CONSUMERS BANCORP INC /OH/ - FORM 10-Q

Attached files

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EX-10.7 - CONSUMERS BANCORP INC /OH/	v210959_ex10-7.htm
EX-10.6 - CONSUMERS BANCORP INC /OH/	v210959_ex10-6.htm
EX-31.1 - CONSUMERS BANCORP INC /OH/	v210959_ex31-1.htm
EX-31.2 - CONSUMERS BANCORP INC /OH/	v210959_ex31-2.htm
EX-32.1 - CONSUMERS BANCORP INC /OH/	v210959_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2010

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from _________________ to _________________

Commission File No. 033-79130

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(330) 868-7701

(Registrant’s telephone number)

Not applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if smaller reporting company)	Smaller reporting company x

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

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

Common Stock, no par value	Outstanding at February 11, 2011
	2,043,556 Common Shares

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED December 31, 2010

Table of Contents

	Page Number (s)
Part I – Financial Information
Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2010 and June 30, 2010	1

Consolidated Statements of Income for the three and six months ended December 31, 2010 and 2009	2

Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2010 and 2009	3

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended December 31, 2010 and 2009	4

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009	5

Notes to the Consolidated Financial Statements	6-19

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-31

Item 3 – Not Applicable for Smaller Reporting Companies

Item 4 – Controls and Procedures	32
Part II – Other Information
Item 1 – Legal Proceedings	33

Item 1A – Not Applicable for Smaller Reporting Companies

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3 – Defaults Upon Senior Securities	33

Item 4 – Removed and Reserved

Item 5 – Other Information	33

Item 6 – Exhibits	34

Signatures	35

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	December 31, 2010			June 30, 2010
ASSETS
Cash on hand and noninterest-bearing deposits in other banks	$	5,736		$	5,973
Interest-bearing deposits in other banks		6,146			7,833
Total cash and cash equivalents		11,882			13,806
Certificates of deposit in other financial institutions		3,185			980
Securities, available-for-sale		74,599			64,262
Federal bank and other restricted stocks, at cost		1,186			1,186
Total loans		176,678			174,283
Less allowance for loan losses		(2,266	)		(2,276	)
Net Loans		174,412			172,007
Cash surrender value of life insurance		4,887			4,798
Premises and equipment, net		4,099			3,581
Intangible assets		169			250
Other real estate owned		-			25
Accrued interest receivable and other assets		2,661			2,498
Total assets	$	277,080		$	263,393

LIABILITIES
Deposits
Non-interest bearing demand	$	52,261		$	47,659
Interest bearing demand		14,017			13,687
Savings		71,527			63,704
Time		91,694			91,264
Total deposits		229,499			216,314

Short-term borrowings		13,626			13,086
Federal Home Loan Bank advances		8,223			8,297
Accrued interest and other liabilities		1,954			1,980
Total liabilities		253,302			239,677

SHAREHOLDERS’ EQUITY
Preferred stock (no par value, 350,000 shares authorized)		—			—
Common stock (no par value, 3,500,000 shares authorized; 2,173,998 and 2,168,329 shares issued as of December 31, 2010 and June 30, 2010, respectively)		5,036			4,968
Retained earnings		20,270			19,470
Treasury stock, at cost (130,442 common shares)		(1,659	)		(1,659	)
Accumulated other comprehensive income		131			937
Total shareholders’ equity		23,778			23,716
Total liabilities and shareholders’ equity	$	277,080		$	263,393

See accompanying notes to consolidated financial statements

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months ended December 31,						Six Months ended December 31,
(Dollars in thousands, except per share amounts)	2010			2009			2010			2009
Interest income
Loans, including fees	$	2,578		$	2,481		$	5,173		$	4,941
Securities
Taxable		373			472			798			970
Tax-exempt		221			192			431			380
Federal funds sold and other interest bearing deposits		13			21			23			45
Total interest income		3,185			3,166			6,425			6,336

Interest expense
Deposits		432			582			897			1,233
Short-term borrowings		11			12			24			26
Federal Home Loan Bank advances		66			77			135			155
Total interest expense		509			671			1,056			1,414

Net interest income		2,676			2,495			5,369			4,922
Provision for loan losses		142			141			244			343
Net interest income after provision for loan losses		2,534			2,354			5,125			4,579

Non-interest income
Service charges on deposit accounts		327			414			662			851
Debit card interchange income		157			126			307			244
Bank owned life insurance income		44			44			89			88
Securities gains, net		53			102			70			213
Other-than-temporary loss
Total impairment loss		(50	)		(203	)		(81	)		(180	)
Loss recognized in other comprehensive income		-			23			31			-
Net impairment loss recognized in earnings		(50	)		(180	)		(50	)		(180	)
Gain on sale of OREO		-			1			2			5
Other		51			33			108			69
Total non-interest income		582			540			1,188			1,290

Non-interest expenses
Salaries and employee benefits		1,187			1,134			2,364			2,206
Occupancy and equipment		247			259			511			534
Data processing expenses		140			132			276			264
Professional and director fees		82			80			185			191
FDIC Assessments		78			78			156			159
Franchise taxes		59			52			117			107
Telephone and network communications		58			61			110			122
Debit card processing expenses		84			71			168			142
Amortization of intangible		40			40			81			81
Other		403			348			774			686
Total non-interest expenses		2,378			2,255			4,742			4,492

Income before income taxes		738			639			1,571			1,377
Income tax expense		164			138			364			311
Net Income	$	574		$	501		$	1,207		$	1,066

Basic earnings per share	$	0.28		$	0.25		$	0.59		$	0.52

See accompanying notes to consolidated financial statements

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months ended December 31,						Six Months ended December 31,
	2010			2009			2010			2009

Net Income	$	574		$	501		$	1,207		$	1,066

Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Other-than-temporarily impaired securities:
Unrealized gains (losses) on other-than-temporarily impaired securities		(50	)		(23	)		(31	)		137
Reclassification adjustment for losses included in income		50			180			50			180
Net unrealized gain		—			157			19			317
Income tax effect		—			53			6			108
		—			104			13			209

Available-for-sale securities:
Unrealized gains (losses) arising during the period		(1,423	)		(1,133	)		(1,170	)		538
Reclassification adjustment for gains included in income		(53	)		(102	)		(70	)		(213	)
Net unrealized gain (losses)		(1,476	)		(1,235	)		(1,240	)		325
Income tax effect		(502	)		(421	)		(421	)		110
		(974	)		(814	)		(819	)		215

Other comprehensive income (loss)		(974	)		(710	)		(806	)		424

Total comprehensive income (loss)	$	(400	)	$	(209	)	$	401		$	1,490

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months ended December 31,						Six Months ended December 31,
	2010			2009			2010			2009

Balance at beginning of period	$	24,349		$	22,974		$	23,716		$	21,461

Comprehensive income
Net Income		574			501			1,207			1,066
Other comprehensive income (loss)		(974	)		(710	)		(806	)		424
Total comprehensive income (loss)		(400	)		(209	)		401			1,490

Common stock issued for dividend reinvestment and stock purchase plan (2,680 shares and 5,669 shares for the three and six months in 2010 and 1,733 shares and 3,156 shares for the three and six months in 2009, respectively)		32			21			68			38
Common cash dividends		(203	)		(204	)		(407	)		(407	)

Balance at the end of the period	$	23,778		$	22,582		$	23,778		$	22,582

Common cash dividends per share	$	0.10		$	0.10		$	0.20		$	0.20

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	Six Months Ended December 31,
	2010			2009
Cash flows from operating activities
Net cash from operating activities	$	2,208		$	790

Cash flow from investing activities
Securities available-for-sale
Purchases		(24,247	)		(15,835	)
Maturities, calls and principal pay downs		7,225			7,984
Proceeds from sales of available-for-sale securities		5,123			6,009
Net (increase) decrease in certificates of deposits in other financial Institutions		(2,205	)		589
Net increase in loans		(2,649	)		(6,945	)
Acquisition of premises and equipment		(718	)		(154	)
Sale of other real estate owned		27			136
Net cash from investing activities		(17,444	)		(8,216	)

Cash flow from financing activities
Net increase in deposit accounts		13,185			4,870
Net change in short-term borrowings		540			(3,553	)
Proceeds of Federal Home Loan Bank advances		1,000			-
Repayments of Federal Home Loan Bank advances		(1,074	)		(84	)
Proceeds from dividend reinvestment and stock purchase plan		68			38
Dividends paid		(407	)		(407	)
Net cash from financing activities		13,312			864

