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EX-31.1 - CONSUMERS BANCORP INC /OH/v222615_ex31-1.htm
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EX-31.2 - CONSUMERS BANCORP INC /OH/v222615_ex31-2.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 March 31, 2011

Or

¨
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 May 12, 2011
 
  
2,046,673 Common Shares
 
 
 

 
 
CONSUMERS BANCORP, INC.
FORM 10-Q
QUARTER ENDED March 31, 2011

Table of Contents

 
Page
Number (s)
Part I – Financial Information
 
Item 1 – Financial Statements (Unaudited)
 
Consolidated Balance Sheets at March 31, 2011 and June 30, 2010
1
   
Consolidated Statements of Income for the three and nine months ended March 31, 2011 and 2010
2
   
Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2011 and 2010
3
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended March 31, 2011 and 2010
4
   
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2011 and 2010
5
   
Notes to the Consolidated Financial Statements
6-21
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
22-34
   
Item 3 – Not Applicable for Smaller Reporting Companies
 
   
Item 4 – Controls and Procedures
35
Part II – Other Information
Item 1 – Legal Proceedings
36
   
Item 1A – Not Applicable for Smaller Reporting Companies
 
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
36
   
Item 3 – Defaults Upon Senior Securities
36
   
Item 4 – Removed and Reserved
 
   
Item 5 – Other Information
36
   
Item 6 – Exhibits
36
   
Signatures
37
 
 
 

 
 
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements (unaudited)
CONSUMERS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

   
March 31,
2011
   
June 30,
2010
 
ASSETS
           
Cash on hand and noninterest-bearing deposits in other banks
  $ 5,632     $ 5,973  
Interest-bearing deposits in other banks
    9,160       7,833  
Total cash and cash equivalents
    14,792       13,806  
Certificates of deposit in other financial institutions
    4,165       980  
Securities, available-for-sale
    82,112       64,262  
Federal bank and other restricted stocks, at cost
    1,186       1,186  
Total loans
    176,898       174,283  
Less allowance for loan losses
    (2,101 )     (2,276 )
Net Loans
    174,797       172,007  
Cash surrender value of life insurance
    5,365       4,798  
Premises and equipment, net
    4,461       3,581  
Intangible assets
    129       250  
Other real estate owned
    -       25  
Accrued interest receivable and other assets
    2,830       2,498  
Total assets
  $ 289,837     $ 263,393  
                 
LIABILITIES
               
Deposits
               
Non-interest bearing demand
  $ 60,786     $ 47,659  
Interest bearing demand
    13,937       13,687  
Savings
    77,318       63,704  
Time
    89,838       91,264  
Total deposits
    241,879       216,314  
                 
Short-term borrowings
    14,217       13,086  
Federal Home Loan Bank advances
    7,578       8,297  
Accrued interest and other liabilities
    1,959       1,980  
Total liabilities
    265,633       239,677  
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock (no par value, 350,000 shares authorized)
           
Common stock (no par value, 3,500,000 shares authorized; 2,177,115 and 2,168,329 shares issued as of March 31, 2011 and June 30, 2010, respectively)
    5,074       4,968  
Retained earnings
    20,547       19,470  
Treasury stock, at cost (130,442 common shares)
    (1,659 )     (1,659 )
Accumulated other comprehensive income
    242       937  
Total shareholders’ equity
    24,204       23,716  
Total liabilities and shareholders’ equity
  $ 289,837     $ 263,393  
 
See accompanying notes to consolidated financial statements
 
 
1

 
 
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
   
Three Months ended
March 31,
   
Nine Months ended
March 31,
 
(Dollars in thousands, except per share amounts)
 
2011
   
2010
   
2011
   
2010
 
Interest income
                       
Loans, including fees
  $ 2,517     $ 2,451     $ 7,690     $ 7,392  
Securities
                               
Taxable
    391       445       1,189       1,415  
Tax-exempt
    227       200       658       580  
Federal funds sold and other interest bearing deposits
    15       9       38       54  
Total interest income
    3,150       3,105       9,575       9,441  
                                 
Interest expense
                               
Deposits
    373       499       1,270       1,732  
Short-term borrowings
    9       11       33       37  
Federal Home Loan Bank advances
    60       70       195       225  
Total interest expense
    442       580       1,498       1,994  
                                 
Net interest income
    2,708       2,525       8,077       7,447  
Provision for loan losses
    100       110       344       453  
Net interest income after provision for loan losses
    2,608       2,415       7,733       6,994  
                                 
Non-interest income
                               
Service charges on deposit accounts
    301       333       963       1,184  
Debit card interchange income
    160       133       467       377  
Bank owned life insurance income
    47       43       136       131  
Securities gains, net
    -       -       70       213  
Other-than-temporary loss
                               
Total impairment loss
    (327 )     (100 )     (358 )     (280 )
Loss recognized in other comprehensive income
    177       -       158       -  
Net impairment loss recognized in earnings
    (150 )     (100 )     (200 )     (280 )
Gain/(Loss) on sale of OREO
    -       (51 )     2       (46 )
Other
    44       41       152       110  
Total non-interest income
    402       399       1,590       1,689  
                                 
Non-interest expenses
                               
Salaries and employee benefits
    1,234       1,141       3,598       3,347  
Occupancy and equipment
    263       266       774       800  
Data processing expenses
    137       135       413       399  
Professional and director fees
    80       74       265       265  
FDIC Assessments
    77       77       233       236  
Franchise taxes
    61       57       178       164  
Telephone and network communications
    57       54       167       176  
Debit card processing expenses
    84       73       252       215  
Amortization of intangible
    40       40       121       121  
Other
    386       375       1,160       1,061  
Total non-interest expenses
    2,419       2,292       7,161       6,784  
                                 
Income before income taxes
    591       522       2,162       1,899  
Income tax expense
    109       97       473       408  
Net Income
  $ 482     $ 425     $ 1,689     $ 1,491  
                                 
