is prudent to continue to increase
the allowance for loan losses as total loans increase. Accordingly,
management anticipates it will continue its provisions to the
allowance for loan losses as loan growth continues.
Other income. Other income primarily includes service charges on
deposit and other miscellaneous income. Other income of $663,569
for the year ended June 30, 1998 represented an increase of $66,381,
or 11.12% over the $597,188 of other income for the year ended June
30, 1997. The increase was due primarily to an increase in service
charge income on deposits resulting from an increase in the amount
of deposits as well as increases in the cash surrender value of life
insurance and increases in the fee income related to facilitating
the origination of long-term fixed rate loans for a third party.
Management has elected to not to make long term fixed rate mortgage
loans on its balance sheet and has entered into an arrangement
whereby it assist a third party originate long term fixed rate loans
by taking loan applications and assisting in the completion of
certain loan documents for which it is paid a fee. The arrangement
allows the Corporation to meet its customers need by offering an
opportunity to obtain long-term fixed rate financing on a primary
residence and is a source of addition non-interest income.
Other expense. Other expense totaled $3,976,330 for the year ended
June 30, 1998 compared to $3,655,959 for the year ended June 30,
1997, an increase of $320,371, or8.76%. Increases in salaries and
benefits, occupancy and other expenses were the primary reason for
the increase and were partially offset by a decrease in directors
fees and professional fees.
Salary and benefits expense increased $166,624, or 8.57%. The
increase is the result of normal, annual merit increases and the
addition of new employees to facilitate growth. The increase in
occupancy expense was primarily due to the depreciation and
maintenance associated with two major projects which added to the
net premises and equipment balance sheet totals. A large addition
was made to the main office in Minerva to increase space for the
loan department and management offices. In addition, ATM machines
were installed at four of the branch office locations during the
second quarter of the year. The increase in other expense was
attributable to general increase in various overhead categories due
to the continued growth of the Company.
Income Tax Expense. The volatility of income tax expense is
primarily attributable to the change in income before income taxes.
The provision for income taxes totaled $937,500 for the year ended
June 30, 1998 compared to $807,700 for the year ended June 30, 1997,
an increase of $129,800, or 16.07%. The effective tax rates were
35.1% and 32.1% for the years ended June 30, 1998 and 1997,
respectively.
Financial Condition
Total assets at June 30, 1998 were $131.6 million compared to $118.9
million at June 30, 1997, an increase of $12.7 million, or 10.68%.
The increase in total assets was primarily due to an increase in
loans funded by increased deposits.
Loans receivable increased $6.7 million from $87.2 million at June
30, 1997 to $93.9 million at June 30, 1998. The Corporation
experienced increases in all loan categories except for real estate
construction loans. The largest increase was in commercial loans
which increased $6.9 million or 23.2%. Real estate mortgage loans
and installments loans had more modest increases of .3% and 3.4%
respectively.
Total deposits increased $10.5 million from $106.2 million at June
30, 1997 to $116.7 million at June 30, 1998. The Corporation
experienced increases in all types of deposits other than savings
accounts which decreased only slightly. The majority of deposit
growth was in time deposits which increased by $7.7 million, or
19.8%. In addition, non-interest and interest bearing deposits
increased 10.1% and 13.6% respectively from June 30, 1997 to June
30, 1998.
Total shareholders' equityincreased $1.1 million from $8.9 million
at June 30, 1997 to $10.1 million at June 30, 1998. The increase is
primarily due to net income of $1.7 million which was partially
offset by cash dividends of $595,000.
Asset and Liability Management
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. Management continually strives to obtain the
best mix of loans and investments to both maximize yield and insure
the soundness of the portfolio, as well as to provide funding for
loan demand as needed
The Bank groups its loan portfolio into four major categories;
business loans, real estate loans, personal loans, and credit card
outstanding balances. Business 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. Business loans have shown impressive growth
during the past year, with outstanding balances up by $6,853,052, or
23.2%. This is mainly due to the Bank's ability to tailor loan
programs to the specific requirements of the business, professional,
and agricultural customers in its market area. 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 lines 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 slowed
through the past two year period after several years of substantial
growth. Competition is very heavy in the Bank's market for these
types of loans, both from local and national lenders.In 1997 the
Bank became affiliated with the Community Mortgage Network, which is
a program that allows the Bank to offer very attractive mortgage
loan options to its customers. 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. Credit card receivables are made up of charge card
account holders who are mainly established customers of the Bank,
with the Bank maintaining a very conservative policy on card limits
and new accounts. Personal loans and credit card receivables have
remained at relatively the same levels during the past year.
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 and to a lesser
extent, investments in tax free municipal bonds. Yields for these
various types of investments as of June 30, 1998 were 5.8% for U.S.
Treasury securities, 6.2% for agency securities, and 6.8% for
municipal securities. The Earnings Assets Ratios graph below
indicates the Bank's asset mix at June 30, 1998 and June 30, 1997.
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 remained fairly steady during the year,
with some downward movement during the last two quarters. Much of
this stability in rates is caused by the 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 in either non interest bearing demand deposits
or time deposits.
Of the time deposit increase mentioned above, $1,047,456 is for
jumbo time deposits (those with balances of $100,000 and over).
