CONSUMERS BANCORP INC /OH/ - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - CONSUMERS BANCORP INC /OH/	ex_224861.htm
EX-31.2 - EXHIBIT 31.2 - CONSUMERS BANCORP INC /OH/	ex_224860.htm
EX-31.1 - EXHIBIT 31.1 - CONSUMERS BANCORP INC /OH/	ex_224859.htm
EX-10.12 - EXHIBIT 10.12 - CONSUMERS BANCORP INC /OH/	ex_224858.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

☐	Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2020

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 Exchange 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 3,028,100 shares of Registrant’s common stock, no par value, outstanding as of February 10, 2021.

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED December 31, 2020

Table of Contents

Page

Number (s)

Part I – Financial Information

Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2020 and June 30, 2020	1

Consolidated Statements of Income for the three and six months ended December 31, 2020 and 2019	2

Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2020 and 2019	3

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended December 31, 2020 and 2019	4

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 and 2019	5

Notes to the Consolidated Financial Statements	6-22

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-31

Item 3 – Not Applicable for Smaller Reporting Companies

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

Item 1A – Not Applicable for Smaller Reporting Companies	33

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

Item 3 – Defaults Upon Senior Securities	33

Item 4 – Mine Safety Disclosure	33

Item 5 – Other Information	33

Item 6 – Exhibits	33

Signatures	34

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share data)	December 31, 2020			June 30, 2020
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions	$	8,996		$	8,429
Federal funds sold and interest-bearing deposits in financial institutions		49			1,230
Total cash and cash equivalents		9,045			9,659
Certificates of deposit in other financial institutions		8,599			11,635
Securities, available-for-sale		145,665			143,918
Securities, held-to-maturity (fair value of $3,605 at December 31, 2020 and $3,868 at June 30, 2020)		3,336			3,541
Equity securities, at fair value		400			—
Federal bank and other restricted stocks, at cost		2,472			2,472
Loans held for sale		4,770			3,507
Total loans		557,257			542,861
Less allowance for loan losses		(5,912	)		(5,678	)
Net loans		551,345			537,183
Cash surrender value of life insurance		9,573			9,442
Premises and equipment, net		14,972			14,901
Goodwill		836			836
Core deposit intangible, net		242			256
Accrued interest receivable and other assets		2,805			3,470
Total assets	$	754,060		$	740,820

LIABILITIES
Deposits
Noninterest-bearing demand	$	194,180		$	190,233
Interest bearing demand		104,777			99,173
Savings		241,854			228,567
Time		107,551			115,382
Total deposits		648,362			633,355

Short-term borrowings		13,275			6,943
Federal Home Loan Bank advances		18,083			31,161
Accrued interest and other liabilities		6,632			6,121
Total liabilities		686,352			677,580
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; 3,124,053 shares issued as of December 31, 2020 and June 30, 2020)		20,011			19,974
Retained earnings		44,492			40,460
Treasury stock, at cost (95,953 and 108,475 common shares as of December 31, 2020 and June 30, 2020, respectively)		(1,324	)		(1,454	)
Accumulated other comprehensive income		4,529			4,260
Total shareholders’ equity		67,708			63,240
Total liabilities and shareholders’ equity	$	754,060		$	740,820

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)	2020		2019		2020		2019

Interest and dividend income
Loans, including fees	$	6,583	$	4,862	$	13,072	$	9,623
Securities, taxable		344		480		716		990
Securities, tax-exempt		427		400		847		799
Federal bank and other restricted stocks		21		20		39		40
Federal funds sold and other interest-bearing deposits		42		16		89		42
Total interest and dividend income		7,417		5,778		14,763		11,494
Interest expense
Deposits		487		910		1,064		1,855
Short-term borrowings		2		13		6		24
Federal Home Loan Bank advances		70		59		141		138
Total interest expense		559		982		1,211		2,017
Net interest income		6,858		4,796		13,552		9,477
Provision for loan losses		130		185		260		315
Net interest income after provision for loan losses		6,728		4,611		13,292		9,162

Noninterest income
Service charges on deposit accounts		314		360		621		733
Debit card interchange income		445		384		901		775
Gain on sale of mortgage loans		246		142		482		276
Bank owned life insurance death benefit		—		—		—		324
Bank owned life insurance income		65		66		131		134
Securities gains, net		8		4		8		110
Other		75		69		151		142
Total noninterest income		1,153		1,025		2,294		2,494

Noninterest expenses
Salaries and employee benefits		2,760		2,207		5,451		4,380
Occupancy and equipment		636		595		1,276		1,127
Data processing expenses		176		141		362		526
Debit card processing expenses		216		194		454		395
Professional and director fees		249		133		486		390
FDIC assessments		87		5		148		(2	)
Franchise taxes		108		95		217		190
Marketing and advertising		116		93		250		274
Telephone and network communications		79		70		163		144
Amortization of intangible		7		—		14		—
Other		397		402		809		816
Total noninterest expenses		4,831		3,935		9,630		8,240
Income before income taxes		3,050		1,701		5,956		3,416
Income tax expense		543		261		1,048		473
Net income	$	2,507	$	1,440	$	4,908	$	2,943

Basic and diluted earnings per share	$	0.83	$	0.53	$	1.63	$	1.07

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,
	2020			2019			2020			2019

Net income	$	2,507		$	1,440		$	4,908		$	2,943

Other comprehensive income, net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains (losses) arising during the period		278			(28	)		348			790
Reclassification adjustment for gains included in income		(8	)		(4	)		(8	)		(110	)
Net unrealized gains (losses)		270			(32	)		340			680
Income tax effect		(57	)		6			(71	)		(144	)
Other comprehensive income (loss)		213			(26	)		269			536

Total comprehensive income	$	2,720		$	1,414		$	5,177		$	3,479

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)	Common Stock		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, September 30, 2020	$	20,011	$	42,424		$	(1,324	)	$	4,316		$	65,427
Net income				2,507									2,507
Other comprehensive income										213			213
Cash dividends declared ($0.145 per share)				(439	)								(439	)
Balance, December 31, 2020	$	20,011	$	44,492		$	(1,324	)	$	4,529		$	67,708


