CONSUMERS BANCORP INC /OH/ - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - CONSUMERS BANCORP INC /OH/	ex_171867.htm
EX-31.2 - EXHIBIT 31.2 - CONSUMERS BANCORP INC /OH/	ex_171866.htm
EX-31.1 - EXHIBIT 31.1 - CONSUMERS BANCORP INC /OH/	ex_171865.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2019

Commission File No. 033-79130

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(330) 868-7701

(Registrant’s telephone number)

Not applicable

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None

There were 3,015,578 shares of Registrant’s common stock, no par value, outstanding as of February 11, 2020.

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED December 31, 2019

Table of Contents

Page

Number (s)

Part I – Financial Information

Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2019 and June 30, 2019	1

Consolidated Statements of Income for the three and six months ended December 31, 2019 and 2018	2

Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2019 and 2018	3

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended December 31, 2019 and 2018	4

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2019 and 2018	5

Notes to the Consolidated Financial Statements	6-23

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	24-32

Item 3 – Not Applicable for Smaller Reporting Companies

Item 4 – Controls and Procedures	33
Part II – Other Information
Item 1 – Legal Proceedings	34

Item 1A – Not Applicable for Smaller Reporting Companies	34

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3 – Defaults Upon Senior Securities	34

Item 4 – Mine Safety Disclosure	34

Item 5 – Other Information	34

Item 6 – Exhibits	34

Signatures	35

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share data)	December 31, 2019			June 30, 2019
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions	$	12,586		$	9,322
Federal funds sold and interest-bearing deposits in financial institutions		1,442			139
Total cash and cash equivalents		14,028			9,461
Certificates of deposit in other financial institutions		994			1,983
Securities, available-for-sale		133,082			144,010
Securities, held-to-maturity (fair value of $3,859 at December 31, 2019 and $3,821 at June 30, 2019)		3,580			3,786
Federal bank and other restricted stocks, at cost		1,723			1,723
Loans held for sale		3,220			1,657
Total loans		396,393			369,175
Less allowance for loan losses		(4,095	)		(3,788	)
Net loans		392,298			365,387
Cash surrender value of life insurance		9,311			9,606
Premises and equipment, net		14,422			14,155
Accrued interest receivable and other assets		1,914			2,168
Total assets	$	574,572		$	553,936

LIABILITIES
Deposits
Noninterest-bearing demand	$	121,061		$	116,239
Interest bearing demand		79,008			81,469
Savings		175,465			162,261
Time		112,111			112,205
Total deposits		487,645			472,174

Short-term borrowings		3,870			3,686
Federal Home Loan Bank advances		24,300			22,700
Accrued interest and other liabilities		4,721			4,210
Total liabilities		520,536			502,770
Commitments and contingent liabilities

SHAREHOLDERS’ EQUITY
Preferred stock (no par value, 350,000 shares authorized, none outstanding)		—			—
Common stock (no par value, 8,500,000 shares authorized; 2,854,133 shares issued as of December 31, 2019 and June 30, 2019)		14,697			14,656
Retained earnings		38,691			36,487
Treasury stock, at cost (108,475 and 120,288 common shares as of December 31, 2019 and June 30, 2019, respectively)		(1,454	)		(1,543	)
Accumulated other comprehensive income		2,102			1,566
Total shareholders’ equity		54,036			51,166
Total liabilities and shareholders’ equity	$	574,572		$	553,936

See accompanying notes to consolidated financial statements

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months ended December 31,					Six Months ended December 31,
(Dollars in thousands, except per share amounts)	2019		2018			2019			2018

Interest and dividend income
Loans, including fees	$	4,862	$	4,059		$	9,623		$	8,008
Securities, taxable		480		549			990			1,075
Securities, tax-exempt		400		399			799			774
Federal bank and other restricted stocks		20		22			40			44
Federal funds sold and other interest-bearing deposits		16		34			42			57
Total interest and dividend income		5,778		5,063			11,494			9,958
Interest expense
Deposits		910		618			1,855			1,132
Short-term borrowings		13		14			24			28
Federal Home Loan Bank advances		59		57			138			125
Total interest expense		982		689			2,017			1,285
Net interest income		4,796		4,374			9,477			8,673
Provision for loan losses		185		(775	)		315			(660	)
Net interest income after provision for loan losses		4,611		5,149			9,162			9,333

Noninterest income
Service charges on deposit accounts		360		321			733			637
Debit card interchange income		384		369			775			727
Bank owned life insurance death benefit		—		—			324			—
Bank owned life insurance income		66		68			134			137
Securities gains (losses), net		4		(27	)		110			560
Other		211		213			418			378
Total noninterest income		1,025		944			2,494			2,439

Noninterest expenses
Salaries and employee benefits		2,207		2,099			4,380			4,074
Occupancy and equipment		595		515			1,127			1,003
Data processing expenses		141		157			526			307
Debit card processing expenses		194		189			395			383
Professional and director fees		133		171			390			341
FDIC assessments		5		38			(2	)		76
Franchise taxes		95		88			190			177
Marketing and advertising		93		131			274			235
Telephone and network communications		70		64			144			136
Other		402		428			816			832
Total noninterest expenses		3,935		3,880			8,240			7,564
Income before income taxes		1,701		2,213			3,416			4,208
Income tax expense		261		364			473			686
Net income	$	1,440	$	1,849		$	2,943		$	3,522

Basic and diluted earnings per share	$	0.53	$	0.68		$	1.07		$	1.29

See accompanying notes to consolidated financial statements

CONSUMERS BANCORP, INC.

