UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
Commission File No. 033-79130
CONSUMERS BANCORP, INC.
(Exact name of registrant as specified in its charter)
| OHIO | 033-79130 | 34-1771400 | ||
| (State or other jurisdiction of incorporation or organization) |
(Commission File Number) | (I.R.S. Employer Identification No.) |
| 614 East Lincoln Way, P.O. Box 256, Minerva, Ohio | 44657 | |
| (Address of principal executive offices) | (Zip Code) |
(330) 868-7701
(Issuer’s telephone number)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer 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 13, 2007 | |
| 2,051,540 Common Shares |
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2007
Part I – Financial Information
Item 1 – Financial Statements (Unaudited)
Interim financial information required by Rule 10-01 of Regulation S-X is included in this Form 10-Q as referenced below:
PART 1 – FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
| Unaudited September 30, 2007 |
June 30, 2007 | |||||||
| ASSETS |
||||||||
| Cash and cash equivalents |
$ | 5,412 | $ | 5,558 | ||||
| Securities, available for sale |
47,505 | 42,133 | ||||||
| Federal bank and agency stocks, at cost |
1,146 | 1,146 | ||||||
| Total loans |
143,365 | 141,447 | ||||||
| Less allowance for loan losses |
(1,440 | ) | (1,381 | ) | ||||
| Net Loans |
141,925 | 140,066 | ||||||
| Cash surrender value of life insurance |
4,331 | 4,290 | ||||||
| Premises and equipment, net |
4,139 | 4,273 | ||||||
| Intangible assets |
692 | 733 | ||||||
| Other real estate owned |
25 | 1,478 | ||||||
| Accrued interest receivable and other assets |
1,895 | 2,281 | ||||||
| Total assets |
$ | 207,070 | $ | 201,958 | ||||
| LIABILITIES |
||||||||
| Deposits |
||||||||
| Non-interest bearing demand |
$ | 41,106 | $ | 42,170 | ||||
| Interest bearing demand |
10,609 | 10,086 | ||||||
| Savings |
47,913 | 49,006 | ||||||
| Time |
72,090 | 68,329 | ||||||
| Total deposits |
171,718 | 169,591 | ||||||
| Short-term borrowings |
9,089 | 9,330 | ||||||
| Federal Home Loan Bank advances |
5,147 | 2,625 | ||||||
| Accrued interest and other liabilities |
1,753 | 1,630 | ||||||
| Total liabilities |
187,707 | 183,176 | ||||||
| Commitments and contingent liabilities |
— | — | ||||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Common stock (no par value, 2,500,000 shares authorized; 2,160,000 issued) |
4,869 | 4,869 | ||||||
| Retained earnings |
16,195 | 15,920 | ||||||
| Treasury stock, at cost (107,566 shares at September 30, 2007 and 94,566 shares at June 30, 2007) |
(1,397 | ) | (1,235 | ) | ||||
| Accumulated other comprehensive income (loss) |
(304 | ) | (772 | ) | ||||
| Total shareholders’ equity |
19,363 | 18,782 | ||||||
| Total liabilities and shareholders’ equity |
$ | 207,070 | $ | 201,958 | ||||
See accompanying notes to consolidated financial statements
1
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
| Three Months ended September 30, |
||||||||
| 2007 | 2006 | |||||||
| Interest income |
||||||||
| Loans, including fees |
$ | 2,702 | $ | 2,601 | ||||
| Securities |
||||||||
| Taxable |
387 | 282 | ||||||
| Tax-exempt |
164 | 154 | ||||||
| Federal funds sold |
5 | 1 | ||||||
| Total interest income |
3,258 | 3,038 | ||||||
| Interest expense |
||||||||
| Deposits |
949 | 765 | ||||||
| Short-term borrowings |
95 | 41 | ||||||
| Federal Home Loan Bank advances |
64 | 133 | ||||||
| Total interest expense |
1,108 | 939 | ||||||
| Net interest income |
2,150 | 2,099 | ||||||
| Provision for loan losses |
100 | 171 | ||||||
| Net interest income after Provision for loan losses |
