UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 30, 2014

 

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 (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 November 14, 2014
	2,732,341 Common Shares

 

 

CONSUMERS BANCORP, INC.
FORM 10-Q
QUARTER ENDED September 30, 2014

 

Table of Contents

 

 

		Page Number (s)
Part I – Financial Information
Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2014 and June 30, 2014		1
Consolidated Statements of Income for the three months ended September 30, 2014 and 2013		2
Consolidated Statements of Comprehensive Income for the three months ended September 30, 2014 and 2013		3
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30, 2014 and 2013		4
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2014 and 2013		5
Notes to the Consolidated Financial Statements		6-26
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		27-35
Item 3 – Not Applicable for Smaller Reporting Companies
Item 4 – Controls and Procedures		36
Part II – Other Information
Item 1 – Legal Proceedings		37
Item 1A – Not Applicable for Smaller Reporting Companies
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3 – Defaults Upon Senior Securities		37
Item 4 – Mine Safety Disclosure		37
Item 5 – Other Information		37
Item 6 – Exhibits		37
Signatures		38

 

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(Dollars in thousands, except per share data)		September 30, 2014				June 30, 2014
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions		$	7,537			$	9,049
Federal funds sold and interest-bearing deposits in financial institutions			3,175				2,076
Total cash and cash equivalents			10,712				11,125
Certificates of deposit in other financial institutions			4,206				2,703
Securities, available-for-sale			133,415				126,393
Securities, held-to-maturity (fair value of $2,957 at September 30, 2014 and $3,040 at June 30, 2014)			2,910				3,000
Federal bank and other restricted stocks, at cost			1,396				1,396
Loans held for sale			490				559
Total loans			223,183				224,966
Less allowance for loan losses			(2,419	)			(2,405	)
Net loans			220,764				222,561
Cash surrender value of life insurance			6,011				5,967
Premises and equipment, net			7,895				6,713
Other real estate owned			54				204
Accrued interest receivable and other assets			1,980				1,856
Total assets		$	389,833			$	382,477
LIABILITIES
Deposits
Non-interest bearing demand		$	76,812			$	75,353
Interest bearing demand			44,375				42,718
Savings			126,143				125,151
Time			68,871				70,675
Total deposits			316,201				313,897
Short-term borrowings			21,564				19,489
Federal Home Loan Bank advances			8,282				6,296
Accrued interest and other liabilities			3,240				2,592
Total liabilities			349,287				342,274
Commitments and contingent liabilities			—				—
SHAREHOLDERS’ EQUITY
Preferred stock (no par value, 350,000 shares authorized, none outstanding)			—				—
Common stock (no par value, 3,500,000 shares authorized; 2,854,133 shares issued as of September 30, 2014 and June 30, 2014)			14,630				14,630
Retained earnings			26,370				25,940
Treasury stock, at cost (121,267 and 129,875 common shares as of September 30, 2014 and June 30, 2014, respectively)			(1,652	)			(1,650	)
Accumulated other comprehensive income			1,198				1,283
Total shareholders’ equity			40,546				40,203
Total liabilities and shareholders’ equity		$	389,833			$	382,477

 

See accompanying notes to consolidated financial statements

 

 

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

		Three Months ended September 30,
(Dollars in thousands, except per share amounts)		2014				2013
Interest income
Loans, including fees		$	2,704			$	2,667
Securities, taxable			463				281
Securities, tax-exempt			352				328
Federal funds sold and other interest bearing deposits			14				12
Total interest income			3,533				3,288
Interest expense
Deposits			190				199
Short-term borrowings			7				6
Federal Home Loan Bank advances			48				50
Total interest expense			245				255
Net interest income			3,288				3,033
Provision for loan losses			67				133
Net interest income after provision for loan losses			3,221				2,900
Non-interest income
Service charges on deposit accounts			320				363
Debit card interchange income			229				214
Bank owned life insurance income			44				46
Securities gains, net			37				—
Gain on disposition of other real estate owned			22				—
Other			139				72
Total non-interest income			791				695
Non-interest expenses
Salaries and employee benefits			1,717				1,560
Occupancy and equipment			368				316
Data processing expenses			142				138
Professional and director fees			97				111
FDIC assessments			60				51
Franchise taxes			77				75
Marketing and advertising			66				65
Telephone and network communications			72				73
Debit card processing expenses			114				111
Other			359				349
Total non-interest expenses			3,072				2,849
Income before income taxes			940				746
Income tax expense			184				125
Net income		$	756			$	621
Basic and diluted earnings per share		$	0.28			$	0.24

 

See accompanying notes to consolidated financial statements

 

 

CONSUMERS BANCORP, INC.

