CONSUMERS BANCORP INC /OH/ - Quarter Report: 2007 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2007

Commission File No. 033-79130

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

(330) 868-7701

(Issuer’s telephone number)

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

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

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

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

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

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CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED DECEMBER 31, 2007

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PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements

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CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements.

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CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

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CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 1 – Summary of Significant Accounting Policies:

Basis of Presentation:

The consolidated financial statements for interim periods are unaudited and reflect all adjustments (consisting of only normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by accounting principles generally accepted in the United States of America. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Consumers Bancorp, Inc.’s Form 10-K for the year ended June 30, 2007. The results of operations for the interim period disclosed herein are not necessarily indicative of the results that may be expected for a full year.

The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiary, Consumers National Bank (the “Bank”). All significant inter-company transactions and accounts have been eliminated in consolidation.

Segment Information: Consumers Bancorp, Inc. is a bank holding company engaged in the business of commercial and retail banking, which accounts for substantially all of the revenues, operating income, and assets.

Earnings per Share: Earnings per common share are computed based on the weighted average common shares outstanding. The weighted average number of outstanding shares was 2,048,422 and 2,110,040 for the quarters ended December 31, 2007 and 2006, respectively. The weighted average number of outstanding shares was 2,055,134 and 2,123,624 for the six months ended December 31, 2007 and 2006, respectively. The Corporation’s capital structure contains no dilutive securities.

Adoption of New Accounting Standards: Effective July 1, 2007, the Corporation adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the Corporation’s Consolidated Financial Statements in accordance with FASB Statement 109. Upon adoption of FIN No. 48, no material reserves for uncertain tax positions were recorded. The adoption of this pronouncement had no material effect on the Corporation’s Consolidated Financial Statements.

The Corporation’s practice is to recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2007, the Corporation did not record an accrual for either interest or penalties related to unrecognized tax benefits.

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CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The Corporation files U.S. federal and Ohio state income tax returns. Tax years 2003-2006 remain open to examination by major taxing jurisdictions to which the Corporation is subject.

Note 2 – Securities

The estimated fair values of securities at December 31, 2007, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

At December 31, 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 $2,170, or 10.9%, of shareholders’ equity. Other than this issue, there were no other holdings of securities of any one issuer, other than the U.S. government and its agencies and corporations, with an aggregate book value which exceeds 10% of shareholders’ equity. As of December 31, 2007, any unrealized losses on securities have not been recognized into income because the issuer(s) securities are of high credit quality and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity dates.

Note 3 – Loans

Major classifications of loans were as follows:

For each of the periods listed above, all of the impaired loans were also included in non-accrual loans.

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CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 4 – Allowance for Loan Losses

A summary of activity in the allowance for loan losses for the six months ended December 31, 2007, and 2006, were as follows:

Note 5 – Federal Home Loan Bank Advances

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

Each fixed rate advance has a prepayment penalty equal to the present value of 100% of the lost cash flow based upon the difference between the contract rate on the advance and the current rate on the new advance. Each floating rate advance can be prepaid, without penalty, at each interest rate reset date. The $5 million advance with the maturity date of December 7, 2017 can be called, at the option of the FHLB, on December 7, 2010 and then quarterly thereafter until maturity.

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

(Dollars in thousands, except per share data)

General

The following is management’s analysis of the Corporation’s results of operations for the three and six month periods ended December 31, 2007, compared to the same period in 2006, and the consolidated balance sheets at December 31, 2007 compared to June 30, 2007. This discussion is designed to provide a more comprehensive review of the operating results and financial condition than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

Overview

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

Forward-Looking Statements

When used in this report (including information incorporated by reference in this report), the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate”, “project,” “believe” or similar expressions are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond the Corporation’s control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, the Corporation undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to: regional and national economic conditions becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality of assets; changes in levels of market interest rates which could reduce anticipated or actual margins; credit risks, competitive and regulatory factors affecting lending activities; government regulation, and material unforeseen changes in the financial condition or results of Consumers National Bank’s customers could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected.

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The risks and uncertainties identified above are not the only risks the Corporation faces. Additional risks and uncertainties not presently known to the Corporation or that the Corporation currently believes to be immaterial also may adversely affect the Corporation. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on the Corporation’s business, financial condition and results of operations.

Results of Operations

Three and Six Months Ended December 31, 2007 and 2006

Net Income

Net income increased by $96 and $156 for the three and six month periods ended December 31, 2007, respectively, as compared to the same periods last year. The increase in net income was mainly attributable to an increase in net interest income and service charges on deposit accounts along with a decline in provision for loan losses. Earnings per common share were $0.23 and $0.45 for the three and six month periods ended December 31, 2007, respectively, as compared to $0.18 and $0.36, respectively, for the same periods last year.

