CFSB Bancorp, Inc. /MA/ - Quarter Report: 2023 March (Form 10-Q)

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 March 31, 2023


☐	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

Stock, Par Value $0.01 Common 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 May 8, 2023, the registrant had 6,632,642 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Net Income (Loss)	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Changes in Stockholders' Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION	51

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		53

Item 1. Financial Statements.

CFSB Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	March 31,			June 30,
	2023			2022
Assets:
Cash and due from banks	$	1,518		$	1,609
Short-term investments		3,824			30,058
Total cash and cash equivalents		5,342			31,667
Securities available for sale, at fair value		158			199
Securities held to maturity, at amortized cost, fair value of $136,774 at March 31, 2023 and $133,593 at June 30, 2022		150,981			145,239
Federal Home Loan Bank stock, at cost		241			191
Loans, net of allowance for loan losses of $1,747 at March 31, 2023 and $1,747 at June 30, 2022		176,943			172,593
Premises and equipment, net		3,411			3,334
Accrued interest receivable		1,356			1,265
Bank-owned life insurance		10,335			10,144
Deferred tax asset		1,003			1,079
Operating lease right of use asset		976			-
Other assets		930			472
Total assets	$	351,676		$	366,183

Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing	$	30,054		$	31,168
Interest-bearing		239,952			255,907
Total deposits		270,006			287,075
Mortgagors' escrow accounts		1,566			1,555
Operating lease liability		983			-
Accrued expenses and other liabilities		3,447			3,303
Total liabilities		276,002			291,933
Stockholders' Equity
Preferred Stock, $.01 par value, 10,000,000 shares authorized as of March 31, 2023 and June 30, 2022, none issued and outstanding as of March 31, 2023 and June 30, 2022	$	-		$	-
Common Stock, $.01 par value, 90,000,000 shares authorized as of March 31, 2023 and June 30, 2022, 6,632,642 issued and outstanding as of March 31, 2023 and 6,521,642 issued and outstanding as of June 30, 2022		65			65
Additional paid-in capital		27,729			27,720
Retained earnings		50,311			48,970
Accumulated other comprehensive (loss) income		(2	)		-
Unearned compensation - ESOP, 242,866 and 250,536 shares unallocated at March 31, 2023 and June 30, 2022, respectively		(2,429	)		(2,505	)
Total stockholders' equity		75,674			74,250
Total liabilities and stockholders' equity	$	351,676		$	366,183

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Net Income (Loss) (Unaudited)

(In thousands, except per share data)


	For the Three Months Ended					For the Nine Months Ended
	March 31,		March 31,			March 31,		March 31,
	2023		2022			2023		2022
Interest and dividend income:
Interest and fees on loans	$	1,700	$	1,615		$	4,976	$	4,909
Interest and dividends on debt securities:
Taxable		837		548			2,383		1,507
Tax-exempt		101		117			315		360
Interest on short-term investments and certificates of deposit		53		17			303		50
Total interest and dividend income		2,691		2,297			7,977		6,826

Interest expense:
Deposits		533		245			1,115		774
Borrowings		3		1			3		7
Total interest expense		536		246			1,118		781

Net interest income		2,155		2,051			6,859		6,045
Provision for loan losses		-		1			-		26
Net interest income after provision for loan losses		2,155		2,050			6,859		6,019

Non-interest income:
Customer service fees		37		32			110		93
Income on bank-owned life insurance		64		75			191		183
Gain on sale of securities available for sale		-		-			-		48
Other income		47		46			199		205
Total non-interest income		148		153			500		529

Non-interest expenses:
Salaries and employee benefits		1,103		956			3,371		3,061
Occupancy and equipment		256		238			754		656
Advertising		38		32			148		110
Data processing		84		89			262		260
Deposit insurance		20		24			63		67
Charitable Foundation contribution		-		1,554			-		1,554
Other general and administrative		400		334			1,138		1,026
Total non-interest expenses		1,901		3,227			5,736		6,734

Income (loss) before income taxes		402		(1,024	)		1,623		(186	)
Provision (benefit) for income taxes		47		(196	)		282		(64	)
Net income (loss)	$	355	$	(828	)	$	1,341	$	(122	)

Net income (loss) per share:
Basic	$	0.06	$	(0.15	)	$	0.21	N/A
Diluted	$	0.06	$	(0.15	)	$	0.21	N/A

Weighted average shares outstanding:
Basic		6,300,633		5,500,173			6,282,384	N/A
Diluted		6,300,721		5,500,173			6,282,413	N/A

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)


	For the Three Months Ended					For the Nine Months Ended
	March 31,					March 31,
	2023		2022			2023			2022
Net income (loss)	$	355	$	(828	)	$	1,341		$	(122	)
Other comprehensive income (loss):
Change in unrealized holding (losses) gains		-		(3	)		(2	)		30
Reclassification adjustment for net realized gains		-		-			-			(48	)
Net change in unrealized losses		-		(3	)		(2	)		(18	)
Tax effect		-		1			-			5
Net-of-tax amount		-		(2	)		(2	)		(13	)
Comprehensive income (loss)	$	355	$	(830	)	$	1,339		$	(135	)

There were no sales of securities for the three and nine months ended March 31, 2023. There were no sales of securities during the three months ended March 31, 2022. The tax effect related to the net realized gain on sale of securities available for sale was $14,000 for the nine months ended March 31, 2022.

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(Dollars in thousands)


											Accumulated
					Additional						Other			Unearned
	Common Stock				Paid-in			Retained			Comprehensive			Compensation
	Shares		Amount		Capital			Earnings			Income (Loss)			ESOP			Total
Balance at December 31, 2022		6,521,642	$	65	$	27,714		$	49,956		$	(2	)	$	(2,454	)	$	75,279
Net income		-		-		-			355			-			-			355
Other comprehensive loss		-		-		-			-			-			-			-
Restricted stock awards granted		111,000		-		-			-			-			-			-
Stock-based compensation		-		-		19			-			-			-			19
ESOP shares committed to be released		-		-		(4	)		-			-			25			21
Balance at March 31, 2023		6,632,642	$	65	$	27,729		$	50,311		$	(2	)	$	(2,429	)	$	75,674

Balance at December 31, 2021		-	$	-	$	-		$	49,334		$	6		$	-		$	49,340
Net loss		-		-		-			(828	)		-			-			(828	)
Other comprehensive loss		-		-		-			-			(2	)		-			(2	)
Transfer of cash from Colonial Federal Savings Bank to 15 Beach MHC		-		-		-			(100	)		-			-			(100	)
Issuance of shares to mutual holding company		3,586,903		36		-			-			-			-			36
Issuance of shares in the initial public offering, net of expenses of $1,583,000		2,804,306		28		26,417			-			-			-			26,445
Issuance of shares to the Colonial Federal Savings Bank Charitable Foundation		130,433		1		1,303			-			-			-			1,304
Purchase of 255,648 shares by the ESOP		-		-		-			-			-			(2,556	)		(2,556	)
ESOP shares committed to be released		-		-		-			-			-			20			20
Balance at March 31, 2022		6,521,642	$	65	$	27,720		$	48,406		$	4		$	(2,536	)	$	73,659

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(Dollars in thousands)


											Accumulated
					Additional						Other			Unearned
	Common Stock				Paid-in			Retained			Comprehensive			Compensation
	Shares		Amount		Capital			Earnings			Income (Loss)			ESOP			Total
Balance at June 30, 2022		6,521,642	$	65	$	27,720		$	48,970		$	-		$	(2,505	)	$	74,250
Net income		-		-		-			1,341			-			-			1,341
Other comprehensive loss		-		-		-			-			(2	)		-			(2	)
Restricted stock awards granted		111,000		-		-			-			-			-			-
Stock-based compensation		-		-		19			-			-			-			19
ESOP shares committed to be released		-		-		(10	)		-			-			76			66
Balance at March 31, 2023		6,632,642	$	65	$	27,729		$	50,311		$	(2	)	$	(2,429	)	$	75,674