Decrease in cash or cash equivalents		(1,924	)		(6,562	)

Cash and cash equivalents, beginning of period		13,806			18,891
Cash and cash equivalents, end of period	$	11,882		$	12,329

Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	1,071		$	1,443
Federal income taxes		505			370
Non-cash items:
Transfer from loans to repossessed assets	$	-		$	137

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 1 – Summary of Significant Accounting Policies:

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

Basis of Presentation: The consolidated financial statements for interim periods are unaudited and reflect all adjustments (consisting of only normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by accounting principles generally accepted in the United States of America. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Consumers Bancorp, Inc.’s Form 10-K for the year ended June 30, 2010. The results of operations for the interim period disclosed herein are not necessarily indicative of the results that may be expected for a full year.

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

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

Earnings per Share: Earnings per common share are computed based on the weighted average common shares outstanding. The weighted average number of outstanding shares was 2,041,517 and 2,031,377 for the quarters ended December 31, 2010 and 2009, respectively. The weighted average number of outstanding shares was 2,040,043 and 2,030,622 for the six months ended December 31, 2010 and 2009, respectively. The Corporation’s capital structure contains no dilutive securities.

Reclassifications: Certain items in prior financial statements have been reclassified to conform to the current presentation.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

New Accounting Standards Updates: On July 21, 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. See Note 3 - Loans.

Note 2 – Securities

Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2010
Obligations of government sponsored entities	$	8,889	$	61	$	(5	)	$	8,945
Obligations of state and political subdivisions		22,877		120		(877	)		22,120
Mortgage-backed securities – residential		28,539		1,088		(31	)		29,596
Collateralized mortgage obligations		13,574		46		(73	)		13,547
Trust preferred security		522		—		(131	)		391
Total securities	$	74,401	$	1,315	$	(1,117	)	$	74,599

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2010
Obligations of government sponsored entities	$	10,771	$	236	$	(3	)	$	11,004
Obligations of state and political subdivisions		20,073		392		(218	)		20,247
Mortgage-backed securities - residential		24,333		1,279		—			25,612
Collateralized mortgage obligations		7,094		34		(151	)		6,977
Trust preferred security		572		—		(150	)		422
Total securities	$	62,843	$	1,941	$	(522	)	$	64,262

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

	Three Months Ended December 31,				Six Months Ended December 31,
	2010		2009		2010		2009
Proceeds from sales	$	2,570	$	2,845	$	5,123	$	6,009
Gross realized gains		53		102		97		213
Gross realized losses		—		—		27		—

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The amortized cost and fair values of available-for-sale securities at December 31, 2010, by expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized mortgage obligations and the trust preferred security are shown separately.

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	2,679	$	2,706
Due after one year through five years		6,259		6,322
Due after five years through ten years		6,216		6,170
Due after ten years		16,612		15,867
Total		31,766		31,065

Mortgage-backed securities - residential		28,539		29,596
Collateralized mortgage obligations		13,574		13,547
Trust preferred security		522		391
Total	$	74,401	$	74,599

The following table summarizes the securities with unrealized losses at December 31, 2010 and June 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	Less than 12 Months					12 Months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2010
Obligations of government sponsored entities	$	1,010	$	(5	)	$	—	$	—		$	1,010	$	(5	)
Obligations of states and political subdivisions		14,754		(659	)		1,133		(218	)		15,887		(877	)
Mortgage-backed securities - residential		6,514		(31	)		—		—			6,514		(31	)
Collateralized mortgage obligations		9,578		(73	)		—		—			9,578		(73	)
Trust preferred security		—		—			391		(131	)		391		(131	)

Total temporarily impaired	$	31,856	$	(768	)	$	1,524	$	(349	)	$	33,380	$	(1,117	)

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

	Less than 12 Months					12 Months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
June 30, 2010
Obligations of government sponsored entities	$	764	$	(3	)	$	—	$	—		$	764	$	(3	)
Obligations of states and political subdivisions		5,331		(179	)		649		(39	)		5,980		(218	)
Collateralized mortgage obligations		4,763		(151	)		—		—			4,763		(151	)
Trust preferred security		—		—			422		(150	)		422		(150	)

Total temporarily impaired	$	10,858	$	(333	)	$	1,071	$	(189	)	$	11,929	$	(522	)

Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities. However, the trust preferred security is evaluated using the model outlined in FASB ASC Topic 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.

