cbkm20161231_10q.htm

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 December 31, 2016

 

Or

 

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

 

for the transition period from                                                                    To                                                                

 

Commission File No. 033-79130

 

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

OHIO

34-1771400

(State or other jurisdiction

(I.R.S. Employer Identification No.)

of incorporation or organization)

 
   

614 East Lincoln Way, P.O. Box 256, Minerva, Ohio

44657

(Address of principal executive offices)

(Zip Code)

 

(330) 868-7701

(Registrant’s telephone number)

 

Not applicable

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non-accelerated filer ☐  (Do not check if smaller reporting company)

Smaller reporting company ☒

                     

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

 

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

 

                 CommonStock,no par value 

Outstanding at February 10, 2017

2,724,956 Common Shares

    

 

 
 

 

  

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED December 31, 2016

 

Table of Contents

 

Page

Number (s)

Part I – Financial Information

Item 1 – Financial Statements (Unaudited)

 

Consolidated Balance Sheets at December 31, 2016 and June 30, 2016

1

   

Consolidated Statements of Income for the three and six months ended December 31, 2016 and 2015

 2

   

Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2016 and 2015

3

   

Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended December 31, 2016 and 2015

 4

   

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and 2015

5

   

Notes to the Consolidated Financial Statements

6-30

   

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

 31-40

   

Item 3 – Not Applicable for Smaller Reporting Companies

 
   

Item 4 – Controls and Procedures

41

Part II – Other Information

Item 1 – Legal Proceedings

42

   

Item 1A – Not Applicable for Smaller Reporting Companies

 
   

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

42

   

Item 3 – Defaults Upon Senior Securities

42

   

Item 4 – Mine Safety Disclosure

42

   

Item 5 – Other Information

42

   

Item 6 – Exhibits

42

   

Signatures

43

 

 
 

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

 

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(Dollars in thousands, except per share data)

 

December 31,

2016

   

June 30,

2016

 

ASSETS

               

Cash on hand and noninterest-bearing deposits in financial institutions

  $ 8,139     $ 8,164  

Federal funds sold and interest-bearing deposits in financial institutions

    2,711       2,017  

Total cash and cash equivalents

    10,850       10,181  

Certificates of deposit in other financial institutions

    4,916       5,906  

Securities, available-for-sale

    131,285       133,369  

Securities, held-to-maturity (fair value of $4,293 at December 31, 2016 and $3,619 at June 30, 2016)

    4,296       3,494  

Federal bank and other restricted stocks, at cost

    1,396       1,396  

Loans held for sale

    1,774       1,048  

Total loans

    264,804       256,278  

Less allowance for loan losses

    (3,123 )     (3,566 )

Net loans

    261,681       252,712  

Cash surrender value of life insurance

    8,930       6,819  

Premises and equipment, net

    13,451       13,585  

Accrued interest receivable and other assets

    2,856       1,880  

Total assets

  $ 441,435     $ 430,390  
                 

LIABILITIES

               

Deposits

               

Non-interest bearing demand

  $ 100,161     $ 98,224  

Interest bearing demand

    48,991       48,810  

Savings

    140,123       134,606  

Time

    66,170       65,008  

Total deposits

    355,445       346,648  
                 

Short-term borrowings

    19,352       19,129  

Federal Home Loan Bank advances

    20,976       17,281  

Accrued interest and other liabilities

    3,452       3,539  

Total liabilities

    399,225       386,597  

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 December 31, 2016 and June 30, 2016)

    14,630       14,630  

Retained earnings

    29,405       28,432  

Treasury stock, at cost (130,606 and 130,375 common shares as of December 31, 2016 and June 30, 2016, respectively)

    (1,662 )     (1,658 )

Accumulated other comprehensive income

    (163 )     2,389  

Total shareholders’ equity

    42,210       43,793  

Total liabilities and shareholders’ equity

  $ 441,435     $ 430,390  

 

 

See accompanying notes to consolidated financial statements

 

 
1

 

 

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

   

Three Months ended

December 31,

   

Six Months ended

December 31,

 

(Dollars in thousands, except per share amounts)

 

2016

   

2015

   

2016

   

2015

 
                                 

Interest income

                               

Loans, including fees

  $ 3,022     $ 2,789     $ 6,206     $ 5,584  

Securities, taxable

    377       488       779       945  

Securities, tax-exempt

    357       351       708       695  

Federal funds sold and other interest bearing deposits

    30       30       60       54  

Total interest income

    3,786       3,658       7,753       7,278  

Interest expense

                               

Deposits

    183       171       353       347  

Short-term borrowings

    11       10       23       18  

Federal Home Loan Bank advances

    56       40       114       83  

Total interest expense

    250       221       490       448  

Net interest income

    3,536       3,437       7,263       6,830  

Provision for loan losses

    140       192       276       284  

Net interest income after provision for loan losses

    3,396       3,245       6,987       6,546  
                                 

Non-interest income

                               

Service charges on deposit accounts

    314       320       644       634  

Debit card interchange income

    285       240       536       474  

Bank owned life insurance income

    63       49       112       95  

Securities gains, net

    22             125       35  

Loss on disposition of other real estate owned

    (3 )           (3 )      

Other

    116       113       231       219  

Total non-interest income

    797       722       1,645       1,457  
                                 

Non-interest expenses

                               

Salaries and employee benefits

    1,790       1,746       3,528       3,478  

Occupancy and equipment

    478       352       930       694  

Data processing expenses

    145       143       290       287  

Debit card processing expenses

    149       115       282       231  

Professional and director fees

    146       177       278       274  

FDIC assessments

    46       70       101       128  

Franchise taxes

    84       83       168       165  

Marketing and advertising

    65       79       144       172  

Telephone and network communications

    76       75       157       150  

Other

    347       366       734       764  

Total non-interest expenses

    3,326       3,206       6,612       6,343  

Income before income taxes

    867       761       2,020       1,660  

Income tax expense

    145       122       397       294  

Net income

  $ 722     $ 639     $ 1,623     $ 1,366  
                                 
Basic and diluted earnings per share   $ 0.27     $ 0.23     $ 0.60     $ 0.50  

 

 

See accompanying notes to consolidated financial statements

 

 
2

 

 

CONSUMERS BANCORP, INC.