Balance, September 30, 2019	$	14,697	$	37,622		$	(1,454	)	$	2,128		$	52,993
Net income				1,440									1,440
Other comprehensive loss										(26	)		(26	)
Cash dividends declared ($0.135 per share)				(371	)								(371	)
Balance, December 31, 2019	$	14,697	$	38,691		$	(1,454	)	$	2,102		$	54,036

(Dollars in thousands, except per share data)	Common Stock		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance, June 30, 2020	$	19,974	$	40,460		$	(1,454	)	$	4,260	$	63,240
Net income				4,908								4,908
Other comprehensive income										269		269
12,522 shares associated with vested and expired stock awards		37					130					167
Cash dividends declared ($0.29 per share)				(876	)							(876	)
Balance, December 31, 2020	$	20,011	$	44,492		$	(1,324	)	$	4,529	$	67,708


Balance, June 30, 2019	$	14,656	$	36,487		$	(1,543	)	$	1,566	$	51,166
Net income				2,943								2,943
Other comprehensive income										536		536
11,813 shares associated with vested stock awards		41					89					130
Cash dividends declared ($0.27 per share)				(739	)							(739	)
Balance, December 31, 2019	$	14,697	$	38,691		$	(1,454	)	$	2,102	$	54,036

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,
	2020			2019
Cash flows from operating activities
Net cash from operating activities	$	5,706		$	2,214
Cash flow from investing activities
Purchases of securities, available-for-sale		(24,975	)		(6,678	)
Maturities, calls and principal pay downs of securities, available-for-sale		20,304			11,902
Sale of securities, available-for-sale		2,733			6,110
Principal pay downs of securities, held-to-maturity		205			206
Purchase of equity securities		(400	)		—
Net decrease in certificate of deposit in other financial institutions		3,036			989
Net increase in loans		(14,431	)		(27,226	)
Proceeds from BOLI death benefit		—			753
Premises and equipment purchases		(194	)		(219	)
Sale of other repossessed assets		17			—
Net cash from investing activities		(13,705	)		(14,163	)
Cash flow from financing activities
Net increase in deposit accounts		15,007			15,471
Net change in short-term borrowings		6,332			184
Proceeds from Federal Home Loan Bank advances		1,300			9,500
Repayments of Federal Home Loan Bank advances		(14,378	)		(7,900	)
Dividends paid		(876	)		(739	)
Net cash from financing activities		7,385			16,516
Increase (decrease) in cash or cash equivalents		(614	)		4,567
Cash and cash equivalents, beginning of period		9,659			9,461
Cash and cash equivalents, end of period	$	9,045		$	14,028

Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	1,230		$	2,022
Federal income taxes		1,055			350
Non-cash items:
Transfer of loans to other repossessed assets		9			—
Issuance of treasury stock for stock awards		167			89
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, 2020. 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.

Recently Issued Accounting Pronouncements Not Yet Effective: In June 2016, the 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.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The ASU is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR, or other reference rates that may be discontinued, and provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria. The ASU also provides for a one-time sale and/or transfer to AFS or trading to be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. The guidance requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. The Corporation does not expect ASU 2020-04 to have a material impact on its financial statements and disclosures.

Note 2 – Acquisition

On December 29, 2020, the Bank entered into a Branch Purchase and Assumption Agreement (P&A Agreement) with CFBank National Association (CFBank) to acquire two branches of CFBank in Columbiana County, Ohio. The P&A Agreement provides for the sale and transfer by CFBank to the Bank the land, buildings and other associated assets of CFBank’s drive-up branch location in Wellsville, Ohio and CFBank’s branch location in Calcutta, Ohio (the Branches); approximately $100 million in deposits attributable to the Branches; $15 million in aggregate principal amount of subordinated debt securities issued by unrelated financial institutions; all performing loans attributable to the Branches which are outstanding at closing (totaling approximately $3.1 million in aggregate principal amount as of November 30, 2020); and up to $13.5 million in aggregate principal amount of single family residential mortgage loans and home equity lines of credit to be identified by the parties prior to the closing principally from CFBank’s Northeast Ohio loan portfolio. In addition, CFBank will provide the opportunity for the Corporation to purchase at par at least $15 million in aggregate principal amount of participation interests in commercial and commercial real estate loans originated by and held in CFBank’s portfolio. In exchange, Consumers will pay to CFBank the net book value of the land, building and associated assets of the Branches, a deposit premium equal to 1.75% of the average daily deposits of the Branches for the 30 days preceding the closing, and the par value of the subordinated debt securities and loans acquired by Consumers.

The closing of the transactions contemplated by the P&A Agreement is subject to regulatory approval and satisfaction of other customary closing conditions. The parties expect the closing of the transactions to occur early in the third calendar quarter of 2021.

On June 14, 2019, the Corporation 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 the Corporation’s 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 assets and liabilities of Peoples were 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 are 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. The 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		55,320
Premises and equipment		818
Core deposit intangible		270
Accrued interest receivable and other assets		140
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					9,569
Goodwill				$	836

The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgement in accounting for the acquisition. The fair value of loans was estimated using discounted contractual cash flows. The book balance of the loans at the time of the acquisition was $55,273 before considering Peoples’ allowance for loan losses, which was not carried over. The fair value disclosed above reflects a credit-related adjustment of $(890) and an adjustment for other factors of $937. Loans evidencing credit deterioration since origination, purchased credit impaired loans, included in loans receivable, were immaterial. Acquisition costs of $827 pre-tax, or $680 after-tax, were recorded during the twelve-month period ended June 30, 2020.

