EDGAR 10-K Filing

Company CIK: 1879103
Filing Year: 2023
Filename: 1879103_10-K_2023_0000950170-23-049006.json

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ITEM 1. BUSINESS
Item 1. Business.
CFSB Bancorp, Inc.
CFSB Bancorp, Inc. (“CFSB Bancorp” or the “Company”) is a federal corporation that was formed in January 2022 to become the savings and loan holding company of Colonial Federal Savings Bank (the “Bank”) as part of the mutual holding company reorganization of the Bank. Since being incorporated, other than holding the common stock of the Bank, CFSB Bancorp retaining approximately 50% of the net cash proceeds of the stock offering, making a loan to the employee stock ownership plan of the Bank, CFSB Bancorp has not engaged in any other business activities.
CFSB Bancorp completed its stock offering in connection with the mutual holding company reorganization of the Bank on January 12, 2022. The Company sold 2,804,306 shares of common stock at $10.00 per share for gross proceeds of $28.0 million. In connection with the reorganization, the Company also contributed 130,433 shares of common stock and $250,000 in cash to the Colonial Federal Savings Bank Charitable Foundation and issued 3,586,903 shares of common stock to 15 Beach, MHC, its federally-chartered mutual holding company. Shares of the Company’s common stock began trading on January 13, 2022 on The Nasdaq Stock Market under the trading symbol “CFSB.”
CFSB Bancorp, as the holding company of the Bank, is authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. We currently have no agreements to acquire other financial institutions or financial services companies, although we may determine to do so in the future.
CFSB Bancorp’s cash flows will depend on earnings from the investment of the net offering proceeds and from any dividends it receives from the Bank. The Bank is subject to regulatory limitations on the amount of dividends that it may pay. Initially, CFSB Bancorp will not own or lease any property, but instead will pay the Bank for the use of its premises, furniture and equipment. We intend to employ as officers of CFSB Bancorp only persons who are officers of the Bank. However, we will use the support staff of the Bank from time to time. We will pay the Bank for the time the Bank employees devote to CFSB Bancorp; however, these individuals will not be separately compensated by CFSB Bancorp. CFSB Bancorp may hire additional employees, as appropriate, to the extent it expands its business in the future.
15 Beach, MHC
15 Beach, MHC was formed in January 2022 as a federally-chartered mutual holding company in connection with the reorganization of the Bank into the “two-tier” mutual holding company form of organization. 15 Beach, MHC will, for as long as it is in existence, own a majority of the outstanding shares of CFSB Bancorp’s common stock. As a mutual holding company, 15 Beach, MHC is a non-stock company.
15 Beach, MHC’s principal assets are the common stock of CFSB Bancorp it received in the reorganization and offering and $100,000 cash in initial capitalization. Presently, it is expected that the only business activity of 15 Beach, MHC is to own a majority of CFSB Bancorp’s common stock. 15 Beach, MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding companies under federal law, including investing in loans and securities. 15 Beach, MHC is subject to comprehensive regulation and examination by the Federal Reserve Board.
Colonial Federal Savings Bank
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans and, to a lesser extent, multi-family real estate loans, commercial real estate loans, second mortgage loans, home equity lines of credit and consumer loans. Subject to market conditions, we will continue our focus on growing our balance sheet and improving profitability by continuing to originate one- to four-family residential mortgage loans and increasing the origination of multi-family and commercial real estate loans.
At June 30, 2023, we had total assets of $349.0 million, total deposits of $263.4 million and total equity of $75.9 million. We had net income of $1.4 million for the year ended June 30, 2023, compared to net income of $442,000 for the year ended June 30, 2022.
Corporate Information
Our principal executive offices are located at 15 Beach Street Quincy, MA 02170, and our telephone number is (617) 471-0750. Our website address is www.colonialfed.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated by reference into this Form 10-K.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the SEC, under the Exchange Act. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov. Copies of each of our filings with the SEC can also be viewed and downloaded free of charge at our website, www.colonialfed.com, after the reports and amendments are electronically filed with or furnished to the SEC.
Market Area
We conduct our operations from our three full-service banking offices and one limited-service banking office located in Norfolk County, Massachusetts. We consider our primary lending market area to be Norfolk and Plymouth Counties, Massachusetts, however, we occasionally make loans secured by properties located outside of our primary lending market.
Norfolk County is located directly south of the city of Boston, Massachusetts. The county includes 28 eastern Massachusetts communities, all of which are residential suburbs of Boston. Norfolk County is the wealthiest county in the Commonwealth of Massachusetts and is characterized by a high concentration of white-collar professionals who work in the Boston Metropolitan Statistical Area. According to the United States Census Bureau, the total population of Norfolk County was 725,531 as of July 1, 2022.
According to the United States Census Bureau from 2017 through 2021:
•The median household income in Norfolk County was $112,089 compared to a median household income for Massachusetts of $89,026 and $69,021 for the United States;
•The median home value was $529,200, compared to $424,700 for Massachusetts and $244,900 for the United States;
•Approximately 55.5% of the population of Norfolk County held a bachelor’s degree or higher, compared to 45.2% for Massachusetts and 33.7% for the United States; and
•Approximately 6.9% of the population of Norfolk County had incomes below the poverty level, compared to 10.4% for Massachusetts and 11.6% for the United States.
Additionally, according to the U.S. Bureau of Labor Statistics, the unemployment rate at June 30, 2023 was 2.6% for Norfolk County, compared to 2.6% for Massachusetts and 3.6% for the United States.
Competition
We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money centers and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.
As of June 30, 2022 (the latest date for which information is available), our market share was 0.79% of total deposits in Norfolk County, Massachusetts, making us the 23rd largest out of 41 banks operating in Norfolk County.
Lending Activities
Our principal lending activity is one- to four-family residential real estate loans, and, to a lesser extent, multi-family real estate loans, commercial real estate loans, second mortgage loans and home equity lines of credit. Subject to market conditions and our asset-liability analysis, we expect to increase our focus on the origination of multi-family and commercial real estate loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our portfolio. We compete by focusing on personalized service for consumers as well as businesses. Due to our structure, we are able to move quickly on customer requests and are able to price competitively compared to our competitors. Our responsiveness has historically enabled us to grow and retain our customer base.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. At June 30, 2023 and 2022, we had no loans held for sale.
At June 30,
(In thousands)
Amount
Percent
Amount
Percent
Mortgage loans on real estate:
Residential:
1-4 family
$
140,109
78.71
%
$
141,073
80.76
%
Multifamily
12,638
7.10
14,310
8.19
Second mortgages and home equity lines of credit
2,699
1.52
1,970
1.13
Construction
-
-
0.21
Commercial
20,323
11.42
14,761
8.45
Total mortgage loans on real estate
175,769
98.75
172,489
98.74
Consumer loans:
Consumer
0.03
0.05
Home improvement
2,191
1.22
2,116
1.21
Total other loans
2,240
1.25
2,200
1.26
Total loans
178,009
100.00
%
174,689
100.00
%
Less:
Allowance for loan losses
(1,747
)
(1,747
)
Net deferred loan fees
(351
)
(349
)
Loans, net
$
175,911
$
172,593
Contractual Maturities. The following tables set forth the contractual maturities of our loan portfolio at June 30, 2023. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.
Balance at June 30, 2023
Amounts Due in:
(In thousands)
One Year or Less
More than One to Five Years
More than Five to Fifteen Years
More than Fifteen Years
Total
Mortgage loans on real estate:
Residential:
1-4 family
$
-
$
2,749
$
30,330
$
107,030
$
140,109
Multifamily
-
-
1,041
11,597
12,638
Second mortgages and home equity lines of credit
-
1,995
2,699
Construction
-
-
-
-
-
Commercial
-
3,112
16,700
20,323
Total mortgage loans on real estate
-
3,299
36,478
135,992
175,769
Consumer loans:
Consumer
-
-
Home improvement
1,032
1,149
-
2,191
Total other loans
1,032
1,149
2,240
Total loans
$
$
4,331
$
37,627
$
136,036
$
178,009
Fixed Versus Adjustable-Rate Loans. The following table sets forth our fixed- and adjustable-rate loans at June 30, 2023 that are contractually due after June 30, 2024.
Due After June 30, 2024
(Dollars in thousands)
Fixed
Adjustable
Total
Mortgage loans on real estate:
Residential:
1-4 family
$
132,934
$
7,175
$
140,109
Multifamily
1,919
10,719
12,638
Second mortgages and home equity lines of credit
1,740
2,699
Construction
-
-
-
Commercial
1,809
18,514
20,323
Total mortgage loans on real estate
138,402
37,367
175,769
Consumer loans:
Consumer
-
Home improvement
2,181
-
2,181
Total other loans
2,181
2,225
Total loans
$
140,583
$
37,411
$
177,994
One- to Four-Family Residential Real Estate Lending. Our historical primary lending activity has been the origination of one- to four-family, owner-occupied, residential mortgage loans, virtually all of which are secured by properties located in our market area. At June 30, 2023, one- to four-family residential real estate loans totaled $140.1 million, or 78.7% of our total loan portfolio. The average principal loan balance of our one- to four-family residential real estate loans was $244,000 at June 30, 2023.
We currently offer one- to four-family residential real estate loans with terms of up to 30 years. The one- to four-family residential real estate loans that we originate are generally underwritten to Fannie Mae and Freddie Mac guidelines. We currently retain in our portfolio all of the one- to four-family residential real estate loans we originate. We primarily originate fixed-rate one- to four-family residential real estate loans, but, on a much more limited basis, also originate adjustable-rate loans. At June 30, 2023, $132.9 million, or 94.9%, of our one- to four- family residential real estate loans had fixed rates of interest, and $7.2 million, or 5.1%, of our one- to four-family residential real estate loans, had adjustable rates of interest. One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans. We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower.
Our adjustable-rate one- to four-family residential real estate loans carry terms to maturity ranging from 10 to 30 years and generally have fixed rates for initial terms of one, three or five years, and adjust annually thereafter at a margin, which in recent years has been tied to the one-year constant maturity U.S. Treasury rate. The maximum amount by which the interest rate may be increased or decreased is, subject to a contractual floor (which is generally the initial interest rate on the loan), generally 2% annually, with a lifetime interest rate cap of generally 6% over the initial interest rate of the loan.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in market interest rates may be limited.
At June 30, 2023, $17.2 million, or 12.3%, of the one- to four-family residential real estate loan portfolio, was secured by non-owner-occupied properties. We generally originate these loans to individuals to whom we have had a previous borrowing relationship. Generally, we require personal guarantees on these properties if the loan is made to an entity other than individual borrowers. We will not make loans in excess of 80% loan-to-value on non-owner- occupied properties.
We have not offered “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also have not offered loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We have not offered “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income). We also do not originate subprime loans to customers with weakened credit histories.
We require title insurance on all of our one- to four-family residential real estate mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. We do not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified in the appraisal conducted in connection with the origination of the loan.
When underwriting residential real estate loans, we review and verify each loan applicant’s employment, income and credit history and, if applicable, our experience with the borrower. Our policy is to obtain credit reports on all borrowers and guarantors. We also obtain tax returns and financial statements for non-owner-occupied loans. Generally, all properties securing residential real estate loans are appraised by independent appraisers.
Multi-Family and Commercial Real Estate Lending. At June 30, 2023, multi-family real estate loans totaled $12.6 million, or 7.1% of our loan portfolio. Our multi-family real estate loans are generally secured by properties consisting of five or more rental units within our market area. At June 30, 2023, commercial real estate loans totaled $20.3 million, or 11.4% of our portfolio. Our commercial real estate loans are generally secured by office buildings, small retail facilities, mixed-use facilities and warehouses within our market area. We currently offer multi-family and commercial real estate loans with terms of up to 30 years. We currently retain in our portfolio all of the multi-family and commercial real estate loans we originate.
We primarily originate adjustable-rate multi-family and commercial real estate loans, but we do, on a much more limited basis, originate fixed-rate loans. At June 30, 2023, $10.7 million, or 84.8%, of multi-family real estate loans had adjustable rates of interest, and $1.9 million, or 15.2%, of our multi-family real estate loans, had fixed rates of interest. At June 30, 2023, $18.5 million, or 91.1%, of commercial real estate loans had adjustable rates of interest, and $1.8 million, or 8.9%, of our commercial real estate loans, had fixed rates of interest. Interest rates on our adjustable-rate multi-family and commercial real estate loans are generally fixed for the first five years and adjust annually thereafter based on the one-year U.S. Treasury constant maturity rate, plus a margin.
At June 30, 2023, the average loan size of our outstanding multi-family real estate loans was $549,000, and our largest multi-family residential real estate loan had an outstanding balance of $1.8 million and is secured by an apartment building located in our primary market area. At June 30, 2023, this loan was performing according to its original terms. At June 30, 2023, the average loan size of our outstanding commercial real estate loans was $616,000, and our largest commercial real estate loan had an outstanding balance of $5.0 million and is secured by three properties related to an ambulance dispatching and maintenance center located in our primary market area. At June 30, 2023, this loan was performing according to its original terms.
We consider a number of factors in originating multi-family and commercial real estate loans. We evaluate the qualifications, income level and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.20x. Multi-family and commercial real estate loans have loan-to-value ratios of up to 80% of the appraised value of the property securing the loans. When underwriting multi-family and commercial real estate loans, we review and verify each loan applicant’s employment, income and credit history. Our policy is to obtain credit reports, financial statements and tax returns on all borrowers and guarantors. Generally, all properties securing real estate loans are appraised by independent appraisers. Generally, we require personal guaranties from the principals on the loans.
Multi-family and commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties. If we foreclose on a multi-family or commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on multi-family and commercial real estate loans can be both unpredictable and substantial.
Second Mortgage Loans and Home Equity Lines of Credit. At June 30, 2023, second mortgage loans and home equity lines of credit totaled $2.7 million, or 1.5% of our loan portfolio. Second mortgage loans and home equity lines of credit are multi-purpose loans used to finance various home or personal needs for which a one- to four-family primary or secondary residence serves as collateral. We generally originate home equity lines of credit on owner-occupied properties with adjustable rates of interest based on the prime interest rate published in The Wall Street Journal, plus a margin. We generally originate home equity lines of credit with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 20 years. We originate second mortgage loans on owner-occupied properties with fixed rates of interest. We generally originate these loans with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 15 years.
The procedures for underwriting these loans include assessing the applicant’s payment history on other indebtedness, the applicant’s ability to meet existing obligations and payments on the proposed loan, and the loan-to-value ratio. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.
Consumer Lending. We offer a variety of consumer loans to individuals, including home improvement loans, and new and used automobile loans. At June 30, 2023, our consumer loan portfolio totaled $2.2 million, or 1.3% of our total loan portfolio, $2.2 million of which were home improvement loans. Home improvement loans are unsecured fixed-rate loans that must be used to improve a one- to four-family residential real estate property with a maximum amount of $25,000 and a term of five years. Automobile loans are made with a term of five years for vehicles that are two years old or less and up to four years for vehicles that are more than two years old. These loans may be originated with loan-to-value ratios of up to 90% of the value of the vehicle.
Consumer loans generally entail greater risk than one- to four-family residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value. As a result, consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower.
Originations, Sales, Participations and Purchases of Loans
Most of our loan originations are generated by our loan personnel and from referrals from existing customers, real estate brokers, accountants and other professionals. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand, market conditions, the interest rate environment and pricing levels established by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our loan originations can vary from period to period. We do not sell any of the loans we originate.
From time to time, we may purchase loan participations in which we are not the lead lender. From time to time, we may also purchase whole loans. In both of these situations, we follow our customary loan underwriting and approval policies. At June 30, 2023, the outstanding balances of our loan participations where we are not the lead lender totaled $1.5 million, or 0.8% of our loan portfolio, and consisted of four borrower relationships secured by multi-family and commercial real estate located in Connecticut. All such loans were performing in accordance with their original terms. We did not purchase any whole loans during the years ended June 30, 2023 and 2022. We also have not participated out portions of loans during the years ended June 30, 2023 or 2022.
Loan Approval Procedures and Authority
Pursuant to federal law, the aggregate amount of loans that the Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of the Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At June 30, 2023, based on the 15% limitation, the Bank’s loans-to-one-borrower limit was approximately $9.8 million. On the same date, the Bank had no borrowers with outstanding balances in excess of this amount. At June 30, 2023, our largest loan relationship with one borrower was for $7.4 million and consisted of two loans secured by mixed-use real estate. The loans were performing in accordance with their original terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed information submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors or internal evaluations, where permitted by regulations.
The board of directors has granted loan approval authority to a Loan Committee that is comprised of our President and Chief Executive Officer, Treasurer and Chief Operating Officer, Vice President of Retail Lending, Vice President of Financial Markets and Assistant Vice President of Operations. The Loan Committee can approve individual loans up to prescribed limits, depending on the type of loan as follows:
•For all real estate loans, the approval of two Loan Committee members is required for loans up to $400,000 and the approval of three Loan Committee members (one of which must be our President and Chief Executive Officer) is required for loans between $400,000 and $750,000. Real estate loans of greater than $750,000 require the approval of three Loan Committee members (one of which must be our President and Chief Executive Officer) and the board of directors.
