Executive Summary / Key Takeaways

• Consumers Bancorp, Inc. (CBKM) operates as a community-focused regional bank in Ohio, leveraging a local branch network and specialized lending expertise, particularly in agriculture, as key competitive advantages against larger, more technologically advanced rivals.
• Recent financial performance shows a mixed picture: while net interest income grew due to higher asset yields and easing deposit cost pressures, net income saw a slight decline year-over-year for both the quarter and nine-month period ending March 31, 2025, impacted by increased provision for credit losses and higher operating expenses.
• Asset quality metrics warrant close attention, with a notable increase in loans classified as special mention, primarily linked to a single commercial relationship, although management indicates mitigating factors are improving the situation. Non-performing loans also saw a modest increase.
• The bank demonstrated solid deposit growth, increasing total deposits by an annualized 7.2% since June 30, 2024, which, combined with available borrowing capacity and unencumbered securities, supports a sound liquidity position.
• Despite lacking explicit forward-looking quantitative guidance beyond expectations for easing funding costs and potential increases in a specific loan type, the investment thesis hinges on CBKM's ability to capitalize on its local market strengths and manage credit quality effectively in the current economic environment.

The Bedrock of Community Banking: Consumers Bancorp's Enduring Model

Founded in 1965, Consumers Bancorp, Inc. (CBKM) has built its foundation on a traditional community banking model centered in Minerva, Ohio. As a bank holding company, its primary function is to oversee Consumers National Bank, which serves a defined market area spanning several counties in Ohio and bordering regions of Pennsylvania and West Virginia. The core business remains straightforward: attract deposits from local businesses and individuals and deploy those funds into commercial, mortgage, and consumer loans within the community, supplemented by investments in a diversified securities portfolio.

This model inherently positions CBKM as a local specialist. Its network of 19 branches fosters strong customer relationships, a critical element in deposit gathering and understanding local credit needs. This local network effect provides a tangible competitive advantage, contributing to customer loyalty and potentially higher recurring revenue from repeat business compared to institutions lacking such deep community ties. Furthermore, CBKM has cultivated specialized lending expertise, notably in agricultural loans for farmers, a niche where its local knowledge and relationships provide a distinct edge.

However, operating at a regional scale presents inherent challenges when competing with larger financial institutions. While CBKM's local focus is a strength, its smaller operational footprint can lead to higher per-unit operating costs compared to national or super-regional banks that benefit from greater economies of scale. This is particularly evident in areas like technology adoption and efficiency, where larger players can invest more heavily, potentially leading to faster digital transaction processing and lower operational costs per customer interaction.

CBKM's strategic initiatives reflect a blend of traditional banking and targeted expansion. The investment in an affordable housing tax credit partnership in April 2023 aligns with Community Reinvestment Act goals while seeking a satisfactory return. More recently, the formation of CNB Investment Co. in November 2024, a wholly-owned subsidiary focused on investing in municipal securities, indicates a strategic move to optimize the securities portfolio. These initiatives, while not fundamentally altering the core business, represent tactical adjustments within the established banking framework.

In the competitive landscape, CBKM faces a diverse set of rivals. Direct competitors like Franklin Financial Services (FRAF), Regions Financial (RF), BOK Financial (BOKF), and Popular Inc (BPOP) offer similar product suites but often operate at different scales and with varying strategic emphases. While CBKM competes directly for commercial, mortgage, and consumer loans and deposits, its competitive positioning relies heavily on its local presence and personalized service, particularly in rural areas where larger banks may have less penetration. This contrasts with competitors like RF, which leverage significant technological investments and broader geographic reach. CBKM's regulatory licenses act as a barrier to entry for new players, providing a degree of protection for its established market share and potentially enabling better cost control in compliance compared to de novo institutions.

Technologically, the information does not detail specific proprietary technologies that provide a unique, quantifiable advantage for CBKM in the way, for example, a specialized manufacturing process might for an industrial company. The discussion of technology in the competitive context highlights that larger rivals may possess more advanced digital banking tools, leading to greater efficiency in areas like transaction processing. CBKM's operational details mention investments in new software and increases in software licensing fees, suggesting ongoing efforts to enhance its technological capabilities, but specific performance metrics or comparative advantages derived from these investments are not quantified. The increase in debit card processing expenses, linked to higher customer usage and card issuance, points to the importance of digital transaction capabilities in the current operational landscape, but doesn't highlight a technological differentiator for CBKM itself. Therefore, while technology is a factor in the competitive environment, it appears to be an area where CBKM is investing to keep pace, rather than possessing a distinct technological moat.

