UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

Commission File No. 033-79130

CONSUMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(330) 868-7701

(Registrant’s telephone number)

Not applicable

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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

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

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

There were 2,745,658 shares of Registrant’s common stock, no par value, outstanding as of November 4, 2019.

CONSUMERS BANCORP, INC.

FORM 10-Q

QUARTER ENDED September 30, 2019

Table of Contents

	Page Number (s)
Part I – Financial Information
Item 1 – Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2019 and June 30, 2019	1
Consolidated Statements of Income for the three months ended September 30, 2019 and 2018	2
Consolidated Statements of Comprehensive Income for the three months ended September 30, 2019 and 2018	3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30, 2019 and 2018	4
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and 2018	5
Notes to the Consolidated Financial Statements	6-20
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-27
Item 3 – Not Applicable for Smaller Reporting Companies
Item 4 – Controls and Procedures	28
Part II – Other Information
Item 1 – Legal Proceedings	29
Item 1A – Not Applicable for Smaller Reporting Companies	29
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3 – Defaults Upon Senior Securities	29
Item 4 – Mine Safety Disclosure	29
Item 5 – Other Information	29
Item 6 – Exhibits	29
Signatures	30

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CONSUMERS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share data)	September 30, 2019			June 30, 2019
ASSETS
Cash on hand and noninterest-bearing deposits in financial institutions	$	11,642		$	9,322
Federal funds sold and interest-bearing deposits in financial institutions		860			139
Total cash and cash equivalents		12,502			9,461
Certificates of deposit in other financial institutions		1,493			1,983
Securities, available-for-sale		137,603			144,010
Securities, held-to-maturity (fair value of $3,764 at September 30, 2019 and $3,821 at June 30, 2019)		3,686			3,786
Federal bank and other restricted stocks, at cost		1,723			1,723
Loans held for sale		2,436			1,657
Total loans		383,820			369,175
Less allowance for loan losses		(3,909	)		(3,788	)
Net loans		379,911			365,387
Cash surrender value of life insurance		9,245			9,606
Premises and equipment, net		14,539			14,155
Accrued interest receivable and other assets		2,049			2,168
Total assets	$	565,187		$	553,936
LIABILITIES
Deposits
Noninterest-bearing demand	$	122,196		$	116,239
Interest bearing demand		86,887			81,469
Savings		166,937			162,261
Time		111,414			112,205
Total deposits		487,434			472,174
Short-term borrowings		3,754			3,686
Federal Home Loan Bank advances		16,300			22,700
Accrued interest and other liabilities		4,706			4,210
Total liabilities		512,194			502,770
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred stock (no par value, 350,000 shares authorized, none outstanding)		—			—
Common stock (no par value, 3,500,000 shares authorized; 2,854,133 shares issued as of September 30, 2019 and June 30, 2019)		14,697			14,656
Retained earnings		37,621			36,487
Treasury stock, at cost (108,475 and 120,288 common shares as of September 30, 2019 and June 30, 2019, respectively)		(1,454	)		(1,543	)
Accumulated other comprehensive income		2,129			1,566
Total shareholders’ equity		52,993			51,166
Total liabilities and shareholders’ equity	$	565,187		$	553,936

See accompanying notes to consolidated financial statements

1

CONSUMERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months ended September 30,
(Dollars in thousands, except per share amounts)	2019			2018
Interest and dividend income
Loans, including fees	$	4,761		$	3,949
Securities, taxable		510			526
Securities, tax-exempt		399			375
Federal bank and other restricted stocks		20			22
Federal funds sold and other interest-bearing deposits		26			23
Total interest and dividend income		5,716			4,895
Interest expense
Deposits		945			514
Short-term borrowings		11			14
Federal Home Loan Bank advances		79			68
Total interest expense		1,035			596
Net interest income		4,681			4,299
Provision for loan losses		130			115
Net interest income after provision for loan losses		4,551			4,184
Noninterest income
Service charges on deposit accounts		373			316
Debit card interchange income		391			358
Bank owned life insurance death benefit		324			—
Bank owned life insurance income		68			69
Securities gains, net		106			587
Other		207			165
Total noninterest income		1,469			1,495
Noninterest expenses
Salaries and employee benefits		2,173			1,975
Occupancy and equipment		532			488
Data processing expenses		385			150
Debit card processing expenses		201			194
Professional and director fees		257			170
FDIC assessments		(7	)		38
Franchise taxes		95			89
Marketing and advertising		181			104
Telephone and network communications		74			72
Other		414			404
Total noninterest expenses		4,305			3,684
Income before income taxes		1,715			1,995
Income tax expense		212			322
Net income	$	1,503		$	1,673
Basic and diluted earnings per share	$	0.55		$	0.61

See accompanying notes to consolidated financial statements

2

CONSUMERS BANCORP, INC.