•For consumer loans, the approval of two Loan Committee members is required for loans up to $50,000 and the approval of three Loan Committee members is required for consumer loans greater than $50,000.
Loans that involve policy exceptions also must be approved by the Loan Committee and ratified by the board of directors.
Delinquencies and Non-Performing Assets
Delinquency Procedures. A late notice is sent to a borrower between the 16th and 18th day after a loan is past due. When the loan is 30 days past due, we mail the borrower a letter reminding the borrower of the delinquency and attempt to contact the borrower personally to determine the reason for the delinquency. If necessary, at 45 days past due, additional contact will be made with the borrower, which usually includes an in- person meeting and the account will be monitored on a regular basis thereafter. A property will be inspected between the 30th and 90th day of delinquency. When the loan reaches the 60th day of delinquency, we will send the borrower a letter informing the borrower of their rights and our intent to proceed with further collection efforts, including foreclosure, if the loan
default is not cured within 90 days. At the end of the 90-day cure period, a decision will be made whether to begin foreclosure proceedings. Loans are charged off when we believe that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the board of directors each month.
Troubled Debt Restructurings. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months. We had no troubled debt restructurings at June 30, 2023 or 2022.
The CARES Act, in addition to providing financial assistance to both businesses and consumers, created a forbearance program for federally-backed mortgage loans, protected borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provided financial institutions the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The Federal banking regulatory agencies also issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board and provisions of the CARES Act, allows modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments on December 31, 2019, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. We worked with our customers affected by COVID-19 and accommodated 26 loan modifications totaling $9.5 million, none of which remained on modified payment status at June 30, 2023.
Delinquent Loans. There were no loans past due more than 30 days at June 30, 2023 or 2022.
Loans Past Due and Non-performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non- accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and is in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Interest received on non-accrual loans generally is applied against principal and is recognized on a cash basis. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
We had no non-performing loans at June 30, 2023 or 2022.
Real Estate Owned. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal, or evaluation when acceptable, to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense, in either case during the applicable period of such determination. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. We had no real estate owned at June 30, 2023 or 2022.
Non-Performing Assets. There were no non-performing assets at June 30, 2023 or 2022.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency (the “OCC”) to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses in the loan portfolio. General allowances represent loss allowances that have been established to cover probable accrued losses associated with lending activities, but that, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially
because of emerging financial weaknesses even though the loan is currently performing as agreed, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on non-accrual status and classified “substandard.” Management reviews the status of each impaired loan on our watch list on a quarterly basis.
On the basis of this review of our assets, our classified loans and special mention loans at the dates indicated were as follows:
At June 30,
(In thousands)
Substandard
$
-
$
-
Doubtful
-
-
Loss
-
-
Total classified
$
-
$
-
Special mention assets
$
1,431
$
-
The $1.4 million of special mention assets at June 30, 2023 consisted of four residential real estate loans to one borrower.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a given borrower’s ability to repay, the estimated value of any underlying collateral, the size and composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not separately identify consumer loans for impairment disclosure unless such loans are subject to a troubled debt restructuring agreement. The general component covers pools of loans by loan class not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: (1) levels and trends in delinquent, classified, non-accrual and impaired loans, as well as loan modifications; (2) trends in the nature and volume of the portfolio and terms of loans and the existence and effect of any concentrations of credit and changes in the level of such concentrations; (3) effects of the changes in risk selection and lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (4) experience, ability, and depth of lending department management and other relevant staff; and (5) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
We will continue to monitor and modify our allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.
As an integral part of their examination process, the OCC periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process for establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.
Effective July 1, 2023, the Company adopted new accounting guidance, which requires the Company to estimate current expected credit losses ("CECL"). The impact of changing from an incurred loss model as outlined above to an expected loss model, which encompasses allowances for credit losses to be incurred over the life of the portfolio is expected to result in a 0-5% change to the allowance on the Company's consolidated balance sheet. The Company is currently in the process of finalizing its implementation of controls and processes and performing model validation which could affect the final impact of the adoption of this standard.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.
At or For the Year Ended June 30,
Allowance for loan losses
$
1,747
$
1,747
Total loans outstanding
$
178,009
$
174,689
Allowance for loan losses to total loans outstanding
0.98
%
1.00
%
Nonaccrual loans
$
-
$
-
Total loans outstanding
$
178,009
$
174,689
Nonaccrual loans to total loans outstanding
0.00
%
0.00
%
Allowance for loan losses
$
1,747
$
1,747
Nonaccrual loans
$
-
$
-
Allowance for loan losses to nonaccrual loans
-
%
-
%
Net charge-offs (recovery) during the period to daily average outstanding loans outstanding
Residential one-to four- family
Net charge-off (recovery) during period
$
-
$
-
Average amount outstanding
$
141,097
$
137,120
Annualized net charge-off ratio
0.00
%
0.00
%
Multifamily
Net charge-off (recovery) during period
$
-
$
-
Average amount outstanding
$
13,026
$
13,799
Annualized net charge-off ratio
0.00
%
0.00
%
Second mortgages and home equity lines of credit
Net charge-off (recovery) during period
$
-
$
-
Average amount outstanding
$
2,667
$
2,156
Annualized net charge-off ratio
0.00
%
0.00
%
Construction
Net charge-off (recovery) during period
$
-
$
-
Average amount outstanding
$
$
Annualized net charge-off ratio
0.00
%
0.00
%
Commercial real estate
Net charge-off (recovery) during period
$
-
$
-
Average amount outstanding
$
18,460
$
15,654
Annualized net charge-off ratio
0.00
%
0.00
%
Consumer
Net charge-off (recovery) during period
$
-
$
-
Average amount outstanding
$
$
Annualized net charge-off ratio
0.00
%
0.00
%
Home improvement
Net charge-off (recovery) during period
$
-
$
Average amount outstanding
$
2,193
$
2,033
Annualized net charge-off ratio
0.00
%
0.05
%
Total loans
Net charge-off (recovery) during period
$
-
$
Average amount outstanding
$
178,044
$
170,911
Annualized net charge-off ratio
0.00
%
0.00
%
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At June 30,
(In thousands)
Allowance for Loan Losses
Percent of Allowance to Total Allowance
Percent of Loans to Total Loans
Allowance for Loan Losses
Percent of Allowance to Total Allowance
Percent of Loans to Total Loans
Mortgage loans on real estate:
Residential:
1-4 family
$
55.75
%
78.71
%
$
56.44
%
80.76
%
Multifamily
10.88
7.10
12.31
8.19
Second mortgages and home equity lines of credit
1.66
1.52
1.26
1.13
Construction
-
-
-
0.23
0.21
Commercial
19.81
11.42
14.42
8.45
Total real estate
1,539
88.10
98.75
1,479
84.66
98.74
Consumer loans:
Consumer
-
-
0.03
-
-
0.05
Home improvement
3.66
1.22
3.49
1.21
Total consumer
3.66
1.25
3.49
1.26
Total allocated allowance
1,603
91.76
100.00
%
1,540
88.15
100.00
%
Unallocated
8.24
11.85
Total
$
1,747
100.00
%
$
1,747
100.00
%
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
Investment Activities
General. The board of directors is responsible for approving and overseeing the investment policy, which is reviewed at least annually by the board. The objectives of our investment policy are to: (1) provide liquidity necessary to meet short- and long-term business needs in accordance with our liquidity policy; (2) maintain a balance of high-quality, diversified investments to minimize risk; (3) provide collateral for pledging requirements; (4) generate a reasonable rate of return within the context of our liquidity and credit risk objectives; and (5) help mitigate interest rate risk. The board has delegated to our President and Chief Executive Officer the primary responsibility for oversight and implementation of daily investment activities. The President and Chief Executive Officer has appointed investment officers to assist in overseeing our investing activities and strategies. The authorized officers are our President and Chief Executive Officer, Treasurer and Chief Operating Officer, and Vice President of Financial Markets. Investment officers may purchase or sell on our behalf up to $2.0 million of individual securities and up to $10.0 million in the aggregate per calendar month. Amounts that exceed those thresholds require the approval of the board of directors. The board of directors reviews the activities of the investment officers at each of its meetings.
Our current investment policy authorizes us to invest in various types of investment grade investment securities and liquid assets, including U.S. Treasury obligations (up to 55% of our total investment portfolio), securities of various government-sponsored enterprises (up to 55% of our total investment portfolio), corporate debt (up to 45% of our total investment portfolio), mortgage-backed securities (up to 75% of our total investment portfolio), collateralized mortgage obligations (up to 45% of our total investment portfolio), asset-backed securities (up to 10% of our total investment portfolio), municipal obligations (up to 55% of our total investment portfolio), mutual funds (up to 10% of our total investment portfolio) and certificates of deposit of federally insured institutions (up to 10% of our total investment portfolio). We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk mortgage derivative products, corporate junk bonds, or certain types of structured notes.
Generally accepted accounting principles require that, at the time of purchase, we designate a debt security as held to maturity, available for sale, or trading, depending on our ability and intent to hold such security. Debt securities designated as available for sale are reported at fair value, while debt securities designated as held to maturity are reported at amortized cost.
At June 30, 2023, our investment portfolio totaled $148.0 million, which consisted of debt obligations, mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored enterprises as well as corporate and municipal bonds. At such date, $148.0 million was designated as held to maturity and $146,000 was designated as available for sale. We did not hold any trading securities at June 30, 2023. At June 30, 2023, we also owned $381,000 of Federal Home Loan Bank of Boston stock. As a member of the Federal Home Loan Bank of Boston, we are required to purchase stock in the Federal Home Loan Bank of Boston, which is carried at cost and classified as a restricted investment.
The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.
At June 30,
(In thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities
$
$
$
$
Collateralized mortgage obligations
Total securities available for sale
$
$
$
$
Securities held to maturity:
Government-sponsored enterprises:
Debt obligations
$
$
$
-
$
-
Mortgage-backed securities
46,619
43,119
47,741
45,872
Collateralized mortgage obligations
Municipal bonds
43,865
37,445
45,776
40,627
Corporate bonds
56,421
50,746
51,715
47,087
Total securities held to maturity
$
147,902
$
132,273
$
145,239
$
133,593
The following table sets forth the weighted average yield for each range of contractual maturities of available for sale securities and held to maturity securities portfolios at June 30, 2023. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields in the table below have been calculated based on the amortized cost of the security.
As of June 30, 2023
Within 1 Year
After 1 Year Through 5 Years
After 5 Years Through 10 Years
Over 10 Years
Total
(Dollars in thousands)
Amortized Cost
Weighted Average Yield
Amortized Cost
Weighted Average Yield
Amortized Cost
Weighted Average Yield
Amortized Cost
Weighted Average Yield
Amortized Cost
Weighted Average Yield
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities
$
-
-
$
3.08
%
$
3.58
%
$
3.64
%
$
3.56
%
Collateralized mortgage obligations
2.75
%
-
-
-
-
-
-
2.75
%
Total securities available for sale
$
2.75
%
$
3.08
%
$
3.58
%
$
3.64
%
$
3.54
%
Securities held to maturity:
Government-sponsored enterprises:
Debt obligations
$
-
-
$
3.11
%
$
-
-
$
-
-
$
3.11
%
Mortgage-backed securities
2.55
%
4,360
2.68
%
19,713
0.99
%
22,524
2.58
%
46,619
1.92
%
Collateralized mortgage obligations
6.00
%
-
-
-
-
-
-
6.00
%
Municipal bonds
2,570
2.92
%
9,444
3.48
%
10,998
2.65
%
20,853
2.30
%
43,865
2.68
%
Corporate bonds
5,200
3.15
%
21,298
3.09
%
28,216
2.44
%
1,707
2.46
%
56,421
2.75
%
Total securities held to maturity
$
7,793
3.07
%
$
36,098
3.14
%
$
58,927
2.00
%
$
45,084
2.45
%
$
147,902
2.47
%
For additional information regarding our investment securities portfolio, see Note 3 to the notes to our consolidated financial statements.
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Boston advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, loan prepayments, maturities, pre-payments and calls of securities, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including non-interest-bearing checking accounts, interest-bearing checking accounts, money market accounts, savings accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. At June 30, 2023, our core deposits, which are deposits other than certificates of deposit, were $152.7 million, representing 58.0% of total deposits. As part of our business strategy, we intend to continue our effort to increase our core deposits.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates.
The following table sets forth the distribution of total average deposits by account type at the dates indicated.
For the Years Ended June 30,
(In thousands)
Amount
Percent
Average Rate
Amount
Percent
Average Rate
Non-interest bearing NOW and demand
$
31,170
11.36
%
-
%
$
34,909
12.06
%
-
%
Interest bearing NOW and demand
32,252
11.76
0.05
31,258
10.80
0.05
Regular and other
70,338
25.64
0.10
73,139
25.26
0.10
Money market deposits
37,197
13.56
0.25
42,719
14.75
0.27
Total non-certificate accounts
170,957
62.31
0.10
182,025
62.87
0.12
Term certificates of $250,000 or more
23,585
8.60
3.19
25,890
8.94
1.06
Term certificates less than $250,000
79,825
29.09
2.76
81,634
28.19
0.62
Total certificate accounts
103,410
37.69
2.86
107,524
37.13
0.73
Total deposits
$
274,367
100.00
%
1.26
%
$
289,549
100.00
%
0.33
%
The following tables set forth the amount and maturities of our term certificates by interest rate at the dates indicated.
As of June 30, 2023
Amount Due
(In thousands)
Three Months or Less
Over Three Months to Twelve Months
Over 1 Year to 2 Years
Over 2 Years to 3 Years
Over Three Years
Total
0.00%-1.00%
$
6,780
$
11,168
$
4,788
$
1,900
$
1,118
$
25,754
1.01%-2.00%
2,191
8,186
1,257
-
-
11,634
2.01%-3.00%
2,200
14,092
-
-
17,234
3.01%-4.00%
-
27,651
-
-
-
27,651
4.01%-5.00%
-
22,493
4,826
-
1,067
28,386
Total
$
11,171
$
83,590
$
11,813
$
1,900
$
2,185
$
110,659
At June 30, 2023 and 2022, the estimated amounts of uninsured deposits were $35.3 million and $42.5 million, respectively. In addition, as of June 30, 2023, the aggregate amount of certificates of deposit that exceeded the FDIC insurance limit of $250,000 was $23.6 million. We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth the maturity of certificates of deposit of $250,000 or more as of June 30, 2023.
(In thousands)
As of June 30, 2023
Maturity Period:
Three months or less
$
4,750
Over three through six months
4,912
Over six through twelve months
12,473
Over twelve months
2,205
Total
$
24,340
Borrowed Funds. We may obtain advances from the Federal Home Loan Bank of Boston upon the security of our capital stock in the Federal Home Loan Bank of Boston and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. We use such advances to provide short-term funding as a supplement to our deposits. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. At June 30, 2023, we had $3.7 million outstanding in short-term advances from the Federal Home Loan Bank of Boston, with a weighted average interest rate of 5.25%. At June 30, 2023, we had the capacity to borrow an additional $63.5 million in Federal Home Loan Bank of Boston advances. For the year ended June 30, 2023, the average amount of short-term borrowings outstanding during the period was $1.0 million. The maximum short-term borrowings outstanding at any month end during the year ended June 30, 2023, was $5.3 million.
Additionally, at June 30, 2023 we had a $2.4 million available line of credit with the Federal Home Loan Bank of Boston, none of which was drawn at June 30, 2023.
Human Capital Resources
Employees
As of June 30, 2023, we had 29 full-time employees. None of our employees are represented by a labor union or covered by collective bargaining agreements, and we believe our relationship with our employees is good.
Diversity and Inclusion
We are committed to creating and maintaining a workplace free from discrimination or harassment on the basis of color, race, sex, national origin, ethnicity, religion, age, disability, sexual orientation, gender identification or expression or any other status protected by applicable law. Our management team and employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a code of conduct that sets standards for appropriate behavior and are required to attend annual training to help prevent, identify, report and stop any type of discrimination and harassment. Recruitment, hiring, development, training, compensation and advancement at our company are based on qualifications, performance, skills and experience without regard to gender, race and ethnicity.
Competitive Pay and Benefits
We strive to provide pay, comprehensive benefits and services that help meet the varying needs of our employees. Our total rewards package includes competitive pay, comprehensive healthcare benefits package for employees, family medical leave and flexible work schedules. We sponsor a 401(k) plan and we match employee contributions up to a certain limit. In addition, nearly all of our employees are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns stockholder interests by providing stock ownership on a tax-deferred basis at no cost to the employee.
Employee Development and Training
We focus on attracting, retaining, and cultivating talented individuals. We emphasize employee development and training by providing access to a wide range of online and instructor led development and continual learning programs. Employees are encouraged to attend meetings and conferences and have access to broad resources they need to be successful.
Supervision and Regulation
General
As a federal savings bank, the Bank is subject to examination, supervision and regulation, primarily by the OCC, and, secondarily, by the FDIC as deposit insurer. The federal system of regulation and supervision establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund and not for the protection of security holders. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies. That includes with respect to the classification of assets and the establishment of loan loss reserves for regulatory purposes. In addition, the Bank is a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; provide oversight for the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings, interest rate sensitivity and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution from obtaining necessary
regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.