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. 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.
To provide additional source of loan funds, the Bank has entered
into an agreement with the Federal Home Loan Bank (FHLB) of
Cincinnati to obtain matched funding for loans. Repayment is made
either over a fifteen year period, or over a three year period with
a balloon payment. At year end, these FHLB advances totaled
$3,112,897. The Bank considers this agreement with FHLB to be a
good source of loan funding, secondary to its deposit base.
A monthly Rate Sensitivity Report is used to determine the effect of
interest rate changes on the financial statements. In the opinion of
management, enough assets or liabilities could be repriced over the
near term (up to three years) to compensate for such changes. The
spread on interest rates, or the difference between the average
earning assets and the average interest bearing liabilities, is
monitored quarterly. It is the Bank's goal to attempt to maintain
this spread at better than 4.0%. The year end spread for 1998 was
5.2%.
Capital Resources
The subsidiary Bank is subject to various regulatory capital
requirements administered by federal regulatory agencies. Failure
to meet minimum capital requirements can initiate certain mandatory
actions that, if undertaken, could have a direct material affect on
the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to
qualitative judgments by regulators about the Bank's components,
risk weightings and other factors. At June 30, 1998, management
believes the Bank complied with all regulatory capital requirements.
Based on the Bank's computed regulatory capital ratios, the Bank is
considered well capitalized under the Federal Deposit Insurance Act
at June 30, 1998. Management is not aware of any matters occurring
subsequent to June 30, 1998 that would cause the Bank's capital
category to change.
The following table summarizes the Bank's minimum regulatory capital
requirements and actual capital at June 30, 1998.
Excess of Actual
Capital Over Current
Actual capital Current requirement Requirement
-------------- ------------------- -----------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in millions)
Total
risk-based
capital $11.15 12.76% $6.99 8.00% $4.16 4.76%
Tier 1
risk-based
capital 10.05 11.51 3.49 4.00 6.56 7.50
Core
capital 10.05 8.16 4.93 4.00 5.12 4.16
Recent Accounting Developments
Recent pronouncements by the Financial Accounting Standards Board
("FASB") will have an impact on financial statements issued in
subsequent periods. Set forth below are summaries of such
pronouncements.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," was issued in 1996. It
revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and
secured borrowings. SFAS No. 125 was originally effective for some
transactions occurring after December 31, 1996, and was effective
for others in 1998. SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125," which was issued
in December 1996, defers for one year the effective date of
provisions relating to securities lending, repurchase agreements and
other similar transactions. The impact of partial adoption in 1997
was not material to the 1997 financial statements and the impact of
the complete adoption in 1998 was not material to the 1998 financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires that all items that
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. Income tax effects must also be shown. This
Statement is effective for fiscal years beginning after December
15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for
periods beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
addresses the accounting for derivative instruments and certain
derivative instruments embedded in other contracts, and hedging
activities. The statement standardizes the accounting for
derivative instruments by requiring that an entity recognize those
items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is
effective for all fiscal years beginning after June 15, 1999.
These statements are not expected to have a material effect on the
Corporation's consolidated financial position or results of
operation.
Impact on Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with 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.
Year 2000 Issue
Many computer programs use only two digits to identify a year in the
date field and were apparently designed and developed without
considering the impact of the upcoming change in the century. Such
programs could erroneously read entries for the Year 2000 as the
Year 1900. This could result in major systems failures and
miscalculations. Rapid and accurate data processing is essential to
the operations of financial institutions, such as the Corporation.
The Corporation has formed a Year 2000 committee to assess the
extent to which it and its outside vendors may be adversely affected
by Year 2000 problems. Management has determined that most programs
are or will be capable of identifying the turn of the century. The
issue is closely monitored by management and full compliance is
expected by the end of 1998. While the Corporation does not
anticipate that any Year 2000 computer problems or expenses required
to correct such problems will materially affect its financial
condition and results of operations, no assurance can be given in
this regard. The Y2K team's utmost attention and resources are
being directed to meet full readiness.
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"
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,
changes 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.
NOTE 13 -GENERAL INFORMATION
External Independent Certified Public Accountants
Crowe, Chizek and Company LLP
Landerbrook Corporate Center One
5900 Landerbrook Drive, Suite 205
Cleveland, Ohio 44124-4043
General Counsel
John D. Morris
1620 S. Union
P.O. Box 2566
Alliance, Ohio 44601
Transfer Agent and Register
McDonald & Company Securities, Inc.
United Bank Plaza
220 Market Ave. South, Suite 410
Canton, Ohio 44702
Annual Meeting
The 1998 annual meeting of stockholders will be held on September
17, 1998 at 7:00 PM at the main offices of Consumers National Bank,
614 East Lincoln Way, Minerva, Ohio 44657.
Annual Report on Form 10-KSB
A copy of the Bank's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1998 as filed with the Securities and Exchange
Commission will be furnished without charge to stockholders upon
written request to Theresa J. Gill, Administrative Officer.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial infromation from the annual report on
Form 10-ksb for the fiscal year ended and is qualified in its entirety by
reference to such.
</LEGEND>
<S> <C>
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<PERIOD-END> JUN-30-1998
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