CONSUMERS BANCORP INC /OH/ - FORM 10-Q

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EX-31.2 - EXHIBIT 31.2 - CONSUMERS BANCORP INC /OH/	ex_184577.htm
EX-31.1 - EXHIBIT 31.1 - CONSUMERS BANCORP INC /OH/	ex_184572.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 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 3,015,578 shares of Registrant’s common stock, no par value, outstanding as of May 4, 2020.

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED March 31, 2020

Table of Contents

	Page Number (s)
Part I – Financial Information

Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2020 and June 30, 2019	1

Consolidated Statements of Income for the three and nine months ended March 31, 2020 and 2019	2

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

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

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

Notes to the Consolidated Financial Statements	6-20

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-29

Item 3 – Not Applicable for Smaller Reporting Companies

Item 4 – Controls and Procedures	30
Part II – Other Information
Item 1 – Legal Proceedings	31

Item 1A – Not Applicable for Smaller Reporting Companies	31

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3 – Defaults Upon Senior Securities	31

Item 4 – Mine Safety Disclosure	31

Item 5 – Other Information	31

Item 6 – Exhibits	31

Signatures	32

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share data)	March 31, 2020			June 30, 2019
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions	$	12,452		$	9,322
Federal funds sold and interest-bearing deposits in financial institutions		92			139
Total cash and cash equivalents		12,544			9,461
Certificates of deposit in other financial institutions		11,908			1,983
Securities, available-for-sale		139,383			144,010
Securities, held-to-maturity (fair value of $3,792 at March 31, 2020 and $3,821 at June 30, 2019)		3,580			3,786
Federal bank and other restricted stocks, at cost		2,472			1,723
Loans held for sale		1,830			1,657
Total loans		467,804			369,175
Less allowance for loan losses		(4,468	)		(3,788	)
Net loans		463,336			365,387
Cash surrender value of life insurance		9,376			9,606
Premises and equipment, net		15,154			14,155
Goodwill		836			—
Core deposit intangible, net		263			—
Accrued interest receivable and other assets		2,595			2,168
Total assets	$	663,277		$	553,936

LIABILITIES
Deposits
Noninterest-bearing demand	$	137,554		$	116,239
Interest bearing demand		84,273			81,469
Savings		212,613			162,261
Time		128,582			112,205
Total deposits		563,022			472,174

Short-term borrowings		6,386			3,686
Federal Home Loan Bank advances		27,079			22,700
Accrued interest and other liabilities		5,462			4,210
Total liabilities		601,949			502,770
Commitments and contingent liabilities

SHAREHOLDERS’ EQUITY
Preferred stock (no par value, 350,000 shares authorized, none outstanding)		—			—
Common stock (no par value, 8,500,000 shares authorized; 3,124,053 shares issued as of March 31, 2020 and 2,854,133 as of June 30, 2019)		19,974			14,656
Retained earnings		39,300			36,487
Treasury stock, at cost (108,475 and 120,288 common shares as of March 31, 2020 and June 30, 2019, respectively)		(1,454	)		(1,543	)
Accumulated other comprehensive income		3,508			1,566
Total shareholders’ equity		61,328			51,166
Total liabilities and shareholders’ equity	$	663,277		$	553,936

See accompanying notes to consolidated financial statements

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months ended March 31,				Nine Months ended March 31,
(Dollars in thousands, except per share amounts)	2020		2019		2020		2019

Interest and dividend income
Loans, including fees	$	5,654	$	4,115	$	15,277	$	12,123
Securities, taxable		488		566		1,478		1,641
Securities, tax-exempt		387		403		1,186		1,177
Federal bank and other restricted stocks		16		19		56		63
Federal funds sold and other interest-bearing deposits		61		16		103		73
Total interest and dividend income		6,606		5,119		18,100		15,077
Interest expense
Deposits		918		749		2,773		1,881
Short-term borrowings		14		10		38		38
Federal Home Loan Bank advances		80		118		218		243
Total interest expense		1,012		877		3,029		2,162
Net interest income		5,594		4,242		15,071		12,915
Provision for loan losses		445		105		760		(555	)
Net interest income after provision for loan losses		5,149		4,137		14,311		13,470

Noninterest income
Service charges on deposit accounts		355		298		1,088		935
Debit card interchange income		367		338		1,142		1,065
Bank owned life insurance death benefit		—		—		324		—
Bank owned life insurance income		65		66		199		203
Securities gains (losses), net		121		1		231		561
Other		199		157		617		535
Total noninterest income		1,107		860		3,601		3,299

Noninterest expenses
Salaries and employee benefits		2,760		2,129		7,140		6,203
Occupancy and equipment		655		543		1,782		1,546
Data processing expenses		206		154		732		461
Debit card processing expenses		204		182		599		565
Professional and director fees		414		140		804		481
FDIC assessments		54		38		52		114
Franchise taxes		106		89		296		266
Marketing and advertising		125		87		399		322
Telephone and network communications		79		65		223		201
Amortization of intangible		7		—		7		—
Other		464		385		1,280		1,217
Total noninterest expenses		5,074		3,812		13,314		11,376
Income before income taxes		1,182		1,185		4,598		5,393
Income tax expense		164		150		637		836
Net income	$	1,018	$	1,035	$	3,961	$	4,557

Basic and diluted earnings per share	$	0.34	$	0.38	$	1.40	$	1.67

See accompanying notes to consolidated financial statements

CONSUMERS BANCORP, INC.

Consolidated statements of comprehensive income

(Unaudited)

(Dollars in thousands)
	Three Months ended March 31,						Nine Months ended March 31,
	2020			2019			2020			2019

Net income	$	1,018		$	1,035		$	3,961		$	4,557

Other comprehensive income, net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains arising during the period		1,900			1,946			2,690			2,840
Reclassification adjustment for gains included in income		(121	)		(1	)		(231	)		(561	)
Net unrealized gains		1,779			1,945			2,459			2,279
Income tax effect		(373	)		(410	)		(517	)		(480	)
Other comprehensive income		1,406			1,535			1,942			1,799

Total comprehensive income	$	2,424		$	2,570		$	5,903		$	6,356

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, December 31, 2018	$	14,628	$	35,154		$	(1,515	)	$	(1,371	)	$	46,896
Net income				1,035									1,035
Other comprehensive income										1,535			1,535
Cash dividends declared ($0.13 per share)				(355	)								(355	)
Balance, March 31, 2019	$	14,628	$	35,834		$	(1,515	)	$	164		$	49,111


Balance, December 31, 2019	$	14,697	$	38,691		$	(1,454	)	$	2,102		$	54,036
Net income				1,018									1,018
Other comprehensive income										1,406			1,406
269,920 shares issued for the Peoples acquisition		5,277											5,277
Cash dividends declared ($0.135 per share)				(409	)								(409	)
Balance, March 31, 2020	$	19,974	$	39,300		$	(1,454	)	$	3,508		$	61,328

(Dollars in thousands, except per share data)	Common Stock			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, June 30, 2018	$	14,630		$	32,342		$	(1,576	)	$	(1,635	)	$	43,761
Net income					4,557									4,557
Other comprehensive income											1,799			1,799
3,997 shares associated with vested and expired stock awards		(2	)					61						59
Cash dividends declared ($0.39 per share)					(1,065	)								(1,065	)
Balance, March 31, 2019	$	14,628		$	35,834		$	(1,515	)	$	164		$	49,111


Balance, June 30, 2019	$	14,656		$	36,487		$	(1,543	)	$	1,566		$	51,166
Net income					3,961									3,961
Other comprehensive income											1,942			1,942
269,920 shares issued for the Peoples acquisition		5,277												5,277
11,813 shares associated with vested stock awards		41						89						130
Cash dividends declared ($0.405 per share)					(1,148	)								(1,148	)
Balance, March 31, 2020	$	19,974		$	39,300		$	(1,454	)	$	3,508		$	61,328

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	Nine Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net cash from operating activities	$	5,024		$	5,275
Cash flow from investing activities
Purchases of securities, available-for-sale		(18,610	)		(16,778	)
Maturities, calls and principal pay downs of securities, available-for-sale		17,575			13,721
Sale of securities, available-for-sale		11,841			7,670
Principal pay downs of securities, held-to-maturity		206			200
Net decrease in certificate of deposit in other financial institutions		1,914			990
Purchase of Federal Reserve Bank stock, at cost		(595	)		—
Net increase in loans		(43,405	)		(28,239	)
Acquisition, net of cash acquired		(4,295	)		—
Proceeds from BOLI death benefit		753			—
Premises and equipment purchases		(453	)		(1,528	)
Sale of other repossessed assets		39			—
Net cash from investing activities		(35,030	)		(23,964	)
Cash flow from financing activities
Net increase in deposit accounts		29,997			29,326
Net change in short-term borrowings		352			(9,342	)
Proceeds from Federal Home Loan Bank advances		17,500			2,400
Repayments of Federal Home Loan Bank advances		(13,612	)		(2,050	)
Dividends paid		(1,148	)		(1,065	)
Net cash from financing activities		33,089			19,269
Increase in cash or cash equivalents		3,083			580
Cash and cash equivalents, beginning of period		9,461			7,772
Cash and cash equivalents, end of period	$	12,544		$	8,352
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	3,048		$	2,102
Federal income taxes		675			645
Non-cash items:
Transfer from loans held for sale to portfolio		—			75
Issuance of treasury stock for stock awards		89			59
Right of use assets obtained in exchange for lease liabilities		582			—
Acquisition of Peoples:
Consideration paid	$	10,405
Noncash assets acquired:
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
Goodwill		836
Core deposit intangible		270
Accrued interest receivable and other assets		140
Total noncash assets acquired		73,428
Liabilities assumed:
Deposits		60,851
Federal funds purchased		2,348
Federal Home Loan Bank advances		491
Other liabilities		166
Total liabilities assumed		63,856
Net noncash assets acquired		9,572
Cash acquired		833

See accompanying notes to consolidated financial statements.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 1 – Summary of Significant Accounting Policies:

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

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

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

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

Acquisition: At the date of acquisition the Corporation records the assets and liabilities of acquired companies on the Consolidated Balance Sheet at their fair value. The results of operations for acquired companies are included in the Corporation’s Consolidated Statements of Income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Income during the periods incurred.

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

Adoption of New Accounting Standards: In February 2016, FASB issued accounting standards update (ASU) 2016-02, Leases (Topic 842). This ASU requires all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures are required so users can understand more about the nature of an entity’s leasing activities. The new guidance was effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. The Corporation has several lease agreements, such as branch locations, which were previously considered operating leases, and therefore, not recognized on the Corporation’s consolidated condensed statements of financial condition. The new guidance requires these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. As of July 1, 2019, the Corporation adopted ASU 2016-02 using the modified retrospective method. There was no cumulative-effect adjustment to the opening balance of retained earnings for the period of adoption. As of March 31, 2020, the Corporation had contractual operating lease commitments of $500.

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

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 2 – Acquisition

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. 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 $433 were recorded during the third quarter of fiscal year 2020 and $755 for the nine-month period ended March 31, 2020. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

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
March 31, 2020
U.S. Treasury	$	1,747	$	14	$	—		$	1,761
Obligations of U.S. government-sponsored entities and agencies		10,574		290		—			10,864
Obligations of state and political subdivisions		56,969		1,969		(5	)		58,933
U.S. Government-sponsored mortgage-backed securities–residential		55,248		1,822		(1	)		57,069
U.S. Government-sponsored mortgage-backed securities– commercial		1,397		6	——				1,403
U.S. Government-sponsored collateralized mortgage obligations– residential		9,007		346		—			9,353
Total available-for-sale securities	$	134,942	$	4,447	$	(6	)	$	139,383

Held-to-Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
March 31, 2020
Obligations of state and political subdivisions	$	3,580	$	212	$	—	$	3,792
Total held-to-maturity securities	$	3,580	$	212	$	—	$	3,792

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

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

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Proceeds from sales	$	5,731	$	2,772	$	11,841	$	7,670
Gross realized gains		121		12		231		606
Gross realized losses		—		11		—		45

The income tax provision related to the net realized gains amounted to $26 and $49 for the three and nine months ended March 31, 2020. The income tax provision related to net realized gains amounted to $118 for the nine months ended March 31, 2019.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The amortized cost and fair values of debt securities at March 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	$	8,341	$	8,401
Due after one year through five years		15,554		15,963
Due after five years through ten years		13,703		14,023
Due after ten years		31,692		33,171
Total		69,290		71,558

U.S. Government-sponsored mortgage-backed and related securities		65,652		67,825
Total available-for-sale securities	$	134,942	$	139,383