As a savings and loan holding company, CFSB Bancorp is required to comply with the rules and regulations of the Federal Reserve Board. It is subject to examination and supervision by, and be required to file certain reports with, the Federal Reserve Board. CFSB Bancorp is also subject to the rules and regulations of the SEC under the federal securities laws.
Any change in applicable laws or regulations, whether by the OCC, the FDIC, the Federal Reserve Board, the SEC or Congress, could have a material adverse impact on the operations and financial performance of CFSB Bancorp and the Bank.
Set forth below are certain material regulatory requirements that are applicable to CFSB Bancorp and the Bank. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on CFSB Bancorp and the Bank. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on CFSB Bancorp, the Bank and their operations.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, the Bank may generally invest in mortgage loans secured by residential and commercial real estate and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. the Bank may also establish, subject to specified investment limits, “operating subsidiaries” that may engage in certain activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.
The OCC issued a final rule in 2019 implementing a section of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) that permits an eligible federal savings bank with assets of $20.0 billion or less as of December 31, 2017 to elect to operate with the business powers of a national bank, generally subject to the same limitations and restrictions, without converting to a national bank charter. A federal savings bank that makes the so-called “covered savings association” election must divest any activities or investments that are not permitted for a national bank. The Bank had not made such an election as of June 30, 2023.
Capital Requirements. Federal regulations require federally-insured depository institutions, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0% and a Tier 1 capital to total assets leverage ratio of 4.0%.
In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
The federal banking agencies have developed a “Community Bank Leverage Ratio” (the ratio of Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion that meet certain qualifying criteria. A “qualifying community bank” that exceeds this ratio will be deemed compliant with all other capital requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum Community Bank Leverage Ratio at not less than 8% and not more than 10%, and as of January 1, 2022, it has been set at 9%. The Bank has not elected to be subject to the Community Bank Leverage Ratio framework.
At June 30, 2023, the Bank’s capital exceeded all applicable requirements.
Qualified Thrift Lender Test. As a federal savings bank, the Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, it must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At June 30, 2023, the Bank complied with the qualified thrift lender test.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if secured by readily marketable collateral, which generally includes certain financial instruments (but not real estate). As of June 30, 2023, the Bank was in compliance with the loans-to-one borrower limitations.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% and a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% and a common equity Tier 1 ratio of less than
3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on the payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan.
At June 30, 2023, the Bank met the criteria for being considered “well capitalized.”
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application with the OCC for approval of a capital distribution if:
•the savings bank would not be at least well capitalized following the distribution;
•the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;
•the savings bank’s proposed capital distribution would reduce the amount of or retire any part of its common or preferred stock or retire any part of debt instruments such as notes or debentures included in capital;
•the savings bank’s proposed capital distribution is payable in property other than cash;
•the savings bank is directly or indirectly controlled by a mutual savings and loan holding company or by a company that is not a savings and loan holding company; or
•the distribution would violate any applicable statute, regulation, agreement or regulatory condition.
	Even if an application is not otherwise required, every savings bank that is a subsidiary of a savings and loan holding company must file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution. If a savings bank subsidiary of a savings and loan holding company is filing a notice with the Federal Reserve Board for a dividend, and an application to the OCC is not otherwise required, then the savings bank must provide to the OCC an informational copy of the notice filed with the Federal Reserve Board, at the same time the notice is filed.
An application or notice related to a capital distribution may be disapproved by the agency if:
•the federal savings bank would be undercapitalized, significantly undercapitalized or critically undercapitalized following the distribution;
•the proposed capital distribution raises safety and soundness concerns; or
•the capital distribution would violate a prohibition contained in any statute, regulation, agreement or regulatory condition.
In addition, an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement.
Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. The OCC is required to assess the federal savings bank’s record of compliance with the Community Reinvestment Act. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. In 2022, the OCC and other bank regulatory agencies released a notice of proposed rulemaking to strengthen and modernize the Community Reinvestment Act regulations and framework.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. the Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent federal evaluation.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulations. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as the Bank. CFSB Bancorp and 15 Beach MHC are affiliates of the Bank because of its control of the Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets from an affiliate and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
•be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
•not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution to the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and currently range up to
$10,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings bank. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Branching. A federal savings bank that has not elected “covered savings association” status generally has authority to establish branches in any state or states of the United States and its territories. Such authority is subject to OCC approval for new branches.
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as the Bank generally up to a maximum of $250,000 per separately insured depositor.
The FDIC imposes deposit insurance assessments against all insured depository institutions. An institution’s assessment rate depends upon the perceived risk of the institution to the Deposit Insurance Fund, with institutions deemed less risky paying lower rates. Currently, assessments for institutions of less than $10 billion of total assets are based on financial measures and supervisory ratings derived from statistical models estimating the probability of failure within three years. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking, and adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by two basis points beginning in the first quarterly assessment period of 2023.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. The Bank cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Privacy Regulations. Federal regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. The Bank currently has a privacy protection policy in place and believes that such policy complies with the regulations.
USA PATRIOT Act. The Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
•Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national origin and other prohibited factors in extending credit;
•Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
•Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
•Truth in Savings Act, governing disclosures with respect to deposit accounts; and
•rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
•Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
•Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. The Bank was in compliance with this requirement at June 30, 2023. Based on redemption provisions of the Federal Home Loan Bank of Boston, the stock has no quoted market value and is carried at cost. The Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Boston stock. At June 30, 2023, no impairment had been recognized.
Holding Company Regulation
General. CFSB Bancorp and 15 Beach, MHC are savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, CFSB Bancorp and 15 Beach, MHC are registered with the Federal Reserve Board and subject to the regulation, examination, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over CFSB Bancorp, 15 Beach, MHC and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the Bank.
Permissible Activities. Under present law, the business activities of CFSB Bancorp and 15 Beach, MHC are generally limited to those activities permissible for financial holding companies provided certain conditions are met and financial holding company status is elected, and for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations. CFSB Bancorp and 15 Beach, MHC have not elected financial holding company status.
Federal law prohibits a savings and loan holding company, including CFSB Bancorp and 15 Beach, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings association
or savings and loan holding company, without prior Federal Reserve Board approval. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board considers factors such as the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
•the approval of interstate supervisory acquisitions by savings and loan holding companies; and
•the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
Capital. Savings and loan holding companies with less than $3.0 billion in consolidated assets are generally not subject to the regulatory capital requirements unless otherwise advised by the Federal Reserve Board.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of financial and managerial strength to their subsidiary depository institutions.
Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Regulatory guidance provides for prior consultation with Federal Reserve Bank staff concerning dividends in certain circumstances such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. Federal Reserve Board guidance also states that a holding company should inform Federal Reserve Bank supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of CFSB Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Waivers of Dividends by 15 Beach, MHC. CFSB Bancorp may pay dividends on its common stock to public stockholders. If it does, it is also required to pay dividends to 15 Beach, MHC, unless 15 Beach, MHC elects to waive the receipt of dividends. 15 Beach, MHC must receive the approval of the Federal Reserve Board before it may waive the receipt of any dividends from CFSB Bancorp. The Federal Reserve Board has issued an interim final rule providing that it will not object to dividend waivers under certain circumstances, including circumstances where the waiver is not detrimental to the safe and sound operation of the savings bank and a majority of the mutual holding company’s members have approved the waiver of dividends by the mutual holding company within the previous twelve months. In addition, for a “non-grandfathered” mutual holding company such as 15 Beach, MHC, each officer or director of CFSB Bancorp and the Bank, and any tax-qualified stock benefit plan or non-tax-qualified stock benefit plan in which such individual participates that holds any shares of stock to which the waiver would apply, must waive the right to receive any such dividend declared. In addition, any dividends waived by 15 Beach, MHC must be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire “control” of a savings and loan holding company, such as CFSB Bancorp, unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. There is a presumption of control upon the acquisition of 10% or more of a class of voting stock under certain circumstances, such as where the holding company involved has its shares registered under the Exchange Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Emerging Growth Company Status
CFSB Bancorp is an emerging growth company. For as long as CFSB Bancorp continues to be an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, CFSB Bancorp also is not subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that its independent auditors review and attest as to the effectiveness of its internal control over financial reporting. CFSB Bancorp has also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Such an election is irrevocable during the period a company is an emerging growth company. Accordingly, its financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
A company loses emerging growth company status on the earlier of: (1) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (2) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (3) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (4) the date on which such company is deemed to be a “large accelerated filer” under SEC regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
Taxation
15 Beach, MHC, CFSB Bancorp and the Bank are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize material income tax matters and is not a comprehensive description of the tax rules applicable to 15 Beach, MHC, CFSB Bancorp and the Bank.
Our federal and state tax returns have not been audited for the past five years.
Federal Taxation
Method of Accounting. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending June 30 for filing its federal income tax returns. CFSB Bancorp and the Bank file a consolidated federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for income taxes on bad debt reserves by savings institutions with more than $500 million in assets. For taxable years beginning after 1995, the Bank has been subject to the same bad debt reserve rules as commercial banks. It currently utilizes the experience method under Section 585(b)(2) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
Net Operating Loss Carryovers. Effective with the passage of the Tax Cuts and Jobs Act, net operating loss carrybacks are no longer permitted, and net operating losses are allowed to be carried forward indefinitely. Net operating loss carryforwards arising from tax years beginning after January 1, 2018 are limited to offset a maximum of 80% of a future year’s taxable income.
Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any loss remaining after the five-year carryover period that has not been deducted is no longer deductible. At June 30, 2023, the Bank had no capital loss carryovers.
Corporate Dividends. CFSB Bancorp may generally exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.
State Taxation
Financial institutions in Massachusetts are required to file combined income tax returns. The current Massachusetts excise tax rate for financial institutions is 9.0% of federal taxable income, adjusted for certain items. Taxable income includes gross income as defined under the Internal Revenue Code, plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except for those deductions relating to dividends received and income or franchise taxes imposed by a state or political subdivision. Carryforwards and carrybacks of net operating losses and capital losses are not allowed.
A financial institution or business corporation is generally entitled to special tax treatment as a “security corporation” under Massachusetts law provided that: (1) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (2) it has applied for, and received, classification as a “security corporation” by the Commissioner of the Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue Code must pay a tax equal to 1.32% of its gross income. Beach Street Securities Corporation is qualified as a security corporation that is not a bank holding company. As such, it has received security corporation classification by the Massachusetts Department of Revenue and does not conduct any activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative pronouncements issued by the Massachusetts Department of Revenue.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Risks Related to our Lending Activities
Almost all of our loans are secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.
At June 30, 2023, approximately $175.8 million, or 98.8%, of our total loan portfolio was secured by real estate, most of which is located in our primary lending market area of Norfolk and Plymouth Counties, Massachusetts. Future declines in the real estate values in our primary lending markets because of an economic downturn could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for credit losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for credit losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions or the results of our analyses are incorrect, our allowance for credit losses may not be sufficient to cover current expected losses in our loan portfolio, resulting in additions to our allowance. In addition, our emphasis on loan growth and on increasing our portfolio of multi-family and commercial real estate loans, as well as any future credit deterioration, could require us to increase our allowance for credit losses in the future. At June 30, 2023, our allowance for loan losses as a percentage of total loans was 0.98%. Material additions to our allowance would materially decrease our net income.
The Current Expected Credit Losses, (“CECL), standard. CECL was effective for CFSB Bancorp on July 1, 2023. CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for loan losses that are incurred or probable, which would likely require us to increase our allowance for credit losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.
In addition, bank regulators periodically review our allowance for credit losses and, as a result of such reviews, we may be required to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as a result of such review or otherwise may have a material adverse effect on our financial condition and results of operations.
We intend to increase the origination of multi-family and commercial real estate loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.
At June 30, 2023, commercial real estate loans totaled $20.3 million, or 11.4% of our loan portfolio and multi-family real estate loans totaled $12.6 million, or 7.1% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, multi-family and commercial real estate loans generally have more risk than the owner-occupied one- to four-family residential real estate loans that we originate. Because the repayment of multi-family and commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. If we foreclose on these loans, our holding period for the collateral typically is longer than for a one- to four-family residential property because there are fewer potential purchasers of the collateral. In addition, multi-family and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential loans. Accordingly, charge-offs on multi-family and commercial real estate loans may be larger on a per loan basis than those incurred by our one- to four-family residential real estate or consumer loan portfolios.
As our multi-family and commercial real estate loan portfolio increases, the corresponding risks and potential for losses from these loans may also increase, which would adversely affect our business, financial condition and results of operations.
Our non-owner-occupied one- to four-family residential real estate loans may expose us to increased credit risk.
At June 30, 2023, $17.2 million, or 9.7%, of our total loan portfolio consisted of loans secured by non-owner-occupied one- to four-family residential real estate properties. At June 30, 2023, all of our non-owner-occupied one- to four-family residential real estate loans were performing in accordance with their repayment terms. One- to four-family residential loans secured by non-owner-occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner-occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner-occupied properties may be below that of owner-occupied properties due to lenient property maintenance standards that negatively impact the value of the collateral properties.
Risks Related to Economic Conditions
Inflation can have an adverse impact on our business and on our customers.
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there has been a rise in inflation and the Federal Reserve Board has raised certain benchmark interest rates in an effort to combat inflation. As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.
We have a high concentration of loans secured by real estate in our market area. Adverse economic conditions, both generally and in our market area, could adversely affect our financial condition and results of operations.
Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate and other types of lending, including, the ability of borrowers to repay these loans and the value of the collateral securing these loans.
Moreover, a significant decline in general economic conditions, caused by inflation, acts of terrorism, an outbreak of hostilities or other international or domestic calamities or other factors beyond our control could further impact these local economic conditions and could further negatively affect our financial performance. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Risks Related to our Business Strategy
Our business strategy includes loan growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.
Our business strategy primarily focuses on loan growth, funded by deposits. Achieving such growth may require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the level of competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable costs involved in opening branches and expanding lending capacity, and generally a period of time is required to generate the necessary revenues to offset these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of new branches.
A significant percentage of our assets is invested in securities, which have a lower yield than our loan portfolio.
Our results of operations depend substantially on our net interest income. At June 30, 2023, 44.4% of our assets were invested in investment securities and cash and cash equivalents. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase originations of loans that are acceptable to us. Further, at June 30, 2023, $147.9 million, or 99.9%, of our securities portfolio was designated as held to maturity. As a result, we are unable to sell these securities to respond to changes in interest rates that may occur in the future.
We depend on our management team and other key personnel to implement our business strategy and execute successful operations and we could be harmed by the loss of their services or the inability to hire additional personnel.
We depend on the services of the members of our senior management team who direct our strategy and operations. Our executive officers and lending personnel possess substantial expertise, extensive knowledge of our markets and key business relationships. Any one of them could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets.
Risks Related to Market Interest Rates
The reversal of the historically low interest rate environment may further adversely affect our net interest income and profitability.
The Federal Reserve Board decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic. The Federal Reserve Board is reversing its policy of near zero interest rates given its concerns over inflation. Market interest rates have risen in response to the Federal Reserve Board’s recent rate increases. The increase in market interest rates has had and is expected to continue to have, an adverse effect on our net interest income and profitability.
Future changes in interest rates could negatively affect our operating results and asset values.
Net income is the amount by which net interest income and non-interest income exceed non-interest expense and the provision for loan losses. Net interest income makes up a majority of our income and is based on the difference between:
•the interest income we earn on interest-earning assets, such as loans and securities; and
•the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.
The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This is exacerbated due to our historical focus on one- to four-family residential real estate loans, the substantial majority of which have fixed interest rates. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. Furthermore, increases in interest rates may adversely affect our ability to originate loans and/or the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable securities are called, requiring us to reinvest those cash flows at lower interest rates.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates generally results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s
net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity, and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.
We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) and our net interest income would change in the event of a range of assumed changes in market interest rates. As of June 30, 2023, in the event of an instantaneous 100 basis point increase in interest rates, we estimate that we would experience an 10.4% decrease in EVE and a 5.5% decrease in net interest income. For further discussion of how changes in interest rates could impact us, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Colonial Federal Savings Bank-Management of Market Risk.”
Risks Related to Our Funding
Our inability to generate core deposits may cause us to rely more heavily on wholesale funding strategies for funding and liquidity needs, which could have an adverse effect on our net interest margin and profitability.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also receive funds from loan repayments, investment maturities and income on other interest-earning assets. While we emphasize generating transaction accounts, we cannot guarantee if and when this will occur. Further, the considerable competition for deposits in our market area also has made, and may continue to make, it difficult for us to obtain reasonably priced deposits. Moreover, deposit balances can decrease if customers perceive alternative investments as providing a better risk/return tradeoff. If we are not able to increase our lower-cost transactional deposits at a level necessary to fund our asset growth or deposit outflows, we may be forced seek other sources of funds, including other certificates of deposit, Federal Home Loan Bank advances, brokered deposits and lines of credit to meet the borrowing and deposit withdrawal requirements of our customers, which may be more expensive and have an adverse effect on our net interest margin and profitability. In this regard, total deposits decreased $23.7 million, or 8.3%, to $263.4 million at June 30, 2023 from $287.1 million at June 30, 2022. The decrease in deposits has led the Bank to utilize Federal Home Loan Bank advances in recent periods to fund loan growth and to maintain on-balance sheet liquidity. This has resulted in an increase from no Federal Home Loan Bank advances at June 30, 2022 to $3.7 million at June 30, 2023 and a corresponding increase in borrowing expense to $54,000 for the year ended June 30, 2023 as compared to $8,000 for the year ended June 30, 2022.