Consolidated statements of comprehensive income (LOSS)

(Unaudited)

 

(Dollars in thousands)
		Three Months ended September 30,
		2014				2013
Net income		$	756			$	621
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Unrealized gains (losses) arising during the period			(91	)			302
Reclassification adjustment for gains included in income			(37	)			—
Net unrealized gain (losses)			(128	)			302
Income tax effect			(43	)			103
Other comprehensive income (loss)			(85	)			199
Total comprehensive income		$	671			$	820

 

See accompanying notes to consolidated financial statements.

 

 

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share data)
		Three Months ended September 30,
		2014				2013
Balance at beginning of period		$	40,203			$	28,143
Net income			756				621
Other comprehensive income (loss)			(85	)			199
Issuance of 655,668 shares for rights and public offering, net of offering costs of $762			—				9,237
130 Dividend reinvestment plan shares associated with forfeited and expired restricted stock awards retired to treasury stock during the three months ended September 30, 2014			—				—
Common cash dividends			(328	)			(328	)
Balance at the end of the period		$	40,546			$	37,872
Common cash dividends per share		$	0.12			$	0.12

 

See accompanying notes to consolidated financial statements.

 

 

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Dollars in thousands)		Three Months Ended September,
		2014				2013
Cash flows from operating activities
Net cash from operating activities		$	1,766			$	1,023
Cash flow from investing activities
Securities available-for-sale
Purchases			(15,545	)			(21,134	)
Maturities, calls and principal pay downs			3,840				5,331
Proceeds from sales of available-for-sale securities			4,372				—
Securities held-to-maturity
Principal pay downs			90				—
Net (increase) decrease in certificates of deposits in other financial institutions			(1,503	)			980
Net (increase) decrease in loans			1,730				(217	)
Acquisition of premises and equipment			(1,328	)			(483	)
Proceeds from sale of other real estate owned			128				—
Net cash from investing activities			(8,216	)			(15,523	)
Cash flow from financing activities
Net increase in deposit accounts			2,304				4,607
Net change in short-term borrowings			2,075				3,551
Net proceeds from rights and public offering			—				9,237
Proceeds from Federal Home Loan Bank advances			2,000				—
Repayments of Federal Home Loan Bank advances			(14	)			(18	)
Dividends paid			(328	)			(328	)
Net cash from financing activities			6,037				17,049
Increase (decrease) in cash or cash equivalents			(413	)			2,549
Cash and cash equivalents, beginning of period			11,125				9,356
Cash and cash equivalents, end of period		$	10,712			$	11,905
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest		$	244			$	251
Federal income taxes			200				260
Non-cash items:
Transfer from loans to repossessed assets			—				709
Expired and forfeited dividend reinvestment plan shares associated with restricted stock awards that were retired to treasury stock			2				—

 

See accompanying notes to consolidated financial statements.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

 

(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, 2014. 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: The Corporation 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. Any reclassifications had no impact on prior year net income or shareholders’ equity.

 

Recently Issued Accounting Pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Corporation is evaluating the effect of adopting this new accounting Update.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 2 – Securities

 

Available –for-Sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2014
Obligations of U.S. government-sponsored entities and agencies		$	21,650			$	67			$	(132	)		$	21,585
Obligations of state and political subdivisions			44,520				1,144				(145	)			45,519
Mortgage-backed securities – residential			61,674				768				(277	)			62,165
Collateralized mortgage obligations			3,553				37				(3	)			3,587
Trust preferred security			202				357				—				559
Total available-for-sale securities		$	131,599			$	2,373			$	(557	)		$	133,415

 

Held-to-Maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
September 30, 2014
Obligations of state and political subdivisions		$	2,910			$	47			$	—			$	2,957

 

Available–for-Sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2014
Obligations of U.S. government-sponsored entities and agencies		$	18,345			$	126			$	(35	)		$	18,436
Obligations of state and political subdivisions			44,645				1,124				(257	)			45,512
Mortgage-backed securities – residential			57,370				965				(231	)			58,104
Collateralized mortgage obligations			3,887				42				—				3,929
Trust preferred security			202				210				—				412
Total available-for-sale securities		$	124,449			$	2,467			$	(523	)		$	126,393

 

Held-to-Maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
June 30, 2014
Obligations of state and political subdivisions		$	3,000			$	40			$	—			$	3,040

 

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

 

		Three Months Ended September 30,
		2014				2013
Proceeds from sales		$	4,372			$	—
Gross realized gains			37				—

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The income tax provision applicable to realized gains amounted to $12 in 2014.