Performance Under Pressure: Analyzing Recent Financial Trends

Examining CBKM's financial performance through the lens of the nine months ended March 31, 2025, reveals the impact of the prevailing interest rate environment and specific operational factors. Net income for the period was $6.374 million, a slight decrease from $6.477 million in the comparable prior year period. This translated to basic and diluted earnings per share of $2.04, down from $2.09. The third quarter of fiscal year 2025 showed a similar trend, with net income of $1.851 million ($0.59 per share) compared to $2.052 million ($0.66 per share) in the prior year quarter.

The primary driver behind the top-line performance was the net interest income. For the nine months ended March 31, 2025, tax-equivalent net interest income increased by $1.087 million, or 4.6%, reaching $24.834 million. This improvement stemmed from a 27-basis point increase in the yield on average interest-earning assets (to 4.85%) and a 3.7% increase in average interest-earning assets ($37.089 million). The higher asset yields reflect the impact of rising market interest rates on new and repricing loans and securities. The third quarter saw an even more pronounced increase in tax-equivalent net interest income, up 11.8% to $8.656 million, benefiting from a 29-basis point yield increase and a 10-basis point reduction in the cost of interest-bearing liabilities.

However, the benefit from higher asset yields was partially offset by increased interest expense over the nine-month period, which rose by $2.011 million. This increase was primarily attributed to a shift of customer funds towards higher-yielding deposit products like time and money market accounts, driven by increased competition for deposits. While competitive pressures on deposit pricing have reportedly eased somewhat following recent discount rate adjustments, the higher cost of funds for the nine-month period impacted overall profitability compared to the prior year.

Noninterest income provided a positive contribution, increasing by $415 thousand, or 11.5%, for the first nine months of fiscal year 2025. Excluding a securities loss in the prior year period, the increase was 9.1%. Key drivers included a 9.0% increase in debit card interchange income, reflecting higher customer usage, an 38.9% increase in bank owned life insurance income due to the purchase of an additional policy, and a 3.9% increase in service charges on deposit accounts, boosted by new commercial customers. Mortgage banking activity also saw a modest gain.

Operating expenses, however, rose significantly, increasing by $1.415 million, or 7.4%, over the nine-month period. This was primarily driven by higher salaries and employee benefits (up 7.2%), reflecting merit increases and higher incentive accruals, increased occupancy and equipment costs (up 7.0%) due to software investments and building maintenance, higher professional and director fees (up 17.2%), and increased debit card processing expenses (up 12.4%). These expense increases outpaced revenue growth, contributing to the slight decline in net income.

Profitability ratios reflected these trends. The annualized return on average assets (ROAA) for the nine months ended March 31, 2025, was 0.77%, down from 0.81% in the prior year period. Similarly, the annualized return on average equity (ROAE) decreased to 11.98% from 15.33%. While still indicating profitable operations, the compression in these metrics highlights the challenges of managing costs and funding in the current environment.

Balance Sheet Dynamics and the Credit Quality Watch

CBKM's balance sheet expanded modestly, with total assets growing by $36.680 million, or an annualized 4.5%, from June 30, 2024, to $1.13 billion at March 31, 2025. This growth was primarily funded by a significant increase in deposits.

Total deposits rose by $52.529 million, an annualized rate of 7.2%, reaching $1.03 billion. This growth demonstrates the bank's continued ability to attract funding within its market area. The deposit mix includes a substantial portion of noninterest-bearing demand deposits ($237.557 million) and interest-bearing demand and savings accounts ($165.156 million and $366.665 million, respectively), which generally represent lower-cost funding sources. Time deposits totaled $256.131 million. The estimated percentage of uninsured deposits (excluding collateralized public funds) stood at 17.4% as of March 31, 2025, a metric closely watched by investors for potential liquidity risk. Jumbo time deposits ($250k+) accounted for $63.013 million, primarily from local sources. The bank's limited reliance on brokered deposits ($2.010 million) suggests a stable, relationship-based funding model.

Loan growth was more subdued compared to deposits, increasing by $8.715 million, or an annualized 1.5%, to $767.829 million. However, organic loan growth, excluding the paydown of a third-party residential mortgage warehouse line-of-credit, was stronger at $34.874 million, an annualized 6.3%. This organic growth was concentrated in the consumer ($24.553 million increase) and non-owner occupied commercial real estate ($12.310 million increase) portfolios. The mortgage warehouse line, which had a balance of $26.159 million at June 30, 2024, was paid down to zero, reflecting lower mortgage volumes due to higher rates and funding needs of the lead bank. Management anticipates this balance could increase in the future if mortgage activity picks up.

The securities portfolio, primarily available-for-sale, increased slightly to $274.256 million from $264.802 million. This portfolio held an unrealized loss of $29.986 million at March 31, 2025, a common consequence of rising interest rates impacting the fair value of fixed-rate securities. Management asserts that these losses are not credit-related and do not anticipate needing to sell these securities before their value recovers, mitigating immediate concerns about capital impact. The portfolio is diversified across agency mortgage-backed securities, municipal obligations (97.3% investment grade in the AFS portfolio), and other government/corporate debt. Projected cash flow from the portfolio over the next 12 months is approximately $36.325 million, providing potential liquidity for reinvestment.

Asset quality metrics show some signs of deterioration, warranting careful monitoring. Non-performing loans increased to $952 thousand at March 31, 2025, from $858 thousand at June 30, 2024. As a percentage of total loans, non-performing loans were 0.12%, or 0.08% excluding the SBA guaranteed portion. More significantly, loans classified as special mention saw a substantial increase to $12.532 million from $4.455 million. This increase was primarily tied to a single commercial customer facing project delays and reduced industry revenue. Management noted that the construction project is now complete, the property is being leased, and cost-saving measures are in place, with the credit position supported by SBA debentures. While these mitigating factors are positive, the concentration risk associated with this single relationship remains a point of focus.

The provision for credit losses on loans increased to $657 thousand for the nine months ended March 31, 2025, compared to $380 thousand in the prior year period. This higher provision reflects the change in loan mix towards higher-growth segments (consumer and non-owner occupied commercial real estate) and increased net charge-offs, which totaled $540 thousand (annualized 0.09% of total loans) compared to $245 thousand (annualized 0.04%) in the prior year. The allowance for credit losses stood at 1.05% of total loans at March 31, 2025, slightly up from 1.04% at June 30, 2024. Management acknowledges the ongoing uncertainty regarding future credit quality trends and emphasizes continued close monitoring and proactive borrower engagement.

Liquidity remains sound, supported by the strong deposit base and significant borrowing capacity. Beyond deposits, CBKM has access to lines of credit and agreements with the FHLB of Cincinnati and the Federal Reserve discount window. The bank had the ability to borrow an additional $96.716 million from the FHLB and held approximately $93.805 million in unencumbered securities available for pledging at March 31, 2025. Short-term borrowings decreased, partly due to the cessation of the Federal Reserve's Bank Term Funding Program.

Capital levels comfortably exceed regulatory minimums. As of March 31, 2025, the bank's common equity tier 1 and tier 1 capital ratios were 11.38%, the leverage ratio was 8.33%, and the total risk-based capital ratio was 12.38%. These ratios are all well above the levels required to be considered well-capitalized, providing a strong buffer against potential losses and supporting future growth initiatives. Shareholders' equity increased by $9.772 million, benefiting from net income and a favorable change in accumulated other comprehensive loss (related to securities valuation), partially offset by dividends paid.

Outlook and Investment Considerations

While explicit quantitative guidance was not provided, management commentary offers some insight into the near-term outlook. The expectation for the cost of funds to continue trending downward suggests potential for net interest margin expansion if asset yields remain stable or increase. The anticipated increase in the mortgage warehouse line balance, contingent on market conditions, could also contribute to interest income.

The core investment thesis for CBKM rests on its ability to leverage its community banking model and local expertise to drive profitable growth within its defined market area. The recent organic loan growth in key segments and strong deposit gathering capabilities demonstrate the continued effectiveness of this approach. The solid capital position provides financial flexibility.

However, investors must weigh these strengths against pertinent risks. Fluctuations in market interest rates remain a significant factor, impacting both asset yields and funding costs, as well as the value of the securities portfolio. Changes in local and national economic conditions could negatively affect asset quality, potentially leading to higher non-performing loans, charge-offs, and provision expenses. The increase in special mention loans, particularly the concentration risk related to a single customer, highlights the potential for credit challenges. Competitive pressures, especially from larger, more technologically advanced institutions, could constrain loan and deposit pricing power and necessitate ongoing investment in technology to remain competitive. Regulatory changes and cybersecurity threats are also ongoing considerations for the banking sector.

Conclusion

Consumers Bancorp operates as a resilient community bank, deeply embedded in its Ohio market. Its strength lies in its relationship-based deposit franchise, local lending expertise, and solid capital foundation. While recent financial results reflect the challenging interest rate environment and some emerging asset quality concerns, particularly within the special mention category, the underlying business model remains sound. The bank's ability to continue attracting deposits and generating organic loan growth, coupled with management's focus on monitoring credit risk and adapting to market conditions, supports the view that CBKM is well-positioned to navigate the current landscape. The investment story is one of a stable, locally-focused institution with the potential for continued profitability, albeit subject to the inherent risks of the banking sector and the specific challenges highlighted in its recent performance. Investors should closely monitor trends in asset quality, net interest margin, and the effectiveness of the bank's strategy in maintaining its competitive edge against larger rivals.