2,050 | 1,928 | ||||||
| Non-interest income |
||||||||
| Service charges on deposit accounts |
365 | 380 | ||||||
| Loss on sale of securities |
(4 | ) | — | |||||
| Gain (loss) on sale of other assets owned |
13 | (24 | ) | |||||
| Other |
187 | 204 | ||||||
| Total non-interest income |
561 | 560 | ||||||
| Non-interest expenses |
||||||||
| Salaries and employee benefits |
1,069 | 1,060 | ||||||
| Occupancy |
253 | 260 | ||||||
| Directors’ fees |
42 | 37 | ||||||
| Professional fees |
39 | 85 | ||||||
| Franchise taxes |
55 | 28 | ||||||
| Printing and supplies |
29 | 42 | ||||||
| Telephone and network communications |
66 | 56 | ||||||
| Amortization of intangible |
41 | 41 | ||||||
| Other |
451 | 394 | ||||||
| Total non-interest expenses |
2,045 | 2,003 | ||||||
| Income before income taxes |
566 | 485 | ||||||
| Income tax expense |
126 | 105 | ||||||
| Net Income |
$ | 440 | $ | 380 | ||||
| Basic earnings per share |
$ | 0.21 | $ | 0.18 | ||||
See accompanying notes to consolidated financial statements
2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share data)
| Three Months ended September 30, |
||||||||
| 2007 | 2006 | |||||||
| Balance at beginning of period |
$ | 18,782 | $ | 19,102 | ||||
| Comprehensive income |
||||||||
| Net Income |
440 | 380 | ||||||
| Other comprehensive income |
468 | 808 | ||||||
| Total comprehensive income |
908 | 1,188 | ||||||
| Purchase of treasury stock (13,000 and 30,250 shares for the period ending September 30, 2007 and 2006, respectively) |
(162 | ) | (379 | ) | ||||
| Common cash dividends |
(165 | ) | (107 | ) | ||||
| Balance at the end of the period |
$ | 19,363 | $ | 19,804 | ||||
| Cash dividends per common share |
$ | 0.08 | $ | 0.05 | ||||
See accompanying notes to consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| Three Months Ended September 30, |
||||||||
| 2007 | 2006 | |||||||
| Cash flows from operating activities |
||||||||
| Net cash from operating activities |
$ | 869 | $ | 777 | ||||
| Cash flow from investing activities |
||||||||
| Securities available for sale |
||||||||
| Purchases |
(5,943 | ) | (2,191 | ) | ||||
| Maturities and principal pay downs |
792 | 766 | ||||||
| Proceeds from sales of available for sale securities |
489 | — | ||||||
| Net (increase) decrease in loans |
(1,984 | ) | 3,323 | |||||
| Acquisition of premises and equipment |
(3 | ) | (77 | ) | ||||
| Disposal of premises and equipment |
1 | — | ||||||
| Sale of other real estate owned |
1,552 | 263 | ||||||
| Net cash from investing activities |
(5,096 | ) | 2,084 | |||||
| Cash flow from financing activities |
||||||||
| Net increase (decrease) in deposit accounts |
2,127 | (1,059 | ) | |||||
| Net change in short-term borrowings |
(241 | ) | (225 | ) | ||||
| Proceeds of Federal Home Loan Bank advances |
2,575 | 5,610 | ||||||
| Repayments of Federal Home Loan Bank advances |
(53 | ) | (7,144 | ) | ||||
| Purchase of treasury stock |
(162 | ) | (379 | ) | ||||
| Dividends paid |
(165 | ) | (107 | ) | ||||
| Net cash from financing activities |
4,081 | (3,304 | ) | |||||
| Decrease in cash or cash equivalents |
(146 | ) | (443 | ) | ||||
| Cash and cash equivalents, beginning of period |
5,558 | 5,941 | ||||||
| Cash and cash equivalents, end of period |
$ | 5,412 | $ | 5,498 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the period: |
||||||||
| Interest |
$ | 1,154 | $ | 964 | ||||
| Federal income taxes |
— | — | ||||||
| Non-cash items: |
||||||||
| Transfer from loans to repossessed assets |
$ | 25 | — | |||||
See accompanying notes to consolidated financial statements.
4
Notes to the Consolidated Financial Statements
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 1 – Summary of Significant Accounting Policies:
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 Consumers Bancorp, Inc.’s Form 10-K for the year ended June 30, 2007. 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 Consumers Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiary, Consumers National Bank (the “Bank”). All significant inter-company transactions and accounts have been eliminated in consolidation.
Segment Information: Consumers Bancorp, Inc. is a bank holding company engaged in the business of commercial and retail banking, which accounts for substantially all of the revenues, operating income, and assets.
Earnings per Share: Earnings per common share are computed based on the weighted average common shares outstanding. The weighted average number of outstanding shares was 2,061,847 and 2,137,207 for the quarters ended September 30, 2007 and 2006, respectively. The Corporation’s capital structure contains no dilutive securities.
Adoption of New Accounting Standards: Effective July 1, 2007, the Corporation adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the Corporation’s Consolidated Financial Statements in accordance with FASB Statement 109. Upon adoption of FIN No. 48, no material reserves for uncertain tax positions were recorded. The adoption of this pronouncement had no material effect on the Corporation’s Consolidated Financial Statements.
The Corporation’s practice is to recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2007, the Corporation did not record an accrual for either interest or penalties related to unrecognized tax benefits.
The Corporation files U.S. federal and Ohio state income tax returns. Tax years 2003-2006 remain open to examination by major taxing jurisdictions to which the Corporation is subject.
5
CONSUMER BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
(Dollars in thousands, except per share amounts)
Note 2 – Securities
| September 30, 2007 |
Fair Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
|||||||
| Securities available for sale: |
||||||||||
| U.S. Treasury |
$ | 1,000 | $ | — | $ | — | ||||
| Obligations of government sponsored entities |
10,065 | 26 | (65 | ) | ||||||
| Obligations of states and political subdivisions |
15,960 | 24 | (200 | ) | ||||||
| Mortgage-backed securities |
19,497 | 38 | (267 | ) | ||||||
| Equity securities |
983 | — | (17 | ) | ||||||
| Total Securities |
$ | 47,505 | $ | 88 | $ | (549 | ) | |||
| June 30, 2007 |
Fair Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
|||||||
| Securities available for sale: |
||||||||||
| U.S. Treasury |
$ | 998 | $ | — | $ | (2 | ) | |||
| Obligations of government sponsored entities |
9,892 | — | (209 | ) | ||||||
| Obligations of states and political subdivisions |
14,638 | 8 | (503 | ) | ||||||
| Mortgage-backed securities |
15,598 | 7 | (477 | ) | ||||||
| Equity securities |
1,007 | 7 | — | |||||||
| Total Securities |
$ | 42,133 | $ | 22 | $ | (1,191 | ) | |||
The estimated fair values of securities at September 30, 2007, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Estimated Fair Value | |||
| Due in one year or less |
$ | 2,744 | |
| Due after one year through five years |
4,062 | ||
| Due after five years through ten years |
10,384 | ||
| Due after ten years |
9,835 | ||
| Total |
27,025 | ||
| Mortgage-backed securities |
19,497 | ||
| Equity securities |
983 | ||
| Total |
$ | 47,505 | |
6
CONSUMER BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
(Dollars in thousands, except per share amounts)
At September 30, 2007, available for sale securities included municipal securities issued by Farmersville, Texas school district that are insured by Permanent School Fund Guarantee with an aggregate book value of $2,126, or 11.0%, of shareholders’ equity. Other than this issue, there were no other holdings of securities of any one issuer, other than the U.S. government and its agencies and corporations, with an aggregate book value which exceeds 10% of shareholders’ equity. As of September 30, 2007, any unrealized losses on securities that have been in a continuous loss position for 12 months or more have not been recognized into income because the issuer(s) securities are of high credit quality and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity dates.
