XOTC:CBKM Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

xQuarterly Report Pursuant to Section 13 or 15 (d) or the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2012

 

Or

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from   to  

 

Commission File No. 033-79130

 

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

OHIO   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

(Registrant’s telephone number)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value Outstanding at May 7, 2012
  2,053,097 Common Shares

 

 
 

 

 

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED March 31, 2012

 
Table of Contents

 

 

Page

Number (s)

Part I – Financial Information
Item 1 – Financial Statements (Unaudited)  
Consolidated Balance Sheets at March 31, 2012 and June 30, 2011 1
   
Consolidated Statements of Income for the three and nine months ended March 31, 2012 and 2011

2

   
Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2012 and 2011 3
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended March 31, 2012 and 2011

4

   
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and 2011 5
   
Notes to the Consolidated Financial Statements 6-28
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

29-41

   
Item 3 – Not Applicable for Smaller Reporting Companies  
   
Item 4 – Controls and Procedures 42
Part II – Other Information
Item 1 – Legal Proceedings 43
   
Item 1A – Not Applicable for Smaller Reporting Companies  
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 43
   
Item 3 – Defaults Upon Senior Securities 43
   
Item 4 – Mine Safety Disclosure 43
   
Item 5 – Other Information 43
   
Item 6 – Exhibits 43
   
Signatures 44

 

 
 

 

PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements (unaudited)

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

   March 31,
2012
   June 30,
2011
 
ASSETS          
Cash on hand and noninterest-bearing deposits in other banks  $6,041   $5,944 
Interest-bearing deposits in other banks   14,336    7,884 
Total cash and cash equivalents   20,377    13,828 
Certificates of deposit in other financial institutions   3,430    4,900 
Securities, available-for-sale   109,773    91,889 
Federal bank and other restricted stocks, at cost   1,186    1,186 
Total loans   184,075    177,551 
Less allowance for loan losses   (2,214)   (2,101)
Net loans   181,861    175,450 
Cash surrender value of life insurance   5,559    5,411 
Premises and equipment, net   5,610    4,776 
Intangible assets       89 
Other real estate owned       76 
Accrued interest receivable and other assets   1,977    2,535 
Total assets  $329,773   $300,140 
           
LIABILITIES          
Deposits          
Non-interest bearing demand  $63,917   $64,657 
Interest bearing demand   34,047    14,829 
Savings   97,791    79,816 
Time   83,549    88,944 
Total deposits   279,304    248,246 
           
Short-term borrowings   14,467    17,012 
Federal Home Loan Bank advances   6,477    7,535 
Accrued interest and other liabilities   2,049    2,023 
Total liabilities   302,297    274,816 
           
SHAREHOLDERS’ EQUITY          
Preferred stock (no par value, 350,000 shares authorized, none outstanding)        
Common stock (no par value, 3,500,000 shares authorized; 2,183,493 and 2,180,315 shares issued as of March 31, 2012 and June 30, 2011, respectively)   5,156    5,114 
Retained earnings   22,368    20,881 
Treasury stock, at cost (130,442 common shares)   (1,659)   (1,659)
Accumulated other comprehensive income   1,611    988 
Total shareholders’ equity   27,476    25,324 
Total liabilities and shareholders’ equity  $329,773   $300,140 

 

See accompanying notes to consolidated financial statements

  

1
 

 

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

   Three Months ended
March 31,
   Nine Months ended
March 31,
 
(Dollars in thousands, except per share amounts)  2012   2011   2012   2011 
Interest income                    
Loans, including fees  $2,540   $2,517   $7,637   $7,690 
Securities, taxable   445    391    1,400    1,189 
Securities, tax-exempt   267    227    761    658 
Federal funds sold and other interest bearing deposits   12    15    42    38 
Total interest income   3,264    3,150    9,840    9,575 
Interest expense                    
Deposits   289    373    924    1,270 
Short-term borrowings   5    9    23    33 
Federal Home Loan Bank advances   51    60    180    195 
Total interest expense   345    442    1,127    1,498 
Net interest income   2,919    2,708    8,713    8,077 
Provision for loan losses   11    100    170    344 
Net interest income after provision for loan losses   2,908    2,608    8,543    7,733 
                     
Non-interest income                    
Service charges on deposit accounts   338    301    1,061    963 
Debit card interchange income   187    160    545    467 
Bank owned life insurance income   48    47    148    136 
Securities gains (losses), net   (37)       118    70 
Other-than-temporary loss                    
Total impairment loss       (327)       (358)
Loss recognized in other comprehensive income       177        158 
Net impairment loss recognized in earnings       (150)       (200)
Gain (loss) on sale of other real estate owned           (53)   2 
Other   49    44    135    152 
Total non-interest income   585    402    1,954    1,590 
Non-interest expenses                    
Salaries and employee benefits   1,421    1,234    4,060    3,598 
Occupancy and equipment   268    263    784    774 
Data processing expenses   143    137    422    413 
Professional and director fees   80    80    271    265 
FDIC Assessments   48    77    147    233 
Franchise taxes   69    61    198    178 
Marketing and advertising   81    71    210    161 
Telephone and network communications   60    57    176    167 
Debit card processing expenses   97    84    284    252 
Amortization of intangible   8    40    89    121 
Other   336    315    1,032    999 
Total non-interest expenses   2,611    2,419    7,673    7,161 
Income before income taxes   882    591    2,824    2,162 
Income tax expense   196    109    660    473 
Net Income  $686   $482   $2,164   $1,689 
                     
Average common shares – basic   2,051,024    2,044,179    2,050,390    2,041,402 
Average common shares – diluted   2,051,558    2,044,179    2,050,835    2,041,402 
                     
Basic and diluted earnings per share  $0.33   $0.24   $1.06   $0.83 

 

See accompanying notes to consolidated financial statements

 

2
 

 

CONSUMERS BANCORP, INC.

Consolidated statements of comprehensive income

(Unaudited)

 

(Dollars in thousands)

 

   Three Months ended
March 31,
   Nine Months ended
March 31,
 
   2012   2011   2012   2011 
                 
Net Income  $686   $482   $2,164   $1,689 
                     
Other comprehensive income (loss), net of tax:                    
Net change in unrealized gains (losses):                    
Other-than-temporarily impaired securities:                    
Unrealized losses on other-than-temporarily impaired securities       (327)       (358)
Reclassification adjustment for losses included in income       150        200 
Net unrealized gain       (177)       (158)
Income tax effect       60        54 
        (117)       (104)
                     
Available-for-sale securities:                    
Unrealized gains (losses) arising during the period   199    346    1,062    (824)
Reclassification adjustment for (gains) losses included in income   37        (118)   (70)
Net unrealized gain (losses)   236    346    944    (894)
Income tax effect   80    118    321    (303)
    156    228    623    (591)
                     
Other comprehensive income (loss)   156    111    623    (695)
                     
Total comprehensive income  $842   $593   $2,787   $994 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share data)

 

   Three Months ended
March 31,
   Nine Months ended
March 31,
 
   2012   2011   2012   2011 
                 
Balance at beginning of period  $26,817   $23,778   $25,324   $23,716 
                     
Comprehensive income                    
Net Income   686    482    2,164    1,689 
Other comprehensive income (loss)   156    111    623    (695)
Total comprehensive income   842    593    2,787    994 
                     
Common stock issued for dividend reinvestment and stock purchase plan (3,178 shares for three and nine months in 2012 and 3,117 shares and 8,786 shares for the three and nine months in 2011, respectively)   42    38    42    106 
Common cash dividends   (225)   (205)   (677)   (612)
                     
Balance at the end of the period  $27,476   $24,204   $27,476   $24,204 
                     
Common cash dividends per share  $0.11   $0.10   $0.33   $0.30 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Dollars in thousands)  Nine Months Ended
March 31,
 
   2012   2011 
Cash flows from operating activities          
Net cash from operating activities  $3,735   $3,037 
           
Cash flow from investing activities          
Securities available-for-sale          
Purchases   (45,105)   (36,572)
Maturities, calls and principal pay downs   15,801    11,822 
Proceeds from sales of available-for-sale securities   11,485    5,123 
Net (increase) decrease in certificates of deposits in other financial institutions   1,470    (3,185)
Net increase in loans   (6,581)   (3,134)
Purchase of Bank owned life insurance       (431)
Acquisition of premises and equipment   (1,099)   (1,172)
Sale of other real estate owned   23    27 
Net cash from investing activities   (24,006)   (27,522)
           
Cash flow from financing activities          
Net increase in deposit accounts   31,058    25,565 
Net change in short-term borrowings   (2,545)   1,131 
Repayments of Federal Home Loan Bank advances   (1,058)   (719)
Proceeds from dividend reinvestment and stock purchase plan   42    106 
Dividends paid   (677)   (612)
Net cash from financing activities   26,820    25,471 
           
Increase in cash or cash equivalents   6,549    986 
           
Cash and cash equivalents, beginning of period   13,828    13,806 
Cash and cash equivalents, end of period  $20,377   $14,792 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period:          
Interest  $1,142   $1,525 
Federal income taxes   475    680 

 

See accompanying notes to consolidated financial statements.

 

5
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 1 – Summary of Significant Accounting Policies:

 

Nature of Operations: Consumers Bancorp, Inc. (the Corporation) is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, Consumers National Bank (the Bank), a broad array of products and services throughout its primary market area of Stark, Columbiana, Carroll and contiguous counties in Ohio. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.

 

Basis of Presentation: The consolidated financial statements for interim periods are unaudited and reflect all adjustments (consisting of only normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by accounting principles generally accepted in the United States of America. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s Form 10-K for the year ended June 30, 2011. The results of operations for the interim period disclosed herein are not necessarily indicative of the results that may be expected for a full year.

 

The consolidated financial statements include the accounts of the Corporation and the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

 

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 the revenues, operating income, and assets. Accordingly, all of its operations are recorded in one segment, banking.

 

Reclassifications: Certain items in prior financial statements have been reclassified to conform to the current presentation.

 

Newly Issued Accounting Standards: In May, 2011, the Financial Accounting Standards Board (FASB) issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Corporation’s operating results or financial condition, but the additional disclosures are included in Note 4.

 

6
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The adoption of this amendment had no impact on the consolidated financial statements as the prior presentation of comprehensive income was in compliance with this amendment.

 

Note 2 – Securities

 

Description of Securities 

Amortized
Cost
 

   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
March 31, 2012                    
U.S. government-sponsored entities and agencies  $9,553   $86   $   $9,639 
Obligations of state and political subdivisions   32,821    1,479    (93)   34,207 
Mortgage-backed securities – residential   49,580    1,171    (18)   50,733 
Collateralized mortgage obligations   15,176    51    (97)   15,130 
Trust preferred security   202        (138)   64 
Total securities  $107,332   $2,787   $(346)  $109,773 

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
June 30, 2011                    
U.S. government-sponsored entities and agencies  $16,185   $98   $(23)  $16,260 
Obligations of state and political subdivisions   24,725    584    (211)   25,098 
Mortgage-backed securities - residential   29,424    1,172        30,596 
Collateralized mortgage obligations   19,856    74    (62)   19,868 
Trust preferred security   202        (135)   67 
Total securities  $90,392   $1,928   $(431)  $91,889 

 

Proceeds from the sale of available-for-sale securities were as follows:

 

   Three Months Ended
March 31,
   Nine Months Ended
March 31,
 
   2012   2011   2012   2011 
Proceeds from sales  $4,153   $   $11,485   $5,123 
Gross realized gains   16        171    97 
Gross realized losses   53        53    27 

 

7
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The amortized cost and fair values of available-for-sale securities at March 31, 2012, by expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized mortgage obligations and the trust preferred security are shown separately.

 

   Amortized
Cost
   Estimated Fair
Value
 
Due in one year or less  $4,517   $4,542 
Due after one year through five years   5,530    5,617 
Due after five years through ten years   8,674    9,074 
Due after ten years   23,653    24,613 
Total   42,374    43,846 
           
Mortgage-backed securities – residential   49,580    50,733 
Collateralized mortgage obligations   15,176    15,130 
Trust preferred security   202    64 
Total  $107,332   $109,773 

 

The following table summarizes the securities with unrealized losses at March 31, 2012 and June 30, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

   Less than 12 Months   12 Months or more   Total 
Description of Securities  Fair
Value
   Unrealized
Loss
   Fair
Value
   Unrealized
Loss
   Fair
Value
   Unrealized
Loss
 
March 31, 2012                              
Obligations of states and political subdivisions  $2,934   $(90)  $357   $(3)  $3,291   $(93)
Mortgage-backed securities - residential   9,400    (18)           9,400    (18)
Collateralized mortgage obligations   11,462    (97)           11,462    (97)
Trust preferred security           64    (138)   64    (138)
Total temporarily impaired  $23,796   $(205)  $421   $(141)  $24,217   $(346)

 

   Less than 12 Months   12 Months or more   Total 
Description of Securities  Fair
Value
   Unrealized
Loss
   Fair
Value
   Unrealized
Loss
   Fair
Value
   Unrealized
Loss
 
June 30, 2011                              
U.S. government-sponsored entities and agencies  $3,088   $(23)  $   $   $3,088   $(23)
Obligations of states and political subdivisions   3,656    (81)   1,221    (130)   4,877    (211)
Collateralized mortgage obligations    9,665    (62)           9,665    (62)
Trust preferred security           67    (135)   67    (135)
Total temporarily impaired  $16,409   $(166)  $1,288   $(265)  $17,697   $(431)

 

8
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities. However, the trust preferred security is evaluated using the model outlined in FASB ASC Topic 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.

 

In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

Unrealized losses on obligations of state and political subdivisions, residential mortgage-backed securities and collateralized mortgage obligations have not been recognized into income because the decline in fair value is not attributed to credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the securities approach maturity.

 

Under the ASC Topic 325 model, the present value of the remaining cash flows as estimated at the preceding evaluation date are compared to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. The analysis of the trust preferred security falls within the scope of ASC Topic 325.

 

The Corporation owns a trust preferred security, which represents collateralized debt obligations (CDOs) issued by other financial and insurance companies. The security is part of a pool of issuers that support a more senior tranche of securities. Due to the illiquidity in the market, it is unlikely the Corporation would be able to recover its investment in this security if the Corporation sold the security at this time.

 

9
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Due to an increase in principal and/or interest deferrals by the issuers of the underlying securities, the cash interest payments for the trust preferred security are being deferred. On March 31, 2012, the lowest credit rating on this security was Fitch’s rating of C, which is defined as highly speculative. The issuers in this security are primarily banks, bank holding companies and a limited number of insurance companies. The investment security is evaluated using a model to compare the present value of expected cash flows to prior periods expected cash flows to determine if there has been an adverse change in cash flows during the period. The discount rate used to calculate the cash flows is the coupon rate of the security, based on the forward LIBOR curve. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and all interest payment deferrals are treated as defaults with an assumed recovery rate of 15% on deferrals. In addition we use the model to “stress” the CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. According to the March 31, 2012 analysis, the expected cash flows were above the recorded amortized cost of the trust preferred security. The accumulated other-than-temporary impairment loss that has been recognized in earnings was $780 at March 31, 2012 and June 30, 2011. If there is further deterioration in the underlying collateral of this security, other-than-temporary impairments may also occur in future periods.

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

   March 31,
2012
   June 30,
2011
 
Commercial  $18,928   $19,297 
Commercial real estate:          
Construction   597    1,057 
Other   103,337    97,403 
1 – 4 Family residential real estate:          
Owner occupied   34,820    34,488 
Non-owner occupied   17,890    19,098 
Construction   330    597 
Consumer   8,396    5,874 
Subtotal   184,298    177,814 
Less:Net deferred loan fees   (223)   (263)
Allowance for loan losses   (2,214)   (2,101)
Net Loans  $181,861   $175,450 

 

 

10
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2012:

 

           1-4 Family         
       Commercial   Residential         
       Real   Real         
   Commercial   Estate   Estate   Consumer   Total 
                     
Allowance for loan losses:                         
Beginning balance  $118   $965   $900   $143   $2,126 
Provision for loan losses   4    3    2    2    11 
Loans charged-off               (27)   (27)
Recoveries       65        39    104 
Total ending allowance balance  $122   $1,033   $902   $157   $2,214 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ending March 31, 2012:

 

           1-4 Family         
       Commercial   Residential         
       Real   Real         
   Commercial   Estate   Estate   Consumer   Total 
                     
Allowance for loan losses:                         
Beginning balance  $179   $882   $947   $93   $2,101 
Provision for loan losses   (57)   86    19    122    170 
Loans charged-off           (69)   (127)   (196)
Recoveries       65    5    69    139 
Total ending allowance balance  $122   $1,033   $902   $157   $2,214 
11
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2011:

 

           1-4 Family         
       Commercial   Residential         
       Real   Real         
   Commercial   Estate   Estate   Consumer   Total 
                     
Allowance for loan losses:                         
Beginning balance  $80   $1,110   $1,007   $69   $2,266 
Provision for loan losses   54    14    6    26    100 
Loans charged-off   (9)   (238)       (36)   (283)
Recoveries               18    18 
Total ending allowance balance  $125   $886   $1,013   $77   $2,101 

 

A summary of activity in the allowance for loan losses for the nine months ended March 31, 2011, was as follows:

 

   Nine Months
Ended
March 31, 2011
 
Beginning of period  $2,276 
Provision   344 
Charge-offs   (568)
Recoveries   49 
Balance at March 31,  $2,101 

 

12
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012. Included in the recorded investment in loans is $(223) of net deferred loan fees and $463 of accrued interest receivable.

 

           1-4 Family         
       Commercial   Residential         
       Real   Real         
   Commercial   Estate   Estate   Consumer   Total 
Allowance for loan losses:                         
Ending allowance balance attributable to loans:                         
Individually evaluated for impairment  $46   $99   $275   $   $420 
Collectively evaluated for impairment   76    934    627    157    1,794 
Total ending allowance balance  $122   $1,033   $902   $157   $2,214 
                          
Recorded investment in loans:                         
Loans individually evaluated for impairment  $152   $1,083   $1,443   $   $2,678 
Loans collectively evaluated for impairment   18,816    102,877    51,723    8,444    181,860 
Total ending loans balance  $18,968   $103,960   $53,166   $8,444   $184,538 

 

13
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2011. Included in the recorded investment in loans is $(263) of net deferred loan fees and $472 of accrued interest receivable.

 

           1-4 Family         
       Commercial   Residential         
       Real   Real         
   Commercial   Estate   Estate   Consumer   Total 
Allowance for loan losses:                         
Ending allowance balance attributable to loans:                         
Individually evaluated for impairment  $13   $126   $293   $   $432 
Collectively evaluated for impairment   166    756    654    93    1,669 
Total ending allowance balance  $179   $882   $947   $93   $2,101 
                          
Recorded investment in loans:                         
Loans individually evaluated for impairment  $82   $1,405   $1,042   $   $2,529 
Loans collectively evaluated for impairment   19,254    97,093    53,279    5,868    175,494 
Total ending loans balance  $19,336   $98,498   $54,321   $5,868   $178,023 

 

14
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the nine months ended March 31, 2012:

   Unpaid       Allowance for   Average   Interest   Cash Basis 
   Principal   Recorded   Loan Losses   Recorded   Income   Interest 
   Balance   Investment   Allocated   Investment   Recognized   Recognized 
With no related allowance recorded:                              
Commercial  $13   $13   $   $25   $   $ 
Commercial real estate:                              
Other   207    207        491    67    67 
1-4 Family residential real estate:                              
Owner occupied   90    90        94    2    2 
Non-owner occupied   64    65        57    3    3 
With an allowance recorded:                              
Commercial   139    139    46    88    2    2 
Commercial real estate:                              
Other   876    876    99    797    12    12 
1-4 Family residential real estate:                              
Owner occupied   323    324    14    255    2    2 
Non-owner occupied   963    964    261    929    10    10 
Total  $2,675   $2,678   $420   $2,736   $98   $98 

 

15
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans for the three months ended March 31, 2012:

 

   Average   Interest   Cash Basis 
   Recorded   Income   Interest 
   Investment   Recognized   Recognized 
With no related allowance recorded:               
Commercial  $13   $   $ 
Commercial real estate:               
Other   208    64    64 
1-4 Family residential real estate:               
Owner occupied   90         
Non-owner occupied   65    1    1 
With an allowance recorded:               
Commercial   141    2    2 
Commercial real estate:               
Other   869    1    1 
1-4 Family residential real estate:               
Owner occupied   328    2    2 
Non-owner occupied   968    4    4 
Total  $2,682   $74   $74 

 

16
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to loans individually evaluated for impairment by class of loans as of June 30, 2011 and for the nine months ended March 31, 2011:

   As of June 30, 2011   Nine Months ended March 31, 2011 
   Unpaid       Allowance for   Average   Interest   Cash Basis 
   Principal   Recorded   Loan Losses   Recorded   Income   Interest 
   Balance   Investment   Allocated   Investment   Recognized   Recognized 
With no related allowance recorded:                              
Commercial  $18   $18   $   $21   $   $ 
Commercial real estate:                              
Other   413    412        516         
With an allowance recorded:                              
Commercial   64    64    13    59         
Commercial real estate:                              
Other   997    993    126    1,274    32    32 
1-4 Family residential real estate:                              
Owner occupied   320    319    3    296    5    5 
Non-owner occupied   724    723    290    743         
Total  $2,536   $2,529   $432   $2,909   $37   $37 

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans for the three months ended March 31, 2011:

 

   Average   Interest   Cash Basis 
   Recorded   Income   Interest 
   Investment   Recognized   Recognized 
With no related allowance recorded:            
Commercial  $18   $   $ 
Commercial real estate:               
Other   550         
With an allowance recorded:               
Commercial   70         
Commercial real estate:               
Other   1,220    8    8 
1-4 Family residential real estate:               
Owner occupied   324    2    2 
Non-owner occupied   727         
Total  $2,909   $10   $10 

 

17
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and June 30, 2011:

   March 31, 2012   June 30, 2011 
       Loans Past Due        Loans Past Due 
       Over 90 Days        Over 90 Days 
       Still        Still 
   Non-accrual   Accruing   Non-accrual   Accruing 
Commercial  $54   $   $64   $ 
Commercial real estate:                    
Other   947        754     
1 – 4 Family residential:                    
Owner occupied   321        219     
Non-owner occupied   673        723     
Consumer                
Total  $1,995   $   $1,760   $ 

 

Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

18
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 by class of loans:

   Days Past Due             
           90 Days or             
   30 - 59   60 - 89   Greater &   Total   Loans Not     
   Days   Days   Non-accrual   Past Due   Past Due   Total 
Commercial  $   $   $35   $35   $18,933   $18,968 
Commercial real estate:                              
Construction                   597    597 
Other       466    226    692    102,671    103,363 
1-4 Family residential:                              
Owner occupied   141        183    324    34,620    34,944 
Non-owner occupied                   17,893    17,893 
Construction                   329    329 
Consumer       15        15    8,429    8,444 
Total  $141   $481   $444   $1,066   $183,472   $184,538 

 

The above table of past due loans includes the recorded investment in non-accrual loans of $440 in the 60-89 days past due category and $1,111 in the loans not past due category.

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2011 by class of loans:

   Days Past Due             
           90 Days or             
   30 - 59   60 - 89   Greater &   Total   Loans Not     
   Days   Days   Non-accrual   Past Due   Past Due   Total 
Commercial  $   $1   $   $1   $19,335   $19,336 
Commercial real estate:                              
Construction                   1,053    1,053 
Other       242    412    654    96,791    97,445 
1-4 Family residential:                              
Owner occupied       167    23    190    34,438    34,628 
Non-owner occupied       44    175    219    18,877    19,096 
Construction                   597    597 
Consumer   26            26    5,842    5,868 
Total  $26   $454   $610   $1,090   $176,933   $178,023 

 

The above table of past due loans includes the recorded investment in non-accrual loans of $410 in the 60 – 89 days past due category and $740 in the loans not past due category.

 

Troubled Debt Restructurings:

As of March 31, 2012, the recorded investment of loans classified as troubled debt restructurings was $2,071 with $274 of specific reserves allocated to these loans. As of June 30, 2011, the recorded investment of loans classified as troubled debt restructurings was $1,341 with $229 of specific reserves allocated to these loans. As of March 31, 2012 and June 30, 2011, the Corporation had not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

 

19
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

During the nine months ending March 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a permanent reduction of the recorded investment in the loan; or a temporary reduction in the payment amount to interest only.

 

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 12 months to 25 years. Modifications involving an extension of the maturity date were for a period of 6.5 years to 25 years.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending March 31, 2012:

 

       Pre-Modification   Post-Modification 
   Number of   Outstanding Recorded   Outstanding Recorded 
   Loans   Investment   Investment 
Troubled debt restructuring:               
Commercial   1   $85   $85 
Commercial real estate:               
Other   2    137    137 
1 – 4 Family residential:               
Owner occupied   1    114    113 
Non-owner occupied   7    534    458 
Total   11   $870   $793 

 

The troubled debt restructurings described above increased the allowance for loan losses by $32 and resulted in charge offs of $63 during the nine months ending March 31, 2012.

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the period ending March 31, 2012:

 

   Number of   Recorded 
   Loans   Investment 
Troubled debt restructuring:          
Commercial real estate:          
Other   1   $440 

 

20
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

 

The troubled debt restructuring that subsequently defaulted described above did not increase the allowance for loan losses or have any charge-off during the period ending March 31, 2012.

 

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. Management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt and affirm the risk ratings for the loans and leases in their respective portfolio on an annual basis. The Corporation uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans was as follows:

 

21
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

   As of March 31, 2012 
       Special           Not 
   Pass   Mention   Substandard   Doubtful   Rated 
Commercial  $18,118   $173   $45   $152   $480 
Commercial real estate:                         
Construction   428    169             
Other   91,606    8,031    1,668    1,083    975 
1-4 Family residential real estate:                         
Owner occupied   4,355        100    414    30,075 
Non-owner occupied   13,320    2,481    888    1,029    175 
Construction   188                141 
Consumer                   8,444 
Total  $128,015   $10,854   $2,701   $2,678   $40,290 
                          
    As of June 30, 2011 
         Special              Not 
    Pass    Mention    Substandard    Doubtful    Rated 
Commercial  $17,469   $743   $884   $82   $158 
Commercial real estate:                         
Construction   868    76    109         
Other   87,857    5,624    2,055    1,405    504 
1-4 Family residential real estate:                         
Owner occupied   5,526    305    372    319    28,106 
Non-owner occupied   14,549    1,976    1,657    723    191 
Construction   28                569 
Consumer                   5,868 
Total  $126,297   $8,724   $5,077   $2,529   $35,396 

 

Note 4 - Fair Value

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

22
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

 

Securities available-for-sale: When available, the fair values of available-for-sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs). The fair value of the Level 3 security is obtained from a third-party pricing service. Discounted cash flows are calculated using spread to the swap and LIBOR curves. Rating agency and industry research reports as well as defaults and deferrals on the individual security is reviewed and incorporated into the calculation.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

       Fair Value Measurements at 
March 31, 2012 Using
 
   Balance at 
March 31,
2012
   Level 1   Level 2   Level 3 
Securities available-for-sale:                    
U.S. government-sponsored entities and agencies  $9,639   $   $9,639   $ 
Obligations of states and political subdivisions   34,207        34,207     
Mortgage-backed securities – residential   50,733        50,733     
Collateralized mortgage obligations   15,130        15,130     
Trust preferred security   64            64 

 

       Fair Value Measurements at 
June 30, 2011 Using
 
   Balance at 
June 30, 2011
   Level 1   Level 2   Level 3 
Securities available-for-sale:                    
U.S. government-sponsored entities and agencies  $16,260   $   $16,260   $ 
Obligations of states and political subdivisions   25,098        25,098     
Mortgage-backed securities - residential   30,596        30,596     
Collateralized mortgage obligations   19,868        19,868     
Trust preferred security   67            67 

 

There were no transfers between Level 1 and Level 2 during the nine months ended March 31, 2012 or the 2011 fiscal year.

 

23
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents a reconciliation of the trust preferred security measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended March 31, 2012 and 2011:

 

   2012   2011 
Beginning balance  $67   $422 
Realized losses included in non-interest income       (200)
Change in fair value included in other comprehensive income   (3)   (158)
Ending balance, March 31  $64   $64 

 

The significant unobservable inputs used in the fair value measurement of the Corporation’s trust preferred security are probabilities of specific-issuer defaults and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement.

 

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following:

 

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

24
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

       Fair Value Measurements at 
March 31, 2012 Using
 
   Balance at 
March 31, 2012
   Level 1   Level 2   Level 3 
Impaired loans:                    
Commercial  $12   $   $   $12 
Commercial real estate:                    
Other   646            646 
1-4 Family                    
Owner occupied   40            40 
Non-owner occupied   431            431 

 

       Fair Value Measurements at 
June 30, 2011 Using
 
   Balance at 
June 30, 2011
   Level 1   Level 2   Level 3 
Impaired loans:                    
Commercial  $51   $   $   $51 
Commercial real estate:                    
Other   871            871 
1-4 Family                    
Owner occupied   317            317 
Non-owner occupied   434            434 

 

Impaired loans, which are generally measured for impairment using the fair value of the collateral for collateral dependant loans, had a principal balance of $1,516, with a valuation allowance of $387 at March 31, 2012. As of June 30, 2011, impaired loans with a principal balance of $2,105 had a valuation allowance of $432. The resulting impact to the provision for loan losses was $20 and $303 being recorded for the nine month periods ended March 31, 2012 and 2011, respectively.

 

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans included in the above tables primarily relate to adjustments made to the value set forth in the appraisal by deducting estimated holding costs, costs to sell and a distressed sale adjustment. During the reported periods, collateral discounts ranged from 20% to 40% in the case of real estate collateral to 50% in the case of equipment collateral.

 

25
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Disclosure of the fair value of financial assets and financial liabilities is required for those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.

 

Estimated fair value for cash and cash equivalents, certificates of deposits in other financial institutions, accrued interest receivable and payable, demand and savings deposits and short-term borrowings were considered to approximate carrying value. The methodologies for other financial assets and financial liabilities are discussed below:

 

Loans: Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans that reprice at least annually and for fixed rate commercial loans with maturities of six months or less which possess normal risk characteristics, carrying value was determined to be fair value. Fair value of other types of loans (including adjustable rate loans which reprice less frequently than annually and fixed rate term loans or loans which possess higher risk characteristics) was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar anticipated maturities. 

 

Time deposits: Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at March 31, 2012 and June 30, 2011, for deposits of similar remaining maturities. Estimated fair value does not include the benefit that result from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

 

Federal Home Loan Bank advances: Fair value of Federal Home Loan Bank advances was estimated using current rates at March 31, 2012 and June 30, 2011 for similar financing.

 

Federal bank and other restricted stocks include stock acquired for regulatory purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock that are accounted for at cost due to restrictions placed on their transferability; and therefore, are not subject to the fair value disclosure requirements. The Corporation’s lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.

 

26
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table shows the estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

   March 31, 2012   June 30, 2011 
  

Carrying
Amount
 

   Estimated
Fair
Value
  

Carrying
Amount
 

  

Estimated
Fair
Value
 

 
Financial Assets:                    
Level 2 inputs:                    
Cash and cash equivalents  $20,377   $20,377   $13,828   $13,828 
Certificates of deposits in other financial institutions   3,430    3,430    4,900    4,900 
Accrued interest receivable   1,085    1,085    980    980 
Level 3 inputs:                    
Loans, net   181,861    183,830    175,450    174,182 
Financial Liabilities:                    
Level 2 inputs:                    
Demand and savings deposits   195,755    195,755    159,302    159,302 
Time deposits   83,549    84,453    88,944    89,725 
Short-term borrowings   14,467    14,467    17,012    17,012 
Federal Home Loan Bank advances   6,477    7,218    7,535    7,884 
Accrued interest payable   67    67    82    82 

 

27
 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 5 – Earnings Per Share

 

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period.  Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards.  The following table details the calculation of basic and diluted earnings per share:

 

   For the Three Months
Ended March 31,
   For the Nine Months
Ended March 31,
 
   2012   2011   2012   2011 
Basic:                    
Net income available to common shareholders  $686   $482   $2,164   $1,689 
Weighted average common shares outstanding   2,051,024    2,044,179    2,050,390    2,041,402 
Basic income per share  $0.33   $0.24   $1.06   $0.83 
                     
Diluted:                    
Net income available to common shareholders  $686   $482   $2,164   $1,689 
Weighted average common shares outstanding   2,051,024    2,044,179    2,050,390    2,041,402 
Dilutive effect of restricted stock   534        445     
Total common shares and dilutive potential common shares   2,051,558    2,044,179    2,050,835    2,041,402 
Dilutive income per share  $0.33   $0.24   $1.06   $0.83 

 

28
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

(Dollars in thousands, except per share data)

 

General

The following is management’s analysis of the Corporation’s results of operations for the three and nine month periods ended March 31, 2012, compared to the same periods in 2011, and the consolidated balance sheet at March 31, 2012 compared to June 30, 2011. This discussion is designed to provide a more comprehensive review of the operating results and financial condition than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

 

Overview

Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio (the Corporation), owns all of the issued and outstanding common shares of Consumers National Bank, a bank chartered under the laws of the United States of America (the Bank). The Corporation’s activities have been limited primarily to holding the common shares of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Stark, Columbiana, Carroll and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.

 

Results of Operations

Three and Nine Months Ended March 31, 2012 and March 31, 2011

 

Net Income

Net income increased to $686, to $0.33 per common share, in the third quarter of fiscal year 2012 compared with $482, or $0.24 per common share, in the prior year period. For the year-to-date period, net income increased to $2,164, or $1.06 per common share, compared with $1,689, or $0.83 per common share, from the same year ago period. The following key factors summarize our results of operations for the nine months ending March 31, 2012:

·net interest income increased by $636, or 7.9%, in 2012 from the same period in 2011;
·loan loss provision expense in 2012 totaled $170 compared to $344 from the same period in 2011;
·net gains on the sale of securities totaled $118 for 2012 compared to a net loss of $130 in 2011 that includes an other-than-temporary impairment loss related to a trust preferred security the Corporation owns; and
·total noninterest expenses increased $512, or 7.1% in 2012, an increase principally related to salary and employee benefits mainly due to staff hired for the branch location in Hartville, Ohio that opened during the fourth fiscal quarter of 2011.

 

29
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Return on average equity (ROE) and return on average assets (ROA) were 10.09% and 0.86%, respectively, for the third quarter of fiscal year 2012 compared to 8.11% and 0.68%, respectively, for the third quarter of fiscal year 2011.

 

ROE and ROA were 10.87% and 0.92%, respectively, for the 2012 fiscal year-to-date period compared to 9.28% and 0.81%, respectively, for the same periods last year.

 

Net Interest Income

Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total average interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

 

The Corporation’s net interest margin for the three months ended March 31, 2012 was 4.03%, compared to 4.20% for the same year ago period. Net interest income for the three months ended March 31, 2012 increased by $211, or 7.8%, to $2,919 from $2,708 for the same year ago period. The increase in net interest income was primarily the result of a decline in the Corporation’s cost of funds and an increase in average interest-earning assets.

 

Interest income for the three months ended March 31, 2012 increased by $114, or 3.6%, from the same year ago period. An increase of $34,403, or 12.6%, in average interest-earning assets more than offset the impact the low interest rate environment has had on the yield of average interest-earning assets. Interest expense for the three months ended March 31, 2012 decreased by $97, or 21.9%, from the same year ago period. The Corporation’s cost of funds decreased to 0.60% for the three month period ended March 31, 2012 from 0.89% for the same year ago period mainly due to lower market rates affecting the rates paid on interest-bearing deposit accounts and short-term borrowings. The Corporation has introduced a NOW checking account product that pays a higher rate of interest to customers who meet certain qualifications, with one of the main qualifications being the frequent use of a debit card. As a result, debit card interchange income has increased (see discussion in “Non-Interest Income” section) and the cost of the NOW checking account increased from 0.12% to 0.24% from the same year ago period.

 

30
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

The Corporation’s net interest margin for the nine months ended March 31, 2012 was 4.07%, compared to 4.25% for the same period a year ago. Net interest income for the nine months ended March 31, 2012 increased by $636, or 7.9%, to $8,713 from $8,077 for the same year ago period. The increase in net interest income was primarily the result of a decline in the Corporation’s cost of funds and an increase of $34,997, or 13.2%, in average interest-earning assets. The Corporation’s cost of funds decreased to 0.68% for the nine month period ended March 31, 2012 from 1.01% for the same year ago period mainly due to lower market rates affecting the rates paid on interest-bearing deposit accounts and short-term borrowings. The decline in the cost of funds and increase in average interest-earning assets more than offset the impact of the decline in the yield on average interest-earning assets to 4.57% for the nine month period ended March 31, 2012 from 5.01% from the same year ago period.

 

31
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended March 31,

(In thousands, except percentages)

 

   2012   2011 
   Average Balance  

 

Interest

  

Yield/

Rate

   Average Balance  

 

Interest

  

Yield/

Rate

 
Interest-earning assets:                              
Taxable securities  $76,924   $445    2.35%  $56,093   $391    2.87%
Nontaxable securities (1)   30,330    396    5.56    22,344    335    5.91 
Loans receivable (1)   180,594    2,546    5.67    177,060    2,523    5.78 
Interest bearing deposits and federal funds sold   19,227    12    0.25    17,175    15    0.35 
Total interest-earning assets   307,075    3,399    4.49%   272,672    3,264    4.86%
                               
Noninterest-earning assets   13,251              12,972           
                               
Total Assets  $320,326             $285,644           
                               
Interest-bearing liabilities:                              
NOW  $33,044   $20    0.24%  $13,862   $4    0.12%
Savings   94,833    26    0.11    75,623    38    0.20 
Time deposits   83,517    243    1.17    90,889    331    1.48 
Short-term borrowings   13,411    5    0.15    13,844    9    0.26 
FHLB advances   6,484    51    3.16    7,703    60    3.16 
Total interest-bearing liabilities   231,289    345    0.60%   201,921    442    0.89%
                               
Noninterest-bearing liabilities:                              
Noninterest-bearing checking accounts   59,493              57,801           
Other liabilities   2,205              1,836           
Total liabilities   292,987              261,558           
Shareholders’ equity   27,339              24,086           
                               
Total liabilities and shareholders’ equity  $320,326             $285,644           
                               
Net interest income, interest rate spread (1)       $3,054    3.89%       $2,822    3.97%
                               
Net interest margin (net interest as a percent of average interest-earning assets) (1)             4.03%             4.20%
                               
Federal tax exemption on non-taxable securities and loans included in interest income       $135             $114      
                               
Average interest-earning assets to interest-bearing liabilities   132.77%             135.04%          

 

 

(1) calculated on a fully taxable equivalent basis

 

32
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Average Balance Sheets and Analysis of Net Interest Income for the Nine Months Ended March 31,

(In thousands, except percentages)

 

   2012   2011 
   Average Balance  

 

Interest

  

Yield/

Rate

   Average Balance  

 

Interest

  

Yield/

Rate

 
Interest-earning assets:                              
Taxable securities  $74,303   $1,400    2.54%  $51,862   $1,189    3.12%
Nontaxable securities (1)   27,380    1,126    5.69    21,972    966    5.85 
Loans receivable (1)   179,538    7,654    5.67    175,644    7,709    5.85 
Interest bearing deposits and federal funds sold   18,412    42    0.30    15,158    38    0.33 
Total interest-earning assets   299,633    10,222    4.57%   264,636    9,902    5.01%
                               
Noninterest-earning assets   13,301              12,422           
                               
Total Assets  $312,934             $277,058           
                               
Interest-bearing liabilities:                              
NOW  $23,325   $33    0.19%  $13,887   $14    0.13%
Savings   88,895    89    0.13    69,994    113    0.22 
Time deposits   85,979    802    1.24    92,019    1,143    1.65 
Short-term borrowings   15,312    23    0.20    14,052    33    0.31 
FHLB advances   6,907    180    3.47    8,073    195    3.22 
Total interest-bearing liabilities   220,418    1,127    0.68%   198,025    1,498    1.01%
                               
Noninterest-bearing liabilities:                              
Noninterest-bearing checking accounts   63,997              52,820           
Other liabilities   2,045              1,972           
Total liabilities   286,460              252,817           
Shareholders’ equity   26,474              24,241           
                               
Total liabilities and shareholders’ equity  $312,934             $277,058           
                               
Net interest income, interest rate spread (1)       $9,095    3.89%       $8,404    4.00%
                               
Net interest margin (net interest as a percent of average interest-earning assets) (1)             4.07%             4.25%
                               
Federal tax exemption on non-taxable securities and loans included in interest income       $382             $327      
                               
Average interest-earning assets to interest-bearing liabilities   135.94%             133.64%          

  

33
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Provision for Loan Losses

The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management's assessment of the estimated probable credit losses in the Bank’s loan portfolio that have been incurred at each balance sheet date. For the three month period ended March 31, 2012, the provision for loan losses was $11, a decrease of $89 from the same prior year period. For the nine month period ended March 31, 2012, the provision for loan losses was $170, a decrease of $174 from the same prior year period.

 

Net charge-offs for the nine month period ending March 31, 2012 were $57, or 0.04% of total average loans on an annualized basis, compared with $519, or 0.39% of total average loans, for the same period last year. For the nine month period ended March 31, 2012, charge-offs of $63 were related to a non-owner occupied 1-4 family residential loan that was modified as a troubled debt restructuring.

 

The allowance for loan losses as a percentage of loans was 1.18% at June 30, 2011 and 1.20% at March 31, 2012. For the year-to-date period, the provision for the commercial real estate portfolio was $86 primarily as a result of an increase in loans classified as special mention from June 30, 2011. The provision for the commercial loan portfolio was a negative $57 for the current year-to-date period primarily as a result of the upgrade of commercial loans from substandard and special mention to pass.

 

Non-performing loans were $1,995 as of March 31, 2012 and represented 1.08% of total loans. This compared with $1,760, or 0.99%, at June 30, 2011 and $2,168, or 1.19%, as of March 31, 2011. The allowance for loan losses to total non-performing loans at March 31, 2012 was 110.98% compared with 119.38% at June 30, 2011 and 100.19% at March 31, 2011.

 

The provision for loan losses for the period ending March 31, 2012 was considered sufficient by management for maintaining an appropriate allowance for loan losses for probable incurred losses.

 

Non-Interest Income

Non-interest income totaled $585 for the third quarter of fiscal year 2012, compared to $402 for the same period last year. Non-interest income for the third quarter of fiscal year 2012 included a net loss from the sale of securities of $37. During the same year ago period, a $150 other-than-temporary impairment loss was recorded related to a trust preferred security the Corporation owns.

 

Service charges on deposits increased by $37, or 12.3%, during the third quarter of fiscal year 2012 mainly due to fee increases on personal checking accounts that went into effect in December 2011 and an increase in overdraft fee income from the same period last year. Debit card interchange income increased by $27, or 16.9%, from the same period last year mainly due to an increase in debit card usage by our customers.

 

34
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Non-interest income totaled $1,954 for the first nine months of fiscal year 2012, compared to $1,590 for the same period last year. Non-interest income for the current year-to-date period included a net gain from the sale of securities of $118 and a $53 loss from the sale of other real estate that was acquired through loan foreclosure. During the same year ago period, a $200 other-than-temporary impairment loss was recorded related to a trust preferred security the Corporation owns.

 

Service charges on deposits increased by $98, or 10.2%, during the first nine months of fiscal year 2012 mainly due to an increase in overdraft fee income from the same period last year and fee increases on personal checking accounts that went into effect in December 2011. Debit card interchange income increased by $78, or 16.7%, during the current year-to-date period mainly due to an increase in debit card usage by our customers.

 

Non-Interest Expenses

Total non-interest expenses increased to $2,611, or 7.9%, during the third quarter of fiscal year 2012, compared with $2,419 during the same year ago period.

 

Salaries and employee benefits increased by $187, or 15.2%, during the third quarter of fiscal year 2012 mainly due to staff hired for the branch location in Hartville, Ohio that opened during the fourth fiscal quarter of 2011 and normal merit increases that went into effect on July 1, 2011.

 

Occupancy and equipment increased by $5, or 1.9%, during the third quarter of fiscal year 2012 mainly due to expenses associated with the new branch location in Hartville, Ohio that were partially offset by lower depreciation expense on equipment.

 

Federal Deposit Insurance Corporation (FDIC) assessments decreased by $29, or 37.7%, compared to the same period last year mainly due to an industry wide change in the way FDIC insurance assessments are calculated. On April 1, 2011, the deposit insurance assessment base changed from total domestic deposits to average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act.

 

Debit card processing expenses increased by $13, or 15.5%, during the third quarter of fiscal year 2012 mainly as a result of increased debit card usage by our customers.

 

The amortization of intangible expense declined from the previous year since the core deposit purchase premium of the Lisbon, Ohio branch that was purchased in January 2000 is fully amortized.

 

35
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Total non-interest expenses increased to $7,673, or 7.1%, during the first nine months of fiscal year 2012, compared with $7,161 during the same year ago period.

 

Salaries and employee benefits increased by $462, or 12.8%, during the current year-to-date period mainly due to staff hired for the branch location in Hartville, Ohio that opened during the fourth fiscal quarter of 2011, staff that was added in the lending function during the first fiscal quarter of 2011 and normal merit increases that went into effect on July 1, 2011.

 

Occupancy and equipment increased by $10, or 1.3%, during the current year-to-date period mainly due to expenses associated with the new branch location in Hartville, Ohio that were partially offset by lower depreciation expense on equipment.

 

Federal Deposit Insurance Corporation (FDIC) assessments decreased by $86, or 36.9%, compared to the same period last year mainly due to an industry wide change in the way FDIC insurance assessments are calculated. On April 1, 2011, the deposit insurance assessment base changed from total domestic deposits to average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act.

 

Marketing and advertising expenses increased by $49, to $210 compared to the same period last year mainly due to an increase in marketing efforts as a result of the opening of the Hartville, Ohio branch location.

 

Debit card processing expenses increased by $32, or 12.7%, during the first nine months of fiscal year 2012 mainly as a result of increased debit card usage by our customers.

 

The amortization of intangible expense declined from the previous year since the core deposit purchase premium of the Lisbon, Ohio branch that was purchased in January 2000 is fully amortized.

 

Income Taxes

Income tax expense for the three month period ended March 31, 2012 increased by $87, to $196 from $109, compared to a year ago. The effective tax rate was 22.2% for the current quarter as compared to 18.4% for the same period last year.

 

Income tax expense for the nine month period ended March 31, 2012 increased by $187, to $660 from $473, compared to a year ago. The effective tax rate was 23.4% for the current period as compared to 21.9% for the same period last year.

 

36
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

The effective tax rate differed from the federal statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions, loans and earnings on bank owned life insurance.

 

Financial Condition

Total assets at March 31, 2012 were $329,773 compared to $300,140 at June 30, 2011, an increase of $29,633, or an annualized 13.1%.

 

Available-for-sale securities increased by $17,884 from $91,889 at June 30, 2011 to $109,773 at March 31, 2012 due to the deployment of excess liquidity attributed to an increase in deposit balances. Within the securities portfolio, the Corporation owns a trust preferred security, which represents CDOs issued by other financial and insurance companies. As of March 31, 2012, the trust preferred security had an adjusted amortized cost of $202 and a fair value of $64. The security is part of a pool of issuers that support a more senior tranche of securities. Due to the illiquidity in the market, it is unlikely the Corporation would be able to recover its investment in this security if the Corporation sold the security at this time. Due to an increase in principal and/or interest deferrals by the issuers of the underlying securities, the cash interest payments for the trust preferred security are being deferred. On March 31, 2012, the lowest credit rating on this security was Fitch’s rating of C, which is defined as highly speculative. The issuers in this security are primarily banks, bank holding companies and a limited number of insurance companies. The investment security is evaluated using a model to compare the present value of expected cash flows to prior periods expected cash flows to determine if there has been an adverse change in cash flows during the period. The discount rate used to calculate the cash flows is the coupon rate of the security, based on the forward LIBOR curve. We calculate other-than-temporary impairments using a model that considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and all interest payment deferrals are treated as defaults with an assumed recovery rate of 15% on deferrals. In addition we use the model to “stress” the CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. According to the March 31, 2012 analysis, the expected cash flows were above the recorded amortized cost of the trust preferred security. The accumulated other-than-temporary impairment loss recognized in earnings was $780 at March 31, 2012 and June 30, 2011. If there is further deterioration in the underlying collateral of this security, other-than-temporary impairments may also occur in future periods.

 

37
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Loan receivables increased by $6,524, or 3.7%, to $184,075 at March 31, 2012 compared to $177,551 at June 30, 2011.

 

Non-Performing Assets

The following table presents the aggregate amounts of non-performing assets and respective ratios as of the dates indicated.

 

   March 31,
2012
   June 30,
2011
   March 31,
2011
 
Non-accrual loans  $1,995   $1,760   $2,097 
Loans past due over 90 days and still accruing            
Total non-performing loans   1,995    1,760    2,097 
Other real estate owned       76     
Total non-performing assets  $1,995   $1,836   $2,097 
                
Non-performing loans to total loans   1.08%   0.99%   1.19%
Allowance for loan losses to total non-performing loans   110.98%   119.38%   100.19%

 

As of March 31, 2012, impaired loans totaled $2,675, of which $1,974 are included in non-accrual loans. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. Impaired loans and non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors are closely monitoring these loans and believe that the prospects for recovery of principal and interest, less identified specific reserves, are favorable.

 

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

 

Liquidity

The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of our customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances of industry or market stress. Cash is used to fund loans, purchase investments, fund the maturity of liabilities, and at times to fund deposit outflows and operating activities. The Corporation’s principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts from securities; borrowings; and operations. Management considers the asset position of the Corporation to be sufficiently liquid to meet normal operating needs and conditions. The Corporation's earning assets are mainly comprised of loans and investment securities. 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.

 

38
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Net cash inflow from operating activities for the nine month period ended March 31, 2012 was $3,735, net cash outflows from investing activities was $24,006 and net cash inflows from financing activities was $26,820. A major source of cash was $27,286 from sales, maturities, calls or principal pay downs on available-for-sale securities and a $31,058 increase in deposits. A major use of cash included the $45,105 purchase of securities. Total cash and cash equivalents was $20,377 as of March 31, 2012 compared to $13,828 at June 30, 2011 and $14,792 at March 31, 2011.

 

The Bank offers several types of deposit products to its customers. The rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. Total deposits increased by $31,058, or 16.7% on an annualized basis, during the first nine months of fiscal year 2012. Also, during the same period, the overall cost for funds decreased by 33 basis points from the same year ago period. Deposit growth has been impacted by the oil and gas activity in the Corporation’s market area that is located in the Utica and Marcellus Shale region.

 

To provide an additional source of liquidity, the Corporation has entered into an agreement with the Federal Home Loan Bank (FHLB) of Cincinnati. At March 31, 2012, FHLB advances totaled $6,477 as compared with $7,535 at June 30, 2011. As of April 30, 2012, the Bank had the ability to borrow an additional $17,516 from the FHLB based on a blanket pledge of qualifying first mortgage loans. In October 2011, the Corporation prepaid $1,000 of outstanding FHLB advances with maturities of less than one year and a weighted average rate of 3.44%. The prepayment resulted in a prepayment penalty of $17 that was recognized in interest expense in the second quarter of fiscal year 2012. The Corporation considers the FHLB to be a reliable source of liquidity funding, secondary to its deposit base.

 

Short-term borrowings consisted of repurchase agreements which is a financing arrangement that matures daily. The Bank pledges securities as collateral for the repurchase agreements. Short-term borrowings decreased to $14,467 at March 31, 2012 from $17,012 at June 30, 2011.

 

Jumbo time deposits (those with balances of $100 thousand and over) decreased from $34,707 at June 30, 2011 to $31,418 at March 31, 2012. These deposits are monitored closely by the Corporation and are mainly priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee-paid broker to obtain deposits from outside its normal service area as an additional source of funding. The Corporation however, does not rely upon these deposits as a primary source of funding. Although management monitors interest rates on an ongoing basis, a quarterly 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.

 

39
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Capital Resources

Total shareholders’ equity increased by $2,152 from June 30, 2011 to $27,476 as of March 31, 2012. The increase was mainly due to net income for the current nine month period and an increase in the fair value of available-for-sale securities offset by cash dividends paid during the period.

 

The Bank is subject to various regulatory capital requirements administered by federal regulatory 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. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Corporation’s financial statements.

 

The Bank’s leverage and risk-based capital ratios as of March 31, 2012 were 7.4% and 14.1%, respectively. This compares to leverage and risk-based capital ratios of 7.5% and 14.0%, respectively, as of June 30, 2011. The Bank exceeded minimum regulatory capital requirements to be considered well-capitalized for both periods. Management is not aware of any matters occurring subsequent to March 31, 2012 that would cause the Bank’s capital category to change.

 

Critical Accounting Policies

The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations are, to a large degree, dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.

 

The Corporation has identified the appropriateness of the allowance for loan losses and the valuation of securities as critical accounting policies and an understanding of these policies are necessary to understand the financial statements. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Footnote one (Securities and Allowance for Loan Losses), footnote two (Securities), footnote three (Loans) and Management Discussion and Analysis of Financial Condition and Results from Operation (Critical Accounting Policies) of the 2011 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses and valuation of securities and other-than-temporary impairment. There have been no significant changes in the application of accounting policies since June 30, 2011.

 

40
 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

Forward-Looking Statements

When used in this report (including information incorporated by reference in this report), 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond the Corporation’s control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, the Corporation undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Factors that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:

·regional and national economic conditions becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality of assets and the underlying value of collateral could prove to be less valuable than otherwise assumed;
·the economic impact from the oil and gas activity in the region could be less than expected or the timeline for development could be longer than anticipated;
·the nature, extent, and timing of government and regulatory actions;
·material unforeseen changes in the financial condition or results of Consumers National Bank’s customers;
·changes in levels of market interest rates which could reduce anticipated or actual margins;
·competitive pressures on product pricing and services; and
·a continued deterioration in market conditions causing debtors to be unable to meet their obligations.

 

The risks and uncertainties identified above are not the only risks the Corporation faces. Additional risks and uncertainties not presently known to the Corporation or that the Corporation currently believes to be immaterial also may adversely affect the Corporation. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on the Corporation’s business, financial condition and results of operations.

 

41
 

 

CONSUMERS BANCORP, INC.

 

Item 4 – Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rule 13a- 15e. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

 

Changes in Internal Controls Over Financial Reporting

There have not been any changes in the Corporation's internal control over financial reporting that occurred during the Corporation's last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

42
 

 

CONSUMERS BANCORP, INC.

 

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

None

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3 – Defaults Upon Senior Securities

None

 

Item 4 – Mine Safety Disclosures

Not Applicable

 

Item 5 – Other Information

None

 

Item 6 – Exhibits

 

Exhibit  
Number Description
Exhibit 11 Statement regarding Computation of Per Share Earnings (included in Note 1 to the Consolidated Financial Statements).
   
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
   
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
   
Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
   
Exhibit 101 The following material from Consumers Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language) includes: (1) Unaudited Consolidated Balance Sheets, (2) Unaudited Consolidated Statements of Income, (3) Unaudited Consolidated Statements of Comprehensive Income, (4) Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements.

 

43
 

 

CONSUMERS BANCORP, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
 
    CONSUMERS BANCORP, INC. 
    (Registrant)
     
Date: May 14, 2012    /s/ Ralph J. Lober, II
    Ralph J. Lober, II
President & Chief Executive Officer
(principal executive officer)
     
Date: May 14, 2012    /s/ Renee K. Wood
    Chief Financial Officer & Treasurer 
    (principal financial officer) 
     

 

44
 

 

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XOTC:CBKM Quarterly Report 10-Q Filing - 3/31/2012
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