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, 2020
U.S. Treasury	$	499	$	2	$	—		$	501
Obligations of U.S. government-sponsored entities and agencies		7,793		316		—			8,109
Obligations of state and political subdivisions		63,359		3,675		—			67,034
U.S. Government-sponsored mortgage-backed securities–residential		56,757		1,496		(5	)		58,248
U.S. Government-sponsored mortgage-backed securities– commercial		7,004		75		(1	)		7,078
U.S. Government-sponsored collateralized mortgage obligations– residential		4,520		175		—			4,695
Total available-for-sale securities	$	139,932	$	5,739	$	(6	)	$	145,665

Held-to-Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
December 31, 2020
Obligations of state and political subdivisions	$	3,336	$	269	$	—	$	3,605
Total held-to-maturity securities	$	3,336	$	269	$	—	$	3,605

Available–for-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2020
U.S. Treasury	$	1,248	$	8	$	—		$	1,256
Obligations of U.S. government-sponsored entities and agencies		10,133		399		—			10,532
Obligations of state and political subdivisions		60,343		3,149		—			63,492
U.S. government-sponsored mortgage-backed securities - residential		48,645		1,515		(4	)		50,156
U.S. government-sponsored mortgage-backed securities - commercial		8,444		55		(2	)		8,497
U.S. government-sponsored collateralized mortgage obligations - residential		9,712		285		(12	)		9,985
Total available-for-sale securities	$	138,525	$	5,411	$	(18	)	$	143,918

Held-to-Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
June 30, 2020
Obligations of state and political subdivisions	$	3,541	$	327	$	—	$	3,868
Total held-to-maturity securities	$	3,541	$	327	$	—	$	3,868

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2019		2020		2019
Proceeds from sales and calls	$	2,733	$	1,650		2,733		6,110
Gross realized gains		31		4		31		110
Gross realized losses		23		—		23		—

The income tax provision related to the net realized gain amounted to $2 for the three- and six-month periods ended December 31, 2020. The income tax provision related to the net realized gains amounted to $1 and $22 for the three- and six-month periods ended December 31, 2019, respectively.

The amortized cost and fair values of debt securities at December 31, 2020, 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	$	4,930	$	5,006
Due after one year through five years		14,015		14,545
Due after five years through ten years		13,700		14,327
Due after ten years		39,006		41,766
Total		71,651		75,644

U.S. Government-sponsored mortgage-backed and related securities		69,281		70,021
Total available-for-sale securities	$	139,932	$	145,665

Held-to-Maturity
Due after one year through five years	$	334	$	356
Due after five years through ten years		667		735
Due after ten years		2,335		2,514
Total held-to-maturity securities	$	3,336	$	3,605

The following table summarizes the securities with unrealized losses at December 31, 2020 and June 30, 2020, 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, 2020
U.S. Government-sponsored mortgage-backed securities – residential		1,198		(5	)		—		—		1,198		(5	)
U.S. Government-sponsored mortgage-backed securities- commercial		1,422		(1	)		—		—		1,422		(1	)
Total temporarily impaired	$	2,620	$	(6	)	$	—	$	—	$	2,620	$	(6	)

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, 2020
U.S. Government-sponsored mortgage-backed securities – residential		—		—			625		(4	)		625		(4	)
U.S. Government-sponsored mortgage-backed securities – commercial		1,806		(2	)		—		—			1,806		(2	)
U.S. Government-sponsored collateralized mortgage obligations - residential		1,700		(12	)		—		—			1,700		(12	)
Total temporarily impaired	$	3,506	$	(14	)	$	625	$	(4	)	$	4,131	$	(18	)

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, 2020 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 increases in mortgage backed and collateralized mortgage obligations prepayment speeds impacting the yield on bonds that were purchased at a premium. 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, 2020			June 30, 2020
Commercial	$	158,911		$	158,667
Commercial real estate:
Construction		3,802			16,235
Other		250,529			229,029
1 – 4 Family residential real estate:
Owner occupied		93,726			90,494
Non-owner occupied		20,210			19,370
Construction		6,026			9,344
Consumer		24,230			21,334
Subtotal		557,434			544,473
Net Deferred loan fees and costs		(177	)		(1,612	)
Allowance for loan losses		(5,912	)		(5,678	)
Net Loans	$	551,345		$	537,183

The commercial loan category in the above table includes PPP loans of $52,539 as of December 31, 2020 and $66,606 as of June 30, 2020 and a mortgage loan warehouse line of credit to another financial institution with an outstanding balance of $47,268 as of December 31, 2020 and $32,869 as of June 30, 2020. The outstanding balance of the warehouse line of credit can fluctuate significantly based on the other financial institution’s funding needs.

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, 2020:

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

Allowance for loan losses:
Beginning balance	$	940		$	3,694	$	997	$	136		$	5,767
Provision for loan losses		(82	)		122		31		59			130
Loans charged-off		—			—		—		(12	)		(12	)
Recoveries		—			1		—		26			27
Total ending allowance balance	$	858		$	3,817	$	1,028	$	209		$	5,912

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2020:

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

Allowance for loan losses:
Beginning balance	$	947		$	3,623	$	989	$	119		$	5,678
Provision for loan losses		(67	)		192		39		96			260
Loans charged-off		(22	)		—		—		(56	)		(78	)
Recoveries		—			2		—		50			52
Total ending allowance balance	$	858		$	3,817	$	1,028	$	209		$	5,912

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

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, 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 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, 2020. Included in the recorded investment in loans is $1,607 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	$	3	$	—	$	6	$	—	$	9
Acquired loans collectively evaluated for impairment		—		101		84		—		185
Originated loans collectively evaluated for impairment		855		3,716		938		209		5,718
Total ending allowance balance	$	858	$	3,817	$	1,028	$	209	$	5,912

Recorded investment in loans:
Loans individually evaluated for impairment	$	148	$	1,151	$	1,044	$	—	$	2,343
Acquired loans collectively evaluated for impairment		661		7,824		23,220		8,935		40,640
Originated loans collectively evaluated for impairment		158,331		245,489		96,733		15,328		515,881
Total ending loans balance	$	159,140	$	254,464	$	120,997	$	24,263	$	558,864

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, 2020. Included in the recorded investment in loans is $1,936 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	$	28	$	6	$	—	$	—	$	34
Acquired loans collectively evaluated for impairment		—		103		94		—		197
Originated loans collectively evaluated for impairment		919		3,514		895		119		5,447
Total ending allowance balance	$	947	$	3,623	$	989	$	119	$	5,678

Recorded investment in loans:
Loans individually evaluated for impairment	$	179	$	1,045	$	699	$	—	$	1,923
Acquired loans collectively evaluated for impairment		1,095		8,072		27,252		12,550		48,969
Originated loans collectively evaluated for impairment		156,054		236,840		92,168		8,843		493,905
Total ending loans balance	$	157,328	$	245,957	$	120,119	$	21,393	$	544,797

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, 2020 and for the six months ended December 31, 2020:

	As of December 31, 2020						Six Months ended December 31, 2020
	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial real estate:
Other	$	1,286	$	1,151	$	—	$	867	$	4	$	4
1-4 Family residential real estate:
Owner occupied		947		797		—		629		11		11
Non-owner occupied		274		217		—		225		—		—
With an allowance recorded:
Commercial		147		148		3		160		4		4
Commercial real estate:
Other		—		—		—		205		6		6
1-4 Family residential real estate:
Owner occupied		30		30		6		5		—		—
Total	$	2,684	$	2,343	$	9	$	2,091	$	25	$	25

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, 2020:

	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial real estate:
Other	$	907	$	3	$	3
1-4 Family residential real estate:
Owner occupied		720		5		5
Non-owner occupied		220		—		—
With an allowance recorded:
Commercial		150		2		2
Commercial real estate:
Other		204		3		3
1-4 Family residential real estate:
Owner occupied		10		—		—
Total	$	2,211	$	13	$	13

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, 2020 and for the six months ended December 31, 2019:

	As of June 30, 2020						Six Months ended December 31, 2019
	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial real estate:
Other	$	922	$	836	$	—	$	303	$	87	$	87
1-4 Family residential real estate:
Owner occupied		604		463		—		25		7		7
Non-owner occupied		284		236		—		254		—		—
With an allowance recorded:
Commercial		176		179		28		167		5		5
Commercial real estate:
Other		209		209		6		219		6		6
Total	$	2,195	$	1,923	$	34	$	968	$	105	$	105

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 real estate:
Other	$	244	$	1	$	1
1-4 Family residential real estate:
Owner occupied		10		—		—
Non-owner occupied		250		—		—
With an allowance recorded:
Commercial		165		2		2
Commercial real estate:
Other		218		3		3
Total	$	887	$	6	$	6

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, 2020 and June 30, 2020:

	December 31, 2020				June 30, 2020
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
			Still				Still
	Non-accrual		Accruing		Non-accrual		Accruing
Commercial	$	—	$	—	$	21	$	—
Commercial real estate:
Other		902		—		785		—
1 – 4 Family residential:
Owner occupied		821		—		143		29
Non-owner occupied		217		—		236		—
Consumer		—		—		—		12
Total	$	1,940	$	—	$	1,185	$	41

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.

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 December 31, 2020 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	$	—	$	—	$	—	$	—	$	159,140	$	159,140
Commercial real estate:
Construction		—		—		—		—		3,791		3,791
Other		—		—		629		629		250,044		250,673
1-4 Family residential:
Owner occupied		450		4		269		723		93,926		94,649
Non-owner occupied		—		—		—		—		20,223		20,223
Construction		4		—		—		4		6,121		6,125
Consumer		261		49		—		310		23,953		24,263
Total	$	715	$	53	$	898	$	1,666	$	557,198	$	558,864

The above table of past due loans includes the recorded investment in non-accrual loans of $898 in the 90 days or greater category and $1,042 in the loans not past due category.

The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 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	$	—	$	—	$	21	$	21	$	157,307	$	157,328
Commercial real estate:
Construction		—		—		—		—		16,241		16,241
Other		—		2		628		630		229,086		229,716
1-4 Family residential:
Owner occupied		—		—		172		172		91,102		91,274
Non-owner occupied		—		—		—		—		19,410		19,410
Construction		—		—		—		—		9,435		9,435
Consumer		127		49		12		188		21,205		21,393
Total	$	127	$	51	$	833	$	1,011	$	543,786	$	544,797

The above table of past due loans includes the recorded investment in non-accrual loans of $2 in the 60-89 days, $792 in the 90 days or greater category and $391 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 that are classified as TDRs. A modified loan is usually 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. In response to COVID-19, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by the virus. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as TDRs. As of December 31, 2020, 18 borrowers with an aggregate outstanding balance of $667 are in payment deferral status under this loan modification program.

As of December 31, 2020 and June 30, 2020, the Corporation had $934 and $974, respectively, of loans classified as TDRs which are included in impaired loans above. As of December 31, 2020 and June 30, 2020, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. As of December 31, 2020 and June 30, 2020, the Corporation had $3 and $12, respectively, of specific reserve allocated to these loans.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

During the three- and six-month periods ended December 31, 2020 and 2019, 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, 2020 and 2019.

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, 2020 and 2019. 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.

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 pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Generally, 1-4 Family Residential and Consumer loans are not risk rated, except when collateral is used for a business purpose. 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, 2020
			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	158,054	$	453	$	359	$	—	$	274
Commercial real estate:
Construction		3,791		—		—		—		—
Other		241,702		1,933		5,075		902		1,061
1-4 Family residential real estate:
Owner occupied		1,988		—		18		603		92,040
Non-owner occupied		19,265		173		210		217		358
Construction		1,306		—		—		—		4,819
Consumer		687		—		—		—		23,576
Total	$	426,793	$	2,559	$	5,662	$	1,722	$	122,128

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

As of June 30, 2020, 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, 2020
			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	152,911	$	143	$	3,979	$	21	$	274
Commercial real estate:
Construction		16,241		—		—		—		—
Other		220,311		1,469		5,378		785		1,773
1-4 Family residential real estate:
Owner occupied		2,419		—		334		—		88,521
Non-owner occupied		18,435		186		223		236		330
Construction		3,234		—		—		—		6,201
Consumer		153		—		—		—		21,240
Total	$	413,704	$	1,798	$	9,914	$	1,042	$	118,339

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.

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).

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Assets and liabilities measured at fair value on a 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, 2020
	Balance at December 31, 2020		Level 1		Level 2		Level 3
Assets:
U.S. Treasury	$	501	$	—	$	501	$	—
Obligations of U.S. government-sponsored entities and agencies		8,109		—		8,109		—
Obligations of states and political subdivisions		67,034		—		67,034		—
U.S. Government-sponsored mortgage-backed securities – residential		58,248		—		58,248		—
U.S. Government-sponsored mortgage-backed securities – commercial		7,078		—		7,078		—
U.S. Government-sponsored collateralized mortgage obligations - residential		4,695		—		4,695		—
Equity securities		400		—		400		—

			Fair Value Measurements at June 30, 2020
	Balance at June 30, 2020		Level 1		Level 2		Level 3
Assets:
Securities available-for-sale:
Obligations of U.S. Treasury	$	1,256	$	—	$	1,256	$	—
Obligations of government-sponsored entities		10,532		—		10,532		—
Obligations of states and political subdivisions		63,492		—		63,492		—
U.S. Government-sponsored mortgage-backed securities - residential		50,156		—		50,156		—
U.S. Government-sponsored mortgage-backed securities – commercial		8,497		—		8,497		—
U.S. Government-sponsored collateralized mortgage obligations		9,985		—		9,985		—

There were no transfers between Level 1 and Level 2 during the three-month and six-month periods ended December 31, 2020 or 2019.