Consolidated statements of comprehensive income

(Unaudited)

 

 

 

(Dollars in thousands)  

Three Months ended

December 31,

   

Six Months ended

December 31,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income

  $ 722     $ 639     $ 1,623     $ 1,366  
                                 

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

    (3,319 )     (410 )     (3,742 )     403  

Reclassification adjustment for gains included in income

    (22 )           (125 )     (35 )

Net unrealized gain (losses)

    (3,341 )     (410 )     (3,867 )     368  

Income tax effect

    1,136       139       1,315       (125 )

Other comprehensive income (losses)

    (2,205 )     (271 )     (2,552 )     243  
                                 

Total comprehensive income (loss)

  $ (1,483 )   $ 368     $ (929 )   $ 1,609  

 

 

See accompanying notes to consolidated financial statements.

 

 
3

 

 

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share data)  

Three Months ended

December 31,

   

Six Months ended

December 31,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Balance at beginning of period

  $ 44,020     $ 42,379     $ 43,793     $ 41,466  
                                 

Net income

    722       639       1,623       1,366  

Other comprehensive income (loss)

    (2,205 )     (271 )     (2,552 )     243  

231 Dividend reinvestment plan shares associated with forfeited and expired restricted stock awards retired to treasury stock during the six months ended December 31, 2016 and 27 and 275 shares during the three and six months ended December 31, 2015, respectively

                       

Common cash dividends

    (327 )     (327 )     (654 )     (655 )
                                 

Balance at the end of the period

  $ 42,210     $ 42,420     $ 42,210     $ 42,420  
                                 

Common cash dividends per share

  $ 0.12     $ 0.12     $ 0.24     $ 0.24  

 

 

See accompanying notes to consolidated financial statements.

 

 
4

 

 

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Dollars in thousands)

 

Six Months Ended

December 31,

 
   

2016

   

2015

 

Cash flows from operating activities

               

Net cash from operating activities

  $ 2,152     $ 2,068  
                 

Cash flow from investing activities

               

Securities available-for-sale

               

Purchases

    (17,368 )     (14,993 )

Maturities, calls and principal pay downs

    11,753       12,712  

Proceeds from sales of available-for-sale securities

    3,383       1,990  

Securities held-to-maturity

               

Purchases

    (1,000 )      

Principal pay downs

    198       125  

Net (increase) decrease in certificates of deposits in other financial institutions

    990       (945 )

Net increase in loans

    (9,255 )     (12,649 )

Purchase of Bank owned life insurance

    (2,000 )      

Acquisition of premises and equipment

    (252 )     (1,967 )

Sale of other real estate owned

    7        

Net cash from investing activities

    (13,544 )     (15,727 )
                 

Cash flow from financing activities

               

Net increase in deposit accounts

    8,797       9,671  

Net change in short-term borrowings

    223       (184 )

Proceeds from Federal Home Loan Bank advances

    18,325       4,700  

Repayments of Federal Home Loan Bank advances

    (14,630 )     (529 )

Dividends paid

    (654 )     (655 )

Net cash from financing activities

    12,061       13,003  
                 

Increase (decrease) in cash or cash equivalents

    669       (656 )
                 

Cash and cash equivalents, beginning of period

    10,181       10,544  

Cash and cash equivalents, end of period

  $ 10,850     $ 9,888  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period:

               

Interest

  $ 484     $ 449  

Federal income taxes

    150       475  

Non-cash items:

               

Transfer from loans to other real estate owned

    10       38  

Expired and forfeited dividend reinvestment plan shares associated with restricted stock awards that were retired to treasury stock

    4       5  

 

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

  

Note 1 – Summary of Significant Accounting Policies:

 

Nature of Operations: Consumers Bancorp, Inc. (the Corporation) is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, Consumers National Bank (the Bank), a broad array of products and services throughout its primary market area of Carroll, Columbiana, 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, 2016. 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 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 it is too early to estimate any impact.

 

 

 
6

 

 

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

 
                                 

December 31, 2016

                               

Obligations of U.S. government-sponsored entities and agencies

  $ 10,081     $ 69     $ (89 )   $ 10,061  

Obligations of state and political subdivisions

    56,809       520       (668 )     56,661  

Mortgage-backed securities – residential

    56,055       294       (506 )     55,843  

Mortgage-backed securities– commercial

    1,472             (3 )     1,469  

Collateralized mortgage obligations– residential

    6,960       3       (132 )     6,831  

Pooled trust preferred security

    154       266             420  
                                 

Total available-for-sale securities

  $ 131,531     $ 1,152     $ (1,398 )   $ 131,285  

 

Held-to-Maturity

 

Amortized
Cost

   

Gross
Unrecognized

Gains

   

Gross
Unrecognized

Losses

   

Fair
Value

 
                                 

December 31, 2016

                               

Obligations of state and political subdivisions

  $ 4,296     $ 8     $ (11 )   $ 4,293  

 

Available–for-Sale

 

Amortized
Cost

   

Gross
Unrealized

Gains

   

Gross
Unrealized

Losses

   

Fair
Value

 
                                 

June 30, 2016

                               

Obligations of U.S. government-sponsored entities and agencies

  $ 9,682     $ 362     $     $ 10,044  

Obligations of state and political subdivisions

    53,952       2,010       (8 )     55,954  

Mortgage-backed securities – residential

    58,702       920       (26 )     59,596  

Mortgage-backed securities – commercial

    1,485       41             1,526  

Collateralized mortgage obligations - residential

    5,774       49       (3 )     5,820  

Pooled trust preferred security

    153       276             429  
                                 

Total available-for-sale securities

  $ 129,748     $ 3,658     $ (37 )   $ 133,369  

 

 
7

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Held-to-Maturity

 

Amortized
Cost

   

Gross
Unrecognized

Gains

   

Gross
Unrecognized

Losses

   

Fair
Value

 
                                 

June 30, 2016

                               

Obligations of state and political subdivisions

  $ 3,494     $ 125     $     $ 3,619  

 

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

 

   

Three Months Ended

December 31,

   

Six Months Ended

December 31,

 
   

2016

   

2015

   

2016

   

2015

 

Proceeds from sales

  $ 1,594     $     $ 3,383     $ 1,990  

Gross realized gains

    24             127       35  

Gross realized losses

    2             2        

 

The income tax provision applicable to these net realized gains amounted to $8 and $43 for the three and six months ended December 31, 2016 and $12 for the six months ended December 31, 2015.

 

The amortized cost and fair values of debt securities at December 31, 2016, 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

  $ 1,484     $ 1,493  

Due after one year through five years

    17,504       17,684  

Due after five years through ten years

    26,182       26,174  

Due after ten years

    21,720       21,371  

Total

    66,890       66,722  
                 

U.S. Government-sponsored mortgage-backed and related securities

    64,487       64,143  

Pooled trust preferred security

    154       420  

Total available-for-sale securities

  $ 131,531     $ 131,285  
                 

Held-to-Maturity

               
                 

Due after five years through ten years

    638       645  

Due after ten years

    3,658       3,648  

Total held-to-maturity securities

  $ 4,296     $ 4,293  

 

 

 
8

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table summarizes the securities with unrealized losses at December 31, 2016 and June 30, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

   

Less than 12 Months

   

12 Months or more

   

Total

 

Available-for-sale

 

Fair
Value

   

Unrealized
Loss

   

Fair
Value

   

Unrealized
Loss

   

Fair
Value

   

Unrealized
Loss

 

December 31, 2016

                                               

Obligations of US government-sponsored entities and agencies

  $ 6,303     $ (89 )   $     $     $ 6,303     $ (89 )

Obligations of states and political subdivisions

    28,565       (663 )     271       (5 )     28,836       (668 )

Mortgage-backed securities - residential

    35,797       (449 )     3,197       (57 )     38,994       (506 )

Mortgage-backed securities - commercial

    1,469       (3 )                 1,469       (3 )

Collateralized mortgage obligations – residential816(1)——816(1)

    5,590       (117 )     988       (15 )     6,578       (132 )
                                                 

Total temporarily impaired

  $ 77,724     $ (1,321 )   $ 4,456     $ (77 )   $ 82,180     $ (1,398 )

 

   

Less than 12 Months

   

12 Months or more

   

Total

 

Held-to-Maturity

 

Amortized

Cost

   

Gross

Unrecognized
Loss

   

Amortized

Cost

   

Gross

Unrecognized
Loss

   

Amortized

Cost

   

Gross

Unrecognized
Loss

 

December 31, 2016

                                               

Obligations of states and political subdivisions

  $ 933     $ (11 )   $     $     $ 933     $ (11 )

Total temporarily impaired

  $ 933     $ (11 )   $     $     $ 933     $ (11 )

 

   

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, 2016

                                               

Obligations of states and political subdivisions

  $ 572     $ (6 )   $ 641     $ (2 )   $ 1,213     $ (8 )

Mortgage-backed securities - residential

    4,899       (12 )     4,836       (14 )     9,735       (26 )

Collateral mortgage obligation - residential

                1,212       (3 )     1,212       (3 )

Total temporarily impaired

  $ 5,471     $ (18 )   $ 6,689     $ (19 )   $ 12,160     $ (37 )

 

 
9

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities.

 

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

 

The unrealized losses within the securities portfolio as of December 31, 2016 have not been recognized into income because the decline in fair value is not attributed to credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. The decline in fair value 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:

 

   

December 31,

2016

   

June 30,

2016

 

Commercial

  $ 41,938     $ 43,156  

Commercial real estate:

               

Construction

    8,831       7,755  

Other

    153,563       152,766  

1 – 4 Family residential real estate:

               

Owner occupied

    37,652       31,091  

Non-owner occupied

    14,489       14,438  

Construction

    2,981       1,269  

Consumer

    5,350       5,803  

Subtotal

    264,804       256,278  

Allowance for loan losses

    (3,123 )     (3,566 )

Net Loans

  $ 261,681     $ 252,712  

 

Loans presented above are net of deferred loan fees and costs of $310 and $360 for December 31, 2016 and June 30, 2016, respectively.

 

 
10

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2016:

 

                    1-4 Family                  
            Commercial     Residential                  
           

Real

    Real                  
   

Commercial

   

Estate

   

Estate

   

Consumer

   

Total

 
                                         

Allowance for loan losses:

                                       

Beginning balance

  $ 510     $ 2,643     $ 411     $ 120     $ 3,684  

Provision for loan losses

    (14 )     157       51       (54 )     140  

Loans charged-off

          (700 )     (23 )     (8 )     (731 )

Recoveries

    1             26       3       30  

Total ending allowance balance

  $ 497     $ 2,100     $ 465     $ 61     $ 3,123  

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 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

    (9 )     282       78       (75 )     276  

Loans charged-off

          (700 )     (44 )     (12 )     (756 )

Recoveries

    1             29       7       37  

Total ending allowance balance

  $ 497     $ 2,100     $ 465     $ 61     $ 3,123  

 

 

 
11

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2015:

 

                   

1-4 Family

                 
           

Commercial

   

Residential

                 
           

Real

   

Real

                 
   

Commercial

   

Estate

   

Estate

   

Consumer

   

Total

 
                                         

Allowance for loan losses:

                                       

Beginning balance

  $ 387     $ 1,727     $ 278     $ 122     $ 2,514  

Provision for loan losses

    10       3       149       30       192  

Loans charged-off

          (2 )     (120 )     (33 )     (155 )

Recoveries

                      4       4  

Total ending allowance balance

  $ 397     $ 1,728     $ 307     $ 123     $ 2,555  

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2015:

  

                   

1-4 Family

                 
           

Commercial

   

Residential

                 
           

Real

   

Real

                 
   

Commercial

   

Estate

   

Estate

   

Consumer

   

Total

 
                                         

Allowance for loan losses:

                                       

Beginning balance

  $ 316     $ 1,660     $ 289     $ 167     $ 2,432  

Provision for loan losses

    81       73       138       (8 )     284  

Loans charged-off

          (5 )     (120 )     (51 )     (176 )

Recoveries

                      15       15  

Total ending allowance balance

  $ 397     $ 1,728     $ 307     $ 123     $ 2,555  

 

 

 
12

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016. Included in the recorded investment in loans is $614 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

  $ 4     $ 56     $ 2     $     $ 62  

Collectively evaluated for impairment

    493       2,044       463       61       3,061  

Total ending allowance balance

  $ 497     $ 2,100     $ 465     $ 61     $ 3,123  
                                         

Recorded investment in loans:

                                       

Loans individually evaluated for impairment

  $ 41     $ 1,482     $ 427     $     $ 1,950  

Loans collectively evaluated for impairment

    41,992       161,271       54,843       5,362       263,468  

Total ending loans balance

  $ 42,033     $ 162,753     $ 55,270     $ 5,362     $ 265,418  

 

 
13

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016. Included in the recorded investment in loans is $549 of accrued interest receivable net of deferred loans fees and cost of $360.

