<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
Commission file number
033-79130 CONSUMERS BANCORP, INC.
-----------------------
(Exact name of Registrant as specified in its charter)
OHIO 34-1771400
---- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
614 E. Lincoln Way
Minerva, Ohio 44657
- ------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 330-868-770l
------------
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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $3.33 Stated Value Outstanding at February 5, 1999
715,745 Common Shares
<PAGE> 2
CONSUMERS BANCORP, INC.
FORM 10-QSB
QUARTER ENDED DECEMBER 31, 1998
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Interim financial information required by Rule 10-01 of Regulation S-X (17 CFR
Part 210) is included in this Form 10-QSB as referenced below:
<TABLE>
<CAPTION>
Page
Number (s)
----------
<S> <C>
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Condensed Consolidated Statements of Changes in
Shareholders' Equity 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-19
PART II - OTHER INFORMATION
Item 3 - Submission of Matters to a Vote of Security Holders 20
Item 4 - Other Information 20
Item 5 - Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
<PAGE> 3
CONSUMERS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
DEC. 31, JUNE 30,
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,541 $ 4,802
Federal funds sold 8,650 7,725
Securities, available for sale 22,344 19,248
Loans, net 93,085 93,906
Cash surrender value of life insurance 1,964 1,476
Premises and equipment, net 2,834 2,781
Accrued interest and other assets 1,195 1,683
--------- ---------
Total Assets $ 135,613 $ 131,621
========= =========
LIABILITIES
Deposits:
Noninterest bearing, demand $ 21,237 $ 17,713
Interest-bearing demand 11,381 9,828
Savings 42,220 42,324
Time 45,592 46,858
--------- ---------
Total deposits 120,430 116,723
Federal Home Loan Bank advances 3,037 3,113
Accrued and other liabilities 1,359 1,654
--------- ---------
Total Liabilities 124,826 121,490
SHAREHOLDERS' EQUITY
Common stock ($3.33 stated value, 720,000 shares
authorized and issued) 2,400
2,400
Capital surplus 2,427 2,400
Retained earnings 5,958 5,389
Treasury stock, at cost (4,255 at Dec.31, and
4,250 at June 30) (136) (108)
Unrealized gain on securities available for sale 138 50
--------- ---------
Total Shareholders' Equity 10,787 10,131
--------- ---------
Total Liabilities and Shareholders' Equity $ 135,613 $ 131,621
========= =========
</TABLE>
See the Notes to the Consolidated Financial Statements
1
<PAGE> 4
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1988 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,594 $4,504 $2,302 $2,037
Investments & mortgage-backed
securities:
Taxable 578 473 283 279
Tax exempt 56 53 28 25
Federal funds sold 172 88 74 71
------ ------ ------ ------
Total interest income 5,400 5,118 2,687 2,412
Interest expense:
Deposits 2,054 2,021 998 955
FHLB advances 100 98 49 27
------ ------ ------ ------
Total interest expense 2,154 2,119 1,047 982
Net interest income 3,246 2,999 1,640 1,430
Provision for loan losses (Note 4) 153 85 115 18
------ ------ ------ ------
Net interest income after provision
for loan losses 3,093 2,914 1,525 1,412
Other income:
Service charges on deposits 252 194 123 106
Other income 165 100 96 56
------ ------ ------ ------
Total other income 417 294 219 162
Other expenses:
Salaries and Employee Benefits 1,135 1,038 587 496
Occupancy 360 288 181 143
Other non-interest expense 687 656 354 347
------ ------ ------ ------
Total other expenses 2,182 1,982 1,122 986
Income before income taxes 1,328 1,226 621 588
Provision for income taxes 452 418 211 159
------ ------ ------ ------
Net income $ 876 $ 808 $ 411 $ 429
====== ====== ====== ======
Basic earnings per share $ 1.22 $ 1.13 $ .57 $ .60
====== ====== ====== ======
</TABLE>
See the Notes to the Consolidated Financial Statements
2
<PAGE> 5
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Net Income $876 $808
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized gains arising
during the period 88 86
---- ----
Comprehensive income $964 $894
==== ====
</TABLE>
See the Notes to the Consolidated Financial Statements
3
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Balance at beginning of period $ 10,131 $ 8,947
Net income 876 808
Cash dividends $0.43 and $0.31
per share, respectively (307) (323)
Treasury stock purchases (49) -0-
Treasury stock sales 48 -0-
Unrealized gain on investment securities available for sale 88 86
-------- --------
Balance at end of period $ 10,787 $ 9,518