Risks Related to Competitive Matters
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and securities brokerage firms and unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. In addition, some of our competitors offer loans with lower interest rates or more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area.
The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks, such as financial technology companies, securities companies and specialty finance companies to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and
may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. We expect competition to increase in the future because of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. For additional information see “Business of Colonial Federal Savings Bank-Market Area” and “-Competition.”
Our asset size may make it more difficult for us to compete.
Our asset size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from non-traditional banking activities. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.
Risks Related to Laws and Regulations
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.
The Bank is subject to extensive regulation, supervision and examination by the OCC, and CFSB Bancorp is subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and our depositors and borrowers, rather than for our stockholders.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for credit losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.
The Federal Reserve Board may require us to commit capital resources to support the Bank, and we may not have sufficient access to such capital resources.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by CFSB Bancorp to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so.
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives
are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
We can remain an “emerging growth company” for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.
As a result, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.
We qualify as a smaller reporting company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to smaller reporting companies could make our common stock less attractive to investors.
We are a smaller reporting company, and, for as long as we continue to qualify as a smaller reporting company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to smaller reporting companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and two years of audited financial statements in our annual report instead of three years. As long as we are not an accelerated filer, we will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accountants review and attest as to the effectiveness of our internal control over financial reporting. In addition, as a non-accelerated filer, we will have longer deadlines to file our periodic reports with the Securities and Exchange Commission.
We would remain a smaller reporting company and a non-accelerated filer for so long as our voting and non-voting equity held by non-affiliates (“public float”) is less than $250 million or our annual revenues are less than $100 million and our public float is less than $700 million. Public float is determined each year as of the end of a company’s previous second fiscal quarter.
As a result of our smaller reporting company and non-accelerated filer status, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.
Risks Related to Operational Matters
We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches.
Information technology systems are critical to our business. Our business requires us to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and our own business, operations, plans and business strategies. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. Our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Although we take protective measures and believe that we have not experienced any of the data breaches described above, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.
In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, loss of customers and damage to our reputation, and face regulatory action or civil litigation. Any of these events could have a material adverse effect on our financial condition and results of operations. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.
We rely on third-party vendors, which could expose us to additional cybersecurity risks.
Third-party vendors provide key components of our business infrastructure, including certain data processing and information services. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with our contractual agreements with them, or we also could be adversely affected if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
We may be subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers, which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. We are most susceptible to fraud and compliance risk in connection with the origination of loans, automated clearing house transactions, wire transactions, automated teller machine transactions, checking transactions, debit cards that we have issued to our customers and through our online banking portals.
We maintain a system of internal controls and insurance coverage to mitigate against such risks, including data processing system failures and errors, and customer fraud. If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
The cost of additional finance and accounting systems, procedures and controls to satisfy our public company reporting requirements will increase our expenses.
The obligations of being a public company, including the substantial public reporting obligations, require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control over financial reporting. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.
Risks Related to Accounting Matters
Changes in accounting standards could affect reported earnings.
The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.
If management’s estimates and assumptions are incorrect, it may have a material impact on our consolidated financial statements and our financial condition or operating results.
In preparing the periodic reports we are required to file under the Exchange Act, including our consolidated financial statements, our management is required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. The most significant areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for credit losses.
Risks Related to COVID-19
The COVID-19 pandemic could continue to pose risks to our business, our results of operations and the future prospects of BV Financial.
The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in which our clients operate. Given its dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business, our customers, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain. Additionally, the responses of various governmental and non-governmental authorities and consumers to the pandemic may have material long-term effects on us and our customers, which are difficult to quantify in the near-term or long-term.
Other Risks Related to Our Business
Legal and regulatory proceedings and related matters could adversely affect us.
We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term effects of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may voluntarily change their behavior as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
We are a community bank and our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees or by retaining, appointing or electing directors who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and employees. If our reputation is negatively affected by the actions of our employees or directors, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.
Risks Related to the Ownership of Stock
Our public stockholders own a minority of CFSB Bancorp’s common stock and cannot exercise voting control over most matters put to a vote of stockholders.
Public stockholders own a minority of the outstanding shares of CFSB Bancorp’s common stock. As a result, stockholders other than 15 Beach, MHC cannot exercise voting control over most matters put to a vote of stockholders. 15 Beach, MHC owns a majority of CFSB Bancorp’s common stock and, through its board of directors, can exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage the Bank also manage CFSB Bancorp and 15 Beach, MHC. The board of directors and officers of 15 Beach, MHC must ensure that the interests of depositors of the Bank (as members of 15 Beach, MHC) are represented and considered in matters put to a vote of stockholders of CFSB Bancorp. Therefore, 15 Beach, MHC may take action that the public stockholders believe to be contrary to their interests. For example, 15 Beach, MHC may exercise its voting control to defeat a stockholder nominee for election to the board of directors of CFSB Bancorp.
In addition, stockholders will not be able to force a merger or second-step conversion transaction without the consent of 15 Beach, MHC since such transactions also require the approval of a majority of all of the outstanding voting stock of CFSB Bancorp, which can only be achieved if 15 Beach, MHC votes to approve such transactions. Some stockholders may desire a sale or merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since, on a fully converted basis, most full stock institutions tend to trade at higher multiples than mutual holding companies. Stockholders could, however, prevent a second-step conversion because under current regulations and policies, such matter also requires the separate approval of the stockholders other than 15 Beach, MHC.
Our common stock is not heavily traded, and the stock price may fluctuate significantly.
Our common stock is traded on The Nasdaq Stock Market. Certain brokers currently make a market in the common stock, but such transactions are infrequent and the volume of shares traded is relatively small. Management cannot predict whether these or other brokers will continue to make a market in our common stock. Prices on stock that is not heavily traded can be more volatile than heavily traded stock. Factors such as our financial results, the introduction of new products and services by us or our competitors, publicity regarding the banking industry, and various other factors affecting the banking industry may have a significant impact on the market price of the shares of the common stock. Management also cannot predict the extent to which an active public market for our common stock will develop or be sustained in the future. Accordingly, stockholders may not be able to sell their shares of our common stock at the volumes, prices, or times that they desire.
Federal Reserve Board regulations and policy effectively prohibit 15 Beach, MHC from waiving the receipt of dividends, which will likely preclude us from paying any dividends on our common stock.
CFSB Bancorp’s board of directors have the authority to declare dividends on our common stock subject to statutory and regulatory requirements. We currently intend to retain all our future earnings for use in our business and do not expect to pay any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be made by our board of directors and will depend upon our financial condition, results of operations, capital requirements, restrictions under Federal Reserve Board regulations and policy, our business strategy and other factors that our board of directors deems relevant.
Under Federal Reserve Board regulations and policy, if CFSB Bancorp pays dividends to its public stockholders, it also would be required to pay dividends to 15 Beach, MHC, unless 15 Beach, MHC waives the receipt of such dividends. Federal Reserve Board regulations implemented after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) effectively prohibit federally-chartered mutual holding companies from waiving dividends declared by their subsidiaries. See “Supervision and Regulation-Holding Company Regulation-Waivers of Dividends by 15 Beach, MHC” for a further discussion of the applicable requirements related to the potential waiver of dividends by a mutual holding company. Unless Federal Reserve Board regulations and policy change by allowing 15 Beach, MHC to waive the receipt of dividends declared by CFSB Bancorp without diluting minority stockholders, it is unlikely that CFSB Bancorp will pay any dividends.
Various factors may make takeover attempts more difficult to achieve.
Stock banks or their holding companies, as well as individuals, may not acquire control of a mutual holding company, such as CFSB Bancorp. As a result, the only persons that may acquire control of a mutual holding company are other mutual savings institutions or mutual holding companies. Accordingly, it is very unlikely that CFSB Bancorp would be subject to any takeover attempt by activist stockholders or other financial institutions. There also are provisions in our charter and bylaws that may be used to delay or block a takeover attempt, including a provision that prohibits any person, other than 15 Beach, MHC, from voting more than 10% of the shares of common stock outstanding. In addition, federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of CFSB Bancorp without our board of directors’ prior approval.
Under Federal Reserve Board regulations, for a period of three years following completion of the stock offering, no person may directly or indirectly acquire or offer to acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. In addition, under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of a savings and loan holding company. Acquisition of 10% or more of any class of voting stock of a savings and loan holding company creates a rebuttable presumption that the acquirer “controls” the savings and loan holding company. Also, a savings and loan holding company must obtain the prior approval of the Federal Reserve Board before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any financial institution holding company or bank, including the Bank.
In addition, a section in CFSB Bancorp’s charter provides that for a period of five years from the closing of the offering, no person, other than 15 Beach, MHC, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of CFSB Bancorp, held by persons other than 15 Beach, MHC, and that any shares acquired in excess of this limit will not be entitled to be voted and will not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.
Taken as a whole, these statutory provisions and provisions in our charter and bylaws make it very difficult for any potential acquiror from acquiring control of CFSB Bancorp without the approval of our board of directors, which could adversely affect the market price of our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
We conduct our operations from our main office in Quincy, Massachusetts and two additional branch offices in Holbrook and Weymouth, Massachusetts. We also maintain a limited branch office located within, and only available to residents of, a senior citizen housing facility in Quincy, Massachusetts. All of our branch offices are located in Norfolk County, Massachusetts. As of June 30, 2023, the net book value of our real properties, including land, buildings and building improvements, was $3.4 million.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in the opinion of management, would have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm, and other factors.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Stock Market under the symbol “CFSB”. Trading of our common stock commenced on January 13, 2022, following the completion of our initial public offering. Prior to that time, there was no established public trading market for our common stock.
Stockholders
As of September 18, 2023, there were 208 stockholders of record of our common stock. This number does not include beneficial owners whose shares are held in street name.
Dividends
We have never declared or paid any dividends to our stockholders since our inception and we do not plan to declare or pay cash dividends in the foreseeable future. We currently anticipate that we will retain all available funds and any future earnings for the operation and expansion of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. Investors should not purchase our common stock with the expectation of receiving cash dividends.
Unregistered Securities and Share Repurchases
There were no sales of unregistered securities or repurchases of shares of common stock during the quarter ended June 30, 2023.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved.]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from our audited consolidated financial statements, which appear beginning on page of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding the Bank provided elsewhere in this Form 10-K.
Overview
Our results of operations depend primarily on our net interest income and, to a lesser extent, non-interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits and borrowings. Non-interest income consists primarily of earnings on bank-owned life insurance, service charges on deposit accounts and other income. Our results of operations also are affected by our provision for loan losses and non-interest expense. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment, data processing costs, advertising, FDIC deposit insurance premiums and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our audited consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The Jumpstart Our Business Startups Act ("JOBS Act") contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our audited consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.
Allowance for Loan Loss
The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as a critical accounting policy.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a given borrower's ability to repay, the estimated value of any underlying collateral, the size and composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not separately identify consumer loans for impairment disclosure unless such loans are subject to a troubled debt restructuring agreement. The general component covers pools of loans by loan class not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: (1) levels and trends in delinquent, classified, non-accrual and impaired loans, as well as loan modifications; (2) trends in the nature and volume of the portfolio and terms of loans and the existence and effect of any concentrations of credit and changes in level of such concentrations; (3) effects of the changes in risk selection and lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (4) experience, ability, and depth of lending department management and other relevant staff; and (5) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimated specific and general losses in the portfolio.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
There have been no material changes to our critical accounting policies during the year ended June 30, 2023.
For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the audited consolidated financial statements contained elsewhere within this Form 10-K.
Business Strategy
Our current business strategy consists of the following:
•Grow our balance sheet and improve profitability. Given our attractive market area, we believe we are well-positioned to strategically grow our balance sheet without a proportional increase in overhead expense. Accordingly, we intend to increase, on a managed basis, our assets and liabilities, particularly loans and deposits. As we grow our assets, particularly by increasing our loans, in particular, one- to four-family residential, multi-family and commercial real estate loans, as a percentage of assets, while controlling our expenses, we anticipate improving our earnings.
•Grow our loan portfolio prudently with a focus on residential, multi-family and commercial real estate lending. Our principal business activity historically has been the origination of residential mortgage loans, supplemented, to a lesser extent, with multi-family and commercial real estate loans. We expect that one- to four-family residential real estate lending will remain our primary focus. We intend also to increase our focus on originating multi-family and commercial real estate loans. We may hire additional staff to support this growth, including a credit analyst.
•Continue to increase core deposits, with an emphasis on low-cost demand deposits. We seek core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our net interest rate spread and margin. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. We consider our core deposits to include NOW and demand accounts, savings accounts and money market accounts. Core deposits decreased to $152.7 million, or 58.0% of total deposits, at June 30, 2023 from $186.9 million, or 65.1% of total deposits, at June 30, 2022.
•Continue to manage credit risk to maintain a low level of non-performing assets. We believe strong asset quality is a key to our long-term financial success. Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. At both June 30, 2023 and 2022, we did not have any non-performing assets or classified loans.
•Grow organically and through opportunistic bank or branch acquisitions or de novo branching. In addition to organic growth, we will also consider acquisition opportunities that we believe would enhance the value of our franchise and yield potential financial benefits for our stockholders. Although we believe opportunities exist to increase our market share in our historical markets, we would explore opportunities to expand into contiguous markets in Massachusetts. We will consider expanding our branch network by establishing new branches and/or through acquisitions, although we have no current acquisitions or new branches planned. The additional capital we raised in the stock offering will also provide us the opportunity to acquire other financial institutions.
•Continue to provide value to our community. Our goal is to provide long-term value to our customers, employees and the communities we serve by executing a safe and sound service-oriented business strategy that produces increased earnings. We believe there is a significant opportunity for a community-focused bank in our market area, and the increased capital we raised in the stock offering will enable us to compete more effectively with other financial institutions.
Comparison of Financial Condition at June 30, 2023 and June 30, 2022
Total Assets. Total assets decreased $17.2 million, or 4.7%, to $349.0 million at June 30, 2023 from $366.2 million at June 30, 2022. The decrease resulted primarily from decreases in cash and cash equivalents of $24.8 million, or 78.3%, partially offset by increases in securities held to maturity of $2.7 million, or 1.8% and in net loans of $3.3 million, or 1.9%.
Cash and Cash Equivalents. Cash and cash equivalents decreased $24.8 million, or 78.3%, to $6.9 million at June 30, 2023 from $31.7 million at June 30, 2022. The decrease was a result of deposit outflows, as well as the funding for the increase in securities held to maturity and loans.
Securities Available for Sale. Securities available for sale decreased $53,000 to $146,000 at June 30, 2023 from $199,000 at June 30, 2022. The decrease was due to payments on mortgage-backed securities.
Securities Held to Maturity. Securities held to maturity increased $2.7 million, or 1.8%, to $147.9 million at June 30, 2023 from $145.2 million at June 30, 2022, as we invested cash into securities, primarily corporate bonds and debt securities, to increase our overall yield on interest-earning assets.
Net Loans. Net loans increased $3.3 million, or 1.9% to $175.9, million at June 30, 2023 from $172.6 million at June 30, 2022. The increase was due to increases of $5.6 million, or 37.7%, in commercial real estate loans, and $729,000, or 37.0%, in second mortgages and home equity lines of credit, partially offset by decreases of $1.6 million, or 11.7%, in multi-family real estate loans and $964,000, or 0.7%, in one- to four-family residential real estate loans. The increase in commercial real estate loans reflected loan originations during the year, as the Company diversifies its loan mix. The decreases in multi-family and one- to four-family residential real estate loans reflected payoffs on properties sold by the borrower and repayments exceeding originations during the year ended June 30, 2023.
Total Liabilities. Total liabilities decreased $18.8 million, or 6.4%, to $273.1 million at June 30, 2023 from $291.9 million at June 30, 2022. The decrease was the result of decreases in interest-bearing deposits of $25.3 million, or 9.9%, partially offset by increases in non-interest bearing deposits of $1.6 million, or 5.1%, and Federal Home Loan Bank advances of $3.7 million.
Deposits. Deposits decreased $23.7 million, or 8.3%, to $263.4 million at June 30, 2023 from $287.1 million at June 30, 2022. The decrease was the result of decreases of $25.3 million, or 9.9%, in interest-bearing deposits, as money market accounts decreased $20.0 million, or 42.6%, and regular and other savings accounts decreased $11.6 million, or 15.3%, partially offset by an increase of $10.8 million, or 14.3% in certificates of deposit, as new and existing depositors are moving funds to products offering higher interest rates. The decrease in interest-bearing deposits reflects management’s decision not to raise the rates offered on savings and money market accounts in the rising interest rate environment. At June 30, 2023, the Bank held $35.3 million in uninsured deposits.