Consolidated statements of comprehensive income

(Unaudited)

(Dollars in thousands)

	Three Months ended September 30,
	2019			2018
Net income	$	1,503		$	1,673
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains (losses) arising during the period		818			(893	)
Reclassification adjustment for gains included in income		(106	)		(587	)
Net unrealized gains (losses)		712			(1,480	)
Income tax effect		(149	)		312
Other comprehensive income (loss)		563			(1,168	)
Total comprehensive income	$	2,066		$	505

See accompanying notes to consolidated financial statements.

3

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months ended September 30,
	2019			2018
Balance at beginning of period	$	51,166		$	43,761
Net income		1,503			1,673
Other comprehensive income (loss)		563			(1,168	)
11,813 and 4,201 shares issued associated with stock awards during the three months ended September 30, 2019 and 2018, respectively		130			59
Common cash dividends		(369	)		(355	)
Balance at the end of the period	$	52,993		$	43,970
Common cash dividends per share	$	0.135		$	0.13

See accompanying notes to consolidated financial statements.

4

CONSUMERS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	Three Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net cash from operating activities	$	806		$	533
Cash flow from investing activities
Securities available-for-sale
Purchases		(2,318	)		(2,060	)
Maturities, calls and principal pay downs		4,893			4,730
Proceeds from sales		4,460			2,573
Securities held-to-maturity
Principal pay downs		100			95
Net decrease in certificate of deposit in other financial institutions		490			—
Net increase in loans		(14,654	)		(10,247	)
Proceeds from BOLI death benefit		753			—
Acquisition of premises and equipment		(48	)		(350	)
Net cash from investing activities		(6,324	)		(5,259	)
Cash flow from financing activities
Net increase in deposit accounts		15,260			10,576
Net change in short-term borrowings		68			(10,465	)
Proceeds from Federal Home Loan Bank advances		1,500			8,000
Repayments of Federal Home Loan Bank advances		(7,900	)		(17	)
Dividends paid		(369	)		(355	)
Net cash from financing activities		8,559			7,739
Increase in cash or cash equivalents		3,041			3,013
Cash and cash equivalents, beginning of period		9,461			7,772
Cash and cash equivalents, end of period	$	12,502		$	10,785
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	1,050		$	576
Federal income taxes		—			—
Non-cash items:
Transfer from loans held for sale to portfolio		—			75
Issuance of treasury stock for stock awards		89			59
Right of use assets obtained in exchange for lease liabilities		582			—

See accompanying notes to consolidated financial statements.

5

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 1 – Summary of Significant Accounting Policies:

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

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

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

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

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

Adoption of New Accounting Standards: In February 2016, FASB issued accounting standards update (ASU) 2016-02, Leases (Topic 842). This ASU requires all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures are required so users can understand more about the nature of an entity’s leasing activities. The new guidance was effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. The Corporation has several lease agreements, such as branch locations, which were previously considered operating leases, and therefore, not recognized on the Corporation’s consolidated condensed statements of financial condition. The new guidance requires these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. As of July 1, 2019, the Corporation adopted ASU 2016-02 using the modified retrospective method. There was no cumulative-effect adjustment to the opening balance of retained earnings for the period of adoption. At September 30, 2019, the Corporation had contractual operating lease commitments of $555, before considering renewal options that are generally present.

6

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

Note 2 – Acquisition

On June 14, 2019, Consumers entered into an Agreement and Plan of Merger (Merger Agreement) with Peoples Bancorp of Mt. Pleasant, Inc. (Peoples) and its wholly owned subsidiary, The Peoples National Bank of Mount Pleasant. Each Peoples shareholder will receive 63.16 common shares of Consumers common stock or $1,200.00 in cash, subject to total consideration being paid 50% in Consumers common shares and 50% cash as provided in the Merger Agreement. Based on Consumers’ 20-day average closing price of $19.07 on June 13, 2019, the aggregate implied transaction value was approximately $10.3 million. On September 30, 2019, Peoples had approximately $72.4 million in total assets, $54.2 million in loans and $62.7 million in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The transaction is expected to close in January 2020, pending the completion of customary closing conditions. All necessary shareholder and regulatory approvals have been received.

Note 3 – Securities

Available –for-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2019
Obligations of U.S. government-sponsored entities and agencies	$	14,646	$	184	$	(13	)	$	14,817
Obligations of state and political subdivisions		55,737		1,966		(4	)		57,699
U.S. Government-sponsored mortgage-backed securities–residential		54,497		576		(209	)		54,864
U.S. Government-sponsored mortgage-backed securities– commercial		1,651		11		(2	)		1,660
U.S. Government-sponsored collateralized mortgage obligations– residential		8,378		201		(16	)		8,563
Total available-for-sale securities	$	134,909	$	2,938	$	(244	)	$	137,603

Held-to-Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
September 30, 2019
Obligations of state and political subdivisions	$	3,686	$	78	$	—	$	3,764
Total held-to-maturity securities	$	3,686	$	78	$	—	$	3,764

7

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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 September 30,
	2019		2018
Proceeds from sales and calls	$	4,460	$	2,573
Gross realized gains		106		593
Gross realized losses		—		6

The income tax provision related to the net realized gains amounted to $22 for the three months ended September 30, 2019. The income tax benefit related to the net realized losses amounted to $124 for the three months ended September 30, 2018.

The amortized cost and fair values of debt securities at September 30, 2019, by expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

Available-for-Sale	Amortized Cost		Estimated Fair Value
Due in one year or less	$	5,362	$	5,382
Due after one year through five years		14,540		14,802
Due after five years through ten years		23,261		23,727
Due after ten years		27,220		28,605
Total		70,383		72,516
U.S. Government-sponsored mortgage-backed and related securities		64,526		65,087
Total available-for-sale securities	$	134,909	$	137,603
Held-to-Maturity
Due after five years through ten years	$	451	$	472
Due after ten years		3,235		3,292
Total held-to-maturity securities	$	3,686	$	3,764

8

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

	Less than 12 Months					12 Months or more					Total
Available-for-sale	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
September 30, 2019
Obligations of US government-sponsored entities and agencies	$	2,668	$	(13	)	$	—	$	—		$	2,668	$	(13	)
Obligations of states and political subdivisions		1,780		(3	)		209		(1	)		1,989		(4	)
U.S. Government-sponsored mortgage-backed securities – residential		2,558		(6	)		29,328		(203	)		31,886		(209	)
U.S. Government-sponsored mortgage-backed securities – commercial		705		(2	)		—		—			705		(2	)
U.S. Government-sponsored collateralized mortgage obligations – residential		462		(1	)		1,486		(15	)		1,948		(16	)
Total temporarily impaired	$	8,173	$	(25	)	$	31,023	$	(219	)	$	39,196	$	(244	)

	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 September 30, 2019 have not been recognized into income because the decline in fair value is not attributed to credit quality and management does not intend to sell, and it is not likely that management will be required to sell, the securities prior to their anticipated recovery. The decline in fair value within the securities portfolio is largely due to changes in interest rates and the fair value is expected to recover as the securities approach maturity. The mortgage-backed securities and collateralized mortgage obligations were primarily issued by Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The Corporation does not own any private label mortgage-backed securities.

9

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:

	September 30, 2019			June 30, 2019
Commercial	$	81,782		$	80,453
Commercial real estate:
Construction		14,583			16,120
Other		205,214			195,269
1 – 4 Family residential real estate:
Owner occupied		58,406			55,941
Non-owner occupied		14,936			14,517
Construction		3,115			1,931
Consumer		5,912			5,150
Subtotal		383,948			369,381
Net Deferred loan fees and costs		(128	)		(206	)
Allowance for loan losses		(3,909	)		(3,788	)
Net Loans	$	379,911		$	365,387

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2019:

						1-4 Family
				Commercial		Residential
				Real		Real
	Commercial			Estate		Estate		Consumer			Total
Allowance for loan losses:
Beginning balance	$	660		$	2,575	$	494	$	59		$	3,788
Provision for loan losses		(11	)		69		56		16			130
Loans charged-off		—			—		—		(16	)		(16	)
Recoveries		—			1		—		6			7
Total ending allowance balance	$	649		$	2,645	$	550	$	65		$	3,909

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018:

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer			Total
Allowance for loan losses:
Beginning balance	$	586	$	2,277	$	499	$	60		$	3,422
Provision for loan losses		16		100		5		(6	)		115
Loans charged-off		—		—		—		(7	)		(7	)
Recoveries		—		1		3		4			8
Total ending allowance balance	$	602	$	2,378	$	507	$	51		$	3,538

10

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2019. Included in the recorded investment in loans is $764 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		647		2,638		550		65		3,900
Total ending allowance balance	$	649	$	2,645	$	550	$	65	$	3,909
Recorded investment in loans:
Loans individually evaluated for impairment	$	167	$	460	$	266	$	—	$	893
Loans collectively evaluated for impairment		81,639		219,298		76,822		5,932		383,691
Total ending loans balance	$	81,806	$	219,758	$	77,088	$	5,932	$	384,584

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

11

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 September 30, 2019 and for the three months ended September 30, 2019:

	As of September 30, 2019						Three Months ended September 30, 2019
	Unpaid				Allowance for Loan		Average		Interest		Cash Basis
	Principal		Recorded		Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial real estate:
Other	$	316		240	$	—	$	362	$	86	$	86
1-4 Family residential real estate:
Owner occupied		43		12		—		39		7		7
Non-owner occupied		292		255		—		257		—		—
With an allowance recorded:
Commercial real estate:
Other		218		220		7		220		3		3
Commercial		167		169		2		170		3		3
Total	$	1,036	$	896	$	9	$	1,048	$	99	$	99

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 three months ended September 30, 2018:

	As of June 30, 2019						Three Months ended September 30, 2018
	Unpaid				Allowance for Loan		Average		Interest		Cash Basis
	Principal		Recorded		Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	71	$	1	$	1
Commercial real estate:
Other		580		436		—		1,369		11		11
1-4 Family residential real estate:
Owner occupied		124		93		—		99		—		—
Non-owner occupied		297		264		—		292		—		—
With an allowance recorded:
Commercial real estate:
Other		221		222		7		231		3		3
Commercial		173		174		2		—		—		—
Total	$	1,395	$	1,189	$	9	$	2,062	$	15	$	15

12

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

	September 30, 2019				June 30, 2019
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
			Still				Still
	Non-accrual		Accruing		Non-accrual		Accruing
Commercial real estate:
Other	$	185	$	—	$	436	$	—
1 – 4 Family residential:
Owner occupied		5		—		85		—
Non-owner occupied		254		—		264		—
Total	$	444	$	—	$	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 September 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	$	—	$	—	$	—	$	—	$	81,806	$	81,806
Commercial real estate:
Construction		—		—		—		—		14,540		14,540
Other		—		8		—		8		205,210		205,218
1-4 Family residential:
Owner occupied		—		5		—		5		58,974		58,979
Non-owner occupied		—		—		—		—		14,936		14,936
Construction		—		—		—		—		3,173		3,173
Consumer		16		—		—		16		5,916		5,932
Total	$	16	$	13	$	—	$	29	$	384,555	$	384,584

The above table of past due loans includes the recorded investment in non-accrual loans of $13 in the 60-89 days category and $431 in the loans not past due category.

The following table presents the aging of the recorded investment in past due loans as of June 30, 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.

13

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Troubled Debt Restructurings (TDR):

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

At September 30, 2019 and June 30, 2019, the Corporation had $706 and $725, respectively, of loans classified as TDRs which are included in impaired loans above. As of September 30, 2019, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. As of June 30, 2019, the Corporation had committed to lend an additional $9 to customers with outstanding loans that were classified as troubled debt restructurings. At September 30, 2019 and June 30, 2019, the Corporation had $9 of specific reserves allocated to these loans.

During the three-month periods ended September 30, 2019 and 2018, there were no loan modifications completed that were classified as troubled debt restructurings. There were no charge offs from troubled debt restructurings that were completed during the three-month periods ended September 30, 2019 and 2018.

There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the three-month periods ended September 30, 2019 and 2018. A loan is considered in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

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

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

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.

14

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

	As of September 30, 2019
			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	76,118	$	4,448	$	959	$	—	$	281
Commercial real estate:
Construction		14,540		—		—		—		—
Other		191,044		6,741		5,308		185		1,940
1-4 Family residential real estate:
Owner occupied		2,192		—		23		4		56,760
Non-owner occupied		13,823		200		311		255		347
Construction		105		—		—		—		3,068
Consumer		24		—		—		—		5,908
Total	$	297,846	$	11,389	$	6,601	$	444	$	68,304

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

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

Note 5 - Fair Value

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

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

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).

15

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

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

			Fair Value Measurements at September 30, 2019 Using
	Balance at September 30, 2019		Level 1		Level 2		Level 3
Assets:
Obligations of U.S. government-sponsored entities and agencies	$	14,817	$	—	$	14,817	$	—
Obligations of states and political subdivisions		57,699		—		57,699		—
U.S. Government-sponsored mortgage-backed securities – residential		54,864		—		54,864		—
U.S. Government-sponsored mortgage-backed securities – commercial		1,660		—		1,660		—
U.S. Government-sponsored collateralized mortgage obligations - residential		8,563		—		8,563		—

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

There were no transfers between Level 1 and Level 2 during the three-month periods ended September 30, 2019 or 2018.

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

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

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

16

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

Financial assets measured at fair value on a non-recurring basis at September 30, 2019 and June 30, 2019 are summarized below: 

			Fair Value Measurements at September 30, 2019 Using
	Balance at September 30, 2019		Level 1		Level 2		Level 3
Impaired loans:
Commercial Real Estate - Other	$	55	$	—	$	—	$	55

			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 $55, with no valuation allowance at September 30, 2019. 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 months ended September 30, 2019 and 2018.

