CONSUMERS BANCORP INC /OH/ - Quarter Report: 2018 December (Form 10-Q)

 

---

---

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2018

 

Commission File No. 033-79130

 

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

OHIO	34-1771400
(State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization)

 

614 East Lincoln Way, P.O. Box 256, Minerva, Ohio	44657
(Address of principal executive offices)	(Zip Code)

 

(330) 868-7701

(Registrant’s telephone number)

 

Not applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
Emerging growth company ☐

         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

 

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

 

There were 2,733,845 shares of Registrant’s common stock, no par value, outstanding as of February 12, 2019.

 

---

---

 

---

 

 

CONSUMERS BANCORP, INC. FORM 10-Q QUARTER ENDED December 31, 2018

Table of Contents

 

Page Number (s)

Part I – Financial Information
Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2018 and June 30, 2018	1
Consolidated Statements of Income for the three and six months ended December 31, 2018 and 2017	2
Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2018 and 2017	3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended December 31, 2018 and 2017	4
Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2018 and 2017	5
Notes to the Consolidated Financial Statements	6-23
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	24-31
Item 3 – Not Applicable for Smaller Reporting Companies
Item 4 – Controls and Procedures	32
Part II – Other Information
Item 1 – Legal Proceedings	33
Item 1A – Not Applicable for Smaller Reporting Companies	33
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3 – Defaults Upon Senior Securities	33
Item 4 – Mine Safety Disclosure	33
Item 5 – Other Information	33
Item 6 – Exhibits	33
Signatures	34

 

---

 

(Dollars in thousands, except per share data)		December 31, 2018				June 30, 2018
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions		$	9,579			$	7,615
Federal funds sold and interest-bearing deposits in financial institutions			170				157
Total cash and cash equivalents			9,749				7,772
Certificates of deposit in other financial institutions			2,473				2,973
Securities, available-for-sale			143,833				144,028
Securities, held-to-maturity (fair value of $3,852 at December 31, 2018 and $4,048 at June 30, 2018)			3,824				4,024
Federal bank and other restricted stocks, at cost			1,459				1,459
Loans held for sale			1,068				1,448
Total loans			333,562				318,509
Less allowance for loan losses			(3,569	)			(3,422	)
Net loans			329,993				315,087
Cash surrender value of life insurance			9,472				9,335
Premises and equipment, net			13,473				13,315
Accrued interest receivable and other assets			2,611				3,178
Total assets		$	517,955			$	502,619
LIABILITIES
Deposits
Noninterest-bearing demand		$	111,888			$	107,919
Interest bearing demand			83,197				81,299
Savings			155,208				162,204
Time			92,237				78,541
Total deposits			442,530				429,963
Short-term borrowings			3,777				13,367
Federal Home Loan Bank advances			20,922				11,756
Accrued interest and other liabilities			3,830				3,772
Total liabilities			471,059				458,858
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, 2018 and June 30, 2018)			14,628				14,630
Retained earnings			35,154				32,342
Treasury stock, at cost (120,288 and 124,489 common shares as of December 31, 2018 and June 30, 2018, respectively)			(1,515	)			(1,576	)
Accumulated other comprehensive loss			(1,371	)			(1,635	)
Total shareholders’ equity			46,896				43,761
Total liabilities and shareholders’ equity		$	517,955			$	502,619

---

 

		Three Months ended December 31,								Six Months ended December 31,
(Dollars in thousands, except per share amounts)		2018				2017				2018				2017
Interest and dividend income
Loans, including fees		$	4,059			$	3,437			$	8,008			$	6,665
Securities, taxable			549				441				1,075				931
Securities, tax-exempt			399				367				774				734
Federal bank and other restricted stocks			22				18				44				39
Federal funds sold and other interest bearing deposits			34				28				57				65
Total interest and dividend income			5,063				4,291				9,958				8,434
Interest expense
Deposits			618				253				1,132				501
Short-term borrowings			14				57				28				112
Federal Home Loan Bank advances			57				54				125				108
Total interest expense			689				364				1,285				721
Net interest income			4,374				3,927				8,673				7,713
Provision for loan losses			(775	)			60				(660	)			150
Net interest income after provision for loan losses			5,149				3,867				9,333				7,563
Noninterest income
Service charges on deposit accounts			321				301				637				609
Debit card interchange income			369				325				727				648
Bank owned life insurance income			68				68				137				136
Securities gains (losses), net			(27	)			—				560				38
Other			213				145				378				280
Total noninterest income			944				839				2,439				1,711
Noninterest expenses
Salaries and employee benefits			2,099				1,966				4,074				3,776
Occupancy and equipment			515				465				1,003				920
Data processing expenses			157				147				307				295
Debit card processing expenses			189				188				383				368
Professional and director fees			171				122				341				239
FDIC assessments			38				46				76				92
Franchise taxes			88				84				177				168
Marketing and advertising			131				61				235				139
Telephone and network communications			64				75				136				157
Other			428				406				832				799
Total noninterest expenses			3,880				3,560				7,564				6,953
Income before income taxes			2,213				1,146				4,208				2,321
Income tax expense			364				489				686				735
Net income		$	1,849			$	657			$	3,522			$	1,586
Basic and diluted earnings per share		$	0.68			$	0.24			$	1.29			$	0.58

---

 

(Dollars in thousands)
		Three Months ended December 31,								Six Months ended December 31,
		2018				2017				2018				2017
Net income		$	1,849			$	657			$	3,522			$	1,586
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains (losses) arising during the period			1,787				(631	)			894				(527	)
Reclassification adjustment for (gains) losses included in income			27				—				(560	)			(38	)
Net unrealized gains (losses)			1,814				(631	)			334				(565	)
Income tax effect			(382	)			215				(70	)			193
Other comprehensive income (loss)			1,432				(416	)			264				(372	)
Total comprehensive income		$	3,281			$	241			$	3,786			$	1,214