Basic earnings per share
  $ 0.24     $ 0.21     $ 0.83     $ 0.73  
 
See accompanying notes to consolidated financial statements
 
 
2

 
 
CONSUMERS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
(Dollars in thousands)

   
Three Months ended
March 31,
   
Nine Months ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 482     $ 425     $ 1,689     $ 1,491  
                                 
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
    (327 )     (22 )     (358 )     115  
Reclassification adjustment for losses included in income
    150       100       200       280  
Net unrealized gain (loss)
    (177 )     78       (158 )     395  
Income tax effect
    60       27       54       134  
      (117 )     51       (104 )     261  
                                 
Available-for-sale securities:
                               
Unrealized gains (losses) arising during the period
    346       145       (824 )     682  
Reclassification adjustment for gains included in income
                (70 )     (213 )
Net unrealized gain (losses)
    346       145       (894 )     469  
Income tax effect
    118       50       (303 )     160  
      228       95       (591 )     309  
                                 
Other comprehensive income (loss)
    111       146       (695 )     570  
                                 
Total comprehensive income
  $ 593     $ 571     $ 994     $ 2,061  

See accompanying notes to consolidated financial statements.
 
 
3

 
 
CONSUMERS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

(Dollars in thousands, except per share data)

   
Three Months ended
March 31,
   
Nine Months ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Balance at beginning of period
  $ 23,778     $ 22,582     $ 23,716     $ 21,461  
                                 
Comprehensive income
                               
Net income
    482       425       1,689       1,491  
Other comprehensive income (loss)
    111       146       (695 )     570  
Total comprehensive income
    593       571       994       2,061  
                                 
Common stock issued for dividend reinvestment and stock purchase plan (3,117 shares and 8,786 shares for the three and nine months in 2011 and 2,587 shares and 5,743 shares for the three and nine months in 2010, respectively)
    38       30       106       68  
Common cash dividends
    (205 )     (203 )     (612 )     (610 )
                                 
Balance at the end of the period
  $ 24,204     $ 22,980     $ 24,204     $ 22,980  
                                 
Common cash dividends per share
  $ 0.10     $ 0.10     $ 0.30     $ 0.30  

See accompanying notes to consolidated financial statements.
 
 
4

 
 
CONSUMERS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Dollars in thousands)
 
Nine Months Ended
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net cash from operating activities
  $ 3,037     $ 1,476  
                 
Cash flow from investing activities
               
Securities available-for-sale
               
Purchases
    (36,572 )     (23,218 )
Maturities, calls and principal pay downs
    11,822       12,188  
Proceeds from sales of available-for-sale securities
    5,123       6,009  
Net (increase) decrease in certificates of deposits in other financial institutions
    (3,185 )     1,423  
Net increase in loans
    (3,134 )     (10,366 )
Purchase of Bank owned life insurance
    (431 )     -  
Acquisition of premises and equipment
    (1,172 )     (153 )
Sale of other real estate owned
    27       170  
Net cash from investing activities
    (27,522 )     (13,947 )
                 
Cash flow from financing activities
               
Net increase in deposit accounts
    25,565       7,209  
Net change in short-term borrowings
    1,131       (1,624 )
Repayments of Federal Home Loan Bank advances
    (719 )     (1,000 )
Proceeds from dividend reinvestment and stock purchase plan
    106       68  
Dividends paid
    (612 )     (610 )
Net cash from financing activities
    25,471       4,043  
                 
Increase/(decrease) in cash or cash equivalents
    986       (8,428 )
                 
Cash and cash equivalents, beginning of period
    13,806       18,891  
Cash and cash equivalents, end of period
  $ 14,792     $ 10,463  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period:
               
Interest
  $ 1,525     $ 2,041  
Federal income taxes
    680       605  
Non-cash items:
               
Transfer from loans to repossessed assets
  $ -     $ 137  

See accompanying notes to consolidated financial statements.
 
 
5

 
 
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.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss experience, the nature of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
 
 
6

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers loans not individually evaluated for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years.  This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:  commercial, commercial real estate, residential real estate and consumer.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered trouble debt restructurings and classified as impaired. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, 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. Troubled debt restructures are measured at the present value of estimated future cash flows using the loans’s effective interest rate at inception.

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 2,044,179 and 2,033,289 for the quarters ended March 31, 2011 and 2010, respectively. The weighted average number of outstanding shares was 2,041,402 and 2,031,498 for the nine months ended March 31, 2011 and 2010, 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.

New Accounting Standards Updates: On July 21, 2010, the FASB issued Accounting Standards Update (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 non-accrual 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.
 
 
7

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
  
On April 5, 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” to assist creditors in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring (TDR). This statement does not change the long-standing guidance that a restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. The ASU provides clarifications for evaluating whether a concession has been granted and whether a debtor is experiencing financial difficulties. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The effect of adopting this new guidance is not expected to have a significant impact on the Corporation’s financial statements.
 
Note 2 – Securities

Description of Securities
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
March 31, 2011
                       
Obligations of government sponsored entities
  $ 12,311     $ 45     $ (57 )   $ 12,299  
Obligations of state and political subdivisions
    23,144       247       (503 )     22,888  
Mortgage-backed securities – residential
    31,826       1,055       (48 )     32,833  
Collateralized mortgage obligations
    14,092       35       (99 )     14,028  
Trust preferred security
    372             (308 )     64  
Total securities
  $ 81,745     $ 1,382     $ (1,015 )   $ 82,112  
 
 
8

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
   
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
March 31,
   
Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Proceeds from sales
  $           $ 5,123     $ 6,009  
Gross realized gains
                97       213  
Gross realized losses
                27        

The amortized cost and fair values of available-for-sale securities at March 31, 2011, 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
  $ 4,022     $ 4,044  
Due after one year through five years
    6,812       6,853  
Due after five years through ten years
    7,758       7,738  
Due after ten years
    16,863       16,552  
Total
    35,455       35,187  
                 