======== ========
</TABLE>
See the Notes to the Consolidated Financial Statements
4
<PAGE> 7
CONSUMERS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 876 $ 808
Adjustments to reconcile net income to net
cash from operating activities 539 269
------- -------
Net cash from operating activities 1,415 1,077
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (5,686) (1,478)
Sales -0- 999
Maturities and principal paydowns 2,618 1,420
Net increase in federal funds sold (925) (450)
Net decrease (increase) in loans 671 (5,507)
Acquisition of premises and equipment (232) (640)
Purchase of life insurance policies (445) (170)
------- -------
Net cash from investing activities (3,999) (5,826)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 3,707 3,701
Proceeds from FHLB advances -0- 650
Repayments of FHLB advances (76) (59)
Dividends paid (307) (323)
Purchase of treasury stock (49) -0-
Sale of treasury 48 -0-
------- -------
Net cash from financing activities 3,323 3,969
------- -------
Increase (decrease) in cash and cash equivalents 739 (780)
Cash and cash equivalents, beginning of year 4,802 5,047
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,541 $ 4,267
======= =======
</TABLE>
See the Notes to the Consolidated Financial Statements
5
<PAGE> 8
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands of dollars, except per share amounts)
NOTE 1 - 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.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated balance sheets of the
Corporation at December 31, 1998, and its income and cash flows for the periods
presented. The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances.
The Annual Report for the Corporation for the year ended June 30, 1998, contains
consolidated financial statements and related notes which should be read in
conjunction with the accompanying consolidated financial statements.
Industry 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.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, 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, fair values of financial
instruments, and status of contingencies are particularly subject to change.
Cash Reserves: Consumers National Bank is required by the Federal Reserve to
maintain reserves consisting of cash on hand and noninterest-bearing balances on
deposit with the Federal Reserve Bank. The required reserve balance at December
31, 1998 was $849 and at June 30, 1998 was $846.
Securities: Securities are classified into held-to-maturity and
available-for-sale categories. Held-to-maturity securities are those that the
Bank has the positive intent and ability to hold to maturity, and are reported
at amortized cost. Available-for-sale securities are those that the Bank 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 as a separate component of equity, net of
tax.
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.
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
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.
6
<PAGE> 9
CONSUMERS BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
(In thousands of dollars, except per share amounts.)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, 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 inherent risks 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, consumer, and credit card loans, and 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. No loans were determined to be
impaired, as of and for the periods ended December 31, 1998 and June 30, 1998.
Cash Surrender Value of Life Insurance: The Bank has purchased single-premium
life insurance policies to insure the lives of the participants in the salary
continuation plan. As of December 31, 1998, the Bank has total purchased
policies of $1,785 (total death benefit $5,408) with a cash surrender value of
$1,964. As of June 30, 1998, the Bank had total purchased policies of $1,340
(total death benefit $3,967) with a cash surrender value of $1,476. The amount
included in income (net of policy commissions and mortality costs) was
approximately $48 and $40 for the periods ended December 31, 1998 and 1997.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the assets' useful lives
on an accelerated basis, except for buildings for which the straight-line basis
is used.
Other Real Estate Owned: Real estate properties, other than Company premises,
acquired through, or in lieu of, loan foreclosure are initially recorded at fair
value 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 in other expenses. There were no properties held as other real estate
owned at December 31, 1998 and June 30, 1998.