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

The second segment of the portfolio uses the OTTI guidance provided by ASC Topic 325. Under the ASC Topic 325 model, the present value of the remaining cash flows as estimated at the preceding evaluation date are compared to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. The analysis of the trust preferred security falls within the scope of ASC Topic 325.

The Corporation owns a trust preferred security, which represents collateralized debt obligations (CDOs) issued by other financial and insurance companies. The following table summarizes the relevant characteristics of the pooled-trust-preferred security at December 31, 2010. The security is part of a pool of issuers that support a more senior tranche of securities. Due to the illiquidity in the market, it is unlikely the Corporation would be able to recover its investment in this security if the Corporation sold the security at this time.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Deal Name		Par Value				Book Value				Fair Value				Unrealized Loss				# of Issuers Currently Performing/ Remaining				Actual Deferrals and Defaults as a % of Original Collateral				Expected Defaults as a % of Remaining Collateral				Excess Subordination (2)
Pre Tsl XXII (1)		$	982			$	522			$	391			$	131				64/98				29.3	%			13.3	%			—

(1) Security was determined to have other-than-temporary impairment. As such, the book value is net of recorded credit impairment.

(2) Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the security can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by: (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

Due to an increase in principal and/or interest deferrals by the issuers of the underlying securities, the cash interest payments for the trust preferred security are being deferred. On December 31, 2010, the lowest credit rating on this security was Fitch’s rating of C, which is defined as highly speculative. The issuers in this security are primarily banks, bank holding companies and a limited number of insurance companies. The investment security is evaluated using a model to compare the present value of expected cash flows to prior periods expected cash flows to determine if there has been an adverse change in cash flows during the period. The discount rate used to calculate the cash flows is the coupon rate of the security, based on the forward LIBOR curve. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and all interest payment deferrals are treated as defaults with an assumed recovery rate of 15% on deferrals. In addition we use the model to “stress” the CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. According to the December 31, 2010 analysis, the expected cash flows were below the recorded amortized cost of the trust preferred security. Therefore, management determined it was appropriate to record an other-than-temporary impairment loss of $50 from this security during the second fiscal quarter of 2011. Management has reviewed this security and these conclusions with an independent third party. If there is further deterioration in the underlying collateral of this security, other-than-temporary impairments may also occur in future periods.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 3 – Loans

Major classifications of loans were as follows:

	December 31, 2010			June 30, 2010
Commercial	$	14,559		$	14,559
Commercial real estate:
Construction		531			2,916
Other		102,321			99,761
1 – 4 Family residential real estate:
Owner occupied		35,128			34,428
Non-owner occupied		18,484			16,738
Construction		396			328
Consumer		5,512			5,824
Subtotal		176,931			174,554
Less: Net deferred loan fees		(253	)		(271	)
Allowance for loan losses		(2,266	)		(2,276	)
Net Loans	$	174,412		$	172,007

A summary of activity in the allowance for loan losses for the six months ended December 31, 2010, and 2009, was as follows:

	2010			2009
Beginning of period	$	2,276		$	1,992
Provision		244			343
Charge-offs		(285	)		(222	)
Recoveries		31			56
Balance at December 31,	$	2,266		$	2,169

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010. Included in the recorded investment in loans is $(253) of net deferred loan fees and $493 of accrued interest receivable.

			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	18	$	237	$	341	$	—	$	596
Collectively evaluated for impairment		62		873		666		69		1,670

Total ending allowance balance	$	80	$	1,110	$	1,007	$	69	$	2,266

Recorded Investment in Loans:
Loans individually evaluated for impairment	$	93	$	1,787	$	1,057	$	—	$	2,937
Loans collectively evaluated for impairment		14,511		101,097		53,095		5,531		174,234

Total ending loans balance	$	14,604	$	102,884	$	54,152	$	5,531	$	177,171

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Impaired loans were as follows:

	December 31, 2010		June 30, 2010
Period-end loans with no allocated allowance for loan losses	$	570	$	717
Period-end loans with allocated allowance for loan losses		2,367		1,918
Total	$	2,937	$	2,635
Amount of allowance allocated to impaired loans	$	596	$	543

The following table presents impaired loans by class of loans as of December 31, 2010:

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated

With no related allowance recorded:
Commercial	$	20	$	20	$	—
Commercial real estate:
Other		550		550		—
With an allowance recorded:
Commercial		73		73		18
Commercial real estate:
Other		1,238		1,239		237
1-4 Family residential real estate:
Owner occupied		330		330		45
Non-owner occupied		726		727		296
Total	$	2,937	$	2,939	$	596

Nonaccrual loans and loans past due 90 days still on accrual were as follows:

	December 31, 2010		June 30, 2010		December 31, 2009
Loans past due over 90 days and still accruing	$	11	$	—	$	—
Nonaccrual loans		2,157		2,342		2,648

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

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:

			Loans Past Due
			Over 90 Days
			Still
	Nonaccrual		Accruing
Commercial	$	102	$	—
Commercial real estate:
Other		1,099		—
1 – 4 Family residential:
Owner occupied		230		—
Non-owner occupied		726		—
Consumer		—		11
Total	$	2,157	$	11

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

	30 - 59		60 - 89		Greater than
	Days		Days		90 Days		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	30	$	—	$	29	$	59	$	14,545	$	14,604
Commercial real estate:
Construction		—		—		—		—		533		533
Other		255		584		762		1,601		100,750		102,351
1-4 Family residential:
Owner occupied		318		23		—		341		34,910		35,251
Non-owner occupied		—		—		726		726		17,779		18,505
Construction		—		—		—		—		396		396
Consumer		8		—		11		19		5,512		5,531
Total	$	611	$	607	$	1,528	$	2,746	$	174,425	$	177,171

The above table of past due loans includes the recorded investment in nonaccrual loans of $435 in the 30-59 days past due category and $1,517 in the greater than 90 days past due category.

Troubled Debt Restructurings:

The Corporation has allocated $52 and $5 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010 and 2009. As of December 31, 2010 and 2009, the Corporation had not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Corporation uses the following definitions for risk ratings:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100,000 or are included in groups of homogeneous loans. As of December 31, 2010, and based on the most recent analysis performed, the unpaid principal balance by risk category of loans by class of loans is as follows:

			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	13,728	$	541	$	112	$	93	$	85
Commercial real estate:
Construction		312		106		113		—		—
Other		92,220		5,281		3,032		1,788		—
1-4 Family residential real estate:
Owner occupied		3,405		312		34		330		31,047
Non-owner occupied		12,929		1,943		1,951		726		935
Construction		—		—		—		—		396
Consumer		—		—		—		—		5,512
Total	$	122,594	$	8,183	$	5,242	$	2,937	$	37,975

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 4 - Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.

The Corporation used the following methods and significant assumptions to estimate the fair value of items:

Securities: When available, the fair values of available-for-sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). If quoted market prices are not available, fair values are estimated using matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are estimated using a discounted cash flow model and market liquidity premium (Level 3 inputs). Discounted cash flows are calculated using spread to the swap and LIBOR curves. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Federal bank and other restricted stocks includes stock acquired for regulatory purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock that are accounted for at cost due to restrictions placed on their transferability; and therefore, are not subject to the fair value disclosure requirements.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Balance at December 31,		Fair Value Measurements at December 31, 2010 Using
	2010		Level 1		Level 2		Level 3
Assets:
Obligations of government-sponsored entities	$	8,945	$	—	$	8,945	$	—
Obligations of states and political subdivisions		22,120		—		22,120		—
Mortgage-backed securities - residential		29,596		—		29,596		—
Collateralized mortgage obligations		13,547		—		13,547		—
Trust preferred security		391		—		—		391

	Balance at		Fair Value Measurements at June 30, 2010 Using
	June 30, 2010		Level 1		Level 2		Level 3
Assets:
Obligations of government sponsored entities	$	11,004	$	—	$	11,004	$	—
Obligations of states and political subdivisions		20,247		—		20,247		—
Mortgage-backed securities - residential		25,612		—		25,612		—
Collateralized mortgage obligations		6,977		—		6,977		—
Trust preferred security		422		—		—		422

CONSUMERS BANCORP INC /OH/ - FORM 10-Q - February 11, 2011

Attached files