Consolidated statements of comprehensive income

(Unaudited)

(Dollars in thousands)
	Three Months ended December 31,						Six Months ended December 31,
	2019			2018			2019			2018

Net income	$	1,440		$	1,849		$	2,943		$	3,522

Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains (losses) arising during the period		(28	)		1,787			790			894
Reclassification adjustment for (gains) losses included in income		(4	)		27			(110	)		(560	)
Net unrealized gains (losses)		(32	)		1,814			680			334
Income tax effect		6			(382	)		(144	)		(70	)
Other comprehensive income (loss)		(26	)		1,432			536			264

Total comprehensive income	$	1,414		$	3,281		$	3,479		$	3,786

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)
	Three Months ended December 31,						Six Months ended December 31,
	2019			2018			2019			2018

Balance at beginning of period	$	52,993		$	43,970		$	51,166		$	43,761

Net income		1,440			1,849			2,943			3,522
Other comprehensive income (loss)		(26	)		1,432			536			264
11,813 and 4,201 shares issued associated with stock awards during the six months ended December 31, 2019 and 2018, respectively		—			—			130			59
Common cash dividends		(371	)		(355	)		(739	)		(710	)

Balance at the end of the period	$	54,036		$	46,896		$	54,036		$	46,896

Common cash dividends per share	$	0.135		$	0.13		$	0.27		$	0.26

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	Six Months Ended December 31,
	2019			2018
Cash flows from operating activities
Net cash from operating activities	$	2,214		$	4,043

Cash flow from investing activities
Securities available-for-sale
Purchases		(6,678	)		(13,979	)
Maturities, calls and principal pay downs		11,902			9,746
Proceeds from sales		6,110			4,898
Securities held-to-maturity
Principal pay downs		206			200
Net decrease in certificate of deposit in other financial institutions		989			500
Net increase in loans		(27,226	)		(14,321	)
Proceeds from BOLI death benefit		753			(543	)
Acquisition of premises and equipment		(219	)		—
Net cash from investing activities		(14,163	)		(13,499	)

Cash flow from financing activities
Net increase in deposit accounts		15,471			12,567
Net change in short-term borrowings		184			(9,590	)
Proceeds from Federal Home Loan Bank advances		9,500			9,200
Repayments of Federal Home Loan Bank advances		(7,900	)		(34	)
Dividends paid		(739	)		(710	)
Net cash from financing activities		16,516			11,433

Increase in cash or cash equivalents		4,567			1,977

Cash and cash equivalents, beginning of period		9,461			7,772
Cash and cash equivalents, end of period	$	14,028		$	9,749

Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	2,022		$	1,261
Federal income taxes		350			395
Non-cash items:
Transfer from loans held for sale to portfolio		—			75
Issuance of treasury stock for stock awards		89			59
Right of use assets obtained in exchange for lease liabilities		582			—

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 1 – Summary of Significant Accounting Policies:

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

Basis of Presentation: The consolidated financial statements for interim periods are unaudited and reflect all adjustments (consisting of only normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by accounting principles generally accepted in the United States of America. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s Form 10-K for the year ended June 30, 2019. The results of operations for the interim period disclosed herein are not necessarily indicative of the results that may be expected for a full year.

The consolidated financial statements include the accounts of the Corporation and the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

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

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

Adoption of New Accounting Standards: In February 2016, FASB issued accounting standards update (ASU) 2016-02, Leases (Topic 842). This ASU requires all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures are required so users can understand more about the nature of an entity’s leasing activities. The new guidance was effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. The Corporation has several lease agreements, such as branch locations, which were previously considered operating leases, and therefore, not recognized on the Corporation’s consolidated condensed statements of financial condition. The new guidance requires these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. As of July 1, 2019, the Corporation adopted ASU 2016-02 using the modified retrospective method. There was no cumulative-effect adjustment to the opening balance of retained earnings for the period of adoption. At December 31, 2019, the Corporation had contractual operating lease commitments of $527.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. generally accepted accounting principles, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current loss recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the corporation expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined in the guidance, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. However, during July 2019, FASB unanimously voted for a proposal to delay this ASU to January 2023 for smaller reporting companies. On October 16, 2019, FASB approved a final ASU delaying the effective date. The new guidance is effective for annual and interim periods beginning after December 15, 2022 for certain entities, including smaller reporting companies. The Corporation is a smaller reporting company.

Note 2 – Acquisition

On June 14, 2019, Consumers entered into an Agreement and Plan of Merger with Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) and its wholly owned subsidiary, The Peoples National Bank of Mount Pleasant (Peoples Bank). On January 1, 2020, Consumers completed the acquisition by merger of Peoples in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. Immediately following the merger, Peoples Bank, was merged into Consumers banking subsidiary, Consumers National Bank.

On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The transaction will be recorded as a purchase and, accordingly, the operating results of Peoples will be included in the Corporation’s Consolidated Financial Statements beginning on January 1, 2020. The assets and liabilities of Peoples will be recorded on the Corporation’s Balance Sheet at their estimated fair values as of January 1, 2020, the acquisition date, and Peoples’ results of operations will be included in the Corporation’s Consolidated Statements of Income beginning on that date.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of Peoples. Core deposit intangible will be amortized over ten years on a straight-line basis. Goodwill will not be amortized, but instead will be evaluated for impairment.

Consideration Paid				$	10,405
Net assets acquired:
Cash and cash equivalents	$	833
Certificates of deposit in other financial institutions		11,839
Securities, available-for-sale		4,051
Federal bank and other restricted stocks, at cost		154
Loans, net		54,799
Premises and equipment		818
Core deposit intangible		270
Accrued interest receivable and other assets		141
Noninterest-bearing deposits		(11,979	)
Interest-bearing deposits		(48,872	)
Federal funds purchased		(2,348	)
Federal Home Loan Bank advances		(491	)
Other liabilities		(166	)
Total net assets acquired					9,049
Goodwill				$	1,356

The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgement in accounting for the acquisition.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 3 – Securities

Available –for-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2019
Obligations of U.S. government-sponsored entities and agencies	$	11,942	$	132	$	(27	)	$	12,047
Obligations of state and political subdivisions		55,657		1,878		(5	)		57,530
U.S. Government-sponsored mortgage-backed securities–residential		53,058		614		(88	)		53,584
U.S. Government-sponsored mortgage-backed securities– commercial		1,460		—		(4	)		1,456
U.S. Government-sponsored collateralized mortgage obligations– residential		8,303		174		(12	)		8,465
Total available-for-sale securities	$	130,420	$	2,798	$	(136	)	$	133,082

Held-to-Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
December 31, 2019
Obligations of state and political subdivisions	$	3,580	$	279	$	—	$	3,859
Total held-to-maturity securities	$	3,580	$	279	$	—	$	3,859

Available–for-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2019
Obligations of U.S. government-sponsored entities and agencies	$	19,227	$	287	$	(1	)	$	19,513
Obligations of state and political subdivisions		56,405		1,557		(33	)		57,929
U.S. Government-sponsored mortgage-backed securities – residential		56,309		450		(448	)		56,311
U.S. Government-sponsored collateralized mortgage obligations – residential		10,087		198		(28	)		10,257
Total available-for-sale securities	$	142,028	$	2,492	$	(510	)	$	144,010

Held-to-Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
June 30, 2019
Obligations of state and political subdivisions	$	3,786	$	35	$	—	$	3,821
Total held-to-maturity securities	$	3,786	$	35	$	—	$	3,821

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

	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2018		2019		2018
Proceeds from sales	$	1,650	$	2,325	$	6,110	$	4,898
Gross realized gains		4		1		110		594
Gross realized losses		—		28		—		34

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The income tax provision related to the net realized gains amounted to $1 for the three months ended December 31, 2019. The income tax benefit related to net realized losses amounted to $6 for the three months ended December 31, 2018. The income tax provision related to the net realized gains amounted to $22 and $118 for the six-month periods ended December 31, 2019 and 2018, respectively.

The amortized cost and fair values of debt securities at December 31, 2019, by expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

Available-for-Sale	Amortized Cost		Estimated Fair Value
Due in one year or less	$	5,543	$	5,576
Due after one year through five years		15,986		16,319
Due after five years through ten years		18,947		19,273
Due after ten years		27,123		28,409
Total		67,599		69,577

U.S. Government-sponsored mortgage-backed and related securities		62,821		63,505
Total available-for-sale securities	$	130,420	$	133,082

Held-to-Maturity
Due after five years through ten years	$	412	$	434
Due after ten years		3,168		3,425
Total held-to-maturity securities	$	3,580	$	3,859

The following table summarizes the securities with unrealized losses at December 31, 2019 and June 30, 2019, 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
Available-for-sale	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2019
Obligations of US government-sponsored entities and agencies	$	1,655	$	(27	)	$	—	$	—		$	1,655	$	(27	)
Obligations of states and political subdivisions		2,517		(4	)		208		(1	)		2,725		(5	)
U.S. Government-sponsored mortgage-backed securities – residential		3,712		(6	)		15,695		(82	)		19,407		(88	)
U.S. Government-sponsored mortgage-backed securities – commercial		1,456		(4	)		—		—			1,456		(4	)
U.S. Government-sponsored collateralized mortgage obligations – residential		435		(1	)		1,317		(11	)		1,752		(12	)
Total temporarily impaired	$	9,775	$	(42	)	$	17,220	$	(94	)	$	26,995	$	(136	)

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

	Less than 12 Months				12 Months or more					Total
Available-for-sale	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
June 30, 2019
Obligations of U.S. government-sponsored entities and agencies	$	—	$	—	$	998	$	(1	)	$	998	$	(1	)
Obligations of states and political subdivisions		—		—		5,201		(33	)		5,201		(33	)
U.S. Government-sponsored mortgage-backed securities – residential		—		—		36,362		(448	)		36,362		(448	)
U.S. Government-sponsored collateralized mortgage obligations - residential		—		—		3,277		(28	)		3,277		(28	)
Total temporarily impaired	$	—	$	—	$	45,838	$	(510	)	$	45,838	$	(510	)

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

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

The unrealized losses within the securities portfolio as of December 31, 2019 have not been recognized into income because the decline in fair value is not attributed to credit quality and management does not intend to sell, and it is not likely that management will be required to sell, the securities prior to their anticipated recovery. The decline in fair value within the securities portfolio is largely due to changes in interest rates and the fair value is expected to recover as the securities approach maturity. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities.

Note 4 – Loans

Major classifications of loans were as follows:

	December 31, 2019			June 30, 2019
Commercial	$	76,307		$	80,453
Commercial real estate:
Construction		16,226			16,120
Other		216,224			195,269
1 – 4 Family residential real estate:
Owner occupied		61,424			55,941
Non-owner occupied		15,101			14,517
Construction		4,730			1,931
Consumer		6,461			5,150
Subtotal		396,473			369,381
Net Deferred loan fees and costs		(80	)		(206	)
Allowance for loan losses		(4,095	)		(3,788	)
Net Loans	$	392,298		$	365,387

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2019:

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer			Total

Allowance for loan losses:
Beginning balance	$	649	$	2,645	$	550	$	65		$	3,909
Provision for loan losses		117		6		64		(2	)		185
Loans charged-off		—		—		—		(7	)		(7	)
Recoveries		—		1		1		6			8
Total ending allowance balance	$	766	$	2,652	$	615	$	62		$	4,095

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2019:

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer			Total

Allowance for loan losses:
Beginning balance	$	660	$	2,575	$	494	$	59		$	3,788
Provision for loan losses		106		75		120		14			315
Loans charged-off		—		—		—		(23	)		(23	)
Recoveries		—		2		1		12			15
Total ending allowance balance	$	766	$	2,652	$	615	$	62		$	4,095

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

						1-4 Family
			Commercial			Residential
			Real			Real
	Commercial		Estate			Estate			Consumer			Total

Allowance for loan losses:
Beginning balance	$	602	$	2,378		$	507		$	51		$	3,538
Provision for loan losses		20		(793	)		(12	)		10			(775	)
Loans charged-off		—		(55	)		—			(14	)		(69	)
Recoveries		—		867			1			7			875
Total ending allowance balance	$	622	$	2,397		$	496		$	54		$	3,569

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 six months ended December 31, 2018:

						1-4 Family
			Commercial			Residential
			Real			Real
	Commercial		Estate			Estate			Consumer			Total

Allowance for loan losses:
Beginning balance	$	586	$	2,277		$	499		$	60		$	3,422
Provision for loan losses		36		(693	)		(7	)		4			(660	)
Loans charged-off		—		(55	)		—			(21	)		(76	)
Recoveries		—		868			4			11			883
Total ending allowance balance	$	622	$	2,397		$	496		$	54		$	3,569

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019. Included in the recorded investment in loans is $862 of accrued interest receivable.

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2	$	7	$	—	$	—	$	9
Collectively evaluated for impairment		764		2,645		615		62		4,086
Total ending allowance balance	$	766	$	2,652	$	615	$	62	$	4,095

Recorded investment in loans:
Loans individually evaluated for impairment	$	163	$	638	$	258	$	—	$	1,059
Loans collectively evaluated for impairment		76,253		231,791		81,666		6,486		396,196
Total ending loans balance	$	76,416	$	232,429	$	81,924	$	6,486	$	397,255

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2019. Included in the recorded investment in loans is $891 of accrued interest receivable.