Profit Sharing Plan: The Company maintains a 40l(k) profit sharing plan covering
substantially all employees. Contributions are made and expensed annually.
Income Taxes: The Company 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 bases 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.
Earnings and Dividends Declared per Share: Earnings per common share are
computed based on the weighted average common shares outstanding. The number of
outstanding shares used was 715,745 and 716,808 for the periods ending December
31, 1998 and June 30, 1998. The Company's capital structure contains no dilutive
securities. All prior period per share information has been restated for the
effect of the stock split.
7
<PAGE> 10
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
(In thousands of dollars, except per share amounts.)
The Company declared a three-for-one stock split during the year ended June 30,
1998. In conjunction with the stock split, the Company changed the stated value
of common stock from $10.00 to $3.33 and issued 480,000 shares of common stock.
As of December 31, 1998 the Company has 720,000 shares of common stock
authorized and issued.
Statement of Cash Flows: For purposes of reporting cash flows, cash and cash
equivalents include the Company's cash on hand and due from banks. The company
reports net cash flows for customer loan transactions and deposit transactions.
For the six months ended December 31, 1998 and 1997, the Corporation paid $
2,494 and $ 2,146 in interest and $470 and $475 in income taxes.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of the securities available for
sale, as presented on the consolidated balance sheet at December 31, 1998, and
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and Federal Agencies $ 12,601 $ 224 $ -0- $ 12,825
Obligations of states and
political subdivisions 2,276 65 (15) 2,326
Mortgage-backed securities 6,480 8 (73) 6,415
Other securities 778 -0- -0- 778
--------------------------------------------------
Total investment securities $ 22,135 $ 297 $ (88) $ 22,344
==================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
-------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and Federal Agencies $ 13,112 $ 93 $ (4) $ 13,201
Obligations of states and
political subdivisions 2,366 50 (4) 2,412
Mortgage-backed securities 2,916 -0- (61) 2,855
Other securities 780 -0- -0- 780
--------------------------------------------------
Total investment securities $ 19,174 $ 143 $ (69) $ 19,248
==================================================
</TABLE>
8
<PAGE> 11
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
(In thousands of dollars, except per share amounts.)
During the six month period ended December 31, 1998 and December 31, 1997, there
were no sales or transfer of securities classified as available for sale.
The amortized cost and estimated fair value of debt securities at December 31,
1998, 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.
<TABLE>
<CAPTION>
December 31, 1998
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Securities available for sale:
Due in one year or less $ 2,020 $ 2,032
Due after one year through five years 10,022 10,238
Due after five years through ten years 2,658 2,713
Due after ten years 294 285
------- -------
Total $14,994 $15,268
Mortgage-backed securities 6,480 6,415
Equity Securities 661 661
------- -------
661
Total $22,135 $22,344
======= =======
</TABLE>
At December 31, 1998, there were no 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.
9
<PAGE> 12
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
(In thousands of dollars)
Note 3 - Loans
- --------------
Total loans as presented on the balance sheets are comprised of the following
classifications:
Dec. 31, 1998 June 30, 1998
------------- -------------
Real estate - residential mortgage $ 41,915 $ 44,072
Real estate - construction 1,143 1,609
Commercial, financial, and agricultural 37,536 36,449
Personal and other 13,818 13,116
Unearned Fees and costs (192) (195)
Allowance for possible loan losses (1,135) (1,145)
---------- ----------
Net Loans $ 93,085 $ 93,906
========== ==========
No loans were determined to be impaired at either December 31, 1998, or June 30,
1998, nor were there any such loans during the period then ended. At December
31, 1998, loans in non-accrual status totaled $ 372 at December 31, 1998 and at
June 30, l998, totaled $ 43. There was no other real owned as of December 31,
1998, or June 30, 1998.