Mortgage-backed securities - residential
    31,826       32,833  
Collateralized mortgage obligations
    14,092       14,028  
Trust preferred security
    372       64  
Total
  $ 81,745     $ 82,112  
 
 
9

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
The following table summarizes the securities with unrealized losses at March 31, 2011 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
 
March 31, 2011
                                   
Obligations of government sponsored entities
  $ 7,133     $ (57 )   $     $     $ 7,133     $ (57 )
Obligations of states and political subdivisions
    10,845       (315 )     1,163       (188 )     12,008       (503 )
Mortgage-backed securities - residential
    10,288       (48 )                 10,288       (48 )
Collateralized mortgage obligations
    10,163       (99 )                 10,163       (99 )
Trust preferred security
                64       (308 )     64       (308 )
                                                 
Total temporarily impaired
  $ 38,429     $ (519 )   $ 1,227     $ (496 )   $ 39,656     $ (1,015 )

   
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.
 
 
10

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
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 March 31, 2011. 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.

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     $ 372     $ 64     $ 308       62/98       31.7 %     12.8 %      

(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 March 31, 2011, 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 March 31, 2011 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 $150 during the three month period ended March 31, 2011, bringing the total impairment loss to $200 for the nine month period ended March 31, 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.
 
 
11

 
 
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:

   
March 31,
2011
   
June 30,
2010
 
Commercial
  $ 17,097     $ 14,559  
Commercial real estate:
               
Construction
    475       2,916  
Other
    99,762       99,761  
1 – 4 Family residential real estate:
               
Owner occupied
    34,468       34,428  
Non-owner occupied
    19,312       16,738  
Construction
    555       328  
Consumer
    5,492       5,824  
Subtotal
    177,161       174,554  
Less:   Net deferred loan fees
    (263 )     (271 )
Allowance for loan losses
    (2,101 )     (2,276 )
Net Loans
  $ 174,797     $ 172,007  

A summary of activity in the allowance for loan losses for the nine months ended March 31, 2011, and the three and nine months ended March 31, 2010, was as follows:

   
Nine Months
Ended
March 31, 2011
   
Three Months
Ended
March 31, 2010
   
Nine Months
Ended
March 31, 2010
 
Beginning of period
  $ 2,276     $ 2,169     $ 1,992  
Provision
    344       110       453  
Charge-offs
    (568 )     (45 )     (267 )
Recoveries
    49       36       92  
Balance at March 31,
  $ 2,101     $ 2,270     $ 2,270  
 
 
12

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2011:

         
Commercial
   
Residential
             
         
Real
   
Real
             
   
Commercial
   
Estate
   
Estate
   
Consumer
   
Total
 
                               
Allowance for loan losses:
                             
Beginning balance
  $ 80     $ 1,110     $ 1,007     $ 69     $ 2,266  
Provision for loan losses
    54       14       6       26       100  
Loans charged-off
    (9 )     (238 )           (36 )     (283 )
Recoveries
                      18       18  
                                         
Total ending allowance balance
  $ 125     $ 886     $ 1,013     $ 77     $ 2,101  

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 March 31, 2011. Included in the recorded investment in loans is $(263) of net deferred loan fess and $468 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
  $ 15     $ 191     $ 335     $     $ 541  
Collectively evaluated for impairment
    110       695       678       77       1,560  
                                         
Total ending allowance balance
  $ 125     $ 886     $ 1,013     $ 77     $ 2,101  
                                         
Recorded investment in loans:
                                       
Loans individually evaluated for impairment
  $ 88     $ 1,740     $ 1,049     $     $ 2,877  
Loans collectively evaluated for impairment
    17,044       98,524       53,432       5,489       174,489  
                                         
Total ending loans balance
  $ 17,132     $ 100,264     $ 54,481     $ 5,489     $ 177,366  
 
 
13

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2011:

   
Unpaid
         
Allowance for
   
Average
   
Interest
    Cash Basis  
   
Principal
   
Recorded
   
Loan Losses
   
Recorded
   
Income
   
Interest
 
   
Balance
   
Investment
   
Allocated
   
Investment
   
Recognized
   
Recognized
 
                                     
With no related allowance recorded:
                                   
Commercial
  $ 19     $ 19     $     $ 18     $     $  
Commercial real estate:
                                               
Other
    551       550             550              
With an allowance recorded:
                                               
Commercial
    69       69       15       70              
Commercial real estate:
                                               
Other
    1,193       1,190       191       1,217       8        
1-4 Family residential real estate:
                                               
Owner occupied
    324       322       39       324       2        
Non-owner occupied
    727       727       296       727              
Total
  $ 2,883     $ 2,877     $ 541     $ 2,906     $ 10     $  

The following table presents information related to loans individually evaluated for impairment as of June 30, 2010:
   
June 30,
2010
 
Period-end loans with no allocated allowance for loan losses
  $ 717  
Period-end loans with allocated allowance for loan losses
    1,918  
Total
  $ 2,635  
Amount of allowance allocated to impaired loans
  $ 543  
 
 
14

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
The following table presents information for loans individually evaluated for impairment:
   
Nine Months
Ended
March 31, 2011
   
Three Months
Ended
March 31, 2010
   
Nine Months
Ended
March 31, 2010
 
Average of impaired loans during period
  $ 2,909     $ 2,401     $ 2,261  
Interest income recognized during impairment
    37              
Cash-basis interest income recognized
    18              

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2011:

         
Loans Past Due
 
         
Over 90 Days
 
         
Still
 
   
Non-accrual
   
Accruing
 
Commercial
  $ 69     $  
Commercial real estate:
               
Other
    1,057        
1 – 4 Family residential:
               
Owner occupied
    244        
Non-owner occupied
    727        
Consumer
           
Total
  $ 2,097     $  
 
 
15

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
Non-accrual loans and loans past due 90 days still on accrual were as follows:

   
June 30,
2010
   
March 31,
2010
 
Loans past due over 90 days and still accruing
  $     $ 20  
Non-accrual loans
    2,342       2,607  

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

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 by class of loans:

   
Days Past Due
                   
               
90 Days or
                   
    30 – 59     60 - 89    
Greater &
   
Total
   
Loans Not
       
   
Days
   
Days
   
Non-accrual
   
Past Due
   
Past Due
   
Total
 
Commercial
  $ 5     $     $     $ 5     $ 17,127     $ 17,132  
Commercial real estate:
                                               
Construction
                            470       470  
Other
    648             729       1,377       98,417       99,794  
1-4 Family residential:
                                               
Owner occupied
    321             22       343       34,269       34,612  
Non-owner occupied
                727       727       18,584       19,311  
Construction
                            558       558  
Consumer
    3                   3       5,486       5,489  
Total
  $ 977     $     $ 1,478     $ 2,455     $ 174,911     $ 177,366  

The above table of past due loans includes the recorded investment in non-accrual loans of $420 in the 30-59 days past due category and $199 in the loans not past due category.
 
Troubled Debt Restructurings:

The Corporation allocated $50 and $3 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and June 30, 2010. As of March 31, 2011 and June 30, 2010, the Corporation had not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

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:
 
 
16

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
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 March 31, 2011, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

         
Special
               
Not
 
   
Pass
   
Mention
   
Substandard
   
Doubtful
   
Rated
 
Commercial
  $ 15,741     $ 767     $ 382     $ 88     $ 154  
Commercial real estate:
                                       
Construction
    255       104       111              
Other
    90,847       5,017       1,575       1,740       615  
1-4 Family residential real estate:
                                       
Owner occupied
    5,785       309       277       322       27,919  
Non-owner occupied
    14,893       1,813       1,672       727       206  
Construction
    22                         536  
Consumer
                            5,489  
Total
  $ 127,543     $ 8,010     $ 4,017     $ 2,877     $ 34,919  
 
 
17

 

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.
 
 
18

 
 
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:
         
Fair Value Measurements at 
March 31, 2011 Using
 
   
Balance at 
March 31,
2011
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Obligations of government-sponsored entities
  $ 12,299     $     $ 12,299     $  
Obligations of states and political subdivisions
    22,888             22,888        
Mortgage-backed securities - residential
    32,833             32,833        
Collateralized mortgage obligations
    14,028             14,028        
Trust preferred security
    64                   64  

         
Fair Value Measurements at 
June 30, 2010 Using
 
   
Balance at 
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  

The following table presents a reconciliation of the trust preferred security measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended March 31, 2011 and 2010:

   
2011
   
2010
 
Beginning balance
  $ 422     $ 356  
Realized losses included in non-interest income
    (200 )     (280 )
Change in fair value included in other comprehensive income
     (158 )      395  
Ending balance, March 31
  $ 64     $ 471  
 
 
19

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)
 
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

         
Fair Value Measurements at 
March 31, 2011 Using
 
   
Balance at 
March 31,
2011
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Impaired loans
  $ 1,909     $     $     $ 1,909  

         
Fair Value Measurements at 
June 30, 2010 Using
 
   
Balance at 
June 30, 2010
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Impaired loans
  $ 1,375     $     $     $ 1,375  
Other real estate owned, net
    5                   5  

Impaired loans, which are generally measured for impairment using the fair value of the collateral for collateral dependant loans, had a principal balance of $2,450, with a valuation allowance of $541 at March 31, 2011, resulting in an additional provision for loan losses of $303 being recorded for the nine month period ended March 31, 2011. Provision for loan losses recorded for the nine months ended March 31, 2010 related to impaired loans was $328. As of June 30, 2010, impaired loans with a principal balance of $1,918, with a valuation allowance of $543.

Other real estate owned which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $5, which is made up of the outstanding balance of $22, net of a valuation allowance of $17 at June 30, 2010, resulting in a write-down of $17 for the year ended June 30, 2010. There was no other real estate owned as of March 31, 2011.

Fair Value of Financial Instruments

The following table shows the estimated fair value at March 31, 2011 and June 30, 2010, and the related carrying value of financial instruments:
 
 
20

 
 
CONSUMERS BANCORP, INC.
Notes to the Consolidated Financial Statements
(Unaudited) (continued)
 
(Dollars in thousands, except per share amounts)

   
March 31, 2011
   
June 30, 2010
 
   
Carrying
Amount
   
Estimated
Fair
Value
   
Carrying
Amount
   
Estimated
Fair
Value
 
Financial Assets:
                       
Cash and cash equivalents
  $ 14,792     $ 14,792     $ 13,806     $ 13,806  
Certificates of deposits in other financial institutions
    4,165       4,171       980       980  
Securities available-for-sale
    82,112       82,112       64,262       64,262  
Loans, net
    174,797       174,040       172,007       167,577  
Accrued interest receivable
    954       954       943       943  
Financial Liabilities:
                               
Demand and savings deposits
    (152,041 )     (152,041 )     (125,050 )     (125,050 )
Time deposits
    (89,838 )     (90,681 )     (91,264 )     (91,926 )
Short-term borrowings
    (14,217 )     (14,217 )     (13,086 )     (13,086 )
Federal Home Loan Bank advances
    (7,578 )     (7,930 )     (8,297 )     (8,681 )
Accrued interest payable
    (95 )     (95 )     (122 )     (122 )

For purposes of the above disclosures of estimated fair value, the following assumptions were used. Estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand and savings deposits and short-term borrowings were considered to approximate carrying value for instruments that reprice frequently and fully. Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans that reprice at least annually and for fixed rate commercial loans with maturities of six months or less which possess normal risk characteristics, carrying value was determined to be fair value. Fair value of other types of loans (including adjustable rate loans which reprice less frequently than annually and fixed rate term loans or loans which possess higher risk characteristics) was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar anticipated maturities. Fair value for impaired loans was based on recent appraisals of the collateral or, if appropriate, using estimated discounted cash flows. The Corporation has not considered market illiquidity in estimating the fair value of loans due to uncertain and inconsistent market pricing being experienced on March 31, 2011. 

Fair value of core deposits, including demand deposits, savings accounts and certain money market deposits, was the amount payable on demand. Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at March 31, 2011 and June 30, 2010, for deposits of similar remaining maturities. Estimated fair value does not include the benefit that result from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. Fair value of short-term borrowings and accrued interest was determined to be the carrying amounts since these financial instruments generally represent obligations that are due on demand. Fair value of Federal Home Loan Bank advances was estimated using current rates at March 31, 2011 and June 30, 2010 for similar financing. The fair value of unrecorded commitments at March 31, 2011 and June 30, 2010 was not material.
 
 
21

 
 
CONSUMERS BANCORP, INC.
 
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in thousands, except per share data)

General
The following is management’s analysis of the Corporation’s results of operations for the three and nine month periods ended March 31, 2011, compared to the same period in 2010, and the consolidated balance sheet at March 31, 2011 compared to June 30, 2010. 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.

Overview
Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all of the issued and outstanding common shares of Consumers National Bank, a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common shares of the Bank. 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 primarily of U.S. government agency obligations, municipal obligations and mortgage-backed securities.

Results of Operations
Three and Nine Months Ended March 31, 2011 and March 31, 2010

Net Income
Net income increased by $57 and $198 for the three and nine months periods ended March 31, 2011, respectively, as compared to the same periods last year. The increase in net income for the three and nine month periods was mainly attributable to an increase in net interest income as a result of an increase in average interest-earning assets and a decline in cost of funds from the same periods last year. Earnings per common share were $0.24 and $0.83 for the three and nine month periods ended March 31, 2011, as compared to $0.21 and $0.73, respectively, for the same periods last year.

Return on average equity (ROE) and return on average assets (ROA) were 8.11% and 0.68%, respectively, for the third quarter of fiscal year 2011 compared to 7.55% and 0.68%, respectively, for the third quarter of fiscal year 2010.

ROE and ROA were 9.28% and 0.81%, respectively, for the 2011 fiscal year-to-date period compared to 8.80% and 0.78%, respectively, for the same periods last year.
 
 
22

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)
 
Net Interest Income
Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest 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. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total average interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

The Corporation’s net interest margin for the three months ended March 31, 2011 was 4.20%, compared to 4.41% for the same period a year ago. Net interest income for the three months ended March 31, 2011 increased by $183, or 7.2%, to $2,708 from $2,525 for the same year ago period. The increase in net interest income was primarily the result of an increase of $31,644, or 13.1%, in average interest-earning assets and a decline in the Corporation’s cost of funds. The Corporation’s cost of funds decreased to 0.89% for the three month period ended March 31, 2011 from 1.28% for the same year ago period mainly due to lower market rates affecting the rates paid on all interest-bearing deposit accounts and borrowings. These increases were partially offset by a decline in the yield on average interest-earning assets to 4.86% for the three month period ended March 31, 2011 from 5.41% from the same year ago period.

The Corporation’s net interest margin for the nine months ended March 31, 2011 was 4.25%, compared to 4.27% for the same year ago period. Net interest income for the nine months ended March 31, 2011 increased by $630, or 8.5%, to $8,077 from $7,447 for the same year ago period. The increase in net interest income was primarily the result of an increase of $23,457, or 9.7%, in average interest-earning assets and a decline in the Corporation’s cost of funds. The Corporation’s cost of funds decreased to 1.01% for the nine month period ended March 31, 2011 from 1.45% for the same year age period mainly due to lower market rates affecting the rates paid on all interest-bearing deposit accounts and borrowings. These increases were partially offset by a decline in the yield on average interest-earning assets to 5.01% for the nine months ended March 31, 2011 from 5.39% from the same year ago period.
 
 
23

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)
 
Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended March 31,
(In thousands, except percentages)

    
2011
   
2010
 
   
Average
Balance
   
 
Interest
   
Yield/
Rate
   
Average
Balance
   
 
Interest
   
Yield/
Rate
 
Interest-earning assets:
                                   
Taxable securities
  $ 56,093     $ 391       2.87 %   $ 45,439     $ 445       4.03 %
Nontaxable securities (1)
    22,344       335       5.91       19,606       292       6.05  
Loans receivable (1)
    177,060       2,523       5.78       168,426       2,457       5.92  
Interest bearing deposits and federal funds sold
    17,175       15       0.35       7,557       9       0.48  
Total interest-earning assets
    272,672       3,264       4.86 %     241,028       3,203       5.41 %
                                                 
Noninterest-earning assets
    12,972                       12,366                  
                                                 
Total Assets
  $ 285,644                     $ 253,394                  
                                                 
Interest-bearing liabilities:
                                               
NOW
  $ 13,862     $ 4       0.12 %   $ 13,373     $ 7       0.21 %
Savings
    75,623       38       0.20       60,690       40       0.27  
Time deposits
    90,889       331       1.48       87,825       452       2.09  
Short-term borrowings
    13,844       9       0.26       12,795       11       0.35  
FHLB advances
    7,703       60       3.16       8,559       70       3.32  
Total interest-bearing liabilities
    201,921       442       0.89 %     183,242       580       1.28 %
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing checking accounts
    57,801                       45,593                  
Other liabilities
    1,836                       1,695                  
Total liabilities
    261,558                       230,530                  
Shareholders’ equity
    24,086                       22,864                  
                                                 
Total liabilities and shareholders’ equity
  $ 285,644                     $ 253,394                  
                                                 
Net interest income, interest rate spread (1)
          $ 2,822       3.97 %           $ 2,623       4.13 %
                                                 
Net interest margin (net interest as a percent of average interest-earning assets) (1)
                    4.20 %                     4.41 %
                                                 
Federal tax exemption on non-taxable securities and loans included in interest income
          $ 114                     $ 98          
                                                 
Average interest-earning assets to interest-bearing liabilities
    135.04 %                     131.54 %                

(1) calculated on a fully taxable equivalent basis
 
 
24

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)

Average Balance Sheets and Analysis of Net Interest Income for the Nine Months Ended March 31,
(In thousands, except percentages)

    
2011
   
2010
 
   
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
Interest-earning assets:
                                   
Taxable securities
  $ 51,862     $ 1,189       3.12 %   $ 45,823     $ 1,415       4.18 %
Nontaxable securities (1)
    21,972       966       5.85       18,824       848       6.01  
Loans receivable (1)
    175,644       7,709       5.85       165,109       7,413       5.98  
Interest bearing deposits and federal funds sold
    15,158       38       0.33       11,423       54       0.63  
Total interest-earning assets
    264,636       9,902       5.01 %     241,179       9,730       5.39 %
                                                 
Noninterest-earning assets
    12,422                       11,907                  
                                                 
Total Assets
  $ 277,058                     $ 253,086                  
                                                 
Interest-bearing liabilities:
                                               
NOW
  $ 13,887     $ 14       0.13 %   $ 13,314     $ 20       0.20 %
Savings
    69,994       113       0.22       58,468       140       0.32  
Time deposits
    92,019       1,143       1.65       90,180       1,572       2.32  
Short-term borrowings
    14,052       33       0.31       12,666       37       0.39  
FHLB advances
    8,073       195       3.22       9,073       225       3.30  
Total interest-bearing liabilities
    198,025       1,498       1.01 %     183,701       1,994       1.45 %
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing checking accounts
    52,820                       44,945                  
Other liabilities
    1,972                       1,859                  
Total liabilities
    252,817                       230,505                  
Shareholders’ equity
    24,241                       22,581                  
                                                 
Total liabilities and shareholders’ equity
  $ 277,058                     $ 253,086                  
                                                 
Net interest income, interest rate spread (1)
          $ 8,404       4.00 %           $ 7,736       3.94 %
                                                 
Net interest margin (net interest as a percent of average interest-earning assets) (1)
                    4.25 %                     4.27 %
                                                 
Federal tax exemption on non-taxable securities and loans included in interest income
          $ 327                     $ 289          
                                                 
Average interest-earning assets to interest-bearing liabilities
    133.64 %                     131.29 %                
 
 
25

 

CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)
 
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 in the Bank’s loan portfolio that have been incurred at each balance sheet date. For the three and nine month periods ended March 31, 2011, the provision for loan losses was $100 and $344, a decrease of $10 and $109 from the same three and nine month periods in the prior year.

Net charge-offs for the nine months ending March 31, 2011 were $519, compared to $175 for the same period ending March 31, 2010. Net charge-offs for the period ending March 31, 2011 included $413 of commercial real estate and $58 of 1-4 family non-owner occupied residential real estate loans. The allowance for loan losses as a percent of total loans at March 31, 2011 was 1.19% compared with 1.31% at June 30, 2010 and from 1.33% a year ago.

Non-performing loans were $2,097 as of March 31, 2011 and represented 1.19% of total loans. This compared with $2,342, or 1.34%, at June 30, 2010 and $2,627, or 1.54%, as of March 31, 2010. The allowance for loan losses to total non-performing loans at March 31, 2011 was 100.19% compared with 97.18% at June 30, 2010 and 86.41% at March 31, 2010. Despite incurring a higher level of net charge-offs in the current year periods, the provision for loan losses decreased compared to the prior year three and nine month periods due to a decline in the level of nonperforming loans. In addition, the level of specific allocations on impaired loans remained stable in the current fiscal year while specific allocations on impaired loans were increasing during the prior fiscal year. The provision for loan losses as of March 31, 2011 was considered sufficient by management for maintaining an appropriate allowance for loan losses.
 
Non-Interest Income
Non-interest income totaled $402 for the third quarter of fiscal year 2011, compared to $399 for the same period last year. Adjusted for an impairment loss on the trust preferred security and losses on the sale of other real estate owned, non-interest income totaled $552 for the third quarter of fiscal year 2011, compared with $550 for the same period last year.

Service charges on deposits decreased by $32, or 9.6%, during the third fiscal quarter of 2011 mainly due to a new rule issued by the Federal Reserve Board that became effective in August 2010 that prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The future trend of overdraft charges is uncertain as a result of these new consumer regulatory provisions.
 
 
26

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
(Dollars in thousands, except per share data)
 
Debit card interchange income increased by $27, or 20.3%, during the third fiscal quarter of 2011 mainly due to an increase in debit card usage. On July 21, 2010, the Dodd-Frank Act amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. Because of the uncertainty as to any future rulemaking by the Federal Reserve, the Corporation cannot provide any assurance as to the ultimate impact of the Dodd-Frank Act on the amount of interchange income from debit card transactions reported in future periods.

Non-interest income totaled $1,590 during the first nine months of fiscal year 2011, compared to $1,689 for the same period last year. Service charges on deposits decreased by $221 mainly due to the new rule issued by the Federal Reserve Board that was previously discussed. Debit card interchange income increased by $90, or 23.9%, mainly due to an increase in debit card usage.

Net gains recognized on the sale of securities totaled $70 during the first nine months of fiscal year 2011 and $213 during the same year ago period. During fiscal year 2011, the Corporation sold callable agency securities that were projected to be called within a short period of time and recognized gains totaling $97. These gains were partially offset by a $27 loss from the sale of a collateralized mortgage obligation that was underperforming. An other-than-temporary impairment loss of $200 was recorded during the 2011 fiscal year-to-date period and a $280 loss was recorded during the same year ago period related to a trust preferred security the Corporation owns. A discussion of this impairment loss is included on the following pages under the heading “Financial Condition”.

Non-Interest Expenses
Total non-interest expenses increased to $2,419, or 5.5%, during the third quarter of fiscal year 2011, compared with $2,292 during the same year ago period.

Salaries and employee benefits increased by $93, or 8.2%, during the third quarter of fiscal year 2011 mainly due to staff added in fiscal year 2010 in the lending and credit administration functions and staff hired for the branch location in Hartville, Ohio that is scheduled to open during the fourth fiscal quarter of 2011. Also, normal merit increases were reinstated and went into effect on July 1, 2010, following the removal of a salary freeze that was in place during the preceding eighteen months.

Debit card processing expenses increased by $11, or 15.1%, during the third quarter of fiscal year 2011 mainly as a result of increased debit card usage by our customers.
 
 
27

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

 
(Dollars in thousands, except per share data)
 
Other expenses increased by $11, or 2.9%, during the third quarter of fiscal year 2011 mainly due to higher marketing expenses as a result of increased marketing efforts and additional costs associated with the conversion to a new internet banking provider. These increases were partially offset by lower repossession, collection and other real estate property expenses from properties that had been acquired through loan foreclosure.

Total non-interest expenses increased to $7,161, or 5.6%, during the first nine months of fiscal year 2011, compared with $6,784 during the same year ago period.

Salaries and employee benefits increased by $251, or 7.5%, during the first nine months of fiscal year 2011 mainly due to staff added in fiscal year 2010 in the lending and credit administration functions and due to normal merit increases that went into effect on July 1, 2010, following the removal of a salary freeze that was in place during the preceding eighteen months.

Occupancy and equipment expenses decreased by $26, or 3.2%, during the first nine months of fiscal year 2011 mainly due to the renegotiation of miscellaneous equipment and service contracts and lower depreciation expense.

Debit card processing expenses increased by $37, or 17.2%, during the first nine months of fiscal year 2011. This increase was mainly the result of increased debit card usage by our customers.
  
Other expenses increased by $99, or 9.3%, during the first nine month period of fiscal year 2011 mainly due to higher marketing expenses as a result of increased marketing efforts, one-time security expenses following robberies at two of the Corporation’s branch locations, and additional costs from a new vendor providing enhanced webhosting services and from the conversion to a new internet banking provider.

Income Taxes
Income tax expense for the three month period ended March 31, 2011 increased by $12, to $109 from $97, compared to a year ago. The effective tax rate was 18.4% for the current quarter as compared to 18.6% for the same period last year.

Income tax expense for the nine month period ended March 31, 2011 increased by $65, to $473 from $408, compared to a year ago. The effective tax rate was 21.9% for the current period as compared to 21.5% for the same period last year.

The effective tax rate differed from the federal statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions, loans and earnings on bank owned life insurance.
 
 
28

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
(Dollars in thousands, except per share data)
 
Financial Condition
Total assets at March 31, 2011 were $289,837 compared to $263,393 at June 30, 2010, an increase of $26,444, or an annualized 13.4%.

Available-for-sale securities increased by $17,850 from $64,262 at June 30, 2010 to $82,112 at March 31, 2011 due to the deployment of excess liquidity attributed to an increase in deposit balances. Within the securities portfolio, the Corporation owns a trust preferred security, which represents CDOs issued by other financial and insurance companies. As of March 31, 2011, the trust preferred security had an adjusted amortized cost of $372 and a fair value of $64. 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. 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 March 31, 2011, 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 March 31, 2011 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 $150 during the three month period ended March 31, 2011, bringing the total impairment loss to $200 for the nine month period ended March 31, 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.
 
 
29

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
   
(Dollars in thousands, except per share data)
  
Loan receivables increased by $2,615 to $176,898 at March 31, 2011 compared to $174,283 at June 30, 2010. Loan demand, particularly in the commercial area, has declined due to the current economic conditions. In addition, advances on established commercial lines of credit have decreased from prior periods. The cash surrender value of life insurance increased by $567 from June 30, 2010, to $5,365 as of March 31, 2011. The increase was due to the purchase of $431 of life insurance following the conversion of a term life insurance policy that was originally purchased in conjunction with a salary continuation agreement that was entered into with an executive officer in August of 2008. Total shareholders’ equity increased by $488 from June 30, 2010, to $24,204 as of March 31, 2011.  The increase was mainly due to net income for the current nine month period offset by a decrease in the fair value of available-for-sale securities and by cash dividends paid during the period.

 
30

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

 
(Dollars in thousands, except per share data)
  
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets and respective ratios as of the dates indicated.

   
March 31,
2011
   
June 30,
2010
   
March 31,
2010
 
Non-accrual loans
  $ 2,097     $ 2,342     $ 2,607  
Loans past due over 90 days and still accruing
                20  
Total non-performing loans
    2,097       2,342       2,627  
Other real estate owned
          25       102  
Total non-performing assets
  $ 2,097     $ 2,367     $ 2,729  
                         
Non-performing loans to total loans
    1.19 %     1.34 %     1.54 %
Allowance for loan losses to total non-performing loans
    100.19 %     97.18 %     86.41 %

As of March 31, 2011, impaired loans totaled $2,883, of which $2,081 are included in non-accrual loans. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. Impaired loans and non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors are closely monitoring these loans and believe that the prospects for recovery of principal and interest, less identified specific reserves, are favorable.

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

Liquidity
The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of our customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances of industry or market stress. Cash is used to fund loans, purchase investments, fund the maturity of liabilities, and at times to fund deposit outflows and operating activities. The Corporation’s principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts from securities; borrowings; and operations. 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 mainly comprised of loans and investment securities. 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.

 
31

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)
    
Net cash inflow from operating activities for the nine month period ended March 31, 2011 was $3,037, net cash outflows from investing activities was $27,522 and net cash inflows from financing activities was $25,471. A major source of cash was $16,945 from sales, maturities, calls or principal pay downs on available-for-sale securities and a $25,565 increase in deposits. A major use of cash included the $36,572 purchase of securities. Total cash and cash equivalents was $14,792 as of March 31, 2011 compared to $13,806 at June 30, 2010 and $10,463 at March 31, 2010.

The Bank offers several types of deposit products to its customers. The rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. Total deposits increased by $25,565, or 15.7% on an annualized basis, during the first nine months of fiscal year 2011. Also, during the same period, the overall cost for funds decreased by 44 basis points from the same year ago period.

To provide an additional source of liquidity, the Corporation has entered into an agreement with the Federal Home Loan Bank (FHLB) of Cincinnati. At March 31, 2011, FHLB advances totaled $7,578 as compared with $8,297 at June 30, 2010. As of March 31, 2011, the Bank had the ability to borrow an additional $18,975 from the FHLB based on a blanket pledge of qualifying first mortgage loans. In October 2010, the Corporation exchanged $1,000 of outstanding FHLB advances with maturities of less than one year and an average rate of 3.17% with advances that have an average maturity of six years and an average effective rate of 2.00%. The exchange resulted in the payment of a prepayment penalty of $16 that is being amortized as an adjustment to interest expense over the term of the new advances. The Corporation considers the FHLB to be a reliable source of liquidity funding, secondary to its deposit base.

Short-term borrowings consisted of repurchase agreements which is a financing arrangement that matures daily. The Bank pledges securities as collateral for the repurchase agreements. Short-term borrowings increased to $14,217 at March 31, 2011 from $13,086 at June 30, 2010.

Jumbo time deposits (those with balances of $100 thousand and over) increased from $33,764 at June 30, 2010 to $35,434 at March 31, 2011. These deposits are monitored closely by the Corporation and are mainly priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee-paid broker to obtain deposits from outside its normal service area as an additional source of funding. The Corporation however, does not rely upon these deposits as a primary source of funding. 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 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.

 
32

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)
  
Capital Resources
The Bank is 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 effect on the Corporation’s financial statements.

The Bank’s leverage and risk-based capital ratios as of March 31, 2011 were 7.6% and 13.9%, respectively. This compares to leverage and risk-based capital ratios of 7.8% and 13.4%, respectively, as of June 30, 2010. The Bank exceeded minimum regulatory capital requirements to be considered well-capitalized for both periods. Management is not aware of any matters occurring subsequent to March 31, 2011 that would cause the Bank’s capital category to change.

Critical Accounting Policies
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations are, to a large degree, dependent upon the Corporation’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.

The Corporation has identified the appropriateness of the allowance for loan losses and the valuation of securities as critical accounting policies and an understanding of these policies are necessary to understand the financial statements. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Footnote one (Securities and Allowance for Loan Losses), footnote two (Securities), footnote three (Loans) and Management Discussion and Analysis of Financial Condition and Results from Operation (Critical Accounting Policies) of the 2010 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses and valuation of securities and other-than-temporary impairment. There have been no significant changes in the application of accounting policies since June 30, 2010.
 
 
33

 
 
CONSUMERS BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

(Dollars in thousands, except per share data)
  
Forward-Looking Statements
When used in this report (including information incorporated by reference in this report), 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond the Corporation’s control, and could cause actual results to differ materially from those described in such statements.  Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, the Corporation undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Factors that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:
 
·
regional and national economic conditions becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality of assets and the underlying value of collateral could prove to be less valuable than otherwise assumed;
 
·
the nature, extent, and timing of government and regulatory actions;
 
·
material unforeseen changes in the financial condition or results of Consumers National Bank’s customers;
 
·
changes in levels of market interest rates which could reduce anticipated or actual margins;
 
·
competitive pressures on product pricing and services; and
 
·
a continued deterioration in market conditions causing debtors to be unable to meet their obligations.

The risks and uncertainties identified above are not the only risks the Corporation faces. Additional risks and uncertainties not presently known to the Corporation or that the Corporation currently believes to be immaterial also may adversely affect the Corporation.  Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on the Corporation’s business, financial condition and results of operations.

 
34

 
 
CONSUMERS BANCORP, INC.
 
Item 4 – Controls and Procedures

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rule 13a- 15e. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have not been any changes in the Corporation's internal control over financial reporting that occurred during the Corporation's last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 
35

 
 
CONSUMERS BANCORP, INC.
  
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
None

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None

Item 3 – Defaults Upon Senior Securities
None

Item 5 – Other Information
None

Item 6 – Exhibits

Exhibit
   
Number
 
Description
Exhibit 10.6
 
2011 Amendment and Restatement of Salary Continuation agreement entered into with Mr. Lober on February 11, 2011. Reference is made to Form 10-Q of the Corporation filed February 11, 2011, which is incorporated herein by reference.
     
Exhibit 10.7
 
Form Noncompetition agreement entered into with Ms. Wood on February 11, 2011. Reference is made to Form 10-Q of the Corporation filed February 11, 2011, which is incorporated herein by reference.
     
Exhibit 11
 
Statement regarding Computation of Per Share Earnings (included in Note 1 to the Consolidated Financial Statements).
     
Exhibit 31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
Exhibit 31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
Exhibit 32.1
  
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 
36

 
 
CONSUMERS BANCORP, INC.
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
CONSUMERS BANCORP, INC.
   
(Registrant)
     
Date: May 16, 2011
 
/s/ Ralph J. Lober
   
Ralph J. Lober, II
   
Chief Executive Officer
       
Date: May 16, 2011
 
/s/ Renee K. Wood
   
Renee K. Wood
 
  
Chief Financial Officer & Treasurer
 
 
37