 

                   

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

  $     $ 868     $ 6     $     $ 874  

Collectively evaluated for impairment

    505       1,650       396       141       2,692  

Total ending allowance balance

  $ 505     $ 2,518     $ 402     $ 141     $ 3,566  
                                         

Recorded investment in loans:

                                       

Loans individually evaluated for impairment

  $ 1,029     $ 5,105     $ 758     $     $ 6,892  

Loans collectively evaluated for impairment

    42,219       155,734       46,166       5,816       249,935  

Total ending loans balance

  $ 43,248     $ 160,839     $ 46,924     $ 5,816     $ 256,827  

 

 
14

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of December 31, 2016 and for the six months ended December 31, 2016:

 

   

As of December 31, 2016

   

Six Months ended December 31, 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

  $     $     $     $ 330     $ 80     $ 80  

Commercial real estate:

                                               

Construction

    7       7             170       6       6  

Other

    1,779       891             1,081       105       105  

1-4 Family residential real estate:

                                               

Owner occupied

    127       127             127              

Non-owner occupied

    200       199             205              

With an allowance recorded:

                                               

Commercial

    41       41       4       7              

Commercial real estate:

                                               

Other

    583       584       56       2,030       15       15  

1-4 Family residential real estate:

                                               

Owner occupied

    101       101       2       139       3       3  

Total

  $ 2,838     $ 1,950     $ 62     $ 4,089     $ 209     $ 209  

 

 

 
15

 

  

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans for the three months ended December 31, 2016:

 

   

Average

   

Interest

   

Cash Basis

 
   

Recorded

   

Income

   

Interest

 
   

Investment

   

Recognized

   

Recognized

 

With no related allowance recorded:

                       

Commercial real estate:

                       

Construction

  $ 10     $     $  

Other

    607              

1-4 Family residential real estate:

                       

Owner occupied

    127              

Non-owner occupied

    202              

With an allowance recorded:

                       

Commercial

    14              

Commercial real estate:

                       

Other

    1,612       7       7  

1-4 Family residential real estate:

                       

Owner occupied

    101       1       1  

Total

  $ 2,673     $ 8     $ 8  

  

 
16

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of June 30, 2016 and for the six months ended December 31, 2015:

 

   

As of June 30, 2016

   

Six Months ended December 31, 2015

 
   

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

  $ 1,033     $ 1,029     $     $     $     $  

Commercial real estate:

                                               

Construction

    386       384             17              

Other

    2,121       2,106             2,177              

1-4 Family residential real estate:

                                               

Owner occupied

    175       174             282              

Non-owner occupied

    722       407             341              

With an allowance recorded:

                                               

Commercial real estate:

                                               

Other

    2,802       2,615       868       984       18       18  

1-4 Family residential real estate:

                                               

Owner occupied

    177       177       6       188       4       4  

Non-owner occupied

                      229       4       4  

Total

  $ 7,416     $ 6,892     $ 874     $ 4,218     $ 26     $ 26  

 

 

 
17

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans for the three months ended December 31, 2015:

 

   

Average

   

Interest

   

Cash Basis

 
   

Recorded

   

Income

   

Interest

 
   

Investment

   

Recognized

   

Recognized

 

With no related allowance recorded:

                       

Commercial real estate:

                       

Construction

  $ 22     $     $  

Other

    2,202              

1-4 Family residential real estate:

                       

Owner occupied

    280              

Non-owner occupied

    604              

With an allowance recorded:

                       

Commercial real estate:

                       

Other

    1,122       9       9  

1-4 Family residential real estate:

                       

Owner occupied

    187       2       2  

Total

  $ 4,417     $ 11     $ 11  

 

  

 
18

 

 

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 December 31, 2016 and June 30, 2016:

 

 

   

December 31, 2016

    June 30, 2016  
           

Loans Past Due

           

Loans Past Due

 
           

Over 90 Days

           

Over 90 Days

 
           

Still

           

Still

 
   

Non-accrual

   

Accruing

   

Non-accrual

   

Accruing

 

Commercial

  $ 41     $     $ 1,009     $  

Commercial real estate:

                               

Construction

    7             384        

Other

    1,229             4,000        

1 – 4 Family residential:

                               

Owner occupied

    112             234        

Non-owner occupied

    200             407        

Consumer

                       

Total

  $ 1,589     $     $ 6,034     $  

   

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.

 

 

 
19

 

 

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 December 31, 2016 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

  $ 97     $ 72     $     $ 169     $ 41,864     $ 42,033  

Commercial real estate:

                                               

Construction

                            8,845       8,845  

Other

                879       879       153,029       153,908  

1-4 Family residential:

                                               

Owner occupied

          14       112       126       37,628       37,754  

Non-owner occupied

                            14,531       14,531  

Construction

                            2,985       2,985  

Consumer

    16       16             32       5,330       5,362  

Total

  $ 113     $ 102     $ 991     $ 1,206     $ 264,212     $ 265,418  

 

The above table of past due loans includes the recorded investment in non-accrual loans of $41 in the 30-59 days category, $991 in the 90 days or greater category and $557 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, 2016 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

  $ 123     $     $     $ 123     $ 43,125     $ 43,248  

Commercial real estate:

                                               

Construction

                            7,764       7,764  

Other

    59             2,110       2,169       150,906       153,075  

1-4 Family residential:

                                               

Owner occupied

    15             218       233       30,947       31,180  

Non-owner occupied

                196       196       14,278       14,474  

Construction

                            1,270       1,270  

Consumer

    7                   7       5,809       5,816  

Total

  $ 204     $     $ 2,524     $ 2,728     $ 254,099     $ 256,827  

 

The above table of past due loans includes the recorded investment in non-accrual loans of $2,524 in the 90 days or greater category and $3,510 in the loans not past due category.