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2	$	7	$	—	$	—	$	9
Collectively evaluated for impairment		658		2,568		494		59		3,779
Total ending allowance balance	$	660	$	2,575	$	494	$	59	$	3,788

Recorded investment in loans:
Loans individually evaluated for impairment	$	174	$	658	$	357	$	—	$	1,189
Loans collectively evaluated for impairment		80,413		210,709		72,591		5,164		368,877
Total ending loans balance	$	80,587	$	211,367	$	72,948	$	5,164	$	370,066

The following table presents information related to unpaid principal balance, recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of December 31, 2019 and for the six months ended December 31, 2019:

	As of December 31, 2019						Six Months ended December 31, 2019
	Unpaid				Allowance for Loan		Average		Interest		Cash Basis
	Principal		Recorded		Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial real estate:
Other	$	496		421	$	—	$	303	$	87	$	87
1-4 Family residential real estate:
Owner occupied		42		10		—		25		7		7
Non-owner occupied		290		248		—		254		—		—
With an allowance recorded:
Commercial real estate:
Other		215		217		7		219		6		6
Commercial		162		163		2		167		5		5
Total	$	1,205	$	1,059	$	9	$	968	$	105	$	105

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents information related to average recorded investment and interest income associated with loans individually evaluated for impairment by class of loans for the three months ended December 31, 2019:

	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial real estate:
Other	$	244	$	1	$	1
1-4 Family residential real estate:
Owner occupied		10		—		—
Non-owner occupied		250		—		—
With an allowance recorded:
Commercial real estate:
Other		218		3		3
Commercial		165		2		2
Total	$	887	$	6	$	6

The following table presents information related to unpaid principal balance, recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of June 30, 2019 and for the six months ended December 31, 2018:

	As of June 30, 2019						Six Months ended December 31, 2018
	Unpaid				Allowance for Loan		Average		Interest		Cash Basis
	Principal		Recorded		Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	92	$	3	$	3
Commercial real estate:
Other		580		436		—		1,255		19		19
1-4 Family residential real estate:
Owner occupied		124		93		—		98		—		—
Non-owner occupied		297		264		—		287		—		—
With an allowance recorded:
Commercial real estate:
Other		221		222		7		229		7		7
Commercial		173		174		2		—		—		—
Total	$	1,395	$	1,189	$	9	$	1,961	$	29	$	29

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	113	$	2	$	2
Commercial real estate:
Other		1,140		8		8
1-4 Family residential real estate:
Owner occupied		97		—		—
Non-owner occupied		283		—		—
With an allowance recorded:
Commercial real estate:
Other		227		4		4
Total	$	1,860	$	14	$	14

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2019 and June 30, 2019:

	December 31, 2019				June 30, 2019
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
			Still				Still
	Non-accrual		Accruing		Non-accrual		Accruing
Commercial real estate:
Other	$	176	$	191	$	436	$	—
1 – 4 Family residential:
Owner occupied		3		—		85		—
Non-owner occupied		248		—		264		—
Total	$	427	$	191	$	785	$	—

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

The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans:

	Days Past Due
	30 - 59		60 - 89		90 Days or		Total		Loans Not
	Days		Days		Greater		Past Due		Past Due		Total
Commercial	$	—	$	—	$	—	$	—	$	76,416	$	76,416
Commercial real estate:
Construction		—		—		—		—		16,205		16,205
Other		—		6		191		197		216,027		216,224
1-4 Family residential:
Owner occupied		342		3		—		345		61,670		62,015
Non-owner occupied		—		—		—		—		15,106		15,106
Construction		1		—		—		1		4,802		4,803
Consumer		14		—		—		14		6,472		6,486
Total	$	357	$	9	$	191	$	557	$	396,698	$	397,255

The above table of past due loans includes the recorded investment in non-accrual loans of $9 in the 60-89 days category and $418 in the loans not past due category.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the aging of the recorded investment in past due loans as of June 30, 2019 by class of loans:

	Days Past Due
	30 - 59		60 - 89		90 Days or		Total		Loans Not
	Days		Days		Greater		Past Due		Past Due		Total
Commercial	$	—	$	—	$	—	$	—	$	80,587	$	80,587
Commercial real estate:
Construction		—		—		—		—		16,075		16,075
Other		199		—		—		199		195,093		195,292
1-4 Family residential:
Owner occupied		40		—		80		120		56,347		56,467
Non-owner occupied		—		—		—		—		14,518		14,518
Construction		—		—		—		—		1,963		1,963
Consumer		1		—		—		1		5,163		5,164
Total	$	240	$	—	$	80	$	320	$	369,746	$	370,066

The above table of past due loans includes the recorded investment in non-accrual loans of $198 in the 30-59 days, $80 in the 90 days or greater category and $507 in the loans not past due category.

Troubled Debt Restructurings (TDR):

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

At December 31, 2019 and June 30, 2019, the Corporation had $689 and $725, respectively, of loans classified as TDRs which are included in impaired loans above. As of December 31, 2019, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. As of June 30, 2019, the Corporation had committed to lend an additional $9 to customers with outstanding loans that were classified as troubled debt restructurings. At December 31, 2019 and June 30, 2019, the Corporation had $9 of specific reserves allocated to these loans.

During the three and six-month periods ended December 31, 2019 and 2018, there were no loan modifications completed that were classified as troubled debt restructurings. There were no charge offs from troubled debt restructurings that were completed during the three and six-month periods ended December 31, 2019 and 2018.

There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the three and six-month periods ended December 31, 2019 and 2018. A loan is considered in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic trends and other relevant information. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. Management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt and affirms the risk ratings for the loans and leases in their respective portfolio on an annual basis. The Corporation uses the following definitions for risk ratings:

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

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which are disclosed in the previous table within this footnote. Based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans was as follows:

	As of December 31, 2019
			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	71,131	$	552	$	4,450	$	—	$	283
Commercial real estate:
Construction		16,205		—		—		—		—
Other		202,871		7,376		4,574		176		1,227
1-4 Family residential real estate:
Owner occupied		2,049		—		22		3		59,941
Non-owner occupied		14,129		195		235		248		299
Construction		456		—		—		—		4,347
Consumer		17		—		—		—		6,469
Total	$	306,858	$	8,123	$	9,281	$	427	$	72,566

As of June 30, 2019, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

	As of June 30, 2019
			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	74,393	$	4,942	$	1,012	$	—	$	240
Commercial real estate:
Construction		16,075		—		—		—		—
Other		179,952		8,071		5,337		436		1,496
1-4 Family residential real estate:
Owner occupied		2,245		—		24		5		54,193
Non-owner occupied		13,413		205		318		263		319
Construction		—		—		—		—		1,963
Consumer		32		—		—		—		5,132
Total	$	286,110	$	13,218	$	6,691	$	704	$	63,343

Note 5 - 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.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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.

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Securities available-for-sale: When available, the fair values of available-for-sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other unobservable inputs (Level 3 inputs).

Assets and liabilities measured at fair value on a recurring basis are summarized below, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements at December 31, 2019 Using
	Balance at December 31, 2019		Level 1		Level 2		Level 3
Assets:
Obligations of U.S. government-sponsored entities and agencies	$	12,047	$	—	$	12,047	$	—
Obligations of states and political subdivisions		57,530		—		57,530		—
U.S. Government-sponsored mortgage-backed securities – residential		53,584		—		53,584		—
U.S. Government-sponsored mortgage-backed securities – commercial		1,456		—		1,456		—
U.S. Government-sponsored collateralized mortgage obligations - residential		8,465		—		8,465		—

			Fair Value Measurements at June 30, 2019 Using
	Balance at June 30, 2019		Level 1		Level 2		Level 3
Assets:
Securities available-for-sale:
Obligations of government-sponsored entities	$	19,513	$	—	$	19,513	$	—
Obligations of states and political subdivisions		57,929		—		57,929		—
U.S. Government-sponsored mortgage-backed securities - residential		56,311		—		56,311		—
U.S. Government-sponsored collateralized mortgage obligations		10,257		—		10,257		—

There were no transfers between Level 1 and Level 2 during the three or six-month periods ended December 31, 2019 or 2018.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following:

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses or are charged down to their fair value. For collateral dependent loans, fair value is commonly 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.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. There was no other real estate owned being carried at fair value as of December 31, 2019 or June 30, 2019.

There were no financial assets measured at fair value on a non-recurring basis at December 31, 2019. Financial assets measured at fair value on a non-recurring basis at June 30, 2019 are summarized below:

			Fair Value Measurements at June 30, 2019 Using
	Balance at June 30, 2019		Level 1		Level 2		Level 3
Impaired loans:
Commercial Real Estate - Other	$	59	$	—	$	—	$	59

Impaired loans, measured for impairment using the fair value of the collateral, had a recorded investment of $59, with no valuation allowance at June 30, 2019. There was no impact to the provision for loan losses for the three and six-month periods ended December 31, 2019 and 2018.

The following tables presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2019:

June 30, 2019

Fair Value

Valuation

Technique

Unobservable

Inputs

Range

Weighted

Average

Impaired loans:

Commercial Real Estate – Other

Settlement Agreement

N/A

0.0

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table shows the estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	December 31, 2019				June 30, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents	$	14,028	$	14,028	$	9,461	$	9,461
Level 2 inputs:
Certificates of deposits in other financial institutions		994		994		1,983		1,983
Loans held for sale		3,220		3,283		1,657		1,687
Accrued interest receivable		1,511		1,511		1,607		1,607
Level 3 inputs:
Securities held-to-maturity		3,580		3,859		3,786		3,821
Loans, net		392,298		399,465		365,387		366,911
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits		375,534		375,534		359,969		359,969
Time deposits		112,111		112,652		112,205		112,841
Short-term borrowings		3,870		3,870		3,686		3,686
Federal Home Loan Bank advances		24,300		24,208		22,700		22,596
Accrued interest payable		127		127		132		132

Note 6 – Earnings Per Share

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. There were 1,645 and 2,204 shares of restricted stock that were anti-dilutive for the three- and six-month periods ended December 30, 2019. There were 2,178 and 1,042 shares of restricted stock that were anti-dilutive for the three and six-month periods ended December 31, 2018. The following table details the calculation of basic and diluted earnings per share:

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
	2019		2018		2019		2018
Basic:
Net income available to common shareholders	$	1,440	$	1,849	$	2,943	$	3,522
Weighted average common shares outstanding		2,737,800		2,730,375		2,737,755		2,730,355
Basic income per share	$	0.53	$	0.68	$	1.07	$	1.29

Diluted:
Net income available to common shareholders	$	1,440	$	1,849	$	2,943	$	3,522
Weighted average common shares outstanding		2,737,800		2,730,375		2,737,755		2,730,355
Dilutive effect of restricted stock		—		—		—		23
Total common shares and dilutive potential common shares		2,737,800		2,730,375		2,737,755		2,730,378
Dilutive income per share	$	0.53	$	0.68	$	1.07	$	1.29

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 7 –Accumulated Other Comprehensive Income (Loss)

The components of other comprehensive income related to unrealized gains and losses on available-for-sale securities for the three and six-month periods ended December 31, 2019 and 2018, were as follows:

	Pretax			Tax Effect			After-tax			Affected Line Item in Consolidated Statements of Income
Balance as of September 30, 2019	$	2,694		$	(566	)	$	2,128
Unrealized holding loss on available-for-sale securities arising during the period		(28	)		5			(23	)
Amounts reclassified from accumulated other comprehensive income		(4	)		1			(3	)		(a)(b)
Net current period other comprehensive loss		(32	)		6			(26	)
Balance as of December 31, 2019	$	2,662		$	(560	)	$	2,102

Balance as of September 30, 2018	$	(3,549	)	$	746		$	(2,803	)
Unrealized holding gain on available-for-sale securities arising during the period		1,787			(376	)		1,411
Amounts reclassified from accumulated other comprehensive income		27			(6	)		21			(a)(b)
Net current period other comprehensive income		1,814			(382	)		1,432
Balance after reclassification as of December 31, 2018	$	(1,735	)	$	364		$	(1,371	)

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

	Pretax			Tax Effect			After-tax			Affected Line Item in Consolidated Statements of Income
Balance as of June 30, 2019	$	1,982		$	(416	)	$	1,566
Unrealized holding gain on available-for-sale securities arising during the period		790			(166	)		624
Amounts reclassified from accumulated other comprehensive income		(110	)		22			(88	)		(a)(b)
Net current period other comprehensive income		680			(144	)		536
Balance as of December 31, 2019	$	2,662		$	(560	)	$	2,102

Balance as of June 30, 2018	$	(2,069	)	$	434		$	(1,635	)
Unrealized holding gain on available-for-sale securities arising during the period		894			(188	)		706
Amounts reclassified from accumulated other comprehensive income		(560	)		118			(442	)		(a)(b)
Net current period other comprehensive income		334			(70	)		264
Balance after reclassification as of December 31, 2018	$	(1,735	)	$	364		$	(1,371	)

(a) Securities (gains) losses, net

(b) Income tax expense

Note 8 – Revenue Recognition

On July 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Corporation's revenue from contracts with customers is recognized within noninterest income.

Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange income: The Corporation earns interchange income from cardholder transactions conducted through the various payment networks. Interchange income from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees is processed through noninterest income.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the Corporation's sources of noninterest income for the three and six months ended December 31, 2019 and 2018.

	For the three months ended December 31,				For the six months ended December 31,
	2019		2018		2019		2018
Noninterest income
In scope of Topic 606:
Service charges on deposit accounts	$	360	$	321	$	733	$	637
Debit card interchange income		384		369		775		727
Other income		70		213		466		378

Noninterest income (in scope of Topic 606)		814		903		1,974		1,742
Noninterest income (out-of-scope of Topic 606)		211		41		520		697

Total noninterest income	$	1,025	$	944	$	2,494	$	2,439

Note 9 – Leases

Effective July 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2019, the Corporation leases real estate for six office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to September 1, 2028, including extension periods. Lease agreements for four locations have a lease term of 12 months or less and are therefore considered short-term leases and are exempt from Topic 842. The weighted average remaining life of the lease term for the leases with a term over 12 months was 57.92 months as of December 31, 2019.

Costs associated with operating leases accounted for under Topic 842 were $27 and $55 for the three- and six-month periods ended December 31, 2019, respectively. The costs of short-term leases were $22 and $44 for the three- and six-month periods ended December 31, 2019, respectively. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, were $527 as of December 31, 2019.

Total estimated rental commitments for the operating leases within the scope of Topic 842 were as follows as of December 31, 2019:

Period Ending June 30
2020	$	54
2021		105
2022		95
2023		76
2024		51
Thereafter		146
Total	$	527

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 six-month periods ended December 31, 2019, compared to the same period in 2018, and the consolidated balance sheet at December 31, 2019, compared to June 30, 2019. 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 (the Corporation), 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 Bank). 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 Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.

On January 1, 2020, Consumers completed the acquisition by merger of Peoples in a stock and cash transaction for an aggregate consideration of approximately $10,405. In connection with the acquisition, the Corporation issued 269,920 shares of common stock and paid $5,128 in cash to the former shareholders of Peoples. On December 31, 2019, Peoples had approximately $72,016 in total assets, $55,273 in loans and $60,826 in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio.

Results of Operations

Three- and Six-Month Periods Ended December 31, 2019 and 2018

Net income for the second quarter of fiscal year 2020 was $1,440, or $0.53 per common share, compared to $1,849, or $0.68 per common share for the three months ended December 31, 2018. The following are key highlights of our results of operations for the three months ended December 31, 2019 compared to the prior fiscal year comparable period:

	●	net interest income increased by $422 to $4,796, or by 9.6%, in the second quarter of fiscal year 2020 from the same prior year period;
	●	a $185 provision for loans loss expense was recorded in the second quarter of fiscal year 2020 compared with a negative provision for loan loss expense of $775 in the second quarter of fiscal year 2019;
	●	noninterest income increased by $81, or 8.6%, in the second quarter of fiscal year 2020 from the same prior year period as a result of increases in service charges on deposit accounts and debit card interchange income; and
	●	noninterest expenses increased by $55, or 1.4%, in the second quarter of fiscal year 2020 from the same prior year period.

In the first six months of fiscal year 2020, net income was $2,943, or $1.07 per common share, compared to $3,522, or $1.29 per common share for the six months ended December 31, 2018. The following are key highlights of our results of operations for the six months ended December 31, 2019:

	●	net interest income increased by $804 to $9,477, or by 9.3%, in the first six months of fiscal year 2020 from the same prior year period;
	●	a provision for loan loss expense of $315 was recorded in the first six months of fiscal year 2020 compared with a negative provision for loan loss expense of $660 during the same prior year period;
	●	noninterest income increased by $55, or 2.3%, in the first six months of fiscal year 2020 from the same prior year period and included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Additionally, a $106 gain from the sale or call of securities was recognized during the first six months of fiscal year 2020 compared with a $560 gain for the same prior year period; and
	●	noninterest expenses increased by $676, or 8.9%, in the first six months of fiscal year 2020 from the same prior year period and included $322 of expenses associated with the merger between Consumers and Peoples.

Return on average equity and return on average assets were 11.03% and 1.04%, respectively, for the first six months of fiscal year 2020 compared to 15.71% and 1.38%, respectively, for the same prior year period.

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. The federal income tax rate in effect for the 2020 and 2019 fiscal years was 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

The Corporation’s net interest margin was 3.62% for the three months ended December 31, 2019, compared with 3.63% for the same period in 2018. FTE net interest income for the three months ended December 31, 2019 increased by $439, or 9.9%, to $4,874 from $4,435 for the same prior year period.

Tax-equivalent interest income for the three months ended December 31, 2019 increased by $732, or 14.3%, from the same prior year period. Interest income was positively impacted by a $55,700, or 11.6%, increase in average interest-earning assets from the same prior year period.

Interest expense for the three months ended December 31, 2019 increased by $293 from the same prior year period. The Corporation’s cost of funds was 1.02% for the three months ended December 31, 2019 compared with 0.79% for the same prior year period.

The Corporation’s net interest margin was 3.62% for the six months ended December 31, 2019, compared with 3.67% for the same period in 2018. FTE net interest income for the six months ended December 31, 2019 increased by $763, or 8.6%, to $9,632 from $8,869 for the same prior year period.

Tax-equivalent interest income for the six months ended December 31, 2019 increased by $1,495, or 14.7%, from the same prior year period. Interest income was positively impacted by a $53,589, or 11.2%, increase in average interest-earning assets from the same prior year period. Additionally, the Corporation’s yield on average interest-earning assets increased to 4.38% for the six months ended December 31, 2019 from 4.20% for the same period last year. The yield on average interest-earning assets was positively impacted by a 0.11% increase in the yield on loans. Additionally, the yield on average interest-earning assets was positively impacted by a change in the earning asset mix with higher yielding loans increasing and lower yielding securities decreasing.

Interest expense for the six months ended December 31, 2019 increased by $732 from the same prior year period. The Corporation’s cost of funds was 1.05% for the six months ended December 31, 2019 compared with 0.74% for the same prior year period. The increase in short term market interest rates had an impact on the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.