Borrowings. Borrowings, consisting entirely of Federal Home Loan Bank advances, were $3.7 million at June 30, 2023 compared to $0 at June 30, 2022, to fund asset growth and deposit outflows during the year ended June 30, 2023.
Stockholders' Equity. Total stockholders' equity increased $1.6 million, or 2.2%, to $75.9 million at June 30, 2023 from $74.3 million at June 30, 2022. The increase was due to net income of $1.4 million for the year ended June 30, 2023, stock-based compensation of $109,000 and ESOP shares committed to be released of $87,000.
Comparison of Operating Results for the Year Ended June 30, 2023 and 2022
General. We had net income of $1.4 million for the year ended June 30, 2023, compared to net income of $442,000 for the year ended June 30, 2022, an increase of $1.0 million, or 227.1%. The increase in net income was primarily due to the $1.6 million funding of the new charitable foundation during the year ended June 30, 2022 and an increase of $1.5 million, or 15.8%, in interest income for the year ended June 30, 2023, partially offset by an increase in interest expense of $906,000, or 88.8%, a decrease in non-interest income of $31,000, or 4.5%, an increase in salaries and benefits expense of $420,000, or 10.3%, and an increase in income tax expense of $353,000.
Interest and Dividend Income. Interest and dividend income increased $1.5 million, or 15.8%, to $10.7 million for the year ended June 30, 2023 from $9.2 million for the year ended June 30, 2022. The increase was due to an increase of $1.1 million, or 49.9%, in interest and dividends on taxable debt securities, an increase of $193,000, or 3.0% in interest and fees on loans and an increase of $238,000, or 231.1%, in interest on short-term investments and certificates of deposit. Interest income on loans increased primarily due to an increase in the average balance of loans of $7.1 million to $178.0 million for the year ended June 30, 2023 from $171.0 million for the year ended June 30, 2022, partially offset by a decrease in the average yield on loans of four basis points to 3.76% for the year ended June 30, 2023 from 3.80% for the year ended June 30, 2022. Interest income on securities increased due to an increase in the average balance of securities of $27.5 million to $150.3 million for the year ended June 30, 2023 from $122.8 million for the year ended June 30, 2022 and due to an increase in the average yield on securities of 27 basis points to 2.50% for the year ended June 30, 2023 from 2.23% for the year ended June 30, 2022. The interest income on short-term investments and certificates of deposit increased due to an in the average yield earned of 286 basis points to 3.12% for the year ended June 30, 2023, from 0.26% for the year ended June 30, 2022, partially offset by a decrease in the average balance of $28.0 million to $10.9 million for the year ended June 30, 2023, from $38.9 million for the year ended June 30, 2022.
Interest Expense. Interest expense increased $906,000, or 88.8%, to $1.9 million for the year ended June 30, 2023 from $1.0 million for the year ended June 30, 2022. The increase was primarily due to an increase of $880,000, or 108.9%, in interest expense on certificates of deposit. The average cost of certificates of deposit increased 88 basis points to 1.63% for the year ended June 30, 2023 from 0.75% for the year ended June 30, 2022, while the average balance of certificates of deposit decreased $4.1 million to $103.4 million for the year ended June 30, 2023 from $107.5 million for the year ended June 30, 2022. Additionally, interest expense on borrowings, consisting entirely of FHLB advances, increased $46,000, to $54,000 for the year ended June 30, 2023 from $8,000 for the year ended June 30, 2022 due to the increase in the average balance of borrowings to $1.0 million for the year ended June 30, 2023 from $278,000 for the year ended June 30, 2022 and an increase in the average cost of 233 basis points to 5.21% for the year ended June 30, 2023 from 2.88% for the year ended June 30, 2022.
Net Interest Income. Net interest income increased $548,000, or 6.7%, to $8.8 million for the year ended June 30, 2023 from $8.2 million for the year ended June 30, 2022. The increase was due to an increase in average interest-earning assets of $6.6 million combined with an increase in the average rate earned on interest-earning assets of 37 basis points to 3.18% for the year ended June 30, 2023 from 2.81% for the year ended June 30, 2022. Our net interest margin increased to 2.61% for the year ended June 30, 2023 compared to 2.50% for the year ended June 30, 2022.
Provision for Loan Losses. We did not record a provision for loan losses for the year ended June 30, 2023, compared to a provision for loan losses of $26,000 for the year ended June 30, 2022. The allowance for loan losses was $1.7 million, or 0.98% of total loans, at June 30, 2023, compared to $1.7 million, or 1.00% of total loans, at June 30, 2022. We had four residential loans totaling $1.4 million designated as special mention at June 30, 2023, and no loans designated as special mention at June 30, 2022. We had no loans categorized as substandard, doubtful or loss at June 30, 2023 or 2022. We did not have any non-performing loans at either June 30, 2023 or 2022. We had no charge-offs for the year ended June 30, 2023 and $1,000 in charge-offs for the for the year ended June 30, 2022. We had no recoveries for the years ended June 30, 2023 and 2022.
Non-Interest Income. Non-interest income information is as follows.
Year Ended June 30,
Change
(Dollars in thousands)
Amount
Percent
Customer service fees
$
$
$
15.0
%
Income on bank-owned life insurance
(1
)
(0.4
%)
Gain on sale of available for sale securities
-
(56
)
(100.0
%)
Other income
2.8
%
Total non-interest income
$
$
$
(31
)
(4.5
%)
Non-interest income decreased $31,000, or 4.5%, to $664,000 for the year ended June 30, 2023 from $695,000 for the year ended June 30, 2022. The decrease was due to $56,000 in gain on sale of available for sale securities during the year ended June 30, 2022, partially offset by a $19,000 increase of customer service fees.
Non-Interest Expense. Non-interest expense information is as follows.
Year Ended June 30,
Change
(Dollars in thousands)
Amount
Percent
Salaries and employee benefits
$
4,517
4,097
$
10.3
%
Occupancy and equipment
1,028
16.4
%
Advertising
33.1
%
Data processing
(6
)
(1.7
%)
Deposit insurance
17.8
%
Charitable Foundation contribution
-
1,554
(1,554
)
(100.0
%)
Other
1,489
1,370
8.7
%
Total non-interest expense
$
7,669
$
8,483
$
(814
)
(9.6
%)
Non-interest expense decreased $814,000, or 9.6%, to $7.7 million for the year ended June 30, 2023 from $8.5 million for the year ended June 30, 2022. The decrease was due primarily to the $1.6 million funding of the charitable foundation during the year ended June 30, 2022, partially offset by a $420,000 increase in salaries and employee benefit expense due to normal employee annual merit salary benefit increases and stock-based compensation, an increase of $145,000 in occupancy expense related to a branch lease renewal, an increase of $46,000 in advertising expense and an increase of $119,000 in other expenses due primarily to increased audit and expenses associated with being a public company.
Provision for Income Taxes. The Company recorded a provision for income taxes of $301,000 for the year ended June 30, 2023, which represented a $353,000 increase from the benefit for income taxes of $52,000 for the year ended June 30, 2022. Our effective tax (benefit) rate was 17.2% and (13.3%) for the years ended June 30, 2023 and 2022, respectively. The lower effective tax rate for the years ended June 30, 2023 and 2022 as compared to the statutory rate reflected the benefit of our investment in tax-advantaged municipal securities and bank-owned life insurance as well as reduced state taxes through utilization of a Massachusetts securities corporation to hold our investment securities. The benefit for income taxes for the year ended June 30, 2022 was due to the tax benefit related to the funding of the charitable foundation.
Average Balance and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Tax-equivalent adjustments have been made. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $351,000 and $349,000 at June 30, 2023 and 2022, respectively.
For the Year Ended June 30,
(Dollars in thousands)
Average
Outstanding
Balance
Interest
Average
Yield/Rate
Average
Outstanding
Balance
Interest
Average
Yield/Rate
Interest-earning assets:
Loans
$
178,044
$
6,695
3.76
%
$
170,991
$
6,502
3.80
%
Securities(1)
150,334
3,752
2.50
%
122,816
2,743
2.23
%
Other
10,923
3.12
%
38,877
0.26
%
Total interest-earning assets
339,301
10,788
3.18
%
332,684
9,348
2.81
%
Non-interest-earning assets
16,701
20,530
Total assets
$
356,002
$
353,214
Interest-bearing liabilities:
Interest-bearing demand deposits
$
32,252
$
0.05
%
$
31,258
$
0.06
%
Savings deposits
70,338
0.10
%
73,139
0.10
%
Money market deposits
37,197
0.26
%
42,719
0.26
%
Certificates of deposit
103,410
1,688
1.63
%
107,524
0.75
%
Total interest-bearing deposits
243,197
1,872
0.77
%
254,640
1,012
0.40
%
FHLB advances
1,037
5.21
%
2.88
%
Total interest-bearing liabilities
244,234
1,926
0.79
%
254,918
1,020
0.40
%
Noninterest-bearing liabilities
Non-interest-bearing demand deposits
31,170
34,909
Other non-interest-bearing liabilities
5,334
5,907
Total liabilities
280,738
295,734
Stockholders' equity
75,264
57,480
Total liabilities and stockholders' equity
$
356,002
$
353,214
Net interest income - FTE
$
8,862
$
8,328
Net interest rate spread(2)
2.39
%
2.41
%
Net interest-earning assets(3)
$
95,067
$
77,766
Net interest margin - FTE(4)
2.61
%
2.50
%
Average interest-bearing assets to interest-bearing liabilities
138.92
%
130.51
%
(1)Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of $110,000 and $124,000 for the years ended June 30, 2023 and 2022, respectively.
(2)Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.
A reconciliation of income presented on a GAAP basis as compared to a fully-tax equivalent basis is below:
For the Year Ended June 30,
Securities interest income (no tax adjustment)
$
3,642
$
2,619
Tax-equivalent adjustment
Securities (tax-equivalent basis)
$
3,752
$
2,743
Net interest income (no tax adjustment)
8,752
8,204
Tax-equivalent adjustment
Net interest income (tax-equivalent adjustment)
$
8,862
$
8,328
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
For the Year Ended
June 30, 2023 vs. 2022
(In thousands)
Increase (Decrease) Due to Volume
Increase (Decrease) Due to Rate
Total Increase (Decrease)
Interest-earning assets:
Loans
$
$
(75
)
$
Securities
1,009
Other
(74
)
Total interest-earning assets
1,440
Interest-bearing liabilities:
Interest-bearing demand deposits
(3
)
(2
)
Savings deposits
(3
)
(1
)
(4
)
Money market deposits
(14
)
-
(14
)
Certificates of deposit
(31
)
Total deposits
(47
)
FHLB advances
Total interest-bearing liabilities
(25
)
Change in net interest income
$
$
(300
)
$
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans and investment securities, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The Asset/Liability Committee establishes and monitors the amount, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
•market our non-interest bearing demand, money market, savings and demand accounts;
•diversify our loan mix;
•invest in short- to medium-term repricing and/or maturing securities whenever the market allows; and
•maintain a strong capital position.
We do not engage in hedging activities, such as engaging in futures, options or interest rate swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
We consider two types of simulations impacted by changes in interest rates, which are (1) net interest income and (2) changes in the economic value of equity.
Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model, the results of which are provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a one-year period based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. The following table shows the estimated impact on net interest income for the one-year period beginning June 30, 2023 resulting from potential changes in interest rates, expressed in basis points. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.
Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Change in Interest Rates (basis points)(1)
Net Interest Income
Year 1 Forecast (In thousands)
Year 1 Change from Level
+400
$
5,791
(21.1
%)
+300
6,170
(16.0
%)
+200
6,547
(10.8
%)
+100
6,937
(5.5
%)
Level
7,342
-
%
7,479
1.9
%
7,504
2.2
%
7,467
0.0
7,333
(0.1
%)
(1)Assumes an immediate uniform change in interest rates at all maturities.
Economic Value of Equity. We monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.
The table below sets forth, as of June 30, 2023, the calculation of the estimated changes in the Company's EVE that would result from the designated immediate changes in the United States Treasury yield curve.
As of June 30, 2023
Estimated Increase (Decrease) in EVE
EVE as a Percentage of Present Value of Assets(3)
Change in Interest Rates (basis points)(1)
Estimated EVE(2)
(In thousands)
Amount
(In thousands)
Percent
EVE Ratio(4)
Decrease
(basis points)
+400
$
31,163
$
(20,880
)
(40.1
%)
11.4
%
(520
)
+300
36,018
(16,025
)
(30.8
%)
12.8
%
(380
)
+200
41,150
(10,893
)
(20.9
%)
14.1
%
(250
)
+100
46,640
(5,403
)
(10.4
%)
15.4
%
(120
)
Level
52,043
-
-
16.6
%
-
56,716
4,673
9.0
%
17.4
%
60,873
8,830
17.0
%
18.1
%
64,115
12,072
23.2
%
18.4
%
64,243
12,200
23.4
%
18.0
%
(1)Assumes an immediate uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at June 30, 2023, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 20.9% decrease in EVE, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 9.0% increase in EVE.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and EVE tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates and will differ from actual results.
Interest rate calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Boston. At June 30, 2023, we had $3.7 million outstanding in advances from the Federal Home Loan Bank of Boston. At June 30, 2023, we had the ability to borrow $63.5 million in
additional Federal Home Loan Bank of Boston advances. Additionally, at June 30, 2023, we had a $2.4 million line of credit with the Federal Home Loan Bank of Boston, none of which was drawn at June 30, 2023.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $2.1 million and $1.9 million for the years ended June 30, 2023 and 2022, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans and proceeds from maturing securities and pay downs on securities, was $6.9 million for the year ended June 30, 2023, primarily due to the purchase of $16.8 million of securities and a net increase in loans of $3.3 million, partially offset by maturities, pre-payments and calls of securities of $13.7 million. Net cash flows used in investing activities for the year ended June 30, 2022 was $36.3 million, primarily related to purchases of securities held to maturity of $62.9 million, partially offset by maturities, prepayments and calls of securities held to maturity of $22.2 million. Net cash used in financing activities was $20.0 million for the year ended June 30, 2023, primarily related to a net decrease in deposits of $24.7 million. Net cash provided by financing activities was $25.4 million for the year ended June 30, 2022, primarily from the proceeds from the initial sale of common stock.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase loans with an increase in core deposits as supplemented by the use of Federal Home Loan Bank of Boston advances as needed.
Capital Resources. At June 30, 2023 and 2022 the Bank exceeded all of its regulatory capital requirements. See Note 9 to the consolidated financial statements of this annual report.
The net offering proceeds received during the year ended June 30, 2022, as discussed in Note 1 to the audited consolidated financial statements, significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net offering proceeds are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net offering proceeds, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net offering proceeds, as well as other factors associated with the offering, our return on equity will be lower immediately following the offering.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At June 30, 2023, we had $608,000 of commitments to originate loans and $5.0 million of unadvanced funds under home equity lines of credit. See Note 10 to the audited consolidated financial statements for further information.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our consolidated financial statements beginning on page of this Form 10-K. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to non-public companies.
Impact of Inflation and Changing Prices
The audited consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
For information regarding market risk, see Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations-Management of Market Risk.”

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 392)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CFSB Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CFSB Bancorp, Inc. and subsidiaries (the Company) as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended and the related notes (collectively, “the financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2004.
By:/s/ Wolf & Company, P.C.
Boston, Massachusetts
September 20, 2023
CFSB Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
June 30,
June 30,
Assets:
Cash and due from banks
$
1,486
$
1,609
Short-term investments
5,375
30,058
Total cash and cash equivalents
6,861
31,667
Securities available for sale, at fair value
Securities held to maturity, at amortized cost, fair value of $132,273 at
June 30, 2023 and $133,593 at June 30, 2022
147,902
145,239
Federal Home Loan Bank stock, at cost
Loans, net of allowance for loan losses of $1,747 at June 30, 2023 and
$1,747 at June 30, 2022
175,911
172,593
Premises and equipment, net
3,413
3,334
Accrued interest receivable
1,363
1,265
Bank-owned life insurance
10,402
10,144
Deferred tax asset
1,079
1,079
Operating lease right of use asset
-
Other assets
Total assets
$
349,007
$
366,183
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing
$
32,760
$
31,168
Interest-bearing
230,616
255,907
Total deposits
263,376
287,075
Short-term borrowings
3,675
-
Mortgagors' escrow accounts
1,596
1,555
Operating lease liability
-
Accrued expenses and other liabilities
3,509
3,303
Total liabilities
273,118
291,933
Stockholders' Equity
Preferred Stock, $.01 par value, 10,000,000 shares authorized as
of June 30, 2023 and June 30, 2022, and none outstanding
$
-
$
-
Common Stock, $.01 par value, 90,000,000 shares authorized as
of June 30, 2023 and June 30, 2022, 6,632,642 issued
and outstanding as of June 30, 2023 and 6,521,642 issued
and outstanding as of June 30, 2022
Additional paid-in capital
27,814
27,720
Retained earnings
50,416
48,970
Accumulated other comprehensive loss
(3
)
-
Unearned compensation - ESOP, 240,310 and 250,536 shares unallocated
at June 30, 2023 and June 30, 2022, respectively
(2,403
)
(2,505
)
Total stockholders' equity
75,889
74,250
Total liabilities and stockholders' equity
$
349,007
$
366,183
The accompanying notes are an integral part of these consolidated financial statements
CFSB Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
For the Year Ended
June 30,
June 30,
Interest and dividend income:
Interest and fees on loans
$
6,695
$
6,502
Interest and dividends on securities:
Taxable
3,228
2,153
Tax exempt
Interest on short-term investments and certificates of deposit
Total interest and dividend income
10,678
9,224
Interest expense:
Deposits
1,872
1,012
Short-term borrowings
Total interest expense
1,926
1,020
Net interest income
8,752
8,204
Provision for loan losses
-
Net interest income, after provision for loan losses
8,752
8,178
Non-interest income:
Customer service fees
Income on bank-owned life insurance
Gain on sale and call of securities
-
Other income
Total non-interest income
Non-interest expense:
Salaries and employee benefits
4,517
4,097
Occupancy and equipment
1,028
Advertising
Data processing
Deposit insurance
Charitable Foundation
-
1,554
Other general and administrative
1,489
1,370
Total non-interest expense
7,669
8,483
Income before income taxes
1,747
Provision (benefit) for income taxes
(52
)
Net income
$
1,446
$
Net income per share:
Basic
$
0.23
$
0.08
Diluted
$
0.23
$
0.08
Weighted average shares outstanding:
Basic
6,275,819
5,886,929
Diluted
6,275,874
5,886,929
The accompanying notes are an integral part of these consolidated financial statements.