Certain assets and 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. Assets and 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. There were no impaired loans measured at fair value on a non-recurring basis at December 31, 2020 or June 30, 2020 and there was no impact to the provision for loan losses for the three- or six-month periods ended December 31, 2020 or 2019.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Other Real Estate and Repossessed Assets 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 and other repossessed assets, which are primarily vehicles, are evaluated on a quarterly basis for additional impairment and adjusted accordingly. There was no other real estate owned or other repossessed assets being carried at fair value as of December 31, 2020 or June 30, 2020.

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, 2020				June 30, 2020
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents	$	9,045	$	9,045	$	9,659	$	9,659
Level 2 inputs:
Certificates of deposit in other financial institutions		8,599		8,819		11,635		11,889
Loans held for sale		4,770		4,907		3,507		3,566
Accrued interest receivable		2,327		2,327		2,646		2,646
Level 3 inputs:
Securities held-to-maturity		3,336		3,605		3,541		3,868
Loans, net		551,345		565,397		537,183		548,247
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits		540,811		540,811		517,973		517,973
Time deposits		107,551		108,158		115,382		116,238
Short-term borrowings		13,275		13,275		6,943		6,943
Federal Home Loan Bank advances		18,083		18,423		31,161		31,571
Accrued interest payable		88		88		107		107

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 569 shares of restricted stock that were anti-dilutive for the six-month period ended December 31, 2020. 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. 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,
	2020		2019		2020		2019
Basic:
Net income available to common shareholders	$	2,507	$	1,440	$	4,908	$	2,943
Weighted average common shares outstanding		3,017,268		2,737,800		3,015,741		2,737,755
Basic income per share	$	0.83	$	0.53	$	1.63	$	1.07

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Diluted:
Net income available to common shareholders	$	2,507	$	1,440	$	4,908	$	2,943
Weighted average common shares outstanding		3,017,268		2,737,800		3,015,741		2,737,755
Dilutive effect of restricted stock		21		—		—		—
Total common shares and dilutive potential common shares		3,017,289		2,737,800		3,015,741		2,737,755
Dilutive income per share	$	0.83	$	0.53	$	1.63	$	1.07

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, 2020 and 2019, were as follows:

	Pretax			Tax Effect			After-tax			Affected Line Item in Consolidated Statements of Income
Balance as of September 30, 2020	$	5,463		$	(1,147	)	$	4,316
Unrealized holding loss on available-for-sale securities arising during the period		278			(59	)		219
Amounts reclassified from accumulated other comprehensive income		(8	)		2			(6	)	(a)(b)
Net current period other comprehensive loss		270			(57	)		213
Balance as of December 31, 2020	$	5,733		$	(1,204	)	$	4,529

Balance as of September 30, 2019	$	2,694		$	(566	)	$	2,128
Unrealized holding gain 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 income		(32	)		6			(26	)
Balance after reclassification as of December 31, 2019	$	2,662		$	(560	)	$	2,102

(a) Securities (gains) losses, net

(b) Income tax expense

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, 2020	$	5,393		$	(1,133	)	$	4,260
Unrealized holding gain on available-for-sale securities arising during the period		348			(73	)		275
Amounts reclassified from accumulated other comprehensive income		(8	)		2			(6	)	(a)(b)
Net current period other comprehensive income		340			(71	)		269
Balance as of December 31, 2020	$	5,733		$	(1,204	)	$	4,529

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 after reclassification as of December 31, 2019	$	2,662		$	(560	)	$	2,102

(a) Securities (gains) losses, net

(b) Income tax expense

Note 8 – COVID-19

In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, and has spread around the world, resulting in business and social disruption. The coronavirus was declared a Pandemic by the World Health Organization on March 11, 2020. The operations and business results of the Corporation could be materially adversely affected. The extent to which the coronavirus may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others. As a result of the economic shutdown engineered to slow down the spread of COVID-19, the ability of our customers to make payments on loans could be adversely impacted, resulting in elevated loan losses and an increase in the Corporation’s allowance for loan losses. Additionally, it is reasonably possible future evaluations of the carrying amount of goodwill could result in a conclusion that goodwill is impaired.

CONSUMERS BANCORP, INC.

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

(Dollars in thousands, except per share data)

General

The following is management’s analysis of the Corporation’s results of operations for the three- and six-month periods ended December 31, 2020, compared to the same period in 2019, and the consolidated balance sheet at December 31, 2020, compared to June 30, 2020. 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 December 29, 2020, the Bank entered into a P&A Agreement with CFBank to acquire CFBank’s drive-up branch location in Wellsville, Ohio and CFBank’s branch location in Calcutta, Ohio. As part of this transaction, the Bank will acquire approximately $100 million in deposits attributable to the Branches; $15 million in aggregate principal amount of subordinated debt securities issued by unrelated financial institutions; all performing loans attributable to the Branches which are outstanding at closing (totaling approximately $3.1 million in aggregate principal amount as of November 30, 2020); and up to $13.5 million in aggregate principal amount of single family residential mortgage loans and home equity lines of credit to be identified by the parties prior to the closing principally from CFBank’s Northeast Ohio loan portfolio. In addition, CFBank will provide the opportunity for the Corporation to purchase at par at least $15 million in aggregate principal amount of participation interests in commercial and commercial real estate loans originated by and held in CFBank’s portfolio. The closing of the transactions is subject to regulatory approval and satisfaction of other customary closing conditions and is expected to occur early in the third calendar quarter of 2021.

On January 1, 2020, the Corporation completed the acquisition by merger of Peoples Bancorp of Mt. Pleasant, Inc. (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.