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 December 31, (In thousands, except percentages)
	2019								2018
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	79,160		$	480		2.43	%	$	85,035		$	549		2.47	%
Nontaxable securities (1)		61,281			475		3.17			60,213			458		2.97
Loans receivable (1)		390,708			4,865		4.94			327,661			4,061		4.92
Federal bank and other restricted stocks		1,723			20		4.61			1,459			22		5.98
Interest bearing deposits and federal funds sold		3,293			16		1.93			6,097			34		2.21
Total interest-earning assets		536,165			5,856		4.35	%		480,465			5,124		4.20	%

Noninterest-earning assets		31,384								31,156

Total Assets	$	567,549							$	511,621

Interest-bearing liabilities:
NOW	$	84,140		$	131		0.62	%	$	83,946		$	138		0.65	%
Savings		170,287			210		0.49			162,418			176		0.43
Time deposits		111,806			569		2.02			81,896			304		1.47
Short-term borrowings		3,915			13		1.32			3,599			14		1.54
FHLB advances		12,627			59		1.85			15,462			57		1.46
Total interest-bearing liabilities		382,775			982		1.02	%		347,321			689		0.79	%

Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		126,270								115,435
Other liabilities		4,900								4,413
Total liabilities		513,945								467,169
Shareholders’ equity		53,604								44,452

Total liabilities and shareholders’ equity	$	567,549							$	511,621

Net interest income, interest rate spread (1)				$	4,874		3.33	%				$	4,435		3.41	%

Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.62	%							3.63	%

Federal tax exemption on non-taxable securities and loans included in interest income				$	78							$	61

Average interest-earning assets to interest-bearing liabilities		140.07	%							138.33	%

(1) calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%

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 Six Months Ended December 31, (In thousands, except percentages)
	2019								2018
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	81,399		$	990		2.43	%	$	85,554		$	1,075		2.42	%
Nontaxable securities (1)		61,029			949		3.18			59,738			964		3.17
Loans receivable (1)		382,035			9,628		5.00			324,927			8,014		4.89
Federal bank and other restricted stocks		1,723			40		4.61			1,459			44		5.98
Interest bearing deposits and federal funds sold		4,339			42		1.92			5,258			57		2.15
Total interest-earning assets		530,525			11,649		4.38	%		476,936			10,154		4.20	%

Noninterest-earning assets		31,107								30,984

Total Assets	$	561,632							$	507,920

Interest-bearing liabilities:
NOW	$	83,316		$	276		0.66	%	$	83,157		$	263		0.63	%
Savings		168,234			432		0.51			162,840			313		0.38
Time deposits		112,224			1,147		2.03			80,219			556		1.37
Short-term borrowings		3,620			24		1.32			3,822			28		1.45
FHLB advances		14,003			138		1.95			15,559			125		1.59
Total interest-bearing liabilities		381,397			2,017		1.05	%		345,597			1,285		0.74	%

Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		122,263								113,556
Other liabilities		5,071								4,300
Total liabilities		508,731								463,453
Shareholders’ equity		52,901								44,467

Total liabilities and shareholders’ equity	$	561,632							$	507,920

Net interest income, interest rate spread (1)				$	9,632		3.33	%				$	8,869		3.46	%

Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.62	%							3.67	%

Federal tax exemption on non-taxable securities and loans included in interest income				$	155							$	196

Average interest-earning assets to interest-bearing liabilities		139.10	%							138.00	%

(1) calculated on a fully taxable equivalent basis utilizing a statutory federal income tax rate of 21.0%

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 incurred credit losses in the Bank’s loan portfolio that have been incurred at each balance sheet date. For the six-month period ended December 31, 2019, the provision for loan losses was $315 compared with a negative provision for loan loss expense of $660 for the same prior year period. Net charge-offs of $8 were recorded during the six-month period ended December 31, 2019 compared with recoveries of $807 collected during the six-month period ended December 31, 2018.

Non-performing loans were $427 as of December 31, 2019 compared with $785 as of June 30, 2019 and $899 as of December 31, 2018. The allowance for loan losses as a percentage of loans was 1.02% at December 31, 2019 and 1.03% at June 30, 2019. The provision for loan losses for the period ended December 31, 2019 was considered sufficient by management for maintaining an appropriate allowance for probable incurred credit losses.

Noninterest Income

Noninterest income increased by $81, or 8.6%, for the second quarter of fiscal year 2020 from the same period last year and $55, or 2.3%, for the first six months of fiscal year 2020 from the same period last year. Noninterest income for the six months ended December 31, 2019 included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Also, noninterest income included a $110 gain on sale of securities compared with a $560 gain for the six months ended December 31, 2018. During the 2019 fiscal year, a pooled trust preferred security was sold due to the significant increase in the value of this security. The Corporation does not own any other securities of this type. In addition, service charges on deposit accounts increased by 15.1%, gains from the sale of mortgage loans increased by 11.7% and debit card interchange income increased by 6.6% for the six-month period ended December 31, 2019 compared with the same prior year period.

Noninterest Expenses

Total noninterest expenses increased by $55, or by 1.4%, for the second quarter of fiscal year 2020 compared with the same period last year and by $676, or 8.9%, for the first six months of fiscal year 2020 from the same period last year. Included in noninterest expenses for the six-month period ended December 31, 2019 are $322 of expenses associated with the merger between Consumers and Peoples. The expenses associated with the merger were primarily legal and consulting fees that were charged to professional and director fees and the system deconversion files that were charged to data processing expenses. Total noninterest expenses were also impacted by increases in salary and incentive expenses. FDIC assessments were positively impacted since the Small Bank Assessment Credits were applied to the current FDIC insurance invoices since the Deposit Insurance Fund reserve ratio was above 1.38%.

Income Taxes

Income tax expense was $261 and $473 for the three- and six-month periods ended December 31, 2019, respectively compared to $364 and $686 for the three- and six-month periods ended December 31, 2018, respectively. The effective tax rates were 15.3% and 13.8% for the three- and six-month periods ended December 31, 2019, respectively compared to 16.4% and 16.3% for the three- and six-month periods ended December 31, 2018, respectively. Income tax expense and the effective tax rates were lower in the 2020 fiscal year primarily due to a higher amount of tax-free income during the three- and six-month periods ended December 31, 2019.

Financial Condition

Total assets at December 31, 2019 were $574,572 compared to $553,936 at June 30, 2019, an increase of $20,636, or an annualized 7.5%.

