Form 10-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark one)

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2007

 

OR

 

¨ TRANSITION REPORT UNDER 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 of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

614 East Lincoln Way,

P.O. Box 256, Minerva, Ohio 44657

(330) 868-7701

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered under Section 12(b) of the Exchange Act:

NONE

 

Securities registered under Section 12(g) of the Exchange Act:

Common Shares, no par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨        Accelerated filer  ¨        Non-accelerated filer  x

 

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

 

Based on the closing sales price on December 29, 2006, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $17,386,577.

 

The number of shares outstanding of the Registrant’s common stock, without par value was 2,065,434 at September 1, 2007.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain specifically designated portions of Consumers Bancorp, Inc.’s definitive Proxy Statement dated September 13, 2007 for its 2007 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 



Table of Contents

TABLE OF CONTENTS

 

     Page

PART I

  

ITEM 1—BUSINESS

   1

ITEM 1A—RISK FACTORS

   5

ITEM 1B—UNRESOLVED STAFF COMMENTS

   6

ITEM 2—PROPERTIES

   7

ITEM 3—LEGAL PROCEEDINGS

   7

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   7

PART II

  

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   8

ITEM 6—SELECTED FINANCIAL DATA

   10

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   11

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   26

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   26

ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   49

ITEM 9A—CONTROLS AND PROCEDURES

   49

ITEM 9B—OTHER INFORMATION

   49

PART III

  

ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

   50

ITEM 11—EXECUTIVE COMPENSATION

   50

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

   50

ITEM 13—CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

   50

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

   50

PART IV

  

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

   51

SIGNATURES

   52

Index to Exhibits

  

EX-21 Subsidiaries of Consumers Bancorp, Inc.

  

EX-31.1 Section 302 Certification of President and Chief Executive Officer

  

EX-31.2 Section 302 Certification of Chief Financial Officer and Treasurer

  

EX-32.1 Section 906 Certification of President and Chief Executive Officer

  

EX-32.2 Section 906 Certification of Chief Financial Officer and Treasurer

  


Table of Contents

PART I

 

ITEM 1—BUSINESS

 

Business

 

Consumers Bancorp, Inc. (Corporation), is a bank holding company under the Bank Holding Company Act of 1956, as amended and is a registered bank holding company, incorporated under the laws of the State of Ohio. The Corporation owns all of the issued and outstanding capital stock of Consumers National Bank (Bank), a bank chartered under the laws of the United States of America. On February 28, 1995, the Corporation acquired all of the common stock issued by the Bank. The Corporation’s activities have been limited primarily to holding the common stock of the Bank.

 

Since 1965, the Bank’s main office has been serving the Minerva, Ohio area from its location at 614 East Lincoln Way, Minerva, 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 market area, consisting primarily of Stark, Columbiana, Carroll and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government and government agency obligations, municipal obligations, mortgage-backed securities and other securities.

 

Supervision and Regulation

 

The following discussion of supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of the Corporation and the Bank.

 

Regulation of the Corporation:

 

The Bank Holding Company Act: As a bank holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended (BHCA) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (Federal Reserve Board). Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board and required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require.

 

The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company.

 

Privacy Provisions of Gramm-Leach-Bliley Act: The Gramm-Leach-Bliley Act of 2000 contains extensive provisions on a customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must provide to its customers the institution’s policies and procedures regarding the handling of customers’ non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. The Corporation and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.

 

Interstate Banking and Branching: Prior to enactment of the Interstate Banking and Branch Efficiency Act of 1995, the Corporation would have been prohibited from acquiring banks outside Ohio, unless the laws of the state in which the target bank was located specifically authorized the transaction. The Interstate Banking and Branch Efficiency Act has eased restrictions on interstate expansion and consolidation of banking operations by,

 

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among other things: (i) permitting interstate bank acquisitions regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching.

 

Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Corporation’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that the Corporation’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or omit to state a material fact. See Item 9A “Controls and Procedures” for the Corporation’s evaluation of its disclosure controls and procedures.

 

Regulation of the Bank:

 

Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation Regulation: As a national bank, Consumers National Bank is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC). It is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (FDIC).

 

Under regulations promulgated by the OCC, the Bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the OCC. The Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations.

 

The FDIC is an independent federal agency, which insures the deposits of federally insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of the Bank are subject to the deposit insurance assessments of the Bank Insurance Fund of the FDIC. Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institutions varies according to regulatory capital levels of the institution and other factors such as supervisory evaluations.

 

The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.

 

In addition to the supervision and regulation matters listed above, the Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB), which is a privately capitalized, government sponsored enterprise that expands housing and economic development opportunities throughout the nation by providing loans and other banking services to community-based financial institutions.

 

Risk-Based Capital Requirements: The Federal Reserve Board and the OCC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and national banks. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. Failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of “brokered deposits.”

 

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In the calculation of risk-based capital, assets and off-balance sheet items are assigned to broad risk categories, each with an assigned weighting (0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. Direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies have a 0% risk-weight. Off-balance sheet items are also taken into account in the calculation of risk-based capital, with each class of off-balance sheet item being converted to a balance sheet equivalent according to established “conversion factors.” From these computations, the total of risk-weighted assets is derived. Risk-based capital ratios therefore state capital as a percentage of total risk-weighted assets and off-balance sheet items. The ratios established by guideline are minimums only.

 

Current risk-based capital guidelines require bank holding companies and banks to maintain a minimum risk-based total capital ratio equal to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage servicing rights are generally deducted from capital. Tier 1 capital includes stockholders’ equity, qualifying perpetual preferred stock (within limits and subject to conditions, particularly if the preferred stock is cumulative preferred stock), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, identified losses, investments in securities subsidiaries, and certain other assets. Tier 2 capital includes the allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets, any qualifying perpetual preferred stock exceeding the amount includable in Tier 1 capital, mandatory convertible securities, and subordinated debt and intermediate term preferred stock, up to 50% of Tier 1 capital. The OCC’s evaluation of an institution’s capital adequacy takes into account a variety of other factors as well, including interest rate risks to which the institution is subject, the level and quality of an institution’s earnings, loan and investment portfolio characteristics and risks, risks arising from the conduct of nontraditional activities, and a variety of other factors.

 

Accordingly, the OCC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios discussed above.

 

The banking agencies have also established a minimum leverage ratio of 3%, which represents Tier 1 capital as a percentage of total assets, less intangibles. However, for all but the most highly rated banks and bank holding companies, the banking agencies expect an additional margin of at least 100 to 200 basis points. At June 30, 2007, the Bank was in compliance with all regulatory capital requirements. Actual and required capital amounts and ratios are presented elsewhere, specifically in Note 11 of the Corporation’s audited financial statements for the year ended June 30, 2007.

 

Prompt Corrective Action. To resolve the problems of undercapitalized institutions and to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system known as “prompt corrective action.” Under the prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories, depending on its total risk-based capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio, and subjective factors. The categories are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A financial institution’s operations can be significantly affected by its capital classification. For example, an institution that is not “well capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized institution must guarantee, in part, aspects of the institution’s capital plan. Financial institution regulatory agencies generally are required to appoint a receiver or conservator shortly after an institution enters the category of weakest capitalization. The Federal Deposit Insurance Corporation Improvement Act of 1991 also authorizes the regulatory agencies to reclassify an institution from one category into a lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance funds.

 

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Community Reinvestment Act: The Community Reinvestment Act requires depository institutions to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance and assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution.

 

USA Patriot Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001 (Patriot Act). The Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates financial services companies to implement additional policies and procedures with respect to additional measures designed to address any or all of the following matters: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.

 

Employees

 

As of June 30, 2007, the Bank employed 94 full-time and 33 part-time employees. None of the employees are represented by a collective bargaining group. Management considers its relations with employees to be good.

 

Statistical Disclosure

 

The following statistical information is included on the indicated pages of this Report and is incorporated herein by reference:

 

Average Consolidated Balance Sheet And Net Interest Margin

   13

Interest Rates and Interest Differential

   14

Carrying Values Of Securities

   16

Maturities And Weighted-Average Yield Of Securities

   17

Loan Types

   17

Selected Loan Maturities And Interest Sensitivity

   18

Non-accrual, Past Due And Restructured Loans And Other Nonperforming Assets

   19

Potential Problem Loans

   19

Summary Of Loan Loss Experience

   19

Allocation Of Allowance For Loan Losses

   20

Average Amount And Average Rate Paid On Deposits

   21

Time Deposits Of $100,000 Or More

   21

Short-Term Borrowings

   21 and 41

Selected Consolidated Financial Data

   10

 

Available Information

 

The Corporation files annual, quarterly, and current reports, proxy statements, and other information with the SEC. These filings are available to the public over the Internet at the SEC’s web site at www.sec.gov. Shareholders may also read and copy any document that the Corporation files at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

Shareholders may request a copy of any of the Corporation’s filings at no cost by writing or e-mailing the Corporation at the following address or e-mail address: Consumers Bancorp, Inc., Attn: Theresa J. Linder, 614 East Lincoln Way, Minerva, Ohio 44657 or e-mail to shareholderrelations@consumersbank.com.

 

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The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Required Disclosures of the Corporation’s website (www.consumersbancorp.com). Copies of either of the Code of Ethics Policies are also available in print to share owners upon request, addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The Corporation intends to post amendments to or waivers from its Code of Ethics on its website.

 

ITEM 1A—RISK FACTORS

 

Our business may be adversely affected if we fail to effectively manage our lending risks. There are many risks in the business of lending, including risks associated with the duration over which loans may be repaid, risks resulting from changes in economic conditions, risks inherent in dealing with individual borrowers, and risks resulting from changes in the value of loan collateral. Our credit administration function employs risk management techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. A large percentage of our loan portfolio is secured by real estate collateral. In addition, commercial loans to small and medium-sized businesses represent a significant portion of our loan portfolio. Accordingly, the asset quality of our loan portfolio is largely dependent upon the area’s economy and real estate markets. A downturn in the local economy would adversely affect our operations and limit our future growth potential.

 

Our allowance for loan losses might not be sufficient to absorb future charge-offs. An allowance for loan losses recorded under generally accepted accounting principles is an institution’s best estimate within a range of the probable amount of loans that, based on current information and events, the institution will be unable to collect. The amount of the allowance is a product of management’s judgment and it is inevitably imprecise. Estimating the allowance requires significant judgment and the use of estimates related to many factors, including the amount and timing of future cash flows on problem loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which are susceptible to significant change. Our judgment about the adequacy of the loan loss allowance is based on assumptions that we believe are reasonable but that might nevertheless prove to be incorrect. We can give you no assurance that the allowance is sufficient to absorb future charge-offs.

 

Changing interest rates have a direct and immediate impact on financial institutions. Fluctuating rates of interest prevailing in the market affect a bank’s net interest income, which is the difference between interest earned from loans and investments, on one hand, and interest paid on deposits and borrowings, on the other. Banks manage interest rate risk exposure by closely monitoring assets and liabilities, altering from time to time the mix and maturity of loans, investments, and funding sources. Changes in interest rates affect the volume of loans originated, as well as the value of loans and other interest-earning assets, including investment securities. Changes in interest rates could also result in an increase in higher-cost deposit liabilities as well as movement of funds from deposit accounts into direct investments (such as U.S. Government and corporate securities, and other investment instruments such as mutual funds) if the Bank does not pay competitive interest rates. The percentage of household financial assets held in the form of deposits has declined over the years, with banking customers investing a greater portion of their financial assets in stocks, bonds, and mutual funds. Federal Reserve Board monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including the Bank, and are expected to continue to do so in the future.

 

Consumers National Bank has significant competition in both attracting and retaining deposits and in originating loans. Competition is intense in the markets the Bank serves. It is anticipated that the competition will remain intense. The Bank competes on price and service with other banks and financial services companies such as savings and loans, credit unions, finance companies, mortgage companies, and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry and banking reform.

 

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Concentration of service area could negatively affect our financial performance. A concentration of credit risk can arise with respect to loans and deposits. As of June 30, 2007, the Bank’s deposit and lending market area is concentrated in Stark, Columbiana and Carroll Counties in northeastern Ohio. Because of the concentration of deposits and loans in these three counties, in the event of adverse economic conditions, the Bank could experience more difficulty in attracting deposits and experience higher rates of loss and delinquency on its loans than if the loans were more geographically diversified. Adverse economic conditions in this region of Ohio may reduce demand for credit of fee-based products and could negatively affect real estate and other collateral values, interest rate levels, and the availability of credit to refinance loans at or prior to maturity.

 

Our common stock is thinly traded and therefore susceptible to wide price swings. Our common stock is traded on the over-the-counter (OTC) Bulletin Board® under the ticker symbol “CBKM,” but trading volume is low. Thinly traded, illiquid stocks are more susceptible to significant and sudden price changes than stocks that are widely followed by the investment community and actively traded on an exchange or NASDAQ. The liquidity of the common stock depends upon the presence in the marketplace of willing buyers and sellers. We do not intend at the current time to seek listing of our common stock on a securities exchange and we do not intend to seek authorization for trading of our shares on NASDAQ.

 

The banking industry is heavily regulated; the compliance burden to the industry is considerable; the principal beneficiary of federal and state regulation is the public at large and depositors, not shareholders. We are and will remain subject to extensive federal government supervision and regulation. Affecting many aspects of the banking business, including permissible activities, lending, investments, payment of dividends, the geographic locations in which banking services can be offered, and numerous other matters, federal supervision and regulation are intended principally to protect depositors, the public, and the deposit insurance funds administered by the FDIC. Protection of shareholders is not a goal of banking regulation.

 

Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies have undergone significant changes, some retroactively applied, and they could change significantly again. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or us in particular. The burdens of banking regulation could place banks in general at a competitive disadvantage compared to less regulated competitors. We cannot predict whether any potential legislation will be enacted, and if enacted, the effect that it, or any implemented regulations, would have on our financial condition or results of operations. We are not aware of any current recommendations by regulatory authorities that, if they were to be implemented, would have a material effect on our business.

 

Government regulation could restrict our ability to pay cash dividends. Dividends from the Bank are our most significant source of cash for payment of dividends to our shareholders. Statutory and regulatory limits could prevent the Bank from paying dividends. We believe that we will be able to continue paying our regular quarterly cash dividend. However, we cannot assure you that the Bank’s profitability will continue to provide sufficient cash to allow us to continue paying our regular quarterly cash dividends.

 

We could incur liabilities under federal and state environmental laws if we foreclose on commercial properties. A high percentage of the Bank’s loans are secured by real estate. Although many of these loans are residential mortgage loans with little associated environmental risk, some are commercial loans secured by property on which manufacturing and other commercial enterprises are conducted. The Bank has in the past and could again acquire property by foreclosing on loans in default. Under federal and state environmental laws, the Bank could face liability for some or all of the costs of removing hazardous substances, contaminants, or pollutants from properties acquired in this fashion. Although other persons might be primarily responsible for these costs, they might not be financially solvent or they might be unable to bear the full cost of clean up.

 

ITEM 1B—UNRESOLVED STAFF COMMENTS

 

None

 

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ITEM 2—PROPERTIES

 

The Bank owns and maintains the premises in which seven of the ten banking facilities are located, and leases offices in Carrollton, Alliance and Malvern. The location of each of the currently operating offices is as follows:

 

Minerva Office:

   614 E. Lincoln Way, P.O. Box 256, Minerva, Ohio, 44657

Salem Office:

   141 S. Ellsworth Ave., P.O. Box 798, Salem, Ohio, 44460

Waynesburg Office:

   8607 Waynesburg Dr. SE, P.O. Box 746, Waynesburg, Ohio, 44423

Hanoverton Office:

   30034 Canal St., P.O. Box 178, Hanoverton, Ohio, 44423

Carrollton Office:

   1017 Canton Rd. NW, P.O. Box 8, Carrollton, Ohio, 44615

Alliance Office:

   610 West State St., Alliance, Ohio, 44601

Lisbon Office:

   7895 Dickey Dr., Lisbon, Ohio 44432

Louisville Office:

East Canton Office:

  

1111 N. Chapel St., Louisville, Ohio 44641

440 W. Noble, East Canton, Ohio, 44730

Malvern Office:

   4070 Alliance Rd., Malvern, Ohio 44644

 

In the opinion of management, the properties listed above are adequately covered by insurance.

 

ITEM 3—LEGAL PROCEEDINGS

 

The Corporation is not a party to any pending material legal or administrative proceedings, other than ordinary routine litigation incidental to the business of the Corporation. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest that is adverse to the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the financial position or results of operations of the Corporation.

 

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Nothing to be reported.

 

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PART II

 

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Corporation had 2,065,434 common shares outstanding on June 30, 2007 with 654 shareholders of record and an estimated 280 additional beneficial holders whose stock was held in nominee name.

 

The common shares of Consumers Bancorp, Inc. are traded on the over-the-counter bulletin board. The following quoted market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not represent actual transactions. The market prices represent highs and lows reported during the quarterly period.

 

Quarter Ended

   September 30,
2006
   December 31,
2006
   March 31,
2007
   June 30,
2007

High

   $ 13.00    $ 12.95    $ 12.75    $ 12.75

Low

     12.25      12.15      12.00      10.40

Cash dividends paid per share

     0.05      0.07      0.07      0.07

Quarter Ended

   September 30,
2005
   December 31,
2005
   March 31,
2006
   June 30,
2006

High

   $ 17.25    $ 18.25    $ 16.65    $ 15.00

Low

     16.50      16.41      14.99      12.00

Cash dividends paid per share

     0.09      0.09      0.07      0.07

 

Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Corporation’s common shares, these prices may not reflect the prices at which the common shares would trade in an active market. See Note 1 to the Consolidated Financial Statements for dividend restrictions.

 

The Corporation has no compensation plans under which equity securities are authorized for issuance. The following table shows the repurchases of the Corporation’s securities that were made during the fourth fiscal quarter of 2007:

 

     Total
Number of
Shares
Purchased
   Average
Price
Paid per
Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
   Maximum Number of
Shares that May Yet
Be Purchased Under
the Plan

April 1, 2007 – April 30, 2007

   —      —      —      24,513

May 1, 2007 – May 31, 2007

   24,513    12.25    24,513    —  

June 1, 2007 – June 30, 2007

   —      —      —      —  
                   
   24,513    12.25    24,513    —  
                   

 

The share repurchase plan that was approved by the Board of Directors in June 2006 has been completed. In July 2007 the Board of Directors authorized a new share repurchase program for up to 75,000 shares that can be purchased through June 2008. Repurchases can be made from time-to-time in the open market or through privately negotiated transactions depending on market and/or other conditions. The repurchase program may be suspended or discontinued at any time.

 

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Performance Graph

 

Set forth below is a line graph comparing the yearly change in the cumulative total shareholder return on Consumers Bancorp’s Common Stock against the cumulative return of the NASDAQ Bank Index and the S&P 500 Index for the five-year period ended June 30, 2007. The total shareholder return assumes a $100 investment in Consumers Bancorp’s Common Stock, the NASDAQ Bank Index and the S&P 500 Index on June 30, 2002 and that all dividends were reinvested.

 

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     2002    2003    2004    2005    2006    2007

CBKM.OB

   $ 100    $ 100    $ 103    $ 78    $ 62    $ 50

NASDAQ Banks Index

     100      102      121      127      133      131

S&P 500 Index

     100      98      115      120      128      152

 

Historical stock price performance shown on the graph is not necessarily indicative of the future price performance.

 

9


Table of Contents

ITEM 6—SELECTED FINANCIAL DATA

 

Five-Year Selected Data

(Dollar amounts in thousands, except per share data)

 

     June 30,
2007
    June 30,
2006
    June 30,
2005
    June 30,
2004
    June 30,
2003
 

Interest income

   $ 12,338     $ 11,387     $ 10,384     $ 10,066     $ 11,618  

Interest expense

     3,912       3,029       1,595       1,554       2,681  
                                        

Net interest income

     8,426       8,358       8,789       8,512       8,937  

Provision for loan losses

     728       730       122       381       414  
                                        

Net interest income after provision for loan losses

     7,698       7,628       8,667       8,131       8,523  

Other income

     2,154       2,171       2,298       2,299       2,258  

Other expense

     8,316       8,353       8,175       7,432       7,621  
                                        

Income before income taxes

     1,536       1,446       2,790       2,998       3,160  

Income taxes

     273       268       835       915       955  
                                        

Net income

   $ 1,263     $ 1,178     $ 1,955     $ 2,083     $ 2,205  
                                        

Basic earnings per share

   $ 0.60     $ 0.55     $ 0.91     $ 0.97     $ 1.03  

Cash dividends paid per share

   $ 0.26     $ 0.32     $ 0.36     $ 0.34     $ 0.34  

Cash dividends paid

   $ 547     $ 686     $ 772     $ 730     $ 730  

Weighted average number of shares outstanding

     2,105,656       2,142,479       2,145,432       2,146,281       2,146,281  

Total assets

   $ 201,958     $ 203,550     $ 191,180     $ 186,237     $ 182,067  

Securities available-for-sale

     42,133       37,470       24,733       30,141       24,282  

Loans

     141,447       148,002       149,662       140,145       124,660  

Allowance for loan losses

     1,381       1,557       1,523       1,753       1,685  

Deposits

     169,591       167,308       162,499       154,768       157,502  

Federal Home Loan Bank advances

     2,625       10,790       2,335       6,757       822  

Total shareholders’ equity

     18,782       19,102       19,297       18,110       17,268  

Return on Average Assets

     0.63 %     0.59 %     1.03 %     1.13 %     1.21 %

Return on Average Equity

     6.43       6.08       10.24       11.65       13.11  

Dividend Payout Ratio

     43.31       58.23       39.49       35.05       33.11  

Average Equity to Average Assets

     9.75       9.64       10.04       9.74       9.23  

 

10


Table of Contents

ITEM 7—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 financial condition and results of operations as of and for the year ended June 30, 2007, compared to prior years. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

 

Overview

 

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

 

Forward-Looking Statements

 

All statements set forth in this discussion or future filings by the Corporation with the Securities and Exchange Commission, or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, that are not historical in nature, including statements as to the Corporation’s expectations, beliefs and strategies regarding the future, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Although the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, the Corporation can give no assurance that such expectations will prove to be correct. The forward-looking statements included in this discussion speak only as of the date of this Form 10-K, and, except as required by law, the Corporation undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements and that could adversely affect the Corporation’s performance are set forth under Item 1A—Risk Factors in this Report on Form 10-K.

 

Comparison of Results of Operations for the Years Ended June 30, 2007, June 30, 2006 and June 30, 2005

 

Net Income. Net income increased by $85, or 7.2%, from 2006 to 2007 mainly as a result of an increase in the net interest margin from 4.65% to 4.67% and as a result of a reduction in other expenses. Net income decreased by 39.7% from 2005 to 2006 mainly as a result of an increase in provision expense and by a decrease in the net interest margin as a result of an increase in our cost of funds due to higher market rates affecting the rates paid on borrowings and time deposits.

 

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

 

11


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

interest-earning assets and interest-bearing liabilities. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

 

Net interest income for the year of 2007 was $8,426, an increase of $68, or 0.8%, from $8,358 in the year of 2006. The Corporation’s net interest margin for the year ended June 30, 2007 was 4.67%, an increase of 2 basis points from 2006. Interest income for the year of 2007 was $12,338, an increase of $951, or 8.4%, from $11,387 in the year of 2006. This increase was mainly due to an increase in the yield on loans of 61 basis points from 2006 to 2007. The yield on loans was positively impacted as variable rate loans within the portfolio repriced upward to higher market rates. Interest expense for the year of 2007 was $3,912, an increase of $883, or 29.2%, from $3,029 in the year of 2006. This increase was mainly caused by higher market rates affecting the rates paid on time deposits and borrowings.

 

Net interest income for the year of 2006 was $8,358, a decrease of $431, or 4.9%, from $8,789 in the year of 2005. The Corporation’s net interest margin for the year ended June 30, 2006 was 4.65%, a decrease of 42 basis points from 2005. Interest income on a FTE basis for the year of 2006 was $11,642, an increase of $1,170, or 11.2%, from $10,472 in the year of 2005. This increase was mainly due to a $9,017 increase in the average balance of tax-exempt municipal securities and an increase in the yield on loans of 27 basis points from 2005 to 2006. The yield on loans was positively impacted as variable rate loans within the portfolio repriced upward to higher market rates. Interest expense for the year of 2006 was $3,029, an increase of $1,434, or 89.9%, from $1,595 in the year of 2005. This increase was mainly caused by higher market rates affecting the rates paid on borrowings and time deposits, as well as an increase in average time deposits and FHLB advances outstanding. Time deposits have increased as clients have moved money from lower yielding savings products to take advantage of the higher rates being offered on time deposits. The Corporation’s net interest margin remains higher than most other banks in Ohio due to a higher than average commercial mortgage portfolio and our low cost of funds.

 

Net Interest Income Year ended June 30,

   2007     2006     2005  

Net interest income

   $ 8,426     $ 8,358     $ 8,789  

Taxable equivalent adjustments to net interest

     276       255       88  
                        

Net interest income, fully taxable equivalent

   $ 8,702     $ 8,613     $ 8,877  

Net interest margin

     4.52 %     4.51 %     5.02 %

Taxable equivalent adjustment

     0.15       0.14       0.05  
                        

Net interest margin, fully taxable equivalent

     4.67 %     4.65 %     5.07 %
                        

 

12


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

Three-Year Average Balance Sheet and Net Interest Margin

 

     2007     2006     2005  
     Average
Balance
  Interest   Yield/
Rate
    Average
Balance
  Interest   Yield/
Rate
    Average
Balance
  Interest   Yield/
Rate
 

Interest earning assets:

                  

Taxable securities

   $ 26,450   $ 1,243   4.70 %   $ 23,480   $ 976   4.16 %   $ 24,768   $ 945   3.82 %

Nontaxable Securities (1)

     14,753     873   5.92       12,790     780   6.10       3,773     217   5.75  

Loans receivable (1)

     144,187     10,440   7.24       148,986     9,880   6.63       146,255     9,306   6.36  

Federal funds sold

     1,093     58   5.31       146     6   4.11       221     4   1.81  
                                          

Total interest earning assets

     186,483     12,614   6.76 %     185,402     11,642   6.28       175,017     10,472   5.98  

Non-interest earning assets

     15,066         15,600         15,034    
                              

Total assets

   $ 201,549       $ 201,002       $ 190,051    
                              

Interest bearing liabilities:

                  

NOW

   $ 10,160   $ 29   0.29 %   $ 11,898   $ 33   0.28 %   $ 14,413   $ 78   0.54 %

Savings

     50,333     448   0.89       52,468     316   0.60       58,407     228   0.39  

Time deposits

     68,473     2,991   4.37       58,967     1,990   3.37       45,074     1,004   2.23  

Short-term borrowings

     5,681     186   3.27       5,721     134   2.34       6,176     80   1.30  

FHLB advances

     5,072     258   5.09       12,431     556   4.47       6,184     205   3.32  
                                          

Total interest bearing liabilities

     139,719     3,912   2.80 %     141,485     3,029   2.14       130,254     1,595   1.22  
                              

Non-interest bearing liabilities

     42,187         40,149         40,707    
                              

Total liabilities

     181,906         181,634         170,961    

Shareholders’ equity

     19,643         19,368         19,090    
                              

Total liabilities and shareholders’ equity

   $ 201,549       $ 201,002       $ 190,051    
                              

Net interest income, interest rate spread (1)

     $ 8,702   3.96 %     $ 8,613   4.14 %     $ 8,877   4.76 %

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

       4.67 %       4.65 %       5.07 %

Average interest earning assets to interest bearing liabilities

       133.47 %       131.04 %       134.37 %

(1) Calculated on a fully taxable equivalent basis

 

13


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

The following table presents the changes in the Corporation’s interest income and interest expense resulting from changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities. Changes attributable to both rate and volume that cannot be segregated have been allocated in proportion to the changes due to rate and volume.

 

INTEREST RATES AND INTEREST DIFFERENTIAL

 

     2007 Compared to 2006
Increase / (Decrease)
    2006 Compared to 2005
Increase / (Decrease)
 
     Total
Change
    Change
due to
Volume
    Change
due to
Rate
    Total
Change
    Change
due to
Volume
    Change
due to
Rate
 
     (In thousands)  

Interest earning assets:

            

Taxable securities

   $ 267     $ 131     $ 136     $ 31     $ (49 )   $ 80  

Nontaxable securities (1)

     93       117       (24 )     563       519       44  

Loans receivable (2)

     560       (326 )     886       574       174       400  

Federal funds sold

     52       50       2       2       (1 )     3  
                                                

Total interest income

     972       (28 )     1,000       1,170       643       527  
                                                

Interest bearing liabilities:

            

NOW accounts

     (4 )     (5 )     1       (45 )     (14 )     (31 )

Savings deposits

     132       (13 )     145       88       (23 )     111  

Time deposits

     1,001       354       647       986       309       677  

Short-term borrowings

     52       (1 )     53       54       (6 )     60  

FHLB advances

     (298 )     (366 )     68       351       207       144  
                                                

Total interest expense

     883       (31 )     914       1,434       473       961  
                                                

Net interest income

   $ 89     $ 3     $ 86     $ (264 )   $ 170     $ (434 )
                                                

(1) Nontaxable income is adjusted to a fully tax equivalent basis utilizing a 34% tax rate.
(2) Non-accrual loan balances are included for purposes of computing the rate and volume effects although interest on these balances has been excluded.

 

Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses inherent in the Corporation’s loan portfolio that have been incurred at each balance sheet date. The provision for loan losses was $728 in fiscal year 2007 compared to $730 in fiscal year 2006 and $122 in fiscal year 2005. The $728 provision for loan losses in 2007 mainly resulted from net charge-offs that were taken during the same period. A portion of the net charge-offs were related to a loan that had been specifically allocated for within the allowance for loan loss in a prior period when the probable loss had been identified. The increased provision for loan losses for the twelve month period ended June 30, 2006 resulted from an increase in net charge-offs and an increase in non-performing loans.

 

Net charge-offs were $904 during fiscal year 2007, compared to $696 for the same period last year. Net charge-offs for 2007 were mainly isolated to one loan relationship within the commercial, financial and agricultural portfolio. A total of $669 was included in net charge-offs for 2007 related to this one loan relationship that was secured by two multi-family rental unit properties. For 2006, $362 of the charge-offs within commercial, financial and agricultural portfolio were related to a single borrower that had loans for several multi-family rental units.

 

14


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

Non-performing loans as a percentage of total loans decreased from 2.16% as of June 30, 2006 to 0.68% as of June 30, 2007. The decrease in non-performing loans from June 30, 2006 to June 30, 2007 was primarily related to the foreclosure of a $1.8 million loan relationship that was secured by two multi-family rental unit properties. Upon foreclosure, the properties were transferred into other real estate owned and are currently under purchase agreements for at least the recorded value of the properties; therefore, no further loss on these properties is anticipated.

 

Other Income. Total other income primarily includes service charges on deposits and other miscellaneous income. Service charges on deposits declined slightly in 2007 to $1,492 from $1,540 and $1,544 for fiscal years ended 2006 and 2005, respectively. This decline was mainly due to a slight decline in overdrawn account fee income. Debit card interchange income increased in 2007 to $317 from $269 and $225 for fiscal years ended 2006 and 2005, respectively due to increased volume. Alternative investment income, which is income from investment banking, advisory, brokerage, and underwriting, increased to $179 in 2007 from $64 in 2006. The alternative investment program expanded in the latter part of 2006 with the addition of an experienced Financial Consultant. This program had an impact on other income in 2007 and we believe it will be an important component of earnings into the future. Other income increased by $25, or 17.0%.

 

Gains recognized on the sale of securities totaled $24 during 2007 and $66 during 2005. There were no security gains recognized in 2006. A loss of $181 was recognized on other real estate owned, which represents property acquired by the Corporation as a result of foreclosure, or by deed in lieu of foreclosure. Gains of $6 and $136 were recognized on the sale of other real estate owned during 2006 and 2005, respectively.

 

Other Expenses. Total other expenses were $8,316 for the year ended June 30, 2007, a decrease of $37, or 0.4% from $8,353 for the year ended June 30, 2006, which had increased $178, or 2.2%, from $8,175 for the year ended June 30, 2005.

 

Salary and employee benefit expenses decreased $26, or 0.6%, during the fiscal year ended June 30, 2007 and increased $380, or 9.6%, during the fiscal year ended June 30, 2006. The increase in 2006 was the result of a full year’s impact of salary and employee benefit expenses related to the management positions that were filled in 2005.

 

Directors’ fees decreased by $15, or 10.3%, for 2006 from 2005 mainly due to the Directors implementing a voluntary fee reduction plan.

 

In 2006, professional fees decreased by $213 due to the senior management team now performing services that were previously performed by outside consultants.

 

The amortization of the intangible is directly related to the purchase premium of the Lisbon, Ohio branch.

 

An expense of $167 was recognized in 2005 related to asset disposals and impairment as old ATM and computer equipment were replaced and due to the write down of a building in anticipation of its disposal. A new building was constructed for the Bank’s Hanoverton branch. After the new building was completed, the existing structure was razed during the 2006 fiscal year.

 

Other expense totaled $1,752 for the year ended June 30, 2007, an increase of $19, or 1.1%, from $1,733 for the year ended June 30, 2006. Other expense increased by $162 from 2005 to 2006. Contributing to the increase in non-interest expenses during 2006 were fees associated with moving to an imaged environment in the proof department. As a result of the imaged environment, the Corporation is now able to electronically capture images at its branch locations eliminating the need to courier work from each branch to a central location which is expected to result in subsequent savings to the Company.

 

15


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

For fiscal year 2008, the Corporation will be required to issue its assertion on internal control over financial reporting and in fiscal year 2009 the Corporation’s independent registered public accounting firm will render its opinion on the internal control over financial reporting. It is anticipated that this will result in additional costs to the organization due to the required certifications and these costs have yet to be determined.

 

Income Tax Expense. The provision for income taxes totaled $273, $268 and $835 for the years ended June 30, 2007, 2006 and 2005, respectively. The effective tax rates were 17.8%, 18.5% and 29.9%, respectively. 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 June 30, 2007 were $201,958 compared to $203,550 at June 30, 2006, a decrease of $1,592, or 0.8%. Loans declined by $6,555, or 4.4%, mainly due to the current competitive environment and securities available-for-sale increased by $4,663, or 12.4%, mainly due to the purchase of mortgage-backed securities.

 

Securities. The following table sets forth certain information regarding the amortized cost and fair value of the Corporation’s securities at the dates indicated.

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

June 30, 2007

          

U.S. Treasury

   $ 1,000    $ —      $ (2 )   $ 998

Obligations of government sponsored entities

     10,101      —        (209 )     9,892

Obligations of state and political subdivisions

     15,133      8      (503 )     14,638

Mortgage-backed securities

     16,068      7      (477 )     15,598

Equity securities

     1,000      7      —         1,007
                            

Total securities

   $ 43,302    $ 22    $ (1,191 )   $ 42,133
                            

June 30, 2006

          

U.S. Treasury

   $ 1,000    $ —      $ (12 )   $ 988

Obligations of government sponsored entities

     10,121      —        (355 )     9,766

Obligations of state and political subdivisions

     14,580      9      (291 )     14,298

Mortgage-backed securities

     11,977      5      (564 )     11,418

Equity securities

     1,000      —        —         1,000
                            

Total securities

   $ 38,678    $ 14    $ (1,222 )   $ 37,470
                            

June 30, 2005

          

U.S. Treasury

   $ 999    $ —      $ (5 )   $ 994

Obligations of government sponsored entities

     5,238      —        (71 )     5,167

Obligations of state and political subdivisions

     3,638      60      (1 )     3,697

Mortgage-backed securities

     15,096      20      (241 )     14,875
                            

Total securities

   $ 24,971    $ 80    $ (318 )   $ 24,733
                            

 

16


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2007:

 

     Amortized
Cost
   Fair
Value
   Average
Yield /
Cost
 

AVAILABLE-FOR-SALE

        

U.S. Treasury:

        

Over 3 months through 1 year

   $ 1,000    $ 998    4.31 %
                

Total U.S. Treasury

     1,000      998    4.31  

Obligations of government sponsored entities:

        

Over 3 months through 1 year

     —        —      —    

Over 1 year through 5 years

     4,241      4,140    3.80  

Over 5 years through 10 years

     4,397      4,322    5.42  

Over 10 years

     1,463      1,430    5.49  
                

Total obligations of government sponsored entities

     10,101      9,892    4.76  

Obligations of state and political subdivisions:

        

Over 3 months through 1 year

     745      744    6.04  

Over 1 year through 5 years

     874      871    5.64  

Over 5 years through 10 years

     5,552      5,358    6.10  

Over 10 years

     7,962      7,665    6.29  
                

Total obligations of state and political subdivisions

     15,133      14,638    6.18  

Mortgage-backed securities:

        

3 months or less

     —        —      —    

Over 3 months through 1 year

     977      967    3.81  

Over 1 year through 5 years

     11,043      10,709    4.48  

Over 5 years through 10 years

     4,048      3,922    5.47  
                

Total mortgage-backed securities

     16,068      15,598    4.74  

Equity securities

     1,000      1,007    6.50  
                

Total securities

   $ 43,302    $ 42,133    5.13 %
                

 

The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.