 

The amortized cost and fair values of debt securities at September 30, 2014, 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
Available-for-Sale
Due in one year or less		$	2,184			$	2,210
Due after one year through five years			10,758				10,818
Due after five years through ten years			33,709				34,130
Due after ten years			19,519				19,946
Total			66,170				67,104
Mortgage-backed securities – residential			61,674				62,165
Collateralized mortgage obligations			3,553				3,587
Trust preferred security			202				559
Total available-for-sale securities		$	131,599			$	133,415
Held-to-Maturity
Due after ten years			2,910				2,957
Total held-to-maturity securities		$	2,910			$	2,957

 

The following table summarizes the securities with unrealized losses at September 30, 2014 and June 30, 2014, 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
Available-for-sale		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
September 30, 2014
Obligations of U.S. government- sponsored entities and agencies		$	12,614			$	(111	)		$	1,479			$	(21	)		$	14,093			$	(132	)
Obligations of states and political subdivisions			2,532				(11	)			8,574				(134	)			11,106				(145	)
Mortgage-backed securities - residential			11,020				(59	)			9,707				(218	)			20,727				(277	)
Collateralized mortgage obligations			1,331				(3	)			—				—				1,331				(3	)
Total temporarily impaired		$	27,497			$	(184	)		$	19,760			$	(373	)		$	47,257			$	(557	)

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

		Less than 12 Months								12 Months or more								Total
Available-for-sale		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
June 30, 2014
Obligation of U.S. government- sponsored entities and agencies		$	1,492			$	(7	)		$	5,411			$	(28	)		$	6,903			$	(35	)
Obligations of states and political subdivisions			9,929				(223	)			3,719				(34	)			13,648				(257	)
Mortgage-backed securities - residential			10,403				(210	)			2,342				(21	)			12,745				(231	)
Total temporarily impaired		$	21,824			$	(440	)		$	11,472			$	(83	)		$	33,296			$	(523	)

 

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.

 

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

 

The unrealized losses within the securities portfolio as of September 30, 2014 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. The decline in fair value of the residential mortgage-backed securities, obligations of state and political subdivisions and obligations of U.S. government-sponsored entities and agencies is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

		September 30, 2014				June 30, 2014
Commercial		$	31,579			$	33,809
Commercial real estate:
Construction			3,285				3,688
Other			133,777				131,518
1 – 4 Family residential real estate:
Owner occupied			29,787				31,044
Non-owner occupied			15,817				16,505
Construction			817				186
Consumer			8,521				8,604
Subtotal			223,583				225,354
Less: Net deferred loan fees			(400	)			(388	)
Allowance for loan losses			(2,419	)			(2,405	)
Net Loans		$	220,764			$	222,561

 

 

 

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 September 30, 2014:

 

										1-4 Family
						Commercial				Residential
						Real				Real
		Commercial				Estate				Estate				Consumer				Total
Allowance for loan losses:
Beginning balance		$	307			$	1,440			$	294			$	364			$	2,405
Provision for loan losses			(7	)			15				27				32				67
Loans charged-off			—				—				(33	)			(33	)			(66	)
Recoveries			—				—				1				12				13
Total ending allowance balance		$	300			$	1,455			$	289			$	375			$	2,419

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ending September 30, 2013:

 

										1-4 Family
						Commercial				Residential
						Real				Real
		Commercial				Estate				Estate				Consumer				Total
Allowance for loan losses:
Beginning balance		$	161			$	1,471			$	614			$	250			$	2,496
Provision for loan losses			(11	)			28				(60	)			176				133
Loans charged-off			—				—				(61	)			(99	)			(160	)
Recoveries			—				—				7				10				17
Total ending allowance balance		$	150			$	1,499			$	500			$	337			$	2,486

 

 

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 September 30, 2014. Included in the recorded investment in loans is $485 of accrued interest receivable net of deferred loan fees of $400.

 

										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		$	—			$	113			$	22			$	—			$	135
Collectively evaluated for impairment			300				1,342				267				375				2,284
Total ending allowance balance		$	300			$	1,455			$	289			$	375			$	2,419
Recorded investment in loans:
Loans individually evaluated for impairment		$	—			$	1,530			$	788			$	—			$	2,318
Loans collectively evaluated for impairment			31,635				135,465				45,716				8,534				221,350
Total ending loans balance		$	31,635			$	136,995			$	46,504			$	8,534			$	223,668

 

 

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, 2014. Included in the recorded investment in loans is $491 of accrued interest receivable net of deferred loan fees of $388.