---

 

(Dollars in thousands, except per share data)
		Three Months ended December 31,								Six Months ended December 31,
		2018				2017				2018				2017
Balance at beginning of period		$	43,970			$	44,271			$	43,761			$	43,535
Net income			1,849				657				3,522				1,586
Other comprehensive income (loss)			1,432				(416	)			264				(372	)
4,201 and 6,321 shares issued associated with stock awards during the six months ended December 31, 2018 and 2017, respectively			—				—				61				90
204 Dividend reinvestment plan shares associated with forfeited and expired restricted stock awards retired to treasury stock during the six months ended December 31, 2017			—				—				(2	)			—
Common cash dividends			(355	)			(341	)			(710	)			(668	)
Balance at the end of the period		$	46,896			$	44,171			$	46,896			$	44,171
Common cash dividends per share		$	0.13			$	0.125			$	0.26			$	0.245

---

 

(Dollars in thousands)		Six Months Ended December 31,
		2018				2017
Cash flows from operating activities
Net cash from operating activities		$	4,043			$	3,484
Cash flow from investing activities
Securities available-for-sale
Purchases			(13,979	)			(5,101	)
Maturities, calls and principal pay downs			9,746				8,848
Proceeds from sales			4,898				1,586
Securities held-to-maturity
Principal pay downs			200				198
Net decrease in certificate of deposit in other financial institutions			500				—
Net increase in loans			(14,321	)			(20,967	)
Acquisition of premises and equipment			(543	)			(129	)
Sale of other real estate owned			—				71
Net cash from investing activities			(13,499	)			(15,494	)
Cash flow from financing activities
Net increase in deposit accounts			12,567				8,518
Net change in short-term borrowings			(9,590	)			(1,479	)
Proceeds from Federal Home Loan Bank advances			9,200				5,400
Repayments of Federal Home Loan Bank advances			(34	)			(532	)
Dividends paid			(710	)			(668	)
Net cash from financing activities			11,433				11,239
Increase (decrease) in cash or cash equivalents			1,977				(771	)
Cash and cash equivalents, beginning of period			7,772				9,912
Cash and cash equivalents, end of period		$	9,749			$	9,141
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest		$	1,261			$	709
Federal income taxes			395				405
Non-cash items:
Transfer from loans to other real estate owned			—				57
Transfer from loans held for sale to portfolio			75				172
Issuance of treasury stock for stock awards			59				90
Expired and forfeited dividend reinvestment plan shares associated with restricted stock awards that were retired to treasury stock			—				4

---

 

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, 2018. 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 the revenues, operating income, and assets. Accordingly, all its operations are recorded in one segment, banking.

 

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

 

Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, 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 in the guidance, that are SEC filers for fiscal years and for interim periods within 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 is in the midst of gathering critical data to evaluate the impact. However, it is too early to estimate the impact.

 

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). This 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. The Corporation has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Corporation’s consolidated condensed statements of financial condition. The Corporation expects the new guidance to require these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. Therefore, the Corporation’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Corporation’s consolidated condensed statements of financial condition, along with our regulatory capital ratios. The definition of a lease and the cash flows required to be evaluated will change. The Corporation continues to evaluate the extent of the potential impact the new guidance will have on the Corporation’s consolidated financial statements. At December 31, 2018, the Corporation had contractual operating lease commitments of approximately $500, before considering renewal options that are generally present.

---

 

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 benefit related to net realized losses amounted to $6 for the three months ended December 31, 2018. The income tax provision related to the net realized gains amounted to $118 and $13 for the six-month periods ended December 31, 2018 and 2017, respectively.

 

The amortized cost and fair values of debt securities at December 31, 2018, 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 are shown separately.

 

 

The following table summarizes the securities with unrealized losses at December 31, 2018 and June 30, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

 

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

 

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

 

The unrealized losses within the securities portfolio as of December 31, 2018 have not been recognized into income because the decline in fair value is not attributed to credit quality and 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:

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2018:

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2018:

 

 

 

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 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, 2018. Included in the recorded investment in loans is $784 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, 2018. Included in the recorded investment in loans is $732 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, 2018 and for the six months ended December 31, 2018:

 

 

 

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, 2018:

 

 

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, 2018 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 the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2018 and June 30, 2018:

 

 

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.

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans:

 

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

The above table of past due loans includes the recorded investment in non-accrual loans of $184 in the 90 days or greater category and $715 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, 2018 by class of loans:

 

 

The above table of past due loans includes the recorded investment in non-accrual loans of $249 in the 30-59 days, $80 in the 90 days or greater category and $761 in the loans not past due category.

 

Troubled Debt Restructurings (TDR):

The Corporation has certain loans that have been modified in order to maximize collection of loan balances. A modified loan is classified as a TDR if, for economic reasons, management grants a concession to the original terms and conditions of the loan to a borrower who is experiencing financial difficulties that it would not have otherwise considered.

 

At December 31, 2018 and June 30, 2018, the Corporation had $1,251 and $1,269, respectively, of loans classified as TDRs which are included in impaired loans above. As of December 31, 2018 and June 30, 2018, the Corporation had committed to lend an additional $112 and $174, respectively, to customers with outstanding loans that were classified as troubled debt restructurings. At December 31, 2018 and June 30, 2018, the Corporation had $7 and $29, respectively, of specific reserves allocated to these loans.

 

During the three and six-month periods ended December 31, 2018 and 2017, 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, 2018 and 2017.

 

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, 2018 and 2017. A loan is considered 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 affirms 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.

 

 

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

 

(Dollars in thousands, except per share amounts)

 

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.

 

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: