To Our Valued Shareholders

Transcription

1 To Our Valued Shareholders Please find enclosed the Annual Report for Community Investors Bancorp, Inc. for fiscal year ending June 30, Please review the financial information and footnotes in this report and please do not hesitate to contact me if you have any questions. Community Investors Bancorp, Inc. (the Bank) reported total assets as of June 30, 2016 of $140.3 million or an increase of $3.3 million or 2.4% from June 30, 2015, including gross loans of $112.3 million or an increase of $2.8 million or 2.5% from The Bank reported net earnings of $901,000 or $1.13 per basic share for year ended June 30, 2016, representing an increase of $51, or 6.00%. This compares to net earnings of $850, or $1.07 per basic share reported for fiscal year ending June 30, The increase in 2016 reflects an increase in net interest income of $166, and an increase in other income of $386, plus a decrease in the provision for loan losses of $144, This was partially offset by an increase in general and administrative and other expenses of $625, The increase in net interest income and other income reflects increased loan activity in all of our loan markets. The provision of loan losses reflects improved collection efforts on troubled credits as well as increased loan portfolios. General, administrative and other expenses increased due to increases related to technology consulting and professional expenses. Ohio sales tax is now collected on our core data processing and technology consulting services. The addition of mobile banking as well as cybersecurity challenges and regulatory requirements continue to add to our need for technology. Classified assets remain at high levels as we work through distressed situations. The economy continues its slow and uneven recovery in our various markets. During the quarter, we added a full time staff member to reduce delinquencies on an ongoing basis and collect current delinquent or charged-off credits. Early results are promising. Total shareholder equity increased by $758, to $12.3 million as a result of net income plus improvements in unrealized gains on investments. In addition, dividends of $191, or $.24 per share were paid on common shares during the fiscal year. We continue to see new opportunities and customers in all of our markets, while we strive to improve efficiency. Continuing customer demands, regulatory requirements, as well as our own expectations require us to continually improve our service and provide the latest technology and banking options. We expect to grow at a pace commensurate with prudent risk management, conservative capital management and careful liquidity planning. Improving operational efficiencies is often hindered by increasing regulatory, compliance and technology demands. As always, our dedicated associates are determined to meet the challenges presented in this difficult environment. In the fiscal year 2016, our Secondary Market mortgage lending area continues to experience tremendous growth. The Secondary Market area again has contributed over $1,000,000 in gross revenue to First Federal Community Bank, and continues to grow its relationships within in the markets we serve. The regulatory environment is constantly evolving, and we continue to ensure compliance while maintaining growth in this area. The introduction of TRID in October, 2015 created some challenges, but we feel that we adapted to the changes successfully. These changes led to the creation of many internal processes, as well as the introduction of several new external software

2 enhancements. It has certainly been a long and challenging process to ensure compliance, but we feel that our systems will allow us to continue to flourish as a leader in the mortgage lending market. In addition, we are very confident that we are nimble enough to meet and exceed the expectations of our referral partners, and our customers! Your Board of Directors has directed management toward even more improved financial performance of the bank for the benefit of shareholders. We are determined to achieve our goals through the strategies we have continued to implement. We have achieved significant progress but our goals remain lofty. On behalf of the Board of Directors, Officers and Associates of Community Investors Bancorp, Inc. and First Federal Community Bank, I would like to express our sincere appreciation to our shareholders and customers for your continued loyalty and support. Sincerely, Phillip W. Gerber President and CEO

3 Independent Auditor s Report and Consolidated Financial Statements June 30, 2016, 2015 and 2014

4 June 30, 2016, 2015 and 2014 Contents Independent Auditor s Report... 1 Consolidated Financial Statements Balance Sheets... 2 Statements of Income... 3 Statements of Comprehensive Income... 4 Statements of Stockholders Equity... 5 Statements of Cash Flows... 6 Notes to Financial Statements... 7

5 Independent Auditor s Report Board of Directors Community Investors Bancorp, Inc. Bucyrus, Ohio We have audited the accompanying consolidated financial statements of Community Investors Bancorp, Inc., which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2016, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Investors Bancorp, Inc. as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2016 in accordance with accounting principles generally accepted in the United States of America. Other Information Our audit was performed for the purpose of forming an opinion on the basic financial statements as a whole. The letter to shareholders and selected consolidated financial data are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. Pittsburgh, Pennsylvania September 23, 2016

6 Consolidated Balance Sheets June 30, 2016 and 2015 ($ in Thousands) Assets Cash and due from banks $ 3,857 $ 3,415 Interest-bearing deposits 3,000 3,292 Federal funds sold Cash and cash equivalents 7,016 6,710 Interest-bearing time deposits Available-for-sale securities 14,347 13,223 Loans held-for-sale 6,189 4,998 Loans, net of allowance for loan losses of $1,345 and $1,375 at June 30, 2016 and 2015, respectively 104, ,127 Premises and equipment 4,017 4,071 Federal Home Loan Bank stock 2,246 2,237 Foreclosed assets held-for-sale Interest receivable Mortgage servicing rights Other assets Total assets $ 140,330 $ 137,068 Liabilities and Stockholders Equity Liabilities Deposits Demand $ 8,800 $ 9,331 Savings, NOW and money market 60,134 56,590 Time 22,156 23,328 Total deposits 91,090 89,249 Federal Home Loan Bank advances 35,515 35,280 Advances from borrowers for taxes and insurance Interest payable Deferred federal income taxes Other liabilities Total liabilities 128, ,525 Stockholders Equity Common stock, $.01 par value; authorized 4,000,000 shares; issued 1,525,297 shares; outstanding 795,192 shares Additional paid-in capital 5,299 5,299 Retained earnings 14,313 13,603 Accumulated other comprehensive income Treasury stock, at cost Common; 2016 and ,105 shares (7,457) (7,457) Total stockholders equity 12,301 11,543 Total liabilities and stockholders equity $ 140,330 $ 137,068 See 2

7 Consolidated Statements of Income ($ in Thousands, Except Per Share Amounts) Interest and Dividend Income Loans $ 5,506 $ 5,352 $ 4,692 Securities Taxable Tax-exempt Dividends on Federal Home Loan Bank stock Deposits with financial institutions and other Total interest and dividend income 5,824 5,674 5,090 Interest Expense Deposits Federal Home Loan Bank advances Total interest expense Net Interest Income 5,185 5,019 4,365 Provision for Loan Losses Net Interest Income After Provision for Loan Losses 4,763 4,453 3,966 Noninterest Income Gain on sales of available-for-sale securities Net gains on loan sales 3,303 2,969 1,318 Other service charges and fees Total noninterest income 3,947 3,561 2,088 Noninterest Expense Salaries and employee benefits 4,014 3,734 2,569 Net occupancy and equipment expense Data processing fees Professional fees Franchise taxes Loss on sale of foreclosed assets Impairment of foreclosed assets held for sale FDIC insurance premiums Other 1,445 1,289 1,113 Total noninterest expense 7,387 6,762 5,390 Income Before Income Tax 1,323 1, Provision for Income Taxes Net Income $ 901 $ 850 $ 466 Basic Earnings Per Share $ 1.13 $ 1.07 $ 0.59 See 3

8 Consolidated Statements of Comprehensive Income ($ in Thousands) Net income $ 901 $ 850 $ 466 Other comprehensive income (loss): Net unrealized gains on available-for-sale securities Reclassification adjustment for realized net gains included in net income - - (26) Other comprehensive income, before tax effect Tax expense Other comprehensive income Comprehensive income $ 949 $ 889 $ 554 See 4

9 Consolidated Statements of Stockholders Equity ($ in Thousands) Additional Paid-in Retained Accumulated Other Comprehensive Treasury Common Stock Capital Earnings Income (Loss) Stock Total Balance, July 1, 2013 $ 15 $ 5,299 $ 12,526 $ (44) $ (7,457) $ 10,339 Net income Other comprehensive loss Dividends on common stock, $0.10 per share - - (80) - - (80) Balance, June 30, ,299 12, (7,457) 10,813 Net income Other comprehensive income Dividends on common stock, $0.20 per share - - (159) - - (159) Balance, June 30, ,299 13, (7,457) 11,543 Net income Other comprehensive income Dividends on common stock, $0.24 per share - - (191) - - (191) Balance, June 30, 2016 $ 15 $ 5,299 $ 14,313 $ 131 $ (7,457) $ 12,301 See 5

10 Consolidated Statements of Cash Flows ($ in Thousands) Operating Activities Net income $ 901 $ 850 $ 466 Items not requiring (providing) cash Depreciation and amortization Provision for loan losses Amortization of premiums and discounts on securities Deferred income taxes Gain on sales of available-for-sale securities - - (26) Impairment of foreclosed assets held for sale Loss on sale of foreclosed assets Changes in Loans held-for-sale (1,191) (1,853) (1,342) Interest receivable 39 (32) (11) Other assets (150) (364) (16) Interest payable and other liabilities (23) Net cash provided by (used in) operating activities 930 (59) 55 Investing Activities Net change in interest-bearing time deposits Purchases of available-for-sale securities (1,768) 1,257 - Proceeds from maturities of available-for-sale securities 619-2,658 Proceeds from sale of available-for-sale securities - - 1,125 Net change in loans (2,099) (5,797) (14,891) Purchase of premises and equipment (246) (284) (178) Purchase of FHLB stock (9) - - Proceeds from sale of foreclosed assets Net cash used in investing activities (2,437) (3,774) (10,633) Financing Activities Net (decrease) increase in deposit accounts 1,841 (6,776) (107) Proceeds from Federal Home Loan Bank advances 33,000 31,500 39,000 Repayment of Federal Home Loan Bank advances (32,812) (19,229) (28,500) Dividends paid on common stock (191) (159) (80) Net change in advances from borrowers for taxes and insurance (25) Net cash provided by financing activities 1,813 5,423 10,360 Increase (Decrease) in Cash and Cash Equivalents 306 1,590 (218) Cash and Cash Equivalents, Beginning of Year 6,710 5,120 5,338 Cash and Cash Equivalents, End of Year $ 7,016 $ 6,710 $ 5,120 Supplemental Cash Flows Information Interest paid $ 631 $ 668 $ 727 Income taxes paid $ 75 $ 75 $ - Property acquired in settlement of loans $ 124 $ 46 $ 281 Loans disbursed upon sale of foreclosed assets $ 44 $ - $ - See 6

11 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Community Investors Bancorp, Inc. (the Company ) is a thrift holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, First Federal Community Bank of Bucyrus (the Bank ). The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in northern Ohio. The Bank faces competition from other financial institutions and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. Principles of Consolidation The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, servicing rights, valuation of deferred tax assets, other-than-temporary impairments (OTTI) and fair values of financial instruments. Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At June 30, 2016, the Company s cash accounts exceeded federally insured limits by approximately $2,860,000. Interest-bearing Time Deposits Interest-bearing time deposits in banks mature within three years and are carried at cost. 7

12 Securities Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, including equity securities, are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on sale of securities are recorded on the trade date and are determined using the specific identification method. For debt securities with fair value below amortized cost when the Company does not intend to sell a debt security, and it is more likely than not, the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. When the Company intends to sell or would more likely than not be required to sell a debt security before the expected recovery of the amortized cost basis, it recognizes the full impairment amount. For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made. The Company recognized no other-than-temporary impairments on debt securities in 2016, 2015 or Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, chargeoffs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. 8

13 For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Management s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. Consistent with regulatory guidance, chargeoffs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined. For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral. The Company charges-off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to delinquency thresholds established by applicable regulatory guidance to determine the charge-off timeframe for these loans. Loans at these delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. 9

14 When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan s current payment status and the borrower s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a 10

15 loan-by-loan basis for non-homogenous type loans such as commercial, non-owner residential, multifamily, nonresidential and construction loans by either the present value of expected future cash flows discounted at the loan s effective interest rate, the loan s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense. The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company. Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectibility of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring ( TDR ) has occurred, which is when, for economic or legal reasons related to a borrower s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan. It is the Company s policy that any restructured loans on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan. 11

16 With regard to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously. Premises and Equipment Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective leases or the estimated lives of the improvements, whichever is shorter. Federal Home Loan Bank Stock Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment. Foreclosed Assets Held for Sale Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets. At June 30, 2016, there were no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At June 30, 2016, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process is $1,562,000. Mortgage Servicing Rights Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC ), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial 12

17 earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a reduction to noninterest income. Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Treasury Stock Treasury stock is stated at cost. Cost is determined by the weighted average cost method. Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-thannot recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management s judgment. 13

18 If necessary, the Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. With a few exceptions, the Company is no longer subject to examination by tax authorities for years before As of June 30, 2016, the Company had no material uncertain income tax positions. Earnings Per Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Treasury stock shares are not deemed outstanding for earnings per share calculations. Comprehensive Income Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities and, if necessary, unrealized appreciation (depreciation) on available-forsale securities for which a portion of an other-than-temporary impairment has been recognized in income. Accumulated other comprehensive income consists solely of the cumulative unrealized gains and losses on available-for-sale securities, net of tax. Advertising Advertising costs are expensed as incurred. Reclassifications Certain reclassifications have been made to the 2016 and 2015 financial statements to conform to the 2016 financial statement presentation. These reclassifications had no effect on net income. 14

19 Note 2: Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses of securities are as follows: Available-for-sale Securities: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Approximate Fair Value June 30, 2016: U.S. government agencies $ 6,895 $ 50 $ - $ 6,945 U.S. government agency mortgage-backed securities 1, ,468 State and political subdivisions 5, ,398 Equity securities (13) 536 $ 14,148 $ 212 $ (13) $ 14,347 June 30, 2015: U.S. government agencies $ 6,947 $ 19 $ (8) $ 6,958 U.S. government agency mortgage-backed securities 1, (1) 1,917 State and political subdivisions 3, (1) 3,794 Equity securities (9) 554 $ 13,098 $ 144 $ (19) $ 13,223 15

20 The amortized cost and fair value of available-for-sale securities at June 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Cost Value Within one year $ 2,155 $ 2,165 One to five years 8,949 9,039 Five to ten years 1,101 1,139 After ten years ,205 12,343 U.S. government agency mortgagebacked securities 1,420 1,468 Equity securities Totals $ 14,148 $ 14,347 $ - $ - The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $7,847,000 and $8,129,000 at June 30, 2016 and 2015, respectively. Gross gains of $26,000 resulting from sales of available-for-sale securities were realized for the year ended June 30, There were no securities sold in the years ending June 30, 2016 and Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2016 and 2015 was $475,000 and $3,002,000, which is approximately 3% and 23%, respectively, of the fair value of the Company s total investment portfolio. These declines primarily resulted from changes in market interest rates. Based on evaluation of available evidence, including recent changes in market interest rates and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the otherthan-temporary impairment is identified. 16

21 The following tables show the Company s investments gross unrealized losses and fair value of the Company s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2016 and 2015: June 30, 2016 Less than 12 Months 12 Months or More Total Description of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses Equity securities $ - $ - $ 475 $ 13 $ 475 $ 13 Total temporarily impaired securities $ - $ - $ 475 $ 13 $ 475 $ 13 June 30, 2015 Less than 12 Months 12 Months or More Total Description of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses U.S. government agencies $ 1,506 $ 4 $ 495 $ 4 $ 2,001 $ 8 State and political subdivisions U.S. government agency mortgage-backed securities Equity securities Total temporarily impaired securities $ 2,028 $ 6 $ 974 $ 13 $ 3,002 $ 19 17

22 Note 3: Loans and Allowance for Loan Losses Categories of loans at June 30 include: Residential real estate $ 83,593 $ 77,284 Nonresidential real estate 9,172 14,284 Commercial 7,087 6,487 Consumer and other 6,306 6,541 Total loans 106, ,596 Less Net deferred loan costs Allowance for loan losses 1,345 1,375 Net loans $ 104,724 $ 103,127 Activity in the allowance for loan losses was as follows: Balance, beginning of year $ 1,375 $ 1,450 $ 1,650 Provision charged to expense Losses charged off (679) (852) (711) Recoveries Balance, end of year $ 1,345 $ 1,375 $ 1,450 18

23 The following tables present the activity in the allowance for loan losses based on portfolio segment as of June 30, 2016 and 2015: June 30, 2016 Residential Non- Residential Real Estate Real Estate Commercial Consumer Total Allowance for loan losses: Balance, July 1, 2015 $ 587 $ 301 $ 384 $ 103 $ 1,375 Provision for loan losses 517 (99) (41) Charge-offs (233) (211) (151) (84) (679) Recoveries Balance, June 30, 2016 $ 943 $ 108 $ 203 $ 91 $ 1,345 June 30, 2015 Residential Non- Residential Real Estate Real Estate Commercial Consumer Total Allowance for loan losses: Balance, July 1, 2014 $ 640 $ 363 $ 357 $ 90 $ 1,450 Provision for loan losses Charge-offs (410) (348) (50) (44) (852) Recoveries Balance, June 30, 2015 $ 587 $ 301 $ 384 $ 103 $ 1,375 19

24 The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2016 and 2015: June 30, 2016 Residential Non- Residential Real Estate Real Estate Commercial Consumer Total Allowance for loan losses: Ending balance, individually evaluated for impairment $ 193 $ - $ 5 $ 18 $ 216 Ending balance, collectively evaluated for impairment $ 750 $ 108 $ 198 $ 73 $ 1,129 Loans: Ending balance $ 83,593 $ 9,172 $ 7,087 $ 6,306 $ 106,158 Ending balance; individually evaluated for impairment $ 1,799 $ 145 $ 1,051 $ 18 $ 3,013 Ending balance; collectively evaluated for impairment $ 81,794 $ 9,027 $ 6,036 $ 6,288 $ 103,145 June 30, 2015 Residential Non- Residential Real Estate Real Estate Commercial Consumer Total Allowance for loan losses: Ending balance, individually evaluated for impairment $ 75 $ 120 $ 115 $ 19 $ 329 Ending balance, collectively evaluated for impairment $ 512 $ 181 $ 269 $ 84 $ 1,046 Loans: Ending balance $ 77,284 $ 14,284 $ 6,487 $ 6,541 $ 104,596 Ending balance; individually evaluated for impairment $ 1,159 $ 1,002 $ 168 $ 22 $ 2,351 Ending balance; collectively evaluated for impairment $ 76,125 $ 13,282 $ 6,319 $ 6,519 $ 102,245 The Bank has adopted a standard loan grading system for all loans. 20

25 Definitions: Pass: Loans that do not exhibit the characteristics of the other three categories will be passed over and thereby classified as "Pass". These are loans that are performing as planned and show no material evidence of diminished value or added risk. The borrower is in compliance with loan covenants. All term loans are paying as agreed. It is the intention of management to avoid the adverse classification of good assets by defaulting to this category in the absence of evidence to the contrary. Special Mention: Loans that do not currently expose the Company to a sufficient degree of risk to warrant classification under this policy but do possess credit deficiencies or potential weaknesses deserving management's close attention shall be designated Special Mention. These loans have a potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. Substandard: Loans classified Substandard are inadequately protected by current net worth and paying capacity of the obligor or of the collateral pledged. Loans so classified must have a welldefined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of a loss. Doubtful: Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Risk characteristics of each loan portfolio segment are described as follows: Residential Real Estate and Consumer Residential real estate and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. 21

26 Non-Residential Real Estate Non-residential real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Non-residential real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Nonresidential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company s nonresidential portfolio are diverse, but with geographic location almost entirely in the Company s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied non-residential estate versus nonowner-occupied loans. Commercial Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Consumer The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company s market area) and the creditworthiness of a borrower. 22

27 The following tables present the credit risk profile of the Company s loan portfolio based on rating category and payment activity as of June 30, 2016 and 2015: June 30, 2016 Residential Non- Residential Real Estate Real Estate Commercial Consumer Total Pass $ 81,220 $ 8,883 $ 5,862 $ 6,288 $ 102,253 Special mention Substandard 2, , ,905 Doubtful Total $ 83,593 $ 9,172 $ 7,087 $ 6,306 $ 106,158 June 30, 2015 Residential Non- Residential Real Estate Real Estate Commercial Consumer Total Pass $ 75,526 $ 13,089 $ 6,242 $ 6,478 $ 101,335 Special mention Substandard 1,758 1, ,261 Doubtful Total $ 77,284 $ 14,284 $ 6,487 $ 6,541 $ 104,596 23