 

At June 30, 2007, available for sale securities included municipal securities issued by Farmersville Texas school district that are insured by Permanent School Fund Guarantee with an aggregate book value of $2,175, or 11.6%, of shareholders’ equity. Other than this issuance, there were no other holdings of securities of any one issuer, other than the U.S. government and its agencies and corporations, with an aggregate book value which exceeds 10% of shareholders’ equity.

 

17


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

Loans. Major classifications of loans were as follows as of June 30:

 

     2007    2006    2005    2004    2003

Real estate—mortgage

   $ 50,988    $ 53,596    $ 61,936    $ 65,242    $ 57,497

Real estate—construction

     2,184      1,720      4,648      3,945      669

Commercial, financial and agricultural

     82,075      86,397      75,815      64,362      58,484

Installment loans to individuals

     6,200      6,289      7,263      6,596      8,240
                                  

Total Loans

   $ 141,447    $ 148,002    $ 149,662    $ 140,145    $ 124,890
                                  

 

The following is a schedule of contractual maturities and repayments of real estate construction, commercial, financial and agricultural loans, as of June 30, 2007:

 

Due in one year or less

   $ 8,064

Due after one year but within five years

     8,252

Due after five years

     67,943
      

Total

   $ 84,259
      

 

The following is a schedule of fixed and variable rate real estate construction, commercial, financial and agricultural loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2007:

 

     Fixed
Interest Rates
   Variable
Interest Rates

Total real estate construction, commercial, financial and agricultural loans due after one year

   $ 18,877    $ 57,318

 

Foreign Outstandings—there were no foreign outstandings during the periods presented. There are no concentrations of loans greater than 10% of total loans, which are not otherwise disclosed as a category of loans.

 

Allowance for Loan Losses. The allowance for loan losses balance and the provision charged to expense are judgmentally determined by management based upon the periodic review of the loan portfolio, an analysis of impaired loans, past loan loss experience, economic conditions, anticipated loan portfolio growth, and various other circumstances which are subject to change over time. In making this judgment, management reviews selected large loans as well as delinquent loans, non-accrual loans, problem loans, and loans to industries experiencing economic difficulties. The collectibility of these loans is evaluated after considering the current financial position of the borrower, the estimated market value of the collateral, guarantees and the Corporation’s collateral position versus other creditors. Judgments, which are necessarily subjective, as to the probability of loss and the amount of such loss, are formed on these loans, as well as other loans in the aggregate.

 

Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is in doubt. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.

 

Properties acquired by the Corporation as a result of foreclosure, or by deed in lieu of foreclosure, are classified as “other real estate owned” until such time as they are or otherwise disposed. As of June 30, 2007, there was $1,478 of properties classified as other real estate owned. Subsequent to year-end, all of the properties

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

within other real estate owned are under purchase agreements for at least the recorded value of the properties; therefore, no further loss on these properties is anticipated. Non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to bring the loan current.

 

The following schedule summarizes non-accrual, past due, and impaired loans for the years ended June 30:

 

     2007    2006    2005    2004    2003

Non-accrual loans

   $ 886    $ 3,198    $ 1,807    $ 2,092    $ 1,050

Accrual loans past due 90 days

     73      —        190      178      39
                                  

Total non-performing loans

   $ 959    $ 3,198    $ 1,997    $ 2,270    $ 1,089

Other real estate owned

     1,478      749      524      585      35
                                  

Total non-performing assets

   $ 2,437    $ 3,947    $ 2,521    $ 2,855    $ 1,124
                                  

Impaired Loans

   $ 706    $ 2,803    $ 1,096    $ 797    $ 505

 

There were no restructured loans for the periods presented.

 

Potential Problem Loans. There were no loans, not otherwise identified above, included on management’s watch or troubled loan lists that management has serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Management’s watch and troubled loan lists includes both loans which management has some doubt as to the borrowers’ ability to comply with the present repayment terms and loans which management is actively monitoring due to changes in the borrowers financial condition. These loans and their potential loss exposure have been considered in management’s analysis of the adequacy of the allowance for loan losses.

 

The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the years ended June 30:

 

     2007    2006    2005    2004    2003

Allowance for loan losses at beginning of year

   $ 1,557    $ 1,523    $ 1,753    $ 1,685    $ 1,668

Loans charged off:

              

Real estate mortgage

     91      209      —        84      56

Real estate construction

     —        —        —        —        —  

Commercial, financial and agricultural

     794      447      344      86      32

Installment loans to individuals

     152      168      161      283      515
                                  

Total charge offs

     1,037      824      505      453      603

Recoveries:

              

Real estate mortgage

     1      12      6      17      29

Real estate construction

     —        —        —        —        —  

Commercial, financial and agricultural

     34      7      43      7      16

Installment loans to individuals

     98      109      104      116      161
                                  

Total recoveries

     133      128      153      140      206
                                  

Net charge offs

     904      696      352      313      397

Provision for loan losses charged to operations

     728      730      122      381      414
                                  

Allowance for loan losses at end of year

   $ 1,381    $ 1,557    $ 1,523    $ 1,753    $ 1,685
                                  

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:

 

     Allocation of the Allowance for Loan Losses  
     Allowance
Amount
   % of Loan
Type to
Total Loans
    Allowance
Amount
   % of Loan
Type to
Total Loans
 
     June 30, 2007     June 30, 2006  

Commercial, financial and agricultural

   $ 961    58.0 %   $ 1,124    58.4 %

Installment loans to individuals

     96    4.4       156    4.2  

Real estate

     324    37.6       277    37.4  

Unallocated

     —      —         —      —    
                          

Total

   $ 1,381    100.0 %   $ 1,557    100.0 %
                  

 

     Allocation of the Allowance for Loan Losses  
     Allowance
Amount
   % of Loan
Type to
Total Loans
    Allowance
Amount
   % of Loan
Type to
Total Loans
 
     June 30, 2005     June 30, 2004  

Commercial, financial and agricultural

   $ 662    50.7 %   $ 639    46.0 %

Installment loans to individuals

     173    4.8       272    4.7  

Real estate

     580    44.5       676    49.3  

Unallocated

     108    —         166    —    
                          

Total

   $ 1,523    100.0 %   $ 1,753    100.0 %
                  
     June 30, 2003             

Commercial, financial and agricultural

   $ 681    46.8 %     

Installment loans to individuals

     596    6.6       

Real estate

     302    46.6       

Unallocated

     106    —         
                  

Total

   $ 1,685    100.0 %     
              

 

While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur. During 2006, the 2005 unallocated portion of the allowance for loan losses was allocated within the allowance for loan losses to the various loan types.

 

Funding Sources. Total deposits increased $2,283, or 1.4%, from $167,308 at June 30, 2006 to $169,591 at June 30, 2007. Non-interest bearing deposits increased $301, or 0.7%, from June 30, 2006 to June 30, 2007, while interest-bearing checking balances decreased $70, or 0.7%, for the same period. Time deposits increased $3,621, or 5.6%, and savings deposits decreased $1,569, or 3.1%, as customers took advantage of the higher rates being offered on time deposits.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:

 

     Years Ended June 30,  
     2007     2006     2005  
     Amount    Rate     Amount    Rate     Amount    Rate  

Non-interest bearing demand deposit

   $ 41,058    —       $ 39,005    —       $ 40,707    —    

Interest bearing demand deposit

     10,160    0.29 %     11,898    0.28 %     14,413    0.54 %

Savings

     50,333    0.89       52,468    0.60       58,407    0.39  

Certificates and other time deposits

     68,473    4.37       58,967    3.37       45,074    2.23  
                           

Total

   $ 170,024    2.04 %   $ 162,338    1.44 %   $ 158,601    0.83 %
                           

 

The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2007 by time remaining until maturity:

 

Maturing in:

  

Under 3 months

   $ 4,476

Over 3 to 6 months

     8,455

Over 6 to 12 months

     4,363

Over 12 months

     2,678
      

Total

   $ 19,972
      

 

See Note 7—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.

 

Shareholders’ equity. Total shareholders’ equity decreased by $320 from $19,102 at June 30, 2006 to $18,782 at June 30, 2007. The decrease was primarily due to cash dividends paid and an increase in treasury stock of $932. These decreases were partially offset by net income of $1,263 for the current fiscal year.

 

The share repurchase plan that was approved by the Board of Directors in June 2006 has been completed. As was previously disclosed, in July 2007 the Board of Directors authorized a new share repurchase program for up to 75,000 shares that can be purchased through June 2008. Repurchases can be made from time-to-time in the open market or through privately negotiated transactions depending on market and/or other conditions. The repurchase program may be suspended or discontinued at any time.

 

Liquidity

 

Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions. The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in federal funds sold on a daily basis.

 

The Bank groups its loan portfolio into three major categories: real estate loans; commercial, financial and agricultural loans; and consumer loans. The Bank’s real estate loan portfolio consists of three basic segments: conventional mortgage loans having fixed rates for terms not longer than fifteen years, variable rate home equity line of credit loans and fixed rate loans having maturity or renewal dates that are less than the scheduled amortization period. Real estate loan growth has declined the last two years as competition has increased significantly in the Bank’s market for these types of loans, both from local and national lenders. Commercial,

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

financial and agricultural loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate and fixed rate notes having maturities of generally not greater than five years. Personal loans offered by the Bank are generally written for periods of up to five years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.

 

Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. The majority of the Bank’s securities are held in obligations of U.S. Government sponsored entities, mortgage-backed securities, and investments in tax free municipal bonds.

 

The Bank offers several forms of deposit products to its customers. The rates offered by the Bank and the fees charged for them are competitive with others available currently in the market area. Time deposit interest rates have increased during the year. Rates continue to come under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits to fund growth. Compared to our peers, the Corporation’s cost of funds still remains at a relatively low level at 2.80%.

 

Jumbo time deposits (those with balances of $100 and over) increased from $19,565 at June 30, 2006 to $19,972 at June 30, 2007. These deposits are monitored closely by the Bank and typically 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. However, these deposits are not relied upon as a primary source of funding and the Bank can foresee no dependence on these types of deposits in the near term.

 

The net interest margin is monitored monthly. It is the Bank’s goal to maintain the net interest margin at 4.0% or greater. The net interest margin on a tax equivalent basis for 2007 was 4.67% as compared to 4.65% for 2006 and 5.07% in 2005.

 

Capital Resources

 

At June 30, 2007, management believes the Bank complied with all regulatory capital requirements. Based on the Bank’s computed regulatory capital ratios, the Office of the Comptroller of the Currency has determined the Bank to be well capitalized under the Federal Deposit Insurance Act as of its latest exam date. The Bank’s actual and required capital amounts are disclosed in Note 11 of the consolidated financial statements. Management is not aware of any matters occurring subsequent to that exam that would cause the Bank’s capital category to change.

 

Impact of Inflation and Changing Prices

 

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Corporation are monetary in nature. Therefore, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity, maturity structure and quality of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

Critical Accounting Policies

 

The financial condition and results of operations for Consumers Bancorp, Inc. presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and management’s discussion and analysis 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.

 

Presented below is a discussion of the accounting policy that management believes is the most important to the portrayal and understanding of the Corporation’s financial condition and result of operations. This policy requires management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Also, see Note 1 of the Notes to Consolidated Financial Statements for additional information related to significant accounting policies.

 

Allowance for Loan Losses. Management periodically reviews the loan portfolio in order to establish an estimated allowance for loan losses (allowance) that are probable as of the respective reporting date. Additions to the allowance are charged against earnings for the period as a provision for loan losses. Actual loan losses are charged against the allowance when management believes that the collection of principal will not occur. Unpaid interest for loans that are placed on non-accrual status is reversed against current interest income.

 

The allowance is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb probable losses. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan groups or pools that are based on historical loss experience and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other things. The allowance is also subject to periodic examination by regulators whose review includes a determination as to its adequacy to absorb potential losses.

 

Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk grading, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors including the breadth and depth of experience of lending officers, credit administration and the loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower, and changes in the value and availability of the underlying collateral and guarantees.

 

While the Corporation strives to reflect all known risk factors in its evaluations, judgment errors may occur. If different assumptions or conditions were to prevail, the amount and timing of interest income and loan losses could be materially different. These factors are most pronounced during economic downturns. Since, as described above, so many factors can affect the amount and timing of losses on loans it is difficult to predict, with any degree of certainty, the affect on income if different conditions or assumptions were to prevail.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

Quantitative and Qualitative Disclosures about Market Risk

 

The Bank measures interest-rate risk from the perspectives of earnings at risk and value at risk. The primary purpose of both the loan and securities portfolios is the generation of income. Credit risk is the principal focus of risk analysis in the loan portfolio, while interest-rate risk is the principal focus in the securities portfolio. The securities portfolio is the vehicle used to manage both interest-rate and liquidity risk. The Bank monitors interest rate risk position using simulation analysis of net interest income and net income over a two-year period. The Bank also calculates the effect of an instantaneous change in market interest rates on the economic value of equity or net portfolio value. Once these analyses are complete, management reviews the results, with an emphasis on the income-simulation results for purposes of managing interest-rate risk. The rate sensitivity position is managed to avoid wide swings in net interest margins. Measurement and identification of current and potential interest rate risk exposures is conducted quarterly, with reporting and monitoring also occurring quarterly. The Bank applies interest rate shocks to its financial instruments up and down 50, 100, 200, and 300 basis points. The projected volatility of net interest income to a +200 and -100 basis points change for all quarterly models during 2007 and 2006 fell within the Board of Directors guidelines for net interest income change.

 

The following table presents an analysis of the potential sensitivity of the Bank’s annual net interest income and present value of the Bank’s financial instruments to sudden and sustained increase or decrease of 100 and 200 basis points change in market interest rates:

 

     2007     Guidelines     2006     Guidelines  

One Year Net Interest Income Change

        

+200 Basis Points

   (1.6 )%   >-20.0 %   (1.7 )%   >-16 %

+100 Basis Points

   (0.7 )%   >-12.5 %   (0.9 )%   >-8 %

-100 Basis Points

   0.6 %   >-12.5 %   1.4 %   >-8 %

-200 Basis Points

   1.2 %   >-20.0 %   2.4 %   >-16 %

Net Present Value of Equity Change

        

+200 Basis Points

   (14.3 )%   >-25.0 %   (13.7 )%   >-20 %

+100 Basis Points

   (6.2 )%   >-20.0 %   (5.6 )%   >-20 %

-100 Basis Points

   (1.2 )%   >-20.0 %   (0.6 )%   >-20 %

-200 Basis Points

   (5.6 )%   >-25.0 %   (3.4 )%   >-20 %

 

The preceding analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments and reactions of depositors to changes in interest rates, and should not be relied upon as being indicative of actual results. Further, the analysis does not necessarily contemplate all actions the Bank may undertake in response to changes in interest rates.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—(continued)

(Dollars in thousands, except per share data)

 

Contractual Obligations, Commitments and Contingent Liabilities

 

The following table presents, as of June 30, 2007, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

 

     Note
Reference
   2008    2009    2010    2011    2012    Thereafter    Total

Certificates of deposit

   6    $ 60,720    $ 5,909    $ 1,188    $ 469    $ 7    $ 36    $ 68,329

Short-term borrowings

   7      9,330      —        —        —        —        —        9,330

Federal Home Loan Advances

   8      1,530      234      201      131      89      440      2,625

Salary continuation plan

   9      16      16      16      16      16      641      721

Operating leases

   4      112      112      95      35      33      112      499

Deposits without maturity

        —        —        —        —        —        —        101,262

 

Note 12 to the Consolidated Financial Statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. These commitments and contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.

 

Off-Balance Sheet Arrangements

 

At June 30, 2007, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, in an effort to execute a sound and defensive interest rate risk management policy.

 

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Table of Contents

ITEM 7A—QUANTITATIVE AND QUALIT ATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this section appears under the caption “Quantitative and Qualitative Disclosures about Market Risk” located in Item 7 on page 24 of this Report.

 

ITEM 8—FINANCIAL STAT EMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Consumers Bancorp, Inc.

Minerva, Ohio

 

We have audited the accompanying consolidated balance sheets of Consumers Bancorp, Inc. as of June 30, 2007 and 2006 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Consumers Bancorp, Inc. as of June 30, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2007, in conformity with U. S. generally accepted accounting principles.

 

As discussed in Note 1, the Company adopted Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements” and accordingly adjusted assets and liabilities at the beginning of fiscal 2007 with an offsetting adjustment to the opening balance of retained earnings.

 

/s/ Crowe Chizek and Company LLC

 

Crowe Chizek and Company LLC

 

Columbus, Ohio

August 28, 2007

 

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Table of Contents

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

As of June 30, 2007 and 2006

(Dollar amounts in thousands, except per share data)

 

     2007     2006  

ASSETS:

    

Cash and cash equivalents

   $ 5,558     $ 5,941  

Securities, available-for-sale

     42,133       37,470  

Federal bank and agency stocks, at cost

     1,146       1,118  

Total loans

     141,447       148,002  

Less allowance for loan losses

     (1,381 )     (1,557 )
                

Net loans

     140,066       146,445  

Cash surrender value of life insurance

     4,290       4,139  

Premises and equipment, net

     4,273       4,648  

Intangible assets, net

     733       894  

Other real estate owned

     1,478       749  

Accrued interest receivable and other assets

     2,281       2,146  
                

Total assets

   $ 201,958     $ 203,550  
                

LIABILITIES:

    

Deposits:

    

Non-interest bearing demand

   $ 42,170     $ 41,869  

Interest bearing demand

     10,086       10,156  

Savings

     49,006       50,575  

Time

     68,329       64,708  
                

Total deposits

     169,591       167,308  

Short-term borrowings

     9,330       5,049  

Federal Home Loan Bank advances

     2,625       10,790  

Accrued interest payable and other liabilities

     1,630       1,301  
                

Total liabilities

     183,176       184,448  

Commitments and contingent liabilities

     —         —    

SHAREHOLDERS’ EQUITY:

    

Common shares, no par value; 2,500,000 shares authorized; 2,160,000 shares issued

     4,869       4,869  

Retained earnings

     15,920       15,333  

Treasury stock, at cost (94,566 and 19,566 common shares at June 30, 2007 and 2006, respectively)

     (1,235 )     (303 )

Accumulated other comprehensive loss

     (772 )     (797 )
                

Total shareholders’ equity

     18,782       19,102  
                

Total liabilities and shareholders’ equity

   $ 201,958     $ 203,550  
                

 

See accompanying notes to consolidated financial statements.

 

 

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Table of Contents

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

     2007     2006    2005

Interest income:

       

Loans, including fees

   $ 10,421     $ 9,865    $ 9,288

Federal funds sold

     58       6      4

Securities:

       

Taxable

     1,243       976      945

Tax-exempt

     616       540      147
                     

Total interest income

     12,338       11,387      10,384

Interest expense:

       

Deposits

     3,468       2,339      1,310

Federal Home Loan Bank advances

     258       556      205

Short-term borrowings

     186       134      80
                     

Total interest expense

     3,912       3,029      1,595
                     

Net interest income

     8,426       8,358      8,789

Provision for loan losses

     728       730      122
                     

Net interest income after provision for loan losses

     7,698       7,628      8,667

Other income:

       

Service charges on deposit accounts

     1,492       1,540      1,544

Debit card interchange income

     317       269      225

Securities gains, net

     24       —        66

Gain (loss) on other real estate owned

     (181 )     6      136

Bank owned life insurance income

     151       145      152

Alternative investment income

     179       64      16

Other

     172       147      159
                     

Total other income

     2,154       2,171      2,298

Other expenses:

       

Salaries and employee benefits

     4,296       4,322      3,942

Occupancy

     1,129       1,107      1,135

Directors’ fees

     128       130      145

Professional fees

     252       218      431

Franchise taxes

     167       193      228

Printing and supplies

     165       230      173

Amortization of intangible

     161       161      161

Telephone and communications

     213       251      206

Asset impairment/disposal, net

     3       8      167

Other real estate owned

     50       —        16

Other

     1,752       1,733      1,571
                     

Total other expenses

     8,316       8,353      8,175
                     

Income before income taxes

     1,536       1,446      2,790

Income tax expense

     273       268      835
                     

Net income

   $ 1,263     $ 1,178    $ 1,955
                     

Basic earnings per share

   $ 0.60     $ 0.55    $ 0.91

 

See accompanying notes to consolidated financial statements.

 

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CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

     Common
Shares
   Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

Balance, June 30, 2004

   $ 4,869    $ 13,658     $ (204 )   $ (213 )   $ 18,110  

Comprehensive Income:

           

Net income

        1,955           1,955  

Other comprehensive income

            56       56  
                 

Total comprehensive income

              2,011  

Cash dividends declared ($0.36 per share)

        (772 )         (772 )

Purchase of 2,837 treasury shares

          (52 )       (52 )
                                       

Balance, June 30, 2005

     4,869      14,841       (256 )     (157 )     19,297  

Comprehensive Income:

           

Net income

        1,178           1,178  

Other comprehensive income (loss)

            (640 )     (640 )
                 

Total comprehensive income

              538  

Cash dividends declared ($0.32 per share)

        (686 )         (686 )

Purchase of 3,010 treasury shares

          (47 )       (47 )
                                       

Balance, June 30, 2006

     4,869      15,333       (303 )     (797 )     19,102  

Adjustment to apply SAB 108 (See Note 1)

        (129 )         (129 )

Comprehensive Income:

           

Net income

        1,263           1,263  

Other comprehensive income

            25       25  
                 

Total comprehensive income

              1,288  

Cash dividends declared ($0.26 per share)

        (547 )         (547 )

Purchase of 75,000 treasury shares

          (932 )       (932 )
                                       

Balance, June 30, 2007

   $ 4,869    $ 15,920     $ (1,235 )   $ (772 )   $ 18,782  
                                       

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

     2007     2006     2005  

Cash flows from operating activities:

      

Net income

   $ 1,263     $ 1,178     $ 1,955  

Adjustments to reconcile net income to net cash flows from operating activities:

      

Depreciation

     568       580       645  

Securities amortization, net

     7       66       117  

Provision for loan losses

     728       730       122  

Loss on disposal/impairment of premises

     3       8       167  

(Gain) loss on sale of other real estate

     181       (6 )     (136 )

Deferred income taxes

     (110 )     9       80  

Gain on sale of securities

     (24 )     —         (66 )

Stock dividend on FHLB stock

     (28 )     (52 )     (47 )

Intangible amortization

     161       161       161  

Change in:

      

Cash surrender value of life insurance

     (151 )     (145 )     (152 )

Accrued interest receivable

     (164 )     (228 )     44  

Accrued interest payable

     (75 )     79       84  

Other assets and other liabilities

     401       (59 )     (563 )
                        

Net cash flows from operating activities

     2,760       2,321       2,411  

Cash flows from investing activities:

      

Securities available-for-sale

      

Purchases

     (11,042 )     (18,157 )     (2,551 )

Sales

     1,922       —         2,536  

Maturities and principal pay downs

     4,512       4,384       5,303  

Net decrease in Federal funds sold

     —         —         210  

Net (increase) decrease in loans

     4,448       11       (10,314 )

Acquisition of premises and equipment

     (198 )     (869 )     (620 )

Proceeds from sale/disposal of premises

     2       14       48  

Proceeds from sale of other real estate owned

     293       734       642  
                        

Net cash flows from investing activities

     (63 )     (13,883 )     (4,746 )

Cash flows from financing activities:

      

Net increase in deposit accounts

     2,283       4,809       7,731  

Proceeds from FHLB advances

     1,250       9,080       —    

Repayments of FHLB advances

     (9,415 )     (625 )     (4,422 )

Change in short-term borrowings

     4,281       (997 )     590  

Dividends paid

     (547 )     (686 )     (772 )

Purchase of treasury stock

     (932 )     (47 )     (52 )
                        

Net cash flows from financing activities

     (3,080 )     11,534       3,075  
                        

Change in cash and cash equivalents

     (383 )     (28 )     740  

Cash and cash equivalents, beginning of year

     5,941       5,969       5,229  
                        

Cash and cash equivalents, end of year

   $ 5,558     $ 5,941     $ 5,969  
                        

Supplemental noncash disclosures:

      

Transfers from loans to repossessed assets

   $ 1,203     $ 953     $ 445  

Adjustment to Apply SAB 108 (see Note 1)

     (129 )     —         —    

 

See accompanying notes to consolidated financial statements.

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Unless otherwise indicated, dollar amounts are in thousands, except per share data.

 

Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank). All significant intercompany transactions have been eliminated in the consolidation.

 

Business Segment Information: Consumers Bancorp, Inc. is a bank holding company engaged in the business of commercial and retail banking, which accounts for substantially all of its revenues, operating income, and assets. Accordingly, all of its operations are reported in one segment, banking.

 

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

 

Cash Reserves: The Bank is required by the Federal Reserve to maintain reserves consisting of cash on hand and non-interest bearing balances on deposit with the Federal Reserve Bank. The required reserve balance at June 30, 2007 and 2006 was $1,724 and $1,536, respectively.

 

Securities: Securities are generally classified into either held-to-maturity or available-for-sale categories. Held-to-maturity securities are those that the Corporation has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those that the Corporation may decide to sell if needed for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in other comprehensive income as a separate component of equity, net of tax. Other securities, such as Federal Home Loan Bank stock, are carried at cost. Securities are written down to fair value when a decline in fair value is not temporary.

 

Realized gains or losses on sales are determined based on the amortized cost of the specific security sold. Amortization of premiums and accretion of discounts are computed under a system materially consistent with the level yield method and are recognized as adjustments to interest income. Prepayment activity on mortgage-backed securities is affected primarily by changes in interest rates. Yields on mortgage-backed securities are adjusted as prepayments occur through changes to premium amortization or discount accretion.

 

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating, other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Corporation’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

 

Federal Home Loan Bank (FHLB) stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Since this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

 

Loans: Loans are reported at the principal balance outstanding, net of unearned income, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 120 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later than 90 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is not considered probable.

 

All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the customer has exhibited the ability to repay and demonstrated this ability over a six month period and future payments are reasonably assured.

 

Concentrations of Credit Risk: The Bank grants consumer, real estate and commercial loans primarily to borrowers in Stark, Columbiana and Carroll counties. Automobiles and other consumer assets, business assets and residential and commercial real estate secure most loans.

 

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred losses, increased by the provision for loan losses and decreased by charge-offs, less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and probable losses in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

 

Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan.

 

Cash Surrender Value of Life Insurance: The Bank has purchased single-premium life insurance policies to insure the lives of current and former participants in the salary continuation plan. As of June 30, 2007, the Bank had policies with total death benefits of $9,972 and total cash surrender values of $4,290. As of June 30, 2006, the Bank had policies with total death benefits of $9,881 and total cash surrender values of $4,139. The amount included in income (net of policy commissions and mortality costs) was $151, $145 and $152 for the years ended June 30, 2007, 2006 and 2005, respectively.

 

Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, generally over the lesser of the remaining term of the lease facility or the estimated economic life of the improvement. Useful lives range from three years for software to thirty-nine and one-half years for buildings.

 

Intangible Assets: Core deposit intangible is recorded at cost and is amortized over an estimated life of 12 years on a straight line method. Intangibles are assessed annually for impairment and written down as necessary.

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

Long-term Assets: Premises and equipment, core deposit and other intangible assets and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

 

Other Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less costs to sell at the date of acquisition. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported as a charge to income. Other real estate owned was $1,478 at June 30, 2007 and $749 at June 30, 2006.

 

Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

 

Profit Sharing Plan: The Bank maintains a 401(k) profit sharing plan covering all eligible employees. Contributions are made and expensed annually.

 

Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

 

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

 

Earnings and Dividends Declared per Share: Earnings per common share are computed based on the weighted average common shares outstanding. The weighted average number of common shares outstanding was 2,105,656; 2,142,479 and 2,145,432 for the years ended June 30, 2007, 2006 and 2005, respectively. The Corporation’s capital structure contains no dilutive securities.

 

Statement of Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include the Corporation’s cash on hand and due from banks. The Corporation reports net cash flows for customer loan, deposit, Federal Funds sold or purchased, and repurchase agreement transactions. The Bank paid $3,987, $2,950 and $1,511 in interest and $225, $300, and $1,020 in income taxes for the years ended June 30, 2007, 2006 and 2005, respectively.

 

Comprehensive Income (loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale.

 

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders. As of June 30, 2007 the Bank could, without prior approval, declare a dividend of approximately $366.

 

Adoption of New Accounting Standards: In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which is effective for fiscal years ending on or after November 15, 2006. SAB No. 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB No.108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior years errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB No. 108, are to be recorded upon initial adoption of SAB No. 108. The amount so recorded is shown as a cumulative effect adjustment in opening retained earnings as of July 1, 2006. Included in this cumulative effect adjustment are the following items and amounts:

 

Vacation accrual: The Corporation under accrued vacation expense over several prior years. The annual under accrual that occurred in prior periods was insignificant to any given prior period’s earnings. The accumulation of these annual under accruals totaled $129, net of tax, as of July 1, 2006.

 

In July 2006, the Financial Accounting Standards Board (“FASB”) released Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” This Interpretation revises the recognition tests for tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest amount that is more likely than not to be allowed. Any reduction in deferred tax assets or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The Corporation has evaluated this new statement and determined it will not have a material effect on the financial statements when adopted in future years.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. SFAS No. 158 requires an employer to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (b) measure a plan’s assets and its obligations that determine its funded status at the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur. Those changes will be reported in the comprehensive income of a business entity. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for publicly traded companies. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

years ending after December 15, 2008. The adoption of SFAS No. 158 does not have a material effect on the Corporation’s statement of financial position at June 30, 2007 nor on the Corporation’s comprehensive income for the twelve months ended June 30, 2007.

 

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management has not completed its evaluation of the impact of adoption of this standard.

 

In July 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract for EITF Issue No. 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangement.” This draft abstract from EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The Task Force concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the purchase of an endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard will be effective for fiscal years beginning after December 15, 2007. At June 30, 2007, the Corporation owned $4,290 of bank owned life insurance. However, these life insurance policies are not subject to endorsement split-dollar life insurance arrangements. Therefore, management does not expect the adoption of EITF Issue No. 06-4 to have a material impact on the Corporation’s financial statements.

 

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The Corporation does not believe the adoption of this issue will have a material impact on the financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Assets and Financial Liabilities. This statement allows entities the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities. Subsequent changes in fair value of the financial assets and liabilities would be recognized in earnings when they occur. This pronouncement also establishes certain additional disclosure requirements. It is effective as of the beginning of the first fiscal year beginning after November 15, 2007 and early adoption is permitted. If the Corporation adopts this pronouncement early, it would be effective July 1, 2007, otherwise it would become effective July 1, 2008. At the present time, the Corporation has not determined if it will elect early adoption, to what assets and liabilities it would apply to the provisions of the statement and what impact it would have on the Corporation’s consolidated financial statements.

 

Reclassifications: Certain reclassifications have been made to the June 30, 2006 and 2005 financial statements to be comparable to the June 30, 2007 presentation.

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

NOTE 2—SECURITIES

 

The following table sets forth certain information regarding the amortized cost and fair value of the Corporation’s securities at the dates indicated.

 

Description of Securities

   Fair
Value
  

Gross
Unrealized

Gains

  

Gross
Unrealized

Losses

 

June 30, 2007

        

U.S. Treasury

   $ 998    $ —      $ (2 )

Obligations of government sponsored entities

     9,892      —        (209 )

Obligations of state and political subdivisions

     14,638      8      (503 )

Mortgage-backed securities

     15,598      7      (477 )

Equity securities

     1,007      7      —    
                      

Total securities

   $ 42,133    $ 22    $ (1,191 )
                      

June 30, 2006

        

U.S. Treasury

   $ 988    $ —      $ (12 )

Obligations of government sponsored entities

     9,766      —        (355 )

Obligations of state and political subdivisions

     14,298      9      (291 )

Mortgage-backed securities

     11,418      5      (564 )

Equity securities

     1,000      —        —    
                      

Total securities

   $ 37,470    $ 14    $ (1,222 )
                      

 

Securities with a carrying value of approximately $26,145 and $21,246 were pledged at June 30, 2007 and 2006, respectively, to secure public deposits and commitments as required or permitted by law.

 

Proceeds from sales of all equity and debt securities during 2007 and 2005 were $1,922 and $2,536, respectively. Gross gains were $24 and $66 with no losses recognized during 2007 and 2005, respectively. There were no sales of equity or debt securities during 2006.

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

Securities with unrealized losses at June 30, 2007 and 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

     Less than 12 Months     12 Months or more     Total  

Description of Securities

   Fair
Value
   Unrealized
Loss
    Fair
Value
   Unrealized
Loss
    Fair
Value
   Unrealized
Loss
 

June 30, 2007

               

U.S. Treasury

   $ —      $ —       $ 998    $ (2 )   $ 998    $ (2 )

Obligations of government sponsored entities

     5,752      (107 )     4,140      (102 )     9,892      (209 )

Obligations of states and political subdivisions

     12,569      (477 )     1,191      (26 )     13,760      (503 )

Mortgage-backed securities

     6,706      (160 )     8,721      (317 )     15,427      (477 )
                                             

Total temporarily impaired

   $ 25,027    $ (744 )   $ 15,050    $ (447 )   $ 40,077    $ (1,191 )
                                             

June 30, 2006

               

U.S. Treasury

   $ 988    $ (12 )   $ —      $ —       $ 988    $ (12 )

Obligations of government sponsored entities

     4,720      (161 )     5,046      (194 )     9,766      (355 )

Obligations of states and political subdivisions

     12,828      (276 )     312      (15 )     13,140      (291 )

Mortgage-backed securities

     863      (10 )     10,353      (554 )     11,216      (564 )
                                             

Total temporarily impaired

   $ 19,399    $ (459 )   $ 15,711    $ (763 )   $ 35,110    $ (1,222 )
                                             

 

Unrealized losses on securities have not been recognized into income because the issuer(s) of the securities are of high credit quality and the decline in fair value is primarily due to changes in interest rates. Management has the ability and intent to hold these securities for the foreseeable future. The fair value is expected to recover as the securities approach their maturity dates.

 

The fair values of debt securities available-for-sale at June 30, 2007 by contractual 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, are shown separately.

 

     Fair Value

Due in one year or less

   $ 1,742

Due after one year through five years

     5,011

Due after five years through ten years

     9,680

Due after ten years

     9,095
      

Total

     25,528

Mortgage-backed securities

     15,598

Equity securities

     1,007
      

Total

   $ 42,133
      

 

37


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

NOTE 3—LOANS

 

Major classifications of loans were as follows as of June 30:

 

     2007     2006  

Real estate—mortgage

   $ 51,022     $ 53,630  

Real estate—construction

     2,184       1,720  

Commercial, financial and agricultural

     82,286       86,621  

Installment loans to individuals

     6,200       6,289  
                
     141,692       148,260  

Deferred loan fees and costs

     (245 )     (258 )

Allowance for loan losses

     (1,381 )     (1,557 )
                

Net loans

   $ 140,066     $ 146,445  
                

 

The changes in the allowance for loan losses consists of the following for the years ended June 30:

 

     2007     2006     2005  

Balance at beginning of year

   $ 1,557     $ 1,523     $ 1,753  

Provision

     728       730       122  

Charge-offs

     (1,037 )     (824 )     (505 )

Recoveries

     133       128       153  
                        

Balance at end of year

   $ 1,381     $ 1,557     $ 1,523  
                        

 

Impaired loans were as follows as of June 30:

 

     2007    2006

Total impaired loans

   $ 706    $ 2,803

Amount of allowance for loan losses allocated

     136      393

 

As of June 30, 2007, all impaired loans had a specific allowance for loan loss allocation:

 

     2007    2006    2005

Average of impaired loans during the year

   $ 2,115    $ 1,707    $ 1,190

Interest income recognized during impairment

     53      3      7

Cash-basis interest income recognized

     53      3      —  

 

Nonperforming loans were as follows:

 

     2007    2006

Loans past due over 90 days and still accruing

   $ 73    $ —  

Loans on non-accrual

     886      3,198

Increase in interest income if loans had been on accrual

     98      157

 

38


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

The Bank has granted loans to certain of its executive officers, directors and their affiliates. A summary of activity during the year ended June 30, 2007 of related party loans were as follows:

 

     2007  

Principal balance at beginning of year

   $ 1,425  

New loans

     235  

Reclassification

     400  

Repayments

     (289 )
        

Principal balance at end of year

   $ 1,771  
        

 

NOTE 4—PREMISES AND EQUIPMENT

 

Major classifications of premises and equipment were as follows as of June 30:

 

     2007     2006  

Land

   $ 953     $ 953  

Land improvements

     324       311  

Building and leasehold improvements

     3,296       3,287  

Furniture, fixture and equipment

     5,258       5,186  
                

Total premises and equipment

     9,831       9,737  

Accumulated depreciation and amortization

     (5,558 )     (5,089 )
                

Premises and equipment, net

   $ 4,273     $ 4,648  
                

 

Depreciation was $568, $580 and $645 for the years ended June 30, 2007, 2006 and 2005, respectively.

 

The Corporation is obligated under non-cancelable operating leases for facilities and equipment. The approximate minimum annual rentals and commitments under these non-cancelable agreements and leases with remaining terms in excess of one year are as follows:

 

2008

   $  112

2009

     112

2010

     95

2011

     35

2012

     33

Thereafter

     112
      
   $ 499
      

 

Rent expense incurred during the fiscal years ended June 30, 2007, 2006 and 2005 were $96, $81 and $58, respectively.

 

During the 2006 fiscal year, Consumers National Bank entered into an operating lease agreement for the Malvern branch location. The lessor of the property is a member of the Corporation’s Board of Directors. The initial term of the lease is a period of ten years. The base rent through the end of the fifth year is one percent of the total Project Cost, as defined in the lease agreement. At the beginning of year six, the rent to be paid shall be

 

39


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

increased in accordance with the change in the Consumers Price Index. For years one through five, the estimated annual lease expense is $32 per year.

 

For the year ended June 30, 2005, the Corporation recorded a net asset impairment/disposal loss of $167, which included a non-cash impairment loss of $122. At June 30, 2005, management determined that the fair value of ATMs and a building, which was in the process of being replaced, was less than their carrying values in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The remaining $45 loss was mainly related to the disposal of certain computer equipment.

 

NOTE 5—INTANGIBLE ASSETS

 

The following summarizes the original balance and accumulated amortization of core deposit intangible assets at June 30, 2007 and 2006:

 

     2007    2006

Original balance

   $ 1,927    $ 1,927

Less: accumulated amortization

     1,194      1,033
             

Net balance, June 30

   $ 733    $ 894
             

 

Amortization expense for the years ended June 30, 2007, 2006 and 2005 was $161 for each year. Amortization expense is estimated to be $161 for each of the next four years and $89 in year five.

 

NOTE 6—DEPOSITS

 

The aggregate amount of time deposits, each with a minimum denomination of $100, was $19,972 and $19,565 as of June 30, 2007 and 2006, respectively.

 

Scheduled maturities of time deposits at June 30, 2007 were as follows:

 

2008

   $  60,720

2009

     5,909

2010

     1,188

2011

     469

2012

     7

Thereafter

     36
      
   $ 68,329
      

 

Related party deposits totaled $2,610 as of June 30, 2007 and $1,488 as of June 30, 2006.

 

40


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

NOTE 7—SHORT-TERM BORROWINGS

 

Short-term borrowings consisted of Federal funds purchased and repurchase agreements. Repurchase agreements are financing arrangements. Physical control is maintained for all securities pledged to secure repurchase agreements. Information concerning all short-term borrowings at June 30, maturing in less than one year is summarized as follows:

 

     2007     2006     2005  

Balance at June 30

   $ 9,330     $ 5,049     $ 6,046  

Average balance during the year

     5,681       5,721       6,176  

Maximum month-end balance

     9,330       7,760       8,864  

Average interest rate during the year

     3.27 %     2.34 %     1.30 %

Weighted average rate June 30

     4.06       2.94       1.75  

 

Repurchase agreements mature daily. The Bank has pledged obligations of government sponsored entities with a carrying value of $10,297 at June 30, 2007, as collateral for the repurchase agreements. Total interest expense on short-term borrowings was $186, $134 and $80 for the years ended June 30, 2007, 2006 and 2005, respectively.

 

NOTE 8—FEDERAL HOME LOAN BANK ADVANCES

 

A summary of Federal Home Loan Bank (FHLB) advances were as follows:

 

Maturity

   Term    Interest Rate    Balance
June 30, 2007
   Balance
June 30, 2006

08/08/2006

   Floating    5.43    $ —      $ 2,080

09/13/2006

   Floating    5.43      —        2,000

02/01/2008

   Floating    5.21      —        4,000

06/20/2008

   Floating    5.54      —        1,000

09/24/2007

   Floating    5.37      1,250      —  

07/01/2010

   Fixed    6.90      41      64

10/01/2010

   Fixed    7.00      51      82

12/01/2010

   Fixed    6.10      181      226

04/01/2014

   Fixed    2.54      473      669

04/01/2019

   Fixed    4.30      629      669
                   
         $ 2,625    $ 10,790
                   

 

41


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the difference between the contract rate on the advance and the current rate on the new advance. The following table is a summary of the scheduled principal payments for all advances:

 

Twelve Months Ending June 30

   Principal
Payments

2008

   $ 1,530

2009

     234

2010

     201

2011

     131

2012

     89

Thereafter

     440
      
   $ 2,625
      

 

Pursuant to collateral agreements with the FHLB, advances are secured by all the stock invested in the FHLB and certain qualifying first mortgage loans. As of June 30, 2007, the Bank could borrow a total of $31,959 in advances based on the amount of FHLB stock owned. Qualifying first mortgage loans available to secure FHLB advances totaled approximately $36,835 and $36,472 at June 30, 2007 and 2006, respectively.

 

NOTE 9—EMPLOYEE BENEFIT PLANS

 

The Bank has a 401(k) savings and retirement plan available for substantially all eligible employees. Under the plan, the Bank is required to match each participant’s voluntary contribution to the plan but not to exceed four percent of the individual’s compensation. Amounts charged to operations were $101, $84 and $71, for the years ended June 30, 2007, 2006 and 2005, respectively.

 

The Bank has adopted a Salary Continuation Plan (the “Plan”) to encourage Bank executives to remain employees of the Bank. In consideration of executives entering into noncompetition, nonsolicitation and confidentiality agreements with the Bank, the Bank entered these executives into the Plan. The Plan provides executives with 180 months (and in the event of the executive’s death, surviving beneficiary) salary continuation payments equal to a certain percentage of the executive’s prior three year average of total W-2 compensation, which has not been reduced for other Bank benefit programs. Vesting under the Plan commences at age 50 and is prorated until age 65. The executive can become fully vested in the salary continuation benefits upon termination of employment following a change in control of the Bank. Payments under the Plan commence on the first day of the month following the executive’s termination of employment (other than for termination for cause or suicide within two years of the date of entering into the Plan or any material misstatement of fact by the executive on any application for life insurance purchased by the Bank). For early termination benefits prior to age 65 for reasons other than death, disability, or change of control, interest is credited at an annual rate in a range of 6.0% to 7.5%, compounded monthly, on the unpaid balance of the 180 equal monthly salary continuation payments. The accrued liability for the salary continuation plan was $721 as of June 30, 2007 and $589 as of June 30, 2006. For the years ended June 30, 2007, 2006 and 2005, approximately $148, $137 and $111, respectively, have been charged to expense in connection with the Plan.

 

42


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

NOTE 10—INCOME TAXES

 

The provision for income taxes consists of the following for the years ended June 30:

 

     2007     2006    2005

Current income taxes

   $ 293     $ 259    $ 755

Deferred income taxes

     (20 )     9      80
                     
   $ 273     $ 268    $ 835
                     

 

The net deferred income tax asset consists of the following components at June 30:

 

     2007     2006  

Deferred tax assets:

    

Allowance for loan losses

   $ 280     $ 345  

Deferred compensation

     320       205  

Net unrealized securities losses

     398       411  

Intangibles

     78       67  

OREO writedowns

     55       —    

Accrued Expense

     9       —    

Deferred tax liabilities:

    

Depreciation

     (192 )     (175 )

Loan fees

     (141 )     (145 )

Prepaid expenses

     (88 )     (73 )

FHLB stock dividends

     (152 )     (142 )
                

Net deferred asset

   $ 567     $ 493  
                

 

The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate of 34% to statutory income before taxes consists of the following for the years ended June 30:

 

     2007     2006     2005  

Income taxes computed at the statutory rate on pretax income

   $ 522     $ 492     $ 949  

Tax exempt income

     (203 )     (181 )     (61 )

Cash surrender value income

     (52 )     (49 )     (52 )

Other

     6       6       (1 )
                        
   $ 273     $ 268     $ 835  
                        

 

NOTE 11—REGULATORY MATTERS

 

The Bank is subject to regulatory capital requirements administered by federal banking 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. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

 

43


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

 

As of fiscal year-end 2007, the Corporation met the definition of a small bank holding company and, therefore was exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies. At year-end 2007 and 2006, actual Bank capital levels (in millions) and minimum required levels were as follows:

 

     Actual     Minimum Required
For Capital
Adequacy Purposes
    Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  

June 30, 2007

               

Total capital (to risk weighted assets)

               

Bank

   $ 20.2    13.4 %   $ 12.1    8.0 %   $ 15.1    10.0 %

Tier 1 capital (to risk weighted assets)

               

Bank

     16.8    11.1       6.0    4.0       9.0    6.0  

Tier 1 capital (to average assets)

               

Bank

     16.8    8.3       8.2    4.0       10.2    5.0  

June 30, 2006

               

Total capital (to risk weighted assets)

               

Bank

   $ 20.0    13.0 %   $ 12.3    8.0 %   $ 15.4    10.0 %

Tier 1 capital (to risk weighted assets)

               

Bank

     16.4    10.7       6.2    4.0       9.2    6.0  

Tier 1 capital (to average assets)

               

Bank

     16.4    8.2       8.0    4.0       10.0    5.0  

 

As of the latest regulatory examination, the Bank was categorized as well capitalized. There are no conditions or events since that examination that management believes may have changed the Bank’s category.

 

The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. As of June 30, 2007 the Bank could, without prior approval, declare a dividend of approximately $366.

 

NOTE 12—COMMITMENTS WITH OFF-BALANCE SHEET RISK

 

The Bank is a party to commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments are agreements to lend to customers providing there are no violations of any condition established in the contract. Commitments to extend credit have a fixed expiration date or other termination clause. These instruments involve elements of credit and interest rate risk more than the amount

 

44


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

recognized in the statements of financial position. The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.

 

The Bank evaluates each customer’s credit on a case by case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. The amount of commitments to extend credit and the exposure to credit loss for non-performance by the customer was $23,470 and $21,393 as of June 30, 2007 and 2006, respectively. Of the June 30, 2007 commitments, $17,934 carried variable rates of interest ranging from 4.75% to 11.25% and $5,536 carried fixed rates of interest ranging from 4.37% to 9.25%. Of the June 30, 2006 commitments, $20,180 carried variable rates of interest ranging from 1.99% to 10.25% and $1,213 carried fixed rates of interest ranging from 4.50% to 8.00%. Financial standby letters of credit were $2,327 and $2,118 as of June 30, 2007 and 2006, respectively. In addition, commitments to extend credit of $4,762 and $4,695 as of June 30, 2007 and 2006, respectively, were available to checking account customers related to the overdraft protection program. Since some loan commitments expire without being used, the amount does not necessarily represent future cash commitments.

 

NOTE 13—FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

 

The following table shows the estimated fair value at June 30, 2007 and 2006, and the related carrying value of financial instruments:

 

     2007     2006  
     Carrying
Amount
    Estimated
Fair
Value
    Carrying
Amount
    Estimated
Fair
Value
 

Financial Assets

        

Cash and cash equivalents

   $ 5,558     $ 5,558     $ 5,941     $ 5,941  

Securities available-for-sale

     42,133       42,133       37,470       37,470  

Loans, net

     140,066       141,527       146,445       146,967  

Accrued interest receivable

     1,053       1,053       889       889  

Financial Liabilities

        

Demand and savings deposits

     (101,262 )     (101,262 )     (102,600 )     (102,600 )

Time deposits

     (68,329 )     (68,242 )     (64,708 )     (64,674 )

Short-term borrowings

     (9,330 )     (9,330 )     (5,049 )     (5,049 )

Federal Home Loan Bank advances

     (2,625 )     (2,495 )     (10,790 )     (10,768 )

Accrued interest payable

     (233 )     (233 )     (308 )     (308 )

 

For purposes of the above disclosures of estimated fair value, the following assumptions were used. Estimated fair value for cash and due from banks was considered to approximate cost. Estimated fair value of securities was based on quoted market values for the individual securities or equivalent securities. 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. Fair value for non-accrual loans was based on recent appraisals of the collateral or, if appropriate, using estimated discounted cash flows.

 

45


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

Fair value of core deposits, including demand deposits, savings accounts and certain money market deposits, was the amount payable on demand. Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at June 30, 2007 and 2006, for deposits of similar remaining maturities. Estimated fair value does not include the benefit that result from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. Fair value of short-term borrowings and accrued interest was determined to be the carrying amounts since these financial instruments generally represent obligations that are due on demand. Fair value of Federal Home Loan Bank advances was estimated using current rates at June 30, 2007 and 2006 for similar financing. The fair value of unrecorded commitments at June 30, 2007 and 2006 was not material.

 

NOTE 14—PARENT COMPANY FINANCIAL STATEMENTS

 

Condensed financial information of Consumers Bancorp. Inc. (parent company only) follows:

 

     June 30,
2007
   June 30,
2006

Condensed Balance Sheets

     

Assets

     

Cash

   $ 32    $ 544

Subordinated debenture receivable from subsidiary

     2,000      2,000

Other assets

     30      40

Investment in subsidiary

     16,776      16,524
             

Total assets

   $ 18,838    $ 19,108
             

Liabilities

     

Other liabilities

   $ 56    $ 6

Shareholders’ equity

     18,782      19,102
             

Total liabilities & shareholders’ equity

   $ 18,838    $ 19,108
             

 

     Year Ended
June 30, 2007
   Year Ended
June 30, 2006
    Year Ended
June 30, 2005

Condensed Statements of Income

       

Cash dividends from subsidiary

   $ 900    $ 3,192     $ 797

Other income

     160      —         43

Other expense

     143      82       59
                     

Income before income taxes and equity in undistributed net income of subsidiary

     917      3,110       781

Income tax expense (benefit)

     10      (26 )     —  
                     

Income before equity in undistributed net income of subsidiary

     907      3,136       781

Equity in undistributed net income (dividends in excess of net income) of subsidiary

     356      (1,958 )     1,174
                     

Net income

   $ 1,263    $ 1,178     $ 1,955
                     

 

46


Table of Contents

CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

     Year Ended
June 30, 2007
    Year Ended
June 30, 2006
    Year Ended
June 30, 2005
 

Condensed Statements of Cash Flows

      

Cash flows from operating activities

      

Net income

   $ 1,263     $ 1,178     $ 1,955  

Distributions in excess of (equity in undistributed net income) of Bank subsidiary

     (356 )     1,958       (1,174 )

Gain on sale of securities

     —         —         (31 )

Change in other assets and liabilities

     60       (26 )     (26 )
                        

Net cash flows from operating activities

     967       3,110       724  

Cash flows from investing activities

      

Sales of securities available-for-sale

     —         —         177  

Issuance of subordinated note

     —         (2,000 )     —    
                        

Net cash flows from investing activities

     —         (2,000 )     177  

Cash flows from financing activities

      

Dividend paid

     (547 )     (686 )     (772 )

Purchase of treasury stock

     (932 )     (47 )     (52 )
                        

Net cash used by financing activities

     (1,479 )     (733 )     (824 )
                        

Change in cash and cash equivalents

     (512 )     377       77  

Cash and cash equivalents, beginning of year

     544       167       90  
                        

Cash and cash equivalents, end of year

   $ 32     $ 544     $ 167  
                        

 

NOTE 15—OTHER COMPREHENSIVE INCOME

 

     2007     2006     2005  

Unrealized holding gains (losses) on available-for-sale securities

   $ 62     $ (970 )   $ 151  

Less reclassification adjustments for gains later recognized in income

     (24 )     —         (66 )
                        

Net unrealized gains (losses)

     38       (970 )     85  

Tax effect

     13       330       (29 )
                        

Other comprehensive income (loss)

   $ 25     $ (640 )   $ 56  
                        

 

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CONSUMERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share data)

 

NOTE 16—QUARTERLY FINANCIAL DATA (Unaudited)

 

     Interest
Income
   Net Interest
Income
   Net
Income
  

Earnings
per Share-Basic

and Diluted

2007

           

First Quarter

   $ 3,038    $ 2,099    $ 380    $ 0.18

Second Quarter

     3,080      2,130      380      0.18

Third Quarter

     3,041      2,066      304      0.14

Fourth Quarter

     3,179      2,131      199      0.10

2006

           

First Quarter

   $ 2,707    $ 2,109    $ 378    $ 0.18

Second Quarter

     2,856      2,109      316      0.15

Third Quarter

     2,888      2,057      297      0.14

Fourth Quarter

     2,936      2,083      187      0.09

 

The fourth quarter of 2007 includes a loss on other real estate owned of $156, or $103 after-tax, due to information obtained during the fourth quarter following the pending sale of an OREO property. The fourth quarter of 2006 includes provision for loan loss expense of $416, or $275 after-tax, due to information obtained during the fourth quarter related to two commercial real estate loan relationships.

 

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ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FIN ANCIAL DISCLOSURE

 

None.

 

ITEM 9A—CONTROLS AND PROCEDURES

 

The management of the Corporation is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. As of June 30, 2007, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure and controls procedures. Based on that evaluation, management concluded that the Corporation’s disclosure controls and procedures as of June 30, 2007 were effective in ensuring that information required to be disclosed in this Annual Report on Form 10-K were recorded, processed, summarized and reported within the time period required by the United States Securities and Exchange Commission’s rules and forms.

 

There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect the Corporation’s internal control over financial reporting.

 

ITEM 9B—OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item as to the Corporation’s directors and executive officers is set forth in the Corporation’s Proxy Statement dated September 13, 2007 under the captions “Election of Directors” on page 2, “Directors and Executive Officers” on pages 3 and 4, “The Board of Directors and its Committees” on pages 5 and 6, “Section 16(a) Beneficial Ownership Reporting Compliance” on page 14, and “Certain Transactions and Relationships” on page 14, and is incorporated herein by reference.

 

The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Required Disclosures of the corporation’s website (www.consumersbancorp.com). Copies of either of the Code of Ethics Policies are also available in print to share owners upon request, addressed to the Corporate Secretary at Consumers Bancorp, Inc., 614 East Lincoln Way, Minerva, Ohio 44657. The Corporation intends to post amendments to or waivers from its Code of Ethics on its website.

 

ITEM 11—EXECUTIVE COMPENSATION

 

The information required by this item is set forth in the Corporation’s Proxy Statement dated September 13, 2007 under the captions “Compensation of Directors” on page 7, “Executive Compensation” on page 9 and 10, “Defined Contribution Plan” on page 11, “Salary Continuation Program” on page 12, “Change of Control Agreements” on pages 12-13, “Compensation Committee Report on Compensation” on page 13, and “Executive & Compensation Committees Interlocks and Insider Participation” on page 13, and is incorporated herein by reference.

 

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item is set forth in the Corporation’s Proxy Statement dated September 13, 2007 under the caption “Security Ownership of Certain Beneficial Owners and Management” on pages 7-8, and is incorporated herein by reference.

 

ITEM 13—CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

The information required by this item is set forth in the Corporation’s Proxy Statement dated September 13, 2007 under the caption “Certain Transactions and Relationships” on page 14, and is incorporated herein by reference.

 

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this item is set forth in the Corporation’s Proxy Statement dated September 13, 2007 under the caption “Auditor’s Fees” on page 15, and is incorporated herein by reference.

 

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PART IV

 

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) 1. FINANCIAL STATEMENTS

 

The consolidated financial statements required in response to this Item are incorporated by reference to Item 8 of this Report.

 

(a) 2. FINANCIAL STATEMENT SCHEDULES

 

Not applicable

 

(a) 3. EXHIBITS

 

Exhibit Number   

Description of Document

3.1    Amended and Restated Articles of Incorporation of the Corporation. Reference is made to Exhibit A to the Definitive Proxy Statement of the Corporation filed September 28, 2000, which exhibit is incorporated herein by reference. Reference is also made to page 5 of the Definitive Proxy Statement of the Corporation filed September 17, 2001 for an amendment to the Amended and Restated Articles of Incorporation to increase the number of Consumers Bancorp, Inc.’s authorized common shares to two million five hundred thousand.
3.2    Amended and Restated Code of Regulations of the Corporation. Reference is made to Exhibit A to the Definitive Proxy Statement of the Corporation filed September 9, 2002, which is incorporated herein by reference.
4    Form of Certificate of Common Shares. Reference is made to Form 10-KSB of the Corporation filed September 26, 2002, which is incorporated herein by reference.
10.1    Salary Continuation agreement entered into with Mr. Muckley on March 1, 2005. Reference is made to Form 10-K of the Corporation filed September 15, 2005, which is incorporated herein by reference.
10.2    Form of Change of Control agreement entered into with Ms. Wood and Mr. Hugenberg on July 1, 2005. Reference is made to Form 10-K of the Corporation filed September 15, 2005, which is incorporated herein by reference.
10.3    Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23, 2005. Reference is made to Form 10-Q of the Corporation filed February 14, 2006, which is incorporated herein by reference.
11    Computation of Earnings per Share. Reference is made to this Annual Report on Form 10-K Note 1, page 33, which is incorporated herein by reference.
21    Subsidiaries of Consumers Bancorp, Inc. filed with this Annual Report on Form 10-K.
31.1    Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer and Treasurer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    CONSUMERS BANCORP, INC.
Date  September 13, 2007     By:   /S/    STEVEN L. MUCKLEY        
        President and Chief Executive Officer
      By:   /S/    RENEE K. WOOD        
        Chief Financial Officer and Treasurer

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of registrant and in the capacities indicated on September 13, 2007.

 

Signatures

     

Signatures

/S/    LAURIE L. MCCLELLAN        

Laurie L. McClellan

Chairman of the Board of Directors

   

/S/    STEVEN L. MUCKLEY        

Steven L. Muckley

President, Chief Executive Officer and Director

/S/    JOHN P. FUREY        

John P. Furey

Director

   

/S/    JAMES V. HANNA        

James V. Hanna

Director

/S/    DAVID W. JOHNSON        

David W. Johnson

Director

   

/S/    JAMES R. KIKO, SR.        

James R. Kiko, Sr.

Director

/S/    THOMAS M. KISHMAN        

Thomas M. Kishman

Director

   

/S/    HARRY W. SCHMUCK, JR.        

Harry W. Schmuck, Jr.

Director

/S/    JOHN E. TONTI        

John E. Tonti

Director

   

             

 

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EXHIBIT INDEX

 

Exhibit Number   

Description of Document

3.1    Amended and Restated Articles of Incorporation of the Corporation. Reference is made to Exhibit A to the Definitive Proxy Statement of the Corporation filed September 28, 2000, which exhibit is incorporated herein by reference. Reference is also made to page 5 of the Definitive Proxy Statement of the Corporation filed September 17, 2001 for an amendment to the Amended and Restated Articles of Incorporation to increase the number of Consumers Bancorp, Inc.’s authorized common shares to two million five hundred thousand.
3.2    Amended and Restated Code of Regulations of the Corporation. Reference is made to Exhibit A to the Definitive Proxy Statement of the Corporation filed September 9, 2002, which exhibit is incorporated herein by reference.
4    Form of Certificate of Common Shares. Reference is made to Form 10-KSB of the Corporation filed September 26, 2002, which is incorporated herein by reference.
10.1    Salary Continuation agreement entered into with Mr. Muckley on March 1, 2005. Reference is made to Form 10-K of the Corporation filed September 15, 2005, which is incorporated herein by reference.
10.2    Form of Change of Control agreement entered into with Ms. Wood and Mr. Hugenberg on July 1, 2005. Reference is made to Form 10-K of the Corporation filed September 15, 2005, which is incorporated herein by reference.
10.3    Lease Agreement entered into between Furey Holdings, LLC and Consumers National Bank on December 23, 2005. Reference is made to Form 10-Q of the Corporation filed February 14, 2006, which is incorporated herein by reference.
11    Computation of Earnings per Share. Reference is made to this Annual Report on Form 10-K Note 1, page 33, which is incorporated herein by reference.
21    Subsidiaries of Consumers Bancorp, Inc. Filed with this Annual Report on Form 10-K.
31.1    Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer and Treasurer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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