CONSUMERS BANCORP: OH / Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-K)

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(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 local, regional and national economic conditions becoming less

more favorable than expected, resulting in, among other things, a high unemployment rate

rate, a deterioration in the credit quality of our assets or debtors that cannot

to fulfill their obligations;

? low and sustained market interest rates could lead to lower equity

interest margin and net interest income;

? changes in the level of non-productive assets and write-offs;

? the effect of changes in laws and regulations (including laws and regulations

concerning taxes, banking, securities and insurance) with which we must

comply;

? the fall in the value of assets impacting the underlying value of the collateral;

? unforeseen changes in our liquidity position, including, but not limited to

to, the evolution of the cost of liquidity and our ability to find alternatives

funding sources;

? the effects and modifications of commercial, monetary and fiscal policies and laws,

including the interest rate policies of the Federal Reserve Board;

? changes in consumption, borrowing and saving habits;

? changes in accounting methods, rules and interpretations that may

    result of COVID-19 or otherwise;
  ? our ability to attract and retain qualified employees;
  ? competitive pressures on product pricing and services;
  ? breaches of security or failures of our technology systems due to
    technological or other factors and cybersecurity threats; and
  ? changes in the reliability of our vendors, internal control systems or
    information systems.



The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties that we do not currently know or that we currently consider to be immaterial may also affect us negatively. If known or unknown risks and uncertainties turn into actual events, these 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.



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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.



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Comparison of operating results for the years ended June 30, 2021
and June 30, 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:



  ? net interest income increased by $5,099, or 23.7%, in fiscal year 2021,
    primarily as a result of a $151,376, or 25.7%, increase in average

interest-bearing assets, mainly due to organic growth in loans and

the addition of PPP loan receivables;

? a 850 $ a provision for loan losses was made during fiscal year 2021

year compared to $ 1,980 during fiscal year 2020. The upper provision

recorded in fiscal year 2020 is mainly the result of the drop in

the economic conditions triggered by the COVID-19 pandemic;

? total other income decreased by $ 237, or 5.0%, during fiscal year 2021, mainly

since the period of the previous year included $ 324 income recognized as a result of

proceeds received from a life insurance claim held by a bank and a $ 355

gain on sale of securities. These reductions were partially offset by a

$ 316, or 20.1%, an increase in debit card exchange revenues, and a 210 $, Where

38.7%, increase in capital gains on the sale of mortgage loans; and

? total other expenses increased by $ 1,593, or 9.0%, during fiscal year 2021 and

includes a full year of expenses associated with the three new offices

locations and additional staff gained as a result of the merger with Peoples

compared to only six months of these expenses being included in the previous fiscal year

period of one year. In addition, incentive accruals and mortgage commissions

    increased during the 2021 fiscal year.




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.



Net Interest Income Year ended June 30,            2021         2020
Net interest income                              $ 26,583     $ 21,484

Taxable equivalent Net interest adjustments 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.



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Average balance sheet and net interest margin


                                         2021                                       2020
                         Average                      Yield/        Average                      Yield/
                         Balance       Interest        Rate         Balance       Interest        Rate
Interest earning
assets:
Taxable securities      $  89,424     $    1,594          1.82 %   $  81,609     $    1,932          2.40 %
Nontaxable securities
(1)                        70,878          2,148          3.18        61,215          1,914          3.24
Loan receivables (1)      549,890         24,901          4.53       433,948         21,553          4.97
Federal bank and
other restricted
stocks                      2,472             76          3.07         1,960             75          3.83
Equity securities             202             17          8.42             -              -             -
Interest bearing
deposits and federal
funds sold                 27,831            166          0.60        10,589            157          1.48
Total interest
earning assets            740,697         28,902          3.93 %     589,321         25,631          4.37 %
Noninterest earning
assets                     31,283                                     32,180
Total assets            $ 771,980                                  $ 621,501
Interest bearing
liabilities:
Interest bearing
demand                  $ 112,801     $      149          0.13 %   $  86,418     $      428          0.50 %
Savings                   251,138            333          0.13       191,119            799          0.42
Time deposits             102,554          1,133          1.10       118,847          2,259          1.90
Short-term borrowings       8,895              9          0.10         4,306             43          1.00
FHLB advances              20,077            276          1.37        17,630            292          1.66

Total

bearing interest

liabilities               495,465          1,900          0.38 %     418,320          3,821          0.91 %
Noninterest-bearing
liabilities               209,262                                    

146,050

Total liabilities         704,727                                    

564,370

Shareholders' equity       67,253                                     

57 131

Total liabilities and
shareholders' equity    $ 771,980                                  $ 

621 501

Net interest income,
interest rate spread
(1)                                   $   27,002          3.55 %                 $   21,810          3.46 %
Net interest margin
(net interest as a
percent of average
interest earning
assets) (1)                                               3.67 %                                     3.72 %
Federal tax exemption
on non-taxable
securities and loans
included in interest
income                                $      419                                 $      326
Average interest
earning assets to
interest bearing
liabilities                                             149.50 %           
                       140.88 %



————————————————– ——————————

(1) Calculated on an equivalent fully taxable basis using a statutory federal tax rate of 21.0%.