Note 3 – Loans
Major classifications of loans were as follows:
| September 30, 2007 | June 30, 2007 | |||||
| Real estate – residential mortgage |
$ | 48,562 | $ | 50,988 | ||
| Real estate – construction |
3,145 | 2,184 | ||||
| Commercial, financial and agriculture |
84,816 | 82,075 | ||||
| Consumer |
6,842 | 6,200 | ||||
| Total Loans |
$ | 143,365 | $ | 141,447 | ||
| September 30, 2007 |
June 30, 2007 |
September 30, 2006 | |||||||
| Loans past due over 90 days and still accruing |
$ | — | $ | 73 | $ | — | |||
| Loans on non-accrual |
803 | 886 | 2,944 | ||||||
| Impaired loans |
693 | 706 | 2,889 | ||||||
| Amount of allowance allocated to impaired loans |
172 | 136 | 602 | ||||||
Impaired loans of $693, $706 and $2,827 as of September 30, 2007, June 30, 2007 and September 30, 2006, respectively, were included in non-accrual loans.
7
CONSUMER BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
(Dollars in thousands, except per share amounts)
Note 4 – Allowance for Loan Losses
A summary of activity in the allowance for loan losses for the three months ended September 30, 2007, and 2006, were as follows:
| 2007 | 2006 | |||||||
| Beginning of period |
$ | 1,381 | $ | 1,557 | ||||
| Provision |
100 | 171 | ||||||
| Charge-offs |
(60 | ) | (51 | ) | ||||
| Recoveries |
19 | 33 | ||||||
| Balance at September 30, |
$ | 1,440 | $ | 1,710 | ||||
Note 5 – Federal Home Loan Bank Advances
A summary of Federal Home Loan Bank (FHLB) advances are as follows:
| Maturity |
Term |
Interest Rate |
Balance September 30, 2007 |
Interest Rate |
Balance June 30, 2007 | |||||||
| 09/24/2007 |
Floating | — | — | 5.37 | 1,250 | |||||||
| 12/19/2007 |
Floating | 5.10 | 1,860 | — | — | |||||||
| 12/24/2007 |
Floating | 5.10 | 1,615 | — | — | |||||||
| 12/26/2007 |
Floating | 5.10 | 350 | — | — | |||||||
| 07/01/2010 |
Fixed | 6.90 | 38 | 6.90 | 41 | |||||||
| 10/01/2010 |
Fixed | 7.00 | 39 | 7.00 | 51 | |||||||
| 12/01/2010 |
Fixed | 6.10 | 169 | 6.10 | 181 | |||||||
| 04/01/2014 |
Fixed | 2.54 | 457 | 2.54 | 473 | |||||||
| 04/01/2019 |
Fixed | 4.30 | 619 | 4.30 | 629 | |||||||
| $ | 5,147 | $ | 2,625 | |||||||||
Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the difference between the contract rate on the advance and the current rate on the new advance. Each floating rate advance can be prepaid, without penalty, at each interest rate reset date.
8
CONSUMERS BANCORP, INC.
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, 2007, compared to the same period in 2006, and the consolidated balance sheets at September 30, 2007 compared to June 30, 2007. 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, 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 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 and government agency obligations, municipal obligations, mortgage-backed securities and other securities.
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 or experience to differ from results discussed in the forward-looking statements include, but are not limited to: regional and national economic conditions; changes in levels of market interest rates; credit risks, competitive and regulatory factors affecting lending activities; government regulation, and material unforeseen changes in the financial condition or results of Consumers National Bank’s customers could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected.
9
CONSUMERS BANCORP, INC.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
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.
Results of Operations
Three Months Ended September 30, 2007 and 2006
Net Income
Net income was $440 for the three months ended September 30, 2007, an increase of $60 compared to the same period last year when net income was $380. The increase in net income was mainly attributable to an increase in net interest income along with a decline in provision for loan losses and non-interest expenses. Earnings per common share were $0.21 for the first quarter of fiscal year 2008 as compared to $0.18 for the same period in fiscal 2007.
Return on average equity (ROE) and return on average assets (ROA) were 9.20% and 0.85%, respectively, for the first quarter of fiscal year 2008 compared to 7.78% and 0.75%, respectively, for the first quarter of fiscal year 2007.
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 interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances.
The Corporation’s net interest margin for the three months ended September 30, 2007 was 4.68%, compared to 4.62% for the same period last year. Net interest income for the three months ended September 30, 2007 increased by $51, or 2.4%, to $2,150 from $2,099 for the same period last year. The increase in the net interest margin and net interest income was primarily due to an increase in the yield on interest-earning assets from 6.62% for the three months ended September 30, 2006 to 7.01% for the same period in 2007. The increase in the yield on interest-earning assets was mainly due to a 52 basis point increase in the yield on loans resulting from adjustment rate loans repricing to current higher market rates. The Corporation’s cost of funds increased from 2.64% for the three months ended September 30, 2006 to 3.08% for the three months ended September 30, 2007 mainly due to higher rates affecting the rates paid on short-term borrowings and time deposits.
10
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)
| 2007 | 2006 | |||||||||||||||||||
| Average Balance |
Interest | Yield/ Rate |
Average Balance |
Interest | Yield/ Rate |
|||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||
| Taxable securities |
$ | 31,114 | $ | 387 | 4.95 | % | $ | 24,765 | $ | 282 | 4.52 | % | ||||||||
| Nontaxable securities (1) |
15,157 | 229 | 6.01 | % | 14,831 | 219 | 5.86 | % | ||||||||||||
| Loans receivable (1) |
142,384 | 2,711 | 7.57 | % | 146,522 | 2,604 | 7.05 | % | ||||||||||||
| Federal funds sold |
360 | 5 | 5.53 | % | 58 | 1 | 6.84 | % | ||||||||||||
| Total interest-earning assets |
189,015 | 3,332 | 7.01 | % | 186,176 | 3,106 | 6.62 | % | ||||||||||||
| Noninterest-earning assets |
15,680 | 15,504 | ||||||||||||||||||
| Total Assets |
$ | 204,695 | $ | 201,680 | ||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||
| NOW |
$ | 10,498 | $ | 6 | 0.23 | % | $ | 9,837 | $ | 3 | 0.12 | % | ||||||||
| Savings |
48,114 | 125 | 1.03 | % | 50,311 | 109 | 0.86 | % | ||||||||||||
| Time deposits |
70,106 | 818 | 4.64 | % | 65,218 | 653 | 3.98 | % | ||||||||||||
| Short-term borrowings |
9,017 | 95 | 4.19 | % | 5,511 | 41 | 2.88 | % | ||||||||||||
| FHLB advances |
5,162 | 64 | 4.93 | % | 10,040 | 133 | 5.26 | % | ||||||||||||
| Total interest-bearing liabilities |
142,897 | 1,108 | 3.08 | % | 140,917 | 939 | 2.64 | % | ||||||||||||
| Noninterest-bearing liabilities: |
||||||||||||||||||||
| Noninterest-bearing checking accounts |
41,241 | 40,373 | ||||||||||||||||||
| Other liabilities |
1,555 | 1,009 | ||||||||||||||||||
| Total liabilities |
185,693 | 182,299 | ||||||||||||||||||
| Shareholders’ equity |
19,002 | 19,381 | ||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 204,695 | $ | 201,680 | ||||||||||||||||
| Net interest income, interest rate spread (1) |
$ | 2,224 | 3.93 | % | $ | 2,167 | 3.98 | % | ||||||||||||
| Net interest margin (net interest as a percent of average interest-earning assets (1) |
4.68 | % | 4.62 | % | ||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities |
132.27 | % | 132.12 | % | ||||||||||||||||
| (1) | calculated on a fully taxable equivalent basis |
11
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 credit losses inherent in the Bank’s loan portfolio that have been incurred at each balance sheet date. The provision for loan losses decreased to $100 for the three month period ended September 30, 2007 compared to $171 for the same period last year.
The lower provision for loan losses for the three month period ended September 30, 2007 resulted mainly from a decrease in non-performing loans. Non-performing loans were $803, $959 and $2,944 as of September 30, 2007, June 30, 2007 and September 30, 2006, respectively. Non-performing loans as of September 30, 2006 included one large loan relationship that was secured by two multi-family rental unit properties that have been sold during first fiscal quarter of 2008. The provision for loan losses as of September 30, 2007 was considered sufficient by management for maintaining an appropriate allowance for loan losses.
Non-Interest Income
Non-interest income increased to $561 during the first quarter of fiscal year 2008, compared to $560 for the same period last year. Within non-interest income, service charges on deposits declined by $15 mainly due to a reduction in overdraft charges. Other income declined by $17 mainly due to a decline of $42 in alternative investment income that was partially offset by a $15 increase in debit card interchange income. Also, within non-interest income there was a $13 gain on the sale of other real estate property acquired through loan foreclosure as compared to a loss of $24 for the three months ending September 30, 2006.
Non-Interest Expenses
Non-interest expenses increased by 2.1%, to $2,045 during the first quarter of fiscal year 2008, compared to $2,003 during the same period last year. Within non-interest expenses, other expenses increased by $57 mainly due to a one time recruiting fee related to the hiring of an additional experienced lending officer, higher debit card interchange fees (due to increased customer volume) and higher loan collection expenses. These increases were partially offset by a $46 decrease in professional fees for the three months ended September 30, 2007 as compared to the same period last year. Professional fees for 2006 included one time expenses related to a new product introduction and an operations review.
Income Taxes
Income tax expense for the three months ended September 30, 2007 increased $21, to $126 from $105, compared to the same period in 2006. The effective tax rate was 22.3% for the current quarter as compared to 21.6% for the same period last year. The effective tax rate differed from the federal statutory rate principally as a result of tax-exempt
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CONSUMERS BANCORP, INC.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
income from obligations of states and political subdivisions, loans and earnings on bank owned life insurance.
Financial Condition
Total assets at September 30, 2007 were $207,070 compared to $201,958 at June 30, 2007, an increase of $5,112, or 2.5%. Available for sale securities increased by $5,372 from $42,133 at June 30, 2007 to $47,505 at September 30, 2007 mainly due to the purchase of mortgage-backed securities in order to take advantage of bonds priced at a discount. Loan receivables increased by $1,918 to $143,365 at September 30, 2007 compared to $141,447 at June 30, 2007. The current increase in loan receivables is mainly attributable to more favorable rate environment and more aggressive calling efforts by the lending officers.
Total shareholders’ equity increased by $581 from June 30, 2007, to $19,363 as of September 30, 2007. This increase was mainly due to net income for the current three month period and an increase in the fair market value of available for sale securities as a result of changes in interest rates. These increases were partially offset by cash dividends paid during the period as well as an increase in treasury stock.
In June 2007, the Board of Directors authorized a share repurchase program for up to 75,000 shares that can be repurchased through June 2008. As part of this repurchase program, 13,000 shares were repurchased during the first quarter of fiscal year 2008.
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CONSUMERS BANCORP, INC.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets and respective ratios as of the dates indicated.
| September 30, 2007 | June 30, 2007 | September 30, 2006 | ||||||||||
| Non-accrual loans |
$ | 803 | $ | 886 | $ | 2,944 | ||||||
| Loans past due over 90 days and still accruing |
— | 73 | — | |||||||||
| Total non-performing loans |
803 | 959 | 2,944 | |||||||||
| Other real estate owned |
25 | 1,478 | 462 | |||||||||
| Total non-performing assets |
$ | 828 | $ | 2,437 | $ | 3,406 | ||||||
| Non-performing loans to total loans |
0.56 | % | 0.68 | % | 2.04 | % | ||||||
| Allowance for loan losses to total non-performing loans |
179.33 | % | 144.00 | % | 58.08 | % | ||||||
| Loans 90 days or more past due and still accruing to total loans |
— | 0.05 | % | — | ||||||||
Following is a breakdown of non-accrual loans as of September 30, 2007 by collateral:
| September 30, 2007 | |||
| Commercial non-mortgage collateral |
$ | 147 | |
| Multifamily residential properties |
101 | ||
| 1-4 family residential properties |
555 | ||
| Total |
$ | 803 | |
As of September 30, 2007, impaired loans totaled $693, all of which 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 good.
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
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CONSUMERS BANCORP, INC.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
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.
The Corporation offers several deposit products to its customers. The rates offered by the Corporation and the fees charged for these products are competitive with others available currently in the market area. Interest rates on savings deposits have remained at historical low levels, while rates on demand deposits and time deposits have increased in recent months due to current market conditions.
To provide an additional source of liquidity, the Corporation has entered into an agreement with the Federal Home Loan Bank (FHLB) of Cincinnati. At September 30, 2007, FHLB advances totaled $5,147 as compared with $2,625 at June 30, 2007. The Corporation considers the FHLB to be a reliable source of liquidity funding, secondary to its deposit base.
Jumbo time deposits (those with balances of $100 thousand and over) increased from $19,972 at June 30, 2007 to $20,837 at September 30, 2007. These deposits are monitored closely by the Corporation and 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.
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CONSUMERS BANCORP, INC.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollars in thousands, except per share data)
Capital Resources
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 is considered well capitalized under the Federal Deposit Insurance Act at September 30, 2007. Management is not aware of any matters occurring subsequent to September 30, 2007 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 Company 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. Footnote one (Allowance for Loan Losses), footnote three (Loans) and Management Discussion and Analysis of Financial Condition and Results from Operation (Critical Accounting Policies and Allowance for Loan Losses) of the 2007 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, 2007.
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CONSUMERS BANCORP, INC.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity prices, credit spreads and/or commodity prices. Within the Bank, the dominant market risk exposure is fluctuation in interest rates. The negative effect of this exposure is felt through the net interest margin and the market value of various assets and liabilities.
The Bank measures interest-rate risk from the perspectives of earnings at risk and value at risk. The primary purpose of both the loan and investment portfolios is the generation of income, but credit risk is the principal focus of risk analysis in the loan portfolio and interest-rate risk is the principal focus in the investment portfolio. Because of the greater liquidity of the investment portfolio, it is the vehicle for managing interest-rate risk in the entire balance sheet. The Bank manages its interest rate risk position using simulation analysis of net interest income and net income over a two-year period. The Bank also calculates the effect of an instantaneous change in market interest rates on the economic value of equity or net portfolio value. Once these analyses are complete, management reviews the results, with an emphasis on the income-simulation results for purposes of managing interest-rate risk. The rate sensitivity position is managed to avoid wide swings in net interest margins. Measurement and identification of current and potential interest rate risk exposures are conducted quarterly, with reporting and monitoring also occurring quarterly. The Bank applies interest rate shocks to its financial instruments up and down 100 and 200 basis points.
The following table presents an analysis of the potential sensitivity of the Bank’s annual net interest income and present value of the Bank’s financial instruments to a sudden and sustained increase and decrease change in market interest rates of 200 and 100 basis points:
| One Year Net Interest Income Change |
Maximum Change 2007 |
Guidelines | |||
| +200 Basis Points |
(1.9 | )% | >(20.0)% | ||
| +100 Basis Points |
(0.9 | )% | >(12.5)% | ||
| -100 Basis Points |
0.5 | % | >(12.5)% | ||
| -200 Basis Points |
1.3 | % | >(20.0)% | ||
| Net Present Value of Equity Change |
|||||
| +200 Basis Points |
(15.2 | )% | >(25)% | ||
| +100 Basis Points |
(6.6 | )% | >(20)% | ||
| -100 Basis Points |
(0.5 | )% | >(20)% | ||
| -200 Basis Points |
(5.3 | )% | >(25)% |
The projected volatility of net interest income and net present value of equity shown in the table falls within Board of Directors guidelines in right hand column.
The preceding analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments and reactions of depositors to changes in interest rates, and should not be relied upon as being indicative of actual results. Further, the analysis does not necessarily contemplate all actions the Bank may undertake in response to changes in interest rates.
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CONSUMERS BANCORP, INC.
Item 4 – Controls and Procedures
As of September 30, 2007, an evaluation was carried out 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 Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2007, the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation, in reports that it files or submits under the Exchange Act (1) was recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
There were no changes in the Corporation’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting.
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CONSUMERS BANCORP, INC.
There were no material changes to the risk factors as presented in the Corporation’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
| Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plan |
Maximum Number of Shares that May Yet Be Purchased Under the Plan | |||||
| July 1, 2007 – July 31, 2007 |
— | — | — | |||||
| August 1, 2007 – August 31, 2007 |
— | — | — | |||||
| September 1, 2007 – September 30, 2007 |
13,000 | 12.43 | 13,000 | 62,000 | ||||
| 13,000 | 12.43 | 13,000 | 62,000 | |||||
In June 2007, the Corporation announced a share repurchase program for up to 75,000 shares that can be repurchased through June 2008. The purchases made in September 2007 were accomplished through an open-market transaction and through one privately negotiated transaction.
Item 4 – Submission of Matters to a Vote of Security Holders
Consumers Bancorp, Inc. held its Annual Meeting of Shareholders on October 17, 2007, for the purpose of electing three directors and to transact such other business as would properly come before the meeting. Shareholders elected three Class I Directors, consisting of James V. Hanna, James R. Kiko, Sr., and John E. Tonti, each have been elected to serve a term ending in 2010. The Class II Directors, consisting of Harry W. Schmuck, David W. Johnson, and Laurie L. McClellan each have been elected to serve a term ending in 2008. The remaining Class III Directors, consisting of John P. Furey, Thomas M. Kishman, and Steven L. Muckley each have been elected to serve a term ending in 2009.
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CONSUMER BANCORP, INC
Results of shareholder voting for the election of Directors were as follows:
| James V. Hanna |
James R. Kiko, Sr. |
John E. Tonti | ||||
| For |
1,606,477 | 1,607,671 | 1,608,121 | |||
| Withheld |
4,836 | 3,642 | 3,192 | |||
| Abstentions |
— | — | — |
On November 14, 2007, the Board of Directors of Consumers Bancorp, Inc., declared a $0.08 per share cash dividend for shareholders of record on November 26, 2007 that will be paid on December 12, 2007.
Consumers National Bank entered into a First Amendment to the Salary Continuation agreement (“Amendment”) with Mr. Muckley, President and Chief Executive Officer, effective as of November 13, 2007. Certain terms related to the distribution of benefits were modified in order to comply with Internal Revenue Code Section 409A. A copy of the form of Amendment entered into with Mr. Muckley is attached hereto as Exhibit 10.4.
Exhibit 10.4 First Amendment to the Salary Continuation agreement dated March 1, 2005 entered into with Mr. Muckley on November 13, 2007.
Exhibit 11 Statement regarding Computation of Per Share Earnings (included in Note 1 to the Consolidated Financial Statements).
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of President & Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer & Treasurer
Exhibit 32.1 Certification of President & Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
Exhibit 32.1 Certification of Chief Financial Officer & Treasurer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
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CONSUMER BANCORP, INC
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CONSUMERS BANCORP, INC. | ||
| (Registrant) | ||
| Date: November 14, 2007 | /s/ Steven L. Muckley | |
| Steven L. Muckley | ||
| President & Chief Executive Officer | ||
| Date: November 14, 2007 | /s/ Renee K. Wood | |
| Renee K. Wood | ||
| Chief Financial Officer & Treasurer | ||
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