PART I

Item 1—Business 

(Dollars in thousands, except per share data)

General

Consumers Bancorp, Inc. (Corporation) is a bank holding company as defined under the Bank Holding Company Act of 1956, as amended (BHCA), and is a registered bank holding company under that act and was incorporated under the laws of the State of Ohio in 1994. In February 1995, the Corporation acquired all the issued and outstanding capital stock of Consumers National Bank (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.

Consumers National Bank is a community-oriented financial institution that offers a wide range of commercial and consumer loan and deposit products, as well as mortgage, financial planning and investment services to individuals, farmers and small and medium sized businesses in our markets. Since 1965, the Bank’s main office has been serving the Minerva, Ohio, and surrounding areas from its location at 614 East Lincoln Way, Minerva, Ohio. The Bank seeks to be the provider of choice for financial solutions to customers who value exceptional personalized service, local decision making, and modern banking technology. 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, and Wayne andcounties in Ohio. Its market includes these counties as well as the fourteen contiguous counties in northeast Ohio, western Pennsylvania, and northern West Virginia. As of June 30, 2021,2022, the Bank had 1921 full-service branch locations and one loan production office. The Bank also invests in securities consisting primarily of obligations of U.S. government-sponsored entities, municipal obligations and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

On January 1, 2020,July 16, 2021, the Corporation completed theits acquisition by merger(branch acquisition) of Peoples Bancorp of Mt. Pleasant, Inc. (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 centerstwo branches located in Mt. Pleasant, Adena,Calcutta and Dillonvale,Wellsville, Ohio with an estimated fair value of $60,851, as of the date of the acquisition.from CFBank, National Association. In connection with the branch acquisition, the Corporation assumed $104,538 in branch deposits for a deposit premium of 1.75%. In addition, the Corporation acquired $15,602 of subordinated debt securities issued 269,920 sharesby unrelated financial institutions, $19,943 of common stockloans, and paid $5,128 in cash to the former shareholdersrecorded goodwill 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.$1,616. This transaction qualified as a business combination.

Supervision and Regulation

The Corporation and the Bank are subject to regulation by the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Office of the Comptroller of the Currency (OCC) and other federal and state regulators.  The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Earnings and dividends of the Corporation are affected by state and federal laws and regulations and by policies of various regulatory authorities. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of the Corporation and the Bank. The following describes selected federal and state statutory and regulatory provisions that have, or could have, a material impact on the Corporation. The following discussion of supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed.

Regulation of the Corporation

The Bank Holding Company Act: As a bank holding company, the Corporation is subject to regulation under the BHCA, and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require.

The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, subject to certain exceptions, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice. The Federal Reserve Board has extensive enforcement authority over bank holding companies for violations of laws and regulations and unsafe or unsound practices.

Privacy Provisions of Gramm-Leach-Bliley Act: The Gramm-Leach-Bliley Act of 1999 contains extensive provisions on a customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must provide to its customers the institution’s policies and procedures regarding the handling of customers’ non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed, and the customer is given the opportunity to opt out of such disclosure. The Corporation and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.

Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the areas of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Corporation’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that the Corporation’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or omit to state a material fact.

Regulation of the Bank

As a national bank, the Bank is subject to regulation, supervision, and examination by the OCC and by the Federal Deposit Insurance Corporation (FDIC). These examinations are designed primarily for the protection of the depositors of the Bank.

Dividend Restrictions: Dividends from the Bank are the primary source of funds for payment of dividends to the Corporation’s shareholders. There are statutory limits, however, on the amount of dividends the Bank can pay without regulatory approval. Under regulations promulgated by the OCC, the Bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the OCC. 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.

FDIC: The FDIC is an independent federal agency, which insures the deposits of federally insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of the Bank are subject to the deposit insurance assessments of the Deposit Insurance Fund of the FDIC. Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institution varies according to regulatory capital levels of the institution and other factors such as supervisory evaluations.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.

The Coronavirus Aid, Relief, and Economic Security Act of 2020: In response to the novel COVID-19 pandemic (COVID-19), the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the CARES Act), was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Corporation and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve Board and other federal banking agencies, including those with direct supervisory jurisdiction over the Corporation. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. The Corporation continues to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to COVID-19.

The CARES Act amended the loan program of the U.S. Small Business Administration (SBA), in which the Bank participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (PPP), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of COVID-19, Congress enacted additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19. In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress caused by the pandemic. This legislation included provisions for additional stimulus payments to individuals and their dependents, the extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. As a participating lender in the PPP, the Corporation continues to monitor legislative, regulatory, and supervisory developments related thereto.

Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered short-term. Recently, Section 541 of the Consolidated Appropriations Act, 2021, extended this relief to the earlier of 60 days after the end of the national emergency proclamation or January 1, 2022. The Corporation implemented a short-term modification program that offersoffered principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Borrowers arewere eligible for an additional 90 days of payment deferrals if situations warrantwarranted a need for an extension. Interest will bewas deferred but will continuecontinued to accrue during the deferment period and the maturity date on amortizing loans will bewas 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 willwere not be classified as troubled debt restructurings.

Banks and bank holding companies have been particularly impacted by the COVID-19 pandemic as a result of disruption and volatility in the global markets. The above mentioned and other significant fiscal stimulus and monetary policy actions of the U.S. government and Federal Reserve have been contributing factors to an inflationary surge during most of 2021 and into 2022. Management continues to monitor the potential development of additional legislative, fiscal, or monetary policy developments taken by the U.S. government.

Current Expected Credit Loss Model: In December 2018, the OCC, the Federal Reserve Board, and the FDIC issued a final rule to address regulatory treatment of credit loss allowances under the current expected credit loss (CECL) model. The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day one adverse effects on regulatory capital that may result from the adoption of the CECL model. The Bank is required to adopt the CECL model by July 1, 2023 since it’s a smaller reporting company.

Risk-Based Capital Requirements: The Federal Reserve Board and the OCC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and national banks, respectively. The Corporation meets the definition of a Small Bank Holding Company and, therefore, was exempt from maintaining consolidated regulatory capital ratios. Instead, regulatory capital ratios only apply at the subsidiary bank level. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the capital base. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. In addition, failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of “brokered deposits.”

Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (CBLR) requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided by average total consolidated assets. In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (ii) have less than $10 billion in average total consolidated assets, (iii) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (iv) not be an advanced approaches banking organization. A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be "well capitalized" under the prompt corrective action rules. The Bank has not elected to be subject to the CBLR.

Unless a community bank qualifies for, and elects to comply with the CBLR beginning on January 1, 2020, national banks are required to maintain the Basel III minimum levels of regulatory capital. The Basel III capital requirements for U.S. banking organizations became effective on January 1, 2015 and were fully phased in by January 1, 2019. Under Basel III, the Bank is required to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a Tier 1 leverage ratio of 4%. Basel III also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which effectively resulted in a minimum common equity Tier 1 capital ratio of 7%, a Tier 1 capital ratio of 8.5%, a total capital ratio of 10.5% and a Tier 1 leverage ratio of 6.5%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a common equity Tier 1 ratio to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC.  These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The OCC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios. As of June 30, 2021,2022, the Bank exceeded minimum regulatory capital requirements to be considered well-capitalized.  

Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) created many new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency,established the Consumer Financial Protection Bureau (CFPB), which regulates consumer financial products and giving it responsibility for implementing, examiningservices and enforcing compliance with federal consumer protection laws.certain financial services providers. The CFPB has examinationis authorized to prevent unfair, deceptive and abusive acts or practices and seeks to ensure consistent enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. Although the CFPB does notof laws so that consumers have direct supervisory authority over banks with less than $10 billion in assets,access to fair, transparent and competitive markets for consumer financial products and services. Since it was established the CFPB has broadexercised extensive rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests. The Corporation is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with these regulatory requirements and assess their potential impact on our business.interpretive authority.

Interstate Banking and Branching: The Interstate Banking and Branch Efficiency Act of 1995 has eased restrictions on interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision, and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching.

Community Reinvestment Act: The Community Reinvestment Act (CRA) requires depository institutions to assist in meeting the credit needs of their market areas, including low- and moderate-income areas, consistent with safe and sound banking practices. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance and assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution. The Bank’s most recent CRA rating is satisfactory.

USA PATRIOT Act: In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act). The Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial services companies implement additional policies and procedures with respect to additional measures designed to address any or all of the following matters: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.

Cybersecurity: In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack.

In the ordinary course of business, electronic communications and information systems are relied upon to conduct operations, to deliver services to customers and to store sensitive data. The Corporation employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, increasing volume of attacks, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by the Corporation and its customers.

Government Monetary Policy: The earnings of the Corporation are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. Federal Reserve Board monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including the Bank, and are expected to continue to do so in the future.

Employees

As of June 30, 2021,2022, the Bank employed 156171 full-time and 2016 part-time employees. None of the employees are represented by a collective bargaining group. Management considers its relations with employees to be good.

Available Information 

The Corporation files annual, quarterly, and current reports, proxy statements, and other information with the SEC. These filings are available to the public over the Internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any document that the Corporation files at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.

The Corporation’s reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are available, free of charge, on our website (www.consumers.bank) as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The Corporation’s Code of Ethics Policy, which is applicable to all directors, officers and employees of the Corporation, and its Code of Ethics for Principal Financial Officers, which is applicable to the principal executive officer and the principal financial officer, are each available on the Investor Relations section under Corporate Governance of the Corporation’s website. The Corporation intends to post amendments to or waivers from either of its Code of Ethics Policies on its website. A printed copy of any of these documents will be provided to any requesting shareholder.

Item 1A—Risk Factors

Not applicable for Smaller Reporting Companies.

Item 1B—Unresolved Staff Comments

None.

Item 2—Properties

The Bank operates nineteen21 full-service banking facilities and one loan production office (LPO) as noted below:

The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. In management’s opinion, all properties owned and operated by the Bank are adequately insured. 

Item 3—Legal Proceedings  

The Corporation is not a party to any pending material legal or administrative proceedings, other than ordinary routine litigation incidental to the business of the Corporation. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest therein that is adverse to the Corporation. No routine litigation in which the Corporation is involved is expected to have a material adverse impact on the financial position or results of operations of the Corporation.

Item 4—Mine Safety Disclosures 

None.

PART II

Item 5—Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities  

The Corporation had 3,028,1003,056,674 common shares outstanding on June 30, 20212022, with 752735 shareholders of record and an estimated 723756 additional beneficial holders whose stock was held in nominee name. Attention is directed to Item 12 in this Form 10-K for information regarding the Corporation’s equity incentive plans, which information is incorporated herein by reference.

The common shares of Consumers Bancorp, Inc. are quoted on the OTCQX® Best Market under the symbol CBKM. The following quoted market prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions and may not represent actual transactions. The market prices represent highs and lows reported during the applicable quarterly period.

Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Corporation’s common shares, these prices may not reflect the prices at which the common shares would trade in an active market.

The Corporation’s management is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent on the Corporation’s future earnings, capital requirements and financial condition. The Corporation’s principal source of funds for dividend payment is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. 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. See Note 1 and Note 13 to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for dividend restrictions.

There were no repurchases of the Corporation’s securities during the 2021 fiscal year.year 2022.

Item 7—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, 20212022 and 2020.2021. 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 risksRisks and uncertainties that could cause actual results for future periods to differ materially from those anticipated or projected include, but are not limited to:

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, and Wayne andcounties in Ohio. Its market includes these counties as well as the fourteen contiguous counties in northeast Ohio, western Pennsylvania, and northern 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 July 16, 2021, the Corporation completed the branch acquisition and assumed $104,538 of branch deposits for a 1.75% deposit premium and purchased $15,602 in subordinated debt securities issued by unrelated financial institutions and $19,943 in loans. In relation to the branch acquisition, the Corporation recorded goodwill of $1,616. This transaction qualified as a business combination.

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 pursuingpursued multiple avenues to assist customers during these uncertain times. For commercial borrowers, the CARES Act includesincluded 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, thepayroll. The Bank originated a total of $68,788$113,367 of PPP loans during the first and $6,107 remained outstanding assecond rounds of assistance. As of June 30, 2021. Under the second round2022, there were $179 of the PPP program, a total of $44,579 of loans were funded and outstanding as of June 30, 2021.outstanding.

Additionally, on March 22, 2020 the Corporation adopted a loan modification program to assist borrowers impacted by COVID-19. The program iswas available to most borrowers whose loan was not past due on March 22, 2020, the date this loan modification program was adopted. The program offersoffered principal and interest payment deferrals for up to 90 days or interest only payments for up to 90 days. Interest will bewas deferred but will continuecontinued to accrue during the deferment period and the maturity date on amortizing loans will bewas 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 willwere not be classified as troubled debt restructurings. As of June 30, 2021, eight borrowers with an outstanding balance of $198 are2022, there were no loans in payment deferral status under this loan modification program. This modification program ended as of April 26, 2022.

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 June 30, 20212022 and June 30, 20202021

Net Income. Net income was $11,192 for fiscal year 2022 compared with $8,988 for fiscal year 2021 compared with $5,527 for fiscal year 2020.2021. The following key factors summarize our results of operations for the year ended June 30, 20212022 compared with the same prior year period:

Return on average equity and return on average assets were 13.36%16.43% and 1.16%1.17%, respectively, for the 2021 fiscal year-to-date periodyear 2022 compared with 9.67%13.36% and 0.89%1.16%, 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.balances and average securities include unrealized gains and losses on securities available for sale, while yields are based on average amortized cost.

FTE net interest income for the 2021 fiscal year 2022 was $27,002,$33,259, an increase of $5,192$6,257 or 23.8%23.2%, from $21,810$27,002 in the 2020 fiscal year.year 2021. The Corporation’s tax equivalent net interest margin was 3.60% for fiscal year 2022 and 3.67% for the year ended June 30, 2021 and was 3.72% for the fiscal year ended 2020.2021. FTE interest income for the 2021 fiscal year 2022 was $28,902,$34,673, an increase of $3,271,$5,771, or 12.8%20.0%, from the 2020 fiscal year such change2021, primarily due to a result of a $151,376,$179,192, or 25.7%24.2%, increase in average interest-earning assets from the 2020 fiscal year.year 2021. The growth in average interest-earning assets was primarily a result of organic loan growtha $112,149 increase in the average balance of available-for-sale securities and the addition of PPPa $46,960, or 8.5%, increase in average loans. Interest income was positively impacted byin both the accretion of origination fees from the PPP loanscurrent 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 inprior year periods by the accretion of origination fees from PPP loans as thesethat were forgiven during those periods. The PPP loans are forgiven, combinedhad an average balance of $17,692 for fiscal year 2022, and during this same period, $2,612 of interest and fee income was recognized on the PPP loans. This compares with an average balance of $63,761 for fiscal year 2021, and the significant decline inrecognition of $2,549 of interest rates, will continue to impact the yield on interest-earning assets and could ultimately result in a decline in interest income.fee income during fiscal year 2021. The Corporation’s yield on average interest-earning assets was 3.93%3.75% for the 20212022 fiscal year compared with 4.37%3.93% for the same period last year.

Interest expense for the 2021 fiscal year 2022 was $1,900,$1,414, a decrease of $1,921,$486, or 50.3%25.6%, from the 2020 fiscal year.year 2021. The Corporation’s cost of funds was 0.38%0.22% for the 2021 fiscal year 2022 compared with 0.91%0.38% for the same prior year period. The decline in short termhistorically low market interest rates that were in place throughout much of fiscal year 2022 had an impact on the rates paid on all interest-bearing deposit products and Federal Home Loan Bank (FHLB) advances.products. The cost of funds is expected to increase due to the recent increases in short-term market rates.

Average Balance Sheet and Net Interest Margin

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

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. The amount of the provision is affected by loan charge-offs, recoveries and changes in specific and general allocations required for the allowance for loan losses. Management considers a number of factors that impact the provision for loan losses, such as 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

A provision for loan loss expense of $850$735 was recorded compared with $1,980 in fiscal year 2020. The provision for loan loss expense was higher2022 compared with $850 in fiscal year 20202021. The loan loss provision expense recorded in fiscal year 2022 was primarily due to the deterioration inorganic growth within the economic environment as a result of the impact of COVID-19 and higher loan balances from organic loan growth.

portfolio. For the 2021 fiscal year 2022, net charge offs of $57$46 were recorded compared with $90$57 for the same period last year. The allowance for loan losses as a percentage of loans was 1.17% at June 30, 2022 and 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.2021. As of June 30, 2020,2021, the allowance for loan losses as a percentage of total loans, excluding the PPP loans, acquiredwas 1.25%. The decline in the Peoples acquisition,allowance for loan losses as a percentage of total loans excluding the PPP loans was 1.15%.due to the improvement in economic conditions that had been adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations (including booster shots) have created optimism in the community, but some uncertainty remains due to the continued concern over increased infection rates from various variants of COVID-19.

Non-performing loans were $1,771$440 as of June 30, 20212022 and represented 0.31%0.07% of total loans. This compared with $1,226,$1,771, or 0.23%0.31% of total loans at June 30, 2020.2021. Non-performing loans declined primarily due to the full payoff of three loans that had a balance of $949 as of June 30, 2021 that were on non-accrual for an extended period. 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 decreasedincreased by $237,$269, or 5.0%6.0%, to $4,466$4,735 for the 2021 fiscal year. Other incomeyear 2022. Service charges on deposit accounts increased by $240, or 19.7% primarily due to an increase in the number of overdraft charges as overdrafts increased from the lows that were experienced during the pandemic as many eligible individuals received economic stimulus payments and consumers changed their spending habits in 2020 fiscal year includes $324and 2021. Effective March 1, 2022, the Bank made a small reduction to the non-sufficient funds/overdraft fee and eliminated many internal account transfer fees. The Bank may make future reductions to the non-sufficient funds/overdraft fee in response to the industry wide trend of income recognizedreducing overdraft fees as large banks have announced a reduction in these types of fees in response to regulatory pressure. 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 $14service charges on deposit accounts may be negatively impacted in fiscal year 2021.

future periods. Debit card interchange income increased by $316,$178, or 20.1%9.4%, in 2021fiscal year 2022 to $1,891$2,069 primarily as a result of increased debit card usage and an increase in the number of cards issued. Gain on sale of mortgage loans increasedMortgage banking activity decreased by $210,$121, or 38.7%16.1%, in 2021 primarily asfiscal year 2022 because of a result of an increasedecrease in volume due to refinances asthe increase in 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.rates.

Other Expenses. Total other expenses were $23,215 for the year ended June 30, 2022; an increase of $3,854, or 19.9%, from $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, 2020.2021.

Salaries and employee benefit expenses increased by $1,270,$2,408, or 13.3%22.2%, during the 2021 fiscal year 2022 primarily sincedue to the 2021 fiscal year includes a full yearaddition of expenses associated with thestaff at three new office locations, the addition of lending staff, and additional staff gained as a result of the merger with Peoples compared with only six months of these expense being includedincreases in the prior year period. In addition, incentive accruals and mortgage commissions also increased during the 2021 fiscal year.health care costs.

Occupancy and equipment expenses increased by $122,$440, or 4.9%17.0%, during the 2021 fiscal year 2022 from the same period last year primarily due to investments in new technology and computer equipment as a result ofwell as 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.locations.

Data processing expenses decreasedincreased by $179,$67, or 19.7%9.2% 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,$278, or 184.9%92.1%, for the 2021 fiscal year since2022 from the Small Bank Assessment Credits were appliedsame prior year period due to the FDIC insurance invoices duringgrowth in the 2020 fiscal year.organization.

Debit card processing expenses increased by $140,$75, or 17.3%7.9% 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,$178, or 20.1%9.4% from the prior year.

Income Tax Expense. Income tax expense totaled $1,850$2,339 and $912$1,850 and the effective tax rates were 17.1%17.3% and 14.2%17.1% for the fiscal years ended June 30, 20212022 and 2020,2021, respectively. Income tax expense was calculated utilizing a statutory federal income tax rate of 21.0% in the 2020fiscal years 2022 and 2021 fiscal years.2021. 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.earnings.

Financial Condition

Total assets at June 30, 20212022 were $833,804$977,313 compared with $740,820$833,804 at June 30, 2020,2021, an increase of $92,984,$143,509, or 12.6%17.2%. The growth in total assets is mainly attributable to an increase of $68,297,$88,465, or 46.3%41.0%, in available-for-sale and held-to-maturity securities which wasand a $45,416, or 8.0%, increase in total loans. These increases were primarily funded by a $93,494,$159,713, or 14.8%22.0%, increase in total deposits.deposits and include $104,538 of deposits acquired as part of the branch acquisition. Total shareholders’ equity declined to $53,970 as of June 30, 2022, from $69,900 as of June 30, 2021. The primary reason for the decline in shareholders’ equity was a $25,656 net decrease in accumulated other comprehensive income due to a shift in unrealized gains on the mark-to-market of available-for-sale securities to a net unrealized loss.

Securities. Total securities were $215,756$304,221 at June 30, 2021,2022, of which $207,760$296,347 were classified as available-for-sale and $7,996$7,874 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, 20212022 and 20202021 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income or loss:

The following tables summarize the amortized cost and fair value of held-to-maturity securities at June 30, 20212022 and 20202021 and the corresponding gross unrecognized gains and losses:

The following tables summarize the amounts and distribution of the Corporation’s securities held and the weighted average yields as of June 30, 2021:2022:  

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$45,416 to $611,843 at June 30, 2022 compared to $566,427 at June 30, 2021 compared to $542,861 at2021. Excluding PPP and acquired loan balances, core organic loan growth was $81,194, or 15.7% for the fiscal year ended June 30, 2020.2022. Commercial loans includeincluded PPP loans of $50,686$179 and $66,606$50,686 as of June 30, 2022 and 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.respectively. Consumer loans increased by $8,241,$15,251, or 38.6%51.6%, primarily as a result of the expansion of indirect auto lending and an increase in direct auto loans as a result ofdue to successful marketing campaigns. Major classifications of loans, net of deferred loan fees and costs, were as follows as of June 30:

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, 2021:2022: 

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, 2021:2022:

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, 2021,2022, impaired loans totaled $1,954,$473, of which $1,771$431 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:

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: