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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2003.
Commission file number
033-79130 CONSUMERS BANCORP, INC.
-----------------------
(Exact name of Issuer 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 330-868-7701
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value Outstanding at May 13, 2003
2,146,281 Common Shares
CONSUMERS BANCORP, INC
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Interim financial information required by Rule 10-01 of Regulation S-X (17 CFR
Part 210) is included in this Form 10-Q as referenced below:
Page
Number (s)
----------
Consolidated Balance Sheets
March 31, 2003 and June 30, 2002 1
Consolidated Statements of Income
Three and nine months ended March 31, 2003 and 2002 2
Consolidated Statement of Comprehensive Income 3
Condensed Consolidated Statements of Changes in Shareholders' Equity
Three and nine months ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2003 and 2002 4
Notes to the Consolidated Financial Statements 5-10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation 11-23
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 24-25
Item 4 - Controls and Procedures 25
PART II - OTHER
Item 1 - Legal Proceedings 26
Item 2 - Changes in Securities and Use of Proceeds 26
Item 3 - Defaults upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 26
Signatures 27
CONSUMERS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share data)
March 31, 2003 June 30, 2002
-------------- -------------
ASSETS
Cash and cash equivalents $ 7,471 $ 7,851
Federal funds sold 13,846 7,710
Securities, available for sale 27,167 34,122
Loans, net 122,060 123,454
Cash surrender value of life insurance 3,649 3,499
Premises and equipment, net 5,679 5,334
Intangible assets 1,418 1,538
Accrued interest receivable and other assets 920 1,196
---------- ----------
Total assets $ 182,210 $ 184,704
========== ==========
LIABILITIES
Deposits
Non-interest bearing demand $ 32,661 $ 31,044
Interest bearing demand 12,833 12,948
Savings 60,492 58,137
Time 51,463 57,939
---------- ----------
Total Deposits 157,449 160,068
---------- ----------
Securities sold under agreements to repurchase 5,258 5,133
Federal Home Loan Bank advance 844 2,153
Accrued interest and other liabilities 1,607 1,530
---------- ----------
Total liabilities 165,158 168,884
SHAREHOLDERS' EQUITY
Common stock (no par value, 2,500,000 shares
authorized; 2,160,000 issued) 4,869 4,869
Retained earnings 12,050 10,830
Treasury stock, at cost (13,719 shares at
March 31, 2003 and June 30, 2002) (204) (204)
Accumulated other comprehensive income 337 325
---------- ----------
Total shareholders' equity 17,052 15,820
---------- ----------
Total liabilities and shareholders' equity $ 182,210 $ 184,704
========== ==========
See accompanying notes to consolidated financial statements.
1
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ----- ---- ----
Interest income
Loans, including fees $ 2,506 $ 2,929 $ 7,854 $ 9,285
Securities
Taxable 263 301 928 866
Tax-exempt 31 32 95 89
Federal funds sold 22 35 93 154
---------- ---------- ---------- ----------
Total interest income 2,822 3,297 8,970 10,394
Interest expense
Deposits 578 875 1,997 3,287
Federal Home Loan Bank advances 24 33 85 101
Other 16 15 59 55
---------- ---------- ---------- ----------
Total interest expense 618 923 2,141 3,443
Net interest income 2,204 2,374 6,829 6,951
Provision for loan losses 100 223 317 724
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 2,104 2,151 6,512 6,227
Other income
Service charges on deposit accounts 274 239 1,003 740
Other 262 181 650 530
---------- ---------- ---------- ----------
Total other income 536 420 1,653 1,270
Other expenses
Salaries and employee benefits 945 893 2,787 2,590
Occupancy 329 270 941 831
Directors' fees 53 39 159 141
Professional fees 58 55 240 133
Franchise taxes 44 44 134 133
Printing and supplies 46 48 128 153
Telephone 45 45 152 138
Amortization of intangible 40 40 120 121
Other 306 365 947 944
---------- ---------- ---------- ----------
Total other expenses $ 1,866 $ 1,799 $ 5,608 $ 5,184
---------- ---------- ---------- ----------
Income before income taxes 774 772 2,557 2,313
Income tax expense 233 232 779 710
---------- ---------- ---------- ----------
Net Income $ 541 $ 540 $ 1,778 $ 1,603
========== ========== ========== ==========
Basic earnings per share $ .25 $ .25 $ .83 $ .75
See accompanying notes to consolidated financial statements
2
CONSUMERS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share data)
Three Months ended Nine Months ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period $ 16,767 $ 14,868 $ 15,820 $ 14,217
Comprehensive income:
Net Income 541 540 1,778 1,603
Other comprehensive income (loss) (84) (58) 12 (125)
---------- ---------- ---------- ----------
Total comprehensive income 457 482 1,790 1,478
Common cash dividends (172) (165) (558) (516)
Purchase of 4,500 Treasury shares (90) (90)
Treasury shares issued 6
---------- ---------- ---------- ----------
Balance at the end of the period $ 17,052 $ 15,095 $ 17,052 $ 15,095
========== ========== ========== ==========
Common cash dividends per share $ 0.08 $ 0.08 $ 0.26 $ 0.24
See accompanying notes to consolidated financial statements.
3
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
March 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,778 $ 1,603
Adjustments to reconcile net income to net cash
from operating activities 764 (186)
---------- ----------
Net cash from operating activities 2,542 1,417
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (10,034) (17,588)
Maturities and principal pay downs 16,748 8,822
Net (increase) in federal funds sold (6,136) (4,500)
Net decrease (increase) in loans 1,688 1,679
Acquisition of premises and equipment (827) (300)
Purchase of life insurance policies (365)
---------- ----------
Net cash from investing activities 1,439 (12,252)
CASH FLOW FROM FINANCING
Net (decrease) increase in deposit accounts (2,619) 8,400
Net increase in repurchase agreements 125 2,140
Repayments of FHLB advances (1,309) (75)
Dividends paid (558) (516)
Sale of treasury stock 6
Purchase of treasury stock (90)
---------- ----------
Net cash from financing activities (4,361) 9,865
---------- ----------
Change in cash or cash equivalents (380) (970)
Cash and cash equivalents, beginning of year 7,851 6,626
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,471 $ 5,656
========== ==========
See accompanying notes to consolidated financial statements.
4
CONSUMERS BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, 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). The Bank has a title company,
Community Title Agency, Inc. as part of its business. During December 2002,
Consumers National Bank purchased the assets and assumed the liabilities of its
wholly owned finance company. The Finance Company's Salem, Ohio office was
closed. 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 March 31, 2003, 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 accounting
principles generally accepted in the United States of America that might
otherwise be necessary in the circumstances. The Annual Report for the
Corporation for the year ended June 30, 2002, contains consolidated financial
statements and related notes that should be read in conjunction with the
accompanying consolidated financial statements.
Segment Information: The Corporation is a financial 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 generally accepted in the United States of
America, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, 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 Bank
to maintain reserves consisting of cash on hand and noninterest-bearing balances
on deposit with the Federal Reserve Bank. The required reserve balance at March
31, 2003 was $1,224 and at June 30, 2002 was $1,181.
Securities: All securities currently owned are classified as available-for-sale.
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.
5
CONSUMERS BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(continued)
(Dollars in thousands, except per share amounts)
NOTE 1 - CONTINUED
Realized gains or losses on sales are determined based on the amortized cost of
the specific security sold. Amortization of premiums and accretion of discount
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 amortized or discount accreted.
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.
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.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, 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 March 31, 2003 and June 30, 2002.
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 March 31, 2003, the Bank has total purchased policies
of $2,885
6
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(continued)
(Dollars in thousands, except per share amounts)
NOTE 1- CONTINUED
(total death benefit $9,358) with a cash surrender value of $3,649. As of June
30, 2002, the Bank had total purchased policies of $ 2,885 (total death benefit
$9,358) with a cash surrender value of $3,499. The amount included in income
(net of policy commissions and mortality costs) was approximately, $52 and $49
for the three month periods ended and $150 and $125 for the nine month periods
ended March 31, 2003 and 2002.
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 building 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 March 31, 2003 and June 30, 2002.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Profit Sharing Plan: The Company maintains a 401(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.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
7
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(continued)
(Dollars in thousands, except per share amounts)
NOTE 1- CONTINUED
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 2,146,281 and 2,146,631 for the quarters and
2,146,281 and 2,150,698 for the nine month periods ended March 31, 2003 and
March 31, 2002. The Company's capital structure contains no dilutive securities.
Statement of Cash Flows: For purpose 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 nine months ended March 31, 2003 and 2002, the Corporation paid $2,236
and $3,738 in interest and $961 and $789 in income taxes.
NOTE 2 - SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of the securities available for
sale, as presented on the consolidated balance sheet at March 31, 2003 and June
30, 2002 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
MARCH 31, 2003
Securities available for sale:
U.S. Treasury and Federal Agencies $ 6,345 $ 137 $ $ 6,482
Obligations of states and
political subdivisions 2,872 136 3,008
Mortgage-backed securities 16,326 265 (8) 16,583
Other securities 1,113 (19) 1,094
----------------------------------------------------------------------
Total Securities $ 26,656 $ 538 $ (27) $ 27,167
========== ========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
JUNE 30, 2002
Securities available for sale
U.S. Treasury and Federal Agencies $ 11,067 $ 100 $ $ 11,167
Obligations of states and
political subdivisions 3,040 73 (9) 3,104
Mortgage-backed securities 18,481 335 (10) 18,806
Other securities 1,042 3 1,045
----------------------------------------------------------------------
Total Securities $ 33,630 $ 511 $ (19) $ 34,122
========== ========== ========== ==========
8
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(continued)
(Dollars in thousands, except per share amounts)
NOTE 2 - SECURITIES AVAILABLE FOR SALE
There were no sales or transfer of securities classified as available for sale
for the three or nine month periods ended March 31, 2003 and March 31, 2002.