 

										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		$	—			$	110			$	8			$	—			$	118
Collectively evaluated for impairment			307				1,330				286				364				2,287
Total ending allowance balance		$	307			$	1,440			$	294			$	364			$	2,405
Recorded investment in loans:
Loans individually evaluated for impairment		$	—			$	2,404			$	798			$	—			$	3,202
Loans collectively evaluated for impairment			33,855				132,760				47,019				8,621				222,255
Total ending loans balance		$	33,855			$	135,164			$	47,817			$	8,621			$	225,457

 

 

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 as of September 30, 2014 and for the three months ended September 30, 2014:

 

		As of September 30, 2014												Three Months ended September 30, 2014
		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 real estate:
Other		$	773			$	766			$	—			$	1,350			$	—			$	—
1-4 Family residential real estate:
Owner occupied			120				120				—				120				—				—
With an allowance recorded:
Commercial real estate:
Other			763				764				113				766				9				9
1-4 Family residential real estate:
Owner occupied			126				126				4				126				2				2
Non-owner occupied			543				542				18				545				5				5
Total		$	2,325			$	2,318			$	135			$	2,907			$	16			$	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, 2014 and for the three months ended September 30, 2013:

 

		As of June 30, 2014												Three Months ended September 30, 2013
		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		$	—			$	—			$	—			$	4			$	—			$	—
Commercial real estate:
Other			1,642				1,635				—				537				—				—
1-4 Family residential real estate:
Owner occupied			121				121				—				124				—				—
Non-owner occupied			472				472				—				142				1				1
With an allowance recorded:
Commercial			—				—				—				31				3				3
Commercial real estate:
Other			768				769				110				791				5				5
1-4 Family residential real estate:
Owner occupied			127				127				4				280				—				—
Non-owner occupied			78				78				4				839				6				6
Total		$	3,208			$	3,202			$	118			$	2,748			$	15			$	15

 

 

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 September 30, 2014 and June 30, 2014:

 

		September 30, 2014								June 30, 2014
						Loans Past Due								Loans Past Due
						Over 90 Days								Over 90 Days
						Still								Still
		Non-accrual				Accruing				Non-accrual				Accruing
Commercial		$	—			$	—			$	—			$	—
Commercial real estate:
Other			814				—				1,683				—
1 – 4 Family residential:
Owner occupied			304				—				276				—
Non-owner occupied			—				—				—				—
Consumer			—				—				—				—
Total		$	1,118			$	—			$	1,959			$	—

 

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.

 

 

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 September 30, 2014 by class of loans:

 

		Days Past Due
		30 - 59				60 - 89				90 Days or				Total				Loans Not
		Days				Days				Greater				Past Due				Past Due				Total
Commercial		$	—			$	—			$	—			$	—			$	31,635			$	31,635
Commercial real estate:
Construction			—				—				—				—				3,264				3,264
Other			87				—				757				844				132,887				133,731
1-4 Family residential:
Owner occupied			216				—				223				439				29,432				29,871
Non-owner occupied			—				—				—				—				15,814				15,814
Construction			—				—				—				—				819				819
Consumer			79				9				—				88				8,446				8,534
Total		$	382			$	9			$	980			$	1,371			$	222,297			$	223,668

 

The above table of past due loans includes the recorded investment in non-accrual loans of $39 in the 30-59 days category, $980 in the 90 days or greater category and $99 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, 2014 by class of loans:

 

		Days Past Due
		30 - 59				60 - 89				90 Days or				Total				Loans Not
		Days				Days				Greater				Past Due				Past Due				Total
Commercial		$	66			$	—			$	—			$	66			$	33,789			$	33,855
Commercial real estate:
Construction			—				—				—				—				3,679				3,679
Other			—				—				1,625				1,625				129,860				131,485
1-4 Family residential:
Owner occupied			111				122				81				314				30,817				31,131
Non-owner occupied			—				39				—				39				16,462				16,501
Construction			—				—				—				—				185				185
Consumer			106				—				—				106				8,515				8,621
Total		$	283			$	161			$	1,706			$	2,150			$	223,307			$	225,457

 

The above table of past due loans includes the recorded investment in non-accrual loans of $40 in the 30 - 59 days past due category, $122 in the 60-90 days past due category, $1,706 in the 90 days or greater and $91 in the loans not past due category.

 

Troubled Debt Restructurings:

As of September 30, 2014, the recorded investment of loans classified as troubled debt restructurings was $1,514 with $135 of specific reserves allocated to these loans. As of June 30, 2014, the recorded investment of loans classified as troubled debt restructurings was $1,528 with $118 of specific reserves allocated to these loans. As of September 30, 2014 and June 30, 2014, the Corporation had not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

During the three months ended September 30, 2014 and 2013 there were no loan modifications completed that were classified as troubled debt restructurings. There were no charge offs from troubled debt restructurings during the three month periods ended September 30, 2014 and 2013.