CFSB Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
For the Year Ended June 30,
Net income
$
1,446
$
Other comprehensive income:
Change in unrealized holding (losses) gains
(5
)
Reclassification adjustment for net realized gains included in income
-
(56
)
Net change in unrealized losses
(5
)
(24
)
Tax effect
Net-of-tax amount
(3
)
(17
)
Comprehensive income
$
1,443
$
The related income tax expense for net realized gains included in income was $19,000 for the year ended June 30, 2022.
The accompanying notes are an integral part of these consolidated financial statements.
CFSB Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands, except share data)
Accumulated
Additional
Other
Unearned
Common Stock
Paid-in
Retained
Comprehensive
Compensation
Shares
Amount
Capital
Earnings
Income (Loss)
ESOP
Total
Balance at June 30, 2022
6,521,642
$
$
27,720
$
48,970
$
-
$
(2,505
)
$
74,250
Net income
-
-
-
1,446
-
-
1,446
Other comprehensive loss
-
-
-
-
(3
)
-
(3
)
Restricted stock awards granted
111,000
-
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
ESOP shares committed to be released
-
-
(15
)
-
-
Balance at June 30, 2023
6,632,642
$
$
27,814
$
50,416
$
(3
)
$
(2,403
)
$
75,889
Balance at June 30, 2021
-
$
-
$
-
$
48,628
$
$
-
$
48,645
Net income
-
-
-
-
-
Other comprehensive loss
-
-
-
-
(17
)
-
(17
)
Transfer of cash from Colonial Federal Savings Bank to 15 Beach MHC
-
-
-
(100
)
-
-
(100
)
Issuance of shares to mutual holding company
3,586,903
-
-
-
-
Issuance of shares in the initial public offering, net of expenses of $1,583,000
2,804,306
26,417
-
-
-
26,445
Issuance of shares to the Colonial Federal Savings Bank Charitable Foundation
130,433
1,303
-
-
-
1,304
Purchase of 255,648 shares by the ESOP
-
-
-
-
-
(2,556
)
(2,556
)
ESOP shares committed to be released
-
-
-
-
-
Balance at June 30, 2022
6,521,642
$
$
27,720
$
48,970
$
-
$
(2,505
)
$
74,250
The accompanying notes are an integral part of these consolidated financial statements
CFSB Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended June 30,
Cash flows from operating activities:
Net income
$
1,446
$
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses
-
Gain on sale and call of securities
-
(56
)
Amortization of securities, net
Contribution of stock to the Colonial Federal Savings Bank Charitable Foundation
-
1,303
Net change in deferred loan costs and fees
(18
)
Increase in cash surrender value of bank-owned life insurance
(258
)
(259
)
Deferred income tax expense (benefit)
(407
)
Depreciation and amortization, net
ESOP expense
Stock-based compensation
-
Net increase in accrued interest receivable
(98
)
(119
)
Other, net
Net cash provided by operating activities
2,053
1,884
Cash flows from investing activities:
Maturities of certificates of deposit
-
Activity in securities available for sale:
Maturities, prepayments and calls
Sales
-
2,031
Activity in securities held to maturity:
Maturities, prepayments and calls
13,668
22,246
Purchases
(16,768
)
(62,944
)
Loan originations and payments, net
(3,320
)
1,814
Additions to premises and equipment
(314
)
(130
)
Purchase of bank-owned life insurance
-
(635
)
Purchase of Federal Home Loan Bank stock
(190
)
-
Redemption of Federal Home Loan Bank stock
-
Net cash used in investing activities
(6,876
)
(36,287
)
Cash flows from financing activities:
Net (decrease) increase in deposits
(23,699
)
2,401
Net increase (decrease) in short-term borrowings
3,675
(918
)
Proceeds from sale of common stock, net
-
26,482
Common stock purchased by ESOP
-
(2,556
)
Net increase (decrease) in mortgagors' escrow accounts
(17
)
Net cash (used in) provided by financing activities
(19,983
)
25,392
Net change in cash and cash equivalents
(24,806
)
(9,011
)
Cash and cash equivalents at beginning of year
31,667
40,678
Cash and cash equivalents at end of year
$
6,861
$
31,667
Supplemental information:
Interest paid on deposits and short-term borrowings
$
1,926
$
1,020
Income taxes paid
$
$
Adoption of ASU 2016-02, detailed in Notes 1 and 10
$
1,044
$
-
The accompanying notes are an integral part of these consolidated financial statements
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of presentation and consolidation
These consolidated financial statements of CFSB Bancorp, Inc. (the "Company") include the accounts of Colonial Federal Savings Bank (the “Bank”) and its wholly-owned subsidiary, Beach Street Security Corporation, which was established to buy, hold and sell securities. All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments necessary for a fair presentation are reflected in these consolidated financial statements, and all adjustments made are of a normal recurring nature.
Business
The Bank provides a variety of financial services to individuals and small businesses through its offices in Quincy, Holbrook and Weymouth. Its primary deposit products are savings, checking and term certificate accounts, and its primary lending product is residential mortgage loans.
Reorganization and Offering
On January 12, 2022, the Bank reorganized from a federally chartered mutual savings bank to a two-tier mutual holding company structure. As part of the reorganization, a mutual holding company (the “MHC”) was formed as a federal corporation, into which all of the current voting rights of the members of the Bank were transferred. As part of the reorganization, the Bank converted to a federal stock savings bank. The Company, a stock holding company was established as a federal corporation and a majority-owned subsidiary of the MHC at all times so long as the MHC remains in existence. Concurrently with the reorganization, the Company sold 43% of its common stock in a stock offering on a priority basis to depositors of the Bank and the tax qualified employee plans of the Bank and contributed 2% of its common stock to a charitable foundation established as a part of the reorganization. The remainder of the Company common stock is held by the MHC. The Company sold 2,804,306 shares of common stock at $10.00 per share for gross offering proceeds of $28.0 million.
Following the completion of the reorganization, all depositors who had liquidation rights with respect to the Bank as of the effective date of the reorganization will continue to have such rights solely with respect to 15 Beach, MHC so long as they continue to hold their deposit accounts with the Bank. In addition, all persons who become depositors of the Bank subsequent to the reorganization will have such liquidation rights with respect to 15 Beach, MHC.
Employee Stock Ownership Plan ("ESOP")
The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of shareholders' equity. The Company records compensation expense for the ESOP equal to the fair market value of shares when they are committed to be released from the suspense account to participants' accounts under the plan.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. For purposes of calculating basic EPS, weighted average common shares outstanding excludes unallocated ESOP shares and non-vested restricted shares. Diluted EPS is computed using the same method as basic EPS and reflects the potential dilution that could occur if stock options shares were exercised and converted into common stock. The potentially diluted shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. For the year ended June 30, 2023, 272,945 shares were excluded from the computation of diluted earnings per share because they were anti-dilutive. There were no anti-dilutive shares for the six months ended June 30, 2022. Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the average market value for the periods presented.
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS calculation for the year ended June 30, 2023 and the six months ended June 30, 2022, which reflects the period in which the Company had outstanding shares.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
For the Year Ended
For the Six Months Ended
(In thousands, except share and per share amounts)
June 30, 2023
June 30, 2022
Net income
$
1,446
$
Weighted average number of common shares outstanding
6,555,275
6,125,299
Less: Average unallocated ESOP shares
(245,823
)
(238,370
)
Less: Average non-vested restricted shares
(33,633
)
-
Weighted average number of common shares outstanding used to calculate basic earnings per common share
6,275,819
5,886,929
Dilutive effect of share-based compensation
-
Weighted average number of common shares outstanding used to calculate diluted earnings per common share
6,275,874
5,886,929
Earnings per common share
Basic
$
0.23
$
0.08
Diluted
$
0.23
$
0.08
Use of estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses.
Reclassification
Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, and interest-bearing deposits consisting primarily of balances at the Federal Reserve Bank of Boston and deposits sold that mature overnight. The Company may from time to time have deposits in financial institutions which exceed federally insured limits. At June 30, 2023 and 2022, the Company had a concentration of cash on deposit at the Federal Reserve Bank of Boston amounting to $1,660,000 and $28,930,000, respectively.
Certificates of deposit
Certificates of deposits generally mature within one year and are carried at cost, which approximates fair value.
Fair value hierarchy
The Company groups its assets that are measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.
Level 1 - Valuation is based on quoted prices in active exchange markets for identical assets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax effects.
Purchase premiums and discounts are recognized in interest income using the level yield method over the terms of the securities except for purchase premiums on callable securities which are amortized to the earliest call date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Each reporting period, the Company evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).
OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income, net of applicable taxes.
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB of Boston. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB of Boston may declare dividends on the stock. The Company reviews its investment in FHLB stock for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of June 30, 2023 and 2022, no impairment has been recognized.
Loans
The Company’s loan portfolio includes residential real estate, commercial real estate, construction and consumer loan segments. Residential real estate loans include classes for 1-4 family, multi-family, second mortgages and home equity lines of credit.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. When loans are sold or paid off, any unamortized fees and costs are recorded in earnings.
The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual status is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are less than 90 days past due and future payments are reasonably assured, generally after six months.
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
General component
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, multi-family loans, commercial real estate, construction and consumer loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume, credit concentrations and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no significant changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during fiscal 2023 or fiscal 2022.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential one- to four-family: This segment consists of one- to four-family, owner-occupied, residential mortgage loans, virtually all of which are secured by properties in our market area. Generally, mortgages with loan-to-value ratios greater than 80% require private mortgage insurance, with limited exceptions. Underwriting approval is dependent on review of the borrower's ability to repay and credit history in accordance with the Company's policy. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit quality of this segment.
Multi-family: This segment consists of real estate loans secured by properties of five or more rental units within our market area. We consider a number of factors in originating multi-family loans. We evaluate the qualifications, income level and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality of this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.
Second mortgages and home equity lines of credit: Second mortgage loans and home equity lines of credit are multi-purpose loans used to finance various home or personal needs for which a one- to four-family primary or secondary residence serves as collateral. We generally originate home equity lines of credit with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 20 years. We originate second mortgage loans on owner-occupied properties with fixed rates of interest. We generally originate these loans with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 15 years. Underwriting approval is dependent on review of the borrower's ability to repay and credit history in accordance with the Company's policy. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit quality of this segment.
Construction - Our construction loans are generally 1-4 family residential owner occupied properties where the borrower is improving the property.
Commercial real estate - Loans in this segment are primarily on income-producing properties throughout Eastern Massachusetts. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy due to increased vacancy rates, which in turn, would have an effect on the credit quality in this segment.
Consumer and home improvement - Loans in this segment, which include home improvement loans, are generally unsecured and repayment is dependent on the credit quality of the individual borrower. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Allocated component
The allocated component relates to loans that are classified as impaired. Based on internal credit ratings, residential real estate, multi-family, commercial real estate and construction loans are evaluated for impairment on a loan-by-loan basis. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.
Unallocated component
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating general and allocated reserves in the portfolio.
Premises and equipment
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the term of the respective leases.
Bank-owned life insurance
Bank-owned life insurance policies are reflected on the consolidated balance sheet at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income in the consolidated statements of operations and are not subject to income taxes.
Deferred Compensation Plan
The Company has entered into individual Deferred Compensation Agreements with specified executives.
Advertising
Advertising expenses are charged to earnings when incurred.
Pension plan
Costs of the multi-employer pension plan are based on the contribution required to be made to the plan. It is the Company’s policy to fund pension costs in the year of accrual.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes in the period of enactment. A valuation allowance is established against deferred tax assets when, based upon available evidence it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company’s base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable.
The Company does not have any uncertain tax positions at June 30, 2023 or 2022 which require disclosure. The Company accounts for interest and penalties as part of its provision for federal and state taxes. No interest and penalties were recorded for the years ended June 30, 2023 or 2022.
Transfers of financial assets
Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.
During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.
Comprehensive income/loss
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the retained earnings section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.
The components of accumulated other comprehensive loss, included in stockholders' equity, are as follows:
For the Year Ended
(Dollars in thousands)
June 30, 2023
June 30, 2022
Net unrealized losses on available for sale securities
$
(5
)
$
(24
)
Tax effect
Other comprehensive loss
$
(3
)
$
(17
)
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Leases
The Company leases certain branch locations under noncancelable operating leases. Under the Company's policy, operating leases do not have renewal options to extend lease terms. Upon commencement of a new lease, the Company will recognize a right of use ("ROU") asset and corresponding lease liability. The discount rate used in determining the present value of lease payments is based on the Company's incremental borrowing rate for borrowings with terms similar to each lease at commencement date. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be separated. The Company has elected the short-term lease recognition exemption for all leases that qualify.
Stock-based Compensation
The fair value of restricted stock and stock options is determined on the date of grant and amortized to compensation expense with a corresponding increase to additional paid-in capital over the required service period. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted based on actual forfeiture experience. The Black Scholes option-pricing model is used to determine the fair value of the stock options granted.
Recent accounting pronouncements
As an emerging growth company as defined in the JOBS Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to non-public companies. As of June 30, 2023, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.
On June 16, 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all current expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU, as amended, is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted Topic 326 on July 1, 2023 and is in the process of validating the new model used to quantify the estimate for the Allowance for Credit Losses and updating its policy documents and internal controls accordingly.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
2. Restrictions on cash and amounts due from banks
Effective March 26, 2020, the Board of Governors of the Federal Reserve reduced reserve requirement ratios to zero percent and therefore no reserve balance was required at June 30, 2023 or 2022.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
3. Securities
The amortized cost and fair value of securities, with gross unrealized gains and losses, follows:
June 30, 2023
(In thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities
$
$
-
$
(5
)
$
Collateralized mortgage obligations
-
-
Total securities available for sale
$
$
-
$
(5
)
$
Securities held to maturity:
Government-sponsored enterprises:
Debt obligations
$
$
-
$
(34
)
$
Mortgage-backed securities
46,619
-
(3,500
)
43,119
Collateralized mortgage obligations
-
-
Municipal bonds
43,865
(6,423
)
37,445
Corporate bonds
56,421
-
(5,675
)
50,746
Total securities held to maturity
$
147,902
$
$
(15,632
)
$
132,273
June 30, 2022
(In thousands)
Amortized
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities
$
$
-
$
-
$
Collateralized mortgage obligations
-
-
Total securities available for sale
$
$
-
$
-
$
Securities held to maturity:
Government-sponsored enterprises:
Mortgage-backed securities
$
47,741
$
$
(1,895
)
$
45,872
Collateralized mortgage obligations
-
-
Municipal bonds
45,776
(5,172
)
40,627
Corporate bonds
51,715
(4,648
)
47,087
Total securities held to maturity
$
145,239
$
$
(11,715
)
$
133,593
Securities with an amortized cost of $14,657,000 and a fair value of $12,410,000 at June 30, 2023 were pledged to secure a credit line with the Federal Reserve Bank. See Note 7 of these consolidated financial statements.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
The amortized cost and fair value of debt securities, by contractual maturity, at June 30, 2023 and June 30, 2022, is shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2023
Available for Sale
Held to Maturity
(In thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Within 1 year
$
-
$
-
$
7,770
$
7,686
Over 1 year through 5 years
-
-
31,738
29,987
Over 5 years through 10 years
-
-
39,215
34,185
Over 10 years
-
-
22,559
17,295
-
-
101,282
89,153
Mortgage-backed securities
46,619
43,119
Collateralized mortgage obligations
$
$
$
147,902
$
132,273
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Information pertaining to securities with gross unrealized losses at June 30, 2023 and 2022 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
June 30, 2023
Less Than Twelve Months
Over Twelve Months
(In thousands)
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Securities available for sale:
Mortgage-backed securities
$
$
$
$
Total temporarily impaired securities available for sale
$
$
$
$
Securities held to maturity:
Mortgage-backed securities
$
$
10,494
$
3,164
$
32,597
Debt obligations
-
-
Municipal bonds
6,280
6,312
27,676
Corporate bonds
9,534
5,357
40,213
Total temporarily impaired securities held to maturity
$
$
27,270
$
14,833
$
100,486
June 30, 2022
Less Than Twelve Months
Over Twelve Months
(In thousands)
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Securities held to maturity:
Mortgage-backed securities
$
1,712
$
39,843
$
$
1,855
Municipal bonds
3,520
25,976
1,652
6,394
Corporate bonds
3,679
37,015
5,682
Total temporarily impaired securities held to maturity
$
8,911
$
102,834
$
2,804
$
13,931
At June 30, 2023, 279 debt securities have unrealized losses with aggregate depreciation of 10.90% from the Company's amortized cost basis. These unrealized losses are the result of changes in the interest rate environment and there have been no downgrades in the investment quality of these securities or the issuers. The contractual terms of these securities do not permit the entities to settle the security at a price less than par value. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, it does not consider these securities to be other-than-temporarily impaired at June 30, 2023.