Balance at June 30, 2021		-	$	-	$	-		$	48,628		$	17		$	-		$	48,645
Net loss		-		-		-			(122	)		-			-			(122	)
Other comprehensive loss		-		-		-			-			(13	)		-			(13	)
Transfer of cash from Colonial Federal Savings Bank to 15 Beach MHC		-		-		-			(100	)		-			-			(100	)
Issuance of shares to mutual holding company		3,586,903		36		-			-			-			-			36
Issuance of shares in the initial public offering, net of expenses of $1,583,000		2,804,306		28		26,417			-			-			-			26,445
Issuance of shares to the Colonial Federal Savings Bank Charitable Foundation		130,433		1		1,303			-			-			-			1,304
Purchase of 255,648 shares by the ESOP		-		-		-			-			-			(2,556	)		(2,556	)
ESOP shares committed to be released		-		-		-			-			-			20			20
Balance at March 31, 2022		6,521,642	$	65	$	27,720		$	48,406		$	4		$	(2,536	)	$	73,659

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes of Cash Flows (Unaudited)

(In thousands)


	For the Nine Months Ended
	March 31,
	2023			2022
Cash flows from operating activities:
Net income (loss)	$	1,341		$	(122	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		-			26
Gain on sales of securities available for sale, net		-			(48	)
Amortization of securities, net		331			434
Contribution of stock to the Colonial Federal Savings Bank Charitable Foundation		-			1,304
Net change in deferred loan costs and fees		17			18
Increase in cash surrender value of bank-owned life insurance		(191	)		(123	)
Depreciation and amortization, net		176			193
ESOP expense		66			20
Stock-based compensation		19			-
Net increase in accrued interest receivable		(91	)		(65	)
Other, net		(231	)		(510	)
Net cash provided by operating activities		1,437			1,127
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		39			62
Sales		-			2,031
Activity in securities held to maturity:
Maturities, prepayments and calls		10,695			16,923
Purchases		(16,768	)		(46,962	)
Purchases of Federal Home Loan Bank of Boston stock		(50	)		-
Loan originations and payments, net		(4,367	)		1,649
Additions to premises and equipment		(253	)		(44	)
Purchase of bank-owned life insurance		-			(635	)
Net cash used in investing activities		(10,704	)		(26,976	)
Cash flows from financing activities:
Net decrease in deposits		(17,069	)		(654	)
Net decrease in short-term borrowings		-			(803	)
Proceeds from sale of common stock, net		-			26,481
Common stock purchased by ESOP		-			(2,556	)
Net increase (decrease) in mortgagors' escrow accounts		11			(32	)
Net cash (used in) provided by financing activities		(17,058	)		22,436
Net change in cash and cash equivalents		(26,325	)		(3,413	)
Cash and cash equivalents at beginning of period		31,667			40,678
Cash and cash equivalents at end of period	$	5,342		$	37,265
Supplemental information:
Interest paid on deposits and short-term borrowings	$	1,119		$	783
Income taxes paid	$	540		$	196

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

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

CFSB Bancorp, Inc. 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 of CFSB Bancorp, Inc. (the "Company") include the accounts of Colonial Federal Savings Bank (the “Bank”) and its wholly-owned subsidiary, Beach Street Security Corporation, which was established for the purpose of buying, holding and selling securities. All significant intercompany balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. 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. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These unaudited consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended June 30, 2022.

Business

The Bank conducts operations from its three full-service banking offices and one limited-service banking office located in Quincy, Holbrook and Weymouth, Massachusetts, all within Norfolk County. The Bank considers its primary lending market area to be Norfolk and Plymouth Counties; however, the Bank occasionally makes loans secured by properties located outside of its primary lending market. The Bank's business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans and, to a lesser extent, multi-family real estate loans, commercial real estate loans, second mortgage loans and home equity lines of credit, consumer loans and construction loans.

Reorganization and Offering

On January 12, 2022, the Bank reorganized from a federally chartered mutual savings bank to a two-tier mutual holding company structure. As part of the reorganization, a mutual holding company (the “MHC”) was formed as a federal corporation, into which all of the current voting rights of the members of the Bank were transferred. As part of the reorganization, the Bank converted to a federal stock savings bank. 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 a stock offering and contributed 2% of its common stock to a 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.

Employee Stock Ownership Plan (the "ESOP")

As part of the reorganization stock offering, the Bank established the Colonial Federal Savings Bank Employee Stock Ownership Plan to provide eligible employees of the Bank the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Bank employees. The ESOP was funded through the purchase of 255,648 shares through a loan from the Company. The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders' equity. The Company records compensation expense for the ESOP equal to fair market value of shares when they are committed to be released from the suspense account to participants' accounts under the plan.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

Stock-based Compensation

The fair value of restricted stock and stock options is determined on the date of grant and amortized to compensation expense with a corresponding increase to additional paid-in capital over the required service period. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted based on actual forfeiture experience. The Black Scholes option-pricing model is used to determine the fair value of the stock options granted.

Earnings Per Share

The following table presents the factors used in the earnings per share calculation:


	For the Three Months Ended						For the Nine Months Ended
	March 31, 2023			March 31, 2022			March 31, 2023			March 31, 2022
Net income (loss)	$	355		$	(828	)	$	1,341		$	(122	)
Weighted average number of common shares outstanding		6,545,175			5,724,553			6,529,486		N/A
Less: Average unallocated ESOP shares		(244,542	)		(224,380	)		(247,102	)	N/A
Average number of common shares outstanding used to calculate basic earnings per share		6,300,633			5,500,173			6,282,384		N/A
Effect of dilutive share-based compensation		88			-			29		N/A
Average number of common shares outstanding used to calculate diluted earnings per share		6,300,721			5,500,173			6,282,413		N/A
Basic earnings per share	$	0.06		$	(0.15	)	$	0.21		N/A
Diluted earnings per share	$	0.06		$	(0.15	)	$	0.21		N/A

Use of estimates

In preparing consolidated financial statements in conformity with GAAP, 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the allowance for loan losses and deferred income taxes.

Management believes that the allowance for loan losses was adequate as of March 31, 2023 and June 30, 2022. While management uses current information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions or other factors. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews the Bank's allowance for loan losses, and as a result of such reviews, management may have to adjust the allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is management's responsibility and any increase or decrease in the allowance is the responsibility of management.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

Management believes that the deferred tax provision was adequate as of March 31, 2023 and June 30, 2022. In accordance with Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes,” management uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require management to make projections of future taxable income. The judgments and estimates management makes in determining the deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory, economic or business factors change. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the federal and state portion of its deferred tax asset.

Recent accounting pronouncements

On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 economic 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. To date, the Company has completed the development of historical loss and recovery data, and is working on identification and layering of various assumptions needed to translate the data into a life of loan loss estimate. In addition, the Company has also begun developing accounting policies, as well as considering the need for new internal controls relevant to the updated methodologies and models.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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 March 31, 2023 or June 30, 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

SECURITIES

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


	March 31, 2023
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	155	$	-	$	(3	)	$	152
Collateralized mortgage obligations		6		-		-			6
Total securities available for sale	$	161	$	-	$	(3	)	$	158

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	995	$	-	$	(19	)	$	976
Mortgage-backed securities		48,987		9		(3,037	)		45,959
Collateralized mortgage obligations		2		-		-			2
Municipal bonds		44,514		16		(6,019	)		38,511
Corporate bonds		56,483		25		(5,182	)		51,326
Total securities held to maturity	$	150,981	$	50	$	(14,257	)	$	136,774


	June 30, 2022
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	186	$	-	$	-		$	186
Collateralized mortgage obligations		13		-		-			13
Total securities available for sale	$	199	$	-	$	-		$	199

Securities held to maturity:
Government-sponsored enterprises:
Mortgage-backed securities		47,741		26		(1,895	)		45,872
Collateralized mortgage obligations		7		-		-			7
Municipal bonds		45,776		23		(5,172	)		40,627
Corporate bonds		51,715		20		(4,648	)		47,087
Total securities held to maturity	$	145,239	$	69	$	(11,715	)	$	133,593

Securities with an amortized cost of $14,662,000 and a fair value of $12,522,000 at March 31, 2023 were pledged to secure a credit line with the Federal Reserve Bank. See Note 7.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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.