Note 4 - Allowance for Loan Losses
- ----------------------------------
A summary of activity in the allowance for loan losses for the six months ended
December 31, 1998, and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(in thousands of dollars) 1998 1997
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,145 $ 1,060
Loans charged off (185) (32)
Recoveries of loans previously charged off 22 12
Provision 153 85
---------- ----------
Balance at end of period $ 1,135 $ 1,125
========== ==========
</TABLE>
10
<PAGE> 13
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share data)
GENERAL
The following is managements analysis of the Corporation's results of operations
as of and for the three month and six month periods ended December 31, 1998,
compared to the same period in 1997, and the consolidated balance sheets at
December 31, 1998 compared to December 31, 1997. 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.
RESULTS OF OPERATIONS
Net Income. The Corporation earned net income of $411 for the three months ended
December 31, 1998 compared to $429 for the three months ended December 31, 1997.
This decrease was primarily due to an increase in income tax expense and an
increase in other expenses. Net income increased $68 or 8.4% for the six months
ended December 31, 1998 as compared to the comparable period in 1997. The
increase is due to an increases in net interest income and all other income
partially offset by increases in other expense.
Net Interest Income. Net interest income totaled $1,640 for the three months
ended December 31, 1998 compared to $1,430 for the three months ended December
31, 1998, an increase of $210 or 14.7%. Net interest income totaled $3,246 for
the six months ended December 31, 1998 compared to $2,999 for the six months
ended December 31, 1997, an increase of $247 or 8.2%. The additional net
interest income was primarily due to the increase in interest and fees on loans
resulting from an increase in average loans outstanding, and an increase in the
yield on loans, which was partially offset by increases in interest expense due
to an increase in average interest bearing liabilities during the year.
Interest and fees on loans increased $265, or 13%, to $2,302 for the three
months ended December 31, 1998 from $2,037 for the three months ended December
31, 1997. Interest and fees on loans increased $282 or 5.5% for the six months
ended December 31, 1998 as compared to the six months ended December 31, 1997.
The increase in interest income was due to higher average loans outstanding. The
yield on average loans outstanding for the three month and six month periods
ended December 31, 1998 was 9.58% and 9.61% respectively.
Interest earned on taxable and tax-exempt securities totaled $311 for the three
month period ended December 31, 1998 compared to $304 for the three month period
ended December 31, 1997. The increase was primarily the result of significantly
higher average balances due to securities purchases made during the past three
months, caused by somewhat slower loan growth. Interest income on federal funds
sold increased by $3 for the three months ended December 31,
11
<PAGE> 14
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share data)
1998, due to an increase in the average out standings. As loan growth has
recently slowed, excess funds have been maintained in short term investments
such as federal funds sold and are gradually being invested in various
securities as opportunities arise, with consideration given to future funding
needs.
Interest paid on deposits increased $43, or 4.5% for the three months and $35 or
1.7% for the six months ended December 31, 1998 compared to the three months and
six months ended December 31, 1997 respectively. The increase was primarily a
result of the increase in average interest-bearing deposits during the period
and was partially offset by a decline in interest rates.
Interest paid on FHLB Advances totaled $49 for the three months ended December
31, 1998 as compared to $27 for the three months ended December 31, 1997.
Interest paid on advances for the six months ended December 31, 1998 was $100 as
compared to $97 for the comparable period in 1997. The change was a result of an
increase in the average level of borrowings from 1997 to 1998 as well as an
increase in the cost of borrowings.
Provision for Loan Losses. The Corporation maintains an allowance for loan
losses in an amount which, in managements judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. While management
utilizes its best judgment and information available, the ultimate adequacy of
the allowance is dependent upon a variety of factors, including the performance
of the Corporation's loan portfolio, the economy, changes in collateral values
and interest rates, and the view of the regulatory authorities toward loan
classifications. The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses, after net charge-offs
have been deducted, to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio. The amount of the
provision is based on management's monthly review of the loan portfolio and
consideration of such factors as historical loss experience, economic
conditions, changes in the size and composition of the loan portfolio, and
specific borrower considerations, including the ability to repay the loan and
the estimated value of the underlying collateral.
The provision for loan losses for the three months ended December 31, 1998
totaled $115 as compared to $18 for the year ended December 31, 1997, an
increase of $97, or 538.9%. The allowance for loan losses totaled $1,135, or
1.20% of total loans receivable at December 31, 1998, compared with $1,145, or
1.20% of total loans receivable at June 30, 1998. The increase in the provision
is reflective of the fact that the Corporation provided for net charge-offs
during the period. Net charge-offs to average loans increased from .04% for the
six month period ended December 31, 1997 to .34% for the six month period ended
December 31, 1998. This increase results primarily from the charge-off of two
credits. Notwithstanding the charge-off history, management believes it is
prudent to continue to increase the allowance for loan losses as total
12
<PAGE> 15
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands of dollars, except per share data)
loans increase. Accordingly management anticipates it will continue its
provisions to the allowance for loan losses whenever loan growth occurs.
Other Income. Other income primarily includes service charges on deposits and
other miscellaneous income. Other income of $219 for the three months ended
December 31, 1998 represented an increase of $57, or 35.2% compared to the $162
of other income for the three months ended December 31, 1997. The increase was
primarily due to an increase in service charge income on deposits resulting from
adjustments made to the deposit service fee schedule, as well as the growth in
deposit balances from the prior period. Increased income has also been realized
from the increase in cash surrender value of life insurance, and fee income
related to facilitating the origination of long term fixed rate loans for a
third party. Management has elected not to make long term fixed rate mortgage
loans on its balance sheet, and has entered into an arrangement whereby it
assists a third party originate long term fixed rate loans by taking loan
applications, and assisting in the completion of certain loan documents for
which it is paid a fee. The arrangement allows the Corporation to meet its
customers' needs by offering an opportunity to obtain long term fixed rate
financing on a primary residence and is a source of additional non-interest
income.
Other expense. Other expense totaled $1,122 for the three months ended December
31, 1998 compared to $986 for the three months ended December 31, 1997, an
increase of $136, or 13.8%. Other expense increased $200 or 10.1% for the six
month period ended December 31, 1998 as compared to 1997. Increases in salaries
and benefits, occupancy, and other expenses were the primary reason for the
increase.
Salary and benefits expense increased $91, or 18.3% and $97 or 9.3% for the
three and six month periods ended December 31, 1998 as compared to December 31,
1997, respectively. The increase is the result of normal annual merit increases
and the addition of new employees to facilitate growth. The increase in
occupancy expense of $38 and $72 for the three and six month periods ended
December 31, 1998 as compared to December 31, 1997, respectively, was primarily
due to the depreciation and maintenance associated with two major projects which
added to the net premises and equipment balance sheet totals. A large addition
was made to the main office in Minerva to increase space for loan department and
management offices. In addition, ATM machines were installed at four of the
branch office locations during the second quarter of the last fiscal year. The
increase in other expense was attributable to a general increase in various
overhead categories due to continued growth of the Corporation.
Income tax expense. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. The provision for
income taxes totaled $211 for the three months ended December 31, 1998 compared
to $159 for the three months ended December 31, 1997, an
13
<PAGE> 16
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands of dollars, except per share data)
increase of $52, or 32.7%. The effective tax rates was 34.0% for the three and
six month periods ended December 31, 1998 and 1997 respectively.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $135,613 compared to $131,621 at June 30,
1998, an increase of $3,992, or 3.0%. The increase in total assets was primarily
due to increases in mortgage backed securities funded by deposit growth. Loan
receivables decreased $821 from $93,906 at June 30, 1998 to $93,085 at December
31, 1998. Personal loan totals increased for the period while residential real
estate loans decreased $2,157, or 4.9%, real estate construction loans decreased
$466, or 29%, and commercial, financial, and agricultural loans increased
$1,087, or 3.0%. The decreases are caused by customer refinances to take
advantage of the current low rates available on many real estate loans. Loan
growth should show a gradual increase as these refinancings slow in the near
future. Excess funds have been shifted to investments in available for sale
securities, which have increased from $19,248 at June 30, 1998 to $22,344 at
December 31, 1998, or 16.1%.
Total shareholders equity increased from $10,131 at June 30, 1998, to $10,787 at
December 31, 1998. This increase is a combination of net income for the period
along with an increase in the unrealized gain on available for sale securities,
offset by purchases of treasury stock and cash dividends paid.
ASSET AND LIABILITY MANAGEMENT
Management considers the asset position of the Corporation to be sufficiently
liquid to meet normal operating needs and conditions. The Corporation's earning
assets are divided primarily between loans and investment securities, with any
excess funds placed in federal funds sold on a daily basis. Management
continually strives to obtain the best mix of loans and investments to both
maximize yield and insure the soundness of the portfolio, as well as to provide
funding for loan demand as needed.
The Corporation groups its loan portfolio into four major categories: commercial
loans, real estate loans, personal loans, and credit card outstanding balances.
Commercial loans are comprised of both variable rate notes subject to daily
interest rate changes based on the prime rate, and fixed rate notes having
maturities of generally not greater than five years. Commercial loans have shown
impressive growth recently, with outstanding balances up by $1,087, or 3.0%
since June 30, 1998. This is mainly due to the Corporation's ability to tailor
loan programs to the specific requirements of the business, professional, and
agricultural customers in its market area. The Corporation's real estate loan
portfolio consists of three basic segments: conventional mortgage loans having
fixed rates and maturities not exceeding fifteen years, variable rate home
14
<PAGE> 17
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands of dollars, except per share data)
equity lines of credit, and fixed rate loans having maturity or renewal dates
that are less than the scheduled amortization period. Real estate loan growth
has slowed through the past two year period after several years of substantial
growth. Competition is very heavy in the Corporation's market for these types of
loans, both from local and national lenders. In 1997 the Corporation became
affiliated with the Community Mortgage Network, which is a program that allows
the Corporation to offer very attractive mortgage loan options to its customers.
The personal loans offered by the Corporation are generally written for periods
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. Credit card receivables are made up of charge card
account holders who are mainly established customers of the Corporation, with
the Corporation maintaining a very conservative policy on card limits and new
accounts. Personal loans and credit card receivables have remained at relatively
the same levels during the past full fiscal year.
Funds not allocated to the Corporation's loan portfolio are invested in various
securities having diverse maturity schedules. The majority of the Corporation's
investments are held in U.S. Treasury securities or other securities issued by
U.S. Government agencies, and to a lesser extent, investments in tax free
municipal bonds. Net interest yields for the investment account were 5.64% and
5.80% respectively for the three month and six month periods ended December 31,
1999.
The Corporation offers several forms of deposit programs to its customers. The
rates offered by the Corporation and the fees charged for them are competitive
with others available currently in the market area. Time deposit interest rates
have continued their downward trend this period that began during the middle of
the last fiscal year. These rates had been relatively high for some time as many
financial institutions attempted to attract and keep new deposits to fund loan
growth, but as this growth has slowed, rates have slipped lower as well.
Interest rates on demand deposits and savings deposits continue to fall to low
historical levels. As a result of the current rate structure on deposits, growth
has been flat recently, with some loss of deposit base during the current
quarter.
Jumbo time deposits (those with balances of $100 and over) have decreased from
$10,662 at June 30, 1998 to $9,814 December 31, 1998, or 8.6%. These deposits
are monitored closely by the Corporation, priced on an individual basis, and
often matched with a corresponding investment instrument. The Corporation has on
occasion used a fee paid broker to obtain these types of funds from outside its
normal service area as another alternative for its funding needs. These deposits
are not relied upon as a primary source of funding however, and the Corporation
can foresee no dependence on these types of deposits for the near term.
15
<PAGE> 18
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands of dollars, except per share data)
To provide an additional source of loan funds, the Corporation has entered into
an agreement with the Federal Home Loan Bank (FHLB) of Cincinnati to obtain
matched funding for loans. Repayment is made either over a fifteen year period,
or over a three year period with a balloon payment. At December 31, 1998, these
FHLB balances totaled $3,037. The Corporation considers this agreement with the
FHLB to be a good source of loan funding, secondary to its deposit base.
A monthly rate sensitivity report is used to determine the effect of interest
rate changes on the financial statements. In the opinion of management, enough
assets or liabilities could be repriced over the near term (up to three years)
to compensate for such changes. The spread on interest rates, or the difference
between the average earning assets and the average interest bearing liabilities,
is monitored quarterly. It is the Corporation's goal to maintain this spread at
better than 4.0%. The spread for the three and six month period ended at
December 31, 1998 was 5.19% and 5.14%, respectively and for the fiscal year
ended June 30, 1998 was 5.2%.
CAPITAL RESOURCES
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
Tier 1 Capital Amount Percent Amount Percent
- -------------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
Actual $ 10,640 12.1% $ 10,050 11.5%
Required 3,517 4.0% 3,490 4.0%
Total Risked Based Capital
- --------------------------
Actual $ 11,740 13.3% $ 11,150 12.8%
Required 7,061 8.0% 6,990 8.0%
</TABLE>
The subsidiary Bank is subject to various regulatory capital requirements
administered by federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory actions that, if undertaken, could
have a direct material affect on the Bank's financial statements. The Bank is
considered well capitalized under the Federal Deposit Insurance Act at December
31, 1998. Management is not aware of any matters occurring subsequent to
December 31, 1998 that would cause the Bank's capital category to change.
RECENT ACCOUNTING DEVELOPMENTS
Recent pronouncements by the Financial Accounting Standards Board ("FASB") will
have an impact on financial statements issued in subsequent periods. Set forth
below are summaries of such pronouncements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and display of comprehensive
income and its
16
<PAGE> 19
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (In thousands of dollars, except per share data)
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This Statement is effective for fiscal years beginning after December
15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segnents of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal years beginning after
June 15, 1999.
These statements are not expected to have a material effect on the Corporation's
consolidated financial position or results of operation.
IMPACT ON INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, 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.
17
<PAGE> 20
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands of dollars, except per share data)
YEAR 2000 ISSUE
Many computer programs use only two digits to identify a year in the date field
and were apparently designed and developed without considering the impact of the
upcoming change in the century. Such programs could erroneously read entries for
the Year 2000 ["Y2K"] as the year 1900. This could result in major system
failures and miscalculations.
It is anticipated that approximately $50 will be spent on the preparedness
project. This includes assessment, renovation (if necessary) and validation of
all systems and applications.
Rapid and accurate data processing is essential to the operation of financial
institutions, such as Consumers National Bank. As a result, the Corporation has
formed a Year 2000 committee to assess the extent to which the Bank and its
outside vendors may be adversely affected by Year 2000 problems. At the end of
this fiscal year, the Corporation's Y2K team had completed the awareness and
assessment phases for all systems and applications. Currently, the team is in
the renovation and validation phase and December 31, 1998, was identified as a
target completion date for this phase of the project. Of the twenty mission
critical tasks, all but one has been validated, with its validation date being
extended to March 31, 1999. Management has completed a mailing of a
questionnaire to business loan customers with balances $100 and greater to
establish a risk analysis of these customers. To date there has been a 100%
return of the questionnaires. Letters of the Corporation's Y2K readiness have
been sent to 100% of the banks checking customers and to all other deposit
customers with aggregate accounts greater than $100.