There were no sales of securities available for sale during the year ended June 30, 2023. Proceeds from the sale of securities available for sale was $2,031,000 for the year ended June 30, 2022.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
4. Loans
A summary of the balances of loans follows:
(In thousands)
June 30, 2023
June 30, 2022
Mortgage loans on real estate:
Residential:
1-4 family
$
140,109
$
141,073
Multifamily
12,638
14,310
Second mortgages and home equity lines of credit
2,699
1,970
Construction
-
Commercial
20,323
14,761
Total mortgage loans on real estate
175,769
172,489
Consumer loans:
Consumer
Home improvement
2,191
2,116
Total other loans
2,240
2,200
Total loans
178,009
174,689
Allowance for loan losses
(1,747
)
(1,747
)
Net deferred loan fees
(351
)
(349
)
Loans, net
$
175,911
$
172,593
There were no loans serviced for others at June 30, 2023 and 2022.
Residential loans are subject to a blanket lien securing FHLB advances. See Note 7 of these consolidated financial statements.
Included in total loans are loans due from directors and other related parties of $2.1 million and $3.0 million at June 30, 2023 and 2022, respectively. All loans made to directors have substantially the same terms and interest rates as other bank borrowers at their origination date. The Board of Directors confirms that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with underwriting policies prior to approving loans to individual directors. The following presents the activity in amount due from directors and other related parties for the years ended June 30, 2023 and 2022:
(In thousands)
June 30, 2023
June 30, 2022
Outstanding related party loans at July 1,
$
3,047
$
2,544
New loans
-
1,211
Draws
-
Transfers
(482
)
-
Repayments
(490
)
(708
)
Outstanding related party loans at June 30,
$
2,078
$
3,047
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Activity in the allowance for loan losses and allocation of the allowance to loan segments follows:
(In thousands)
Residential 1-4 Family
Multifamily
Second Mortgages and Home Equity Lines of Credit
Construction
Commercial Real Estate
Consumer
Home Improvement
Unallocated
Total
Balance at June 30, 2022
$
$
$
$
$
$
-
$
$
$
1,747
Provision (credit) for loan losses
(12
)
(25
)
(4
)
-
(63
)
-
Loans charged-off
-
-
-
-
-
-
-
-
-
Recoveries
-
-
-
-
-
-
-
-
-
Balance at June 30, 2023
$
$
$
$
-
$
$
-
$
$
$
1,747
Balance at June 30, 2021
$
$
$
$
-
$
$
-
$
$
$
1,722
Provision (credit) for loan losses
(57
)
(1
)
(27
)
-
Loans charged-off
-
-
-
-
-
-
(1
)
-
(1
)
Recoveries
-
-
-
-
-
-
-
-
-
Balance at June 30, 2022
$
$
$
$
$
$
-
$
$
$
1,747
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
The allocation of the allowance for loan losses to each category is presented as of June 30, 2023 and 2022.
(In thousands)
Residential 1-4 Family
Multifamily
Second Mortgages and Home Equity Lines of Credit
Construction
Commercial Real Estate
Consumer
Home Improvement
Unallocated
Total
June 30, 2023
Allowance for impaired loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Allowance for non-impaired loans
-
-
1,747
Total allowance for loan losses
$
$
$
$
-
$
$
-
$
$
$
1,747
Impaired loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-impaired loans
140,109
12,638
2,699
-
20,323
2,191
-
178,009
Total loans
$
140,109
$
12,638
$
2,699
$
-
$
20,323
$
$
2,191
$
-
$
178,009
June 30, 2022
Allowance for impaired loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Allowance for non-impaired loans
-
1,747
Total allowance for loan losses
$
$
$
$
$
$
-
$
$
$
1,747
Impaired loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-impaired loans
141,073
14,310
1,970
14,761
2,116
-
174,689
Total loans
$
141,073
$
14,310
$
1,970
$
$
14,761
$
$
2,116
$
-
$
174,689
At June 30, 2023 and 2022 there were no past due loans or loans on non-accrual status and there were no loans past due ninety days or more and still accruing.
There were no impaired loans at June 30, 2023 or 2022.
During the years ended June 30, 2023 and 2022, there were no troubled debt restructurings or troubled debt restructurings that defaulted in the first twelve months after restructuring. Management is required to perform a discounted cash flow calculation to determine the amount of impairment reserve required on any troubled debt restructurings. Any reserve would be recorded through the provision for loan losses.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Credit Quality Information
The Company utilizes an internal loan rating system for residential real estate, commercial real estate, and construction loans as follows:
Pass: Loans in this category are considered to pose low to average risk. Passed assets are generally protected by the current net worth and paying capacity of the obligor or by the value of collateral pledged.
Special Mention: Loans in this category possess credit deficiencies or potential weaknesses deserving management’s close attention. If uncorrected, such deficiencies or weaknesses may expose the Company to an increased risk of loss.
Substandard: Loans in this category are considered to be inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. These assets have a well-defined weakness and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans in this category have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loss: Loans in this category are considered uncollectible and continuance as a bankable asset is not warranted. Loans in this category are generally charged-off.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate and construction loans. On a monthly basis, the Company reviews the residential and other loan portfolios for credit quality primarily through the use of delinquency reports.
The following table presents information on the Company’s loans by risk ratings at June 30, 2023 and 2022:
(In thousands)
Residential 1-4 Family
Multifamily
Second Mortgages and Home Equity Lines of Credit
Construction
Commercial Real Estate
Consumer
Home Improvement
Total
June 30, 2023
Pass
$
138,678
$
12,638
$
2,699
$
-
$
20,323
$
$
2,191
$
176,578
Special mention
1,431
-
-
-
-
-
-
1,431
Total loans
$
140,109
$
12,638
$
2,699
$
-
$
20,323
$
$
2,191
$
178,009
June 30, 2022
Pass
$
141,073
$
14,310
$
1,970
$
$
14,761
$
$
2,116
$
174,689
Total loans
$
141,073
$
14,310
$
1,970
$
$
14,761
$
$
2,116
$
174,689
At June 30, 2023 and 2022, there were no loans rated substandard, doubtful or loss.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
5. Premises and Equipment
A summary of the cost and accumulated depreciation and amortization of premises and equipment follows:
(In thousands)
June 30, 2023
June 30, 2022
Land
$
1,553
$
1,553
Bank buildings
1,066
1,066
Building improvements
Furniture, fixtures and equipment
1,239
1,225
Leasehold improvements
5,116
4,937
Accumulated depreciation and amortization
(1,703
)
(1,603
)
$
3,413
$
3,334
Depreciation and amortization expense for the years ended June 30, 2023 and 2022 amounted to $235,000 and $255,000, respectively.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
6. Deposits
A summary of deposit balances, by type, is as follows:
(In thousands)
June 30, 2023
June 30, 2022
NOW and demand
$
61,538
$
64,163
Regular and other
64,184
75,774
Money market deposits
26,995
47,010
Total non-certificate accounts
152,717
186,947
Term certificates of $250,000 or more
24,340
24,608
Term certificates less than $250,000
86,319
75,520
Total certificate accounts
110,659
100,128
Total deposits
$
263,376
$
287,075
A summary of certificate accounts by maturity is as follows:
June 30, 2023
June 30, 2022
(Dollars in thousands)
Amount
Weighted Average Rate
Amount
Weighted Average Rate
Due within 3 months
$
11,171
1.11
%
$
24,873
0.45
%
Over 3 months to 1 year
83,590
3.23
53,974
0.77
Over 1 year to 2 years
11,813
2.33
14,307
0.96
Over 2 years to 3 years
1,900
0.61
5,277
0.92
Over 3 years to 5 years
2,185
2.49
1,697
0.65
$
110,659
2.86
%
$
100,128
0.73
%
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
7. Federal Home Loan Bank Advances and Other Borrowings
Overnight advances or advances having a one-month maturity totaled $3.7 million at June 30, 2023 at a weighted average rate of 5.25%. There were no overnight advances or advances having a one-month maturity at June 30, 2022. Selected information for such short-term borrowings is as follows:
June 30, 2023
June 30, 2022
(Dollars in thousands)
Average daily balance
$
1,037
$
Maximum amount outstanding at any month end
5,300
The Company has an available line of credit in the amount of $2,354,000 with the FHLB at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Company’s total assets. At June 30, 2023 and 2022 there were no funds advanced under the line of credit. All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as first mortgage loans on owner-occupied 1-4 family residential property.
The Company has an available line of credit under the Federal Reserve Bank Borrower-in-Custody program offered through the Discount Window. Under the terms of the credit line, the Company has pledged certain qualifying securities with a fair market value of $12,410,000 and $12,777,000, respectively, and the line bears a variable interest rate equal to the federal funds rate plus 0.50%. At June 30, 2023 and 2022, there were no outstanding balances under this program.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
Allocation of federal and state income taxes between current and deferred portions is as follows:
For the Year Ended June 30,
(In thousands)
Current tax provision:
Federal
$
$
State
Deferred tax expense (benefit):
Federal
(62
)
(322
)
State
-
(200
)
Valuation allowance
(407
)
Total income tax provision (benefit)
$
$
(52
)
The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
Years Ended June 30,
(Dollars in thousands)
Statutory amount
$
$
Increase (decrease) resulting from:
State taxes, net of federal tax expense (benefit)
(120
)
Tax exempt interest
(85
)
(96
)
Bank-owned life insurance
(31
)
(34
)
Stock-based compensation
-
Other, net
(43
)
Valuation allowance
Effective tax (benefit)
$
$
(52
)
Effective tax rate
17.2
%
-13.3
%
The components of the net deferred tax asset are as follows:
As of June 30,
(In thousands)
Deferred tax assets:
Allowance for loan losses
$
$
Employee benefit plans
ESOP
Stock-based compensation
-
Accrued rent
-
Net unrealized loss on available for sale securities
-
Depreciation and amortization
-
Charitable Foundation contribution carryforward
1,258
1,211
Valuation allowance
(179
)
(115
)
Gross deferred tax assets
1,079
1,096
Deferred tax liabilities:
Depreciation and amortization
$
-
$
(17
)
-
(17
)
Net deferred tax asset
$
1,079
$
1,079
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
A summary of the change in the net deferred tax asset is as follows:
Years Ended June 30,
(In thousands)
Balance at beginning of fiscal year
$
1,079
$
Deferred tax (expense) benefit
(2
)
Deferred tax effects of net unrealized gain on available for sale securities
Balance at end of fiscal year
$
1,079
$
1,079
The calculation of the Company's charitable contribution carryforward deferred tax asset is based upon a carryforward of approximately $1,271,000 of charitable contributions at June 30, 2023. As of June 30, 2023 it has been determined that it is more likely than not that a portion of the benefit from this charitable contribution carryforward will not be realized prior to expiration. As a result, a valuation allowance of $179,000 has been provided on this deferred tax asset for the year ended June 30, 2023. As of June 30, 2022, the valuation allowance related to the benefit from the charitable foundation contribution carryforward was $115,000. All other deferred tax assets as of June 30, 2023 and 2022 have not been reduced by a valuation allowance because management believes that it is more likely than not that the full amount of these deferred tax assets will be realized.
The federal income tax reserve for loan losses at the Company’s base year amounted to $2,582,000. If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used, limited to the amount of the reserve, would be subject to taxation in the fiscal year in which used. As the Company intends to use the reserve only to absorb loan losses, a deferred income tax liability of $726,000 has not been provided.
The Company and the Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statues of limitations by the internal revenue service for the years ended December 2019 through 2022. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2019 are open.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
9. Minimum Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Federal banking regulations require minimum capital requirements for community banking institutions as set forth in the following table. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital, Tier 1 capital or total capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. At June 30, 2023, the Company and the Bank met the required capital conservation buffer. Management believes that the Bank’s capital levels will remain characterized as “well capitalized”.
As of June 30, 2023, the most recent notification from the Office of the Comptroller of Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank is subject to dividend restrictions imposed by various regulators, including a limitation on the total of all dividends that the Bank may pay to the Company in any calendar year, to an amount that shall not exceed the Bank's net income for the current year, plus its net income retained for the two previous years, subject to regulatory approval.
The Bank’s actual capital amounts and ratios as of June 30, 2023 and 2022 are also presented in the table below.
Actual
Minimum Capital Requirement
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2023
Total capital (to risk weighted assets)
$
65,141
32.9
%
$
15,850
8.0
%
$
19,813
10.0
%
Common equity Tier 1 capital (to risk weighted assets)
63,394
32.0
8,916
4.5
12,878
6.5
Tier 1 capital (to risk weighted assets)
63,394
32.0
11,888
6.0
15,850
8.0
Tier 1 capital (to adjusted total assets)
63,394
18.2
13,950
4.0
17,438
5.0
June 30, 2022
Total capital (to risk weighted assets)
$
65,237
34.9
%
$
14,936
8.0
%
$
18,670
10.0
%
Common equity Tier 1 capital (to risk weighted assets)
63,490
34.0
8,401
4.5
12,135
6.5
Tier 1 capital (to risk weighted assets)
63,490
34.0
11,202
6.0
14,936
8.0
Tier 1 capital (to adjusted total assets)
63,490
17.4
14,580
4.0
18,225
5.0
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingencies
Loan commitments
The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds on lines-of-credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
At June 30, 2023 and 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:
(In thousands)
June 30, 2023
June 30, 2022
Commitments to grant loans
$
$
5,551
Unadvanced funds on construction loans
-
Unadvanced funds on equity lines of credit
4,089
4,305
Unadvanced funds on commercial and other lines of credit
1,188
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for construction loans and lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis and the commitments are collateralized by real estate.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Operating lease commitments
The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2022, using the modified retrospective transition method. Therefore, periods prior to that date were not restated, and accordingly disclosures are not presented on a comparable basis. The Company elected the package of practical expedients, which permits the Company not to reassess prior conclusions about lease identifications, lease classification and direct costs. The Company did not elect to apply the hindsight expedient pertaining to using hindsight knowledge as of the effective date when determining lease terms and impairment.
As of June 30, 2023, the Company had entered into two noncancelable operating lease agreements for branch locations. The Company, by policy, does not include renewal options for leases as part of its ROU asset and lease liabilities unless they are deemed reasonably certain to exercise.
The Company's ROU asset related to operating leases totaled $953,000 at June 30, 2023 and is recognized in the Company's Consolidated Balance Sheet as an operating lease right of use asset.
As of June 30, 2023, the weighted average remaining lease term for operating leases was 8.88 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.56%. The following table sets forth the undiscounted cash flows of base rent related to operating leases outstanding at June 30, 2023 with payments scheduled over the next five years and thereafter, including a reconciliation to the operating lease liability recognized in the Company's Consolidated Balance Sheet in operating lease liability.
Years ending
(In thousands)
June 30,
$
Thereafter
Total minimum lease payments
$
1,126
Less: imputed interest
(164
)
Total lease liability
$
The cost of lease payments is not included above. Total rent expense for the years ended June 30, 2023 and 2022 amounted to $136,000 and $93,000, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $117,000 for the year ended June 30, 2023
Employment agreements
During the year ended June 30, 2023, the Company entered into employment agreements with two executives (each for a term of three years) which provide for a specified annual compensation and certain other benefits as defined in the agreement. Commencing on the first anniversary of the effective date of the agreement and continuing on each anniversary thereafter, members of the Board of Directors may extend the agreement for an additional year.
The Company has also entered into agreements with certain executives setting forth the terms and conditions of payment due to the executive and the rights and obligations of the parties in the event of a change in control as defined in the agreement. The agreements are subject to renewal each year by the Board of Directors prior to the anniversary of the effective date.
Other contingencies
Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
11. Employee Benefits Plan
Employee Stock Ownership Plan
As part of the stock offering, the Company established the Colonial Federal Savings Bank Employee Stock Ownership Plan ("ESOP") to provide eligible employees of the Company the opportunity to own Company common stock. The ESOP is a tax-qualified retirement plan for the benefit of Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal limits. The number of shares committed to be released per year is 10,226.
The ESOP funded its purchase of 255,648 shares through a loan from the Company equal to 100% of the purchase price of the common stock. The ESOP trustee will repay the loan principally through the Company's contributions to the ESOP over the loan term of 25 years. At June 30, 2023, the principal balance on the ESOP loan was $2.5 million.
Total compensation expense recognized in connection with the ESOP for the years ended June 30, 2023 and 2022 was $87,000 and $51,000, respectively.
Shares held by the ESOP include the following:
June 30, 2023
June 30, 2022
Shares held by the ESOP include the following:
Committed to be allocated
15,338
5,112
Unallocated
240,310
250,536
Total
255,648
255,648
The fair value of unallocated shares was approximately $1.9 million at June 30, 2023.
Defined benefit plan
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”), a tax-qualified defined-benefit pension plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and is subject to the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The risks of participating in this multi-employer plan are different from a single-employer plan in the following aspects:
a. Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
c. If the Company chooses to stop participating in its multi-employer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
Pension expense under the plan for the years ended June 30, 2023 and 2022 amounted to $700,000 and $735,000, respectively.
Total contributions made to the Pentegra DB Plan, as reported on Form 5500 amounted to $139,477,000 and $248,563,000 for the plan years ended June 30, 2022 and June 30, 2021, respectively, the latest data on file. The Company’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the Pentegra DB Plan. Contributions of $675,000 and $715,000 were paid by the Company during the years ended June 30, 2023 and 2022, respectively.
The funded status (market value of plan assets divided by funding target) of the Company’s portion of the Pentegra DB Plan as of July 1, 2023 and 2022, was 109.66% and 120.63%, respectively, per the valuation reports. Market value of plan assets reflects any contributions received applied to the 2022-2023 plan year.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
401(k) plan
The Company has a savings plan which is intended to qualify under Section 401(k) of the Internal Revenue Code. The plan provides for voluntary contributions by participating employees ranging from two percent to fifteen percent of their compensation, subject to certain limitations. The Company matches 10% of the employee’s voluntary contributions up to 3% of their compensation. Employer 401(k) plan contribution expense amounted to $22,000 and $33,000 for the years ended June 30, 2023 and 2022, respectively.
Supplemental compensation plan
The Company has entered into a Supplemental Executive Retirement Plan (the “SERP”) with certain officers, which provides for payments upon attaining the retirement age noted in the SERP. The present value of these future payments is provided over the remaining terms of the officers’ employment and at June 30, 2023 and 2022, the accrued liability amounted to $877,000 and $814,000, respectively. SERP expense for the years ended June 30, 2023 and 2022 amounted to $63,000 and $66,000, respectively. In connection with these SERPs, the Company purchased life insurance policies, which have a cash surrender value of $5.9 million and $5.8 million at June 30, 2023 and 2022, respectively.
In addition, the Company provides death benefits for officers and directors of the Company under the terms of Split Dollar Agreements. The Company has purchased life insurance contracts in connection with these agreements and the cash surrender value of the policies at June 30, 2023 and 2022 amounted to $4.5 million and $4.3 million, respectively. For the years ended June 30, 2023 and 2022, post-retirement expense related to these obligations amounted to $96,000 and $89,000, respectively.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
12. Fair Value of Assets and Liabilities
Determination of fair value
The Company uses fair value measurements to record fair value adjustments to certain assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in some instances, quoted market prices may not be available. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques, including collateral value. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Assets and liabilities measured at fair value on a recurring basis.
At June 30, 2023 and 2022, securities available for sale were measured at Level 2 with a fair value of $146,000 and $199,000, respectively. All fair value measurements are obtained from a third- party pricing service and are not adjusted by management. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no securities measured at fair value in Levels 1 and 3.
There are no liabilities measured at fair value on a recurring basis at June 30, 2023 and 2022.
Assets and liabilities measured at fair value on a non-recurring basis.
The Company may also be required, from time to time, to measure certain other financial assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There are no assets or liabilities measured at fair value on a non-recurring basis at June 30, 2023 or 2022.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and 2022.
June 30, 2023
(In thousands)
Carrying
Value
Level 1
Level 2
Level 3
Total
Assets:
Cash and cash equivalents
$
6,861
$
6,861
$
-
$
-
$
6,861
Securities available for sale
-
-
Securities held to maturity
147,902
-
132,273
-
132,273
Federal Home Loan Bank of Boston stock
-
-
Loans, net
175,911
-
-
157,505
157,505
Accrued interest receivable
1,363
-
-
1,363
1,363
Liabilities:
Deposits
263,376
-
-
241,711
241,711
Short-term borrowings
3,675
-
-
3,667
3,667
June 30, 2022
(In thousands)
Carrying
Value
Level 1
Level 2
Level 3
Total
Assets:
Cash and cash equivalents
$
31,667
$
31,667
$
-
$
-
$
31,667
Securities available for sale
-
-
Securities held to maturity
145,239
-
133,593
-
133,593
Federal Home Loan Bank of Boston stock
-
-
Loans, net
172,593
-
-
161,098
161,098
Accrued interest receivable
1,265
-
-
1,265
1,265
Liabilities:
Deposits
287,075
-
-
268,039
268,039
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
13. Stock-Based Compensation
Under the CFSB Bancorp, Inc. 2023 Equity Incentive Plan (the "2023 Equity Plan"), the Company may grant options, restricted stock, restricted stock units or performance awards to its directors, officers and employees. Both incentive stock options and nonqualified stock options may be granted under the 2023 Equity Plan with 319,560 shares initially reserved for options. Any options forfeited because vesting requirements are not met or expired will become available for re-issuance under the 2023 Equity Plan. The exercise price of each option equals the market price of the Company's stock on the date of the grant and the maximum term of each option is 10 years. The total number of shares initially reserved for restricted stock is 127,824. Options and awards generally vest ratably over three to five years. The fair value of shares awarded is based on the market price at the date of grant.
Stock Options
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
•Volatility is based on peer group volatility because the Company does not have a sufficient trading history.
•Expected life represents the period of time that the options are expected to be outstanding, taking into account the contractual term, and the vesting period.
•Expected dividend yield is based on the Company's history and expectations of dividend payouts.
•The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a period equivalent to the expected life of the option.
During the year ended June 30, 2023, the Company made the following grants of options to purchase shares of common stock and used the following assumptions in measuring the fair value of such grants:
For the Year Ended
June 30, 2023
Options granted
$
273,000
Vesting period (years)
Expiration period (years)
Expected volatility
29.3
%
Expected life (years)
6.5
Expected dividend yield
%
Risk free interest rate
3.7
%
Option fair value
$3.17
There were no grants of options to purchase common stock during the year ended June 30, 2022.
A summary of stock option activity for the year ended June 30, 2023 is presented in the table below:
Stock Option Grants
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
Balance at July 1, 2022
Granted
273,000
$
8.33
9.95
Exercised
-
-
-
Forfeited
-
-
-
Balance at June 30, 2023
273,000
$
8.33
9.70
$
-
Exercisable at June 30, 2023
-
$
-
-
$
-
Unrecognized compensation cost
$
812,000
Weighted average remaining recognition period (years)
4.70
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
For the year ended June 30, 2023, stock-based compensation expense applicable to stock options was $52,000. There was no stock-based compensation expense applicable to stock-options for the year ended June 30, 2022. There were no tax benefits related to stock-based compensation expense applicable to stock-options for the years ended June 30, 2023 and 2022, respectively.
Restricted Stock
Shares issued may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will become available for reissuance under the 2023 Equity Plan. The fair market value of shares awarded, based on the market price at the date of grant, is amortized over the applicable vesting period. Restricted stock awarded to date has been at no cost to the awardee. The following table presents activity in restricted stock awards under the 2023 Equity Plan for the year ended June 30, 2023:
Restricted Stock Awards
Weighted Average Grant Price
Restricted stock awards at July 1, 2022
Granted
111,000
$
8.35
Vested
-
-
Forfeited
-
-
Restricted stock awards at June 30, 2023
111,000
$
8.35
Unrecognized compensation cost
$
870,000
Weighted average remaining recognition period (years)
4.70
For the year ended June 30, 2023, stock-based compensation related to restricted stock was $57,000. There was no stock-based compensation applicable to restricted stock for the year ended June 30, 2022. There were no tax benefits related to stock-based compensation expense applicable to restricted stock for the years ended June 30, 2023 and 2022, respectively.
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
14. Other General and Administrative Expenses
Included in other general and administrative expense for the year ended June 30, 2023 and 2022 are certain items exceeding 1% of the Company's total interest and non-interest income as follows:
For the Year Ended
June 30, 2023
June 30, 2022
Consulting expense
$
$
Audit expense
Telephone expense
Directors' compensation expense
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
15. Parent Company Condensed Financial Statements
Financial information as of June 30, 2023 and 2022 and for the years then ended pertaining to CFSB Bancorp, Inc. is as follows:
BALANCE SHEETS
June 30,
June 30,
Assets:
Cash and due from banks
$
9,551
$
10,213
Investment in Colonial Federal Savings Bank
62,781
60,934
Due from Colonial Federal Savings Bank
-
Accrued interest receivable on ESOP loan
Deferred tax assets
ESOP loan
2,486
2,556
Other assets
Total assets
$
75,896
$
74,279
Liabilities and Stockholders' Equity:
Liabilities
Other liabilities
$
$
Total liabilities
Stockholders' Equity
Common stock
$
$
Additional paid-in capital
27,814
27,720
Retained earnings
50,416
48,970
Accumulated other comprehensive loss
(3
)
-
ESOP-Unearned compensation
(2,403
)
(2,505
)
Total stockholders' equity
75,889
74,250
Total liabilities and stockholders' equity
$
75,896
$
74,279
STATEMENTS OF OPERATIONS
For the Year Ended
June 30,
June 30,
Interest income
$
$
Operating expenses
1,666
Loss before income taxes and equity in undistributed net income in Colonial Federal Savings Bank
(276
)
(1,626
)
Applicable income tax expense (benefit)
(68
)
(311
)
Loss before equity in undistributed net income of Colonial Federal Savings Bank
(208
)
(1,315
)
Equity in undistributed net income of Colonial Federal Savings Bank
1,654
1,757
Net income
$
1,446
$
CFSB Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
Cash flows from operating activities:
Net income
$
1,446
$
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed net income of Colonial Federal Savings Bank
(1,654
)
(1,757
)
Stock contribution to Charitable Foundation
-
1,429
Increase in due from Colonial Federal Savings Bank
(614
)
-
Increase in accrued interest receivable
-
(40
)
Decrease (increase) in deferred tax assets
(302
)
Decrease (increase) in other assets
(234
)
(Decrease) increase in other liabilities
(22
)
Net cash used in operating activities
(732
)
(433
)
Cash flows from investing activities:
Contribution of common stock sale proceeds to Colonial Federal Savings Bank
-
(13,280
)
Principal payments received on ESOP loan
-
Net cash provided by (used in) investing activities
(13,280
)
Cash flows from financing activities:
Proceeds from sale of common stock, net
-
26,482
Common stock purchased by ESOP
-
(2,556
)
Net cash (used in) provided by financing activities
-
23,926
Net change in cash and cash equivalents
(662
)
10,213
Cash and cash equivalents at beginning of period
10,213
-
Cash and cash equivalents at end of period
$
9,551
$
10,213

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Treasurer and Chief Operating Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of June 30, 2023, the Company’s Chief Executive Officer and Treasurer and Chief Operating Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Treasurer and Chief Operating Officer, we evaluated the effectiveness of our internal control over financial reporting based on criteria established in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management, including our Chief Executive Officer and Treasurer and Chief Operating Officer, concluded that our internal control over financial reporting was effective and met the criteria of the “Internal Control - Integrated Framework (2013)” as of June 30, 2023.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Information regarding directors, executive officers and corporate governance of the Company is presented under the headings “Other Information Relating to Directors and Executive Officers - Delinquent Section 16(a) Reports Compliance,” “Proposal 1 - Election of Directors,” “Corporate Governance - Code of Ethics for Senior Officers” and “- Committees of the Board of Directors - Audit Committee” in the Company’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders (the “Proxy Statement”) and is incorporated herein by reference.
A copy of the Code of Ethics for Senior Officers is available to shareholders of the “Investor Relations” portion on the Bank's website of www.colonialfed.com.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Information regarding executive compensation is presented under the headings “Executive Compensation” and “Director Compensation” in the Proxy Statement and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information regarding security ownership of certain beneficial owners and management is presented under the heading “Stock Ownership” in the Proxy Statement and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of June 30, 2023 with respect to compensation plans (other than our employee stock ownership plan) under which equity securities of the Registrant are authorized for issuance. Additional information regarding stock-based compensation plans is presented in Note 13 of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data located elsewhere in this report.
Number of Securities to be Issued Upon Exercise of Outstanding Option, Warrants and Rights
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
Number of Securities Remaining Available for Future Issuance Under Share-Based Compensation Plans
Equity Compensation Plans Approved by Security Holders
273,000
$
8.33
$
46,560

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions, and director independence is presented under the heading “Corporate Governance - Director Independence” and “Other Information Relating to Directors and Executive Officers - Transactions with Certain Related Persons” in the Proxy Statement and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
Information regarding principal accounting fees and services is presented under the heading “Proposal 2 - Ratification of the Appointment of Independent Registered Public Accountants” in the Proxy Statement and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(1) Financial Statements:
Our consolidated financial statements are set forth in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
(2) Financial Statement Schedules:
Schedules have been omitted since they are either not required or not applicable or the information is otherwise included herein
(3) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed below.
Exhibit
Number
Description
Form
File No.
Exhibit
Exhibit Filing Date
Furnished Herewith
3.1
Charter of CFSB Bancorp, Inc.
S-1
333-259406
3.1
September 9, 2021
3.2
Bylaws of CFSB Bancorp, Inc.
S-1
333-259406
3.2
October 26, 2021
4.0
Form of Common Stock Certificate of CFSB Bancorp, Inc.
S-1
333-259406
September 9, 2021
10.1
Amended and Restated Employment Agreement between Colonial Federal Savings Bank and Michael E. McFarland
S-1
333-259406
10.1
September 9, 2021
10.2
Amended and Restated Employment Agreement between Colonial Federal Savings Bank and Susan J. Shea
S-1
333-259406
10.2
September 9, 2021
10.3
Change in Control Agreement between Colonial Federal Savings Bank and Kemal A. Denizkurt
S-1
333-259406
10.3
September 9, 2021
10.4
Amended and Restated Deferred Compensation Plan between Colonial Federal Savings Bank and Michael E. McFarland
S-1
333-259406
10.4
September 9, 2021
10.5
Amended and Restated Deferred Compensation Plan between Colonial Federal Savings Bank and Susan J. Shea
S-1
333-259406
10.5
September 9, 2021
10.6
Amended and Restated Deferred Compensation Plan between Colonial Federal Savings Bank and Kemal A. Denizkurt
S-1
333-259406
10.5
September 9, 2021
10.7
Form of Amended and Restated Colonial Federal Savings Bank Group Term Replacement Plan
S-1
333-259406
10.7
September 9, 2021
10.8
Retirement Death Benefit Only Plan between Colonial Federal Savings Bank and Michael E. McFarland
S-1
333-259406
10.8
September 9, 2021
10.9
Amended and Restated Split Dollar Agreement between Colonial Federal Savings Bank and Michael E. McFarland
S-1
333-259406
10.9
September 9, 2021
10.10
Amended and Restated Split Dollar Agreement between Colonial Federal Savings Bank and Paul Baharian
S-1
333-259406
10.1
September 9, 2021
10.11
Amended and Restated Split Dollar Agreement between Colonial Federal Savings Bank and Edward Keohane
S-1
333-259406
10.11
September 9, 2021
10.12
Amended and Restated Split Dollar Agreement between Colonial Federal Savings Bank and Stephen Marini
S-1
333-259406
10.12
September 9, 2021
10.13
Amended and Restated Split Dollar Agreement between Colonial Federal Savings Bank and James M. O’Leary, Jr.
S-1
333-259406
10.13
September 9, 2021
10.14
CFSB Bancorp, Inc. 2023 Equity Incentive Plan
DEF 14A
001-41220
Appendix A
January 13, 2023
21.1
Subsidiaries of CFSB Bancorp, Inc.
10-K
001-41220
21.1
September 22, 2022
23.1
Consent of Wolf & Company, P.C.
X
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
Inline XBRL Instance Document
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
X
Cover Page Interactive Data File (embedded within the Inline XBRL)
X
16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CFSB BANCORP, INC.
Date: September 20, 2023
By:
/s/ Michael E. McFarland
Michael E. McFarland
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Michael E McFarland
President, Chief Executive Officer and Director
September 20, 2023
Michael E McFarland
(Principal Executive Officer)
/s/ Susan Shea
Treasurer and Chief Operating Officer
September 20, 2023
Susan Shea
(Principal Financial and Accounting Officer)
/s/ James M. O'Leary, Jr.
Chairman of the Board
September 20, 2023
James M. O'Leary, Jr.
/s/ Paul N. Baharian
Director
September 20, 2023
Paul N. Baharian
/s/ Robert Guarnieri
Director
September 20, 2023
Robert Guarnieri
/s/ Edward J. Keohane
Director
September 20, 2023
Edward J. Keohane
/s/ Stephen D. Marini
Director
September 20, 2023
Stephen D. Marini
/s/ Tracy L. Wilson
Director
September 20, 2023
Tracy L. Wilson