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Item7—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 financial condition and results of operations as of and for the years ended June 30, 2021 and 2020. This discussion is designed to provide a more comprehensive review of the operating results and financial position 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.

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “continue,” “estimate,” “intend,” “plan,” “seek,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control, and could cause actual results to differ materially from those described in such statements. Any such forward-looking statements are made only as of the date of this report or the respective dates of the relevant incorporated documents, as the case may be, and, except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. The COVID-19 pandemic is affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impact on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other risks and uncertainties that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:

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

● declining asset values impacting the underlying value of collateral;

● changes in consumer spending, borrowing and savings habits;

● our ability to attract and retain qualified employees;

● competitive pressures on product pricing and services;

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

Overview

Consumers Bancorp, Inc., a bank holding company incorporated under the laws of the State of Ohio, owns all the issued and outstanding capital stock of Consumers National Bank, a bank chartered under the laws of the United States of America. The Corporation’s activities have been limited primarily to holding the common stock 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, Pennsylvania, and West Virginia. 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 in a stock and cash transaction for an aggregate consideration of approximately $10,405. As a result of the acquisition, the Corporation received loans with an estimated fair value of $55,320, as of the date of the acquisition, and deposits at three banking centers located in Mt. Pleasant, Adena, and Dillonvale, Ohio with an estimated fair value of $60,851, as of the date of the acquisition. 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. The financial position and results of operations of Peoples prior to its acquisition date are not included in the Corporations’ financial results for periods prior to the acquisition date.

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 CARES Act includes key SBA initiatives to assist small businesses. The PPP loans were designed to provide a direct incentive for small businesses to keep their workers on the payroll, From the first round of assistance, the Bank originated a total of $68,788 of PPP loans and $6,107 remained outstanding as of June 30, 2021. Under the second round of the PPP program, a total of $44,579 of loans were funded and outstanding as of June 30, 2021.

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 June 30, 2021, eight borrowers with an outstanding balance of $198 are in payment deferral status under this loan modification program.

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

Given the dynamic nature of the circumstances surrounding the pandemic, it is difficult to ascertain the full impact that the ongoing economic disruption will have on the Corporation. The Corporation has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. The branch lobbies were closed at various times throughout the pandemic but are now open for normal business. The Corporation is encouraging virtual meetings and conference calls in place of in-person meetings. Additionally, travel for business has been restricted. The Corporation is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.

Comparison of Results of Operations for the Years Ended June30, 2021 andJune30, 2020

Net Income. Net income was $8,988 for fiscal year 2021 compared with $5,527 for fiscal year 2020. The following key factors summarize our results of operations for the year ended June 30, 2021 compared with the same prior year period:

Return on average equity and return on average assets were 13.36% and 1.16%, respectively, for the 2021 fiscal year-to-date period compared with 9.67% and 0.89%, respectively, for the same period last year.

Net Interest Income. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the largest component of the Corporation’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. In addition, prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, can significantly affect net interest income. Since the Federal Open Market Committee establishing a near-zero target range for the federal funds rate, earnings could be negatively affected if the interest we receive on loans and securities falls more quickly than interest we pay on deposits and borrowings. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis (FTE) by total interest-earning assets. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate of 21.0%. All average balances are daily average balances. Non-accruing loans are included in average loan balances.

Taxable equivalent adjustments to net interest 419 326

Net interest income, fully taxable equivalent $ 27,002 $ 21,810

Net interest margin 3.62 % 3.67 %

Taxable equivalent adjustment 0.05 0.05

Net interest margin, fully taxable equivalent 3.67 % 3.72 %

FTE net interest income for the 2021 fiscal year was $27,002, an increase of $5,192 or 23.8%, from $21,810 in the 2020 fiscal year. The Corporation’s tax equivalent net interest margin was 3.67% for the year ended June 30, 2021 and was 3.72% for the fiscal year ended 2020. FTE interest income for the 2021 fiscal year was $28,902, an increase of $3,271, or 12.8%, from the 2020 fiscal year, such change primarily a result of a $151,376, or 25.7%, increase in average interest-earning assets from the 2020 fiscal year. The growth in average interest-earning assets was primarily a result of organic loan growth and the addition of PPP loans. Interest income was positively impacted by the accretion of origination fees from the PPP loans and from a change in the earning asset mix, with higher yielding loans increasing faster than lower yielding securities. PPP loans had an average balance of $63,761 for the twelve-month period ended June 30, 2021, with a total of $2,549 of interest and fee income recognized during the twelve-month period ended June 30, 2021. As of June 30, 2021, there was a total of $2,449 of unamortized net fees associated with the PPP loans which will be amortized into income over the life of the loans. A reduction in the accretion of origination fees from PPP loans as these loans are forgiven, combined with the significant decline in interest rates, will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income. The Corporation’s yield on average interest-earning assets was 3.93% for the 2021 fiscal year compared with 4.37% for the same period last year.

Interest expense for the 2021 fiscal year was $1,900, a decrease of $1,921, or 50.3%, from the 2020 fiscal year. The Corporation’s cost of funds was 0.38% for the 2021 fiscal year compared with 0.91% for the same prior year period. The decline in short term market interest rates had an impact on the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.

Average Balance Sheet and Net Interest Margin

Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

Interest earning assets:

Interest bearing liabilities:

Total liabilities and shareholders’ equity $ 771,980 $ 621,501

The following table presents the changes in the Corporation’s interest income and interest expense resulting from changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities. Changes attributable to both rate and volume that cannot be segregated have been allocated in proportion to the changes due to rate and volume.

INTEREST RATES AND INTEREST DIFFERENTIAL

(In thousands)

Interest earning assets:

Federal bank and other restricted stocks 1 17 (16 ) (11 ) 21 (32 )

Interest bearing deposits and federal funds sold 9 144 (135 ) 64 101 (37 )

Equity securities 17 17 — — — —

Interest bearing liabilities:

Provision for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses in the Corporation’s loan portfolio that have been incurred at each balance sheet date. Management considers historical loss experience, the present and prospective financial condition of borrowers, the current conditions within the markets where the Corporation originates loans, the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the ultimate collectability of the loan portfolio. In fiscal year 2021, a provision for loan loss expense of $850 was recorded compared with $1,980 in fiscal year 2020. The provision for loan loss expense was higher in 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 from organic loan growth.

For the 2021 fiscal year, net charge offs of $57 were recorded compared with $90 for the same period last year. The allowance for loan losses as a percentage of loans was 1.14% at June 30, 2021 and 1.05% at June 30, 2020. The loans acquired from the Peoples acquisition were recorded at fair value without a related allowance for loan losses. As of June 30, 2020, the allowance for loan losses as a percentage of total loans, excluding the loans acquired in the Peoples acquisition, was 1.15%.

Non-performing loans were $1,771 as of June 30, 2021 and represented 0.31% of total loans. This compared with $1,226, or 0.23% of total loans at June 30, 2020. 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 closely monitor these loans and believe the prospect for recovery of principal, less identified specific reserves, are favorable.

Other Income. Total other income decreased by $237, or 5.0%, to $4,466 for the 2021 fiscal year. Other income in the 2020 fiscal year includes $324 of income recognized as a result of proceeds received from a bank owned life insurance policy claim and net securities gains of $355 compared to net security gains of $14 in fiscal year 2021.

Debit card interchange income increased by $316, or 20.1%, in 2021 to $1,891 primarily as a result of increased debit card usage and an increase in the number of cards issued. Gain on sale of mortgage loans increased by $210, or 38.7%, in 2021 primarily as a result of an increase in volume due to refinances as mortgage rates declined. These increases were partially offset by a decline of $130, or 9.6%, in service charges on deposit accounts primarily due to a decline in overdraft charges as many eligible individuals have received Economic Impact Payments and consumer spending habits have changed during the pandemic, resulting in fewer overdrafts.

Other Expenses. Total other expenses were $19,361 for the year ended June 30, 2021; an increase of $1,593, or 9.0%, from $17,768 for the year ended June 30, 2020.

Salaries and employee benefit expenses increased by $1,270, or 13.3%, during the 2021 fiscal year primarily since the 2021 fiscal year includes a full year of expenses associated with the three new office locations and additional staff gained as a result of the merger with Peoples compared with only six months of these expense being included in the prior year period. In addition, incentive accruals and mortgage commissions also increased during the 2021 fiscal year.

Occupancy and equipment expenses increased by $122, or 4.9%, during the 2021 fiscal year from the same period last year primarily as a result of higher real estate taxes, custodial, building upkeep, maintenance, lease and utility expenses for the additional office locations acquired in the Peoples acquisition and the new leased Green, Ohio office location that opened during the 2021 fiscal year. This was partially offset by lower depreciation expense in the 2021 fiscal year for the Salem branch location since it was expected that this location would be replaced in the spring of 2021.

Data processing expenses decreased by $179, or 19.7% and professional and director fees decreased by $170, or 16.6%, during the 2021 fiscal year from the same period last year primarily since the 2020 fiscal year included system conversion and termination costs, investment banker, legal, accounting and auditing fees associated with the acquisition of Peoples.

FDIC assessments increased by $196, or 184.9%, for the 2021 fiscal year since the Small Bank Assessment Credits were applied to the FDIC insurance invoices during the 2020 fiscal year.

Debit card processing expenses increased by $140, or 17.3% primarily as a result of increased debit card usage. The increase in debit card usage is also reflected in debit card interchange income which increased by $316, or 20.1% from the prior year.

Income Tax Expense. Income tax expense totaled $1,850 and $912 and the effective tax rates were 17.1% and 14.2% for the years ended June 30, 2021 and 2020, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in the 2020 and 2021 fiscal years. The effective tax rate differs from the federal statutory rate as a result of tax-exempt income from obligations of states and political subdivisions, loans and bank owned life insurance earnings and death benefit.

Financial Condition

Total assets at June 30, 2021 were $833,804 compared with $740,820 at June 30, 2020, an increase of $92,984, or 12.6%. The growth in total assets is mainly attributable to an increase of $68,297, or 46.3%, in available-for-sale and held-to-maturity securities which was primarily funded by a $93,494, or 14.8%, increase in total deposits.

Securities. Total securities were $215,756 at June 30, 2021, of which $207,760 were classified as available-for-sale and $7,996 were classified as held-to-maturity. The securities portfolio is mainly comprised of mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, state and political subdivisions and government-sponsored enterprises.

The following tables summarize the amortized cost and fair value of available-for-sale securities at June 30, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:

Other debt securities 500 — (8 ) 492

The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 2021 and 2020 and the corresponding gross unrecognized gains and losses:

Obligations of state and political subdivisions $ 7,996 $ 356 $ — $ 8,352

Obligations of state and political subdivisions $ 3,541 $ 327 $ — $ 3,868

The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2021:

Available-for-sale Amortized Cost Fair Value Average Yield

Obligations of government-sponsored entities:

Total obligations of government-sponsored entities 14,746 15,033 1.90

Obligations of state and political subdivisions:

Total obligations of state and political subdivisions 73,013 76,499 3.13

Mortgage-backed securities - residential:

Mortgage-backed securities – commercial:

Total mortgage-backed securities - commercial 8,641 8,845 1.99

Collateralized mortgage obligations:

Other debt securities

Held-to-maturity Amortized Cost Fair Value Average Yield

Obligations of state and political subdivisions:

Total held-to-maturity securities $ 7,996 $ 8,352 2.27 %

The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective yields considering amortization or accretion if the securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been calculated on a tax equivalent basis. Average yields are based on amortized cost balances.