 

There were no loans classified as troubled debt restructurings for which there was a payment default during the three month periods ending September 30, 2014 or 2013. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

 

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, current economic trends and other relevant information. 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.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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. These loans are evaluated based on delinquency status, which are disclosed in the previous table within this footnote. Based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans was as follows:

 

		As of September 30, 2014
						Special												Not
		Pass				Mention				Substandard				Doubtful				Rated
Commercial		$	26,967			$	3,669			$	133			$	—			$	866
Commercial real estate:
Construction			3,207				—				57				—				—
Other			125,364				2,686				3,450				1,530				701
1-4 Family residential real estate:
Owner occupied			3,960				—				—				246				25,665
Non-owner occupied			13,954				515				588				542				215
Construction			377				—				—				—				442
Consumer			—				—				—				—				8,534
Total		$	173,829			$	6,870			$	4,228			$	2,318			$	36,423

 

		As of June 30, 2014
						Special												Not
		Pass				Mention				Substandard				Doubtful				Rated
Commercial		$	29,337			$	3,503			$	62			$	—			$	953
Commercial real estate:
Construction			3,619				—				60				—				—
Other			121,659				3,040				3,526				2,404				856
1-4 Family residential real estate:
Owner occupied			3,959				—				—				248				26,924
Non-owner occupied			14,632				565				599				550				155
Construction			—				—				—				—				185
Consumer			—				—				—				—				8,621
Total		$	173,206			$	7,108			$	4,247			$	3,202			$	37,694

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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.

 

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).

 

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 September 30, 2014 Using
		Balance at September 30, 2014				Level 1				Level 2				Level 3
Assets:
Obligations of U.S. government-sponsored entities and agencies		$	21,585			$	—			$	21,585			$	—
Obligations of states and political subdivisions			45,519				—				45,519				—
Mortgage-backed securities – residential			62,165				—				62,165				—
Collateralized mortgage obligations			3,587				—				3,587				—
Trust preferred security			559				—				559				—

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

						Fair Value Measurements at June 30, 2014 Using
		Balance at June 30, 2014				Level 1				Level 2				Level 3
Assets:
Obligations of U.S. government-sponsored entities and agencies		$	18,436			$	—			$	18,436			$	—
Obligations of states and political subdivisions			45,512				—				45,512				—
Mortgage-backed securities - residential			58,104				—				58,104				—
Collateralized mortgage obligations			3,929				—				3,929				—
Trust preferred security			412				—				412				—

 

There were no transfers between Level 1 and Level 2 during the three month periods ended September 30, 2014 or 2013.

 

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.

 

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

 

						Fair Value Measurements at September 30, 2014 Using
		Balance at September 30, 2014				Level 1				Level 2				Level 3
Impaired loans:
Commercial Real Estate - Other		$	101			$	—			$	—			$	101

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

						Fair Value Measurements at June 30, 2014 Using
		Balance at June 30, 2014				Level 1				Level 2				Level 3
Impaired loans:
Commercial Real Estate - Other		$	101			$	—			$	—			$	101

 

Impaired loans included in the tables above are measured for impairment using the fair value of the collateral and had a carrying amount of $101, with no valuation allowance at September 30, 2014 and June 30, 2014. The resulting impact to the provision for loan losses was a reduction of $88 being recorded for the three month period ended September 30, 2013. There was no provision for loan loss recorded related to impaired loans measured at fair value for the three month period ended September 30, 2014.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2014 and June 30, 2014:

 

Fair Value

Valuation Technique

Unobservable Inputs

Range

Weighted Average

Impaired loans:

Commercial Real Estate - Other

$

101

Sales comparison approach

Adjustment for differences between comparable sales

-14.00% to 31.90%

22.52

%

 

The valuation technique used by an independent third party appraiser in the fair value measurement of collateral for collateral-dependent commercial real estate impaired loans consisted of the sales comparison approach. The significant unobservable inputs used in the fair value measurement relate to any adjustment made to the value set forth in the appraisal due to a distressed sale situation.

 

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:

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

		September 30, 2014								June 30, 2014
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents		$	10,712			$	10,712			$	11,125			$	11,125
Level 2 inputs:
Certificates of deposits in other financial institutions			4,206				4,206				2,703				2,703
Loans held for sale			490				494				559				570
Accrued interest receivable			1,220				1,220				1,048				1,048
Level 3 inputs:
Securities held-to-maturity			2,910				2,957				3,000				3,040
Loans, net			220,764				221,579				222,561				223,128
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits			247,330				247,330				243,222				243,222
Time deposits			68,871				69,044				70,675				70,583
Short-term borrowings			21,564				21,564				19,489				19,489
Federal Home Loan Bank advances			8,282				8,634				6,296				6,655
Accrued interest payable			45				45				44				44

 

The assumptions used to estimate fair value are described as follows:

 

Cash and cash equivalents: The carrying value of cash, deposits in other financial institutions and federal funds sold were considered to approximate fair value resulting in a Level 1 classification.

 

Certificates of deposits in other financial institutions, accrued interest receivable and payable, demand and savings deposits and short-term borrowings: The carrying value of certificates of deposits in other financial institutions, accrued interest receivable and payable, demand and savings deposits and short-term borrowings were considered to approximate fair value due to their short-term duration resulting in a Level 2 classification.

 

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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 resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

Securities held-to-maturity: The held-to-maturity security is a revenue bond made to a local municipality. The fair value of this security is calculated using a spread to the Bloomberg municipal fair market health care curve resulting in a Level 3 classification.

 

Time deposits: Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at September 30, 2014 and June 30, 2014, 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 resulting in a Level 2 classification.

 

Federal Home Loan Bank advances: Fair value of Federal Home Loan Bank advances was estimated using current rates at September 30, 2014 and June 30, 2014 for similar financing resulting in a Level 2 classification.

 

Federal bank and other restricted stocks, at cost: 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.

 

Off-balance sheet commitments: 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 above table.

 

 

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 September 30,
		2014				2013
Basic:
Net income available to common shareholders		$	756			$	621
Weighted average common shares outstanding			2,721,695				2,613,698
Basic income per share		$	0.28			$	0.24
Diluted:
Net income available to common shareholders		$	756			$	621
Weighted average common shares outstanding			2,721,695				2,613,698
Dilutive effect of restricted stock			418				275
Total common shares and dilutive potential common shares			2,722,113				2,613,973
Dilutive income per share		$	0.28			$	0.24

  

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 6 –Accumulated Other Comprehensive Income

 

The components of other comprehensive income related to unrealized gains and losses on available-for-sale securities for the three month periods ended September 30, 2014 and 2013, were as follows:

 

		Pretax				Tax Expense (Benefit)				After-tax				Affected Line Item in Consolidated Statements of Income
Balance as of June 30, 2014		$	1,944			$	(661	)		$	1,283
Unrealized holding loss on available-for-sale securities arising during the period			(91	)			31				(60	)
Amounts reclassified from accumulated other comprehensive income			(37	)			12				(25	)		(a)(b)
Net current period other comprehensive income			(128	)			43				(85	)
Balance as of September 30, 2014		$	1,816			$	(618	)		$	1,198
Balance as of June 30, 2013		$	(24	)		$	8			$	(16	)
Net current period other comprehensive income			302				(103	)			199
Balance as of September 30, 2013		$	278			$	(95	)		$	183

 

(a) Securities gains, net

(b) Income tax expense

 

  

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 month period ended September 30, 2014, compared to the same period in 2013, and the consolidated balance sheet at September 30, 2014, compared to June 30, 2014. 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 Months Ended September 30, 2014 and September 30, 2013

 

In the first quarter of fiscal year 2015, net income was $756, or $0.28 per common share, compared with $621, or $0.24 per common share, in the prior year period. The following are key highlights of our results of operations for the three months ending September 30, 2014:

 

·

net interest income increased to $3,288, or by 8.4%, in the first quarter of fiscal year 2015 from the same prior year period;

·

noninterest income increased by $96 primarily as a result of a $42 increase in gains from the sale of mortgage loans, a $37 gain from the sale of securities and a $22 gain from the sale of other real estate acquired through loan foreclosure that were recognized during the first quarter of fiscal year 2015; and

·

noninterest expenses increased by $223, or 7.8%, in the first quarter of fiscal year 2015 principally as a result of higher salary and employee benefits and occupancy expenses.

 

Return on average equity and return on average assets were 7.40% and 0.78%, respectively, for the first quarter of fiscal year 2015 compared to 6.82% and 0.70%, respectively, for the first quarter of fiscal year 2014.

 

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

 

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 was 3.79% for the three month periods ended September 30, 2014 and 2013. Net interest income for the three months ended September 30, 2014 increased by $255, or 8.4%, to $3,288 from $3,033 for the same year ago period. The increase in net interest income was primarily the result of an increase in average interest-earning assets.

 

Interest income for the three months ended September 30, 2014 increased by $245, or 7.5%, from the same year ago period. An increase of $30,516, or 9.1%, in average interest-earning assets from the same prior year period partially 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 September 30, 2014 decreased by $10, or 3.9%, from the same year ago period. The Corporation’s cost of funds decreased to 0.36% for the three month period ended September 30, 2014 from 0.41% for the same year ago period.

