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, 2017

 

 

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 ☒ 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 ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ☒
Emerging growth company ☐

         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

 

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

 

There were 2,729,644 shares of Registrant’s common stock, no par value, outstanding as of November 7, 2017.

 

 

CONSUMERS BANCORP, INC. FORM 10-Q QUARTER ENDED September 30, 2017

Table of Contents

 

Page Number (s)

Part I – Financial Information
Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2017 and June 30, 2017		1
Consolidated Statements of Income for the three months ended September 30, 2017 and 2016		2
Consolidated Statements of Comprehensive Income for the three months ended September 30, 2017 and 2016		3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30, 2017 and 2016		4
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2017 and 2016		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		37
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

 

 

 

 

(Dollars in thousands, except per share data)		September 30, 2017				June 30, 2017
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions		$	9,896			$	9,439
Federal funds sold and interest-bearing deposits in financial institutions			4,283				473
Total cash and cash equivalents			14,179				9,912
Certificates of deposit in other financial institutions			3,921				3,921
Securities, available-for-sale			136,382				142,086
Securities, held-to-maturity (fair value of $4,258 at September 30, 2017 and $4,329 at June 30, 2017)			4,164				4,259
Federal bank and other restricted stocks, at cost			1,425				1,425
Loans held for sale			2,061				1,252
Total loans			287,718				272,867
Less allowance for loan losses			(3,194	)			(3,086	)
Net loans			284,524				269,781
Cash surrender value of life insurance			9,133				9,065
Premises and equipment, net			13,287				13,398
Other real estate owned			—				71
Accrued interest receivable and other assets			2,571				2,713
Total assets		$	471,647			$	457,883
LIABILITIES
Deposits
Non-interest bearing demand		$	110,407			$	102,683
Interest bearing demand			54,289				54,123
Savings			152,515				151,154
Time			66,629				66,511
Total deposits			383,840				374,471
Short-term borrowings			27,905				23,986
Federal Home Loan Bank advances			12,304				12,320
Accrued interest and other liabilities			3,327				3,571
Total liabilities			427,376				414,348
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, 2017 and June 30, 2017)			14,630				14,630
Retained earnings			30,728				30,122
Treasury stock, at cost (124,489 and 130,606 common shares as of September 30, 2017 and June 30, 2017, respectively)			(1,576	)			(1,662	)
Accumulated other comprehensive income			489				445
Total shareholders’ equity			44,271				43,535
Total liabilities and shareholders’ equity		$	471,647			$	457,883

 

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)		2017				2016
Interest income
Loans, including fees		$	3,228			$	3,184
Securities, taxable			511				402
Securities, tax-exempt			367				351
Federal funds sold and other interest bearing deposits			37				30
Total interest income			4,143				3,967
Interest expense
Deposits			248				170
Short-term borrowings			55				12
Federal Home Loan Bank advances			54				58
Total interest expense			357				240
Net interest income			3,786				3,727
Provision for loan losses			90				136
Net interest income after provision for loan losses			3,696				3,591
Non-interest income
Service charges on deposit accounts			308				330
Debit card interchange income			323				251
Bank owned life insurance income			68				49
Securities gains, net			38				103
Other			135				115
Total non-interest income			872				848
Non-interest expenses
Salaries and employee benefits			1,810				1,738
Occupancy and equipment			455				452
Data processing expenses			148				145
Debit card processing expenses			180				133
Professional and director fees			117				132
FDIC assessments			46				55
Franchise taxes			84				84
Marketing and advertising			78				79
Telephone and network communications			82				81
Other			393				387
Total non-interest expenses			3,393				3,286
Income before income taxes			1,175				1,153
Income tax expense			246				252
Net income		$	929			$	901
Basic and diluted earnings per share		$	0.34			$	0.33

 

See accompanying notes to consolidated financial statements

 

 

 

(Dollars in thousands)
		Three Months ended September 30,
		2017				2016
Net income		$	929			$	901
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains (losses) arising during the period			104				(423	)
Reclassification adjustment for gains included in income			(38	)			(103	)
Net unrealized gain (losses)			66				(526	)
Income tax effect			(22	)			179
Other comprehensive income (loss)			44				(347	)
Total comprehensive income		$	973			$	554

 

See accompanying notes to consolidated financial statements.

 

 

(Dollars in thousands, except per share data)
		Three Months ended September 30,
		2017				2016
Balance at beginning of period		$	43,535			$	43,793
Net income			929				901
Other comprehensive income (loss)			44				(347	)
6,321 shares associated with stock awards during the three months ended September 30, 2017			90				—
204 and 231 Dividend reinvestment plan shares associated with forfeited and expired restricted stock awards retired to treasury stock during the three months ended September 30, 2017 and 2016, respectively			—				—
Common cash dividends			(327	)			(327	)
Balance at the end of the period		$	44,271			$	44,020
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 30,
		2017				2016
Cash flows from operating activities
Net cash from operating activities		$	503			$	581
Cash flow from investing activities
Securities available-for-sale
Purchases			(426	)			(3,229	)
Maturities, calls and principal pay downs			4,412				5,796
Proceeds from sales			1,586				1,789
Securities held-to-maturity
Purchases			—				(1,000	)
Principal pay downs			95				95
Net decrease in certificates of deposits in other financial institutions			—				250
Net increase in loans			(14,833	)			(4,237	)
Acquisition of premises and equipment			(86	)			(191	)
Sale of other real estate owned			71				—
Net cash from investing activities			(9,181	)			(727	)
Cash flow from financing activities
Net increase in deposit accounts			9,369				6,323
Net change in short-term borrowings			3,919				1,417
Proceeds from Federal Home Loan Bank advances			—				9,700
Repayments of Federal Home Loan Bank advances			(16	)			(14,615	)
Dividends paid			(327	)			(327	)
Net cash from financing activities			12,945				2,498
Increase in cash or cash equivalents			4,267				2,352
Cash and cash equivalents, beginning of period			9,912				10,181
Cash and cash equivalents, end of period		$	14,179			$	12,533
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest		$	347			$	242
Federal income taxes			—				—
Non-cash items:
Transfer from loans to other real estate owned			—				10
Expired and forfeited dividend reinvestment plan shares associated with restricted stock awards that were retired to treasury stock			4				4

 

See accompanying notes to consolidated financial statements.

 

 

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 Carroll, Columbiana, Jefferson, Stark, Summit, Wayne 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, 2017. 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 Not Yet Effective: In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised 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. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The adoption of ASU 2014-09 as it relates to non-interest income, such as service charges and debit card interchange income, is not expected to have a material effect on the Corporation’s financial statements.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

In June 2016, FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this guidance on the Corporation’s consolidated financial statements, and are in the midst of gathering critical data to evaluate the impact. However, it is too early to estimate the impact.

 

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The ASU will require all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this guidance on the Corporation’s consolidated financial statements and expects to recognize an increase in other assets and other liabilities for the rights and obligations created by leasing of branch offices. Management also expects minimal impact in the income statement with respect to occupancy expense related to leases.

 

 

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, 2017
Obligations of U.S. government-sponsored entities and agencies		$	12,503			$	89			$	(73	)		$	12,519
Obligations of state and political subdivisions			56,231				872				(217	)			56,886
Mortgage-backed securities – residential			59,536				164				(356	)			59,344
Mortgage-backed securities– commercial			1,452				—				(4	)			1,448
Collateralized mortgage obligations– residential			5,738				—				(100	)			5,638
Pooled trust preferred security			181				366				—				547
Total available-for-sale securities		$	135,641			$	1,491			$	(750	)		$	136,382

 

Held-to-Maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
September 30, 2017
Obligations of state and political subdivisions		$	4,164			$	94			$	—			$	4,258

 

Available–for-Sale		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2017
Obligations of U.S. government-sponsored entities and agencies		$	12,571			$	90			$	(74	)		$	12,587
Obligations of state and political subdivisions			56,824				890				(254	)			57,460
Mortgage-backed securities – residential			64,092				184				(438	)			63,838
Mortgage-backed securities – commercial			1,459				—				(1	)			1,458
Collateralized mortgage obligations - residential			6,310				1				(100	)			6,211
Pooled trust preferred security			155				377				—				532
Total available-for-sale securities		$	141,411			$	1,542			$	(867	)		$	142,086

 

Held-to-Maturity		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
June 30, 2017
Obligations of state and political subdivisions		$	4,259			$	73			$	(3	)		$	4,329

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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

 

		Three Months Ended September 30,
		2017				2016
Proceeds from sales		$	1,586			$	1,789
Gross realized gains			39				103
Gross realized losses			1				—

 

The income tax provision related to these net realized gains and losses amounted to $13 for the three months ended September 30, 2017 and $35 for the three months ended September 30, 2016.

 

The amortized cost and fair values of debt securities at September 30, 2017, 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 pooled trust preferred security are shown separately.

 

Available-for-Sale		Amortized Cost				Estimated Fair Value
Due in one year or less		$	2,839			$	2,854
Due after one year through five years			16,018				16,314
Due after five years through ten years			27,350				27,664
Due after ten years			22,527				22,573
Total			68,734				69,405
U.S. Government-sponsored mortgage-backed and related securities			66,726				66,430
Pooled trust preferred security			181				547
Total available-for-sale securities		$	135,641			$	136,382
Held-to-Maturity
Due after five years through ten years			601				626
Due after ten years			3,563				3,632
Total held-to-maturity securities		$	4,164			$	4,258

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

The following table summarizes the securities with unrealized losses at September 30, 2017 and June 30, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

(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
September 30, 2017
Obligations of US government-sponsored entities and agencies		$	3,921			$	(73	)		$	—			$	—			$	3,921			$	(73	)
Obligations of states and political subdivisions			12,984				(198	)			1,740				(19	)			14,724				(217	)
Mortgage-backed securities - residential			43,781				(307	)			3,381				(49	)			47,162				(356	)
Mortgage-backed securities - commercial			1,448				(4	)			—				—				1,448				(4	)
Collateralized mortgage obligations – residential			5,036				(89	)			602				(11	)			5,638				(100	)
Total temporarily impaired		$	67,170			$	(671	)		$	5,723			$	(79	)		$	72,893			$	(750	)

 

		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, 2017
Obligations of US government-sponsored entities and agencies		$	4,336			$	(74	)		$	—			$	—			$	4,336			$	(74	)
Obligations of states and political subdivisions			13,881				(241	)			834				(13	)			14,715				(254	)
Mortgage-backed securities - residential			42,071				(391	)			2,805				(47	)			44,876				(438	)
Mortgage-backed securities - commercial			1,458				(1	)			—				—				1,458				(1	)
Collateral mortgage obligation - residential			5,417				(88	)			654				(12	)			6,071				(100	)
Total temporarily impaired		$	67,163			$	(795	)		$	4,293			$	(72	)		$	71,456			$	(867	)

 

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.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The unrealized losses within the securities portfolio as of September 30, 2017 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 not likely that management will be required to sell the securities prior to their anticipated recovery. The decline in fair value within the securities portfolio is largely due to changes in interest rates and the fair value is expected to recover as the securities approach maturity. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities.

 

Note 3 – Loans

Major classifications of loans were as follows:

 

		September 30, 2017				June 30, 2017
Commercial		$	51,479			$	46,336
Commercial real estate:
Construction			7,437				5,588
Other			163,991				157,861
1 – 4 Family residential real estate:
Owner occupied			42,861				41,581
Non-owner occupied			14,072				14,377
Construction			2,725				1,993
Consumer			5,153				5,131
Subtotal			287,718				272,867
Allowance for loan losses			(3,194	)			(3,086	)
Net Loans		$	284,524			$	269,781

 

Loans presented above are net of deferred loan fees and costs of $299 and $294 for September 30, 2017 and June 30, 2017, respectively.

 

 

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 September 30, 2017:

 

										1-4 Family
						Commercial				Residential
						Real				Real
		Commercial				Estate				Estate				Consumer				Total
Allowance for loan losses:
Beginning balance		$	518			$	2,038			$	473			$	57			$	3,086
Provision for loan losses			52				25				—				13				90
Loans charged-off			—				—				—				(3	)			(3	)
Recoveries			2				18				—				1				21
Total ending allowance balance		$	572			$	2,081			$	473			$	68			$	3,194

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2016:

 

										1-4 Family
						Commercial				Residential
						Real				Real
		Commercial				Estate				Estate				Consumer				Total
Allowance for loan losses:
Beginning balance		$	505			$	2,518			$	402			$	141			$	3,566
Provision for loan losses			5				125				27				(21	)			136
Loans charged-off			—				—				(21	)			(4	)			(25	)
Recoveries			—				—				3				4				7
Total ending allowance balance		$	510			$	2,643			$	411			$	120			$	3,684

 

 

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, 2017. Included in the recorded investment in loans is $679 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		$	—			$	33			$	—			$	—			$	33
Collectively evaluated for impairment			572				2,048				473				68				3,161
Total ending allowance balance		$	572			$	2,081			$	473			$	68			$	3,194
Recorded investment in loans:
Loans individually evaluated for impairment		$	125			$	1,462			$	425			$	—			$	2,012
Loans collectively evaluated for impairment			51,463				170,356				59,400				5,166				286,385
Total ending loans balance		$	51,588			$	171,818			$	59,825			$	5,166			$	288,397

 

 

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, 2017. Included in the recorded investment in loans is $581 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		$	—			$	42			$	2			$	—			$	44
Collectively evaluated for impairment			518				1,996				471				57				3,042
Total ending allowance balance		$	518			$	2,038			$	473			$	57			$	3,086
Recorded investment in loans:
Loans individually evaluated for impairment		$	444			$	1,587			$	203			$	—			$	2,234
Loans collectively evaluated for impairment			45,993				162,176				57,901				5,144				271,214
Total ending loans balance		$	46,437			$	163,763			$	58,104			$	5,144			$	273,448

 

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, 2017 and for the three months ended September 30, 2017:

 

 

		As of September 30, 2017												Three Months ended September 30, 2017
		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		$	124			$	125			$	—			$	114			$	2			$	2
Commercial real estate:
Other			1,121				1,123				—				1,053				10				10
1-4 Family residential real estate:
Owner occupied			102				101				—				102				—				—
Non-owner occupied			324				324				—				327				—				—
With an allowance recorded:
Commercial real estate:
Other			338				339				33				343				—				—
Total		$	2,009			$	2,012			$	33			$	1,939			$	12			$	12

 

 

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 June 30, 2017 and for the three months ended September 30, 2016:

 

		As of June 30, 2017												Three Months ended September 30, 2016
		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		$	482			$	444			$	—			$	660			$	80			$	80
Commercial real estate:
Construction			—				—				—				329				6				6
Other			1,928				1,039				—				1,555				105				105
1-4 Family residential real estate:
Owner occupied			104				103				—				127				—				—
Non-owner occupied			—				—				—				208				—				—
With an allowance recorded:
Commercial real estate:
Other			548				548				42				2,449				8				8
1-4 Family residential real estate:
Owner occupied			99				100				2				177				2				2
Total		$	3,161			$	2,234			$	44			$	5,505			$	201			$	201

 

 

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, 2017 and June 30, 2017:

 

		September 30, 2017								June 30, 2017
						Loans Past Due								Loans Past Due
						Over 90 Days								Over 90 Days
						Still								Still
		Non-accrual				Accruing				Non-accrual				Accruing
Commercial		$	—			$	—			$	368			$	—
Commercial real estate:
Other			565				—				729				—
1 – 4 Family residential:
Owner occupied			89				—				90				—
Non-owner occupied			324				—				—				—
Total		$	978			$	—			$	1,187			$	—

 

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, 2017 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		$	—			$	—			$	—			$	—			$	51,588			$	51,588
Commercial real estate:
Construction			—				—				—				—				7,452				7,452
Other			—				—				—				—				164,366				164,366
1-4 Family residential:
Owner occupied			23				—				74				97				42,885				42,982
Non-owner occupied			—				—				—				—				14,112				14,112
Construction			—				—				—				—				2,731				2,731
Consumer			18				—				—				18				5,148				5,166
Total		$	41			$	—			$	74			$	115			$	288,282			$	288,397

 

The above table of past due loans includes the recorded investment in non-accrual loans of $74 in the 90 days or greater category and $904 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, 2017 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		$	—			$	—			$	35			$	35			$	46,402			$	46,437
Commercial real estate:
Construction			—				—				—				—				5,596				5,596
Other			—				—				130				130				158,037				158,167
1-4 Family residential:
Owner occupied			13				—				74				87				41,605				41,692
Non-owner occupied			—				—				—				—				14,416				14,416
Construction			—				—				—				—				1,996				1,996
Consumer			22				—				—				22				5,122				5,144
Total		$	35			$	—			$	239			$	274			$	273,174			$	273,448

 

The above table of past due loans includes the recorded investment in non-accrual loans of $239 in the 90 days or greater category and $948 in the loans not past due category.

 

Troubled Debt Restructurings:

As of September 30, 2017, the recorded investment of loans classified as troubled debt restructurings was $1,732 with $30 of specific reserves allocated to these loans. As of September 30, 2017, the Corporation had committed to lend an additional $57 to customers with outstanding loans that were classified as troubled debt restructurings. As of June 30, 2017, the recorded investment of loans classified as troubled debt restructurings was $1,740 with $33 of specific reserves allocated to these loans. As of June 30, 2017, the Corporation had committed to lend an additional $175 to customers with outstanding loans that were 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, 2017 and 2016 there were no loan modifications completed that were classified as troubled debt restructurings. There were no charge offs from troubled debt restructurings that were completed during the three month periods ended September 30, 2017 and 2016.

 

There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the three month periods ended September 30, 2017 and 2016. 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, 2017
						Special												Not
		Pass				Mention				Substandard				Doubtful				Rated
Commercial		$	50,091			$	808			$	303			$	—			$	386
Commercial real estate:
Construction			6,221				1,186				4				—				41
Other			154,075				7,072				1,915				566				738
1-4 Family residential real estate:
Owner occupied			2,420				—				25				15				40,522
Non-owner occupied			12,958				206				440				324				184
Construction			1,154				—				—				—				1,577
Consumer			131				—				—				—				5,035
Total		$	227,050			$	9,272			$	2,687			$	905			$	48,483

 

		As of June 30, 2017
						Special												Not
		Pass				Mention				Substandard				Doubtful				Rated
Commercial		$	44,435			$	907			$	642			$	—			$	453
Commercial real estate:
Construction			4,514				1,035				—				4				43
Other			150,460				5,110				1,566				470				561
1-4 Family residential real estate:
Owner occupied			2,668				—				11				30				38,983
Non-owner occupied			13,633				210				261				187				125
Construction			1,223				—				—				—				773
Consumer			145				—				—				—				4,999
Total		$	217,078			$	7,262			$	2,480			$	691			$	45,937

 

 

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 unobservable inputs (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, 2017 Using
		Balance at September 30, 2017				Level 1				Level 2				Level 3
Assets:
Obligations of U.S. government-sponsored entities and agencies		$	12,519			$	—			$	12,519			$	—
Obligations of states and political subdivisions			56,886				—				56,886				—
Mortgage-backed securities – residential			59,344				—				59,344				—
Mortgage-backed securities – commercial			1,448				—				1,448				—
Collateralized mortgage obligations - residential			5,638				—				5,638				—
Pooled trust preferred security			547				—				547				—

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

						Fair Value Measurements at June 30, 2017 Using
		Balance at June 30, 2017				Level 1				Level 2				Level 3
Assets:
Obligations of U.S. government-sponsored entities and agencies		$	12,587			$	—			$	12,587			$	—
Obligations of states and political subdivisions			57,460				—				57,460				—
Mortgage-backed securities - residential			63,838				—				63,838				—
Mortgage-backed securities - commercial			1,458				—				1,458				—
Collateralized mortgage obligations - residential			6,211				—				6,211				—
Pooled trust preferred security			532				—				532				—

 

There were no transfers between Level 1 and Level 2 during the three month periods ended September 30, 2017 or 2016.

 

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 or are charged down to their fair value. 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.

 

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

There were no financial assets measured at fair value on a non-recurring basis at September 30, 2017. Financial assets measured at fair value on a non-recurring basis at June 30, 2017 are summarized below:

 

						Fair Value Measurements at June 30, 2017 Using
		Balance at June 30, 2017				Level 1				Level 2				Level 3
Impaired loans:
Commercial Real Estate - Other		$	130			$	—			$	—			$	130
Other Real Estate Owned:
1-4 Family residential real estate			71				—				—				71

 

There were no impaired loans measured at fair value on a non-recurring basis at September 30, 2017. The resulting impact to the provision for loan losses was a decrease of $17 being recorded for the three months ended September 30, 2017. Impaired loans, measured for impairment using the fair value of the collateral, had a recorded investment of $130, with no valuation allowance at June 30, 2017. The resulting impact to the provision for loan losses was an increase of $41 being recorded for the three months ended September 30, 2016.

 

Other real estate owned which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $71, which was made up of the outstanding balance of $103, net of a valuation allowance of $32 at June 30, 2017. There were no other real estate owned being carried at fair value as of September 30, 2017.

 

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2017:

 

June 30, 2017		Fair Value			Valuation Technique		Unobservable Inputs				Range				Weighted Average
Impaired loans:
Commercial Real Estate – Other		$	130		Bid Indications			N/A				0.0	%			0.0	%
Other Real Estate Owned:
1-4 Family residential real estate		$	71		Bid Indications			N/A				0.0	%			0.0	%

 

 

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:

 

		September 30, 2017								June 30, 2017
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents		$	14,179			$	14,179			$	9,912			$	9,912
Level 2 inputs:
Certificates of deposits in other financial institutions			3,921				3,924				3,921				3,927
Loans held for sale			2,061				2,102				1,252				1,286
Accrued interest receivable			1,442				1,442				1,212				1,212
Level 3 inputs:
Securities held-to-maturity			4,164				4,258				4,259				4,329
Loans, net			284,524				284,618				269,781				266,041
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits			317,211				317,211				307,960				307,960
Time deposits			66,629				66,620				66,511				66,535
Short-term borrowings			27,905				27,905				23,986				23,986
Federal Home Loan Bank advances			12,304				12,038				12,320				12,054
Accrued interest payable			50				50				40				40

 

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: Fair value of certificates of deposits in other financial institutions was estimated using current rates for deposits of similar remaining maturities resulting in a Level 2 classification.

 

Accrued interest receivable and payable, demand and savings deposits and short-term borrowings: The carrying value of 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.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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.

 

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 securities are general obligation and revenue bonds made to local municipalities. The fair values of these securities are estimated using a spread to the applicable municipal fair market 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, 2017 and June 30, 2017, for deposits of similar remaining maturities, resulting in a Level 2 classification. Estimated fair value does not include the benefit that results from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

 

Federal Home Loan Bank advances: Fair value of Federal Home Loan Bank advances was estimated using current rates at September 30, 2017 and June 30, 2017 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.  There were 2,062 shares of restricted stock that were anti-dilutive for the three months ended September 30, 2017. There were no equity instruments that were anti-dilutive for the three months ended September 30, 2016. The following table details the calculation of basic and diluted earnings per share:

 

		For the Three Months Ended September 30,
		2017				2016
Basic:
Net income available to common shareholders		$	929			$	901
Weighted average common shares outstanding			2,724,997				2,723,915
Basic income per share		$	0.34			$	0.33
Diluted:
Net income available to common shareholders		$	929			$	901
Weighted average common shares outstanding			2,724,997				2,723,915
Dilutive effect of restricted stock			—				4
Total common shares and dilutive potential common shares			2,724,997				2,723,919
Dilutive income per share		$	0.34			$	0.33

 

 

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 period ended September 30, 2017 and 2016, were as follows:

 

		Pretax				Tax Effect				After-tax			Affected Line Item in Consolidated Statements of Income
Balance as of June 30, 2017		$	675			$	(230	)		$	445
Unrealized holding gain on available-for-sale securities arising during the period			104				(35	)			69
Amounts reclassified from accumulated other comprehensive income			(38	)			13				(25	)	(a)(b)
Net current period other comprehensive income			66				(22	)			44
Balance as of September 30, 2017		$	741			$	(252	)		$	489
Balance as of June 30, 2016		$	3,621			$	(1,232	)		$	2,389
Unrealized holding gain on available-for-sale securities arising during the period			(423	)			144				(279	)
Amounts reclassified from accumulated other comprehensive income			(103	)			35				(68	)	(a)(b)
Net current period other comprehensive income			(526	)			179				(347	)
Balance as of September 30, 2016		$	3,095			$	(1,053	)		$	2,042

 

 

(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 months ended September 30, 2017, compared to the same period in 2016, and the consolidated balance sheet at September 30, 2017, compared to June 30, 2017. 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 Carroll, Columbiana, Jefferson, Stark, Summit, Wayne 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, 2017 and September 30, 2016

 

In the first quarter of fiscal year 2018, net income was $929, or $0.34 per common share, compared to $901, or $0.33 per common share for the three months ended September 30, 2016. The following are key highlights of our results of operations for the three months ended September 30, 2017:

●

net interest income increased by $59 to $3,786, or by 1.6%, in the first quarter of fiscal year 2018 from the same prior year period;

●

loan loss provision expense in the first quarter of fiscal year 2018 totaled $90 compared to $136 in the same prior year period;

●

non-interest income increased by $24, or 2.8%, in the first quarter of fiscal year 2018 from the same prior year period; and

●

non-interest expenses increased by $107, or 3.3%, in the first quarter of fiscal year 2018 from the same prior year period.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

Return on average equity and return on average assets were 8.35% and 0.79%, respectively, for the first three months of fiscal year 2018 compared to 8.12% and 0.83%, respectively, for the same prior year period.

 

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 3.63% for the three months ended September 30, 2017, compared with 3.87% for the same period in 2016. FTE net interest income for the three months ended September 30, 2017 increased by $66, or 1.7%, to $3,974 from $3,908 for the same year ago period. The net interest margin for the three months ended September 30, 2016 was positively impacted by $191 recognized in interest income as a result of the full payoff of two loan relationships that were on non-accrual. Excluding the interest income recognized on the non-accrual loans, the net interest margin would have been 3.68% for the quarter ended September 30, 2016.

 

FTE interest income for the three months ended September 30, 2017 increased by $183, or 4.4%, from the same year ago period. The increase in FTE interest income was primarily the result of an increase of $30,491, or 7.5%, in average interest-earning assets from the same prior year period. The Corporation’s yield on average interest-earning assets was 3.96% for the three months ended September 30, 2017, a decrease from 4.10% for the same period last year. For the quarter ended September 30, 2016, the yield on average interest-earning assets would have been 3.92% excluding the interest income of $191 recognized on the non-accrual loans. Interest expense for the three months ended September 30, 2017 increased by $117 from the same year ago period. The Corporation’s cost of funds was 0.46% for the three months ended September 30, 2017 compared with 0.34% for the same year ago period. The increase in interest rates has impacted the rates paid on money market accounts, short-term borrowings and time deposits.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended September 30, (In thousands, except percentages)
		2017												2016
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
Interest-earning assets:
Taxable securities		$	85,216			$	511				2.38	%		$	75,967			$	402				2.14	%
Nontaxable securities (1)			60,714				549				3.63				59,093				526				3.65
Loans receivable (1)			280,396				3,234				4.58				260,683				3,190				4.85
Interest bearing deposits and federal funds sold			8,559				37				1.72				8,651				30				1.38
Total interest-earning assets			434,885				4,331				3.96	%			404,394				4,148				4.10	%
Noninterest-earning assets			31,752												26,760
Total Assets		$	466,637											$	431,154
Interest-bearing liabilities:
NOW		$	53,199			$	20				0.15	%		$	48,580			$	17				0.14	%
Savings			151,658				80				0.21				133,512				31				0.09
Time deposits			66,420				148				0.88				66,006				122				0.73
Short-term borrowings			26,281				55				0.83				19,448				12				0.24
FHLB advances			12,865				54				1.67				15,124				58				1.52
Total interest-bearing liabilities			310,423				357				0.46	%			282,670				240				0.34	%
Noninterest-bearing liabilities:
Noninterest-bearing checking accounts			108,185												101,144
Other liabilities			3,881												3,321
Total liabilities			422,489												387,135
Shareholders’ equity			44,148												44,019
Total liabilities and shareholders’ equity		$	466,637											$	431,154
Net interest income, interest rate spread (1)						$	3,974				3.50	%						$	3,908				3.76	%
Net interest margin (net interest as a percent of average interest-earning assets) (1)											3.63	%											3.87	%
Federal tax exemption on non-taxable securities and loans included in interest income						$	188											$	181
Average interest-earning assets to interest-bearing liabilities			140.09	%											143.06	%

(1) calculated on a fully taxable equivalent basis

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

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 months ended September 30, 2017, the provision for loan losses was $90 compared to $136 for the same prior year period.

 

Non-performing loans were $978 as of September 30, 2017 compared with $1,187 as of June 30, 2017 and $2,354 as of September 30, 2016. For the three months ended September 30, 2017 net recoveries totaled $18 compared with net charge-offs of $18 for the same prior year period. The allowance for loan losses as a percentage of loans was 1.11% at September 30, 2017 and 1.13% at June 30, 2017. The provision for loan losses for the period ended September 30, 2017 was considered sufficient by management for maintaining an appropriate allowance for probable incurred credit losses.

 

Non-Interest Income

Non-interest income increased by $24 for the first quarter of fiscal year 2018 from the same prior year period. Non-interest income for the first quarter of fiscal year 2018 included a $38 gain from the sale of securities compared with a $103 gain for the same prior year period. Excluding the securities gains, non-interest income increased by $89, or 11.9%, primarily as a result of increases in debit card interchange income and bank owned life insurance income.

 

Non-Interest Expenses

Total non-interest expenses increased by $107, or 3.3%, for the first fiscal quarter of 2018 from the same period last year primarily as a result of an increase in salary and benefit expenses and debit card interchange expenses. Salary and benefit expenses increased by $72, or 4.1%, primarily because of an increase in incentive expense.

 

Income Taxes

Income tax expense for the three months ended September 30, 2017 decreased by $6, to $246 from $252, compared to a year ago. The effective tax rate was 20.9% for the current quarter as compared with 21.9% for the same prior year period.

 

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, 2017 were $471,647 compared to $457,883 at June 30, 2017, an increase of $13,764, or an annualized 12.0%.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

Total loans increased by $14,851, or an annualized 21.8%, from $272,867 at June 30, 2017 to $287,718 at September 30, 2017. A total of $5,585 of the loan growth was related to entering into a participation agreement to allow for the short-term purchase of agency eligible residential loans from various mortgage lenders on a warehouse line of credit facility. The remaining growth in the loan portfolio was primarily related to growth within the commercial real estate segment to borrowers within the Bank’s primary market area. The loan growth was primarily funded by an increase of $9,369, or an annualized 10.0%, in total deposits and a decline of $5,704 in available-for-sale securities.

 

Non-Performing Assets

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

 

		September 30, 2017				June 30, 2017				September 30, 2016
Non-accrual loans		$	978			$	1,187			$	2,354
Loans past due over 90 days and still accruing			—				—				—
Total non-performing loans			978				1,187				2,354
Other real estate owned			—				71				10
Total non-performing assets		$	978			$	1,258			$	2,364
Non-performing loans to total loans			0.34	%			0.44	%			0.90	%
Allowance for loan losses to total non-performing loans			326.58	%			259.98	%			156.50	%

 

As of September 30, 2017, impaired loans totaled $2,012, of which $978 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)

 

(Dollars in thousands, except per share data)

 

Net cash inflow from operating activities for the three months ended September 30, 2017 was $503, net cash outflows from investing activities was $9,181 and net cash inflows from financing activities was $12,945. A major source of cash was a $9,369 increase in deposits and $5,998 from sales, maturities, calls or principal pay downs on available-for-sale securities. A major use of cash included a $14,833 increase in loans. Total cash and cash equivalents was $14,179 as of September 30, 2017, compared to $9,912 at June 30, 2017 and $12,533 at September 30, 2016.

 

The Bank offers several types of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. Deposits totaled $383,840 at September 30, 2017 compared with $374,471 at June 30, 2017.

 

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At September 30, 2017, advances from the FHLB of Cincinnati totaled $12,304 compared with $12,320 at June 30, 2017. As of September 30, 2017, the Bank had the ability to borrow an additional $22,009 from the FHLB of Cincinnati based on a blanket pledge of qualifying first mortgage and multi-family loans. The Corporation considers the FHLB of Cincinnati 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 $27,905 at September 30, 2017 from $23,986 at June 30, 2017.

 

Jumbo time deposits (those with balances of $250 and over) totaled $13,710 at September 30, 2017 and $14,252 at June 30, 2017. 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.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Since commitments to extend credit have a fixed expiration date or other termination clause, some commitments will expire without being drawn upon and the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments and collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $56,433 at September 30, 2017 and $53,742 at June 30, 2017.

 

Capital Resources

Total shareholders’ equity increased to $44,271 as of September 30, 2017 from $43,535 as of June 30, 2017. The increase was the result of net income for the first fiscal quarter of 2018 of $929 which was partially offset by $327 in cash dividends paid.

 

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.

 

As of September 30, 2017, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 12.79% and the leverage and total capital ratios were 9.05% and 13.76%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 13.21% and leverage and total risk-based capital ratios of 9.06% and 14.20%, respectively, as of June 30, 2017. 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, 2017 that would cause the Bank’s capital category to change.

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

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 as a critical accounting policy and an understanding of this policy is 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 - Allowance for Loan Losses), 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 2017 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since June 30, 2017.

 

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:

●

material unforeseen changes in the financial condition or results of Consumers National Bank’s customers;

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

●

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;

●

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 or debtors being unable to meet their obligations;

●

pricing and liquidity pressures that may result in a rising market rate environment;

●

competitive pressures on product pricing and services;

●

rapid fluctuations in market interest rates could result in changes in fair market valuations and net interest income; and

●

the nature, extent, and timing of government and regulatory actions.

 

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.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

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, 2017.

 

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.

 

 

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 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, 2017, 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 7, 2017	/s/ Ralph J. Lober                       Ralph J. Lober, II President & Chief Executive Officer (principal executive officer)
Date: November 7, 2017	/s/ Renee K. Wood                     Renee K. Wood Chief Financial Officer & Treasurer (principal financial officer)

 

38