Loans. Loan receivables increased by $23,566 to $566,427 at June 30, 2021 compared to $542,861 at June 30, 2020. Commercial loans include PPP loans of $50,686 and $66,606 as of June 30, 2021 and 2020, respectively, and a third-party residential mortgage warehouse line-of-credit had a zero balance as of June 30, 2021 compared with an outstanding balance of $32,869 as of June 30, 2020. Excluding the declines in the PPP loans and the residential mortgage warehouse line-of-credit, organic loan growth was $72,355, or 16.3%. The increase in the 1-4 family residential real estate portfolio was primarily due to a majority of the mortgage loans originated in the third quarter of fiscal year 2021 being kept within the portfolio rather than being sold to the secondary market. Consumer loans increased by $8,241, or 38.6%, primarily as a result of the expansion of indirect auto lending and an increase in direct auto loans as a result of successful marketing campaigns. Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:

Commercial real estate:

1-4 Family residential real estate:

The following table shows the major classifications of loans, net of deferred fees and costs, which are based on the contractual terms for repayment of principal, that are due in the periods indicated as of June 30, 2021:

Maturing

After one year After five years

Within but within But within After

one year five years Fifteen years Fifteen years Total

Commercial real estate:

1-4 Family residential real estate:

The following is a schedule of fixed and variable rate 1-4 family residential real estate construction, commercial and commercial real estate loans due after one year (variable rate loans are those loans with floating or adjustable interest rates) as of June 30, 2021:

Fixed Interest Rates Variable Interest Rates

Allowance for Loan Losses. The allowance for loan losses balance and the provision charged to expense are judgmentally determined by management based upon a periodic review of the loan portfolio for valuation purposes and to determine the adequacy of the allowance for loan losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend of nonperforming assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectability of loans in the portfolio.

Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to a current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is not expected. The loans must be brought and kept current for six sustained payments before being considered for removal from non-accrual status. 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. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. As of June 30, 2021, impaired loans totaled $1,954, of which $1,771 are included in non-accrual loans. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings.

The following table summarizes non-accrual loans, non-performing assets, impaired and restructured loans, and associated ratios for the years ended June 30:

Accruing loans past due 90 days or more — 41

Total non-performing loans $ 1,771 $ 1,226

Other real estate and repossessed assets owned — 7

Total non-performing assets $ 1,771 $ 1,233

Accruing restructured loans $ 183 $ 738

Non-accrual to total loans 0.31 % 0.22 %

The non-performing loans are either in the process of foreclosure or efforts are being made to work with the borrower to bring the loan current. Properties and vehicles acquired by the Corporation as a result of foreclosure or repossession, or by deed in lieu of foreclosure, are classified as “other real estate and repossessed assets owned” until they are sold or otherwise disposed of.

The following table summarizes the Corporation’s loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the years ended June 30:

Allowance for loan losses at beginning of year $ 5,678 $ 3,788

Loans charged off:

Commercial 22 —

1-4 Family residential real estate 4 6

Recoveries:

Commercial real estate 4 4

1-4 Family residential real estate 3 4

Total recoveries 91 56

Net charge offs 57 90

Provision for loan losses charged to operations 850 1,980

Allowance for loan losses at end of year $ 6,471 $ 5,678

Ratio of net charge offs to average loans outstanding 0.01 % 0.02 %

ALLL to total loans 1.14 % 1.05 %

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios:

Allocation of the Allowance for Loan Losses

While management’s periodic analysis of the adequacy of the allowance for loan loss may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-off that may occur. While the Corporation has historically experienced strong trends in asset quality, as a result of the current situation regarding the COVID-19 pandemic, uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs. Management will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

Goodwill: Goodwill remained unchanged at $826 at June 30, 2021 and 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed during the year ended June 30, 2021.

Funding Sources. Total deposits increased by $93,494, or 14.8%, from $633,355 at June 30, 2020 to $726,849 at June 30, 2021. For the fiscal year ended June 30, 2021, noninterest-bearing demand deposits increased by $38,868, or 20.4%, savings and money market deposits increased by $54,194, or 23.7%, and interest-bearing demand deposits increased by $28,274, or 28.5%, from the same prior year period. Certificates and other time deposits decreased by $27,843, or 24.1%, from the same prior year period as customers chose to move funds to savings and money market deposit products due to the low-rate environment.

The following is a schedule of average deposit amounts and average rates paid on each category for the periods included:

Years Ended June 30,

Amount Rate Amount Rate

The following table summarizes time deposits issued in amounts of $100 or more as of June 30, 2021 by time remaining until maturity:

Maturing in:

Short-term borrowings increased by $5,260, or 75.8%, to $12,203 at June 30, 2021 from $6,943 at June 30, 2020. This increase was primarily associated with the retention of PPP loan proceeds in commercial sweep repurchase agreement accounts. See Note 8—Short-Term Borrowings to the Consolidated Financial Statements, for information concerning short-term borrowings.

Capital Resources

Total shareholders’ equity increased by $6,660 from $63,240 at June 30, 2020 to $69,900 at June 30, 2021. The primary reason for the increase was net income of $8,988 for the current fiscal year which was partially offset by cash dividends paid of $1,785. For the 2021 fiscal year, the average equity to average total assets ratio was 8.71% and the dividend payout ratio was 19.9%. For the 2020 fiscal year, the average equity to average total assets ratio was 9.19% and the dividend payout ratio was 28.1%.

At June 30, 2021, management believes the Bank complied with all regulatory capital requirements. Based on the Bank’s computed regulatory capital ratios, the OCC has determined the Bank to be well capitalized under the Federal Deposit Insurance Act as of its latest exam date. The Bank’s actual and required capital amounts are disclosed in Note 13-Regulatory Matters to the Consolidated Financial Statements. Management is not aware of any matters occurring subsequent to that exam that would cause the Bank’s capital category to change.

Liquidity

Management considers the asset position of the Bank to be sufficiently liquid to meet normal operating needs and conditions. The Bank’s earning assets are divided primarily between loans and available-for-sale securities, with any excess funds placed in federal funds sold or interest-bearing deposit accounts with other financial institutions.

Net cash inflows from operating activities for the 2021 fiscal year were $14,013 and net cash inflows from financing activities were $83,858. Net cash outflows from investing activities were $89,001. The major sources of cash were a $93,494 net increase in deposits and a $42,820 increase from sales, maturities, or principal pay downs on available-for-sale securities. The major uses of cash were the $108,168 purchase of available-for-sale securities and a $23,471 net increase in loans. Total cash and cash equivalents were $18,529 as of June 30, 2021 compared to $9,659 at June 30, 2020.

The Bank groups its loan portfolio into four major categories: commercial loans; commercial real estate loans; 1-4 family residential real estate loans; and consumer loans. The Bank’s 1-4 family residential real estate loan portfolio primarily consists of fixed and variable rate mortgage loans for terms generally not longer than thirty years and variable rate home equity lines of credit. Commercial and commercial real estate loans are comprised of both variable rate notes subject to interest rate changes based on the prime rate or Treasury index, and fixed rate notes having maturities of generally not greater than twenty years. Consumer loans offered by the Bank are generally written for periods of up to seven years, based on the nature of the collateral. These may be either installment loans having regular monthly payments or demand type loans for short periods of time.

Funds not allocated to the Bank’s loan portfolio are invested in various securities having diverse maturity schedules. A majority of the Bank’s securities are held in obligations of U.S. Government-sponsored entities, mortgage-backed securities, and investments in tax-exempt municipal bonds.

The Bank offers several forms of deposit products to its customers. We believe the rates offered by the Bank and the fees charged for them are competitive with others currently available in the market area. While the Bank continues to be under competitive pressures in the Bank’s market area as financial institutions attempt to attract and keep new deposits, we believe many commercial and retail customers are turning to community banks. Compared to our peers, the Corporation’s core deposits consist of a larger percentage of noninterest-bearing demand deposits resulting in the cost of funds remaining at a relatively low level of 0.38%.

Jumbo time deposits (those with balances of $250 and over) were $18,488 and $36,747 at June 30, 2021 and 2020, respectively. These deposits are monitored closely by the Bank and typically 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. However, these deposits are not relied upon as a primary source of funding and there were no brokered deposits as of June 30, 2021 or 2020.

Dividends from the Bank are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends the Bank can pay without regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Additionally, the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations. As of June 30, 2021, the Bank could, without prior approval, declare a dividend of approximately $8,741.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Corporation are monetary in nature. Therefore, as a financial institution, interest rates have a more significant impact on the Corporation’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity, maturity structure and quality of the Corporation’s assets and liabilities are critical to the maintenance of acceptable performance levels.

Critical Accounting Policies and Use of Significant Estimates

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 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 most significant accounting policies followed by the Corporation are presented in Note 1-Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. In the event different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Management has identified the following as critical accounting policies:

Allowance for Loan Losses. The determination of the allowance for loan losses involves considerable subjective judgment and estimation by management. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.

Goodwill. The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. As of April 30, 2021, the measurement date, a qualitative assessment was performed to determine whether there is a more likely than not (greater than 50% likelihood) that the fair value of the Corporation was less than its carrying amount. The impairment test of goodwill indicated no impairment existed as of the measurement date. However, it is impossible to know the future impact of the evolving economic conditions related to COVID-19. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.

Contractual Obligations, Commitments and Contingent Liabilities

The following table presents, as of June 30, 2021, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

Deposits without maturity — — — — — — 639,310

Note 14-Commitments with Off-Balance Sheet Risk to the Consolidated Financial Statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. These commitments and contingencies consist primarily of commitments to extend credit to borrowers under lines of credit.

Off-Balance Sheet Arrangements

At June 30, 2021, the Corporation had no unconsolidated, related special purpose entities, nor did the Corporation engage in derivatives and hedging contracts, such as interest rate swaps, which may expose the Corporation to liabilities greater than the amounts recorded on the consolidated balance sheet. The Corporation’s investment policy prohibits engaging in derivative contracts for speculative trading purposes; however, in the future, the Corporation may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.

Item7A— Quantitative and Qualitative Disclosures About Market Risk

Not applicable for Smaller Reporting Companies.

Item8— Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Consumers Bancorp, Inc.

Minerva, Ohio

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. and subsidiaries (the “Company”) as of June 30, 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Significant Assumptions in General Reserves - Refer to Notes 1 and 4 to the Financial Statements

Critical Audit Matter Description

The allowance for loan losses (allowance) represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience over the estimated loss emergence period adjusted for current factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

We identified the Company’s significant assumptions in general reserves in the allowance for loan losses as a critical audit matter. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the qualitative factors within the allowance included the following, among others:

/s/ Plante & Moran, PLLC

We have served as the Company's auditor since 2020.

Auburn Hills, Michigan

September 16, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Consumers Bancorp, Inc.

Minerva, Ohio

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Consumers Bancorp, Inc. (the "Company") as of June 30, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

/s/ Crowe LLP

Crowe LLP

We served as the Company's auditor from 1998 to 2020.

Cleveland, Ohio

September 22, 2020

CONSOLIDATED BALANCE SHEETS

As of June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

ASSETS:

Certificates of deposit in financial institutions 5,825 11,635

Equity securities, at fair value 424 —

Federal bank and other restricted stocks, at cost 2,472 2,472

Less allowance for loan losses (6,471 ) (5,678 )

Cash surrender value of life insurance 9,702 9,442

Core deposit intangible, net 229 256

Accrued interest receivable and other assets 2,825 3,470

LIABILITIES:

Deposits:

Accrued interest payable and other liabilities 6,802 6,121

Commitments and contingent liabilities (Note 14)

SHAREHOLDERS’ EQUITY:

Preferred stock, no par value; 350,000 shares authorized — —

Accumulated other comprehensive income 3,550 4,260

Total liabilities and shareholders’ equity $ 833,804 $ 740,820

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

Interest and dividend income:

Equity securities 17 —

Federal bank and other restricted stocks 76 75

Federal funds sold and interest-bearing deposits 166 157

Interest expense:

Short-term borrowings 9 43

Federal Home Loan Bank advances 276 292

Net interest income after provision for loan losses 25,733 19,504

Other income:

Service charges on deposit accounts 1,220 1,350

Debit card interchange income 1,891 1,575

Bank owned life insurance death benefit — 324

Bank owned life insurance income 260 265

Gain on sale of mortgage loans 753 543

Securities gains, net 14 355

Net change in market value of equity securities 24 —

Other expenses:

Data processing expenses 728 907

Debit card processing expenses 950 810

Professional and director fees 857 1,027

Federal Deposit Insurance Corporation assessments 302 106

Marketing and advertising 522 475

Loan and collection expenses 142 95

Telephone and communications 344 301

Amortization of intangible 27 14

Basic and diluted earnings per share $ 2.98 $ 1.92

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

Other comprehensive income, net of tax:

Net change in unrealized gains:

Unrealized gains (losses) arising during the period (886 ) 3,766

Reclassification adjustment for gains included in income (14 ) (355 )

Net unrealized gain (loss) (900 ) 3,411

Other comprehensive income (loss) (710 ) 2,694

Total comprehensive income $ 8,278 $ 8,221

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

Cash dividends declared ($0.54 per share) (1,554 ) (1,554 )

Other comprehensive loss (710 ) (710 )

Cash dividends declared ($0.59 per share) (1,785 ) (1,785 )

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

Cash flows from operating activities:

Adjustments to reconcile net income to net cash flows from operating activities:

Securities amortization and accretion, net 621 353

(Gain) loss on disposal of fixed assets 26 (2 )

Gain on sale of mortgage loans (753 ) (543 )

Deferred income tax benefit (320 ) (361 )

Gain on sale of securities (14 ) (355 )

Net change in market value of equity securities (24 ) —

Amortization of intangibles 27 14

Origination of loans held for sale (50,694 ) (38,411 )

Income from BOLI death benefit — (324 )

Increase in cash surrender value of life insurance (260 ) (265 )

Change in other assets and other liabilities 1,291 (167 )

Net cash flows from operating activities 14,013 5,593

Cash flows from investing activities:

Securities available-for-sale:

Maturities, calls and principal pay downs 37,275 25,909

Proceeds from sales of available-for-sale securities 5,545 18,421

Securities held-to-maturity:

Purchase of equity security (400 ) —

Purchase of Federal Home Loan Stock — (595 )

Acquisition, net of cash received — (4,295 )

Proceeds from BOLI death benefit — 753

Acquisition of premises and equipment (1,154 ) (497 )

Proceeds from sale of other real estate and repossessed assets owned 17 60

Net cash flows from investing activities (89,001 ) (113,050 )

Cash flows from financing activities:

Proceeds from Federal Home Loan Bank advances 1,300 22,500

Repayments of Federal Home Loan Bank advances (14,411 ) (14,530 )

Change in short-term borrowings 5,260 909

Increase in cash and cash equivalents 8,870 198

Cash and cash equivalents, beginning of year 9,659 9,461

Cash and cash equivalents, end of year $ 18,529 $ 9,659

Supplemental disclosure of cash flow information:

Cash paid during the period:

Non-cash items:

Transfer from loans to other repossessed assets 9 7

Transfer from loans held for sale to portfolio 161 —

Issuance of treasury stock for stock awards 167 89

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

Premises and equipment — 818

Core deposit intangible — 270

Accrued interest receivable and other assets — 140

Total noncash assets acquired — 73,428

Liabilities assumed:

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021 and 2020

(Dollar amounts in thousands, except per share data)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of Consumers Bancorp, Inc. (Corporation) and its wholly owned subsidiary, Consumers National Bank (Bank), together referred to as the Corporation. All significant intercompany transactions have been eliminated in the consolidation.

Nature of Operations: Consumers Bancorp, Inc. is a bank holding company headquartered in Minerva, Ohio that provides, through its banking subsidiary, a broad array of products and services throughout its primary market area of Carroll, Columbiana, Jefferson, Stark, Summit, Wayne, and contiguous counties in Ohio, Pennsylvania, and West Virginia. 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.

Business Segment Information: The Corporation is engaged in the business of commercial and retail banking, which accounts for substantially all its revenues, operating income, and assets. Accordingly, all its operations are reported 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.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.

Interest–Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

Certificates of Deposit in Financial Institutions: Certificates of deposit in other financial institutions are carried at cost.

Cash Reserves: The Bank is required to maintain cash on hand and noninterest-bearing balances on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. The required reserve balance was zero at June 30, 2021 and 2020.

Securities: Securities are generally classified into either held-to-maturity or available-for-sale categories. Held-to-maturity securities are carried at amortized cost and are those the Corporation has the positive intent and ability to hold to maturity. Available-for-sale securities are those the Corporation may decide to sell before maturity if needed for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included in other comprehensive income (loss) as a separate component of equity, net of tax.

Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

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 evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Corporation has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management mayconsider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Corporation intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI will be recognized in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security. If a security is determined to be other-than-temporarily impaired, but the Corporation does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

Equity Securities: Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.

Federal Bank and Other Restricted Stocks: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock, included with Federal bank and other restricted stocks on the Consolidated Balance Sheet, is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Federal Reserve Bank stock is also carried at cost. Since these stocks are viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Changes in the fair values of these derivatives are included in net gains on sales of loans.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.

Interest income on commercial, commercial real estate and 1-4 family residential loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is determined by the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received on loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the customer has exhibited the ability to repay and demonstrated this ability over at least a consecutive six-month period and future payments are reasonably assured.

During the 2021 fiscal year, the Corporation funded PPP loans to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and are forgivable by the SBA if certain criteria are met. The Corporation originated PPP loans totaling $46,761 during the 2021 fiscal year. PPP processing fees received from the SBA were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. Approximately $1,911of fees from the SBA were recognized in interest income in the 2021 fiscal year and there were $2,449 of unamortized net deferred fees as of June 30, 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when funded.

Concentrations of Credit Risk: The Bank grants consumer, real estate, and commercial loans primarily to borrowers in Carroll, Columbiana, Jefferson, Stark, Summit and Wayne counties. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economy in these counties. Automobiles and other consumer assets, business assets and residential and commercial real estate secure most loans.

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

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience over the estimated loss emergence period adjusted for current factors based on the risks present for each portfolio segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the most recent three-year period, depending on loan segment. This actual loss experience is supplemented with economic and other factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of and trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; volume and severity of past due loans and other similar conditions; quality of the loan review system; value of underlying collateral for collateral dependent loans; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:

Commercial: Commercial loans are made for a wide variety of general business purposes, including financing for equipment, inventories and accounts receivable. The term of each commercial loan varies by its purpose. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Current and projected cash flows are evaluated to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the areas where the Bank operates.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial Real Estate: Commercial real estate loans include mortgage loans to farmers, owners of multi-family investment properties, developers and owners of commercial real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan, the business conducted on the property securing the loan or, in the case of loans to farmers, management and operation of the farm. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus nonowner-occupied loans.

1-4 Family Residential Real Estate: Residential real estate loansare secured by one to four family residential properties and include both owner occupied, non-owner occupied and home equity loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, an established credit record and an appropriately appraised value of the real estate securing the loan that generally requires that the residential real estate loan amount be no more than 85% of the purchase price or the appraised value of the real estate securing the loan unless the borrower provides private mortgage insurance.

Consumer: The Corporation originates direct and indirect consumer loans, primarily automobile loans, personal lines of credit, and unsecured consumer loans in its primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.

Other Real Estate and Repossessed Assets Owned: Real estate properties and other repossessed assets, which are primarily vehicles, acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less costs to sell at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If the fair value declines after acquisition, a valuation allowance is recorded as a charge to income. Operating costs after acquisition are expensed. Gains and losses on disposition are reported as a charge to income.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, generally over the lesser of the remaining term of the lease facility or the estimated economic life of the improvement. Useful lives range from three years for software to thirty-nine and one-half years for buildings.

Cash Surrender Value of Life Insurance: The Bank has purchased single-premium life insurance policies to insure the lives of current and former participants in the salary continuation plan. As of June 30, 2021, the Bank had policies with total death benefits of $19,107 and total cash surrender values of $9,702. As of June 30, 2020, the Bank had policies with total death benefits of $19,067 and total cash surrender values of $9,442. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Tax-exempt income is recognized from the periodic increases in cash surrender value of these policies.

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized over their estimated useful lives. Goodwill is not amortized but is assessed at least annually for impairment. Any such impairment will be recognized in the period identified. The Corporation has selected April 30 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Assets: Premises, equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Repurchase Agreements: Substantially all repurchase agreement liabilities, which are classified as short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Retirement Plans: The Bank maintains a 401(k) savings and retirement plan covering all eligible employees and matching contributions are expensed as made. Salary continuation plan expense allocates the benefits over years of service.

Income Taxes: The Corporation files a consolidated federal income tax return. Income tax expense is the sum of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation applies a more likely than not recognition threshold for all tax uncertainties in accordance with U.S. generally accepted accounting principles. A tax position is recognized as a benefit only if it is more likely than not that the position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable upon the vesting of restricted stock awards.

Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees over the required service period, generally defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Corporation’s common stock at the date of grant. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of equity, net of tax.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the Corporation’s financial statements.

Fair Value of Financial Instruments: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15 of the Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, discounted cash flows, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders.

Reclassifications: Certain reclassifications have been made to the June 30, 2020 financial statements to be comparable to the June 30, 2021 presentation. The reclassifications had no impact on prior year net income or shareholders’ equity.

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. The Corporation is currently evaluating the impact of adopting this new guidance on the consolidated financial statements, current systems and processes. At this time, the Corporation is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Corporation is planning to adopt this new guidance within the time frame noted above.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2—ACQUISITION

On July 16, 2021, the Corporation completed its acquisition of two branches (Branches) from CFBank, National Association (CFBank) located in Calcutta and Wellsville, Ohio. In connection with the acquisition, CFBank transferred to the Bank the land, buildings and other associated assets of the Branches; $104 million in deposits attributable to the Branches; $15 million in aggregate principal amount of subordinated debt securities issued by unrelated financial institutions; $13 million of loans attributable to the Branches and other single family residential mortgage loans and home equity lines of credit from CFBank’s Northeast Ohio loan portfolio. In addition, the Bank purchased $7.7 million in aggregate principal amount of participation interests in commercial and commercial real estate loans originated by and held in CFBank’s portfolio. An additional $7.3 million in participation interests is expected to be purchased by the Bank by December 31, 2021. As consideration for the Branches, the Bank paid CFBank the net book value of the land, building and associated assets of the Branches; a deposit premium equal to 1.75% of the average daily deposits of the Branches for the 30 days preceding the closing; and the par value of the subordinated debt securities and loans acquired by the Bank.

On January 1, 2020, the Corporation completed the acquisition by merger of Peoples and its wholly owned subsidiary, The Peoples National Bank of Mount Pleasant (Peoples Bank) 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. As of the date of acquisition of Peoples, the estimated fair value of loans received was $55,320 and the estimated fair value of deposits assumed was $60,851. Acquisition costs of $827 pre-tax, or $680 after-tax, were expensed during the twelve-month period ended June 30, 2020. The transaction created $836 of goodwill, none of which is deductible for tax purposes.

NOTE 3—SECURITIES

The following table summarizes the amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

Other debt securities 500 — (8 ) 492

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Obligations of state and political subdivisions $ 7,996 $ 356 $ — $ 8,352

Obligations of U.S. Treasury $ 1,248 $ 8 $ — $ 1,256

Obligations of state and political subdivisions $ 3,541 $ 327 $ — $ 3,868

Proceeds from sales of available-for-sale securities during fiscal year 2021 and fiscal year 2020 were as follows:

Gross realized gains 44 355

Gross realized losses (30 ) —

The income tax provision related to these net realized gains amounted to $3 in fiscal year 2021 and $74 in fiscal year 2020.

The amortized cost and fair values of debt securities at June 30, 2021 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 and collateralized mortgage obligations are shown separately.

Available-for-sale Amortized Cost Fair Value

Due after one year through five years 12,346 12,800

Due after five years through ten years 20,295 20,824

U.S. Government-sponsored mortgage-backed and related securities 115,008 115,736

Held-to-maturity Amortized Cost Fair Value

Due after one year through five years $ 294 $ 309

Due after five years through ten years 5,367 5,547

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities with a carrying value of approximately $96,970 and $69,048 were pledged at June 30, 2021 and 2020, respectively, to secure public deposits and commitments as required or permitted by law. At June 30, 2021 and 2020, there were no holdings of securities of any one issuer, other than obligations of U.S. government-sponsored entities and agencies, with an aggregate book value greater than 10% of shareholders’ equity.

The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2021 and 2020, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:

Less than 12 Months 12 Months or more Total

Obligations of state and political subdivisions 7,398 (75 ) — — 7,398 (75 )

Less than 12 Months 12 Months or more Total

Mortgage-backed securities – residential $ — $ — $ 625 $ (4 ) $ 625 $ (4 )

Mortgage-backed securities – commercial 1,806 (2 ) — — 1,806 (2 )

Collateralized mortgage obligations – residential 1,700 (12 ) — — 1,700 (12 )

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.

As of June 30, 2021, the Corporation’s securities portfolio consisted of 312 available-for-sale and four held-to-maturity securities. There were 48 available-for-sale securities in an unrealized loss position at June 30, 2021, one of which was in a continuous loss position for twelve or more months. There were no held-to-maturity securities in an unrealized loss position at June 30, 2021. The unrealized losses within the available-for-sale securities portfolio in the 2021 fiscal year was primarily attributed to a change in rates. 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. Also, management monitors the financial condition of the individual municipal securities to ensure they meet minimum credit standards. Since the Corporation does not intend to sell these securities and it is not likely the Corporation will be required to sell these securities at an unrealized loss position prior to any anticipated recovery in fair value, which may be maturity, management does not believe there is any OTTI related to these securities at June 30, 2021. Also, there was no OTTI recognized at June 30, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2021, the Corporation owned equity securities with an amortized cost of $400. The following table presents the net unrealized gains and losses on equity securities recognized in earnings for the twelve months ended June 30, 2021 and 2020. There were no realized gains or losses on the sale of equity securities during the periods presented. The Corporation did not own any equity securities as of June 30, 2020.

NOTE 4—LOANS

Major classifications of loans were as follows as of June 30:

Commercial real estate:

1 – 4 Family residential real estate:

Net deferred loan fees and costs (2,253 ) (1,612 )

Allowance for loan losses (6,471 ) (5,678 )

The commercial loan category in the above table includes PPP loans of $50,686 as of June 30, 2021 and $66,606 as of June 30, 2020 and a mortgage loan warehouse line of credit to another financial institution with a zero outstanding balance as of June 30, 2021 and $32,869 as of June 30, 2020. The outstanding balance of the warehouse line of credit can fluctuate significantly based on the other financial institution’s funding needs.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2021:

Commercial Residential

Real Real

Commercial Estate Estate Consumer Total

Allowance for loan losses:

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2020:

Commercial Residential

Real Real

Commercial Estate Estate Consumer Total

Allowance for loan losses:

Loans charged-off — — (6 ) (140 ) (146 )

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, 2021. Included in the recorded investment in loans is $1,184 of accrued interest receivable.

Commercial Residential

Real Real

Commercial Estate Estate Consumer Total

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 1 $ — $ 3 $ — $ 4

Acquired loans collectively evaluated for impairment — 83 77 — 160

Recorded investment in loans:

Loans individually evaluated for impairment $ 437 $ 921 $ 596 $ — $ 1,954

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020. Included in the recorded investment in loans is $1,936 of accrued interest receivable.

Commercial Residential

Real Real

Commercial Estate Estate Consumer Total

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 28 $ 6 $ — $ — $ 34

Acquired loans collectively evaluated for impairment — 103 94 — 197

Recorded investment in loans:

Loans individually evaluated for impairment $ 179 $ 1,045 $ 699 $ — $ 1,923

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2021:

Unpaid Allowance for Average Interest Cash Basis

Principal Recorded Loan Losses Recorded Income Interest

Balance Investment Allocated Investment Recognized Recognized

With no related allowance recorded:

Commercial real estate:

1-4 Family residential real estate:

With an allowance recorded:

Commercial real estate:

1-4 Family residential real estate:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2020:

Unpaid Allowance for Average Interest Cash Basis

Principal Recorded Loan Losses Recorded Income Interest

Balance Investment Allocated Investment Recognized Recognized

With no related allowance recorded:

Commercial $ — $ — $ — $ 4 $ — $ —

Commercial real estate:

1-4 Family residential real estate:

With an allowance recorded:

Commercial real estate:

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 June 30, 2021 and 2020:

Loans Past Due Loans Past Due

Over 90 Days Over 90 Days

Still Still

Non-accrual Accruing Non-accrual Accruing

Commercial $ 303 $ — $ 21 $ —

Commercial real estate:

1 – 4 Family residential:

Consumer — — — 12

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 June 30, 2021 by class of loans:

Days Past Due

Days Days Greater Past Due Past Due Total

Commercial real estate:

1-4 Family residential:

The above table of past due loans includes the recorded investment in non-accrual loans of $994 in the 90 days or greater category and $777 in the loans not past due category.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 by class of loans:

Days Past Due

Days Days Greater Past Due Past Due Total

Commercial real estate:

1-4 Family residential:

The above table of past due loans includes the recorded investment in non-accrual loans of $2 in the 60-89 days, $792 in the 90 days or greater category and $391 in the loans not past due category.

Troubled Debt Restructurings (TDR):

The Corporation has certain loans that have been modified in order to maximize collection of loan balances that are classified as TDRs. A modified loan is usually classified as a TDR if, for economic reasons, management grants a concession to the original terms and conditions of the loan to a borrower who is experiencing financial difficulties that it would not have otherwise considered. In response to COVID-19, on March 22, 2020, the Corporation adopted a loan modification program to assist borrowers impacted by the virus. The program is available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offers principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers are eligible for an additional 90 days of payment deferrals if situations warrant a need for an extension. Interest will be deferred but will continue to accrue during the deferment period and the maturity date on amortizing loans will be extended by the number of months the payment was deferred. Consistent with issued regulatory guidance, modifications made under this program in response to COVID-19 will not be classified as TDRs. As of June 30, 2021, eight borrowers with an aggregate outstanding balance of $198 are in payment deferral status under this loan modification program that are not classified as TDRs.

On June 30, 2021 and 2020, the Corporation had $688 and $974, respectively, of loans classified as TDRs which are included in impaired loans above. On June 30, 2021 and 2020, the Corporation had $4 and $12, respectively, of specific reserves allocated to these loans. For the year ended June 30, 2021, there were no loans modified that were classified as a troubled debt restructuring.

During the fiscal year ended June 30, 2020, the terms of one loan was modified as a troubled debt restructuring by extending the maturity date. As of June 30, 2020, the Corporation had not committed to lend any additional funds to customers with outstanding loans that were classified as troubled debt restructurings. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2020:

Pre-Modification Post-Modification

Number of Outstanding Recorded Outstanding Recorded

Loans Investment Investment

1-4 Family residential:

The troubled debt restructuring described above did not result in any charge-off nor did it increase the allowance for loan losses during the twelve months ended June 30, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no loans classified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the twelve-month periods ended June 30, 2021 and 2020. 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, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed monthly. 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, based on currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which was discussed previously.

As of June 30, 2021, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

Special Not

Pass Mention Substandard Doubtful Rated

Commercial real estate:

Construction 10,478 — — — —

1-4 Family residential real estate:

As of June 30, 2020, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

Special Not

Pass Mention Substandard Doubtful Rated

Commercial real estate:

Construction 16,241 — — — —

1-4 Family residential real estate:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5—PREMISES AND EQUIPMENT

Major classifications of premises and equipment were as follows as of June 30:

Furniture, fixture and equipment 6,616 6,333

Accumulated depreciation and amortization (8,329 ) (7,575 )

Depreciation expense was $940 and $1,044 for the years ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, the Corporation leased real estate for seven office locations and various equipment under operating lease agreements. The lease agreements have maturity dates ranging from one year or less to May 31, 2035, including extension periods. Lease agreements for three locations have a lease term of 12 months or less and are therefore considered short-term leases. The weighted average remaining life of the lease term for the leases with a term over 12 months was 87.68 months as of June 30, 2021.

Rent expense for all the operating leases was $205 and $196 for the twelve-month periods ended June 30, 2021 and 2020, respectively. The right-of-use asset, included in premises and equipment, and the lease liability, included in other liabilities, were $1,177 and $473 as of June 30, 2021 and 2020, respectively.

Total estimated rental commitments for the operating leases with a term over 12 months were as follows as of June 30, 2021:

Period Ending June 30

NOTE 6 – GOODWILL AND ACQUIRED INTANGIBLE ASSETS

The change in goodwill was as follows:

Beginning of year $ 836 $ —

Acquired goodwill — 836

Ending balance as of June 30, $ 836 $ 836

The following table summarizes the Corporation’s acquired intangible assets as of June 30, 2021 and 2020.

Goodwill and the core deposit intangible assets resulted from the acquisition of Peoples that was completed on January 1, 2020. Goodwill represents the excess of the total purchase price paid for the acquisition over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the asset might be impaired. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. For the goodwill impairment analysis, the Corporation is the only reporting unit. Management performed a qualitative impairment test of the Corporation’s goodwill during the fourth quarter of the 2021 fiscal year. Based on this test, management concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the only intangible asset on the Corporation’s balance sheet with an indefinite life.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The core deposit intangible asset is amortized on a straight-line basis over ten years. The Corporation recorded intangible amortization expense of $27 in 2021 and $14 in 2020. The intangible amortization expense for the core deposit intangible asset recorded as of June 30, 2021 is expected to be $27 per year for each of the next five fiscal years and $94 thereafter. The core deposit intangible asset that will be recorded for the two branches that were purchased and closed on July 16, 2021 will impact these numbers.

NOTE 7—DEPOSITS

Interest-bearing deposits as of June 30, 2021 and 2020 were as follows:

Time:

Scheduled maturities of time deposits at June 30, 2021 were as follows:

Twelve Months Ending June 30

As of June 30, 2021, FHLB public unit deposit standby letters of credit of $7,000 were issued to collateralize public fund deposits.

NOTE 8—SHORT-TERM BORROWINGS

Short-term borrowings consisted of repurchase agreements and federal funds purchased. Information concerning all short-term borrowings at June 30, 2021 and 2020, maturing in less than one year is summarized as follows:

Average balance during the year 8,895 4,306

Average interest rate during the year 0.10 % 1.00 %

Weighted average rate, June 30 0.05 % 0.25 %

Securities sold under agreements to repurchase are utilized to facilitate the needs of our customers. Physical control is maintained for all securities pledged to secure repurchase agreements. Securities available-for-sale pledged for repurchase agreements as of June 30, 2021 and 2020 are presented in the following table:

Overnight and Continuous

U.S. government-sponsored entities and agencies pledged $ 767 $ 1,031

Residential mortgage-backed securities pledged 6,493 2,720

Commercial mortgage-backed securities 6,042 3,288

Total interest expense on short-term borrowings was $9 and $43 for the years ended June 30, 2021 and 2020, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9—FEDERAL HOME LOAN BANK ADVANCES

Consumers Bancorp Inc /Oh/ CBKM US Equity

CBKM · 10-K · period ended 2021-06-30

Item7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item7A— Quantitative and Qualitative Disclosures About Market Risk

Item8— Financial Statements and Supplementary Data

Consumers Bancorp Inc /Oh/ CBKM US Equity☆

CBKM · 10-K · period ended 2021-06-30

Item7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item7A— Quantitative and Qualitative Disclosures About Market Risk

Item8— Financial Statements and Supplementary Data

Consumers Bancorp Inc /Oh/ CBKM US Equity