The estimated fair value of debt securities at March 31, 2003, 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.
Estimated Fair
Value
--------------
Securities for sale:
Due in one year or less $ 3,889
Due after one year through five years 4,608
Due after five years through ten years 993
Due after ten years
----------
Total 9,490
Mortgage-backed securities 16,583
Other Securities 1,094
----------
Total $ 27,167
----------
At March 31, 2003, 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.
NOTE 3 - LOANS
Total loans as presented on the balance sheets are comprised of the following
classifications:
March 31, 2003 June 30, 2002
-------------- -------------
Real-estate - residential mortgage $ 56,903 $ 56,716
Real-estate - construction 1,102 2,107
Commercial, financial and agriculture 56,497 53,535
Personal and other 9,470 13,029
---------- ----------
Total 123,972 125,387
Unearned fees and costs (229) (265)
Allowance for loan losses (1,683) (1,668)
---------- ----------
Loans, net $ 122,060 $ 123,454
========== ==========
9
CONSUMERS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(continued)
(Dollars in thousands)
NOTE 3 - LOANS (CONTINUED)
No loans were determined to be impaired at either March 31, 2003, or June 30,
2002, nor were there any such loans during the period then ended. At March 31,
2003, loans in non-accrual status totaled $1,080 and at June 30, 2002, totaled
$829.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the periods ended
March 31, 2003, and March 31, 2002 are as follows:
Three months ended Nine months ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Beginning of period $ 1,707 $ 1,558 $ 1,668 $ 1,552
Provision 100 223 317 724
Loans charged off (189) (232) (460) (759)
Recoveries of loans previously
charged off 65 62 158 94
---------- ---------- ---------- ----------
Balance at March 31, $ 1,683 $ 1,611 $ 1,683 $ 1,611
========== ========== ========== ==========
10
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following is management's analysis of the Corporation's results of
operations as of and for the three month period and nine month periods ending
March 31, 2003, compared to the same period in 2002, and the consolidated
balance sheets at March 31, 2003 compared to June 30, 2002. 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.
BUSINESS
Consumers Bancorp, Inc. (the "Corporation"), is a bank holding company under the
Bank Holding Company Act of 1956, as amended, Incorporated under the laws of the
State of Ohio, the Corporation owns all of the issued and outstanding capital
stock of Consumers National Bank (the "Bank"), a bank chartered under the laws
of the United States. On February 28, 1995, the Corporation acquired all of the
common stock issued by the Bank. The Corporation's activities have been limited
primarily to holding the common shares of the Bank.
Serving the Minerva, Ohio area since 1965, the Bank's main office is located at
614 E. Lincoln Way, Minerva, Ohio. The Bank's business involves attracting
deposits from businesses and individual customers and using such deposits to
originate commercial, mortgage and consumer loans in its market area, consisting
primarily of Stark, Columbiana, Carroll, and contiguous counties in Ohio. The
Bank also invests in securities consisting of U.S. government and government
agency obligations, municipal obligations, mortgage-backed securities and other
securities.
The Bank owns 100% of Community Title Agency, Inc., a title agency company. The
subsidiary accounts for less than 2% of the Corporation's consolidated assets
and business.
11
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NET INCOME Net income was $541 for the third quarter of 2003, an increase of $1
compared to the third quarter of 2002 net income of $540. Earnings per common
share for the third quarter of 2002 were $0.25 as compared to $0.25 for the
third quarter of 2002. Return on average equity (ROE) and return on average
assets (ROA) were 12.86% and 1.30%, respectively, for the third quarter of 2003
compared to 14.32% and 1.17%, respectively, in 2002.
NET INTEREST INCOME
Net interest income for the third quarter of 2003 was $2,204, a decrease of $170
or 7.2% from $2,374 in the third quarter of 2002. Net interest income, the
difference between interest income earned on interest-earning assets and
interest expense incurred on interest-bearing liabilities, is the most
significant component of the Corporation's earnings. Net interest income is
affected by changes in the volumes, rates and composition of interest-earning
assets and interest-bearing liabilities. Average earning assets decreased 2.4%
from the third quarter last year, with average loans, decreasing 6.3% from last
year due in part to accelerated mortgage refinancings within the banking
industry and the Bank's exit from sub prime consumer loan lending. Average
interest bearing liabilities decreased 6.2% from the same quarter last year. The
Corporation's net interest margin for the quarter ended March 31, 2003 was
5.50%, an increase of 9 basis points from last quarter and a decrease of 27
basis points from the third quarter a year ago. The decline in interest rates as
well as increased refinancings at lower rates in the third quarter 2003 caused
the interest margin to decline.
12
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME FOR THE
THREE MONTHS ENDED MARCH 31
(In thousands except percentages)
2003 2002
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Taxable securities $ 27,805 $ 263 2.12% $ 24,055 $ 301 5.94%
Nontaxable securities(1) 2,977 48 5.97 2,822 49 7.01
Loans receivable(1) 124,721 2,509 8.16 133,060 2,932 8.94
Federal funds sold 8,634 22 1.03 8,262 35 1.72
------------- -------- ---- ------------- -------- ----
Total Interest-Earning Assets $ 164,137 $ 2,842 7.02% $ 168,199 $ 3,317 8.00%
Noninterest-Earning Assets 15,535 15,184
------------- -------------
Total Assets $ 179,672 $ 183,383
============= =============
Interest Bearing Liabilities
NOW $ 12,484 $ 23 .75% $ 12,816 $ 43 1.36%
Savings 59,919 126 .85 57,059 167 1.19
Time deposits 51,447 429 3.38 63,295 665 4.26
Repurchase agreements 4,590 16 1.41 3,038 15 2.00
FHLB advances 1,342 24 7.25 2,192 33 6.11
------------- -------- ---- ------------- -------- ----
Total interest bearing 129,782 618 1.93% 138,400 923 2.70%
liabilities
Noninterest bearing liabilities 32,829 29,730
------------- -------------
Total liabilities 162,611 168,130
Shareholders equity $ 17,061 $ 15,253
------------- -------------
Total liabilities and
Shareholders equity $ 179,672 $ 183,383
============= =============
Net interest income, interest
rate spread (1) $ 2,224 5.09% $ 2,394 5.30%
Net interest margin (net
interest as a percent of
average interest-earning
assets (1) 5.50% 5.77%
Average interest-earning assets
to interest-bearing liabilities
126.47% 121.28%
(1) calculated on a fully taxable equivalent basis
13
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in the Corporation's
loan portfolio, which have been incurred at each balance sheet date. The
provision for loan losses decreased $123 or 55.2% to $100 in the third quarter
of 2003 compared to $223 in the third quarter of 2003. The decreased provision
for loan losses in the third quarter of 2003 was attributable to decline in both
the loan portfolio and net charge-offs. Net charge-offs were $124 or 0.40%
(annualized) of average loans during the three months ended March 31, 2003,
compared to $170 or 0.52% (annualized) for the same period in 2002.
March 31, June 30, March 31,
2003 2002 2002
-----------------------------------------------
Allowance for loan losses as a
percentage of loans 1.36% 1.33% 1.22%
Allowance for loan losses as a
percentage of non-performing
assets 139.09% 120.78% 134.02%
The continuing weaker economy was reflected as the allowance for loan losses as
a percentage of non-performing loans for the third quarter of 2003 remained
relatively stable compared to the third quarter of 2002 as a result of
non-performing loans increasing from $1,202 at March 31, 2002 to $1,210 at March
31, 2003.
NON-INTEREST INCOME
Non-interest income was $536 for the third quarter increasing 27.6% from $420 in
the same period last year. Service charges on deposits were $274, up $35, or
14.6% from last year, attributable mainly to the introduction of Overdraft
Privilege Program during 2002 coupled with deposit growth in non-interest
bearing checking.
NON-INTEREST EXPENSE
Non-interest expense for the third quarter was $1,866, compared to $1,799 in the
third quarter last year. The increase in the third quarter was due primarily to
the increase in occupancy expense and salary. Additionally, non-interest expense
was impacted by increased professional fees to support corporate governance
issues and payment of overdraft privilege fees to the originating vendor. The
efficiency ratio was 67.6% for the third quarter of 2003, compared to 63.9% for
the same quarter last year.
INCOME TAXES
The provision for income taxes for the third quarter of 2003 increased $1 to
$233 from $232 for the same period in 2002. The effective tax rate for the three
months ended March 31, 2003 and 2002 was 30.1%.
14
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
NET INCOME. The Corporation earned net income of $1,778 for the nine months
ended March 31, 2003 compared to $1,603 for the nine months ended March 31,
2002. This increase was primarily due to a decrease of $407 in the provision for
loan losses and $383 in other income offset by an increase in other expenses.