COVID-19 Pandemic

In response to COVID-19, management is actively pursuing multiple avenues to assist customers during these uncertain times. For commercial borrowers, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) includes key SBA initiatives to assist small businesses. The Paycheck Protection Program (PPP) was designed to provide a direct incentive for small businesses to keep their workers on the payroll. The SBA will forgive loans obtained under this program if the borrower meets payroll and other requirements. A total of $52,539 of PPP loans from the first round of assistance were outstanding as of December 31, 2020. Demand for the second round of the PPP program has been strong and submission of applications began on January 15, 2021. As of February 2, 2021, there were a total of $25,831 of loans funded and an additional $8,263 million submitted and waiting the SBA’s approval as part of the second round of the PPP loan program.

Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as troubled debt restructurings. As of December 31, 2020, 18 borrowers with an outstanding balance of $667 are in payment deferral status under this loan modification program.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

We have assisted and may continue to assist customers who are experiencing financial hardship due to COVID-19 by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties. The consumer reserve personal line of credit, an on this unsecured line of credit that is linked to a personal checking account, has been redesigned to provide easier access and a lower initial rate. Commercial customers have been encouraged to access available funds on their lines of credit, and we’ve been ready to provide emergency commercial lines of credit to qualified borrowers in order to assist in meeting payroll and other recurring fixed expenses. In response to COVID-19, we provided four emergency lines of credit; however, the lines of credit have since been closed as the borrowers did not need to access the funds.

The Corporation has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. With the holiday surge in COVID-19 cases, the branch lobbies were again closed to the public for walk-in transactions but available to customers to complete paperwork or complex transactions. If the infection rate improves, we expect to reopen branch lobbies during the first calendar quarter of 2021. The Corporation is encouraging virtual meetings and conference calls in place of in-person meetings. Additionally, travel for business has been restricted. The Corporation is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces.

Results of Operations

Three- and Six-Month Periods Ended December 31, 2020 and 2019

Net income for the second quarter of fiscal year 2021 was $2,507, or $0.83 per common share, compared to $1,440, or $0.53 per common share for the three months ended December 31, 2019. The following are key highlights of our results of operations for the three months ended December 31, 2020 compared to the prior fiscal year comparable period:

	●	net interest income increased by $2,062 to $6,858, or 43.0%, in the second quarter of fiscal year 2021 from the same prior year period primarily as a result of an increase in average interest earning assets and a reduction in the cost of funds;
	●	a $130 provision for loans loss expense was recorded for the second quarter of fiscal year 2021 compared with $185 for the prior year period;
	●	noninterest income increased by $128, or 12.5%, in the second quarter of fiscal year 2021 from the same prior year period primarily as a result of a $104, or 73.2%, increase on gains from the sale of mortgage loans and a $61, or 15.9%, increase in debit card interchange income; and
	●	noninterest expenses increased by $896, or 22.8%, in the second quarter of fiscal year 2021 from the same prior year period primarily due to an increase in salaries and employee benefit expenses due to the inclusion of a full quarter of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples, increased incentive accruals, and higher mortgage commissions due to the increase in volume.

In the first six months of fiscal year 2021, net income was $4,908, or $1.63 per common share, compared to $2,943, or $1.07 per common share, for the six months ended December 31, 2019. The following are key highlights of our results of operations for the six months ended December 31, 2020:

	●	net interest income increased by $4,075 to $13,552, or by 43.0%, in the first six months of fiscal year 2021 from the same prior year period;
	●	a provision for loan loss expense of $260 was recorded in the first six months of fiscal year 2021 compared with a provision for loan loss expense of $315 during the same prior year period;
	●	noninterest income decreased by $200 in the first six months of fiscal year 2021 primarily since the prior year period included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and a $110 gain on the sale of securities. These reductions were partially offset by a $205, or 74.0%, increase on gains from the sale of mortgage loans and a $126, or 16.3%, increase in debit card interchange income; and
	●	noninterest expenses increased by $1,390, or 16.9%, in the first six months of fiscal year 2021 from the same prior year period primarily due to an increase in salaries and employee benefit expenses due to the inclusion of six months of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples, increased incentive accruals, and higher mortgage commissions due to the increase in volume.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

Return on average equity and return on average assets were 14.83% and 1.31%, respectively, for the six months ended December 31, 2020 compared to 11.03% and 1.04%, respectively, for the same prior year period.

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. In addition, prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, can significantly affect net interest income. As a result of the Federal Open Market Committee established a near-zero target range for the federal funds rate, earnings could be negatively affected if the interest we receive on loans and securities falls more quickly than interest we pay on deposits and borrowings. 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 2021 and 2020 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 3.87% for the three months ended December 31, 2020, compared with 3.62% for the same period in 2019. FTE net interest income for the three months ended December 31, 2020 increased by $2,090, or 42.9%, to $6,964 from $4,874 for the same prior year period.

Tax-equivalent interest income for the three months ended December 31, 2020 increased by $1,667, or 28.5%, from the same prior year period. Interest income was positively impacted by a $182,889, or 34.1%, increase in average interest-earning assets from the same prior year period due to the assets acquired from the Peoples acquisition as well as organic loan growth. Additionally, interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. However, a reduction in the accretion of origination fees from PPP loans as these loans are forgiven and the significant decline in interest rates will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 4.18% for the three months ended December 31, 2020 compared with 4.35% for the same period last year.

Interest expense for the three months ended December 31, 2020 decreased by $423, or 43.1%, from the same prior year period primarily due to a reduction in deposit and borrowing costs as a result of lower market interest rates. The Corporation’s cost of funds was 0.46% for the three months ended December 31, 2020 compared with 1.02% for the same prior year period.

The Corporation’s net interest margin was 3.86% for the six months ended December 31, 2020, compared with 3.62% for the same period in 2019. FTE net interest income for the six months ended December 31, 2020 increased by $4,124, or 42.8%, to $13,756 from $9,632 for the same prior year period.

Tax-equivalent interest income for the six months ended December 31, 2020 increased by $3,318, or 28.5%, from the same prior year period. Interest income was positively impacted by a $182,309, or 34.4%, increase in average interest-earning assets from the same prior year period due to the assets acquired from the Peoples acquisition as well as organic loan growth. Additionally, interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. However, a reduction in the accretion of origination fees from PPP loans as these loans are forgiven and the significant decline in interest rates will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 4.20% for the six months ended December 31, 2020 compared with 4.38% for the same period last year.