Total loans increased by $27,218, or an annualized 14.7%, from $369,175 at June 30, 2019 to $396,393 at December 31, 2019. The growth in the loan portfolio was primarily related to growth within the commercial real estate and 1-4 family residential real estate segments to borrowers within the Bank’s primary market area. The loan growth was primarily funded by an increase of $15,471, or an annualized 6.6%, in total deposits.

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.

	December 31, 2019			June 30, 2019			December 31, 2018
Non-accrual loans	$	427		$	785		$	899
Loans past due over 90 days and still accruing		—			—			—
Total non-performing loans		427			785			899
Other real estate owned		—			—			—
Total non-performing assets	$	427		$	785		$	899

Non-performing loans to total loans		0.11	%		0.21	%		0.27	%
Allowance for loan losses to total non-performing loans		959.02	%		482.55	%		397.00	%

As of December 31, 2019, impaired loans totaled $1,059, of which $427 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.

For the six months ended December 31, 2019, net cash inflow from operating activities was $2,214, net cash outflows from investing activities was $14,163 and net cash inflows from financing activities was $16,516. A major source of cash was a $15,471 increase in deposits and $18,012 from sales, maturities, calls or principal pay downs on available-for-sale securities. A major use of cash was a $27,226 increase in loans. Total cash and cash equivalents were $14,028 as of December 31, 2019, compared to $9,461 at June 30, 2019 and $9,749 at December 31, 2018.

The Bank offers several types of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with the rates and fees charged by other banks for similar deposit products currently available in the market area. Deposits totaled $487,645 at December 31, 2019 compared with $472,174 at June 30, 2019.

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At December 31, 2019, advances from the FHLB of Cincinnati totaled $24,300 compared with $22,700 at June 30, 2019. As of December 31, 2019, the Bank had the ability to borrow an additional $21,983 from the FHLB of Cincinnati based on a blanket pledge of qualifying first mortgage and multi-family loans. The Corporation considers the FHLB of Cincinnati to be a reliable source of liquidity funding, secondary to its deposit base.

Short-term borrowings consisted of repurchase agreements, which are financing arrangements that mature daily, and federal funds purchased from correspondent banks. The Bank pledges securities as collateral for the repurchase agreements. Short-term borrowings totaled $3,870 at December 31, 2019 and $3,686 at June 30, 2019.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Jumbo time deposits (those with balances of $250 and over) totaled $37,969 at December 31, 2019 and $39,034 at June 30, 2019. 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.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Since commitments to extend credit have a fixed expiration date or other termination clause, some commitments will expire without being drawn upon and the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments and collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $88,524 at December 31, 2019 and $86,265 at June 30, 2019.

Capital Resources

Total shareholders’ equity increased to $54,036 as of December 31, 2019 from $51,166 as of June 30, 2019. The increase was primarily the result of net income of $2,943 for the first six months of fiscal year 2020 and $536 in accumulated other comprehensive income from an increase in the unrealized gains in the mark-to-market of available-for-sale securities. These increases were partially offset by cash dividends paid of $739.

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.

As of December 31, 2019, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 11.51% and the leverage and total capital ratios were 8.89% and 12.45%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 11.68% and leverage and total risk-based capital ratios of 8.88% and 12.60%, respectively, as of June 30, 2019. 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 December 31, 2019 that would cause the Bank’s capital category to change.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

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 as a critical accounting policy and an understanding of this policy is 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. Note one (Summary of Significant Accounting Policies - Allowance for Loan Losses), note four (Loans) and Management’s Discussion and Analysis of Financial Condition and Results of Operation (Critical Accounting Policies and Use of Significant Estimates) of the 2019 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since June 30, 2019.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements relating to the merger of Peoples Bancorp with and into Consumers, unanticipated difficulties or expenditures relating to the transaction; legal proceedings, including those that may be instituted against Consumers, its board of directors, its executive officers and others; disruptions of current plans and operations caused by the merger and the resulting integration of Peoples Bancorp with Consumers; potential difficulties in employee retention due to the merger; any failure to meet expected cost savings, synergies and other financial and strategic benefits in connection with the merger within anticipated time frames or at all; the response of customers, suppliers and business partners to the merger; and risks related to diverting management’s attention from Consumers’ ongoing business operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our 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, we undertake 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:

	●	changes in local, regional and national economic conditions becoming less favorable than we expect, resulting in a deterioration in credit quality of our loan assets, among other things;
	●	the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
	●	inflation, interest rate, securities market and monetary fluctuations;
	●	changes in the level of non-performing assets and charge-offs;
	●	declining asset values impacting the underlying value of collateral;
	●	the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;
	●	competitive pressures on product pricing and services;
	●	breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;
	●	changes in the reliability of our vendors, internal control systems or information systems;
	●	our ability to attract and retain qualified employees;
	●	changes in accounting policies, rules and interpretations;
	●	unanticipated changes in our liquidity position, including, but not limited to, changes in the cost of liquidity and our ability to find alternative funding sources; and
	●	changes in consumer spending, borrowing and savings habits.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

While the list of factors presented here is, and the Risk Factors starting on page 16 of the registration statement on Form S-4/A filed with the SEC on September 4, 2019 related to the merger of Consumers/Peoples are, considered representative no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.

CONSUMERS BANCORP, INC.

Item 4 – Controls and Procedures

Evaluation of Disclosure 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 Corporation’s disclosure controls and procedures were effective as of December 31, 2019.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in the Corporation’s internal control over financial reporting that occurred during the Corporation’s last quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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 4 – Mine Safety Disclosures

Not Applicable

Item 5 – Other Information

None

Item 6 – Exhibits

Exhibit

Number

Description

Exhibit 11

Statement regarding Computation of Per Share Earnings (included in Note 6 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.

Exhibit 101

The following materials from Consumers Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended December 31, 2019, formatted in XBRL (Extensible Business Reporting Language) include: (1) Unaudited Consolidated Balance Sheets, (2) Unaudited Consolidated Statements of Income, (3) Unaudited Consolidated Statements of Comprehensive Income, (4) Unaudited Consolidated Statement of Changes in Shareholders’ Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements.

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: February 12, 2020	/s/ Ralph J. Lober Ralph J. Lober, II President & Chief Executive Officer (principal executive officer)

Date: February 12, 2020	/s/ Renee K. Wood Renee K. Wood Chief Financial Officer & Treasurer (principal financial officer)

CONSUMERS BANCORP INC /OH/ - FORM 10-Q - February 12, 2020

Attached files

CONSUMERS BANCORP INC /OH/ Reports