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

September 30, 2019	Fair Value		Valuation Technique	Unobservable Inputs		Range			Weighted Average
Impaired loans:
Commercial Real Estate – Other	$	55	Settlement Agreement		N/A		0.0	%		0.0	%

June 30, 2019	Fair Value		Valuation Technique	Unobservable Inputs		Range			Weighted Average
Impaired loans:
Commercial Real Estate – Other	$	59	Settlement Agreement		N/A		0.0	%		0.0	%

17

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:

	September 30, 2019				June 30, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Level 1 inputs:
Cash and cash equivalents	$	12,502	$	12,502	$	9,461	$	9,461
Level 2 inputs:
Certificates of deposits in other financial institutions		1,493		1,495		1,983		1,983
Loans held for sale		2,436		2,485		1,657		1,687
Accrued interest receivable		1,547		1,547		1,607		1,607
Level 3 inputs:
Securities held-to-maturity		3,686		3,764		3,786		3,821
Loans, net		379,911		385,670		365,387		366,911
Financial Liabilities:
Level 2 inputs:
Demand and savings deposits		376,020		376,020		359,969		359,969
Time deposits		111,414		112,141		112,205		112,841
Short-term borrowings		3,754		3,754		3,686		3,686
Federal Home Loan Bank advances		16,300		16,287		22,700		22,596
Accrued interest payable		117		117		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 4,062 shares of restricted stock that were anti-dilutive for the three-month period ended September 30, 2019. There were no equity instruments that were anti-dilutive for the three-month period ended September 30, 2018. The following table details the calculation of basic and diluted earnings per share:

	For the Three Months Ended September 30,
	2019		2018
Basic:
Net income available to common shareholders	$	1,503	$	1,673
Weighted average common shares outstanding		2,734,578		2,729,103
Basic income per share	$	0.55	$	0.61
Diluted:
Net income available to common shareholders	$	1,503	$	1,673
Weighted average common shares outstanding		2,734,578		2,729,103
Dilutive effect of restricted stock		—		68
Total common shares and dilutive potential common shares		2,734,578		2,729,171
Dilutive income per share	$	0.55	$	0.61

18

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-month periods ended September 30, 2019 and 2018, were as follows:

	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		818			(171	)		647
Amounts reclassified from accumulated other comprehensive income		(106	)		22			(84	)	(a)(b)
Net current period other comprehensive income		712			(149	)		563
Balance as of September 30, 2019	$	2,694		$	(565	)	$	2,129
Balance as of June 30, 2018	$	(2,069	)	$	434		$	(1,635	)
Unrealized holding loss on available-for-sale securities arising during the period		(893	)		188			(705	)
Amount reclassified from accumulated other comprehensive income		(587	)		124			(463	)	(a)(b)
Net current period other comprehensive income		(1,480	)		312			(1,168	)
Balance as of September 30, 2018	$	(3,549	)	$	746		$	(2,803	)

(a) Securities (gains) losses, net

(b) Income tax expense

Note 8 – Revenue Recognition

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

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

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

19

CONSUMERS BANCORP, INC.

Notes to the Consolidated Financial Statements

(Unaudited) (continued)

(Dollars in thousands, except per share amounts)

The following table presents the Corporation's sources of noninterest income for the three months ended September 30, 2019 and 2018.

	For the three months ended September 30,
	2019		2018
Noninterest income
In scope of Topic 606:
Service charges on deposit accounts	$	373	$	316
Debit card interchange income		391		358
Other income		396		66
Noninterest income (in scope of Topic 606)		1,160		740
Noninterest income (out-of-scope of Topic 606)		309		755
Total noninterest income	$	1,469	$	1,495

Note 9 – Leases

Effective July 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of September 30, 2019, the Corporation leases real estate for six office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to September 1, 2028, including extension periods. Lease agreements for four locations have a lease term of 12 months or less and are therefore considered short-term leases and are exempt from Topic 842. The weighted average remaining life of the lease term for the leases with a term over 12 months was 60.92 years as of September 30, 2019.

Costs associated with operating leases accounted for under Topic 842 was $27 and the cost of short-term leases was $22 for the three months ended September 30, 2019. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, were $555 as of September 30, 2019.

Total estimated rental commitments for the operating leases within the scope of Topic 842 were as follows as of September 30, 2019:

Period Ending June 30
2020	$	82
2021		105
2022		95
2023		76
2024		51
Thereafter		146
Total	$	555

20

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 months ended September 30, 2019, compared to the same period in 2018, and the consolidated balance sheet at September 30, 2019, compared to June 30, 2019. This discussion is designed to provide a more comprehensive review of the operating results and financial condition than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

Overview

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

On June 14, 2019, Consumers entered into a Merger Agreement with Peoples and its wholly-owned subsidiary, The Peoples National Bank of Mount Pleasant. On September 30, 2019, Peoples had approximately $72.4 million in total assets, $54.2 million in loans and $62.7 million in deposits at its three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio. The transaction is expected to close in January 2020, pending the completion of customary closing conditions. All necessary shareholder and regulatory approvals have been received.

Results of Operations

Three Months Ended September 30, 2019 and 2018

Net income for the first quarter of fiscal year 2020 was $1,503, or $0.55 per common share, compared to $1,673, or $0.61 per common share for the three months ended September 30, 2018. The following are key highlights of our results of operations for the three months ended September 30, 2019 compared to the prior fiscal year comparable period:

● net interest income increased by $382 to $4,681, or by 8.9%, in the first quarter of fiscal year 2020 from the same prior year period;

● noninterest income decreased by $26, or 1.7%, in the first quarter of fiscal year 2020 from the same prior year period and included $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim. Additionally, a $106 gain from the sale or call of securities was recognized in the first quarter of fiscal year 2020 compared with a $587 gain for the same prior year period; and

● noninterest expenses increased by $621, or 16.9%, in the first quarter of fiscal year 2020 from the same prior year period and include $317 of expenses associated with the expected merger with Peoples.

Return on average equity and return on average assets were 11.42% and 1.07%, respectively, for the first fiscal quarter 2020 compared to 14.92% and 1.32%, respectively, for the same prior year period.

21

CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Net Interest Income

Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total average interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. The federal income tax rate in effect for the 2020 and 2019 fiscal years was 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

The Corporation’s net interest margin was 3.61% for the three months ended September 30, 2019, compared with 3.70% for the same period in 2018. FTE net interest income for the three months ended September 30, 2019 increased by $324, or 7.3%, to $4,758 from $4,434 for the same year ago period.

Tax-equivalent interest income for the three months ended September 30, 2019 increased by $763, or 15.2%, from the same year ago period. Interest income was positively impacted by a $51,474, or 10.9%, increase in average interest-earning assets from the same prior year period. Additionally, the Corporation’s yield on average interest-earning assets increased to 4.40% for the three months ended September 30, 2019 from 4.20% for the same period last year. The yield on average interest-earning assets was positively impacted by a 0.19% 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 three months ended September 30, 2019 increased by $439 from the same year ago period. The Corporation’s cost of funds was 1.08% for the three months ended September 30, 2019 compared with 0.69% for the same year ago period. The increase in short term market interest rates has impacted the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Average Balance Sheets and Analysis of Net Interest Income for the Three Months Ended September 30,

(In thousands, except percentages) 

	2019								2018
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Interest-earning assets:
Taxable securities	$	83,631		$	510		2.44	%	$	86,075		$	526		2.37	%
Nontaxable securities (1)		60,783			474		3.19			59,260			506		3.37
Loans receivable (1)		373,362			4,763		5.06			322,193			3,953		4.87
Federal bank and other restricted stocks		1,723			20		4.61			1,459			22		5.98
Interest bearing deposits and federal funds sold		5,383			26		1.92			4,421			23		2.06
Total interest-earning assets		524,882			5,793		4.40	%		473,408			5,030		4.20	%
Noninterest-earning assets		30,831								30,809
Total Assets	$	555,713							$	504,217
Interest-bearing liabilities:
NOW	$	82,491		$	145		0.70	%	$	82,368		$	125		0.60	%
Savings		166,181			222		0.53			163,262			137		0.33
Time deposits		112,642			578		2.04			78,542			252		1.27
Short-term borrowings		3,929			11		1.11			4,045			14		1.37
FHLB advances		15,378			79		2.04			15,656			68		1.72
Total interest-bearing liabilities		380,621			1,035		1.08	%		343,873			596		0.69	%
Noninterest-bearing liabilities:
Noninterest-bearing checking accounts		118,256								111,677
Other liabilities		4,638								4,185
Total liabilities		503,515								459,735
Shareholders’ equity		52,198								44,482
Total liabilities and shareholders’ equity	$	555,713							$	504,217
Net interest income, interest rate spread (1)				$	4,758		3.32	%				$	4,434		3.51	%
Net interest margin (net interest as a percent of average interest-earning assets) (1)							3.61	%							3.70	%
Federal tax exemption on non-taxable securities and loans included in interest income				$	77							$	135
Average interest-earning assets to interest-bearing liabilities		137.90	%							137.67	%

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

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Provision for Loan Losses

The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable incurred credit losses in the Bank’s loan portfolio that have been incurred at each balance sheet date. For the three-month period ended September 30, 2019, the provision for loan losses was $130 compared with $115 for the same prior year period.

Non-performing loans were $444 as of September 30, 2019 compared with $785 as of June 30, 2019 and $1,054 as of September 30, 2018. Net charge-offs of $9 were recorded for the three-month period ended September 30, 2019 and a $1 net recovery was recorded for the three-month period ended September 30, 2018. The allowance for loan losses as a percentage of loans was 1.01% at September 30, 2019 and 1.03% at June 30, 2019. The provision for loan losses for the period ended September 30, 2019 was considered sufficient by management for maintaining an appropriate allowance for probable incurred credit losses.

Noninterest Income

Noninterest income decreased by $26, or 1.7%, for the first quarter of fiscal year 2020 from the same period last year. Noninterest income for the three months ended September 30, 2019 included a $106 gain on sale of securities compared with a $587 gain for the three months ended September 30, 2018. During the 2019 fiscal year, a pooled trust preferred security was sold because of the significant increase in the value of this security. The Corporation does not own any other securities of this type. For the three-month period ended September 30, 2019, $324 of income was recognized as a result of proceeds received from a bank owned life insurance policy claim. In addition, gains from the sale of mortgage loans increased by 36.4%, service charges on deposit accounts increased by 18.0% and debit card interchange income increased by 9.2% from the same prior year period.

Noninterest Expenses

Total noninterest expenses increased by $621, or by 16.9%, during the first quarter of fiscal year 2020 compared with the same year ago period primarily as a result of $317 of expenses associated with the expected merger between Consumers and Peoples. The expenses associated with the merger were primarily legal and consulting fees that were charged to professional and director fees and the system deconversion files that were charged to data processing expenses. Total noninterest expenses were also impacted by increases in salary and incentive expenses. FDIC assessments were positively impacted since the Small Bank Assessment Credits were applied to the current FDIC insurance invoice since the Deposit Insurance Fund reserve ratio was above 1.38%.

Income Taxes

Income tax expense was $212 for the three-month period ended September 30, 2019 compared to $322 for the three-month period ended September 30, 2018. The effective tax rate was 12.4% for the three-month period ended September 30, 2019 compared to 16.1% for the three-month period ended September 30, 2018. Income tax expense and the effective tax rate were lower in the 2020 fiscal year primarily due to a higher amount of tax-free income during the three-month period ended September 30, 2019.

Financial Condition

Total assets at September 30, 2019 were $565,187 compared to $553,936 at June 30, 2019, an increase of $11,251, or an annualized 8.1%.

Total loans increased by $14,645, or an annualized 15.9%, from $369,175 at June 30, 2019 to $383,820 at September 30, 2019. The growth in the loan portfolio was primarily related to growth within the commercial real estate and 1-4 family residential real estate segments to borrowers within the Bank’s primary market area. The loan growth was primarily funded by an increase of $15,260, or an annualized 12.9%, in total deposits.

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Non-Performing Assets

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

	September 30, 2019			June 30, 2019			September 30, 2018
Non-accrual loans	$	444		$	785		$	1,053
Loans past due over 90 days and still accruing		—			—			1
Total non-performing loans		444			785			1,054
Other real estate owned		—			—			—
Total non-performing assets	$	444		$	785		$	1,054
Non-performing loans to total loans		0.12	%		0.21	%		0.32	%
Allowance for loan losses to total non-performing loans		880.41	%		482.55	%		335.67	%

As of September 30, 2019, impaired loans totaled $896, of which $444 are included in non-accrual loans. Commercial and commercial real estate loans are classified as impaired if management determines that full collection of principal and interest, in accordance with the terms of the loan documents, is not probable. Impaired loans and non-performing loans have been considered in management’s analysis of the appropriateness of the allowance for loan losses. Management and the Board of Directors are closely monitoring these loans and believe that the prospects for recovery of principal and interest, less identified specific reserves, are favorable.

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

Liquidity

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

For the three months ended September 30, 2019, net cash inflow from operating activities was $1,130, net cash outflows from investing activities was $6,648 and net cash inflows from financing activities was $8,559. A major source of cash was a $15,260 increase in deposits and $9,353 from sales, maturities, calls or principal pay downs on available-for-sale securities. A major use of cash was a $14,654 increase in loans. Total cash and cash equivalents were $12,502 as of September 30, 2019, compared to $9,461 at June 30, 2019 and $10,785 at September 30, 2018.

The Bank offers several types of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with the rates and fees charged by other banks for similar deposit products currently available in the market area. Deposits totaled $487,434 at September 30, 2019 compared with $472,174 at June 30, 2019.