 

Troubled Debt Restructurings:

As of December 31, 2016, the recorded investment of loans classified as troubled debt restructurings was $362 with $34 of specific reserves allocated to these loans. As of December 31, 2016, the Corporation had not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. As of June 30, 2016, the recorded investment of loans classified as troubled debt restructurings was $3,529 with $43 of specific reserves allocated to these loans. As of June 30, 2016, the Corporation had committed to lend an additional $207 to customers with outstanding loans that were classified as troubled debt restructurings.

 

 
20

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

During the three and six months ended December 31, 2016 and 2015 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 and six month periods ended December 31, 2016 and 2015.

 

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 and six month periods ended December 31, 2016 and 2015. 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.

 

 

 
21

 

 

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 December 31, 2016

 
           

Special

                  Not  
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Rated

 

Commercial

  $ 40,230     $ 1,115     $ 116     $ 4     $ 568  

Commercial real estate:

                                       

Construction

    8,792                   7       46  

Other

    145,302       5,017       1,118       1,229       1,242  

1-4 Family residential real estate:

                                       

Owner occupied

    3,050             12       47       34,645  

Non-owner occupied

    13,713       178       268       200       172  

Construction

    601                         2,384  

Consumer

    145                         5,217  

Total

  $ 211,833     $ 6,310     $ 1,514     $ 1,487     $ 44,274  

 

   

As of June 30, 2016

 
           

Special

                  Not  
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Rated

 

Commercial

  $ 35,243     $ 6,190     $ 1,162     $     $ 653  

Commercial real estate:

                                       

Construction

    7,305             384             75  

Other

    144,101       2,482       4,026       2,150       316  

1-4 Family residential real estate:

                                       

Owner occupied

    3,506       72       349       47       27,206  

Non-owner occupied

    12,999       406       486       196       387  

Construction

    235                         1,035  

Consumer

    210             6             5,600  

Total

  $ 203,599     $ 9,150     $ 6,413     $ 2,393     $ 35,272  

 

 
22

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 4 - Fair Value

 

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

 

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

 

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

 

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

 

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

 

Securities available-for-sale: When available, the fair values of available-for-sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).

 

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

 

           

Fair Value Measurements at

December 31, 2016 Using

 
   

Balance at

December 31,

2016

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Obligations of U.S. government-sponsored entities and agencies

  $ 10,061     $     $ 10,061     $  

Obligations of states and political subdivisions

    56,661             56,661        

Mortgage-backed securities – residential

    55,843             55,843        

Mortgage-backed securities – commercial

    1,469             1,469        

Collateralized mortgage obligations - residential

    6,831             6,831        

Pooled trust preferred security

    420             420        

 

 

 
23

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

           

Fair Value Measurements at

June 30, 2016 Using

 
   

Balance at

June 30, 2016

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Obligations of U.S. government-sponsored entities and agencies

  $ 10,044     $     $ 10,044     $  

Obligations of states and political subdivisions

    55,954             55,954        

Mortgage-backed securities - residential

    59,596             59,596        

Mortgage-backed securities - commercial

    1,526             1,526        

Collateralized mortgage obligations - residential

    5,820             5,820        

Pooled trust preferred security

    429             429        

 

There were no transfers between Level 1 and Level 2 during the three or six month periods ended December 31, 2016 or 2015.

 

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

 

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

 

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

 

           

Fair Value Measurements at

December 31, 2016 Using

 
   

Balance at

December 31,

2016

   

Level 1

   

Level 2

   

Level 3

 

Impaired loans:

                               

Commercial Real Estate - Other

  $ 831     $     $     $ 831  

 

 

 
24

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

           

Fair Value Measurements at

June 30, 2016 Using

 
   

Balance at

June 30,

2016

   

Level 1

   

Level 2

   

Level 3

 

Impaired loans:

                               

Commercial Real Estate - Other

  $ 1,206     $     $     $ 1,206  

1-4 Family residential real estate Non-owner occupied

    197                   197  

 

Impaired loans, which are generally measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $831 at December 31, 2016. The resulting impact to the provision for loan losses was a decrease of $87 and $47 being recorded for the three and six months ended December 31, 2016, respectively. As of June 30, 2016, the recorded investment of impaired loans was $2,150, with a valuation allowance of $747. The resulting impact to the provision for loan losses was an increase of $69 and $123 being recorded for the three and six month periods ended December 31, 2015.

 

The following tables presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2016 and June 30, 2016:

 

December 31, 2016

 

Fair

Value

 

Valuation

Technique

 

Unobservable

Inputs

   

Range

   

Weighted

Average

 

Impaired loans:

                                 

Commercial Real Estate – Other

  $ 831  

Bid Indications

    N/A       0.0 %     0.0 %

 

 

June 30, 2016

 

Fair

Value

 

Valuation

Technique

 

Unobservable

Inputs

   

Range

   

Weighted

Average

 

Impaired loans:

                                 

Commercial Real Estate – Other

  $ 459  

Settlement Contract

    N/A       0.0 %     0.0 %

Commercial Real Estate – Other

  $ 754  

Bid Indications

    N/A       0.0 %     0.0 %

1-4 Family residential real estate non-owner occupied

  $ 197  

Bid Indications

    N/A       0.0 %     0.0 %

 

 
25

 

 

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:

 

   

December 31, 2016

   

June 30, 2016

 
   

Carrying
Amount

   

Estimated
Fair
Value

   

Carrying
Amount

   

Estimated
Fair
Value

 

Financial Assets:

                               

Level 1 inputs:

                               

Cash and cash equivalents

  $ 10,850     $ 10,850     $ 10,181     $ 10,181  

Level 2 inputs:

                               

Certificates of deposits in other financial institutions

    4,916       4,920       5,906       5,906  

Loans held for sale

    1,774       1,798       1,048       1,067  

Accrued interest receivable

    1,169       1,169       1,077       1,077  

Level 3 inputs:

                               

Securities held-to-maturity

    4,296       4,293       3,494       3,619  

Loans, net

    261,681       258,053       252,712       253,155  

Financial Liabilities:

                               

Level 2 inputs:

                               

Demand and savings deposits

    289,275       289,275       281,640       281,640  

Time deposits

    66,170       66,304       65,008       65,111  

Short-term borrowings

    19,352       19,352       19,129       19,129  

Federal Home Loan Bank advances

    20,976       20,615       17,281       17,486  

Accrued interest payable

    46       46       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.

 

 
26

 

 

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 December 31, 2016 and June 30, 2016, for deposits of similar remaining maturities. 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 resulting in a Level 2 classification.

 

Federal Home Loan Bank advances: Fair value of Federal Home Loan Bank advances was estimated using current rates at December 31, 2016 and June 30, 2016 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.

 

 

 
27

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 5 – Earnings Per Share

 

 

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period.  Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards.  There were no equity instruments that were anti-dilutive for the three and six months ended December 31, 2016 and 2015. The following table details the calculation of basic and diluted earnings per share:

 

   

For the Three Months

Ended December 31,

   

For the Six Months

Ended December 31,

 
   

2016

   

2015

   

2016

   

2015

 

Basic:

                               

Net income available to common shareholders

  $ 722     $ 639     $ 1,623     $ 1,366  

Weighted average common shares outstanding

    2,724,061       2,724,774       2,723,988       2,724,573  

Basic income per share

  $ 0.27     $ 0.23     $ 0.60     $ 0.50  
                                 

Diluted:

                               

Net income available to common shareholders

  $ 722     $ 639     $ 1,623     $ 1,366  

Weighted average common shares outstanding

    2,724,061       2,724,774       2,723,988       2,724,573  

Dilutive effect of restricted stock

    19       157       13       173  

Total common shares and dilutive potential common shares

    2,724,080       2,724,931       2,724,001       2,724,746  

Dilutive income per share

  $ 0.27     $ 0.23     $ 0.60     $ 0.50  

 

 

 
28

 

 

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 and six month periods ended December 31, 2016 and 2015, were as follows:

 

   

Pretax

   

Tax Effect

   

After-tax

 

Affected Line

Item in

Consolidated

Statements of

Income

Balance as of September 30, 2016

  $ 3,095     $ (1,053 )   $ 2,042    

Unrealized holding loss on available-for-sale securities arising during the period

    (3,319 )     1,128       (2,191 )  

Amounts reclassified from accumulated other comprehensive income

    (22 )     8       (14 )

(a)(b)

Net current period other comprehensive income

    (3,341 )     1,136       (2,205 )  

Balance as of December 31, 2016

  $ (246 )   $ 83     $ (163 )  
                           

Balance as of September 30, 2015

  $ 2,141     $ (728 )   $ 1,413    

Unrealized holding gain on available-for-sale securities arising during the period

    (410 )     139       (271 )  

Amounts reclassified from accumulated other comprehensive income

                 

(a)(b)

Net current period other comprehensive income

    (410 )     139       (271 )  

Balance as of December 31, 2015

  $ 1,731     $ (589 )   $ 1,142    

 

 

(a) Securities gains, net

(b) Income tax expense

 

 

 
29

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

   

Pretax

   

Tax Effect

   

After-tax

 

Affected Line

Item in

Consolidated

Statements of

Income

Balance as of June 30, 2016

  $ 3,621     $ (1,232 )   $ 2,389    

Unrealized holding loss on available-for-sale securities arising during the period

    (3,742 )     1,272       (2,470 )  

Amounts reclassified from accumulated other comprehensive income

    (125 )     43       (82 )

(a)(b)

Net current period other comprehensive income

    (3,867 )     1,315       (2,552 )  

Balance as of December 31, 2016

  $ (246 )   $ 83     $ (163 )  
                           

Balance as of June 30, 2015

  $ 1,363     $ (464 )   $ 899    

Unrealized holding gain on available-for-sale securities arising during the period

    403       (137 )     266    

Amounts reclassified from accumulated other comprehensive income

    (35 )     12       (23 )

(a)(b)

Net current period other comprehensive income

    368       (125 )     243    

Balance as of December 31, 2015

  $ 1,731     $ (589 )   $ 1,142    

 

 

(a) Securities gains, net

(b) Income tax expense

 

 
30

 

 

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

 

(Dollars in thousands, except per share data)

 

General

The following is management’s analysis of the Corporation’s results of operations for the three and six months ended December 31, 2016, compared to the same period in 2015, and the consolidated balance sheet at December 31, 2016, compared to June 30, 2016. 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, 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 and Six Months Ended December 31, 2016 and December 31, 2015

 

In the second quarter of fiscal year 2017, net income was $722, or $0.27 per common share, compared to $639, or $0.23 per common share for the three months ended December 31, 2015. The following are key highlights of our results of operations for the three months ended December 31, 2016:

 

net interest income increased by $99 to $3,536, or by 2.9%, in the second quarter of fiscal year 2017 from the same prior year period;

 

loan loss provision expense in the second quarter of fiscal year 2017 totaled $140 compared to $192 in the same prior year period;

 

non-interest income increased by $75, or 10.4%, in the second quarter of fiscal year 2017 from the same prior year period; and

 

non-interest expenses increased by $120, or 3.7%, in the second quarter of fiscal year 2017 from the same prior year period principally as a result of higher occupancy and equipment expenses.

 

 

 
31

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

 

In the first six months of fiscal year 2017, net income was $1,623, or $0.60 per common share, compared to $1,366, or $0.50 per common share for the six months ended December 31, 2015. The following are key highlights of our results of operations for the six months ended December 31, 2016:

 

net interest income increased by $433 to $7,263, or by 6.3%, in fiscal year 2017 from the same prior year period;

 

non-interest income increased by $188, or 12.9%, in fiscal year 2017 from the same prior year period; and

 

non-interest expenses increased by $269, or 4.2%, in fiscal year 2017 from the same prior year period principally as a result of higher occupancy and equipment expenses.

 

Return on average equity and return on average assets were 7.34% and 0.74%, respectively, for the first six months of fiscal year 2017 compared to 6.43% and 0.65%, 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 3.62% for the three months ended December 31, 2016, compared with 3.68% for the same period in 2015. FTE net interest income for the three months ended December 31, 2016 increased by $99, or 2.7%, to $3,721 from $3,622 for the same year ago period. The increase in net interest income was primarily the result of an increase of $17,080, or 4.4%, in average interest-earning assets from the same prior year period.

  

FTE interest income for the three months ended December 31, 2016 increased by $128, or 3.3%, from the same year ago period. The Corporation’s yield on average interest-earning assets was 3.86% for the three months ended December 31, 2016, a decrease from 3.90% for the same period last year. Interest expense for the three months ended December 31, 2016 increased by $29, or 13.1%, from the same year ago period. The Corporation’s cost of funds was 0.34% for the three months ended December 31, 2016 compared with 0.32% for the same year ago period.

 

The Corporation’s net interest margin was 3.74% for the six months ended December 31, 2016, compared with 3.69% for the same period in 2015. FTE net interest income for the six months ended December 31, 2016 increased by $433, or 6.0%, to $7,629 from $7,196 for the same year ago period. Interest income was positively impacted by $191 in the first quarter of fiscal year 2017 as the result of the 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 3.65% for the six-month period ended December 31, 2016.

 

 
32

 

 

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 December 31,

(In thousands, except percentages)

 

 

   

2016

   

2015

 
   

Average

Balance

   

Interest

   

Yield/

Rate

   

Average

Balance

   

Interest

   

Yield/

Rate

 

Interest-earning assets:

                                               

Taxable securities

  $ 75,524     $ 377       2.01 %   $ 87,685     $ 488       2.24 %

Nontaxable securities (1)

    60,326       535       3.58       55,415       528       3.84  

Loans receivable (1)

    263,909       3,029       4.55       237,148       2,797       4.68  

Interest bearing deposits and federal funds sold

    9,907       30       1.20       12,338       30       0.96  

Total interest-earning assets

    409,666       3,971       3.86 %     392,586       3,843       3.90 %
                                                 

Noninterest-earning assets

    29,148                       27,183                  
                                                 

Total Assets

  $ 438,814                     $ 419,769                  
                                                 

Interest-bearing liabilities:

                                               

NOW

  $ 48,960     $ 19       0.15 %   $ 47,291     $ 18       0.15 %

Savings

    138,402       36       0.10       135,549       30       0.09  

Time deposits

    66,425       128       0.76       64,812       123       0.75  

Short-term borrowings

    20,481       11       0.21       22,084       10       0.18  

FHLB advances

    14,042       56       1.58       5,863       40       2.71  

Total interest-bearing liabilities

    288,310       250       0.34 %     275,599       221       0.32 %
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing checking accounts

    103,143                       98,235                  

Other liabilities

    3,695                       3,251                  

Total liabilities

    395,148                       377,085                  

Shareholders’ equity

    43,666                       42,684                  
                                                 

Total liabilities and shareholders’ equity

  $ 438,814                     $ 419,769                  
                                                 

Net interest income, interest rate spread (1)

          $ 3,721       3.52 %           $ 3,622       3.58 %
                                                 

Net interest margin (net interest as a percent of average interest-earning assets) (1)

                    3.62 %                     3.68 %
                                                 

Federal tax exemption on non-taxable securities and loans included in interest income

          $ 185                     $ 185          
                                                 

Average interest-earning assets to interest-bearing liabilities

    142.09 %                     142.45 %                

 

(1) calculated on a fully taxable equivalent basis

 

 

 
33

 

 

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 Six Months Ended December 31,

(In thousands, except percentages)

 

   

2016

   

2015

 
   

Average

Balance

   

Interest

   

Yield/

Rate

   

Average

Balance

   

Interest

   

Yield/

Rate

 

Interest-earning assets:

                                               

Taxable securities

  $ 75,745     $ 779       2.07 %   $ 87,704     $ 945       2.17 %

Nontaxable securities (1)

    59,710       1,061       3.61       54,519       1,045       3.85  

Loans receivable (1)

    262,296       6,219       4.70       234,689       5,600       4.73  

Interest bearing deposits and federal funds sold

    9,225       60       1.29       12,068       54       0.89  

Total interest-earning assets

    406,976       8,119       3.98 %     388,980       7,644       3.92 %
                                                 

Noninterest-earning assets

    28,008                       26,541                  
                                                 

Total Assets

  $ 434,984                     $ 415,521                  
                                                 

Interest-bearing liabilities:

                                               

NOW

  $ 48,770     $ 36       0.15 %   $ 47,533     $ 35       0.15 %

Savings

    135,957       67       0.10       136,157       60       0.09  

Time deposits

    66,216       250       0.75       65,102       252       0.77  

Short-term borrowings

    19,965       23       0.23       20,824       18       0.17  

FHLB advances

    14,583       114       1.55       6,047       83       2.72  

Total interest-bearing liabilities

    285,491       490       0.34 %     275,663       448       0.32 %
                                                 

Noninterest-bearing liabilities:

                                               

Noninterest-bearing checking accounts

    102,144                       94,231                  

Other liabilities

    3,507                       3,328                  

Total liabilities

    391,142                       373,222                  

Shareholders’ equity

    43,842                       42,299                  
                                                 

Total liabilities and shareholders’ equity

  $ 434,984                     $ 415,521                  
                                                 

Net interest income, interest rate spread (1)

          $ 7,629       3.64 %           $ 7,196       3.60 %
                                                 

Net interest margin (net interest as a percent of average interest-earning assets) (1)

                    3.74 %                     3.69 %
                                                 

Federal tax exemption on non-taxable securities and loans included in interest income

          $ 366                     $ 366          
                                                 

Average interest-earning assets to interest-bearing liabilities

    142.55 %                     141.11 %                

 

(1) calculated on a fully taxable equivalent basis

 

 
34

 

 

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 December 31, 2016, the provision for loan losses was $140 compared to $192 for the same prior year period. For the six-month period ended December 31, 2016, the provision for loan losses was $276 compared to $284 for the same prior year period.

 

For the six-month period ended December 31, 2016, net charge-offs totaled $719, or an annualized net charge-off to total loan ratio of 0.54%, compared with $161, or 0.13% of total loans, for the same period last year. Net charge-offs for the three and six month periods ended December 31, 2016 were impacted by a $700 charge-off related to one commercial real estate credit. The collateral securing this credit is in the process of being liquidated and is expected to result in the Bank receiving payment in the amount of the remaining balance of the recorded investment. The allowance for loan losses as a percentage of loans was 1.18% at December 31, 2016 and 1.39% at June 30, 2016.

 

The provision for loan losses for the period ended December 31, 2016 was considered sufficient by management for maintaining an appropriate allowance for probable incurred credit losses.

 

Non-Interest Income

Non-interest income increased by $75 for the second quarter of fiscal year 2017 from the same period last year. Non-interest income increased by $188, or 12.9%, for the first six months of fiscal year 2017 from the same period last year. In the first six months of fiscal year 2017, a $125 net gain was recognized from the sale of securities compared with a $35 net gain in the same prior year period.

 

Non-Interest Expenses

Total non-interest expenses increased to $3,326, or by 3.7%, during the second quarter of fiscal year 2017, compared with $3,206 during the same year ago period. Total non-interest expenses increased to $6,612, or by 4.2%, during the first six months of fiscal year 2017, compared with $6,343 during the same year ago period. Occupancy and equipment expenses increased by $236, or 34.0%, during the first six months of fiscal year 2017 from the same period last year primarily as a result of an increase in building depreciation expense and real estate taxes since the new branch and corporate office facility in Minerva, Ohio was completed during the third fiscal quarter of 2016.

 

Income Taxes

Income tax expense for the three months ended December 31, 2016 increased by $23, to $145 compared to a year ago. The effective tax rate was 16.7% for the current quarter as compared to 16.0% for the same period last year.

 

 
35

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

Income tax expense for the first six months ended December 31, 2016 increased by $103, to $397 from $294, compared to a year ago. The effective tax rate was 19.7% for the current period as compared to 17.7% for the same period last year.

 

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

 

Financial Condition

Total assets at December 31, 2016 were $441,435 compared to $430,390 at June 30, 2016, an increase of $11,045, or an annualized 5.1%. 

 

Total loans increased by $8,526, or an annualized 6.7%, from $256,278 at June 30, 2016 to $264,804 at December 31, 2016. The growth in loans was primarily attributed to the investments in two newer loan production offices in the Stow and Wooster, Ohio markets as well as additions in commercial loan staff. The loan growth was primarily funded by an increase of $8,797, or an annualized 5.1%, in total deposits. The cash surrender value of life insurance increased to $8,930 at December 31, 2016 from $6,819 at June 30, 2016 primarily as a result of the investment of $2 million in additional BOLI policies.

 

Non-Performing Assets

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

 

   

December 31,

2016

   

June 30,

2016

   

December 31,

2015

 

Non-accrual loans

  $ 1,589     $ 6,034     $ 3,498  

Loans past due over 90 days and still accruing

                 

Total non-performing loans

    1,589       6,034       3,498  

Other real estate owned

                38  

Total non-performing assets

  $ 1,589     $ 6,034     $ 3,536  
                         

Non-performing loans to total loans

    0.60 %     2.35 %     1.45 %

Allowance for loan losses to total non-performing loans

    196.54 %     59.10 %     73.04 %

 

Non-accrual loans decreased from June 30, 2016 primarily as a result of receiving full payoff of two loan relationships with a recorded investment of $3.1 million. As of December 31, 2016, impaired loans totaled $1,950, of which $1,589 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.

 

 

 
36

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

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.

 

Net cash inflow from operating activities for the six months ended December 31, 2016 was $2,152, net cash outflows from investing activities was $13,544 and net cash inflows from financing activities was $12,061. A major source of cash was $15,136 from sales, maturities, calls or principal pay downs on available-for-sale securities, a $8,797 increase in deposits and a net increase of $3,695 in Federal Home Loan Bank (FHLB) advances. A major use of cash included the $18,368 purchase of securities and $9,255 increase in loans. Total cash and cash equivalents was $10,850 as of December 31, 2016 compared to $10,181 at June 30, 2016 and $9,888 at December 31, 2015.

 

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 $355,445 at December 31, 2016 compared with $346,648 at June 30, 2016.

 

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At December 31, 2016, advances from the FHLB of Cincinnati totaled $20,976 as compared with $17,281 at June 30, 2016. As of December 31, 2016, the Bank had the ability to borrow an additional $9,952 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.

 

 

 
37

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

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 $19,352 at December 31, 2016 from $19,129 at June 30, 2016.

 

Jumbo time deposits (those with balances of $100 and over) totaled $27,917 at December 31, 2016 and $26,879 at June 30, 2016. 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.

 

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 $50,237 at December 31, 2016 and $47,728 at June 30, 2016.

 

 
38

 

 

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

Total shareholders’ equity decreased to $42,210 as of December 31, 2016 from $43,793 as of June 30, 2016. The decrease was the result of a net reduction of $2,552 in accumulated other comprehensive income from a decline in unrealized gains on available-for-sale securities and $654 in cash dividends paid, which was partially offset by $1,623 in net income during the first six months of the 2017 fiscal year.

 

The Bank is subject to various regulatory capital requirements administered by federal regulatory agencies. Capital adequacy guidelines and prompt corrective-action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Corporation’s financial statements.

 

The Bank’s common equity tier 1 capital and tier 1 capital ratios were 13.33% and the leverage and total capital ratios as of December 31, 2016 were 9.34% and 14.35%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 13.37% and leverage and total risk-based capital ratios of 9.25% and 14.58%, respectively, as of June 30, 2016. 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 December 31, 2016 that would cause the Bank’s capital category to change.

 

Critical Accounting Policies

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

 

The Corporation has identified the appropriateness of the allowance for loan losses 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 2016 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, 2016.

 

 

 
39

 

 

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

 

(Dollars in thousands, except per share data)

 

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;

 

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.

 

 
40

 

 

CONSUMERS BANCORP, INC.

 

 

Item 4 – Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15e. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of December 31, 2016.

 

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.

 

 

 
41

 

 

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 10.1

Amendment No. 3, dated October 3, 2016, to the Salary Continuation agreement entered into with Mr. Lober on February 11, 2011.

 

Exhibit 10.2

Salary Continuation Agreement with Scott E. Dodds dated November 4, 2016. Reference is made to Form 8-K filed November 9, 2016, which is incorporated herein by reference.

 

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 December 31, 2016, 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.

 

 
42

 

 

CONSUMERS BANCORP, INC.

 

SIGNATURES

 

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

 

 

     

CONSUMERS BANCORP, INC. 

(Registrant)

 
         
Date: February 14, 2017 

 

 

/s/ Ralph J. Lober

 

 

 

 

Ralph J. Lober, II

 

 

 

 

President & Chief Executive Officer

(principal executive officer)

 

         
Date: February 14, 2017      /s/ Renee K. Wood  
      Renee K. Wood  
      Chief Financial Officer & Treasurer  
      (principal financial officer)  

 

 

43