NET INTEREST INCOME. Net interest income totaled $6,829 for the nine months
ended March 31, 2003 compared to $6,951 for the nine months ended March 31,
2002, a decrease of $122 or 1.8%. The decrease in net interest income was
primarily due to the decrease in loan and federal funds interest income.
Interest and fees on loans decreased $1,431, or 15.4%, to $7,854 for the nine
months ended March 31, 2003 from $9,285 for the nine months ended March 31,
2002. The decrease in interest income was due to decreases in both average
volume and yield. The yield on average loans outstanding for the nine month
periods ended March 31, 2003, and March 31, 2002 was 8.37% and 9.26%
respectively.
Interest earned on taxable and tax-exempt securities totaled $1,023 for the nine
month period ended March 31, 2003 compared to $955 for the nine month period
ended March 31, 2002. The increase was primarily a result of an increase in
volume. Interest income on federal funds sold decreased by $61 for the nine
months ended March 31, 2003, due to a decrease in yield.
15
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME FOR
THE NINE MONTHS ENDED MARCH 31
(In thousands except percentages)
2003 2002
---- ----
Average Yield/ Average Yield/
Balance Interest rate Balance Interest rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Taxable securities $ 30,030 $ 928 4.39% $ 19,963 $ 866 5.61%
Nontaxable securities (1) 2,998 145 6.41 2,458 137 7.10
Loans receivable(1) 125,119 7,864 8.37 133,771 9,297 9.26
Federal funds sold 8,951 93 1.38 9,023 154 2.27
------------- -------- ---- ------------- -------- ----
Total Interest-Earning Assets $ 166,360 $ 9,030 7.23% $ 166,679 $ 10,454 8.35%
Noninterest-Earning Assets 15,787 15,423
------------- -------------
Total Assets $ 182,147 $ 182,102
============= =============
Interest Bearing Liabilities
NOW $ 13,122 $ 114 1.15% $ 12,305 $ 132 1.43%
Savings 58,978 455 1.03 54,769 744 1.81
Time deposits 53,599 1,428 3.55 65,410 2,411 4.91
Repurchase agreements 4,680 59 1.67 2,729 55 2.68
FHLB advances 1,806 85 6.23 2,223 101 6.05
------------- -------- ---- ------------- -------- ----
Total interest bearing 132,185 2,141 2.16% 137,436 3,443 3.34%
liabilities
Noninterest bearing liabilities 33,289 29,754
------------- -------------
Total liabilities 165,474 167,190
Shareholders equity $ 16,673 $ 14,912
------------- -------------
Total liabilities and
Shareholders equity $ 182,147 $ 182,102
============= =============
Net interest income, interest
rate spread (1) $ 6,889 5.07% $ 7,011 5.01%
Net interest margin (net
interest as a percent of
average interest-earning
assets (1) 5.53% 5.60%
Average interest-earning assets
to interest-bearing liabilities
125.59% 121.28%
(1) calculated on a fully taxable equivalent basis
16
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Interest expense on deposits decreased $1,290, or 39.2% for the nine months
ended March 31, 2003 compared to the nine months ended March 31, 2002. The
decrease was a result of rate decreases on savings and time deposits.
Interest paid on FHLB Advances totaled $85 for the nine months ended March 31,
2003 as compared to $101 for the nine months ended March 31, 2002.
PROVISION FOR LOAN LOSSES. The Corporation maintains an allowance for loan
losses in an amount, which, in management's judgment, is adequate to absorb
probable losses in the loan portfolio. While management utilizes specific
allocations and historical loss experience, the ultimate adequacy of the
allowance is dependent on a variety of factors, including the performance of the
Corporation's loan portfolio, the economy, changes in real estate 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 probable losses 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
estimated value of the underlying collateral.
The provision for loan losses for the nine months ended March 31, 2003 totaled
$317 as compared to $724 for the nine months ended March 31, 2002, a decrease of
$407 or 56.2%. Annualized net charge-offs to average loans decreased to .32 %
for the nine month period ended March 31, 2003 from .66% for the period ended
March 31, 2002. The decrease in net charge-offs in 2003 compared to 2002 is
primarily attributed to the reduction of consumer lending at the former Finance
Company subsidiary and a tightening of consumer credit standards. Charge-offs
have been made in accordance with the Corporation's standard policy and have
occurred primarily in the consumer loan portfolio.
OTHER INCOME. Other income includes service charges on deposits and other
miscellaneous income. Service charges on deposit accounts of $1,003 for the nine
months ended March 31, 2003 represented an increase of $263, or 35.5% compared
to the $740 of other income for the nine months ended March 31, 2002. The
increases were primarily due to volume increases in overdraft and non-sufficient
funds fees attributable to an Overdraft Privilege program. Increased income has
also been realized from the increase in cash surrender value of life insurance
and interchange income from debit cards due to increased volume of users in
checking accounts.
17
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
OTHER EXPENSE. Other expense totaled $5,608 for the nine months ended March 31,
2003 compared to $5,184 for the nine months ended March 31, 2002, an increase of
$424, or 8.2%.
Salary and benefits expense increased $197 or 7.6% for the nine month period
ended March 31, 2003 as compared to March 31, 2002. The increase is the result
of normal annual merit increases and the addition of new personnel within loan
review, compliance and loan operation areas. Occupancy expense increased $110
for the nine month period ended March 31, 2003, as compared to March 31, 2002.
INCOME TAX EXPENSE. The provision for income taxes totaled $779 for the nine
months ended March 31, 2003 compared to $710 for the nine months ended March 31,
2002, an increase of $69 or 9.7%. The effective tax rate was 30.5% and 30.7% for
the nine month periods ended March 31, 2003 and 2002 respectively.
FINANCIAL CONDITION
Total assets at March 31, 2003 were $182,210 compared to $184,704 at June 30,
2002, a decrease of $2,494 or 1.4%. Loan receivables decreased $1,394 from
$123,454 at June 30, 2002 to $122,060 at March 31, 2003. Personal loan totals
decreased for the period while residential real estate loans increased $187 or
..33%, real estate construction loans decreased $1,005 or 47.7%, and commercial
loans increased $2,962 or 5.5%. Loan growth is expected to continue to remain
stable to slightly increasing in the near future as customers experience a
decline in short-term interest rates and longer-term mortgage rates. Available
for sale securities have decreased from $34,122 at June 30, 2002 to $27,167 at
March 31, 2003, or 20.4%. The portfolio reflects an increase in short-maturity
and current cash flowing instruments. The duration of the investment portfolio
was 2.23 years at March 31, 2003 as compared to 2.71 years at June 30, 2002 and
3.10 years at March 31, 2002. Federal funds sold have increased $6,136 a result
of investment and net loan volume decreases.
Total shareholders equity increased $1,232 at June 30, 2002, to $17,052 at March
31, 2003. This increase is a combination of net income for the period, offset by
cash dividends paid and an increase in value of available for sale securities.
18
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
NON-PERFORMING ASSETS
The following table presents the aggregate amounts of non-performing assets and
respective ratios on the dates indicated.
March 31, June 30, March 31,
2003 2002 2002
---- ---- ----
Non-accrual loans $ 1,080 $ 829 $ 1,043
Restructured loans 0 0 0
-------- -------- --------
Total non-performing loans 1,080 829 1,043
Other real estate owned 0 0 0
-------- -------- --------
Total non-performing assets $ 1,080 $ 829 $ 1,043
======== ======== ========
Loans 90 days or more past due
and not on non-accrual $ 130 $ 552 $ 158
Non-performing loans to total
Loans .98% 1.10% .91%
Allowance for credit losses to
total non-performing loans 139.09 120.78 134.14
Loans 90 days or more past due
and not on non-accrual to total
loans .11 .44 .12
LIQUIDITY
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 three major categories:
commercial loans, real estate loans, and personal loans. 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 growth recently, with
outstanding balances up by $2,962 or 5.5 % since June 30, 2002. 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
19
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
estate loan portfolio consists of three basic segments: conventional mortgage
loans having fixed rates and maturities not exceeding fifteen years, variable
rate home equity lines of credit, and fixed rate loans having maturity or
renewal dates that are less than the scheduled amortization period. Competition
is very heavy in the Corporation's market for these types of loans, both from
local and national lenders. The Bank became affiliated with third parties, which
allow the Bank to offer very attractive mortgage loan options to its customers.
The personal loans offered by the Bank 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. Personal loans have declined during the past quarter, as
automobile loans have been affected by the auto manufacturers' offerings of zero
and highly discounted rates through their financing subsidiaries.
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 6.41% and
7.10% respectively for the nine month periods ended March 31, 2003 and March 31,
2002.
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 decreased this period. The rate of loan growth has decreased with selected
deposit rates decreasing as well. Interest rates on demand deposits and savings
deposits continue to decline and are at historical low levels.
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 2 year maturity. At March 31, 2003, these FHLB balances totaled $844. The
Corporation considers this agreement with the FHLB to be a good source of
liquidity funding, secondary to its deposit base.
Jumbo time deposits (those with balances of $100 and over) declined from $11,485
at June 30, 2002 to $7,481 at March 31, 2003. 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. Although management
monitors interest rates on an ongoing basis, a quarterly rate sensitivity report
is used to determine the effect of interest rate changes on the financial
statements. In the opinion of
20
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 on a taxable
equivalent basis for the nine month periods ended March 31, 2003 and 2002 were
5.07% and 5.01%, respectively and for the fiscal year ended June 30, 2002 was
5.03%.
CAPITAL RESOURCES
The following table presents the capital ratios of Consumers Bancorp, Inc.
March 31, 2003 June 30, 2002
-------------- -------------
Total adjusted average assets for
leverage ratio $ 181,901 $ 182,744
Risk-weighted assets and off-balance-
sheet financial instruments for
capital ratio 112,751 117,314
Tier I capital 14,887 13,957
Total risk-based capital 16,300 15,426
Leverage Ratio 8.2% 7.6%
Tier I capital ratio 13.2 11.9
Total capital ratio 14.5 13.2
Capital ratios applicable to Consumers National Bank at March 31, 2003 were as
follows:
Total
Tier I Risk-based
Leverage Capital Capital
-------- ------- -------
Regulatory Capital Requirements
Minimum 4.0% 4.0% 8.0%
Well-capitalized 5.0 6.0 10.0
Bank Subsidiary
Consumers National Bank 8.5 13.5 14.8
The Company and subsidiary Bank are subject to various regulatory capital
requirements administered by federal regulatory agencies. Capital adequacy
guidelines and prompt corrective-action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Failure to meet various capital
requirements can initiate regulatory action that could have a direct material
affect on the
21
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Company's financial statements. The Bank is considered well capitalized under
the Federal Deposit Insurance Act at March 31, 2003. Management is not aware of
any matters occurring subsequent to March 31, 2003 that would cause the Bank's
capital category to change.
IMPACT ON INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the Untied States of
America, which require the measurement of financial position and results of
operations primarily in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Corporation are monetary in nature. Therefore, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services. The
liquidity, maturity structure and quality of the Corporation's assets and
liabilities are critical to the maintenance of acceptable performance levels.
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 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, changed 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.
CRITICAL ACCOUNTING POLICIES
The financial condition and results of operations for Consumers presented in the
Consolidated Financial Statements, accompanying notes to the Consolidated
Financial Statements and management's discussion and analysis are, to a large
degree, dependent upon the Company's accounting policies. The selection and
application of these accounting policies involve judgments, estimates and
uncertainties that are susceptible to change.
22
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Presented below are discussions of those accounting policies that management
believes are the most important (Critical Accounting Policies) to the portrayal
and understanding of the Company's financial condition and results of
operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of
materially different financial condition or results of operations is a
reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial
Statements.
LOANS, LEASES AND ALLOWANCE FOR ESTIMATED LOSSES
Loans and leases are the Company's largest income earning asset category. Loans
are recorded at the amount advanced to the borrower plus certain costs incurred
by the Bank to originate the loan, less certain origination fees that are
collected from the borrower. The carrying amount of loans is reduced as
principal payments are made. Payments made by the borrower are allocated between
interest income and principal payment based upon the outstanding principal
amount, the contractual rate of interest and other contractual terms. The
carrying amount is further adjusted to reflect amortization of the origination
costs net of origination fees. These items are amortized over the expected life
of the loan.
The accrual of interest income is generally discontinued (Non-Accrual Status)
when management believes that collection of principal and/or interest is
doubtful or when payment becomes 90 to 120 days past due, except for loans that
are well secured and are in a short-term, well-defined process of collection.
Payments received from the borrower after a loan is placed on Non-Accrual Status
are applied to reduce the principal balance of the loan until such time that
collectibility of remaining principal and interest is no longer doubtful.
Management periodically reviews the loan and lease portfolio in order to
establish an estimated allowance for loan and lease losses (Allowance) that are
probable as of the respective reporting date. Additions to the Allowance are
charged against earnings for the period as a provision for loan and lease losses
(Provision). Actual loan and lease losses are charged against (reduce) the
Allowance when management believes that the collection of principal will not
occur. Unpaid interest attributable to prior years for loans that are placed on
Non-Accrual Status is also charged against the Allowance. Unpaid interest for
the current year for loans that are placed on Non-Accrual Status is reversed
against the interest income previously recognized. Subsequent recoveries of
amounts previously charged to the Allowance, if any, are credited to (increase)
the Allowance.
The Allowance is regularly reviewed by management to determine whether or not
the amount is considered adequate to absorb probable losses. If not, an
additional Provision is made to increase the Allowance. This evaluation includes
specific loss estimates on certain individually reviewed loans, statistical loss
estimates for loan groups or pools that are based on historical loss experience
and general loss estimates that are based upon the size, quality, and
concentration characteristics of the various loan portfolios, adverse situations
that may affect a borrower's ability to repay, and current economic and industry
conditions, among other things.
23
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Allowance is also subject to periodic examination by regulators whose review
includes a determination as to its adequacy to absorb potential losses.
