CFSB Bancorp, Inc. /MA/ - Quarter Report: 2021 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-41220

CFSB Bancorp, Inc.

(Exact Name of Registrant as Specified in its Charter)


United States of America	87-4396534
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
15 Beach Street Quincy, Massachusetts	02170
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (617) 471-0750

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common Stock, Par Value $0.01 Per Share CFSB The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 7, 2022, the registrant had 6,521,642 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Net Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Retained Earnings	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION	34

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
Signatures		36

EXPLANATORY NOTE

CFSB Bancorp, Inc. (the “Company,” “we” or “our”) is the stock holding company for Colonial Federal Savings Bank that was created upon the reorganization of Colonial Federal Savings Bank into the mutual holding company structure that was closed on January 12, 2022. As of December 31, 2021, the reorganization had not been completed, and the Company was in formation and had no assets or liabilities and had not conducted any business activities other than formational activities. Accordingly, the unaudited consolidated financial statements and other financial information contained in this Quarterly Report on Form 10-Q relate solely to Colonial Federal Savings Bank and its subsidiary.

The unaudited consolidated financial statements and other financial information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes of Colonial Federal Savings Bank at June 30, 2021 and 2020 and for the years then ended contained in the Company’s definitive prospectus dated November 10, 2021 (the “Prospectus”), as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on November 19, 2021.

Item 1. Financial Statements.

Colonial Federal Savings Bank and Subsidiary

Consolidated Balance Sheets

(In thousands)


	December 31, 2021 (Unaudited)		June 30, 2021
Assets
Cash and due from banks	$	1,475	$	1,708
Short-term investments		46,358		38,970
Total cash and cash equivalents		47,833		40,678
Certificates of deposit		980		980
Securities available for sale, at fair value		254		2,294
Securities held to maturity, at amortized cost, fair value of $123,736 at December 31, 2021 and $107,391 at June 30, 2021		122,931		105,114
Federal Home Loan Bank stock, at cost		453		453
Loans, net of allowance for loan losses of $1,747 at December 31, 2021 and $1,722 at June 30, 2021		172,931		174,433
Premises and equipment, net		3,337		3,459
Accrued interest receivable		1,112		1,146
Bank-owned life insurance		10,008		9,250
Deferred tax asset		592		665
Other assets		1,398		382
	$	361,829	$	338,854
Liabilities and Retained Earnings
Deposits
Non-interest bearing	$	52,378	$	30,129
Interest-bearing		255,182		254,505
Total deposits		307,560		284,634
Short-term borrowings		288		918
Mortgagors' escrow accounts		1,650		1,572
Accrued expenses and other liabilities		2,991		3,085
Total liabilities		312,489		290,209
Commitments and contingencies (Note 9)
Retained earnings		49,334		48,628
Accumulated other comprehensive income		6		17
Total retained earnings		49,340		48,645
	$	361,829	$	338,854

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Colonial Federal Savings Bank and Subsidiary

Consolidated Statements of Net Income (Unaudited)

(In thousands)


	Three Months Ended December 31,					Six Months Ended December 31,
	2021		2020			2021		2020
Interest and dividend income:
Interest and fees on loans	$	1,640	$	1,820		$	3,294	$	3,671
Interest and dividends on debt securities:
Taxable		492		471			959		917
Tax exempt		120		142			243		285
Interest on short-term investments and certificates of deposit		16		11			33		22
Total interest and dividend income		2,268		2,444			4,529		4,895
Interest expense:
Deposits		255		612			529		1,280
Short-term borrowings		2		16			6		38
Total interest expense		257		628			535		1,318
Net interest income		2,011		1,816			3,994		3,577
Provision for loan losses		10		15			25		30
Net interest income, after provision for loan losses		2,001		1,801			3,969		3,547
Non-interest income:
Customer service fees		31		33			61		60
Income on bank-owned life insurance		75		73			149		145
Gain on sale of securities available for sale		-		-			48		-
Other income		55		51			159		148
Total non-interest income		161		157			417		353
Non-interest expense:
Salaries and employee benefits		1,167		1,174			2,147		2,098
Occupancy and equipment		208		202			418		394
Advertising		37		22			78		47
Data processing		91		86			171		170
Deposit insurance		21		22			43		43
Other general and administrative		372		248			691		510
Total non-interest expense		1,896		1,754			3,548		3,262
Income before income taxes		266		204			838		638
Provision (benefit) for income taxes		32		(11	)		132		44
Net income	$	234	$	215		$	706	$	594

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Colonial Federal Savings Bank and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	Three Months Ended December 31,					Six Months Ended December 31,
	2021			2020		2021			2020
Net income	$	234		$	215	$	706		$	594
Other comprehensive income:
Change in unrealized holding gains (losses)		(1	)		-		33			(2	)
Reclassification adjustment for net realized gains included in income		-			-		(48	)		-
Net change in unrealized losses		(1	)		-		(15	)		(2	)
Tax effect		-			-		4			-
Net-of-tax amount		(1	)		-		(11	)		(2	)
Comprehensive income	$	233		$	215	$	695		$	592

The tax effect related to net realized gain on sale of security available for sale was $14,000 for the six months ended December 31, 2021. There were no sales for the three months ended December 31, 2021 or for the three and six months ended December 31, 2020.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Colonial Federal Savings Bank and Subsidiary

Consolidated Statements of Changes in Retained Earnings (Unaudited)

(In thousands)


	Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance at June 30, 2021	$	48,628	$	17		$	48,645
Comprehensive income (loss)		472		(10	)		462
Balance at September 30, 2021		49,100		7			49,107
Comprehensive income (loss)		234		(1	)		233
Balance at December 31, 2021	$	49,334	$	6		$	49,340


	Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance at June 30, 2020	$	47,236	$	10		$	47,246
Comprehensive income (loss)		380		(2	)		378
Balance at September 30, 2020		47,616		8			47,624
Comprehensive income (loss)		215		-			215
Balance at December 31, 2020	$	47,831	$	8		$	47,839

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Colonial Federal Savings Bank and Subsidiary

Consolidated Statements of Changes of Cash Flows (Unaudited)

(In thousands)


	Six Months Ended December 31,
	2021			2020
Cash flows from operating activities:
Net income	$	706		$	594
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		25			30
Gain on sales of securities available for sale, net		(48	)		-
Depreciation and amortization, net		409			335
Net change in:
Cash surrender value of bank-owned life insurance		(123	)		(122	)
Accrued interest receivable		34			56
Other, net		(1,033	)		(344	)
Net cash (used in) provided by operating activities		(30	)		549
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		42			50
Sales		2,031			-
Activity in securities held to maturity:
Maturities, prepayments and calls		9,620			12,732
Purchases		(27,718	)		(12,272	)
Loan originations and payments, net		1,477			7,991
Additions to premises and equipment		(6	)		(62	)
Purchase of bank-owned life insurance		(635	)		-
Net cash (used in) provided by investing activities		(15,189	)		8,439
Cash flows from financing activities:
Net increase in deposits		22,926			3,662
Net (decrease) increase in short-term borrowings		(630	)		723
Repayments of long-term borrowings		-			(2,329	)
Net increase in mortgagors' escrow accounts		78			34
Net cash provided by financing activities		22,374			2,090
Net change in cash and cash equivalents		7,155			11,078
Cash and cash equivalents at beginning of year		40,678			38,344
Cash and cash equivalents at end of year	$	47,833		$	49,422
Supplemental information:
Interest paid on deposits, short term borrowings and long-term debt	$	535		$	1,318
Income taxes paid	$	175		$	-

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS

Basis of presentation and consolidation

These unaudited consolidated financial statements include the accounts of Colonial Federal Savings Bank (the “Bank”) and its wholly-owned subsidiary, Beach Street Security Corporation, which was established for the purpose of buying, holding and selling 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 unaudited 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 are residential mortgage loans and, to a lesser extent, commercial and multi-family real estate loans.

Reorganization and Offering

On September 8, 2021, the Board of Directors of the Bank adopted the Plan of Reorganization from a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan (the “Plan”) whereby the Bank would reorganize from a federally chartered mutual savings bank to a two-tier mutual holding company structure. On January 12, 2022 the Bank received final approval of this plan from the Securities and Exchange Commission (SEC). The mutual holding company (the “MHC”) is a federal corporation, and all of the current ownership and voting rights of the members of the Bank were transferred to the MHC. As part of the Plan, the Bank converted to a federal stock savings bank (the “Stock Bank”). A stock holding company (the “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 Holding Company offered for sale 43% of its common stock in the stock offering and contributed 2% of its common stock to the charitable foundation established as a part of the reorganization. The remainder of the Holding Company common stock is held by the MHC. The Holding Company offered shares of common stock for sale on a priority basis to depositors of the Bank and the tax qualified employee plans of the Bank. The Company sold 2,804,306 shares of common stock at $10.00 per share for gross offering proceeds of $28.0 million. The offering was not oversubscribed. Accordingly, all valid orders were filled.

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 unaudited 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 and deferred income taxes.

Reclassification

Certain amounts in the 2020 unaudited consolidated financial statements have been reclassified to conform to the 2021 presentation.

Recent accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842). This ASU is intended to improve financial reporting about leasing transactions and the key provision impacting the Bank is the requirement for a lessee to record a right-to-use asset and a liability representing the obligation to make lease payments for long-term operating leases. The ASU, as amended, will be effective for fiscal years beginning after December 15, 2021. Management is currently evaluating the impact of

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

adopting this ASU. It is expected that assets and liabilities will increase based on the estimated present value of remaining lease payments in place at the adoption date.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all 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.. Management is currently evaluating the impact of adopting this ASU to the unaudited consolidated financial statements, which may be material.

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 December 31, 2021 or June 30, 2021.

SECURITIES

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows:


	December 31, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	225	$	9	$	-		$	234
Collateralized mortgage obligations		20		-		-			20
Total securities available for sale	$	245	$	9	$	-		$	254

Securities held to maturity:
Government-sponsored enterprises:
Mortgage-backed securities	$	37,889	$	872	$	(134	)	$	38,627
Collateralized mortgage obligations		11		-		-			11
Municipal bonds		46,583		305		(443	)		46,445
Corporate bonds		38,448		548		(343	)		38,653
Total securities held to maturity	$	122,931	$	1,725	$	(920	)	$	123,736

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
Government-sponsored enterprises:
Debt obligations	$	1,983	$	12	$	-		$	1,995
Mortgage-backed securities		260		12		-			272
Collateralized mortgage obligations		27		-		-			27
Total securities available for sale	$	2,270	$	24	$	-		$	2,294
Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	1,001	$	12	$	-		$	1,013
Mortgage-backed securities		27,680		1,229		(12	)		28,897
Collateralized mortgage obligations		17		1		-			18
Municipal bonds		38,360		458		(216	)		38,602
Corporate bonds		38,056		936		(131	)		38,861
Total securities held to maturity	$	105,114	$	2,636	$	(359	)	$	107,391

Securities with an amortized cost of $7,965,000 and a fair value of $8,014,000 at December 31, 2021 were pledged to secure a credit line with the Federal Reserve Bank. See Note 7.

The amortized cost and fair value of debt securities, by contractual maturity, 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.


	December 31, 2021
	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	-	$	-	$	7,994	$	8,059
Over 1 year through 5 years		-		-		21,993		22,528
Over 5 years through 10 years		-		-		24,197		24,014
Over 10 years		-		-		30,847		30,497
		-		-		85,031		85,098
Mortgage-backed securities		225		234		37,889		38,627
Collateralized mortgage obligations		20		20		11		11
	$	245	$	254	$	122,931	$	123,736

Information pertaining to securities with gross unrealized losses at December 31, 2021 and June 30, 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	Less Than Twelve Months				Over Twelve Months
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
December 31, 2021
Securities held to maturity:
Mortgage-backed securities	$	127	$	17,217	$	7	$	697
Municipal bonds		388		15,005		55		1,733
Corporate bonds		302		15,908		41		959
Total temporarily impaired securities held to maturity	$	817	$	48,130	$	103	$	3,389

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)


	Less Than Twelve Months				Over Twelve Months
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
June 30, 2021
Securities held to maturity:
Mortgage-backed securities	$	12	$	2,598	$	-	$	-
Municipal bonds		216		7,839		-		-
Corporate bonds		131		9,249		-		-
Total temporarily impaired securities held to maturity	$	359	$	19,686	$	-	$	-

At December 31, 2021, 51 debt securities have unrealized losses with aggregate depreciation of 1.79% from the Bank’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. The contractual terms of these securities do not permit the entities to settle the security at a price less than par value. Because the Bank does not intend to sell these securities and it is not more likely than not that the Bank 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 December 31, 2021.

Proceeds from the sale of securities available for sale was $0 and $2,031,000 for the three and six months ended December 31, 2021, respectively. There were no sales for the three and six months ended December 31, 2020.

