CONSUMERS BANCORP INC /OH/ - Quarter Report: 2017 December (Form 10-Q)

 

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(Dollars in thousands, except per share data)		December 31, 2017				June 30, 2017
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions		$	8,910			$	9,439
Federal funds sold and interest-bearing deposits in financial institutions			231				473
Total cash and cash equivalents			9,141				9,912
Certificates of deposit in other financial institutions			3,921				3,921
Securities, available-for-sale			135,738				142,086
Securities, held-to-maturity (fair value of $4,083 at December 31, 2017 and $4,329 at June 30, 2017)			4,061				4,259
Federal bank and other restricted stocks, at cost			1,425				1,425
Loans held for sale			814				1,252
Total loans			293,594				272,867
Less allowance for loan losses			(3,225	)			(3,086	)
Net loans			290,369				269,781
Cash surrender value of life insurance			9,201				9,065
Premises and equipment, net			13,137				13,398
Other real estate owned			57				71
Accrued interest receivable and other assets			2,418				2,713
Total assets		$	470,282			$	457,883
LIABILITIES
Deposits
Non-interest bearing demand		$	108,503			$	102,683
Interest bearing demand			55,056				54,123
Savings			152,659				151,154
Time			66,771				66,511
Total deposits			382,989				374,471
Short-term borrowings			22,507				23,986
Federal Home Loan Bank advances			17,188				12,320
Accrued interest and other liabilities			3,427				3,571
Total liabilities			426,111				414,348
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred stock (no par value, 350,000 shares authorized, none outstanding)			—				—
Common stock (no par value, 3,500,000 shares authorized; 2,854,133 shares issued as of December 31, 2017 and June 30, 2017)			14,630				14,630
Retained earnings			31,044				30,122
Treasury stock, at cost (124,489 and 130,606 common shares as of December 31, 2017 and June 30, 2017, respectively)			(1,576	)			(1,662	)
Accumulated other comprehensive income			73				445
Total shareholders’ equity			44,171				43,535
Total liabilities and shareholders’ equity		$	470,282			$	457,883

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		Three Months ended December 31,								Six Months ended December 31,
(Dollars in thousands, except per share amounts)		2017				2016				2017				2016
Interest income
Loans, including fees		$	3,437			$	3,022			$	6,665			$	6,206
Securities, taxable			459				377				970				779
Securities, tax-exempt			367				357				734				708
Federal funds sold and other interest bearing deposits			28				30				65				60
Total interest income			4,291				3,786				8,434				7,753
Interest expense
Deposits			253				183				501				353
Short-term borrowings			57				11				112				23
Federal Home Loan Bank advances			54				56				108				114
Total interest expense			364				250				721				490
Net interest income			3,927				3,536				7,713				7,263
Provision for loan losses			60				140				150				276
Net interest income after provision for loan losses			3,867				3,396				7,563				6,987
Non-interest income
Service charges on deposit accounts			301				314				609				644
Debit card interchange income			325				285				648				536
Bank owned life insurance income			68				63				136				112
Securities gains, net			—				22				38				125
Loss on disposition of other real estate owned			—				(3	)			-				(3	)
Other			145				116				280				231
Total non-interest income			839				797				1,711				1,645
Non-interest expenses
Salaries and employee benefits			1,966				1,790				3,776				3,528
Occupancy and equipment			465				478				920				930
Data processing expenses			147				145				295				290
Debit card processing expenses			188				149				368				282
Professional and director fees			122				146				239				278
FDIC assessments			46				46				92				101
Franchise taxes			84				84				168				168
Marketing and advertising			61				65				139				144
Telephone and network communications			75				76				157				157
Other			406				347				799				734
Total non-interest expenses			3,560				3,326				6,953				6,612
Income before income taxes			1,146				867				2,321				2,020
Income tax expense			489				145				735				397
Net income		$	657			$	722			$	1,586			$	1,623
Basic and diluted earnings per share		$	0.24			$	0.27			$	0.58			$	0.60

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		Three Months ended December 31								Six Months ended December 31,
		2017				2016				2017				2016
Net income		$	657			$	722			$	1,586			$	1,623
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized losses arising during the period			(631	)			(3,319	)			(527	)			(3,742	)
Reclassification adjustment for gains included in income			—				(22	)			(38	)			(125	)
Net unrealized losses			(631	)			(3,341	)			(565	)			(3,867	)
Income tax effect			215				1,136				193				1,315
Other comprehensive loss			(416	)			(2,205	)			(372	)			(2,552	)
Total comprehensive income (loss)		$	241			$	(1,483	)		$	1,214			$	(929	)

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(Dollars in thousands, except per share data)
		Three Months ended December 31,								Six Months ended December 31,
		2017				2016				2017				2016
Balance at beginning of period		$	44,271			$	44,020			$	43,535			$	43,793
Net income			657				722				1,586				1,623
Other comprehensive loss			(416	)			(2,205	)			(372	)			(2,552	)
6,321 shares issued associated with stock awards during the six months ended December 31, 2017			—				—				90				—
204 and 231 Dividend reinvestment plan shares associated with forfeited and expired restricted stock awards retired to treasury stock during the six months ended December 31, 2017 and 2016, respectively			—				—				—				—
Common cash dividends			(341	)			(327	)			(668	)			(654	)
Balance at the end of the period		$	44,171			$	42,210			$	44,171			$	42,210
Common cash dividends per share		$	0.125			$	0.12			$	0.245			$	0.24