Management anticipates that most of the Bank's programs will be capable of
identifying the turn of the century. The issue is closely monitored by
management and full readiness is expected by the end of 1998. Additionally,
contingency plans have been developed for all critical systems and applications
determined to be Year 2000 compliant. These contingencies, should they be
needed, will be implemented beginning December 31, 1998. Contingency plans will
also be developed and implemented for systems and applications that have met
Year 2000 compliance. While the Corporation does not anticipate that any year
2000 computer problems or expenses required to correct such problems will
materially affect its financial condition and results of operations, no
assurance can be given in this regard. The Y2K team's utmost attention and
resources are being directed to meet full readiness.
FORWARD LOOKING STATEMENTS
When used 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, the words or phrases "will likely
18
<PAGE> 21
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands of dollars, except per share data)
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 the Private Securities
Litigation Reform Act of 1995. The Corporation wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities and competitive and regulatory factors, 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.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities which would
have such effect if implemented.
GENERAL
The bank opened Community Finance Home Mortgage Company, a consumer finance
company, as a subsidiary during November 1998 at 2368A East State Street Salem,
Ohio. The establishment of the finance subsidiary allows the bank to pursue
small loans to those customers who typically may or may not qualify under the
more stringent credit requirements for commercial bank credit. These loans
typically provide greater interest income and credit risk. Management
anticipates improving interest margins without taking on substantial credit
risk.
The bank will open a full service branch at 610 West State Street Alliance, Ohio
during March 1999.
19
<PAGE> 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
There is no pending litigation, other than routine litigation
incidental to the business of Consumers Bancorp Inc. `the Corporation'
and its affiliate, or of a material nature involving or naming the
Corporation or its affiliate as a defendant. 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 which is adverse to the Corporation or its
affiliate. None of the routine litigation in which the Corporation or
its affiliate are involved is expected to have a material adverse upon
the financial position or results of operations of the Corporation or
its affiliate.
Item 2 - Changes in Securities
- ------------------------------
Not Applicable.
Item 3 - Defaults Upon Senior Securities
- ----------------------------------------
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
- ----------------------------------------------------------------------------
Not Applicable.
Item 5 - Other Information
- --------------------------
Not Applicable.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits
Exhibit 11 Statement regarding Computation of Per Share Earnings
(included in Note 1 to the Consolidated Financial
Statements).
Exhibit 27 Financial Data Schedules.
B. Reports on Form 8-K - No reports on Form 8-K were filed by the Registrant
during the quarter ended December 31, 1998.
20
<PAGE> 23
10-QSB
CONSUMERS BANCORP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONSUMERS BANCORP, INC.
-----------------------
(Registrant)
Date: February 5, 1999 /s/ Mark S. Kelly
- ----------------------- --------------------------------
Mark S. Kelly
President and C.E.O.
Date: February 5, 1999 /s/ Paula J. Meiler
- ----------------------- --------------------------------
Paula J. Meiler
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001006830
<NAME> CONSUMER BANCORP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-30-1998
<CASH> 5,506
<INT-BEARING-DEPOSITS> 35
<FED-FUNDS-SOLD> 8,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,344
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 94,220
<ALLOWANCE> 1,135
<TOTAL-ASSETS> 135,613
<DEPOSITS> 120,430
<SHORT-TERM> 40
<LIABILITIES-OTHER> 1,359
<LONG-TERM> 2,997
0
0
<COMMON> 2,400
<OTHER-SE> 8,387
<TOTAL-LIABILITIES-AND-EQUITY> 135,613
<INTEREST-LOAN> 4,594
<INTEREST-INVEST> 634
<INTEREST-OTHER> 172
<INTEREST-TOTAL> 5,400
<INTEREST-DEPOSIT> 2,054
<INTEREST-EXPENSE> 2,154
<INTEREST-INCOME-NET> 3,246
<LOAN-LOSSES> 163
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,182
<INCOME-PRETAX> 1,328
<INCOME-PRE-EXTRAORDINARY> 1,328
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 876
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 8.10
<LOANS-NON> 372
<LOANS-PAST> 138
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,145
<CHARGE-OFFS> 185
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 1,135
<ALLOWANCE-DOMESTIC> 1,135
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 211
</TABLE>