 

 

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 September 30
(In thousands, except percentages)

 

		2014												2013
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
Interest-earning assets:
Taxable securities		$	83,166			$	463				2.23	%		$	65,949			$	281				1.69	%
Nontaxable securities (1)			48,442				526				4.39				42,443				489				4.54
Loans receivable (1)			224,695				2,715				4.79				216,177				2,678				4.91
Interest bearing deposits and federal funds sold			8,969				14				0.62				10,187				12				0.47
Total interest-earning assets			365,272				3,718				4.06	%			334,756				3,460				4.10	%
Noninterest-earning assets			20,163												19,357
Total Assets		$	385,435											$	354,113
Interest-bearing liabilities:
NOW		$	47,327			$	22				0.18	%		$	38,630			$	19				0.20	%
Savings			125,210				25				0.08				109,596				21				0.08
Time deposits			69,629				143				0.81				77,968				159				0.81
Short-term borrowings			17,650				7				0.16				13,774				6				0.17
FHLB advances			6,689				48				2.85				6,468				50				3.07
Total interest-bearing liabilities			266,505				245				0.36	%			246,436				255				0.41	%
Noninterest-bearing liabilities:
Noninterest-bearing checking accounts			75,624												69,057
Other liabilities			2,760												2,531
Total liabilities			344,889												318,024
Shareholders’ equity			40,546												36,089
Total liabilities and shareholders’ equity		$	385,435											$	354,113
Net interest income, interest rate spread (1)						$	3,473				3.70	%						$	3,205				3.69	%
Net interest margin (net interest as a percent of average interest-earning assets) (1)											3.79	%											3.79	%
Federal tax exemption on non-taxable securities and loans included in interest income						$	185											$	172
Average interest-earning assets to interest-bearing liabilities			137.06	%											135.84	%

 

(1) calculated on a fully taxable equivalent basis

 

 

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 incurred credit losses in the Bank’s loan portfolio that have been incurred at each balance sheet date. For the three month period ended September 30, 2014, the provision for loan losses was $67 compared to $133 for the same prior year period. For the three month period ended September 30, 2014, net charge-offs totaled $53, or an annualized net charge-offs to total loan ratio of 0.09%, compared with $143, or 0.27% of total loans, for the same period last year. The allowance for loan losses as a percentage of loans was 1.08% at September 30, 2014 and 1.07% at June 30, 2014.

 

Non-performing loans were $1,118 as of September 30, 2014 and represented 0.50% of total loans. This compared with $1,959, or 0.87%, at June 30, 2014 and $2,446, or 1.13%, at September 30, 2013. Non-performing loans, impaired loans and loans past due 90 days or greater all declined as a result of receiving proceeds from the private sale of a portion of the collateral securing a commercial real estate credit that was placed on non-accrual during the first quarter of fiscal year 2014. This commercial real estate credit has no specific reserve allocation since it is well secured. The allowance for loan losses to total non-performing loans at September 30, 2014 was 216.37% compared with 122.77% at June 30, 2014 and 101.64% at September 30, 2013.

 

The provision for loan losses for the period ending September 30, 2014 was considered sufficient by management for maintaining an appropriate allowance for loan losses for probable incurred credit losses.

 

Non-Interest Income

Non-interest income increased by $96 for the first quarter of fiscal year 2015 from the same period last year. Included in non-interest income is a $37 gain from the sale of securities and a $22 gain from the sale of other real estate acquired through loan foreclosure. Excluding the securities gain and the gain from the sale of other real estate owned, non-interest income increased by $37, or 5.3%, from the same period last year.

 

Debit card interchange income increased by $15, or 7.0%, from the same period last year primarily due to an increase in debit card usage by our customers.

 

Service charges on deposit accounts decreased by $43, or 11.8%, for the three month period ended September 30, 2014 compared to the same period last year primarily as a result of a decline in overdraft fee income.

 

Other income increased by $67 from the same period last year primarily as a result of $42 increase in the gains from the sale of mortgage loans.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

 

Non-Interest Expenses

Total non-interest expenses increased to $3,072, or by 7.8%, during the first quarter of fiscal year 2015, compared with $2,849 during the same year ago period.

 

Salaries and employee benefits increased by $157, or 10.1%, during the first quarter of fiscal year 2015 primarily due to additional staff hired in the lending area, additional incentive accruals and due to annual merit increases that went into effect on August 1, 2014.

 

Occupancy and equipment expenses increased by $52, or 16.5%, during the first quarter of fiscal year 2015 from the same period last year primarily as a result of investments in new computer and communication equipment. A new facility is being constructed at the Minerva, Ohio location to replace the existing branch and corporate headquarters. The remaining book value of the Minerva facility is being expensed over the estimated remaining useful life. The new facility is anticipated to be completed during the 2016 fiscal year and upon being placed into service, it is expected that occupancy expenses will increase.

 

Professional and director fees decreased by $14 or 12.6%, during the first quarter of fiscal year 2015 from the same period last year primarily as a result of lower consulting fees.

 

Income Taxes

Income tax expense for the three month period ended September 30, 2014 increased by $59, to $184 from $125, compared to a year ago. The effective tax rate was 19.6% for the current quarter as compared to 16.8% for the same period last year.

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 September 30, 2014 were $389,833 compared to $382,477 at June 30, 2014, an increase of $7,356, or an annualized 7.6%.

 

Available-for-sale securities increased by $7,022 from $126,393 at June 30, 2014 to $133,415 at September 30, 2014. Total deposits increased by $2,304, or an annualized 2.9%, and loans decreased by $1,797 from June 30, 2014.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

 

Non-Performing Assets

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

 

		September 30, 2014				June 30, 2014				September 30, 2013
Non-accrual loans		$	1,118			$	1,959			$	2,446
Loans past due over 90 days and still accruing			—				—				—
Total non-performing loans			1,118				1,959				2,446
Other real estate owned			54				204				709
Total non-performing assets		$	1,172			$	2,163			$	3,155
Non-performing loans to total loans			0.50	%			0.87	%			1.13	%
Allowance for loan losses to total non-performing loans			216.37	%			122.77	%			101.64	%

 

 

As of September 30, 2014, impaired loans totaled $2,318, of which $886 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.

 

  

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

 

Net cash inflow from operating activities for the three month period ended September 30, 2014 was $1,766, net cash outflows from investing activities was $8,216 and net cash inflows from financing activities was $6,037. A major source of cash was $8,212 from sales, maturities, calls or principal pay downs on available-for-sale securities, a $2,304 increase in deposits and $4,075 increase in short-term borrowings and Federal Home Loan Bank (FHLB) advances. A major use of cash included the $15,545 purchase of securities. Total cash and cash equivalents was $10,712 as of September 30, 2014 compared to $11,125 at June 30, 2014 and $11,905 at September 30, 2013.

 

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. Deposits totaled $316,201 at September 30, 2014 compared with $313,897 at June 30, 2014.

 

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At September 30, 2014, FHLB advances totaled $8,282 as compared with $6,296 at June 30, 2014. As of September 30, 2014, the Bank had the ability to borrow an additional $16,163 from the FHLB based on a blanket pledge of qualifying first mortgage loans. 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 and federal funds purchased from correspondent banks. The Bank pledges securities as collateral for the repurchase agreements. Short-term borrowings increased to $21,564 at September 30, 2014 from $19,489 at June 30, 2014.

 

Jumbo time deposits (those with balances of $100 and over) totaled $27,697 at September 30, 2014 and $28,224 at June 30, 2014. 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 and can foresee no dependence on these types of deposits in the near term. The Corporation had no brokered deposits at September 30, 2014 or June 30, 2014. 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.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

 

Capital Resources

Total shareholders’ equity increased by $343 to $40,546 as of September 30, 2014 from $40,203 as of June 30, 2014. The increase was primarily the result of $756 in net income for the current fiscal year which was partially offset by cash dividends paid of $328.

 

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 September 30, 2014 were 9.8% and 15.5%, respectively. This compares to leverage and risk-based capital ratios of 9.8% and 15.3 %, respectively, as of June 30, 2014. 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 September 30, 2014 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. Note one (Summary of Significant Accounting Policies - Securities and Allowance for Loan Losses), note two (Securities), note three (Loans) and Management’s Discussion and Analysis of Financial Condition and Results of Operation (Critical Accounting Policies and Use of Significant Estimates) of the 2014 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, 2014.

 

 

 

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;

·

an extended period in which market levels of interest rates remain at historical low levels which could reduce, or put pressure on our ability to maintain, anticipated or actual margins;

·

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;

·

competitive pressures on product pricing and services; and

·

a 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.

 

  

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 Corporation’s disclosure controls and procedures were effective as of September 30, 2014.

 

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 have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

  

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 5 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 materials from Consumers Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language) include: (1) Unaudited Consolidated Balance Sheets, (2) Unaudited Consolidated Statements of Income, (3) Unaudited Consolidated Statements of Comprehensive Income, (4) Unaudited 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.

 

  

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: November 14, 2014		/s/ Ralph J. Lober
		Ralph J. Lober, II
		President & Chief Executive Officer
		(principal executive officer)
Date: November 14, 2014		/s/ Renee K. Wood
		Renee K. Wood
		Chief Financial Officer & Treasurer
		(principal financial officer)