Interest expense for the six months ended December 31, 2020 decreased by $806 from the same prior year period. The Corporation’s cost of funds was 0.50% for the six months ended December 31, 2020 compared with 1.05% for the same prior year period. The decline 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 amounts)

Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended December 31,

(In thousands, except percentages)

	2020								2019
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	74,051		$	344		1.90	%	$	79,160		$	480		2.43	%
Nontaxable securities (1)		67,892			529		3.24			61,281			475		3.17
Loans receivable (1)		552,897			6,587		4.73			390,708			4,865		4.94
Federal bank and other restricted stocks		2,472			21		3.37			1,723			20		4.61
Interest bearing deposits and federal funds sold		21,742			42		0.77			3,293			16		1.93
Total interest-earning assets		719,054			7,523		4.18	%		536,165			5,856		4.35	%

Noninterest-earning assets		30,865								31,384

Total Assets	$	749,919							$	567,549

Interest-bearing liabilities:
NOW	$	107,191		$	38		0.14	%	$	84,140		$	131		0.62	%
Savings		235,414			84		0.14			170,287			210		0.49
Time deposits		112,543			365		1.29			111,806			569		2.02
Short-term borrowings		8,596			2		0.09			3,915			13		1.32
FHLB advances		20,006			70		1.39			12,627			59		1.85
Total interest-bearing liabilities		483,750			559		0.46	%		382,775			982		1.02	%

Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		193,587								126,270
Other liabilities		5,907								4,900
Total liabilities		683,244								513,945
Shareholders’ equity		66,675								53,604

Total liabilities and shareholders’ equity	$	749,919							$	567,549

Net interest income, interest rate spread (1)				$	6,964		3.72	%				$	4,874		3.33	%

Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.87	%							3.62	%

Federal tax exemption on non-taxable securities and loans included in interest income				$	106							$	78

Average interest-earning assets to interest-bearing liabilities		148.64	%							140.07	%

(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 amounts)

Average Balance Sheets and Analysis of Net Interest Income for the Six Months Ended December 31,

(In thousands, except percentages)

	2020								2019
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	76,240		$	716		1.92	%	$	81,399		$	990		2.43	%
Nontaxable securities (1)		67,183			1,043		3.24			61,029			949		3.18
Loans receivable (1)		548,530			13,080		4.73			382,035			9,628		5.00
Federal bank and other restricted stocks		2,472			39		3.13			1,723			40		4.61
Interest bearing deposits and federal funds sold		18,409			89		0.96			4,339			42		1.92
Total interest-earning assets		712,834			14,967		4.20	%		530,525			11,649		4.38	%

Noninterest-earning assets		30,600								31,107

Total Assets	$	743,434							$	561,632

Interest-bearing liabilities:
NOW	$	104,646		$	83		0.16	%	$	83,316		$	276		0.66	%
Savings		231,954			189		0.16			168,234			432		0.51
Time deposits		113,680			792		1.38			112,224			1,147		2.03
Short-term borrowings		8,238			6		0.14			3,620			24		1.32
FHLB advances		22,059			141		1.27			14,003			138		1.95
Total interest-bearing liabilities		480,577			1,211		0.50	%		381,397			2,017		1.05	%

Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		191,360								122,263
Other liabilities		5,851								5,071
Total liabilities		677,788								508,731
Shareholders’ equity		65,646								52,901

Total liabilities and shareholders’ equity	$	743,434							$	561,632

Net interest income, interest rate spread (1)				$	13,756		3.70	%				$	9,632		3.33	%

Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.86	%							3.62	%

Federal tax exemption on non-taxable securities and loans included in interest income				$	204							$	155

Average interest-earning assets to interest-bearing liabilities		148.33	%							139.10	%

(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)

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, 2020, the provision for loan losses was $260 compared with $315 for the same prior year period. Net charge-offs of $26 were recorded during the six-month period ended December 31, 2020 compared with $8 during the six-month period ended December 31, 2019.

Non-performing loans were $1,940 as of December 31, 2020 compared with $1,226 as of June 30, 2020 and $427 as of December 31, 2019. Non-performing loans to total loans were 0.35% at December 31, 2020 and 0.23% at June 30, 2020. Non-accrual loans have primarily increased within the 1-4 family owner occupied loan category in part due to the COVID-19 pandemic impact on certain borrowers.

The allowance for loan losses as a percentage of loans was 1.06% at December 31, 2020 and 1.05% at June 30, 2020. As of December 31, 2020, the ALLL as a percentage of total loans excluding PPP loans was 1.17%. During the second quarter of fiscal year 2021, there was a significant decline in loans classified as substandard due to the full payoff of a large loan relationship that was in this category. Uncertainty remains regarding future levels of criticized and classified loans, non-performing loans and charge-offs, but some deterioration is expected as a result of the COVID-19 pandemic. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

Noninterest Income

Noninterest income increased by $128 for the second quarter of fiscal year 2021 from the same period last year primarily due to a $104, or 73.2%, increase in gains from the sale of mortgage loans and a $61, or 15.9%, increase in debit card interchange income. Debit card interchange income increased as a result of increased debit card usage and an increase in the number of cards issued. These increases were partially offset by a decline of $46, or 12.8%, in service charges on deposit accounts primarily due to a decline in overdraft charges as the COVID-19 pandemic dramatically impacted consumer spending habits and increased NSF and overdraft fee waivers as we assist customers who have been impacted by COVID-19.

Noninterest income decreased by $200 for the six-month period ended December 31, 2020 from the same period last year primarily since the prior year period included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and a $110 gain on the sale of securities. These reductions were partially offset by a $205, or 74.0%, increase on gains from the sale of mortgage loans and a $126, or 16.3%, increase in debit card interchange income, that were partially offset by a decline of $112, or 15.3%, in service charges on deposit accounts. Gains from the sale of mortgage loans have been positively impacted by record low mortgage rates in 2020 helping increase the volume of loans sold.

Noninterest Expenses

Total noninterest expenses increased by $896, or 22.85%, for the second quarter of fiscal year 2021 compared with the same period last year. Noninterest expenses for the three-month period ended December 31, 2020 include expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples that closed on January 1, 2020. In addition, incentive accruals and mortgage commissions also increased during the second quarter of fiscal year 2021. Professional fees of $59 associated with the announced planned purchase of two branch locations in Columbiana County, Ohio were recognized during the three-month period ended December 31, 2020.