	March 31, 2023
	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	-	$	-	$	7,427	$	7,354
Over 1 year through 5 years		-		-		32,357		31,100
Over 5 years through 10 years		-		-		38,323		33,705
Over 10 years		-		-		23,885		18,654
		-		-		101,992		90,813
Mortgage-backed securities		155		152		48,987		45,959
Collateralized mortgage obligations		6		6		2		2
	$	161	$	158	$	150,981	$	136,774


	June 30, 2022
	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	-	$	-	$	4,006	$	4,008
Over 1 year through 5 years		-		-		25,269		24,763
Over 5 years through 10 years		-		-		42,934		38,600
Over 10 years		-		-		25,282		20,343
		-		-		97,491		87,714
Mortgage-backed securities		186		186		47,741		45,872
Collateralized mortgage obligations		13		13		7		7
	$	199	$	199	$	145,239	$	133,593

Information pertaining to securities with gross unrealized losses at March 31, 2023 or June 30, 2022 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	March 31, 2023
	Less Than Twelve Months				Over Twelve Months
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available for sale:
Mortgage-backed securities	$	3	$	139	$	-	$	10
Total temporarily impaired securities available for sale	$	3	$	139	$	-	$	10

Securities held to maturity:
Mortgage-backed securities	$	741	$	22,246	$	2,296	$	22,666
Debt obligations		19		976		-		-
Municipal bonds		116		9,038		5,903		22,799
Corporate bonds		324		14,406		4,858		34,349
Total temporarily impaired securities held to maturity	$	1,200	$	46,666	$	13,057	$	79,814

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2022
	Less Than Twelve Months				Over Twelve Months
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities held to maturity:
Mortgage-backed securities	$	1,712	$	39,843	$	183	$	1,855
Municipal bonds		3,520		25,976		1,652		6,394
Corporate bonds		3,679		37,015		969		5,682
Total temporarily impaired securities held to maturity	$	8,911	$	102,834	$	2,804	$	13,931

At March 31, 2023, 271 debt securities had unrealized losses with aggregate depreciation of 10.13% 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 basis, which may be maturity, it does not consider these securities to be other-than-temporarily impaired at March 31, 2023.

There were no sales of securities during the three and nine months ended March 31, 2023. There were no sales of securities during the three months ended March 31, 2022. Proceeds from the sale of securities available for sale was $2.0 million for the nine months ended March 31, 2022, resulting in realized gains of $48,000.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

LOANS

A summary of the balances of loans follows:


(In thousands)	March 31, 2023			June 30, 2022
Mortgage loans on real estate:
Residential:
1-4 family	$	140,164		$	141,073
Multifamily		12,638			14,310
Second mortgages and home equity lines of credit		2,687			1,970
Construction		807			375
Commercial		20,576			14,761
Total mortgage loans on real estate		176,872			172,489
Consumer loans:
Consumer		54			84
Home improvement		2,130			2,116
Total other loans		2,184			2,200
Total loans		179,056			174,689
Allowance for loan losses		(1,747	)		(1,747	)
Net deferred loan fees		(366	)		(349	)
Loans, net	$	176,943		$	172,593

Residential loans are subject to a blanket lien securing Federal Home Loan Bank ("FHLB") advances. See Note 7.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table presents activity in the allowance for loan losses by loan category for the three and nine months ended March 31, 2023 and 2022.


(In thousands)	Residential 1-4 Family			Multifamily			Second Mortgages and Home Equity Lines of Credit			Construction		Commercial Real Estate			Consumer		Home Improvement			Unallocated			Total
Balance at December 31, 2022	$	967		$	199		$	28		$	6	$	359		$	-	$	65		$	123		$	1,747
Provision (credit) for loan losses		(2	)		(9	)		1			2		(9	)		-		(3	)		20			-
Loans charged-off		-			-			-			-		-			-		-			-			-
Recoveries		-			-			-			-		-			-		-			-			-
Balance at March 31, 2023	$	965		$	190		$	29		$	8	$	350		$	-	$	62		$	143		$	1,747

Balance at December 31, 2021	$	976		$	247		$	25		$	-	$	265		$	-	$	58		$	176		$	1,747
Provision (credit) for loan losses		7			(14	)		(3	)		-		(4	)		-		3			12			1
Loans charged-off		-			-			-			-		-			-		(1	)		-			(1	)
Recoveries		-			-			-			-		-			-		-			-			-
Balance at March 31, 2022	$	983		$	233		$	22		$	-	$	261		$	-	$	60		$	188		$	1,747

Balance at June 30, 2022	$	986		$	215		$	22		$	4	$	252		$	-	$	61		$	207		$	1,747
Provision (credit) for loan losses		(18	)		(16	)		6			2		107			-		4			(85	)		-
Loans charged-off		-			-			-			-		-			-		-			-			-
Recoveries		-			-			-			-		-			-		-			-			-
Balance at March 31, 2023	$	965		$	190		$	29		$	8	$	350		$	-	$	62		$	143		$	1,747

Balance at June 30, 2021	$	967		$	272		$	23		$	-	$	279		$	-	$	58		$	123		$	1,722
Provision (credit) for loan losses		16			(39	)		(1	)		-		(18	)		-		3			65			26
Loans charged-off		-			-			-			-		-			-		(1	)		-			(1	)
Recoveries		-			-			-			-		-			-		-			-			-
Balance at March 31, 2022	$	983		$	233		$	22		$	-	$	261		$	-	$	60		$	188		$	1,747

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The allocation of the allowance for loan losses to each category is presented as of March 31, 2023 and June 30, 2022.


(In thousands)	Residential 1-4 Family		Multifamily		Second Mortgages and Home Equity Lines of Credit		Construction		Commercial Real Estate		Consumer		Home Improvement		Unallocated		Total
March 31, 2023
Allowance for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Allowance for non-impaired loans		965		190		29		8		350		-		62		143		1,747
Total allowance for loan losses	$	965	$	190	$	29	$	8	$	350	$	-	$	62	$	143	$	1,747

Impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-impaired loans		140,164		12,638		2,687		807		20,576		54		2,130		-		179,056
Total loans	$	140,164	$	12,638	$	2,687	$	807	$	20,576	$	54	$	2,130	$	-	$	179,056

June 30, 2022
Allowance for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Allowance for non-impaired loans		986		215		22		4		252		-		61		207		1,747
Total allowance for loan losses	$	986	$	215	$	22	$	4	$	252	$	-	$	61	$	207	$	1,747

Impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-impaired loans		141,073		14,310		1,970		375		14,761		84		2,116		-		174,689
Total loans	$	141,073	$	14,310	$	1,970	$	375	$	14,761	$	84	$	2,116	$	-	$	174,689

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following is a summary of past due and non-accrual loans at March 31, 2023 and June 30, 2022.


(In thousands)	30-59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Nonaccrual Loans
March 31, 2023
Residential 1-4 family	$	1,262	$	-	$	-	$	1,262	$	-
Consumer		5		-		-		5		-
Total loans	$	1,267	$	-	$	-	$	1,267	$	-

At June 30, 2022, there were no past due loans or loans on non-accrual. At June 30, 2022, there were no loans past due ninety days or more and still accruing.

There were no impaired loans at March 31, 2023 or June 30, 2022.

During the three and nine months ended March 31, 2023 and 2022, there were no troubled debt restructurings or troubled debt restructurings that defaulted in the first twelve months after restructuring. Management performs a 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, commercial real estate and construction loans as follows:

Pass: Loans in this category are considered to pose low to average risk. Passed assets are generally protected by the current net worth and paying capacity of the obligor or by the value of collateral pledged.

Special Mention: Loans in this category possess credit deficiencies or potential weaknesses deserving management’s close attention. If uncorrected, such deficiencies or weaknesses may expose the 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.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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


(In thousands)	Residential 1-4 Family		Multifamily		Second Mortgages and Home Equity Lines of Credit		Construction		Commercial Real Estate		Consumer		Home Improvement		Total
March 31, 2023
Pass	$	138,723	$	12,638	$	2,687	$	807	$	20,576	$	54	$	2,130	$	177,615
Special mention		1,441		-		-		-		-		-		-		1,441
Total loans	$	140,164	$	12,638	$	2,687	$	807	$	20,576	$	54	$	2,130	$	179,056

June 30, 2022
Pass	$	141,073	$	14,310	$	1,970	$	375	$	14,761	$	84	$	2,116	$	174,689
Total loans	$	141,073	$	14,310	$	1,970	$	375	$	14,761	$	84	$	2,116	$	174,689

At March 31, 2023 and June 30, 2022, there were no loans rated substandard, doubtful or loss. At June 30, 2022, there were no loans rated special mention.

CFSB Bancorp, Inc. 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)	March 31, 2023			June 30, 2022
Land	$	1,553		$	1,553
Bank buildings		1,066			1,066
Building improvements		926			926
Furniture, fixtures and equipment		1,294			1,225
Leasehold improvements		334			167
		5,173			4,937
Accumulated depreciation and amortization		(1,762	)		(1,603	)
	$	3,411		$	3,334

Depreciation and amortization expense for the three and nine months ended March 31, 2023 amounted to $53,000 and $176,000, respectively. Depreciation expense for the three and nine months ended March 31, 2022 amounted to $63,000 and $193,000, respectively.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

DEPOSITS

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


(In thousands)	March 31, 2023		June 30, 2022
NOW and demand	$	60,714	$	64,163
Regular and other		66,849		75,774
Money market deposits		31,326		47,010
Total non-certificate accounts		158,889		186,947
Term certificates of $250,000 or more		27,659		24,608
Term certificates less than $250,000		83,458		75,520
Total certificate accounts		111,117		100,128
Total deposits	$	270,006	$	287,075

A summary of certificate accounts by maturity is as follows:


	March 31, 2023					June 30, 2022
(Dollars in thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due within 3 months	$	21,805		1.09	%	$	24,873		0.45	%
Over 3 months to 1 year		57,010		2.55			53,974		0.77
Over 1 year to 2 years		28,741		2.88			14,307		0.96
Over 2 years to 3 years		2,009		0.61			5,277		0.92
Over 3 years to 5 years		1,552		1.88			1,697		0.65
	$	111,117		2.30	%	$	100,128		0.73	%

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

There were no short-term or long-term FHLB advances outstanding at March 31, 2023 or June 30, 2022.

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 March 31, 2023 and June 30, 2022, there were no funds advanced under the line of credit. All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as first mortgage loans on owner-occupied one- to four-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 March 31, 2023 and June 30, 2022, the Bank has pledged certain qualifying securities with a fair market value of $12,522,000 and $12,777,000, respectively. The line bears a variable interest rate equal to the federal funds rate plus 0.50%. At March 31, 2023 and June 30, 2022, there was no outstanding balance under this program.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's 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 March 31, 2023, the Bank met the required capital conservation buffer.

As of March 31, 2023, the most recent notification from the Office of the Comptroller of the 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 March 31, 2023 and June 30, 2022 are also presented in the table below.


	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2023
Total capital (to risk weighted assets)	$	64,783		32.6	%	$	15,902		8.0	%	$	19,877		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		63,036		31.7			8,945		4.5			12,920		6.5
Tier 1 capital (to risk weighted assets)		63,036		31.7			11,926		6.0			15,902		8.0
Tier 1 capital (to adjusted total assets)		63,036		17.9			14,090		4.0			17,613		5.0

June 30, 2022
Total capital (to risk weighted assets)	$	65,237		34.9	%	$	14,936		8.0	%	$	18,670		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		63,490		34.0			8,401		4.5			12,135		6.5
Tier 1 capital (to risk weighted assets)		63,490		34.0			11,202		6.0			14,936		8.0
Tier 1 capital (to adjusted total assets)		63,490		17.4			14,580		4.0			18,225		5.0

CFSB Bancorp, Inc. and Subsidiary

Notes to 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 March 31, 2023 and June 30, 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:


(In thousands)	March 31, 2023		June 30, 2022
Commitments to grant loans	$	360	$	5,551
Unadvanced funds on construction loans		28		460
Unadvanced funds on equity lines of credit		4,119		4,305
Unadvanced funds on commercial and other lines of credit		956		1,188

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for construction loans and lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis and the commitments are collateralized by real estate.

Operating lease commitments

The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2022 and began recognizing operating leases on its consolidated balance sheet by recording a Right-Of-Use ("ROU") asset, representing the Company's legal right to use the leased assets and a net lease liability, representing the Company's legal obligation to make these lease payments. The Company, by policy, does not include renewal options for leases as part of its ROU asset and lease liabilities unless they are deemed reasonably certain to exercise. At March 31, 2023, the weighted average remaining lease term for operating leases was 9.13 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.56%.

At March 31, 2023, the Company had entered into two non-cancelable operating lease agreements for branch locations, one of which contains a renewal option to extend lease payments for a period of five years. The Company recognized ROUs and operating lease liabilities totaling $1.0 million at July 1, 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Pursuant to the terms of these lease agreements in effect at March 31, 2023 pertaining to premises, future minimum rent commitments for the fiscal years ending 2023 through 2027 and thereafter are as follows:


	Years ending
(In thousands)	June 30,
2023	$	31
2024		117
2025		117
2026		117
2027		119
Thereafter		655
Total minimum lease payments	$	1,156
Less: Imputed interest		(173	)
Total lease liability	$	983

The cost of the lease payments is not included above. Total lease expense for the three and nine months ended March 31, 2023 amounted to $34,000 and $102,000, respectively. Total lease expense for the three and nine months ended March 31, 2022 amounted to $23,000 and $68,000, respectively.

Other contingencies

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will not have a material effect on the Bank’s unaudited consolidated financial statements.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

10.

EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan

As part of the stock offering, the Bank established the Colonial Federal Savings Bank Employee Stock Ownership Plan ("ESOP") to provide eligible employees of the Bank the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal limits. The number of shares committed to be released per year is 10,226.

The ESOP funded its purchase of 255,648 shares through a loan from the Company equal to 100% of the purchase price of the common stock. The ESOP trustee will repay the loan principally through the Bank's contributions to the ESOP over the loan term of 25 years. At March 31, 2023, the principal balance on the ESOP loan was $2.5 million.


	March 31, 2023
Shares held by the ESOP include the following:
Committed to be allocated		12,782
Unallocated		242,866
Total		255,648

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 $188,000 and $513,000 for the three and nine months ended March 31, 2023, respectively. Pension expense under the Pentegra DB Plan amounted to $180,000 and $555,000 for the three and nine months ended March 31, 2022, respectively. There were no contributions made to the Pentegra DB Plan during the three months ended March 31, 2023. Contributions made to the Pentegra DB Plan during the nine months ended March 31, 2023 amounted to $675,000. There were no contributions made to the Pentegra DB Plan during the three months ended March 31, 2022. Contributions made to the Pentegra DB Plan during the nine months ended March 31, 2022 amounted to $715,000.

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 10% of the employee’s voluntary contributions up to 3% of their compensation. Employer 401(k) contribution expense amounted to $6,000 and $16,000 for the three and nine months ended March 31, 2023, respectively. Employer 401(k) contribution expense amounted to $7,000 and $27,000 for the three and nine months ended March 31, 2022, respectively.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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 March 31, 2023 and June 30, 2022, the accrued liability amounted to $861,000 and $814,000, respectively. SERP expense amounted to $16,000 and $47,000 for the three and nine months ended March 31, 2023, respectively. SERP expense amounted to $17,000 and $52,000 for the three and nine months ended March 31, 2022, respectively. In connection with these SERPs, the Bank purchased life insurance policies, which had a cash surrender value of $5.9 million and $5.7 million at March 31, 2023 and June 30, 2022, 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 March 31, 2023 and June 30, 2022 amounted to $4.5 million and $4.4 million, respectively. For the three and nine months ended March 31, 2023, post-retirement expense related to these obligations amounted to $19,000 and $77,000, respectively, and $14,000 and $41,000 for the three and nine months ended March 31, 2022, respectively.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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.

Assets and liabilities measured at fair value on a recurring basis

At March 31, 2023 and June 30, 2022, securities available for sale were measured at Level 2 with a fair value of $158,000 and $199,000, respectively. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no securities measured at fair value in Levels 1 and 3.

There are no liabilities measured at fair value on a recurring basis at March 31, 2023 or June 30, 2022.

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 March 31, 2023 or June 30, 2022.

CFSB Bancorp, Inc. 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 March 31, 2023 and June 30, 2022.


	March 31, 2023
(In thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	5,342	$	5,342	$	-	$	-	$	5,342
Securities available for sale		158		-		158		-		158
Securities held to maturity		150,981		-		136,774		-		136,774
Federal Home Loan Bank of Boston stock		241		-		-		241		241
Loans, net		176,943		-		-		159,853		159,853
Accrued interest receivable		1,356		-		-		1,356		1,356

Liabilities:
Deposits		270,006		-		-		257,027		257,027

	June 30, 2022
(In thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	31,667	$	31,667	$	-	$	-	$	31,667
Securities available for sale		199		-		199		-		199
Securities held to maturity		145,239		-		133,593		-		133,593
Federal Home Loan Bank of Boston stock		191		-		-		191		191
Loans, net		172,593		-		-		161,098		161,098
Accrued interest receivable		1,265		-		-		1,265		1,265

Liabilities:
Deposits		287,075		-		-		268,039		268,039

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

12.

STOCK-BASED COMPENSATION

Under the CFSB Bancorp, Inc. 2023 Equity Incentive Plan (the "2023 Equity Plan"), the Company may grant options, restricted stock, restricted stock units or performance awards to its directors, officers and employees. Both incentive stock options and nonqualified stock options may be granted under the 2023 Equity Plan with 319,560 shares reserved for options. Any options forfeited because vesting requirements are not met or expired will become available for re-issuance under the 2023 Equity Plan. The exercise price of each option equals the market price of the Company's stock on the date of the grant and the maximum term of each option is 10 years. The total number of shares reserved for restricted stock is 127,824. Options and awards generally vest ratably over three to five years. The fair value of shares awarded is based on the market price at the date of grant.

Stock Options

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

•

Volatility is based on peer group volatility because the Company does not have a sufficient trading history.

•

Expected life represents the period of time that the options are expected to be outstanding, taking into account the contractual term, and the vesting period.

•

Expected dividend yield is based on the Company's history and expectations of dividend payouts.

•

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

During the nine months ended March 31, 2023, the Company made the following grants of options to purchase shares of common stock and used the following assumptions in measuring the fair value of such grants:


	For the Nine Months Ended
	March 31, 2023
Options granted		273,000
Vesting period (years)		5
Expiration period (years)		10
Expected volatility		29.3	%
Expected life (years)		6.5
Expected dividend yield		0	%
Risk-free interest rate		3.70	%
Option fair value	$	3.17

There were no grants of options to purchase shares of common stock during the nine months ended March 31, 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

A summary of stock option activity for the nine months ended March 31, 2023 is presented in the table below:


	Stock Option Grants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance at July 1, 2022
Granted		273,000	$	8.33		9.95
Exercised		-		-		-
Forfeited		-		-		-
Balance at March 31, 2023		273,000	$	8.33		9.95	$	-
Exercisable at March 31, 2023		-	$	-		-	$	-
Unrecognized compensation cost	$	855,000
Weighted average remaining recognition period (years)		4.95

For the three and nine months ended March 31, 2023, stock-based compensation expense applicable to stock options was $9,000. There was no stock-based compensation expense applicable to stock options for the three and nine months ended March 31, 2022. There were no tax benefits related to stock-based compensation expense applicable to stock-options for the three and nine months ended March 31, 2023 and 2022, respectively.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Restricted Stock

Shares issued may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will become available for reissuance under the 2023 Equity Plan. The fair market value of shares awarded, based on the market price at the date of the grant, is amortized over the applicable vesting period. Restricted stock awarded to date has been at no cost to the awardee. The following table presents activity in restricted stock awards under the 2023 Equity Plan for the nine months ended March 31, 2023:


	Restricted Stock Awards		Weighted Average Grant Price
Restricted stock awards at July 1, 2022
Granted		111,000	$	8.35
Vested		-		-
Forfeited		-		-
Restricted stock awards at March 31, 2023		111,000	$	8.35
Unrecognized compensation cost	$	916,000
Weighted average remaining recognition period (years)		4.95

For the three and nine months ended March 31, 2023, stock-based compensation applicable to restricted stock was $10,000. There was no stock-based compensation expense applicable to restricted stock for the three and nine months ended March 31, 2022. There were no tax benefits related to stock-based compensation expense applicable to restricted stock for the three and nine months ended March 31, 2023 and 2022, respectively.

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 Annual Report on Form 10-K.

Overview

Our results of operations depend primarily on our net interest income and, to a lesser extent, non-interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits. 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, Federal Deposit Insurance Corporation 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 any associated economic slowdown either nationally or in our market areas, that are worse than expected, including potential recessionary conditions;

•

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;

•

changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio;

•

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 or changes in the fiscal or monetary policies of the U.S. Treasury or Board of Governors of the Federal Reserve System;

•

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;

•

the current or anticipated impact of military conflict, terrorism or other geopolitical event;

•

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.

Allowance for Loan Losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. No portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as a critical accounting policy.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a given borrower's ability to repay, the estimated value of any underlying collateral, the size and composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not separately identify consumer loans for impairment disclosure unless such loans are subject to a troubled debt restructuring agreement. The general component covers pools of loans by loan class not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: (1) levels and trends in delinquent, classified, non-accrual and impaired loans, as well as loan modifications; (2) trends in the nature and volume of the portfolio and terms of loans and the existence and effect of any concentrations of credit and changes in level of such concentrations; (3) effects of the changes in risk selection and lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (4) experience, ability, and depth of lending department management and other relevant staff; and (5) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimated specific and general losses in the portfolio.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the 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.

Deferred Income Taxes. At March 31, 2023, we had a net deferred tax asset totaling $1.0 million. In accordance with Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes,” we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established if it is not more likely than not realizable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize its federal and state deferred tax asset.

There have been no material changes to our critical accounting policies during the three and nine months ended March 31, 2023.

For additional information on our significant accounting policies, please refer to Note 1 of the audited consolidated financial statements within our Annual Report on Form 10-K.

Comparison of Financial Condition at March 31, 2023 and June 30, 2022

Total Assets. Total assets decreased $14.5 million, or 4.0%, to $351.7 million at March 31, 2023 from $366.2 million at June 30, 2022. The decrease resulted primarily from decreases in cash and cash equivalents of $26.4 million, or 83.3%, partially offset by increases in securities held to maturity of $5.8 million, or 4.0%, and net loans of $4.3 million, or 2.5%. The Company adopted Accounting Standard Update ("ASU") 2016-02-Leases (Topic 842) on July 1, 2022 and began recognizing operating leases on its consolidated balance sheet by recording a Right-Of-Use asset, representing the Company's legal right to use the leased assets and a net lease liability, representing the Company's legal obligation to make these lease payments, which resulted in an increase of $1.0 million in total assets and total liabilities at March 31, 2023.

Cash and Cash Equivalents. Cash and cash equivalents decreased $26.4 million, or 83.3%, to $5.3 million at March 31, 2023 from $31.7 million at June 30, 2022, as we invested excess cash into securities and loans to increase our overall yield on interest-earning assets and funded deposit outflows.

Net Loans. Net loans increased $4.3 million, or 2.5%, to $176.9 million at March 31, 2023 from $172.6 million at June 30, 2022. The increase was due primarily to increases in commercial real estate loans of $5.8 million, or 39.4%, and $717,000, or 36.4%, in second mortgages and home equity lines of credit, partially offset by a decrease of $1.7 million, or 11.7%, in multi-family real estate loans. The growth in commercial real estate loans was the result of increased loan originations and the Bank's continued focus on growing and diversifying the loan portfolio.

Securities Available for Sale. Securities available for sale decreased $41,000, or 20.6%, to $158,000 at March 31, 2023 from $199,000 at June 30, 2022. The decrease was due to prepayments and the decline in fair value due to the rising interest rate environment.

Securities Held to Maturity. Securities held to maturity increased $5.8 million, or 4.0%, to $151.0 million at March 31, 2023 from $145.2 million at June 30, 2022, as we invested excess cash into corporate bonds, municipal bonds and mortgage-backed securities to increase our overall yield on interest-earning assets.

Total Liabilities. Total liabilities decreased $15.9 million, or 5.4%, to $276.0 million at March 31, 2023 from $291.9 million at June 30, 2022. The decrease was the result of decreases in deposits of $17.1 million, or 6.0%, partially offset by the new operating lease liability of $1.0 million.

Deposits. Deposits decreased $17.1 million, or 6.0%, to $270.0 million at March 31, 2023 from $287.1 million at June 30, 2022. The decrease was primarily due to decreases of $9.0 million, or 11.9%, in savings accounts, $3.5 million, or 5.5% in NOW and demand accounts, and $15.7 million, or 33.4%, in money market accounts, partially offset by an increase of $11.0 million, or 11.0%, in term certificates. The decrease reflects management's decision not to increase interest rates for savings and money market accounts. During the second and third quarters of the fiscal year, the Bank held term certificate promotions, which contributed to the increase in the balance of term certificates. Uninsured deposits of Colonial Federal Savings Bank amounted to $37.6 million and $42.5 million at March 31, 2023 and June 30, 2022, respectively.

Stockholders' Equity. Total stockholders' equity increased $1.4 million, or 1.9%, to $75.7 million at March 31, 2023 from $74.3 million at June 30, 2022. The increase was primarily due to net income of $1.3 million and change in unearned ESOP compensation of $66,000 for the nine months ended March 31, 2023.

Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022

General. We reported net income of $355,000 for the three months ended March 31, 2023, compared to a net loss of $828,000 for the three months ended March 31, 2022, an increase of $1.2 million. This increase in net income was primarily due to a charitable contribution of $1.6 million during the three months ended March 31, 2022 in connection with the establishment and funding of a charitable foundation in connection with the Bank's mutual holding company reorganization and stock offering in January 2022. Additionally, net interest income increased $104,000, or 5.1%, partially offset by an increase in non-interest expense (excluding the charitable foundation contribution made during the three months ended March 31, 2022) of $228,000, or 13.6%, and an increase in income tax expense of $243,000.

Interest and Dividend Income. Interest and dividend income increased $394,000, or 17.2%, to $2.7 million for the three months ended March 31, 2023 from $2.3 million for the three months ended March 31, 2022. The increase was attributable to an increase of $273,000, or 41.1%, in interest on securities, an increase of $36,000, or 211.8%, in interest on short-term investments, and an increase of $85,000, or 5.3%, in interest on loans. Interest income on securities increased due to an increase in the average balance of securities

of $23.1 million to $150.9 million for the three months ended March 31, 2023, from $127.8 million for the three months ended March 31, 2022, and an increase in the average yield on securities of 36 basis points to 2.54% for the three months ended March 31, 2023 from 2.18% for the three months ended March 31, 2022. Interest income on short-term investments increased due to an increase in the average yield of 385 basis points to 4.01% for the three months ended March 31, 2023 from 0.16% for the three months ended March 31, 2022, partially offset by a decrease in the average balance of short-term investments of $36.8 million to $5.3 million for the three months ended March 31, 2023 from $42.1 million for the three months ended March 31, 2022. Interest income on loans increased due to an increase in the average balance of loans of $5.0 million to $179.5 million for the three months ended March 31, 2023, from $174.5 million for the three months ended March 31, 2022, and due to an increase in the average yield on loans of nine basis points to 3.79% for the three months ended March 31, 2023 from 3.70% for the three months ended March 31, 2022. The increase in the average yields on interest-earning assets resulted from the higher interest rate environment.

Interest Expense. Interest expense increased $290,000, or 117.9%, to $536,000 for the three months ended March 31, 2023 from $246,000 for the three months ended March 31, 2022. The increase was due to an increase in the average rate paid on certificates of deposit of 112 basis points, to 1.84% for the three months ended March 31, 2023, from 0.72% for the three months ended March 31, 2022 due to the higher interest rate environment, partially offset by a decrease in the average balance of certificates of deposit of $909,000, to $106.6 million for the three months ended March 31, 2023, from $107.5 million for the three months ended March 31, 2022. The decrease in the average balance of term deposits reflected the maturity of certificates of deposit before the Bank held certificates of deposit rate specials during the second and third fiscal quarters of 2023.

Net Interest Income. Net interest income increased $104,000, or 5.1%, to $2.2 million for the three months ended March 31, 2023, from $2.1 million for the three months ended March 31, 2022. The increase was due to an increase in average net interest-earning assets of $3.9 million combined with an increase in the net interest rate spread of three basis points to 2.34% for the three months ended March 31, 2023, from 2.31% for the three months ended March 31, 2022. The net interest margin increased 17 basis points to 2.59% for the three months ended March 31, 2023 compared to 2.42% for the three months ended March 31, 2022. The increase in the net interest rate spread was a result of an increase in the yield on interest-earning assets exceeding the increase in the cost of interest-bearing liabilities.

Provision for Loan Losses. No provision for loan losses for the three months ended March 31, 2023 was recorded compared to a provision for loan losses of $1,000 for the three months ended March 31, 2022. The absence of a provision for the three months ended March 31, 2023 reflected continued strong asset quality. The allowance for loan losses was $1.7 million, or 0.98% of total loans, at March 31, 2023, compared to $1.7 million, or 1.00% of total loans, at March 31, 2022. The allowance for loan losses was $1.7 million, or 0.99% of total loans at June 30, 2022. At March 31, 2023, we had four one- to four-family loans totaling $1.4 million designated as special mention. We had no loans categorized as substandard, doubtful or loss at March 31, 2023 or 2022. We did not have any non-performing loans at either March 31, 2023 or 2022. We had no charge-offs or recoveries for the three months ended March 31, 2023 or 2022. At March 31, 2023, we had four one- to four-family residential real estate loans totaling $1.3 million and one consumer loan, totaling $5,000 that were 30-59 days past due. Each of these loans were made current following March 31, 2023.

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


	Three Months Ended
	March 31,				Change
(Dollars in thousands)	2023		2022		Amount			Percent
Customer service fees	$	37	$	32	$	5			15.6	%
Income on bank-owned life insurance		64		75		(11	)		(14.7	%)
Other income		47		46		1			2.2	%
Total non-interest income	$	148	$	153	$	(5	)		(3.3	%)

Non-interest income decreased $5,000, or 3.3%, to $148,000 for the three months ended March 31, 2023 from $153,000 for the three months ended March 31, 2022. The decrease was primarily due to an $11,000 decrease in income on bank-owned life insurance.

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


	Three Months Ended
	March 31,				Change
(Dollars in thousands)	2023		2022		Amount			Percent
Salaries and employee benefits	$	1,103		956	$	147			15.4	%
Occupancy and equipment		256		238		18			7.6	%
Advertising		38		32		6			18.8	%
Data processing		84		89		(5	)		(5.6	%)
Deposit insurance		20		24		(4	)		(16.7	%)
Charitable Foundation contribution		-		1,554		(1,554	)		(100.0	%)
Other		400		334		66			19.8	%
Total non-interest expense	$	1,901	$	3,227	$	(1,326	)		(41.1	%)

Non-interest expense decreased $1.3 million, or 41.1%, to $1.9 million for the three months ended March 31, 2023 from $3.2 million for the three months ended March 31, 2022. The decrease was due primarily to the absence of a $1.6 million contribution to the Colonial Federal Savings Bank Charitable Foundation during the three months ended March 31, 2022, partially offset by a $147,000 increase in salaries and employee benefit expense due to normal employee annual merit salary benefit increases and the expense recognized in connection with the Colonial Federal Savings Bank Employee Stock Ownership Plan, an $18,000 increase in occupancy and equipment expenses due primarily to increased lease and service contracts expenses, and a $66,000 increase in other expenses due primarily to increased professional expenses.

Provision for Income Taxes. The Company recorded a provision for income taxes of $47,000 for the three months ended March 31, 2023, which was a $243,000 increase from an income tax benefit of $196,000 for the three months ended March 31, 2022. The increase in the provision for income taxes for the three months ended March 31, 2023 was due to the increase in income before income taxes.

Average Balance and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Tax-equivalent adjustments have been made for tax-advantaged municipal securities income. 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 $366,000 and $349,000 at March 31, 2023 and 2022, respectively.


	For the Three Months Ended March 31,
	2023							2022
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	179,452	$	1,700		3.79	%	$	174,485	$	1,615		3.70	%
Securities(1)		150,945		960		2.54	%		127,837		696		2.18	%
Other		5,287		53		4.01	%		42,130		17		0.16	%
Total interest-earning assets		335,684		2,713		3.23	%		344,452		2,328		2.70	%
Non-interest-earning assets		17,207							17,417
Total assets	$	352,891						$	361,869
Interest-bearing liabilities:
Interest-bearing demand deposits	$	32,245	$	4		0.05	%	$	31,088	$	6		0.08	%
Savings deposits		68,097		17		0.10	%		73,426		18		0.10	%
Money market deposits		34,377		22		0.26	%		42,077		27		0.26	%
Certificates of deposit		106,555		490		1.84	%		107,464		194		0.72	%
Total interest-bearing deposits		241,274		533		0.88	%		254,055		245		0.39	%
FHLB advances		244		3		4.92	%		174		1		2.30	%
Total interest-bearing liabilities		241,518		536		0.89	%		254,229		246		0.39	%
Noninterest-bearing liabilities
Non-interest-bearing demand deposits		30,352							31,936
Other non-interest-bearing liabilities		5,554							4,315
Total liabilities		277,424							290,480
Stockholders' equity		75,467							71,389
Total liabilities and stockholders' equity	$	352,891						$	361,869
Net interest income - FTE			$	2,177						$	2,082
Net interest rate spread(2)						2.34	%						2.31	%
Net interest-earning assets(3)	$	94,166						$	90,223
Net interest margin - FTE(4)						2.59	%						2.42	%
Average interest-bearing assets to interest-bearing liabilities						138.99	%						135.49	%

(1)

Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of $22,000 and $31,000 for the three months ended March 31, 2023 and 2022, respectively.

(2)

Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

(3)

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

(4)

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

A reconciliation of income presented on a GAAP basis as compared to a fully tax-equivalent basis is below:


	For the Three Months Ended
	March 31,		March 31,
	2023		2022
Securities interest income (no tax adjustment)	$	938	$	665
Tax-equivalent adjustment		22		31
Securities (tax-equivalent basis)	$	960	$	696
Net interest income (no tax adjustment)		2,155		2,051
Tax-equivalent adjustment		22		31
Net interest income (tax-equivalent adjustment)	$	2,177	$	2,082

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income on a fully tax-equivalent basis for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.


	For the Three Months Ended
	March 31, 2023 vs. 2022
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	46		$	39		$	85
Securities		126			138			264
Other		(15	)		51			36
Total interest-earning assets		157			228			385
Interest-bearing liabilities:
Interest-bearing demand deposits		-			(2	)		(2	)
Savings deposits		(1	)		-			(1	)
Money market deposits		(5	)		-			(5	)
Certificates of deposit		(2	)		298			296
Total deposits		(8	)		296			288
FHLB advances		-			2			2
Total interest-bearing liabilities		(8	)		298			290
Change in net interest income	$	165		$	(70	)	$	95

Comparison of Operating Results for the Nine Months Ended March 31, 2023 and 2022

General. We reported net income of $1.3 million for the nine months ended March 31, 2023, compared to a net loss of $122,000 for the nine months ended March 31, 2022, an increase of $1.5 million. The increase in net income was primarily due to a contribution to the Colonial Federal Savings Bank Charitable Foundation of $1.6 million during the nine months ended March 31, 2022, and an increase in net interest income of $814,000, or 13.5%, partially offset by an increase in non-interest expense, excluding the charitable foundation contribution, of $556,000, or 10.7%, and an increase in income tax expense of $346,000.

Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 16.9%, to $8.0 million for the nine months ended March 31, 2023 from $6.8 million for the nine months ended March 31, 2022. The increase was attributable to an increase of $831,000, or 44.5%, in interest on securities, an increase of $253,000, in interest on short-term investments, and an increase of $67,000, or 1.4%, in interest on loans. Interest income on securities increased due to an increase in the average balance of securities of $33.1 million to $150.3 million for the nine months ended March 31, 2023, from $117.2 million for the nine months ended March 31, 2022, and an increase in the average yield on securities of 24 basis points to 2.47% for the nine months ended March 31, 2023 from 2.23% for the nine months ended March 31, 2022. Interest income on short-term investments increased due to an increase in the average yield of 283 basis points to 3.00% for the nine months ended March 31, 2023 from 0.17% for the nine months ended March 31, 2022, partially offset by a decrease in the average balance of cash and short-term investments of $26.7 million to $13.4 million for the nine months ended March 31, 2023 from $40.1 million for the nine months ended March 31, 2022. Interest income on loans increased due to an increase in the average balance of loans of $7.0 million, to $177.9 million for the nine months ended March 31, 2023, from $170.9 million for the nine months ended March 31, 2022, partially offset by a decrease in the average yield earned on loans of 10 basis points to 3.73% for the nine months ended March 31, 2023, from 3.83% for the nine months ended March 31, 2022. The increase in the average yields on securities and other interest-earning assets resulted from the investments that were purchased during the past nine months, as interest rates increased. The increase in average loan balances was due to originations exceeding loan payoffs. The decrease in loan yields was due to higher interest rate loan payoffs exceeding the rate on loan originations in a high interest rate environment with reduced loan demand.

Interest Expense. Interest expense increased $337,000, or 43.1%, to $1.1 million for the nine months ended March 31, 2023 from $781,000 for the nine months ended March 31, 2022. The increase was due to an increase in the average rate paid on certificates of deposit of 52 basis points to 1.28% for the nine months ended March 31, 2023, from 0.76% for the nine months ended March 31, 2022, partially offset by a decrease in the average balance of certificates of deposit of $8.3 million, to $100.9 million for the nine months ended March 31, 2023, from $109.2 million for the nine months ended March 31, 2022. The decrease in the average balance of certificates of deposit reflected the maturity of certificates of deposit before the Bank held certificates of deposit rate specials during the second and third fiscal quarters of 2023.

Net Interest Income. Net interest income increased $814,000, or 13.5%, to $6.9 million for the nine months ended March 31, 2023, from $6.1 million for the nine months ended March 31, 2022. The increase was due to an increase in average net interest-earning assets of $21.7 million combined with an increase in our net interest rate spread of 14 basis points to 2.54% for the nine months ended March 31, 2023, from 2.40% for the nine months ended March 31, 2022. Our net interest margin increased 22 basis points to 2.71% for the nine months ended March 31, 2023 compared to 2.49% for the nine months ended March 31, 2022. The increase in the net interest rate spread was a result of an increase in the yield on interest-earning assets exceeding the increase in the cost of interest-bearing liabilities.

Provision for Loan Losses. No provision for loan losses was recorded for the nine months ended March 31, 2023 compared to a provision for loan losses of $26,000 for the nine months ended March 31, 2022. The absence of a provision for the nine months ended March 31, 2023 reflected continued strong asset quality.

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


	Nine Months Ended
	March 31,				Change
(Dollars in thousands)	2023		2022		Amount			Percent
Customer service fees	$	110	$	93	$	17			18.3	%
Income on bank-owned life insurance(1)		191		183		8			4.4	%
Gain on sale of securities available for sale		-		48		(48	)		(100.0	%)
Other income		199		205		(6	)		(2.9	%)
Total non-interest income	$	500	$	529	$	(29	)		(5.5	%)

(1) Certain amounts in the prior period have been reclassified to conform to the current period presentation.

Non-interest income decreased $29,000, or 5.5%, to $500,000 for the nine months ended March 31, 2023 from $529,000 for the nine months ended March 31, 2022. The decrease was primarily due to the absence of a $48,000 gain on the sale of securities available for sale during the nine months ended March 31, 2022, partially offset by increases in customer service fees of $17,000.

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


	Nine Months Ended
	March 31,				Change
(Dollars in thousands)	2023		2022		Amount			Percent
Salaries and employee benefits(1)	$	3,371	$	3,061	$	310			10.1	%
Occupancy and equipment		754		656		98			14.9	%
Advertising		148		110		38			34.5	%
Data processing		262		260		2			0.8	%
Deposit insurance		63		67		(4	)		(6.0	%)
Charitable Foundation contribution		-		1,554		(1,554	)		(100.0	%)
Other		1,138		1,026		112			10.9	%
Total non-interest expense	$	5,736	$	6,734	$	(998	)		(14.8	%)

(1) Certain amounts in the prior period have been reclassified to conform to the current period presentation.

Non-interest expense decreased $998,000, or 14.8%, to $5.7 million for the nine months ended March 31, 2023 from $6.7 million for the nine months ended March 31, 2022. This decrease in non-interest expense was primarily due to the contribution to the Colonial Federal Savings Bank Charitable Foundation of $1.6 million during the nine months ended March 31, 2022, partially offset by a $310,000 increase in salaries and employee benefit expense due to normal employee annual merit salary and benefit increases and expenses recognized in connection with the ESOP, a $98,000 increase in occupancy and equipment expenses due primarily to increased lease and service contracts expenses, a $38,000 increase in advertising expense related to an employment agency fee and a $112,000 increase in other expenses due primarily to increased professional expenses.

Provision for Income Taxes. The Company recorded a provision for income taxes of $282,000 for the nine months ended March 31, 2023, a $346,000 increase from an income tax benefit of $64,000 for the nine months ended March 31, 2022. Our effective tax rate was 17.4% and 34.4% for the nine months ended March 31, 2023 and 2022, respectively. The increase in the provision for income taxes for the nine months ended March 31, 2023 was due to the increase in income before income taxes.


	For the Nine Months Ended March 31,
	2023							2022
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	177,898	$	4,976		3.73	%	$	170,944	$	4,909		3.83	%
Securities(1)		150,318		2,782		2.47	%		117,169		1,963		2.23	%
Other		13,445		303		3.00	%		40,100		50		0.17	%
Total interest-earning assets		341,661		8,061		3.15	%		328,213		6,922		2.81	%
Non-interest-earning assets		16,401							15,863
Total assets	$	358,062						$	344,076
Interest-bearing liabilities:
Interest-bearing demand deposits	$	32,982	$	12		0.05	%	$	30,885	$	14		0.06	%
Savings deposits		72,112		54		0.10	%		72,245		55		0.10	%
Money market deposits		39,956		80		0.27	%		41,533		81		0.26	%
Certificates of deposit		100,875		969		1.28	%		109,226		624		0.76	%
Total interest-bearing deposits		245,925		1,115		0.60	%		253,889		774		0.41	%
FHLB advances		80		3		5.00	%		363		7		2.57	%
Total interest-bearing liabilities		246,005		1,118		0.61	%		254,252		781		0.41	%
Noninterest-bearing liabilities
Non-interest-bearing demand deposits		31,928							32,130
Other non-interest-bearing liabilities		5,044							1,151
Total liabilities		282,977							287,533
Stockholders' equity		75,085							56,543
Total liabilities and stockholders' equity	$	358,062						$	344,076
Net interest income - FTE			$	6,943						$	6,141
Net interest rate spread(2)						2.54	%						2.40	%
Net interest-earning assets(3)	$	95,656						$	73,961
Net interest margin - FTE(4)						2.71	%						2.49	%
Average interest-bearing assets to interest-bearing liabilities						138.88	%						129.09	%

(1)

Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of $84,000 and $96,000 for the nine months ended March 31, 2023 and 2022, respectively.

(2)

Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

(3)

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

(4)

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

A reconciliation of income presented on a GAAP basis as compared to a fully tax-equivalent basis is presented below:


	For the Nine Months Ended
	March 31,		March 31,
	2023		2022
Securities interest income (no tax adjustment)	$	2,698	$	1,867
Tax-equivalent adjustment		84		96
Securities (tax-equivalent basis)	$	2,782	$	1,963
Net interest income (no tax adjustment)		6,859		6,045
Tax-equivalent adjustment		84		96
Net interest income (tax-equivalent adjustment)	$	6,943	$	6,141

Rate/Volume Analysis


	For the Nine Months Ended
	March 31, 2023 vs. 2022
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	200		$	(133	)	$	67
Securities		555			264			819
Other		(33	)		286			253
Total interest-earning assets		722			417			1,139
Interest-bearing liabilities:
Interest-bearing demand deposits		1			(3	)		(2	)
Savings deposits		-			(1	)		(1	)
Money market deposits		(3	)		2			(1	)
Certificates of deposit		(48	)		393			345
Total deposits		(50	)		391			341
FHLB advances		(5	)		1			(4	)
Total interest-bearing liabilities		(55	)		392			337
Change in net interest income	$	777		$	25		$	802

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans and investment securities, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The Asset/Liability Committee establishes and monitors the amount, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:

•

market our non-interest-bearing demand, money market, savings and demand accounts;

•

diversify our loan mix;

•

invest in short- to medium-term repricing and/or maturing securities whenever the market allows; and

•

maintain a strong capital position.

We do not engage in hedging activities, such as engaging in futures, options or interest rate swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

We consider two types of simulations impacted by changes in interest rates, which are (1) net interest income and (2) changes in the economic value of equity.

Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model, the results of which are provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a one-year period based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. The following table shows the estimated impact on net interest income for the one-year period beginning March 31, 2023 resulting from potential changes in interest rates, expressed in basis points. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.

Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.


Change in Interest Rates (basis points)(1)	Net Interest Income Year 1 Forecast (In thousands)		Year 1 Change from Level
+400	$	6,469		(18.7	%)
+300		6,858		(13.8	%)
+200		7,194		(9.6	%)
+100		7,541		(5.3	%)
Level		7,960		-
-100		7,931		(0.4	%)
-200		7,845		(1.4	%)
-300		7,699		(3.3	%)
-400		7,716		(3.1	%)

(1)

Assumes an immediate uniform change in interest rates at all maturities.

Economic Value of Equity. We monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.

The table below sets forth, as of March 31, 2023, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.


As of March 31, 2023
			Estimated Increase (Decrease) in EVE						EVE as a Percentage of Present Value of Assets(3)
Change in Interest Rates (basis points)(1)	Estimated EVE(2) (In thousands)		Amount (In thousands)			Percent			EVE Ratio(4)			Decrease (basis points)
+400	$	31,276	$	(21,987	)		(41.3	%)		11.3	%		(540	)
+300		36,388		(16,875	)		(31.7	%)		12.7	%		(400	)
+200		41,793		(11,470	)		(21.5	%)		14.1	%		(260	)
+100		47,494		(5,769	)		(10.8	%)		15.4	%		(130	)
Level		53,263		-			-			16.7	%		-
-100		57,951		4,688			8.8	%		17.5	%		80
-200		62,249		8,986			16.9	%		18.1	%		140
-300		65,474		12,211			22.9	%		18.4	%		170
-400		63,656		10,393			19.5	%		17.6	%		90

(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 of Colonial Federal Savings Bank, which had a book value of stockholders' equity amounting to $63.0 million at March 31, 2023.

(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 March 31, 2023, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 21.5% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 16.9% increase 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 and the Federal Reserve Bank of Boston. At March 31, 2023, we had no outstanding advances from the Federal Home Loan Bank of Boston. At March 31, 2023, we had the ability to borrow $61.2 million in Federal Home Loan Bank of Boston advances. Additionally, at March 31, 2023, we had $2.4 million and $12.5 million under available lines of credit with the Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston, respectively, none of which was drawn at March 31, 2023.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $1.4 million and $1.1 million for the nine months ended March 31, 2023 and 2022, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on securities, was $10.7 million and $27.0 million for the nine months ended March 31, 2023 and 2022, respectively. Net cash used in financing activities was $17.1 million for the nine months ended March 31, 2023, compared to $22.4 million provided by financing activities for the nine months ended March 31, 2022. Changes in net cash related to financing activities were primarily related to changes in deposit balances for the nine months ended March 31, 2023. Changes in net cash related to financing activities were primarily related to proceeds from the Company's initial public offering during the nine months ended March 31, 2022, partially offset by common stock purchased for the Company's ESOP plan, and decreases to the bank's deposit balances and short-term borrowings.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase loans with an increase in core deposits as supplemented by the use of Federal Home Loan Bank of Boston advances as needed.

Capital Resources. At March 31, 2023 and June 30, 2022, the Bank exceeded all of its regulatory capital requirements. See Note 8 of the unaudited consolidated financial statements of this quarterly report.

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 March 31, 2023, we had $360,000 of commitments to originate loans, $4.1 million of unadvanced funds under home equity lines of credit, $28,000 in unadvanced funds on construction loans, and $955,000 of unadvanced funds under commercial and other 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 in the Notes to the unaudited consolidated financial statements and note 1 of the notes to our consolidated financial statements beginning on page F-1 of our Annual Report on Form 10-K. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to non-public companies.

Impact of Inflation and Changing Prices

The 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 Securities Exchange Act of 1934, as amended (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 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 March 31, 2023, the Company’s Chief Executive Officer and Treasurer and Chief Operating Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which 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 March 31, 2023, 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.

None.

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))

10.1		CFSB Bancorp, Inc. 2023 Equity Incentive Plan (incorporated herein by reference to Appendix A to the proxy statement for the 2023 annual meeting of stockholders

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 three and nine months ended March 31, 2023, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income (Loss), (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Stockholders’ Equity, (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: May 10, 2023	By:	/s/ Michael E. McFarland
		Michael E. McFarland
		President and Chief Executive Officer
		(Principal Executive Officer)




Date: May 10, 2023	By:	/s/ Susan Shea
		Susan Shea
		Treasurer and Chief Operating Officer
		(Principal Financial and Accounting Officer)