Those judgments and assumptions that are most critical to the application of
this accounting policy are the initial and on-going credit-worthiness of the
borrower, the amount and timing of future cash flows of the borrower that are
available for repayment of the loan, the sufficiency of underlying collateral,
the enforceability of third-party guarantees, the frequency and subjectivity of
loan reviews and risk gradings, emerging or changing trends that might not be
fully captured in the historical loss experience, and charges against the
Allowance for actual losses that are greater than previously estimated. These
judgments and assumptions are dependent upon or can be influenced by a variety
of factors including the breadth and depth of experience of lending officers,
credit administration and the loan review staff that periodically review the
status of the loan, changing economic and industry conditions, changes in the
financial condition of the borrower and changes in the value and availability
of the underlying collateral and guarantees.
While the Company strives to reflect all known risk factors in its evaluations,
judgment errors may occur. If different assumptions or conditions were to
prevail, the amount and timing of interest income and loan and lease losses
could be materially different. These factors are most pronounced during economic
downturns. Since, as described above, so many factors can affect the amount and
timing of losses on loans and leases it is difficult to predict, with any degree
of certainty, the affect on income if different conditions or assumptions were
to prevail.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank measures interest-rate risk from the perspectives of earnings at risk
and value at risk. The primary purpose of both the loan and investment
portfolios is the generation of income, but if credit risk is the principal
focus of risk analysis in the loan portfolio, interest-rate risk is the
principal focus in the investment portfolio. Because of the greater liquidity of
the investment portfolio, it is the vehicle for managing interest-rate risk in
the entire balance sheet. The Bank manages interest rate risk position using
simulation analysis of net interest income and net income over a two-year
period. The Bank also calculates the effect of an instantaneous change in market
interest rates on the economic value of equity or net portfolio value. Once
these analyses are complete, management reviews the results, with an emphasis on
the income-simulation results for purposes of managing interest-rate risk. The
rate sensitivity position is managed to avoid wide swings in net interest
margins. Measurement and identification of current and potential interest rate
risk exposures is conducted quarterly, with reporting and monitoring also
occurring quarterly. The Bank applies interest rate shocks to its financial
instruments up and down 50, 100, 150, and 200 basis points.
24
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table presents an analysis of the potential sensitivity of the
Bank's annual net interest income and present value of the Bank's financial
instruments to sudden and sustained increase of 200 basis points and 100 basis
points decrease change in market interest rates:
Maximum Change
2003 Guidelines
---- ----------
One Year Net interest Income Change
+200 Basis Points 2% (16.0)%
- -100 Basis Points 1% (16.0)%
Net Present Value of Equity Change
+200 Basis Points (19)% (20.0)%
- -100 Basis Points 9% (20.0)%
The projected volatility of net interest income to a +200 and -100 basis points
change for all quarterly models during 2002 and 2003 fall within the Board of
Directors guidelines for net interest income change. Net present value of equity
change "value at risk" is monitored by Management and has been addressed by
reducing the maturity within the investment portfolio as consumers reduced time
maturities within the deposit portfolio.
ITEM 4 - CONTROLS AND PROCEDURES
Within a 90-day period prior to the filing date of this report, an
evaluation was carried out under the supervision and with the participation of
Consumers Bancorp, Inc. management, including Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) under the Securities
Exchange Act of 1934). Based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are, to the best of their knowledge, effective to ensure
that information required to be disclosed by Consumers Bancorp, Inc. in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported with in the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that there are no significant changes in the Company's internal controls or in
other factors that could significantly affect its internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
25
CONSUMERS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and use of Proceeds
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 99.1 Certification of Chief Executive Officer Pursuant to 10 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act
of 2002.
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 10 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act
of 2002.
B. Reports on Form 8-K - Consumers Bancorp Inc. filed reports on Form 8-K
during the quarter ended March 31, 2003 as follows:
None
26
CONSUMERS BANCORP, INC.
10-Q
CONSUMERS BANCORP, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONSUMERS BANCORP, INC.
-----------------------
(Registrant)
Date: May 13, 2003 /s/ Mark S. Kelly
-----------------------
Mark S. Kelly
President and C.E.O.
Date: May 13, 2003 /s/ Paula J. Meiler
-----------------------
Paula J. Meiler
Chief Financial Officer
27
CERTIFICATIONS
I, Mark S. Kelly, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consumers Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a). designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this quarterly
report is being prepared;
b). evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c). presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function):
a). all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls;
b). any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ Mark S. Kelly
-------------------------------------
Mark S. Kelly
President and Chief Executive Officer
28
CERTIFICATIONS
I, Paula J. Meiler, Treasurer and Chief Financial Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consumers Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a). designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this quarterly
report is being prepared;
b). evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c). presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function):
a). all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls;
b). any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ Paula J. Meiler
-------------------------------------
Paula J. Meiler
Treasurer and Chief Financial Officer
29