Total noninterest expenses increased by $1,390, or 16.9%, for the six-month period ended December 31, 2020 compared with the same period last year. Salaries and employee benefit expenses increased by $1,071, or 24.5%, due to the inclusion of six months of expenses in fiscal year 2021 associated with the three new office locations and additional staff gained as a result of the merger with Peoples, increased incentive accruals, and higher mortgage commissions due to the increase in volume. Data processing expenses declined by $164, or 31.2%, because fiscal year 2020 included expenses for system deconversion files related to the merger with Peoples. Also, FDIC assessments increased by $150 for the current year-to-date period since the Small Bank Assessment Credits were applied to the FDIC insurance invoices for the six-month period ended December 31, 2019.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

Income Taxes

Income tax expense was $543 and $1,048 for the three- and six-month periods ended December 31, 2020, respectively, compared to $261 and $473 for the three- and six-month periods ended December 31, 2019, respectively. The effective tax rate was 17.8% and 17.6% for the three- and six-month periods ended December 31, 2020, respectively, compared with 15.3% and 13.8% for the three- and six-month periods ended December 31, 2019, respectively. The effective tax rates differed from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and bank owned life insurance earnings and death benefit.

Financial Condition

Total assets as of December 31, 2020 were $754,060 compared to $740,820 at June 30, 2020, an increase of $13,240, or an annualized 3.5%.

Total loans increased by $14,396, or an annualized 5.3%, from $542,861 as of June 30, 2020 to $557,257 as of December 31, 2020. As of December 31, 2020, total loans included $52,539 of PPP loans, a decline of $14,067, or 21.1%, from June 30, 2020.

As of December 31, 2020, total deposits increased by $15,007, or an annualized 4.7%, from June 30, 2020. The Corporation has been able to maintain a favorable deposit mix, with 29.9% in noninterest-bearing deposits, 16.2% in interest bearing demand deposits, 37.3% in savings and money market deposits, and 16.6% in time deposits.

Non-Performing Assets

The following table presents the aggregate amounts of non-performing assets and select ratios as of the dates indicated.

	December 31, 2020			June 30, 2020			December 31, 2019
Non-accrual loans	$	1,940		$	1,185		$	427
Loans past due over 90 days and still accruing		—			41			—
Total non-performing loans		1,940			1,226			427
Other repossessed assets		—			7			—
Total non-performing assets	$	1,940		$	1,233		$	427

Non-performing loans to total loans		0.35	%		0.23	%		0.11	%
Allowance for loan losses to total non-performing loans		304.74	%		463.13	%		959.02	%

As of December 31, 2020, impaired loans totaled $2,343, of which $1,938 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 ensure the soundness of the portfolio, as well as to provide funding for loan demand as needed.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

For the six months ended December 31, 2020, net cash inflow from operating activities was $5,706, net cash outflows from investing activities was $13,705 and net cash inflows from financing activities was $7,385. A major source of cash was a $15,007 increase in deposits and $20,304 from maturities, calls or principal pay downs on available-for-sale securities. A major use of cash was $24,975 purchases of available-for-sale securities and a $14,431 increase in loans. Total cash and cash equivalents were $9,045 as of December 31, 2020, compared to $9,659 at June 30, 2020 and $14,028 at December 31, 2019.

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 $648,362 at December 31, 2020 compared with $633,355 at June 30, 2020.

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At December 31, 2020, advances from the FHLB of Cincinnati totaled $18,083 compared with $31,161 at June 30, 2020. As of December 31, 2020, the Bank had the ability to borrow an additional $41,561 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 $13,275 at December 31, 2020 and $6,943 at June 30, 2020.

Jumbo time deposits (those with balances of $250 and over) totaled $33,418 as of December 31, 2020 and $36,747 as of June 30, 2020. 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 $108,614 as of December 31, 2020 and $101,026 as of June 30, 2020.

Capital Resources

Total shareholders’ equity increased to $67,708 as of December 31, 2020 from $63,240 as of June 30, 2020. The primary reason for the increase in shareholders’ equity was from net income of $4,908 for the first six months of fiscal year 2021 which was partially offset by cash dividends paid of $876.

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.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

As of December 31, 2020, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 11.65% and the leverage and total risk-based capital ratios were 8.29% and 12.77%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 11.55% and leverage and total risk-based capital ratios of 8.04% and 12.69%, respectively, as of June 30, 2020. 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, 2020 that would cause the Bank’s capital category to change.

Critical Accounting Policies

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

The Corporation has identified the appropriateness of the allowance for loan losses and the evaluation of goodwill for impairment as critical accounting policies and an understanding of these policies 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 and Goodwill and Other Intangible Assets), Note four (Loans), Note six (Goodwill and Intangible Assets) and Management’s Discussion and Analysis of Financial Condition and Results of Operation (Critical Accounting Policies and Use of Significant Estimates) of the 2020 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, 2020.

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. 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. The COVID-19 pandemic is affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impact on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other risks and uncertainties 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, among other things, high unemployment rates, a deterioration in credit quality of our assets or debtors being unable to meet their obligations;
	●	changes in the level of non-performing assets and charge-offs;
	●	declining asset values impacting the underlying value of collateral;
	●	sustained low market interest rates could result in a decline in the net interest margin and net interest income;
	●	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;
	●	the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;
	●	changes in consumer spending, borrowing and savings habits;
	●	changes in accounting policies, rules and interpretations that may come as a result of COVID-19 or otherwise;
	●	the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
	●	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; and
	●	our ability to attract and retain qualified employees.

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, 2020.

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 10.11	Form of Salary Continuation Agreement. Reference is made to Form 8-K of the Corporation filed December 29, 2020, which is incorporated herein by reference.

Exhibit 10.12	Branch Purchase and Assumption Agreement entered into with CFBank National Association on December 29, 2020.

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, 2020, 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 Condensed 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, 2021	/s/ Ralph J. Lober Ralph J. Lober, II President & Chief Executive Officer (principal executive officer)

Date: February 12, 2021	/s/ Renee K. Wood Renee K. Wood Chief Financial Officer & Treasurer (principal financial officer)

CONSUMERS BANCORP INC /OH/ - FORM 10-Q - February 12, 2021

Attached files

CONSUMERS BANCORP INC /OH/ Reports