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(Dollars in thousands)		Six Months Ended December 31,
		2017				2016
Cash flows from operating activities
Net cash from operating activities		$	3,484			$	2,152
Cash flow from investing activities
Securities available-for-sale
Purchases			(5,101	)			(17,368	)
Maturities, calls and principal pay downs			8,848				11,753
Proceeds from sales			1,586				3,383
Securities held-to-maturity
Purchases			—				(1,000	)
Principal pay downs			198				198
Net decrease in certificates of deposits in other financial institutions			—				990
Net increase in loans			(20,967	)			(9,255	)
Purchase of Bank owned life insurance			—				(2,000	)
Acquisition of premises and equipment			(129	)			(252	)
Sale of other real estate owned			71				7
Net cash from investing activities			(15,494	)			(13,544	)
Cash flow from financing activities
Net increase in deposit accounts			8,518				8,797
Net change in short-term borrowings			(1,479	)			223
Proceeds from Federal Home Loan Bank advances			5,400				18,325
Repayments of Federal Home Loan Bank advances			(532	)			(14,630	)
Dividends paid			(668	)			(654	)
Net cash from financing activities			11,239				12,061
Increase (decrease) in cash or cash equivalents			(771	)			669
Cash and cash equivalents, beginning of period			9,912				10,181
Cash and cash equivalents, end of period		$	9,141			$	10,850
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest		$	709			$	484
Federal income taxes			405				150
Non-cash items:
Transfer from loans to other real estate owned			57				10
Transfer from loans held for sale to portfolio			172				—
Issuance of treasury stock for stock awards			90				—
Expired and forfeited dividend reinvestment plan shares associated with restricted stock awards that were retired to treasury stock			4				4

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Note 1 – Summary of Significant Accounting Policies:

 

Nature of Operations: Consumers Bancorp, Inc. (the Corporation) is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, Consumers National Bank (the Bank), a broad array of products and services throughout its primary market area of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its primary market area.

 

Basis of Presentation: The consolidated financial statements for interim periods are unaudited and reflect all adjustments (consisting of only normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by accounting principles generally accepted in the United States of America. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s Form 10-K for the year ended June 30, 2017. The results of operations for the interim period disclosed herein are not necessarily indicative of the results that may be expected for a full year.

 

The consolidated financial statements include the accounts of the Corporation and the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

 

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

 

Reclassifications: Certain items in prior financial statements have been reclassified to conform to the current presentation. Any reclassifications had no impact on prior year net income or shareholders’ equity.

 

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

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The main provisions of ASU 2016-01 address the valuation and impairment of certain equity investments along with simplified disclosures about those investments. Equity securities with readily determinable fair values will be treated in the same manner as other financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on the Corporation's financial statements.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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

 

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

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Note 2 – Securities

 

 

 

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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

 

 

The income tax provision related to these net realized gains and losses amounted to $13 for the six months ended December 31, 2017 and $8 and $43 for the three and six months ended December 31, 2016.

 

The amortized cost and fair values of debt securities at December 31, 2017, by expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized mortgage obligations and the pooled trust preferred security are shown separately.

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

The following table summarizes the securities with unrealized losses at December 31, 2017 and June 30, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

(Dollars in thousands, except per share amounts)

 

 

 

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

 

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

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The unrealized losses within the securities portfolio as of December 31, 2017 have not been recognized into income because the decline in fair value is not attributed to credit quality, management does not intend to sell and it is not likely that management will be required to sell the securities prior to their anticipated recovery. The decline in fair value within the securities portfolio is largely due to changes in interest rates and the fair value is expected to recover as the securities approach maturity. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities.

 

Note 3 – Loans

Major classifications of loans were as follows:

 

 

Loans presented above are net of deferred loan fees and costs of $313 and $294 for December 31, 2017 and June 30, 2017, respectively.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2017:

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2017:

 

 

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

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2017. Included in the recorded investment in loans is $695 of accrued interest receivable.

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017. Included in the recorded investment in loans is $581 of accrued interest receivable.

 

 

The following table presents information related to unpaid principal balance, recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of December 31, 2017 and for the six months ended December 31, 2017:

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans for the three months ended December 31, 2017:

 

 

The following table presents information related to unpaid principal balance, recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of June 30, 2017 and for the six months ended December 31, 2016:

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

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

 

 

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2017 and June 30, 2017:

 

 

Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2017 by class of loans:

 

 

The above table of past due loans includes the recorded investment in non-accrual loans of $865 in the loans not past due category.

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2017 by class of loans:

 

 

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

 

Troubled Debt Restructurings:

As of December 31, 2017, the recorded investment of loans classified as troubled debt restructurings was $1,582 with $30 of specific reserves allocated to these loans. As of December 31, 2017, the Corporation had committed to lend an additional $192 to customers with outstanding loans that were classified as troubled debt restructurings. As of June 30, 2017, the recorded investment of loans classified as troubled debt restructurings was $1,740 with $33 of specific reserves allocated to these loans. As of June 30, 2017, the Corporation had committed to lend an additional $175 to customers with outstanding loans that were classified as troubled debt restructurings.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

During the three and six months ended December 31, 2017 and 2016, there were no loan modifications completed that were classified as troubled debt restructurings. There were no charge offs from troubled debt restructurings that were completed during the three and six month periods ended December 31, 2017 and 2016.

 

There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the three and six month periods ended December 31, 2017 and 2016. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

 

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic trends and other relevant information. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. Management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt and affirm the risk ratings for the loans and leases in their respective portfolio on an annual basis. The Corporation uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which are disclosed in the previous table within this footnote. Based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans was as follows:

 

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)