LOANS

A summary of the balances of loans follows:



(In thousands)	December 31, 2021			June 30, 2021
Mortgage loans on real estate:
Residential:
1-4 family	$	139,079		$	139,687
Multifamily		16,173			15,868
Second mortgages and home equity lines of credit		2,162			2,454
Commercial		15,508			16,366
Total mortgage loans on real estate		172,922			174,375
Other loans:
Consumer		111			139
Home improvement		1,999			1,972
Total other loans		2,110			2,111
Total loans		175,032			176,486
Less: Allowance for loan losses		(1,747	)		(1,722	)
Net deferred loan fees		(354	)		(331	)
Loans, net	$	172,931		$	174,433

Mortgage loans serviced for others are not included in the accompanying unaudited consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $292,000 at December 31, 2021 and $499,000 at June 30, 2021.

Residential loans are subject to a blanket lien securing FHLB advances. See Note 7.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Activity in the allowance for loan losses and allocation of the allowance to loan segments follows:


(In thousands)	Residential Real Estate			Commercial Real Estate			Consumer			Unallocated			Total

Balance at June 30, 2021	$	1,262		$	279		$	58		$	123		$	1,722
Provision (credit) for loan losses		(37	)		(4	)		1			55			15
Loans charged-off		-			-			-			-			-
Recoveries		-			-			-			-			-
Balance at September 30, 2021		1,225			275			59			178			1,737
Provision (credit) for loan losses		23			(10	)		(1	)		(2	)		10
Loans charged-off		-			-			-			-			-
Recoveries		-			-			-			-			-
Balance at December 31, 2021	$	1,248		$	265		$	58		$	176		$	1,747

Balance at June 30, 2020	$	1,228		$	301		$	48		$	85		$	1,662
Provision (credit) for loan losses		12			(4	)		3			4			15
Loans charged-off		-			-			-			-			-
Recoveries		-			-			-			-			-
Balance at September 30, 2020		1,240			297			51			89			1,677
Provision (credit) for loan losses		12			(4	)		4			3			15
Loans charged-off		-			-			-			-			-
Recoveries		-			-			-			-			-
Balance at December 31, 2020	$	1,252		$	293		$	55		$	92		$	1,692
December 31, 2021
Allowance for impaired loans	$	-		$	-		$	-		$	-		$	-
Allowance for non-impaired loans		1,248			265			58			176			1,747
Total allowance for loan losses	$	1,248		$	265		$	58		$	176		$	1,747
Impaired loans	$	-		$	-		$	-		$	-		$	-
Non-impaired loans		157,414			15,508			2,110			-			175,032
Total loans	$	157,414		$	15,508		$	2,110		$	-		$	175,032
September 30, 2021
Allowance for impaired loans	$	-		$	-		$	-		$	-		$	-
Allowance for non-impaired loans		1,225			275			59			178			1,737
Total allowance for loan losses	$	1,225		$	275		$	59		$	178		$	1,737
Impaired loans	$	-		$	-		$	-		$	-		$	-
Non-impaired loans		154,905			16,160			2,138			-			173,203
Total loans	$	154,905		$	16,160		$	2,138		$	-		$	173,203
June 30, 2021
Allowance for impaired loans	$	-		$	-		$	-		$	-		$	-
Allowance for non-impaired loans		1,262			279			58			123			1,722
Total allowance for loan losses	$	1,262		$	279		$	58		$	123		$	1,722
Impaired loans	$	-		$	-		$	-		$	-		$	-
Non-impaired loans		158,009			16,366			2,111			-			176,486
Total loans	$	158,009		$	16,366		$	2,111		$	-		$	176,486

At December 31, 2021 and June 30, 2021, there were no past due loans or loans on non-accrual. At December 31, 2021 and June 30, 2021, there were no loans past due ninety days or more and still accruing.

There were no impaired loans at December 31, 2021 or June 30, 2021.

During the three and six months ended December 31, 2021 and 2020, there were no troubled debt restructurings or troubled debt restructurings that defaulted in the first twelve months after restructuring. Management performs a

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.

Credit Quality Information

The Bank utilizes an internal loan rating system for residential real estate and commercial real estate 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 Bank 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 Bank 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 Bank formally reviews the ratings on all commercial real estate and construction loans. On a monthly basis, the Bank reviews the residential and other loan portfolios for credit quality primarily through the use of delinquency reports.

The following table presents information on the Bank’s loans by risk ratings:


	December 31, 2021				June 30, 2021
(In thousands)	Residential Real Estate		Commercial Real Estate		Residential Real Estate		Commercial Real Estate
Pass	$	157,414	$	13,506	$	158,009	$	14,342
Special mention		-		2,002		-		2,024
	$	157,414	$	15,508	$	158,009	$	16,366

At December 31, 2021 and June 30, 2021, there were no loans rated substandard, doubtful or loss.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

PREMISES AND EQUIPMENT

A summary of the cost and accumulated depreciation and amortization of premises and equipment follows:


(In thousands)	December 31, 2021			June 30, 2021
Land	$	1,553		$	1,553
Bank buildings		1,066			1,066
Building improvements		926			926
Furniture, fixtures and equipment		1,275			1,267
Leasehold improvements		167			167
		4,987			4,979
Less accumulated depreciation and amortization		(1,650	)		(1,520	)
	$	3,337		$	3,459

Depreciation and amortization expense for the three months ended December 31, 2021 and 2020 amounted to $65,000 and $68,000, respectively. Depreciation and amortization expense for the six months ended December 31, 2021 and 2020 amounted to $130,000 and $134,000, respectively.

DEPOSITS

A summary of deposit balances, by type, is as follows:


(In thousands)	December 31, 2021		June 30, 2021
NOW and demand	$	85,460	$	62,745
Regular and other		71,975		68,998
Money market deposits		41,173		41,319
Total non-certificate accounts		198,608		173,062
Term certificates of $250,000 or more		26,686		25,833
Term certificates less than $250,000		82,266		85,739
Total certificate accounts		108,952		111,572
Total deposits	$	307,560	$	284,634

A summary of certificate accounts by maturity is as follows:


	December 31, 2021					June 30, 2021
(In thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due within 1 year	$	80,497		0.52	%	$	67,440		0.66	%
Over 1 year to 2 years		20,782		1.54			33,517		1.11
Over 2 years to 3 years		4,903		1.06			5,208		1.86
Over 3 years to 5 years		2,770		0.75			5,407		0.95
	$	108,952		0.75	%	$	111,572		0.86	%

FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Short-term FHLB advances with an original maturity of less than one year amounted to $288,000 with a weighted average rate of 2.65% at December 31, 2021 and $918,000 with a weighted average rate of 2.75% at June 30, 2021. There were no long term FHLB advances outstanding at December 31, 2021 and June 30, 2021.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The Bank has an available line of credit in the amount of $2,354,000 with the FHLB of Boston at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank’s total assets. At December 31, 2021 and June 30, 2021, 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 Bank 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 at December 31, 2021 and June 30, 2021, the Bank has pledged certain qualifying securities with a fair market value of $8,014,000 and $10,081,000, respectively, and the line bears a variable interest rate equal to the federal funds rate plus 0.50%. At December 31, 2021 and June 30, 2021, there was no outstanding balance under this program.

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 Bank’s unaudited 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 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 December 31, 2021, the Bank meets the required capital conservation buffer. Management believes that the Bank’s capital levels will remain characterized as “well capitalized.”

As of December 31, 2021, 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’s actual capital amounts and ratios as of December 31, 2021 and June 30, 2021 are also presented in the table.


	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2021
Total capital (to risk weighted assets)	$	51,081		29.3	%	$	13,949		8.0	%	$	17,437		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		49,334		28.3			7,847		4.5			11,334		6.5
Tier 1 capital (to risk weighted assets)		49,334		28.3			10,462		6.0			13,949		8.0
Tier 1 capital (to adjusted total assets)		49,334		14.4			13,682		4.0			17,102		5.0
June 30, 2021
Total capital (to risk weighted assets)	$	50,350		29.7	%	$	13,585		8.0	%	$	16,981		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		48,628		28.6			7,641		4.5			11,038		6.5
Tier 1 capital (to risk weighted assets)		48,628		28.6			10,189		6.0			13,585		8.0
Tier 1 capital (to adjusted total assets)		48,628		14.4			13,519		4.0			16,898		5.0

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

COMMITMENTS AND CONTINGENCIES

Loan commitments

The Bank 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 unaudited consolidated balance sheets.

The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments.

At December 31, 2021 and June 30, 2021, the following financial instruments were outstanding whose contract amounts represent credit risk:


(In thousands)	December 31, 2021		June 30, 2021
Commitments to grant loans	$	3,535	$	1,460
Unadvanced funds on equity lines of credit		4,710		5,659

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 Bank evaluates each customer’s credit worthiness on a case-by-case basis and the commitments are collateralized by real estate.

Operating lease commitments

Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2021 pertaining to premises, future minimum rent commitments for the fiscal years ending 2022 through 2026 and thereafter amounted to $40,000, $119,000, $119,000, $119,000, $119,000 and $747,000, respectively.

The cost of the lease payments is not included above. Total lease expense for the six months ended December 31, 2021 and 2020 amounted to $45,000 for each period.

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 Bank’s unaudited consolidated financial statements.

10.

EMPLOYEE BENEFIT PLANS

Defined benefit plan

The Bank 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 operates as a multi-employer plan for accounting purposes and under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.

Pension expense under the Pentegra DB Plan amounted to $180,000 and $195,000 for the three months ended December 31, 2021 and 2020, respectively, and $375,000 and $390,000 for the six months ended December 31, 2021 and 2020, respectively. There was a contribution of $715,000 and $755,000 to the Pentegra DB Plan during the three months ended December 31, 2021 and 2020, respectively.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

401(k) plan

The Bank 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 2% to 15% of their compensation, subject to certain limitations. The Bank matches 20% of the employee’s voluntary contributions up to 3% of their compensation. Employer 401(k) contribution expense amounted to $9,000 and $10,000 for the three months ended December 31, 2021 and 2020 and $20,000 for each of the six months ended December 31, 2021 and 2020

Supplemental compensation plan

The Bank 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 December 31, 2021 and June 30, 2021, the accrued liability amounted to $783,000 and $748,000, respectively. SERP expense for the six months ended December 31, 2021 and 2020 amounted to $35,000 and $44,000, respectively In connection with these SERPs, the Bank purchased life insurance policies, which had a cash surrender value of $5,637,000 and $4,922,000 at December 31, 2021 and June 30, 2021, respectively.

In addition, the Bank provides death benefits for officers and directors of the Bank under the terms of Split Dollar Agreements. The Bank has purchased life insurance contracts in connection with these agreements and the cash surrender value of the policies at December 31, 2021 and June 30, 2021 amounted to $4,371,000 and $4,328,000, respectively. For the six months ended December 31, 2021 and 2020, post-retirement expense related to these obligations amounted to $27,000 and $19,000, respectively.

11.

FAIR VALUE OF ASSETS AND LIABILITIES

Determination of fair value

The Bank 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.

Fair value hierarchy

The Bank 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.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Assets and liabilities measured at fair value on a recurring basis

At December 31, 2021 and June 30, 2021, securities available for sale were measured at Level 2 with a fair value of $254,000 and $2,294,000, 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 December 31, 2021 and June 30, 2021.

Assets and liabilities measured at fair value on a non-recurring basis

The Bank 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 December 31, 2021 or June 30, 2021.

Colonial Federal Savings Bank and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and June 30, 2021.


	December 31, 2021
(In thousands)	Carrying Value		Level 1		Fair Value Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	47,833	$	47,833	$	-	$	-	$	47,833
Certificates of deposits		980		-		980		-		980
Securities available for sale		254		-		254		-		254
Securities held to maturity		122,931		-		123,736		-		123,736
Federal Home Loan Bank of Boston stock		453		-		-		453		453
Loans - net		172,931		-		-		174,716		174,716
Accrued interest receivable		1,112		-		-		1,112		1,112
Liabilities:
Deposits		307,560		-		-		305,904		305,904
Short term borrowings		288		-		-		289		289
Accrued interest payable		-		-		-		-		-


	June 30, 2021
(In thousands)	Carrying Value		Level 1		Fair Value Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	40,678	$	40,678	$	-	$	-	$	40,678
Certificates of deposits		980		-		988		-		988
Securities available for sale		2,294		-		2,294		-		2,294
Securities held to maturity		105,114		-		107,391		-		107,391
Federal Home Loan Bank of Boston stock		453		-		-		453		453
Loans - net		174,433		-		-		177,324		177,324
Accrued interest receivable		1,146		-		-		1,146		1,146
Liabilities:										-
Deposits		284,634		-		-		285,915		285,915
Short term borrowings		918		-		-		925		925
Accrued interest payable		3		-		-		3		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis reflects our unaudited 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 unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements, which appear beginning on page F-1 of the Prospectus. You should read the information in this section in conjunction with the business and financial information regarding Colonial Federal Savings Bank provided in the Prospectus.

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.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans, prospects, growth and operating strategies;

•

statements regarding the quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

•

conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

•

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

•

our ability to access cost-effective funding;

•

fluctuations in real estate values and both residential and commercial real estate market conditions;

•

demand for loans and deposits in our market area;

•

our ability to implement and change our business strategy;

•

competition among depository and other financial institutions;

•

inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

•

adverse changes in the securities or secondary mortgage markets;

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;

•

changes in the quality or composition of our loan or investment portfolios;

•

technological changes that may be more difficult or expensive than expected;

•

the inability of third-party providers to perform as expected;

•

a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

•

our ability to manage market risk, credit risk and operational risk;

•

our ability to enter new markets successfully and capitalize on growth opportunities;

•

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

•

changes in consumer spending, borrowing and savings habits;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

•

our ability to retain key employees;

•

our compensation expense associated with equity allocated or awarded to our employees; and

•

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our unaudited 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 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 unaudited consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the statement of financial condition 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. As a result of the COVID-19 pandemic, we increased certain of our qualitative loan portfolio risk factors relating to local and national economic conditions. 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 Office of the Comptroller of the Currency, 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 six months ended December 31, 2021.

For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the audited consolidated financial statements within the prospectus.

Comparison of Financial Condition at December 31, 2021 and June 30, 2021

Total Assets. Total assets increased $22.9 million, or 6.8%, to $361.8 million at December 31, 2021 from $338.9 million at June 30, 2021. The increase resulted primarily from increases in cash and cash equivalents of $7.1 million, or 17.4%, securities held to maturity of $17.8 million, or 16.9%, and other assets of $1.0 million, or 266% offset by a decrease in securities available-for-sale of $2.0 million, or 88.9% and net loans of $1.5 million, or 0.9%.

Cash and Cash Equivalents. Cash and cash equivalents increased $7.1 million, or 17.4%, to $47.8 million at December 31, 2021 from $40.7 million at June 30, 2021. The increase was a result of an increase in deposits.

Net Loans. Net loans decreased $1.5 million, or 0.9%, to $172.9 million at December 31, 2021 from $174.4 million at June 30, 2021. The decrease was due to decreases of $608,000, or 0.4%, in one- to four-family residential real estate loans, $858,000, or 5.2%, in commercial real estate loans offset by increases of $305,000, or 1.9% in multi-family real estate loans. One- to four-family residential real estate loans decreased due to lower originations and customers refinancing loans with other institutions as we elected not to originate such loans at the lower rates being offered by our competitors. The decrease in commercial real estate loans reflected repayments exceeding originations during the quarter ended December 31, 2021.

Securities Available-for-Sale. Securities available-for-sale decreased $2.0 million to $254,000 at December 31, 2021 from $2.3 million at June 30, 2021. The decrease was due to the sale in July 2021 of a $2.0 million seven-year U.S. Treasury security that was purchased in March 2021. The security was sold for a pre-tax gain of $48,000.

Securities Held-to-Maturity. Securities held-to-maturity increased $17.8 million, or 16.9%, to $122.9 million at December 31, 2021 from $105.1 million at June 30, 2021, as we invested excess cash into securities to increase our overall yield on our interest-earning assets.

Total Liabilities. Total liabilities increased $22.3 million, or 7.7%, to $312.5 million at December 31, 2021 from $290.2 million at June 30, 2021. The increase was the result of an increase in deposits of $23.0 million, or 8.1%, offset by a $630,000, or 68.6%, decrease in Federal Home Loan Bank advances.

Deposits. Deposits increased $23.0 million, or 8.1%, to $307.6 million at December 31, 2021 from $284.6 million at June 30, 2021. The increase was the result of increases of $22.2 million, or 73.8%, in non-interest bearing deposits, a $3.0 million, or 4.3%, increase in savings accounts offset by decreases of $146,000, or 0.4% in money market accounts and a $2.6 million, or 2.3% in certificates of deposit. The increase in savings accounts reflects subscription funds received in connection with the proposed stock offering which closed on January 12, 2022. The decrease in certificates of deposit reflected depositors’ decision not to renew maturing certificates of deposit due to low current market interest rates.

Borrowings. Borrowings, consisting entirely of Federal Home Loan Bank advances, decreased $630,000, or 68.6% to $288,000 at December 31, 2021 from $918,000 at June 30, 2021, as a result of payments on short-term borrowings.

Retained Earnings. Total retained earnings increased $695,000, or 1.4%, to $49.3 million at December 31, 2021 from $48.6 million at June 30, 2021. The increase primarily resulted from net income of $706,000 for the six months ended December 31, 2021.

Comparison of Operating Results for the Three Months Ended December 31, 2021 and 2020

General. We had net income of $234,000 for the three months ended December 31, 2021, compared to net income of $215,000 for the three months ended December 31, 2020, an increase of $19,000, or 8.8%. The increase in net income was primarily due to an increase in net interest income of $195,000, or 10.7%, offset by increases of $142,000, or 8.1%, in non-interest expense and $43,000, or 390.9% in income tax expense.

Interest and Dividend Income. Interest and dividend income decreased $176,000, or 7.2%, to $2.3 million for the three months ended December 31, 2021 from $2.4 million for the three months ended December 31, 2020. The

decrease was attributable to a $180,000 decrease in interest on loans, a $1,000 decrease in interest on securities and a $5,000 increase on other interest earning assets. Interest income on loans decreased primarily due to a decrease in the average balance of loans of $11.0 million to $172.5 million for the three months ended December 31, 2021 from $183.5 million for the three months ended December 31, 2020 and, to a lesser extent, due to a decrease in the average yield on loans of 17 basis points to 3.80% for the three months ended December 31, 2021 from 3.97% for the three months ended December 31, 2020. Interest income on securities increased due to an increase in the average balance of securities of $22.7 million to $117.4 million for the three months ended December 31, 2021 from $94.7 million for the three months ended December 31, 2020, offset by a decrease in the average yield on securities of 51 basis points to 2.08% for the three months ended December 31, 2021 from 2.59% for the three months ended December 31, 2020. The decreases in the average yields on loans and securities reflected the lower market interest rate environment existing in 2021.

Interest Expense. Interest expense decreased $371,000, or 59.1%, to $257,000 for the three months ended December 31, 2021 from $628,000 for the three months ended December 31, 2020. The decrease was primarily due to a decrease of $356,000, or 63.3%, in interest expense on certificates of deposit. The average cost of certificates of deposit decreased 96 basis points to 0.75% for the three months ended December 31, 2021 from 1.71% for the three months ended December 31, 2020 and the average balance of certificates of deposit decreased $22.1 million to $109.6 million for the three months ended December 31, 2021 from $131.7 million for the three months ended December 31, 2020. Additionally, interest expense on borrowings, consisting entirely of FHLB advances, decreased $14,000, or 87.5% to $2,000 for the three months ended December 31, 2021 from $16,000 for the three months ended December 31, 2020 due primarily to the decrease in the average balance of borrowings to $345,000 for the three months ended December 31, 2021 from $2.3 million for the three months ended December 31, 2020 and, to a lesser extent, a decline in the cost of borrowings of 44 basis points to 2.32% for the three months ended December 31, 2021 from 2.76% for the three months ended December 31, 2020 due to the maturity of a higher-costing borrowing.

Net Interest Income. Net interest income increased $195,000, or 10.7%, to $2.0 million for the three months ended December 31, 2021 from $1.8 million for the three months ended December 31, 2020. The increase was due to an increase in average net interest-earning assets of $9.3 million combined with an increase in our net interest rate spread to 2.37% for the three months ended December 31, 2021 from 2.08% for the three months ended December 31, 2020. Our net interest margin increased to 2.46% for the three months ended December 31, 2021 compared to 2.27% for the three months ended December 31, 2020. The increase in the net interest rate spread was primarily a result of the yield on interest-earning assets decreasing at a slower rate than the decline in the cost of interest-bearing liabilities.

Provision for Loan Losses. We recorded a provision for loan losses of $10,000 and $15,000 for the three-month periods ended December 31, 2021 and December 31, 2020, respectively. The provision reflected the application of qualitative factors related to the economic conditions caused by the COVID-19 pandemic, offset by a decrease in loans and continued strong asset quality. The allowance for loan losses was $1.7 million, or 1.00% of total loans, at December 31, 2021, compared to $1.7 million, or 0.98% of total loans, at December 31, 2020. The allowance for loan loss was $1.7 million, or .98% of total loans at June 30,2021. We had $2.0 million of loans designated special mention at December 31, 2021, which represented a single loan collateralized by four commercial real estate properties. We did not have any loans designated as special mention at December 31, 2020. We had no loans that had been categorized as substandard, doubtful or loss at December 31, 2021 or 2020. We did not have any non-performing loans at either December 31, 2021 or 2020. We did not have any charge-offs or recoveries for the three months ended December 31, 2021 or for the three months ended December 31, 2020.

Non-Interest Income. Non-interest income information is as follows.


	Three Months Ended December 31,				Change
(Dollars in thousands)	2021		2020		Amount			Percent
Customer service fees	$	31	$	33	$	(2	)		(6.1	%)
Income on bank-owned life insurance		75		73		2			2.7	%
Gain on sale of security available for sale		-		-		-			0.0	%
Other income		55		51		4			7.8	%
Total non-interest income	$	161	$	157	$	4			2.5	%

Non-interest income increased $4,000, or 2.5%, to $161,000 for the three months ended December 31, 2021 from $157,000 for the three months ended December 31, 2020. The increase was primarily due to a $4,000 increase in other fee income.

Non-Interest Expense. Non-interest expense information is as follows.


	Three Months Ended December 31,				Change
(Dollars in thousands)	2021		2020		Amount			Percent
Salaries and employee benefits	$	1,167	$	1,174	$	(7	)		(0.6	%)
Occupancy and equipment		208		202		6			3.0	%
Advertising		37		22		15			68.2	%
Data processing		91		86		5			5.8	%
Deposit insurance		21		22		(1	)		(4.5	%)
Other		372		248		124			50.0	%
Total non-interest expense	$	1,896	$	1,754	$	142			8.1	%

Non-interest expense increased $142,000, or 8.1%, to $1.9 million for the three months ended December 31, 2021 from $1.8 million for the three months ended December 31, 2020. The increase was due primarily to a $15,000 increase in advertising expense, and a $124,000 increase in other expenses due to increased consultant and audit expenses.

Provision for Income Taxes. The provision for income taxes was $32,000 for the three months ended December 31, 2021, which represented a $43,000, or 390.9%, increase from the benefit for income taxes of $(11,000) for the three months ended December 31, 2020. Our effective tax rate was 12.0% and (5.4)% for the quarters ended December 31, 2021 and December 31, 2020, respectively. The lower effective tax rate for the three months ended December 31, 2021 and 2020 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 increase in the provision for income taxes for the three months ended December 31, 2021 was due to higher pre-tax income and higher earnings at the bank level for state tax purposes.

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. No 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 $354,000 and $296,000 at December 31, 2021 and December 31, 2020, respectively.


	Three Months Ended December 31,
	2021							2020
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	172,505	$	1,640		3.80	%	$	183,494	$	1,820		3.97	%
Securities		117,441		612		2.08	%		94,652		613		2.59	%
Other		37,190		16		0.17	%		41,440		11		0.11	%
Total interest-earning assets		327,136		2,268		2.77	%		319,586		2,444		3.06	%
Non-interest-earning assets		14,340							13,099
Total assets	$	341,476						$	332,685
Interest-bearing liabilities:
Interest-bearing demand deposits	$	30,903	$	4		0.05	%	$	27,290	$	4		0.06	%
Saving deposits		72,233		18		0.10	%		63,353		16		0.10	%
Money market deposits		41,411		27		0.26	%		31,581		30		0.38	%
Certificates of deposit		109,563		206		0.75	%		131,700		562		1.71	%
Total interest-bearing deposits		254,110		255		0.40	%		253,924		612		0.96	%
FHLB advances		345		2		2.32	%		2,315		16		2.76	%
Total interest-bearing liabilities		254,455		257		0.40	%		256,239		628		0.98	%
Non-interest-bearing demand deposits		34,168							26,068
Other non-interest-bearing liabilities		3,515							2,746
Total liabilities		292,138							285,053
Retained earnings		49,338							47,632
Total liabilities and equity	$	341,476						$	332,685
Net interest income			$	2,011						$	1,816
Net interest rate spread(1)						2.37	%						2.08	%
Net interest-bearing assets(2)	$	72,681						$	63,347
Net interest margin(3)						2.46	%						2.27	%
Average interest-bearing assets to interest-bearing liabilities						128.56	%						124.72	%

(1)

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.

(2)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by average total interest-earning assets.

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.


	Three Months Ended December 31, 2021 vs 2020
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	(109	)	$	(71	)	$	(180	)
Securities		148			(149	)		(1	)
Other		(1	)		6			5
Total interest-earning assets		38			(214	)		(176	)
Interest bearing liabilities:
Interest-bearing demand deposits		1			(1	)		-
Savings deposits		2			-			2
Money market deposits		9			(12	)		(3	)
Certificates of deposit		(94	)		(262	)		(356	)
Total deposits		(82	)		(275	)		(357	)
FHLB advances		(14	)		-			(14	)
Total interest-bearing liabilities		(96	)		(275	)		(371	)
Change in net interest income	$	134		$	61		$	195

Comparison of Operating Results for the Six Months Ended December 31, 2021 and 2020

General. We had net income of $706,000 for the six months ended December 31, 2021, compared to net income of $594,000 for the six months ended December 31, 2020, an increase of $112,000, or 18.9%. The increase in net income was primarily due to an increase in net interest income of $417,000, or 11.7%, and an increase of $64,000, or 18.1%, in non-interest income, offset by an increase of $286,000, or 8.8%, in non-interest expense.

Interest and Dividend Income. Interest and dividend income decreased $366,000, or 7.5%, to $4.5 million for the six months ended December 31, 2021 from $4.9 million for the six months ended December 31, 2020. The decrease was attributable to a $377,000 decrease in interest on loans, offset by an $11,000 increase in interest on other interest-earning assets. Interest income on loans decreased due to a decrease in the average balance of loans of $11.5 million to $173.7 million for the six months ended December 31, 2021 from $185.2 million for the six months ended December 31, 2020 and due to a decrease in the average yield on loans of 18 basis points to 3.79% for the six months ended December 31, 2021 from 3.97% for the six months ended December 31, 2020. Interest income on other interest-earning assets increased due to an increase in the average balance of other interest-earning assets of $817,000 to $39.1 million for the six months ended December 31, 2021 from $38.3 million for the six months ended December 31, 2020. The decreases in the average yields on interest-earning assets reflected the lower market interest rate environment existing in 2021.

Interest Expense. Interest expense decreased $783,000, or 59.4%, to $535,000 for the six months ended December 31, 2021 from $1.3 million for the six months ended December 31, 2020. The decrease was primarily due to a decrease of $750,000, or 63.6%, in interest expense on certificates of deposit. The average cost of certificates of deposit decreased 101 basis points to 0.78% for the six months ended December 31, 2021 from 1.79% for the six months ended December 31, 2020 and the average balance of certificates of deposit decreased $21.4 million to $110.1 million for the six months ended December 31, 2021 from $131.5 million for the six months ended December 31, 2020. Additionally, interest expense on borrowings, consisting entirely of FHLB advances, decreased $32,000, or

84.2%, to $6,000 for the six months ended December 31, 2021 from $38,000 for the six months ended December 31, 2020 due primarily to the decrease in the average balance of borrowings to $456,000 for the six months ended December 31, 2021 from $2.7 million for the six months ended December 31, 2020 and, to a lesser extent, a decline in the cost of borrowings of 20 basis points to 2.63% for the six months ended December 31, 2021 from 2.83% for the six months ended December 31, 2020 due to the maturity of a higher-costing borrowing.

Net Interest Income. Net interest income increased $417,000, or 11.7%, to $4.0 million for the six months ended December 31, 2021 from $3.6 million for the six months ended December 31, 2020. The increase was due to an increase in average net interest-earning assets of $5.6 million combined with an increase in our net interest rate spread to 2.37% for the six months ended December 31, 2021 from 2.02% for the six months ended December 31, 2020. Our net interest margin increased to 2.46% for the six months ended December 31, 2021 compared to 2.23% for the six months ended December 31, 2020. The increase in the net interest rate spread was primarily a result of the yield on interest-earning assets decreasing at a slower rate than the decline in the cost of interest-bearing liabilities.

Provision for Loan Losses. We recorded provision for loan losses of $25,000 and $30,000 for the six-month periods ended December 31, 2021 and December 31, 2020, respectively. The provision reflected the application of qualitative factors related to the economic conditions caused by the COVID-19 pandemic, offset by a decrease in loans and continued strong asset quality. The allowance for loan losses was $1.7 million, or 1.00% of total loans, at December 31, 2021, compared to $1.7 million, or 0.98% of total loans, at December 31, 2020. The allowance for loan losses was $1.7 million, or .98% of total loans, at June 30, 2021. We did not have any charge-offs or recoveries for the six months ended December 31, 2021 or for the six months ended December 31, 2020.

Non-Interest Income. Non-interest income information is as follows.


	Six Months Ended December 31,				Change
(Dollars in thousands)	2021		2020		Amount		Percent
Customer service fees	$	61	$	60	$	1		1.7	%
Income on bank-owned life insurance		149		145		4		2.8	%
Gain on sale of security available for sale		48		-		48
Other income		159		148		11		7.4	%
Total non-interest income	$	417	$	353	$	64		18.1	%

Non-interest income increased $64,000, or 18.1%, to $417,000 for the six months ended December 31, 2021 from $353,000 for the six months ended December 31, 2020. The increase was primarily due to a $48,000 gain realized on the sale in July 2021 of a $2.0 million seven-year U.S. Treasury security that was purchased in March 2021.

Non-Interest Expense. Non-interest expense information is as follows.


	Six Months Ended December 31,				Change
(Dollars in thousands)	2021		2020		Amount		Percent
Salaries and employee benefits	$	2,147	$	2,098	$	49		2.3	%
Occupancy and equipment		418		394		24		6.1	%
Advertising		78		47		31		66.0	%
Data processing		171		170		1		0.6	%
Deposit insurance		43		43		-		0.0	%
Other		691		510		181		35.5	%
Total non-interest expense	$	3,548	$	3,262	$	286		8.8	%

Non-interest expense increased $286,000, or 8.8%, to $3.5 million for the six months ended December 31, 2021 from $3.3 million for the six months ended December 31, 2020. The increase was due primarily to a $49,000 increase in salaries and employee benefit expense due to normal annual merit salary and benefit increases, and a $181,000 increase in other expenses due to increased consultant and audit expenses.

Provision for Income Taxes. The provision for income taxes was $132,000 for the six months ended December 31, 2021, which represented an $88,000, or 200.0%, increase from the provision for income taxes of $44,000 for the six months ended December 31, 2020. Our effective tax rate was 15.8% and 6.9% for the six months ended December 31, 2021 and December 31, 2020, respectively. The lower effective tax rate for the six months ended December 31, 2021 and 2020 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 increase in the provision for income taxes for the six months ended December 31, 2021 was due to higher pre-tax income and higher earnings at the bank level for state tax purposes.


	Six Months Ended December 31,
	2021							2020
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance			Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	173,701	$	3,294		3.79	%	$	185,170		$	3,671		3.97	%
Securities		111,952		1,202		2.15	%		97,144			1,202		2.47	%
Other		39,107		33		0.17	%		38,290			22		0.11	%
Total interest-earning assets		324,760		4,529		2.79	%		320,604	-		4,895		3.05	%
Non-interest-earning assets		14,117							13,089
Total assets	$	338,877						$	333,693
Interest-bearing liabilities:
Interest-bearing demand deposits	$	30,786	$	8		0.05	%	$	27,045		$	7		0.05	%
Saving deposits		71,667		37		0.10	%		63,061			33		0.10	%
Money market deposits		41,266		54		0.26	%		31,435			60		0.38	%
Certificates of deposit		110,088		430		0.78	%		131,480			1,180		1.79	%
Total interest-bearing deposits		253,807		529		0.42	%		253,021			1,280		1.01	%
FHLB advances		456		6		2.63	%		2,686			38		2.83	%
Total interest-bearing liabilities		254,263		535		0.42	%		255,707			1,318		1.03	%
Non-interest-bearing demand deposits		32,018							25,806
Other non-interest-bearing liabilities		3,474							4,706
Total liabilities		289,755							286,219
Retained earnings		49,122							47,474
Total liabilities and equity	$	338,877						$	333,693
Net interest income			$	3,994							$	3,577
Net interest rate spread(1)						2.37	%							2.02	%
Net interest-bearing assets(2)	$	70,497						$	64,897
Net interest margin(3)						2.46	%							2.23	%
Average interest-bearing assets to interest-bearing liabilities						127.73	%							125.38	%

(4)

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.

(5)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis


	Six Months Ended December 31, 2021 vs 2020
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	(227	)	$	(150	)	$	(377	)
Securities		183			(183	)		-
Other		-			11			11
Total interest-earning assets		(44	)		(322	)		(366	)
Interest bearing liabilities:
Interest-bearing demand deposits		1			-			1
Savings deposits		5			(1	)		4
Money market deposits		19			(25	)		(6	)
Certificates of deposit		(192	)		(558	)		(750	)
Total deposits		(167	)		(584	)		(751	)
FHLB advances		(32	)		-			(32	)
Total interest-bearing liabilities		(199	)		(584	)		(783	)
Change in net interest income	$	155		$	262		$	417

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, 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 Committee establishes and monitors the volume, 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:

•

emphasize the marketing of our non-interest-bearing demand, money market, savings and demand accounts;

•

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 December 31, 2021 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	$	8,300		2.6	%
+300		8,302		2.7	%
+200		8,285		2.4	%
+100		8,238		1.9	%
Level		8,087		-
-100		7,566		-6.4	%

(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 December 31, 2021, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.


At December 31, 2021
			Estimated 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	$	38,931	$	(14,657	)		(27.4	%)		12.2	%		(256	)
+300		42,705		(10,883	)		(20.3	%)		12.9	%		(180	)
+200		46,683		(6,905	)		(12.9	%)		13.7	%		(105	)
+100		50,576		(3,012	)		(5.6	%)		14.3	%		(39	)
Level		53,588		-			-			14.7	%		-
-100		52,587		(1,001	)		(1.9	%)		14.1	%		(60	)

(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 December 31, 2021, in the event of an instantaneous 200 basis point increase in interest rates, we would experience an 12.9% decrease in EVE, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 1.99% decrease in EVE.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE 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 EVE table presented assumes 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 assumes 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 EVE table provides 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 on EVE and will differ from actual results.

EVE 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 December 31, 2021, we had $288,000 outstanding in advances from the Federal Home Loan Bank of Boston. At December 31, 2021, we had the ability to borrow $68.4 million in additional Federal Home Loan Bank of Boston advances. Additionally, at December 31, 2021, we had a $2.4 million line of credit with the Federal Home Loan Bank of Boston, none of which was drawn at December 31, 2021.

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 (used in) provided by operating activities was $(30,000) and $549,000 for the six months ended December 31, 2021 and 2020, respectively. Net cash used by 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 $15.2 million for the six months ended December 31, 2021, primarily due to the purchase of $27.7 million of securities, offset by maturities, pre-payments and calls of securities of $9.6 million and a net decrease in loans of $1.5 million. Net cash provided by investing activities was $8.4 million for the six months ended December 31, 2020. Net cash provided by financing activities was $22.4 million for the six months ended December 31, 2021, primarily due to an increase in deposits of $22.9 million, offset by the repayment of $630,000 in Federal Home Loan Bank of Boston advances. Net cash provided by financing activities was $2.1 million for the six months ended December 31, 2020.

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 and the continued use of Federal Home Loan Bank of Boston advances as needed, to fund loan growth.

Capital Resources. At December 31, 2021, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $49.3 million, or 14.4% of adjusted total assets, which is above the well-capitalized required level of $17.1 million, or 5.0%; and total risk-based capital of $51.1 million, or 29.3% of risk-weighted assets, which is above the well-capitalized required level of $17.4 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category.

The net offering proceeds, discussed in Note 1 to the unaudited consolidated financial statements, will significantly increase 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. See “Risk Factors—Risks Related to the Offering—The capital we raise in the stock offering may negatively impact our return on equity until we can fully implement our business plan. This could negatively affect the trading price of our shares of common stock” in the Prospectus.

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 December 31, 2021, we had $3.5 million of commitments to originate loans and $4.7 million of unadvanced funds under home equity lines of credit. See Note 9 in the Notes to the unaudited 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 F-1 of the Prospectus. 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 unaudited 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 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 4. 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-Q, 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 December 31, 2021, 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 Securities Exchange Act of 1934, as amended (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.

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 Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at December 31, 2021, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

Item 1A. Risk Factors.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In connection with the mutual holding company reorganization of the Bank, the Company completed its initial public stock offering on January 12, 2022. The Company sold 2,804,306 shares of common stock at $10.00 per share in its subscription offering, pursuant to a Registration Statement on Form S-1 (SEC File No. 333-259406), which was declared effective by the Securities and Exchange Commission on November 10, 2021. The Company registered 2,975,625 shares pursuant to the Registration Statement. The offering resulted in gross proceeds of approximately $28.0 million. The net proceeds of the offering were approximately $26.5 million. Of the net proceeds of the offering, the Company used $2.6 million to fund a loan to the Bank's employee stock ownership plan (which in turn used those funds to purchase 255,648 shares in the offering), contributed $250,000 to Colonial Federal Savings Bank Charitable Foundation, Inc., its newly formed charitable foundation, invested $13.2 million in the Bank as additional capital, and retained $13.3 million for general corporate purposes. Piper Sandler & Co. served as marketing agent for the offering.

In connection with the reorganization, the Company also issued 3,586,903 shares of common stock to 15 Beach MHC, its federally chartered mutual holding company, and contributed 130,453 shares of common stock to Colonial Federal Savings Bank Charitable Foundation, Inc..

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit Number		Description

3.1		Charter of CFSB Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-259406))

3.2		Bylaws of CFSB Bancorp, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-259406))

4.0		Form of Stock Certificate of CFSB Bancorp, Inc. (incorporated by reference to Exhibit 4.0 of the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-259406))

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

101		The following materials for the quarter ended December 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Retained Earnings, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements *

104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

* Furnished, not filed.

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: February 9, 2022	By:	/s/ Michael E. McFarland
		Michael E. McFarland
		President and Chief Executive Officer
		(Principal Executive Officer)




Date: February 9, 2022	By:	/s/ Susan Shea
		Susan Shea
		Treasurer and Chief Operating Officer
		(Principal Financial and Accounting Officer)