CONSUMERS BANCORP INC /OH/ Management’s Report of Financial Condition and Results of Operations (Form 10-Q)

(in thousands of dollars, except per share data)

General

The following is management's analysis of the Corporation's results of
operations for the three- and six-month periods ended December 31, 2021,
compared to the same periods in 2020, and the consolidated balance sheet at
December 31, 2021, compared to June 30, 2021. This discussion is designed to
provide a more comprehensive review of the operating results and financial
condition than could be obtained from an examination of the financial statements
alone. This analysis should be read in conjunction with the consolidated
financial statements and related footnotes and the selected financial data
included elsewhere in this report.



Overview

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



On July 16, 2021, the Corporation completed its acquisition of two branches
located in Calcutta and Wellsville, Ohio from CFBank, National Association. As
part of the acquisition, the Corporation 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 acquisition, the Corporation recorded goodwill of $1,616.



Covid-19 pandemic

In response to COVID-19, management actively pursued multiple avenues to assist
customers during these uncertain times. For commercial borrowers, the
Coronavirus Aid, Relief and Economic Security Act (the CARES Act) includes key
SBA initiatives to assist small businesses. The Paycheck Protection Program
(PPP) was designed to provide a direct incentive for small businesses to keep
their workers on the payroll. The SBA will forgive loans obtained under this
program if the borrower meets payroll and other requirements. The Bank
originated a total of $113,367 of PPP loans during the first and second rounds
of assistance. As of December 31, 2021, there were $12,692 of PPP loans
outstanding.



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.
Borrowers are eligible for an additional 90 days of payment deferrals if
situations warrant a need for an extension. Interest will be deferred but will
continue to accrue during the deferment period and the maturity date on
amortizing loans will be extended by the number of months the payment was
deferred. Consistent with issued regulatory guidance, modifications made under
this program in response to COVID-19 will not be classified as troubled debt
restructurings. As of December 31, 2021, three borrowers with an outstanding
balance of $68 in the aggregate 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. In addition, the consumer
reserve personal line of credit, an unsecured line of credit that is linked to a
personal checking account, was redesigned to provide easier access to credit and
a lower initial rate.



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.



                                       23
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)




Results of Operations

Three and six month periods ended December 31, 2021 and 2020



Net income for the second quarter of fiscal year 2022 was $3,162, or $1.04 per
common share, compared to $2,507, or $0.83 per common share for the three months
ended December 31, 2020. The following are key highlights of our results of
operations for the three months ended December 31, 2021, compared to the prior
fiscal year comparable period:

? net interest income increased by $1,687 at $8,545i.e. 24.6%, in the second

quarter of fiscal 2022 compared to the same period of the previous year, mainly as

resulting from growth in average interest-earning assets as well as a reduction

in the cost of funds;

? a $270 a provision for loan losses was recognized for the second quarter of

financial year 2022 compared to $130 for the same period of the previous year;

? non-interest income increased by $68or 5.9%, in the second quarter of the fiscal year

the year 2022 compared to the same period of the previous year mainly due to a $77i.e. 17.3%,

increase in debit card interchange revenue and a $52i.e. 16.6%, an increase of

service charges on deposit accounts that were partially offset by a $75

decline in mortgage banking business; and

? non-interest expense increased by $818 in the second quarter of the financial year

2022 compared to the same period of the previous year mainly due to salary increases

and benefits; occupancy and equipment costs; and federal filing

    Insurance Corporation (FDIC) assessments.




In the first six months of fiscal year 2022, net income was $5,827, or $1.92 per
common share, compared to $4,908, or $1.63 per common share, for the six months
ended December 31, 2020. The following are key highlights of our results of
operations for the six months ended December 31, 2021, compared to the prior
fiscal year-to-date comparable period:

? net interest income increased by $2,966 at $16,518i.e. 21.9%, in the first

six months of the 2022 financial year from the same period of the previous year;

? a provision for loan losses of $460 was recorded within the first six months

of the 2022 financial year compared to $260 during the same period of the previous year;

? non-interest income increased by $200i.e. 8.7%, during the first six months of

the 2022 financial year mainly due to a $130or 14.4%, increase in debit card

exchange income and a $103i.e. 16.6%, increase in rental charges on

deposit accounts that have been partially cleared by a $53 decrease in earnings

the sale of mortgages; and

? non-interest expense increased by $1,851i.e. 19.2%, during the first six months of

fiscal 2022 compared to the same period of the prior fiscal year, mainly due to an increase

    in salaries and employee benefit expenses.




The annualized return on average equity and return on average assets were 16.03%
and 1.23%, respectively, for the six months ended December 31, 2021 compared to
14.83% and 1.31%, respectively, for the same prior year period.



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. As a result of 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 average interest-earning assets. FTE income includes tax-exempt income,
restated to a pre-tax equivalent, based on the statutory federal income tax
rate. The federal income tax rate in effect for the 2022 and 2021 fiscal years
was 21.0%. All average balances are daily average balances. Non-accruing loans
are included in average loan balances.



The Company’s net interest margin was 3.77% for the three months ended
December 31, 2021compared to 3.87% for the same period in 2020. ETP net interest income for the three months ended December 31, 2021 increased by
$1,708i.e. 24.5%, at $8,672 from $6,964 for the same period of the previous year.

                                       24
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)



Tax-equivalent interest income for the three months ended December 31, 2021
increased by $1,487, or 19.8%, from the same prior year period. Interest income
was positively impacted by the recognition of origination fees on PPP loans that
were forgiven during the quarter. The PPP loans had an average balance of
$17,803 in the second quarter of fiscal year 2022 and, during this same period,
$1,055 of interest and fee income was recognized on the PPP loans. This compares
with an average balance of $61,633 for the three-month period ended December 31,
2020 and the recognition of $912 of interest and fee income on the PPP loans
during the three-month period ended December 31, 2020. Interest income was also
positively impacted by a $195,418, or 27.2%, increase in average
interest-earning assets from the same prior year period due to the additional
assets acquired as part of the acquisition of the two branches from CFBank. The
yield on average interest-earning assets declined to 3.92% for the three months
ended December 31, 2021 compared with 4.18% for the same period last year. We
believe a reduction in the accretion of origination fees from PPP loans as these
loans are forgiven combined with the continued low level of interest rates, will
continue to impact the yield on interest-earning assets and could ultimately
result in a decline in interest income.



Interest expense for the three months ended December 31, 2021 decreased by $221,
or 39.5%, from the same prior year period primarily due to a reduction in
deposit and borrowing costs as a result of lower market interest rates. The
Corporation's cost of funds was 0.21% for the three months ended December 31,
2021 compared with 0.46% for the same prior year period.



The Company’s net interest margin was 3.70% for the six months ended
December 31, 2021compared to 3.86% for the same period in 2020. ETP net interest income for the six months ended December 31, 2021 increased by $3,008i.e. 21.9%, at $16,764 from $13,756 for the same period of the previous year.



Tax-equivalent interest income for the six months ended December 31, 2021
increased by $2,497, or 16.7%, from the same prior year period. Interest income
was positively impacted by a $190,434, or 26.7%, increase in average
interest-earning assets from the same prior year period primarily due to the
assets acquired from the CFBank branch acquisition as well as organic growth.
Additionally, interest income was positively impacted by the accretion of
origination fees from the PPP loans. The PPP loans had an average balance of
$30,269 for the six-month period ended December 31, 2021 and, during this same
period, $2,052 of interest and fee income was recognized on the PPP loans. This
compares with an average balance of $64,932 for the six-month period ended
December 31, 2020 and the recognition of $1,769 of interest and fee income on
the PPP loans during the six-month period ended December 31, 2020. A reduction
in the accretion of origination fees from PPP loans as these loans are forgiven
could ultimately result in a decline in interest income. The Corporation's yield
on average interest-earning assets was 3.85% for the six months ended December
31, 2021 compared with 4.20% for the same period last year.



Interest expense for the six months ended December 31, 2021 decreased by $511
from the same prior year period. The Corporation's cost of funds was 0.22% for
the six months ended December 31, 2021 compared with 0.50% 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 short-term
borrowings.



                                       25
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)



            Average Balance Sheets and Analysis of Net Interest Income for 

three months ended the 31st of December,

                                           (In thousands, except percentages)




                                               2021                                       2020
                               Average                      Yield/        Average                      Yield/
                               Balance       Interest        Rate         Balance       Interest        Rate
Interest-earning assets:
Taxable securities            $ 182,705     $      806          1.75 %   $  74,051     $      344          1.90 %
Nontaxable securities (1)        86,093            633          3.02        67,892            529          3.24
Loans receivable (1)            592,633          7,499          5.02       552,897          6,587          4.73
Federal bank and other
restricted stocks                 2,472             20          3.21         2,472             21          3.37
Equity securities                   424              9          8.42             -              -             -
Interest bearing deposits
and federal funds sold           50,145             43          0.34        21,742             42          0.77
Total interest-earning
assets                          914,472          9,010          3.92 %     719,054          7,523          4.18 %

Noninterest-earning assets       37,425                                     30,865

Total Assets                  $ 951,897                                  $ 749,919

Interest-bearing
liabilities:
NOW                           $ 143,318     $       35          0.10 %   $ 107,191     $       38          0.14 %
Savings                         343,763             92          0.11       235,414             84          0.14
Time deposits                   116,664            147          0.50       112,543            365          1.29
Short-term borrowings             8,910              1          0.04         8,596              2          0.09
FHLB advances                    16,291             63          1.53        20,006             70          1.39
Total interest-bearing
liabilities                     628,946            338          0.21 %     483,750            559          0.46 %

Noninterest-bearing
liabilities:
Noninterest-bearing
checking accounts               243,465                                    193,587
Other liabilities                 6,998                                      5,907
Total liabilities               879,409                                    683,244
Shareholders' equity             72,488                                     66,675

Total liabilities and
shareholders' equity          $ 951,897                                  $ 749,919

Net interest income,
interest rate spread (1)                    $    8,672          3.71 %                 $    6,964          3.72 %

Net interest margin (net
interest as a percent of
average interest-earning
assets) (1)                                                     3.77 %                                     3.87 %

Federal tax exemption on
non-taxable securities and
loans included in interest
income                                      $      127                                 $      106

Average interest-earning
assets to interest-bearing
liabilities                      145.40 %                                   148.64 %



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



                                       26
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)



            Average Balance Sheets and Analysis of Net Interest Income for 

six months ended the 31st of December,

                                          (In thousands, except percentages)




                                              2021                                      2020
                               Average                     Yield/        Average                     Yield/
                               Balance      Interest        Rate         Balance      Interest        Rate
Interest-earning assets:
Taxable securities            $ 168,323     $   1,517          1.79 %   $  76,240     $     716          1.92 %
Nontaxable securities (1)        84,159         1,228          3.01        67,183         1,043          3.24
Loans receivable (1)            585,497        14,569          4.94       548,530        13,080          4.73
Federal bank and other
restricted stocks                 2,472            40          3.21         2,472            39          3.13
Equity securities                   424            17          7.95             -             -             -
Interest bearing deposits
and federal funds sold           62,393            93          0.30        18,409            89          0.96
Total interest-earning
assets                          903,268        17,464          3.85 %     712,834        14,967          4.20 %

Noninterest-earning assets       36,269                                    30,600

Total Assets                  $ 939,537                                 $ 743,434

Interest-bearing
liabilities:
NOW                           $ 140,608     $      68          0.10 %   $ 104,646     $      83          0.16 %
Savings                         334,222           181          0.11       231,954           189          0.16
Time deposits                   118,888           321          0.54       113,680           792          1.38
Short-term borrowings            10,239             3          0.06         8,238             6          0.14
FHLB advances                    16,444           127          1.53        22,059           141          1.27
Total interest-bearing
liabilities                     620,401           700          0.22 %     480,577         1,211          0.50 %

Noninterest-bearing
liabilities:
Noninterest-bearing
checking accounts               239,965                                   191,360
Other liabilities                 7,081                                     5,851
Total liabilities               867,447                                   677,788
Shareholders' equity             72,090                                    65,646

Total liabilities and
shareholders' equity          $ 939,537                                 $ 743,434

Net interest income,
interest rate spread (1)                    $  16,764          3.63 %                 $  13,756          3.70 %

Net interest margin (net
interest as a percent of
average interest-earning
assets) (1)                                                    3.70 %                                    3.86 %

Federal tax exemption on
non-taxable securities and
loans included in interest
income                                      $     246                                 $     204

Average interest-earning
assets to interest-bearing
liabilities                      145.59 %                                  148.33 %



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



                                       27
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)

Allowance for loan losses

The provision for loan losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable incurred credit losses in the Bank's loan
portfolio that have been incurred at each balance sheet date. For the six-month
period ended December 31, 2021, the provision for loan losses was $460 compared
with $260 for the same prior year period. Net recoveries of $1 were recorded
during the six-month period ended December 31, 2021, compared with net
charge-offs of $26 during the six-month period ended December 31, 2020. The loan
loss provision expense recorded in fiscal year 2022 was primarily due to the
organic growth within the loan portfolio.



Non-performing loans were $744 as of December 31, 2021, compared with $1,771 as
of June 30, 2021 and $1,940 as of December 31, 2020. Non-performing loans to
total loans were 0.12% at December 31, 2021 and 0.31% at June 30, 2021.
Non-performing loans declined primarily due to the full payoff of two loans that
had a balance of $831 as of June 30, 2021 that were on non-accrual for an
extended period. The allowance for loan losses as a percentage of loans was
1.11% at December 31, 2021 and 1.14% at June 30, 2021.



Non-interest income

Noninterest income increased by $68, or 5.9%, for the second quarter of fiscal
year 2022 from the same period last year. For the six-month perioded ended
December 31, 2021, noninterest income increased by $200, or 8.7%, from the same
period last year primarily due to a $130, or 14.4%, increase in debit card
interchange income and a $103, or 16.6% increase in service charges on deposit
accounts. Service charges on deposit accounts may be negatively impacted by an
industry wide trend of reducing overdraft fees as large banks have announced a
reduction in these types of fees in response to regulatory pressure. These
increases were partially offset by mortgage banking activity decreasing by $53,
or 11.0%, from the same prior year period. Gains from the sale of mortgage loans
to the secondary market declined as refinancing of mortgages slowed as a result
of the increase in mortgage rates from the record lows in the previous year.



Noninterest Expenses

Total noninterest expenses increased by $818, or 16.9%, for the second quarter
of fiscal year 2022 compared with the same period last year. Increases in
salaries and employee benefits; FDIC assessments; and occupancy and equipment
expenses contributed to the increase in noninterest expenses for the three-month
period ended December 31, 2021.



Total noninterest expenses increased by $1,851, or 19.2%, for the six-month
period ended December 31, 2021 compared with the same period last year. Salaries
and employee benefit expenses increased by $1,065, or 19.5%, due to the addition
of staff at three new office locations, the addition of lending staff, and
increases in health care costs. FDIC assessments increased by $122, or 82.4%,
for the current fiscal year-to-date period ended December 31, 2021 primarily due
to the growth within the organization.



Income taxes

Income tax expense was $685 and $1,244 for the three- and six-month periods
ended December 31, 2021, respectively, compared to $543 and $1,048 for the
three- and six-month periods ended December 31, 2020, respectively. The
effective tax rates were 17.8% and 17.6% for the three- and six-month periods
ended December 31, 2021 and 2020, respectively. The effective tax rates differed
from the federal statutory rate because of tax-exempt income from obligations of
state and political subdivisions, loans, and bank owned life insurance income.



Financial Condition

Total assets as of December 31, 2021 were $954,903 compared to $833,804 at June
30, 2021, an increase of $121,099, or an annualized 29.0%. Since June 30, 2021,
total deposits increased by $121,371, or an annualized 33.4% and includes
$104,538 of deposits acquired as part of the acquisition of the branches from
CFBank. The Corporation has maintained a favorable deposit mix, with 28.2% in
noninterest-bearing deposits, 16.9% in interest bearing demand deposits, 41.6%
in savings and money market deposits, and 13.3% in time deposits as of December
31, 2021.



Total loans increased by $56,580, or an annualized 20.0%, from June 30, 2021.
The increase in loans included organic loan growth of $53,626 and loans acquired
as part of the acquisition of the branches from CFBank with an outstanding
balance of $15,198 as of December 31, 2021. In addition, the mortgage loan
warehouse line of credit to another financial institution had an outstanding
balance of $25,750 as of December 31, 2021 and was zero as of June 30, 2021.
These increases were partially offset by a $37,994 decline in PPP loans from
June 30, 2021, to $12,692 as of December 31, 2021, as the pace of PPP loan
forgiveness remained high.



                                       28
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)

Non-performing assets

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


                                                December 31,        June 30,        December 31,
                                                    2021              2021              2020
Non-accrual loans                              $          740     $      1,771     $        1,940
Loans past due over 90 days and still
accruing                                                    4                -                  -
Total non-performing loans                                744            1,771              1,940
Other real estate and repossessed assets                   83                -                  -
Total non-performing assets                    $          827     $      

1,771 $1,940

Non-performing loans to total loans                      0.12 %           0.31 %             0.35 %
Allowance for loan losses to total
non-performing loans                                   931.72 %         365.39 %           304.74 %




As of December 31, 2021, impaired loans totaled $908, of which $740 are included
in non-accrual loans. As of June 30, 2021, impaired loans totaled $1,954, of
which $1,771 are included in non-accrual loans. Commercial and commercial real
estate loans are classified as impaired if management determines that full
collection of principal and interest, in accordance with the terms of the loan
documents, is not probable. Impaired loans and non-performing loans have been
considered in management's analysis of the appropriateness of the allowance for
loan losses. Management and the Board of Directors are closely monitoring these
loans and believe that the prospects for recovery of principal and interest,
less identified specific reserves, are favorable.



Contractual obligations, commitments, contingent liabilities and off-balance sheet arrangements



Liquidity

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



For the six months ended December 31, 2021, net cash inflow from operating
activities was $8,548, net cash outflows from investing activities was $18,462
and net cash inflows from financing activities was $12,638. A major source of
cash was $66,552 from the acquisition of the branches from CFBank, a $16,833
increase in organic deposits and $17,520 from maturity, calls, principal pay
downs and sales of available-for-sale securities. A major use of cash included a
$67,274 purchases of available-for-sale securities and a $36,719 increase in
loans. Total cash and cash equivalents were $21,253 as of December 31, 2021,
compared to $18,529 at June 30, 2021 and $9,045 at December 31, 2020.



The Bank offers several types of deposit products to its customers. We believe
the rates offered by the Bank and the fees charged for them are competitive with
the rates and fees charged by other banks for similar deposit products currently
available in the market area. Deposits totaled $848,220 at December 31, 2021
compared with $726,849 at June 30, 2021.



To provide an additional source of liquidity, the Corporation has entered into
an agreement with the Federal Home Loan Bank (FHLB) of Cincinnati. At December
31, 2021, advances from the FHLB of Cincinnati totaled $16,286 compared with
$18,050 at June 30, 2021. As of December 31, 2021, the Bank had the ability to
borrow an additional $91,341 from the FHLB of Cincinnati based on a blanket
pledge of qualifying first mortgage and multi-family loans. The Corporation
considers the FHLB of Cincinnati to be a reliable source of liquidity funding,
secondary to its deposit base.



                                       29
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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)



Short-term borrowings consisted of repurchase agreements, which are financing
arrangements that mature daily, and a line of credit for the Corporation. The
Bank pledges securities as collateral for the repurchase agreements. Short-term
borrowings totaled $10,682 at December 31, 2021 and $13,275 at June 30, 2021.



Jumbo time deposits (those with balances of $250 and over) totaled $19,715 as of
December 31, 2021 and $18,488 as of June 30, 2021. These deposits are monitored
closely by the Corporation and are mainly priced on an individual basis. The
Corporation has the option to use a fee-paid broker to obtain deposits from
outside its normal service area as an additional source of funding. The
Corporation, however, does not rely upon these deposits as a primary source of
funding. Although management monitors interest rates on an ongoing basis, a
quarterly rate sensitivity report is used to determine the effect of interest
rate changes on the financial statements. In the opinion of management, enough
assets or liabilities could be repriced over the near term (up to three years)
to compensate for such changes. The spread on interest rates, or the difference
between the average earning assets and the average interest-bearing liabilities,
is monitored quarterly.


Off-balance sheet arrangements

In the normal course of business, to meet the financial needs of our customers,
we are a party to financial instruments with off-balance sheet risk. These
financial instruments generally include commitments to originate mortgage,
commercial and consumer loans, and involve to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
Consolidated Balance Sheets. The maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments. Since commitments to extend credit have a fixed expiration date or
other termination clause, some commitments will expire without being drawn upon
and the total commitment amounts do not necessarily represent future cash
requirements. The same credit policies are used in making commitments as are
used for on-balance sheet instruments and collateral is required in instances
where deemed necessary. Undisbursed balances of loans closed include funds not
disbursed but committed for construction projects. Unused lines of credit
include funds not disbursed, but committed for home equity, commercial and
consumer lines of credit. Financial standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Total unused
commitments were $131,397 as of December 31, 2021 and $119,299 as of June 30,
2021.



Capital Resources

Total shareholders' equity increased to $73,158 as of December 31, 2021, from
$69,900 as of June 30, 2021. The primary reason for the increase in
shareholders' equity was from net income of $5,827 for the first six months of
fiscal year 2022 which was partially offset by a decrease of $1,968 in
accumulated other comprehensive income due to a decline in the unrealized gain
in the mark-to-market of available-for-sale securities and by cash dividends
paid of $972. During the second quarter of fiscal year 2022, the Corporation
took out an unsecured $5,000 line of credit to provide capital support to the
Bank and for other general corporate purposes. As of December 31, 2021, the
outstanding balance on the line of credit was $2,500.



The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt
corrective-action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the Corporation's
financial statements.



As of December 31, 2021, the Bank's common equity tier 1 capital and tier 1
capital ratios were 10.92% and the leverage and total risk-based capital ratios
were 7.45% and 11.99%, respectively. This compares with common equity tier 1
capital and tier 1 capital ratios of 11.87% and leverage and total risk-based
capital ratios of 7.83% and 13.06%, respectively, as of June 30, 2021. The Bank
exceeded minimum regulatory capital requirements to be considered
well-capitalized for both periods. Management is not aware of any matters
occurring subsequent to December 31, 2021 that would cause the Bank's capital
category to change.



Critical Accounting Policies

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



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                            CONSUMERS BANCORP, INC.

          Managements's Discussion and Analysis of Financial Condition

                     and Results of Operations (continued)


(in thousands of dollars, except per share data)



The Corporation has identified the appropriateness of the allowance for loan
losses and the evaluation of goodwill for impairment as critical accounting
policies and an understanding of these policies is necessary to understand the
financial statements. Critical accounting policies are those policies that
require management's most difficult, subjective or complex judgments often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. Note one (Summary of Significant Accounting Policies -
Allowance for Loan Losses and Goodwill and Other Intangible Assets), Note four
(Loans), Note six (Goodwill and Intangible Assets) and Management's Discussion
and Analysis of Financial Condition and Results of Operation (Critical
Accounting Policies and Use of Significant Estimates) of the 2021 Form 10-K
provide detail with regard to the Corporation's accounting for the allowance for
loan losses. There have been no significant changes in the application of
accounting policies since June 30, 2021.



Forward-looking statements

Certain statements contained in this Quarterly Report on Form 10-Q, which are
not statements of historical fact, constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. 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

favorable than expected, leading, among other things, to a high unemployment rate

rates, a deterioration in the credit quality of our assets or obligors unable

to fulfill its obligations;

? fluctuations in market interest rates may cause changes

valuations and a decline in net interest margin and net interest income;

? changes in the level of non-performing assets and charges;

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

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

comply;

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

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

changes in the cost of liquidity and our ability to find alternatives

funding sources;

? the effects of and changes in commercial, monetary and fiscal policies and laws,

including interest rate policies Federal Reserve Board;

? changes in consumer spending, 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.




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                            CONSUMERS BANCORP, INC.

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