To provide an additional source of liquidity, the Corporation has entered into an agreement with the FHLB of Cincinnati. At September 30, 2019, advances from the FHLB of Cincinnati totaled $16,300 compared with $22,700 at June 30, 2019. As of September 30, 2019, the Bank had the ability to borrow an additional $29,966 from the FHLB of Cincinnati based on a blanket pledge of qualifying first mortgage and multi-family loans. The Corporation considers the FHLB of Cincinnati to be a reliable source of liquidity funding, secondary to its deposit base.

Short-term borrowings consisted of repurchase agreements, which are financing arrangements that mature daily, and federal funds purchased from correspondent banks. The Bank pledges securities as collateral for the repurchase agreements. Short-term borrowings totaled $3,754 at September 30, 2019 and $3,686 at June 30, 2019.

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Jumbo time deposits (those with balances of $250 and over) totaled $37,804 at September 30, 2019 and $39,034 at June 30, 2019. These deposits are monitored closely by the Corporation and are mainly priced on an individual basis. When these deposits are from a municipality, certain bank-owned securities are pledged to guarantee the safety of these public fund deposits as required by Ohio law. The Corporation has the option to use a fee-paid broker to obtain deposits from outside its normal service area as an additional source of funding. The Corporation, however, does not rely upon these deposits as a primary source of funding. Although management monitors interest rates on an ongoing basis, a quarterly rate sensitivity report is used to determine the effect of interest rate changes on the financial statements. In the opinion of management, enough assets or liabilities could be repriced over the near term (up to three years) to compensate for such changes. The spread on interest rates, or the difference between the average earning assets and the average interest-bearing liabilities, is monitored quarterly.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Since commitments to extend credit have a fixed expiration date or other termination clause, some commitments will expire without being drawn upon and the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments and collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $89,167 at September 30, 2019 and $86,265 at June 30, 2019.

Capital Resources

Total shareholders’ equity increased to $52,993 as of September 30, 2019 from $51,166 as of June 30, 2019. The increase was primarily the result of $1,503 of net income for the first quarter of fiscal year 2020 and $563 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 $369.

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 September 30, 2019, the Bank’s common equity tier 1 capital and tier 1 capital ratios were 11.55% and the leverage and total capital ratios were 8.87% and 12.47%, 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 September 30, 2019 that would cause the Bank’s capital category to change.

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CONSUMERS BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

(Dollars in thousands, except per share data)

Critical Accounting Policies

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

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

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements relating to the proposed merger of Peoples Bancorp with and into Consumers, the risk that the proposed transaction may not be completed in a timely manner, or at all; the failure to satisfy the conditions precedent to the consummation of the proposed transaction; unanticipated difficulties or expenditures relating to the proposed transaction; legal proceedings, including those that may be instituted against Consumers, its board of directors, its executive officers and others; disruptions of current plans and operations caused by the announcement and pendency of the proposed transaction and the resulting integration of Peoples Bancorp with Consumers; potential difficulties in employee retention due to the announcement and pendency of the proposed transaction; any failure to meet expected cost savings, synergies and other financial and strategic benefits in connection with the proposed transaction within anticipated time frames or at all; the response of customers, suppliers and business partners to the announcement of the proposed transaction; and risks related to diverting management’s attention from Consumers’ ongoing business operations.  The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements.  These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Factors that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:

● changes in local, regional and national economic conditions becoming less favorable than we expect, resulting in a deterioration in credit quality of our loan assets, among other things;

● the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

● inflation, interest rate, securities market and monetary fluctuations;

● changes in the level of non-performing assets and charge-offs;

● declining asset values impacting the underlying value of collateral;

● the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;

● competitive pressures on product pricing and services;

● breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;

● changes in the reliability of our vendors, internal control systems or information systems;

● our ability to attract and retain qualified employees;

● changes in accounting policies, rules and interpretations;

● unanticipated changes in our liquidity position, including, but not limited to, changes in the cost of liquidity and our ability to find alternative funding sources; and

● changes in consumer spending, borrowing and savings habits.

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

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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 September 30, 2019.

Changes in Internal Controls Over Financial Reporting

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

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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 3.1	Amended and Restated Articles of Incorporation of the Corporation.
Exhibit 11	Statement regarding Computation of Per Share Earnings (included in Note 6 to the Consolidated Financial Statements).

Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

Exhibit 101 The following materials from Consumers Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language) include: (1) Unaudited Consolidated Balance Sheets, (2) Unaudited Consolidated Statements of Income, (3) Unaudited Consolidated Statements of Comprehensive Income, (4) Unaudited Consolidated Statement of Changes in Shareholders’ Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements.

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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: November 8, 2019	/s/ Ralph J. Lober
	Ralph J. Lober, II
	President & Chief Executive Officer
	(principal executive officer)
Date: November 8, 2019	/s/ Renee K. Wood
	Renee K. Wood
	Chief Financial Officer & Treasurer
	(principal financial officer)

30