Return on average equity (ROE) and return on average assets (ROA) were 9.64% and 0.88%, respectively, for the second quarter of fiscal year 2008 compared to 7.61% and 0.75%, respectively, for the second quarter of fiscal year 2007.

Return on average equity (ROE) and return on average assets (ROA) were 9.43% and 0.87%, respectively, for the 2008 fiscal year-to-date period compared to 7.69% and 0.75%, respectively, for the same periods last year.

Net Interest Income

Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

The Corporation’s net interest margin for the three months ended December 31, 2007 was 4.47%, compared to 4.70% for the same period last year. Net interest income for the three months ended December 31, 2007 increased by $41, or 1.9%, to $2,171 from $2,130 for the same period last year. The increase in net interest income was primarily due to an increase in the yield on interest-earning assets from 6.74% for the three months ended December 31, 2006 to 6.90% for the same period in 2007, as well as an increase in average interest-earning assets. The increase in the yield on interest-earning assets was mainly due to a 30 basis point increase in the

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

yield on loans resulting from adjustable rate loans repricing to higher rates. The Corporation’s cost of funds increased from 2.75% for the three months ended December 31, 2006 to 3.25% for the three months ended December 31, 2007 mainly due to higher rates affecting the rates paid on short-term borrowings and time deposits.

The Corporation’s net interest margin for the six months ended December 31, 2007 was 4.57%, compared to 4.66% for the same period last year. Net interest income for the six months ended December 31, 2007 increased by $92, or 2.2%, to $4,321 from $4,229 for the same period last year. The increase in the net interest income was primarily due to an increase in the yield on interest-earning assets from 6.68% for the six months ended December 31, 2006 to 6.95% for the same period in 2007. The increase in the yield on interest-earning assets was mainly due to a 41 basis point increase in the yield on loans resulting from adjustable rate loans repricing to higher rates. The Corporation’s cost of funds increased from 2.70% for the six months ended December 31, 2006 to 3.17% for the six months ended December 31, 2007 mainly due to higher rates affecting the rates paid on short-term borrowings and time deposits.

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended December 31,

(In thousands, except percentages)

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Average Balance Sheets and Analysis of Net Interest Income for the Six Months Ended December 31,

(In thousands, except percentages)

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Provision for Loan Losses

The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses inherent in the Bank’s loan portfolio that have been incurred at each balance sheet date. The provision for loan losses decreased to $108 for the three month period ended December 31, 2007 compared to $172 for the same period last year. The provision for loan losses decreased to $208 for the six month period ended December 31, 2007 compared to $343 for the same period last year.

The lower provision for loan losses for the three and six month periods ended December 31, 2007 resulted mainly from a decrease in net charge-offs as well as a significant reduction in non-performing loans from the prior year. Net charge-offs and the net charge-off ratio were $71 and 0.10%, respectively, for the 2008 fiscal year-to-date period compared with $171 and 0.24%, respectively, for the same period last year. Non-performing loans were $1,178, $959 and $2,272 as of December 31, 2007, June 30, 2007 and December 31, 2006, respectively. Within the $1,178 of non-performing loans, it is anticipated during the third fiscal quarter of 2008 that the principal balance outstanding of $237 will be paid off in full by the borrower from the proceeds of the sale of the collateral. Non-performing loans as of December 31, 2006 included one large loan relationship that was secured by two multi-family rental unit properties that were sold during first fiscal quarter of 2008.

Given the recent uncertainty in the housing market, management completed a review of the Bank’s residential real estate mortgage portfolio to determine its exposure to subprime loans. The Bank, by definition, has not participated in either the subprime first mortgage market or in predatory lending. In addition, a detailed review of the Bank’s home equity portfolio was completed since this portfolio would be the most effected by a decline in home values. The Bank has been conservative in its home equity lending practices with most loans originated at 85% or less of the home value and a small number of loans originated at 90% of the home value with more stringent credit and debt-to- income qualifications. The provision for loan losses as of December 31, 2007 was considered sufficient by management for maintaining an appropriate allowance for loan losses.

Non-Interest Income

Non-interest income increased to $614 during the second quarter of fiscal year 2008, compared to $571 for the same period last year. Within non-interest income, service charges on deposits increased by $52 mainly due to an increase in overdraft charges. Other income declined by $10 mainly due to a decline of $45 in alternative investment income that was partially offset by a $25 increase in debit card interchange income.

Non-interest income increased to $1,175 during the first six months of fiscal year 2008, compared to $1,131 for the same period last year. Within non-interest income, service charges on deposits increased by $37 mainly due to an increase in overdraft charges. Other

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Management’s Discussion and Analysis of Financial Condition