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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



                                2021 Compared to 2020                     2020 Compared to 2019
                                Increase / (Decrease)                     Increase / (Decrease)
                                       Change        Change                      Change         Change
                          Total        due to        due to         Total        due to         due to
                         Change        Volume         Rate         Change        Volume          Rate
                                                         (In thousands)
Interest earning
assets:
Taxable securities      $    (338 )   $     162     $    (500 )   $    (260 )   $    (176 )   $      (84 )
Nontaxable securities
(1)                           234           269           (35 )          (4 )         (34 )           30
Loan receivables (2)        3,348         5,376        (2,028 )       4,952         4,845            107
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             -             -             -              -
Total interest and
dividend income             3,271         5,985        (2,714 )       4,741         4,757            (16 )
Interest bearing
liabilities:
Interest bearing
demand                       (279 )         103          (382 )        (119 )          28           (147 )
Savings deposits             (466 )         197          (663 )          93           127            (34 )
Time deposits              (1,126 )        (278 )        (848 )         726           505            221
Short-term borrowings         (34 )          23           (57 )          (8 )          10            (18 )
FHLB advances                 (16 )          37           (53 )         (27 )          21            (48 )
Total interest
expense                    (1,921 )          82        (2,003 )         665           691            (26 )
Net interest income     $   5,192     $   5,903     $    (711 )   $   4,076     $   4,066     $       10



————————————————– ——————————

(1) Non-taxable income is adjusted on a fully tax equivalent basis using a

Federal statutory tax rate of 21.0%.

(2) Unaccounted loan balances are included for rate calculation purposes.

and volume effects although interest on these balances has been excluded.




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.



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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 costs have decreased by $ 179, or 19.7% and professional and administrative fees decreased by $ 170, or 16.6%, in FY2021 compared to same period last year, mainly from FY2020, included system conversion and termination fees, investment banking fees , legal, accounting and audit costs 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:



                                                             Gross            Gross
June 30, 2021                              Amortized       Unrealized      Unrealized        Fair
Available-for-sale                            Cost           Gains           Losses          Value
Obligations of U.S. government-sponsored
entities and agencies                      $   14,746     $        301     $       (14 )   $  15,033
Obligations of state and political
subdivisions                                   73,013            3,561             (75 )      76,499
U.S. Government-sponsored
mortgage-backed securities - residential       90,065            1,136            (684 )      90,517
U.S. Government-sponsored
mortgage-backed securities - commercial         8,641              204               -         8,845
U.S. Government-sponsored collateralized
mortgage obligations - residential             16,302              129             (57 )      16,374
Other debt securities                             500                -      

(8) 492 Total titles available for sale $ 203,267 $ 5,331 $ (838) $ 207,760




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

(12) 9,985 Total titles available for sale $ 138,525 $ 5,411 $ (18) $ 143,918

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


                                                               Gross             Gross
June 30, 2021                               Amortized      Unrecognized       Unrecognized        Fair
Held-to-maturity                              Cost             Gains             Losses           Value
Obligations of state and political
subdivisions                               $     7,996     $         356     $            -     $   8,352




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



The following tables summarize the amounts and distribution of the Company’s securities held as well as the weighted average returns at June 30, 2021:


                                                Amortized          Fair           Average
Available-for-sale                                 Cost            Value           Yield
Obligations of government-sponsored
entities:
Over 3 months through 1 year                   $      2,501     $     2,534             2.67 %
Over 1 year through 5 years                           3,129           3,235             2.06
Over 5 years through 10 years                         9,116           9,264             1.63
Total obligations of government-sponsored
entities                                             14,746          15,033             1.90
Obligations of state and political
subdivisions:
3 Months or less                                        275             275             4.51
Over 3 months through 1 year                          2,866           2,903             3.38
Over 1 year through 5 years                           9,217           9,565             3.38
Over 5 years through 10 years                        10,679          11,069             3.01
Over 10 years                                        49,976          52,687             3.08
Total obligations of state and political
subdivisions                                         73,013          76,499             3.13
Mortgage-backed securities - residential:
Over 1 year through 5 years                          51,865          52,741             1.67
Over 5 years through 10 years                        38,200          37,776             1.42
Total mortgage-backed securities -
residential                                          90,065          90,517             1.56
Mortgage-backed securities - commercial:
Over 5 years through 10 years                         2,794           2,855             1.77
Over 10 years                                         5,847           5,990             2.09
Total mortgage-backed securities -
commercial                                            8,641           8,845             1.99
Collateralized mortgage obligations:
3 months or less                                         98              98             1.86
Over 3 months through 1 year                          1,932           1,966             1.52
Over 1 year through 5 years                           9,747           9,794             1.48
Over 5 years through 10 years                         1,527           1,518             1.39
Over 10 years                                         2,998           2,998             1.62
Total collateralized mortgage obligations            16,302          16,374             1.50
Other debt securities
Over 5 years through ten years                          500             492             4.62
Total available-for-sale securities            $    203,267     $   207,760             2.17 %




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                                                    Amortized       Fair        Average
Held-to-maturity                                      Cost          Value        Yield
Obligations of state and political subdivisions:
Over 1 year through 5 years                        $       294     $   309          2.89 %
Over 5 years through 10 years                            5,367       5,547          1.86
Over 10 years                                            2,335       2,496          3.13
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:



                                        2021          2020
Commercial                            $ 109,922     $ 157,029
Commercial real estate:
Construction                             10,462        16,190
Other                                   269,157       228,552
1-4 Family residential real estate:
Owner occupied                          119,046        91,006
Non-owner occupied                       19,114        19,337
Construction                              9,156         9,418
Consumer loans                           29,570        21,329
Total loans                           $ 566,427     $ 542,861



The following table presents the main classifications of loans, net of commissions and deferred charges, which are based on the contractual terms of principal repayment, which are due in the periods indicated from June 30, 2021:


                                                                       Maturing
                                                     After one      After five
                                                        year          years
                                        Within       but within     But within          After
                                                                     Fifteen
                                       one year      five years       years         Fifteen years        Total
Commercial                            $   13,458     $   66,898     $   28,031     $         1,535     $ 109,922
Commercial real estate:
Construction                                 209          7,983              -               2,270        10,462
Other                                     11,610         14,757        106,502             136,288       269,157
1-4 Family residential real estate:
Owner occupied                             1,202          5,482         32,906              79,456       119,046
Non-owner occupied                         1,087          1,392         11,545               5,090        19,114
Construction                               1,511            335              -               7,310         9,156
Consumer loans                               726         18,078         10,570                 196        29,570
Total loans                           $   29,803     $  114,925     $  189,554     $       232,145     $ 566,427




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               Variable
                                                        Interest Rates       Interest Rates
Total 1-4 family residential real estate
construction, commercial and commercial real estate
loans due after one year                               $        237,875     $        134,034




                                       17
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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 unrecognized loans, non-performing assets, impaired and restructured loans and associated ratios for the years ended.
June 30th:



                                                   2021         2020
Non-accrual loans                                $  1,771     $  1,185
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
Impaired loans                                   $  1,954     $  1,923
Accruing restructured loans                      $    183     $    738
Non-accrual to total loans                           0.31 %       0.22 %
ALLL to non-accrual loans                          365.39 %     479.16 %




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 Company’s experience with loan losses and provides a breakdown of write-off, collection and other activities for the years ended. June 30th:



                                                         2021        2020

Provision for loan losses at the start of the year $ 5,678 $ 3,788
Write-off loans: Commercial

                                                   22           -
1-4 Family residential real estate                            4           6
Consumer loans                                              122         140
Total charge offs                                           148         146

Recoveries:

Commercial real estate                                        4           4
1-4 Family residential real estate                            3           4
Consumer loans                                               84          48
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 %




                                       18
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The following table shows the breakdown of the allowance for loan losses allocated by type of loan and the related ratios:


                                                  Allocation of the Allowance for Loan Losses
                                                         % of Loan                            % of Loan
                                       Allowance          Type to           Allowance          Type to
                                        Amount          Total Loans           Amount         Total Loans
                                              June 30, 2021                        June 30, 2020
Commercial                            $       904               19.4 %     $        947              28.9 %
Commercial real estate loans                3,949               49.4              3,623              45.1
1-4 Family residential real estate          1,307               26.0                989              22.1
Consumer loans                                311                5.2                119               3.9
Total                                 $     6,471              100.0 %     $      5,678             100.0 %




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.



Here is a table of the average deposit amounts and average rates paid on each category for the periods included:


                                                   Years Ended June 30,
                                               2021                     2020
                                        Amount        Rate       Amount        Rate

Demand deposit not bearing interest $ 203,181$ 140,826

Interest-bearing sight deposit 112,801 0.13% 86,418

     0.50 %
Savings                                  251,138       0.13       191,119   

0.42

Certificates and other term deposits 102,554 1.10 118,847

    1.90
Total                                  $ 669,674       0.24 %   $ 537,210       0.65 %



The following table summarizes the term deposits issued for amounts of $ 100 or more from June 30, 2021 by time remaining until expiry:



Maturing in:
Under 3 months        $  8,744
Over 3 to 6 months       7,390
Over 6 to 12 months     11,699
Over 12 months          15,616
Total                 $ 43,449




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.



                                       19
--------------------------------------------------------------------------------


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 with varying maturities. The majority of the Bank’s securities are held in bonds of Government of the United States-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.



                                       20
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Impact of inflation and price changes



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.



                                       21
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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.



                       Note
                    Reference        2022         2023         2024         2025         2026        Thereafter        Total
Certificates of
deposit                      7     $ 56,866     $ 21,554     $  2,151     $  3,579     $  1,415     $      1,974     $  87,539
Short-term
borrowings                   8       12,203            -            -            -            -                -        12,203
Federal Home Loan
advances                     9        1,799           79        6,567        5,556        4,049                -        18,050
Salary
continuation plan           10          106          146          142          141          141            2,464         3,140
Operating leases             5          167          167          146          114          685                -         1,279
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 provisions



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.

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