Held-to-Maturity
Due after five years through ten years	$	412	$	430
Due after ten years		3,168		3,362
Total held-to-maturity securities	$	3,580	$	3,792

The following table summarizes the securities with unrealized losses at March 31, 2020 and June 30, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	Less than 12 Months					12 Months or more					Total
Available-for-sale	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
March 31, 2020
Obligations of states and political subdivisions	$	1,357	$	(5	)	$	—	$	—		$	1,357	$	(5	)
U.S. Government-sponsored mortgage-backed securities – residential		—		—			648		(1	)		648		(1	)
Total temporarily impaired	$	1,357	$	(5	)	$	648	$	(1	)	$	2,005	$	(6	)

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

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

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

The unrealized losses within the securities portfolio as of March 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 changes in municipal and mortgage backed security spreads and the fair value is expected to recover. 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.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 4 – Loans

Major classifications of loans were as follows:

	March 31, 2020			June 30, 2019
Commercial	$	85,848		$	80,453
Commercial real estate:
Construction		16,673			16,120
Other		229,329			195,269
1 – 4 Family residential real estate:
Owner occupied		87,631			55,941
Non-owner occupied		19,391			14,517
Construction		7,417			1,931
Consumer		21,563			5,150
Subtotal		467,852			369,381
Net Deferred loan fees and costs		(48	)		(206	)
Allowance for loan losses		(4,468	)		(3,788	)
Net Loans	$	463,336		$	365,387

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

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

Allowance for loan losses:
Beginning balance	$	766	$	2,652	$	615	$	62		$	4,095
Provision for loan losses		25		203		116		101			445
Loans charged-off		—		—		—		(91	)		(91	)
Recoveries		—		1		1		17			19
Total ending allowance balance	$	791	$	2,856	$	732	$	89		$	4,468

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

					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		131		278		236		115			760
Loans charged-off		—		—		—		(114	)		(114	)
Recoveries		—		3		2		29			34
Total ending allowance balance	$	791	$	2,856	$	732	$	89		$	4,468

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

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

Allowance for loan losses:
Beginning balance	$	622	$	2,397		$	496	$	54		$	3,569
Provision for loan losses		—		102			5		(2	)		105
Loans charged-off		—		(25	)		—		(9	)		(34	)
Recoveries		—		7			2		7			16
Total ending allowance balance	$	622	$	2,481		$	503	$	50		$	3,656

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 nine months ended March 31, 2019:

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

Allowance for loan losses:
Beginning balance	$	586	$	2,277		$	499		$	60		$	3,422
Provision for loan losses		36		(591	)		(2	)		2			(555	)
Loans charged-off		—		(80	)		—			(30	)		(110	)
Recoveries		—		875			6			18			899
Total ending allowance balance	$	622	$	2,481		$	503		$	50		$	3,656

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2020. Included in the recorded investment in loans is $1,045 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	$	1	$	8	$	—	$	—	$	9
Acquired loans collectively evaluated for impairment		—		13		37		—		50
Originated loans collectively evaluated for impairment		790		2,835		695		89		4,409
Total ending allowance balance	$	791	$	2,856	$	732	$	89	$	4,468

Recorded investment in loans:
Loans individually evaluated for impairment	$	177	$	1,063	$	284	$	—	$	1,524
Acquired loans collectively evaluated for impairment		1,527		9,462		27,562		13,519		52,070
Originated loans collectively evaluated for impairment		84,275		235,513		87,363		8,104		415,255
Total ending loans balance	$	85,979	$	246,038	$	115,209	$	21,623	$	468,849

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

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

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

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 unpaid principal balance, recorded investment and interest income associated with loans individually evaluated for impairment by class of loans as of March 31, 2020 and for the nine months ended March 31, 2020:

	As of March 31, 2020						Nine Months ended March 31, 2020
	Unpaid				Allowance for Loan		Average		Interest		Cash Basis
	Principal		Recorded		Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	21	$	21	$	—	$	5	$	—	$	—
Commercial real estate:
Other		933		846		—		415		88		88
1-4 Family residential real estate:
Owner occupied		79		42		—		27		7		7
Non-owner occupied		288		242		—		251		—		—
With an allowance recorded:
Commercial		155		156		1		164		7		7
Commercial real estate:
Other		214		217		8		218		10		10
Total	$	1,690	$	1,524	$	9	$	1,080	$	112	$	112

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 March 31, 2020:

	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	14	$	—	$	—
Commercial real estate:
Other		641		1		1
1-4 Family residential real estate:
Owner occupied		31		—		—
Non-owner occupied		244		—		—
With an allowance recorded:
Commercial		158		2		2
Commercial real estate:
Other		216		4		4
Total	$	1,304	$	7	$	7

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

	As of June 30, 2019						Nine Months ended March 31, 2019
	Unpaid				Allowance for Loan		Average		Interest		Cash Basis
	Principal		Recorded		Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	100	$	5	$	5
Commercial real estate:
Other		580		436		—		1,176		28		28
1-4 Family residential real estate:
Owner occupied		124		93		—		98		—		—
Non-owner occupied		297		264		—		283		—		—
With an allowance recorded:
Commercial real estate:
Other		221		222		7		227		10		10
Commercial		173		174		2		—		—		—
Total	$	1,395	$	1,189	$	9	$	1,884	$	43	$	43

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	$	116	$	2	$	2
Commercial real estate:
Other		1,019		9		9
1-4 Family residential real estate:
Owner occupied		96		—		—
Non-owner occupied		275		—		—
With an allowance recorded:
Commercial real estate:
Other		224		3		3
Total	$	1,730	$	14	$	14

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2020 and June 30, 2019:

	March 31, 2020				June 30, 2019
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
			Still				Still
	Non-accrual		Accruing		Non-accrual		Accruing
Commercial	$	22	$	—	$	—	$	—
Commercial real estate:
Other		797		—		436		—
1 – 4 Family residential:
Owner occupied		36		—		85		—
Non-owner occupied		242		—		264		—
Consumer		—		13		—		—
Total	$	1,097	$	13	$	785	$	—

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

The following table presents the aging of the recorded investment in past due loans as of March 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	$	—	$	21	$	—	$	21	$	85,958	$	85,979
Commercial real estate:
Construction		—		—		—		—		16,656		16,656
Other		1,126		4		628		1,758		227,624		229,382
1-4 Family residential:
Owner occupied		722		15		35		772		87,538		88,310
Non-owner occupied		—		—		—		—		19,402		19,402
Construction		—		—		—		—		7,497		7,497
Consumer		248		62		13		323		21,300		21,623
Total	$	2,096	$	102	$	676	$	2,874	$	465,975	$	468,849

The above table of past due loans includes the recorded investment in non-accrual loans of $27 in the 60-89 days category, $663 in the 90 days or greater category and $407 in the loans not past due category.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

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

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

Troubled Debt Restructurings (TDR):

The Corporation has certain loans that have been modified in order to maximize collection of loan balances 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. 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 March 31, 2020, there were 32 commercial loans with an outstanding balance of $16,116, five mortgage loans with an outstanding balance of $307 and 16 consumer loans with an outstanding balance of $252 that were granted 90 days of payment deferrals under the loan modification program that was adopted in response to COVID-19 that are not classified as TDRs.

As of March 31, 2020 and June 30, 2019, the Corporation had $673 and $725, respectively, of loans classified as TDRs which are included in impaired loans above. As of March 31, 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 June 30, 2019, the Corporation had committed to lend an additional $9 to customers with outstanding loans that were classified as troubled debt restructurings. As of March 31, 2020 and June 30, 2019, the Corporation had $9 of specific reserves allocated to these loans.

During the three and nine-month periods ended March 31, 2020, 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 nine-month periods ended March 31, 2020.

During the three-month period ended March 31, 2019, the terms of a loan to one borrower were modified as a troubled debt restructuring. The modification of the terms of the loan included a combination of forgiveness of a portion of the principal amount owed, which resulted in a reduction in the monthly payment amount. The following table presents loans by class modified as troubled debt restructurings that occurred during the period ended March 31, 2019:

			Pre-Modification		Post-Modification
	Number of		Outstanding Recorded		Outstanding Recorded
	Loans		Investment		Investment
Commercial real estate:
Other		1	$	161	$	59
Total		1	$	161	$	59

The troubled debt restructuring described above increased the allowance for loan losses and resulted in a charge-off of $80 during the period ended March 31, 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 nine-month periods ended March 31, 2020 and 2019. A loan is considered in payment default once it is 90 days contractually past due under the modified terms.

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, 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 March 31, 2020
			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	81,123	$	186	$	4,348	$	21	$	301
Commercial real estate:
Construction		16,656		—		—		—		—
Other		219,075		2,573		5,205		797		1,732
1-4 Family residential real estate:
Owner occupied		1,971		—		334		2		86,003
Non-owner occupied		18,444		190		229		242		297
Construction		1,683		—		—		—		5,814
Consumer		76		—		—		—		21,547
Total	$	339,028	$	2,949	$	10,116	$	1,062	$	115,694

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

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

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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).

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 March 31, 2020 Using
	Balance at March 31, 2020		Level 1		Level 2		Level 3
Assets:
U.S. Treasury	$	1,761	$	—	$	1,761	$	—
Obligations of U.S. government-sponsored entities and agencies		10,864		—		10,864		—
Obligations of states and political subdivisions		58,933		—		58,933		—
U.S. Government-sponsored mortgage-backed securities – residential		57,069		—		57,069		—
U.S. Government-sponsored mortgage-backed securities – commercial		1,403		—		1,403		—
U.S. Government-sponsored collateralized mortgage obligations - residential		9,353		—		9,353		—

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

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

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

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses or are charged down to their fair value. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate 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 March 31, 2020 or June 30, 2019.

There were no financial assets measured at fair value on a non-recurring basis at March 31, 2020. Financial assets measured at fair value on a non-recurring basis at June 30, 2019 are summarized below:

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

Impaired loans, measured for impairment using the fair value of the collateral, had a recorded investment of $59, with no valuation allowance at June 30, 2019. There was no impact to the provision for loan losses for the three and nine-month periods ended March 31, 2020. The resulting impact to the provision for loan losses was an increase of $25 being recorded for the three months ended March 31, 2019 and $80 for the nine months ended March 31, 2019.

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

June 30, 2019

Fair Value

Valuation

Technique

Unobservable

Inputs

Range

Weighted

Average

Impaired loans:

Commercial Real Estate – Other

Settlement Agreement

N/A

0.0

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

	March 31, 2020				June 30, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents	$	12,544	$	12,544	$	9,461	$	9,461
Level 2 inputs:
Certificates of deposits in other financial institutions		11,908		11,964		1,983		1,983
Loans held for sale		1,830		1,869		1,657		1,687
Accrued interest receivable		1,861		1,861		1,607		1,607
Level 3 inputs:
Securities held-to-maturity		3,580		3,792		3,786		3,821
Loans, net		463,336		471,410		365,387		366,911
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits		434,440		434,440		359,969		359,969
Time deposits		128,582		129,502		112,205		112,841
Short-term borrowings		6,386		6,386		3,686		3,686
Federal Home Loan Bank advances		27,079		27,130		22,700		22,596
Accrued interest payable		157		157		132		132

Note 6 – Earnings Per Share

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. There were 1,786 and 2,863 shares of restricted stock that were anti-dilutive for the three- and nine-month periods ended March 31, 2020. There were 7,121 and 999 shares of restricted stock that were anti-dilutive for the three and nine-month periods ended March 31, 2019. The following table details the calculation of basic and diluted earnings per share:

	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
	2020		2019		2020		2019
Basic:
Net income available to common shareholders	$	1,018	$	1,035	$	3,961	$	4,557
Weighted average common shares outstanding		3,003,205		2,730,376		2,828,427		2,730,887
Basic income per share	$	0.34	$	0.38	$	1.40	$	1.67
Diluted:
Net income available to common shareholders	$	1,018	$	1,035	$	3,961	$	4,557
Weighted average common shares outstanding		3,003,205		2,730,376		2,828,427		2,730,887
Dilutive effect of restricted stock		—		—		—		—
Total common shares and dilutive potential common shares		3,003,205		2,730,376		2,828,427		2,730,887
Dilutive income per share	$	0.34	$	0.38	$	1.40	$	1.67

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Note 7 –Accumulated Other Comprehensive Income (Loss)

The components of other comprehensive income related to unrealized gains and losses on available-for-sale securities for the three and nine-month periods ended March 31, 2020 and 2019, were as follows:

	Pretax			Tax Effect			After-tax			Affected Line Item in Consolidated Statements of Income
Balance as of December 31, 2019	$	2,662		$	(560	)	$	2,102
Unrealized holding loss on available-for-sale securities arising during the period		1,900			(399	)		1,501
Amounts reclassified from accumulated other comprehensive income		(121	)		26			(95	)	(a)(b)
Net current period other comprehensive loss		1,779			(373	)		1,406
Balance as of March 31, 2020	$	4,441		$	(933	)	$	3,508

Balance as of December 31, 2018	$	(1,735	)	$	364		$	(1,371	)
Unrealized holding gain on available-for-sale securities arising during the period		1,946			(410	)		1,536
Amounts reclassified from accumulated other comprehensive income		(1	)		—			(1	)	(a)(b)
Net current period other comprehensive income		1,945			(410	)		1,535
Balance as of March 31,2019	$	210		$	(46	)	$	164

	Pretax			Tax Effect			After-tax			Affected Line Item in Consolidated Statements of Income
Balance as of June 30, 2019	$	1,982		$	(416	)	$	1,566
Unrealized holding gain on available-for-sale securities arising during the period		2,690			(566	)		2,124
Amounts reclassified from accumulated other comprehensive income		(231	)		49			(182	)	(a)(b)
Net current period other comprehensive income		2,459			(517	)		1,942
Balance as of March 31, 2020	$	4,441		$	(933	)	$	3,508

Balance as of June 30, 2018	$	(2,069	)	$	434		$	(1,635	)
Unrealized holding gain on available-for-sale securities arising during the period		2,840			(598	)		2,242
Amounts reclassified from accumulated other comprehensive income		(561	)		118			(443	)	(a)(b)
Net current period other comprehensive income		2,279			(480	)		1,799
Balance after reclassification as of March 31, 2019	$	210		$	(46	)	$	164

(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)

Note 8 – Revenue Recognition

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

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

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

The following table presents the Corporation's sources of noninterest income for the three and nine months ended March 31, 2020 and 2019.

	For the three months ended March 31,				For the nine months ended March 31,
	2020		2019		2020		2019
Noninterest income
In scope of Topic 606:
Service charges on deposit accounts	$	355	$	298	$	1,088	$	935
Debit card interchange income		367		338		1,142		1,065
Other income		78		66		543		196

Noninterest income (in scope of Topic 606)		800		702		2,773		2,196
Noninterest income (out-of-scope of Topic 606)		307		158		828		1,103

Total noninterest income	$	1,107	$	860	$	3,601	$	3,299

Note 9 – Leases

Effective July 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2020, the Corporation leases real estate for six office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to September 1, 2028, including extension periods. Lease agreements for four locations have a lease term of 12 months or less and are therefore considered short-term leases and are exempt from Topic 842. The weighted average remaining life of the lease term for the leases with a term over 12 months was 54.92 months as of March 31,2020.

Costs associated with operating leases accounted for under Topic 842 were $27 and $82 for the three- and nine-month periods ended March 31, 2020, respectively. The costs of short-term leases were $22 and $66 for the three- and nine-month periods ended March 31, 2020, respectively. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, were $500 as of March 31, 2020.

Total estimated rental commitments for the operating leases within the scope of Topic 842 were as follows as of March 31, 2020:

Period Ending June 30
2020	$	27
2021		105
2022		95
2023		76
2024		51
Thereafter		146
Total	$	500

Note 10 – 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 nine-month periods ended March 31, 2020, compared to the same period in 2019, and the consolidated balance sheet at March 31, 2020, compared to June 30, 2019. This discussion is designed to provide a more comprehensive review of the operating results and financial condition than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

Overview

Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio (the Corporation), owns all of the issued and outstanding common shares of Consumers National Bank, a bank chartered under the laws of the United States of America (the Bank). The Corporation’s activities have been limited primarily to holding the common shares of the Bank. The Bank’s business involves attracting deposits from businesses and individual customers and using such deposits to originate commercial, mortgage and consumer loans in its market area, consisting primarily of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne and contiguous counties in Ohio. The Bank also invests in securities consisting primarily of U.S. government sponsored entities, municipal obligations, mortgage-backed and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae.

On January 1, 2020, 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 two key SBA initiatives to assist small businesses. The first SBA program is the Paycheck Protection Program (PPP) that 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 keeps all employees on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. PPP loan commitments of approximately $63,450 for 492 customers were obtained through April 30, 2020. The second SBA program is the Subsidy for Certain Loan Payments in which the SBA will pay the principal, interest, and any associated fees the borrower owes on certain SBA loans for a six-month period. As of March 31, 2020, the Corporation had $17,513 of SBA loans which are eligible for payment assistance from the SBA. Management has been working with these borrowers to secure the principal and interest payments from the SBA.

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. 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 March 31, 2020, 32 commercial loans with an outstanding balance of $16,116, five mortgage loans with an outstanding balance of $307 and 16 consumer loans with an outstanding balance of $252 were granted 90 days of payment deferrals. As of April 30, 2020, 258 commercial loans with an outstanding balance of $74,167, 42 mortgage loans with an outstanding balance of $4,080, three home equity lines of credit with an outstanding balance of $194, and 71 consumer loans with an outstanding balance of $788 were granted 90 days of payment deferrals.

We are also assisting customers by waiving late charges, refunding NSF and overdraft fees, and waiving CD prepayment penalties for customers experiencing financial hardship due to COVID-19. The consumer reserve personal line of credit has been redesigned to provide easier access and a lower initial rate on this unsecured line of credit that is linked to a personal checking account. Commercial customers are encouraged to access available funds on their lines of credit and we expect to provide emergency commercial lines of credit to qualified borrowers in order to assist borrowers in meeting payroll and other recurring fixed expenses.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

Results of Operations

Three- and Nine-Month Periods Ended March 31, 2020 and 2019

Net income for the third quarter of fiscal year 2020 was $1,018, or $0.34 per common share, compared to $1,035, or $0.38 per common share for the three months ended March 31, 2019. The following are key highlights of our results of operations for the three months ended March 31, 2020 compared to the prior fiscal year comparable period:

	●	net interest income increased by $1,352 to $5,594, or by 31.9%, in the third quarter of fiscal year 2020 from the same prior year period primarily as a result of an increase in average interest earning assets acquired as a result of the Peoples acquisition as well as organic growth;
	●	a $445 provision for loans loss expense was recorded in the third quarter of fiscal year 2020, or an increase of $340 from the prior year, primarily due to the deterioration in the economic environment as a result of the impact of COVID-19 and higher loan balances as a result of organic loan growth;
	●	noninterest income increased by $247, or 28.7%, in the third quarter of fiscal year 2020 from the same prior year period as a result of increases in service charges on deposit accounts, gains from the sale of mortgage loans and debit card interchange income. Also, a $121 gain from the sale or call of securities was recognized during the third quarter of fiscal year 2020; and
	●	noninterest expenses increased by $1,262, or 33.1%, in the third quarter of fiscal year 2020 from the same prior year period and included $433 of expenses associated with the Peoples merger and a full quarter of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples.

In the first nine months of fiscal year 2020, net income was $3,961, or $1.40 per common share, compared to $4,557, or $1.67 per common share for the nine months ended March 31, 2019. The following are key highlights of our results of operations for the nine months ended March 31, 2020:

	●	net interest income increased by $2,156 to $15,071, or by 16.7%, in the first nine months of fiscal year 2020 from the same prior year period;
	●	a provision for loan loss expense of $760 was recorded in the first nine months of fiscal year 2020 compared with a negative provision for loan loss expense of $555 during the same prior year period;
	●	noninterest income increased by $302, or 9.2%, in the first nine months of fiscal year 2020 from the same prior year period and included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Additionally, a $231 gain from the sale or call of securities was recognized during the first nine months of fiscal year 2020 compared with a $561 gain for the same prior year period; and
	●	noninterest expenses increased by $1,938, or 17.0%, in the first nine months of fiscal year 2020 from the same prior year period and included $755 of expenses associated with the Peoples merger and a full quarter of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples.

Return on average equity and return on average assets were 9.53% and 0.90%, respectively, for the first nine months of fiscal year 2020 compared to 13.34% and 1.19%, 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. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total average interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. The federal income tax rate in effect for the 2020 and 2019 fiscal years was 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

The Corporation’s net interest margin was 3.76% for the three months ended March 31, 2020, compared with 3.57% for the same period in 2019. FTE net interest income for the three months ended March 31, 2020 increased by $1,360, or 31.5%, to $5,672 from $4,312 for the same prior year period.

Tax-equivalent interest income for the three months ended March 31, 2020 increased by $1,495, or 28.8%, from the same prior year period. Interest income was positively impacted by a $121,331, or 24.9%, increase in average interest-earning assets from the same prior year period due to the assets acquired as a result of the Peoples acquisition as well as organic growth.

Interest expense for the three months ended March 31, 2020 increased by $135, or 15.4%, from the same prior year period primarily as a result of interest-bearing liabilities assumed as a result of the Peoples acquisition that was partially offset by a reduction in deposit and borrowing costs. The Corporation’s cost of funds was 0.92% for the three months ended March 31, 2020 compared with 1.00% for the same prior year period.

The Corporation’s net interest margin was 3.68% for the nine months ended March 31, 2020, compared with 3.63% for the same period in 2019. FTE net interest income for the nine months ended March 31,2020 increased by $2,123, or 16.1%, to $15,304 from $13,181 for the same prior year period.

Tax-equivalent interest income for the nine months ended March 31, 2020 increased by $2,990, or 19.5%, from the same prior year period. Interest income was positively impacted by a $76,032, or 15.8%, increase in average interest-earning assets from the same prior year period. Additionally, the Corporation’s yield on average interest-earning assets increased to 4.41% for the nine months ended March 31, 2020 from 4.23% for the same period last year. The yield on average interest-earning assets was positively impacted by a 0.10% increase in the yield on loans. Additionally, the yield on average interest-earning assets was positively impacted by a change in the earning asset mix with higher yielding loans increasing and lower yielding securities decreasing.

Interest expense for the nine months ended March 31, 2020 increased by $867 from the same prior year period. The Corporation’s cost of funds was 1.00% for the nine months ended March 31, 2020 compared with 0.83% for the same prior year period. The higher short-term market interest and deposit rates throughout the first two quarters of fiscal year 2020 had an impact on the rates paid on 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 March 31,

(In thousands, except percentages)

	2020								2019
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	81,069		$	488		2.45	%	$	85,932		$	566		2.63	%
Nontaxable securities (1)		58,979			464		3.28			60,207			470		3.17
Loans receivable (1)		453,887			5,655		5.01			337,350			4,118		4.95
Federal bank and other restricted stocks		1,926			16		3.34			1,459			19		5.28
Interest bearing deposits and federal funds sold		13,503			61		1.82			3,085			16		2.10
Total interest-earning assets		609,364			6,684		4.43	%		488,033			5,189		4.30	%

Noninterest-earning assets		33,412								30,751

Total Assets	$	642,776							$	518,784

Interest-bearing liabilities:
NOW	$	81,093		$	90		0.45	%	$	77,328		$	124		0.65	%
Savings		207,490			221		0.43			158,476			188		0.48
Time deposits		129,300			607		1.89			97,123			437		1.82
Short-term borrowings		4,707			14		1.20			2,731			10		1.49
FHLB advances		19,424			80		1.66			19,588			118		2.44
Total interest-bearing liabilities		442,014			1,012		0.92	%		355,246			877		1.00	%

Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		135,822								111,616
Other liabilities		4,780								4,331
Total liabilities		582,616								471,193
Shareholders’ equity		60,160								47,591

Total liabilities and shareholders’ equity	$	642,776							$	518,784

Net interest income, interest rate spread (1)				$	5,672		3.51	%				$	4,312		3.30	%

Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.76	%							3.57	%

Federal tax exemption on non-taxable securities and loans included in interest income				$	78							$	70

Average interest-earning assets to interest-bearing liabilities		137.86	%							137.38	%

(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 Nine Months Ended March 31,

(In thousands, except percentages)

	2020								2019
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	81,285		$	1,478		2.44	%	$	85,679		$	1,641		2.49	%
Nontaxable securities (1)		60,355			1,413		3.22			59,891			1,434		3.17
Loans receivable (1)		405,812			15,283		5.01			329,008			12,132		4.91
Federal bank and other restricted stocks		1,791			56		4.16			1,459			63		5.75
Interest bearing deposits and federal funds sold		7,370			103		1.86			4,544			73		2.14
Total interest-earning assets		556,613			18,333		4.41	%		480,581			15,343		4.23	%

Noninterest-earning assets		31,870								30,905

Total Assets	$	588,483							$	511,486

Interest-bearing liabilities:
NOW	$	82,580		$	366		0.59	%	$	81,242		$	387		0.63	%
Savings		181,224			653		0.48			161,406			501		0.41
Time deposits		117,875			1,754		1.98			85,771			993		1.54
Short-term borrowings		4,367			38		1.16			3,463			38		1.46
FHLB advances		15,797			218		1.84			16,883			243		1.92
Total interest-bearing liabilities		401,843			3,029		1.00	%		348,765			2,162		0.83	%

Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		126,750								112,918
Other liabilities		4,587								4,310
Total liabilities		533,180								465,993
Shareholders’ equity		55,303								45,493

Total liabilities and shareholders’ equity	$	588,483							$	511,486

Net interest income, interest rate spread (1)				$	15,304		3.41	%				$	13,181		3.40	%

Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.68	%							3.63	%

Federal tax exemption on non-taxable securities and loans included in interest income				$	233							$	266

Average interest-earning assets to interest-bearing liabilities		138.52	%							137.80	%

(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)

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 three-month period ended March 31, 2020, the provision for loan losses was $445 compared with $105 for the same prior year period. Net charge-offs of $72 were recorded during the three-month period ended March 31, 2020 compared with $18 during the three-month period ended March 31, 2019. The provision for loan loss expense increased in the third quarter of fiscal year 2020 primarily due to the deterioration in the economic environment as a result of the impact of COVID-19 and higher loan balances as a result of organic loan growth.

For the nine-month period ended March 31, 2020, the provision for loan losses was $760 compared with a negative provision for loan loss expense of $555 for the same prior year period. Net charge-offs of $80 were recorded during the nine-month period ended March 31, 2020 compared with recoveries of $789 collected during the nine-month period ended March 31, 2019.

Non-performing loans were $1,110 as of March 31, 2020 compared with $785 as of June 30, 2019 and $817 as of March 31, 2019. The allowance for loan losses as a percentage of loans was 0.95% at March 31, 2020 and 1.03% at June 30, 2019. The ALLL as a percent of total loans on March 31, 2020 declined from the prior year since the acquired loans were recorded at fair value without a related allowance for loan losses. As of March 31, 2020, the ALLL as a percentage of total loans, excluding the loans acquired in the Peoples acquisition, was 1.07%. The provision for loan losses for the period ended March 31, 2020 was considered sufficient by management for maintaining an appropriate allowance for probable incurred credit losses.

Noninterest Income

Noninterest income increased by $247, or 28.7%, for the third quarter of fiscal year 2020 from the same period last year. Noninterest income for the three months ended March 31, 2020 included a $121 gain on sale of securities compared with a $1 gain for the three months ended March 31, 2019. In addition, service charges on deposit accounts increased by $57, or 19.1%, gains from the sale of mortgage loans increased by $30, or 33.0%, and debit card interchange income increased by $29, or 8.6%, for the three months ended March 31, 2020 compared with the same prior year period.

Noninterest income increased by $302, or 9.2%, for the first nine months of fiscal year 2020 from the same period last year. Noninterest income for the nine months ended March 31, 2020 included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Also, noninterest income included a $231 gain on sale of securities compared with a $561 gain for the nine months ended March 31, 2019. During the 2019 fiscal year, a pooled trust preferred security was sold due to the significant increase in the value of this security. The Corporation does not own any other securities of this type. In addition, service charges on deposit accounts increased by $153, or 16.4%, gains from the sale of mortgage loans increased by $59, or 17.4%, and debit card interchange income increased by $77, or 7.2%, for the nine-month period ended March 31, 2020 compared with the same prior year period. It is anticipated that deposit service charges and debit card interchange income will be lower in the fourth quarter of fiscal year 2020. Deposit service charges are expected to be impacted by refunds of NSF and overdraft charges that are being provided to customers impacted by COVID-19. Also, debit card interchange income and ATM usage fees are expected to be lower due to reduced activity since many customers are staying at home.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

Noninterest Expenses

Total noninterest expenses increased by $1,262, or by 33.1%, for the third quarter of fiscal year 2020 compared with the same period last year. Included in noninterest expenses for the three-month period ended March 31, 2020 are $433 of expenses associated with the merger between Consumers and Peoples. The expenses in the third quarter of fiscal year 2020 associated with the merger were primarily consulting fees that were charged to professional and director fees and severance and retention bonuses that were charged to salaries and employee benefits. Also, salaries and employee benefits increased as a result of additional staff gained as a result of the merger with Peoples and increased incentive expenses. Other noninterest expense categories were impacted by a full quarter of expenses associated with the merger with Peoples from the three new office locations and the increased size of the organization.

Total noninterest expenses increased by $1,938, or 17.0%, for the first nine months of fiscal year 2020 from the same period last year. Included in noninterest expenses for the nine-month period ended March 31, 2020 are $755 of expenses associated with the merger between Consumers and Peoples. The expenses associated with the merger were primarily legal and consulting fees that were charged to professional and director fees, system deconversion files that were charged to data processing expenses and severance and retention bonuses that were charged to salaries and employee benefits. In addition, salaries and employee benefits increased as a result of additional staff gained as a result of the merger with Peoples and increased incentive expenses. Other noninterest expense categories were impacted by a full quarter of expenses associated with the merger with Peoples from the three new office locations and the increased size of the organization. FDIC assessments were positively impacted since the Small Bank Assessment Credits were applied to the current FDIC insurance invoices since the Deposit Insurance Fund reserve ratio was above 1.38%.

Income Taxes

Income tax expense was $164 and $637 for the three- and nine-month periods ended March 31, 2020, respectively compared to $150 and $836 for the three- and nine-month periods ended March 31, 2019, respectively. The effective tax rates were 13.9% for both the three- and nine-month periods ended March 31, 2020 compared with 12.7% and 15.5% for the three- and nine-month periods ended March 31, 2019, respectively. The effective tax rate was lower during the nine-month period ended March 31, 2020 primarily due to tax-free income representing a higher percentage of overall pre-tax income.

Financial Condition

Total assets as of March 31, 2020 were $663,277 compared to $553,936 at June 30, 2019, an increase of $109,341, or an annualized 26.3%. From June 30, 2019, total assets increased by $74,261 due to the acquisition of Peoples and $35,080 due to organic growth.

Total loans increased by $98,629, or an annualized 35.6%, from $369,175 as of June 30, 2019 to $467,804 as of March 31, 2020, of which $43,309, or an annualized 8.8%, was related to organic loan growth. It is anticipated that total loans will increase significantly during the fourth quarter of fiscal year 2020 due to participation in PPP. When the program was initially made available, SBA commitments for approximately $63,450 in PPP loans for 492 customers were obtained through April 30, 2020. It is expected that many of these PPP loans will be forgiven during the June 2020 through September 2020 time period.

As of March 31, 2020, total deposits increased by $90,848, or an annualized 25.6%, from June 30, 2019 of which $29,997, or an annualized 4.8%, was related to organic deposit growth. The Corporation has been able to maintain a favorable deposit mix, with 24.4% in noninterest-bearing deposits, 15.0% in interest bearing demand deposits, 37.8% in savings and money market deposits, and 22.8% in time deposits.

Non-Performing Assets

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

	March 31, 2020			June 30, 2019			March 31, 2019
Non-accrual loans	$	1,097		$	785		$	817
Loans past due over 90 days and still accruing		13			—			—
Total non-performing loans		1,110			785			817
Other real estate owned		—			—			—
Other repossessed assets		39			—			—
Total non-performing assets	$	1,149		$	785		$	817

Non-performing loans to total loans		0.24	%		0.21	%		0.24	%
Allowance for loan losses to total non-performing loans		402.52	%		482.55	%		447.49	%

As of March 31, 2020, impaired loans totaled $1,524, of which $1,097 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.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

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

Liquidity

The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of our customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances of industry or market stress. Cash is used to fund loans, purchase investments, fund the maturity of liabilities, and, at times, to fund deposit outflows and operating activities. The Corporation’s principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts from securities; borrowings; and operations. Management considers the asset position of the Corporation to be sufficiently liquid to meet normal operating needs and conditions. The Corporation’s earning assets are mainly comprised of loans and investment securities. Management continually strives to obtain the best mix of loans and investments to both maximize yield and insure the soundness of the portfolio, as well as to provide funding for loan demand as needed.

For the nine months ended March 31, 2020, net cash inflow from operating activities was $5,024, net cash outflows from investing activities was $35,030 and net cash inflows from financing activities was $33,089. A major source of cash was a $29,997 increase in deposits and $29,416 from sales, maturities, calls or principal pay downs on available-for-sale securities. A major use of cash was a $43,405 increase in loans, $18,610 for the purchases of available for-sale securities and $4,295 for the acquisition of Peoples. Total cash and cash equivalents were $12,544 as of March 31, 2020, compared to $9,461 at June 30, 2019 and $8,352 at March 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 $563,022 at March 31, 2020 compared with $472,174 at June 30, 2019.

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At March 31, 2020, advances from the FHLB of Cincinnati totaled $27,079 compared with $22,700 at June 30, 2019. As of March 31, 2020, the Bank had the ability to borrow an additional $14,565 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 $6,386 at March 31, 2020 and $3,686 at June 30, 2019.

Jumbo time deposits (those with balances of $250 and over) totaled $42,165 as of March 31, 2020 and $39,034 as of June 30, 2019. These deposits are monitored closely by the Corporation and are mainly priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee-paid broker to obtain deposits from outside its normal service area as an additional source of funding. The Corporation, however, does not rely upon these deposits as a primary source of funding. Although management monitors interest rates on an ongoing basis, a quarterly rate sensitivity report is used to determine the effect of interest rate changes on the financial statements. In the opinion of management, enough assets or liabilities could be repriced over the near term (up to three years) to compensate for such changes. The spread on interest rates, or the difference between the average earning assets and the average interest-bearing liabilities, is monitored quarterly.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

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 $85,554 as of March 31, 2020 and $86,265 as of June 30, 2019.

Capital Resources

Total shareholders’ equity increased to $61,328 as of March 31, 2020 from $51,166 as of June 30, 2019. The primary reason for the increase was the issuance of common shares as part of the consideration in the acquisition of Peoples, which added $5,277 to shareholders’ equity. In addition, the increase in shareholders’ equity included net income of $3,961 for the first nine months of fiscal year 2020 and $1,942 in accumulated other comprehensive income from an increase in the unrealized gains in the mark-to-market of available-for-sale securities. These increases were partially offset by cash dividends paid of $1,148.

The Bank is subject to various regulatory capital requirements administered by federal regulatory agencies. Capital adequacy guidelines and prompt corrective-action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Corporation’s financial statements.

As of March 31, 2020, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 11.58% and the leverage and total risk-based capital ratios were 8.82% and 12.50%, respectively. This compares with common equity tier 1 capital and tier 1 capital ratios of 11.68% and leverage and total risk-based capital ratios of 8.88% and 12.60%, respectively, as of June 30, 2019. The Bank exceeded minimum regulatory capital requirements to be considered well-capitalized for both periods. Management is not aware of any matters occurring subsequent to March 31, 2020 that would cause the Bank’s capital category to change.

CONSUMERS BANCORP, INC.

Management's Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share amounts)

Critical Accounting Policies

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

The Corporation has identified the appropriateness of the allowance for loan losses as a critical accounting policy and an understanding of this policy is necessary to understand the financial statements. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note one (Summary of Significant Accounting Policies - Allowance for Loan Losses), note four (Loans) and Management’s Discussion and Analysis of Financial Condition and Results of Operation (Critical Accounting Policies and Use of Significant Estimates) of the 2019 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since June 30, 2019.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 adversely 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;
	●	rapid fluctuations in market interest rates could result in changes in fair market valuations and net interest income; pricing and liquidity pressures may result;
	●	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;
	●	unanticipated difficulties or expenditures related to the acquisition of Peoples;
	●	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.

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

CONSUMERS BANCORP, INC.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15e. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of March 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 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 March 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: May 8, 2020	/s/ Ralph J. Lober Ralph J. Lober, II President & Chief Executive Officer (principal executive officer)

Date: May 8, 2020	/s/ Renee K. Wood Renee K. Wood Chief Financial Officer & Treasurer (principal financial officer)

CONSUMERS BANCORP INC /OH/ - FORM 10-Q - May 8, 2020

Attached files

CONSUMERS BANCORP INC /OH/ Reports