CFSB Bancorp, Inc. /MA/ - Quarter Report: 2023 September (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 September 30, 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 November 12, 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	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Stockholders' Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53

PART II.	OTHER INFORMATION	54

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signatures		56

Item 1. Financial Statements.

CFSB Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	September 30,			June 30,
	2023			2023
Assets:
Cash and due from banks	$	1,394		$	1,486
Short-term investments		4,724			5,375
Total cash and cash equivalents		6,118			6,861
Securities available for sale, at fair value		139			146
Securities held to maturity, at amortized cost, net of allowance for credit loss, fair value of $128,726 at September 30, 2023 and $132,273 at June 30, 2023		147,537			147,902
Federal Home Loan Bank stock, at cost		405			381
Loans, net of allowance for credit losses of $1,649 at September 30, 2023 and $1,747 at June 30, 2023		174,080			175,911
Premises and equipment, net		3,354			3,413
Accrued interest receivable		1,395			1,363
Bank-owned life insurance		10,468			10,402
Deferred tax asset		1,132			1,079
Operating lease right of use asset		930			953
Other assets		663			596
Total assets	$	346,221		$	349,007

Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing	$	30,918		$	32,760
Interest-bearing		229,755			230,616
Total deposits		260,673			263,376
Short-term borrowings		3,250			3,675
Mortgagors' escrow accounts		1,626			1,596
Operating lease liability		941			962
Accrued expenses and other liabilities		3,834			3,509
Total liabilities		270,324			273,118
Stockholders' Equity
Preferred Stock, $.01 par value, 10,000,000 shares authorized as of September 30, 2023 and June 30, 2023, none outstanding	$	-		$	-
Common Stock, $.01 par value, 90,000,000 shares authorized as of September 30, 2023 and June 30, 2023, 6,632,642 issued and outstanding as of September 30, 2023 and 6,632,642 issued and outstanding as of June 30, 2023		65			65
Additional paid-in capital		27,896			27,814
Retained earnings		50,316			50,416
Accumulated other comprehensive loss		(3	)		(3	)
Unearned compensation - ESOP, 237,754 and 240,310 shares unallocated at September 30, 2023 and June 30, 2023, respectively		(2,377	)		(2,403	)
Total stockholders' equity		75,897			75,889
Total liabilities and stockholders' equity	$	346,221		$	349,007

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Net Income (Unaudited)

(In thousands, except per share data)


	For the Three Months Ended
	September 30,			September 30,
	2023			2022
Interest and dividend income:
Interest and fees on loans	$	1,722		$	1,619
Interest and dividends on debt securities:
Taxable		868			751
Tax-exempt		97			108
Interest on short-term investments and certificates of deposit		45			127
Total interest and dividend income		2,732			2,605

Interest expense:
Deposits		876			242
Borrowings		50			-
Total interest expense		926			242

Net interest income		1,806			2,363
Provision for (reversal of) credit losses		(166	)		-
Net interest income after provision for (reversal of) credit losses		1,972			2,363

Non-interest income:
Customer service fees		40			37
Income on bank-owned life insurance		66			64
Other income		54			99
Total non-interest income		160			200

Non-interest expenses:
Salaries and employee benefits		1,144			1,018
Occupancy and equipment		254			243
Advertising		38			39
Data processing		89			94
Deposit insurance		33			21
Other general and administrative		358			333
Total non-interest expenses		1,916			1,748

Income before income taxes		216			815
Provision for income taxes		93			170
Net income	$	123		$	645

Net income per share:
Basic	$	0.02		$	0.10
Diluted	$	0.02		$	0.10

Weighted average shares outstanding:
Basic		6,282,203			6,271,977
Diluted		6,282,203			6,271,977

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	For the Three Months Ended
	September 30,
	2023		2022
Net income	$	123	$	645
Other comprehensive loss:
Change in unrealized holding losses		-		(1	)
Net change in unrealized losses		-		(1	)
Tax effect		-		-
Net-of-tax amount		-		(1	)
Comprehensive income	$	123	$	644

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			Loss			ESOP			Total
Balance at June 30, 2023		6,632,642	$	65	$	27,814		$	50,416		$	(3	)	$	(2,403	)	$	75,889
Cumulative effect accounting adjustment(1)		-		-		-			(223	)		-			-			(223	)
Net income		-		-		-			123			-			-			123
Other comprehensive loss		-		-		-			-			-			-			-
Stock-based compensation		-		-		90			-			-			-			90
ESOP shares committed to be released		-		-		(8	)		-			-			26			18
Balance at September 30, 2023		6,632,642	$	65	$	27,896		$	50,316		$	(3	)	$	(2,377	)	$	75,897

Balance at June 30, 2022		6,521,642	$	65	$	27,720		$	48,970		$	-		$	(2,505	)	$	74,250
Net income		-		-		-			645			-			-			645
Other comprehensive loss		-		-		-			-			(1	)		-			(1	)
ESOP shares committed to be released		-		-		(2	)		-			-			25			23
Balance at September 30, 2022		6,521,642	$	65	$	27,718		$	49,615		$	(1	)	$	(2,480	)	$	74,917

(1) Represents adjustment needed to reflect the cumulative impact on retained earnings pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment presented includes $12,000 ($9,000, net of tax) attributable to the change in accounting methodology for estimating the allowance for credit losses related to loans, $276,000 ($198,000, net of tax) attributable to the change in accounting methodology for estimating the allowance for credit losses related to securities held to maturity and $23,000 ($16,000, net of tax) related to the reserve for off-balance sheet exposures resulting from the Company's adoption of the standard. Amount shown in the table above is presented net of tax.

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)



	September 30,
	2023			2022
Cash flows from operating activities:
Net income	$	123		$	645
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for (reversal of) credit losses		(166	)		-
Amortization of securities, net		96			116
Net change in deferred loan costs and fees		30			1
Increase in cash surrender value of bank-owned life insurance		(66	)		(64	)
Depreciation and amortization, net		59			64
Deferred income tax expense		-			(60	)
ESOP expense		18			23
Stock-based compensation		90			-
Net increase in accrued interest receivable		(32	)		(41	)
Other, net		284			46
Net cash provided by operating activities		436			730
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		8			14
Activity in securities held to maturity:
Maturities, prepayments and calls		3,897			2,700
Purchases		(3,861	)		(9,718	)
Purchases of Federal Home Loan Bank of Boston stock		(24	)		-
Loan originations and payments, net		1,899			(2,652	)
Additions to premises and equipment		-			(40	)
Net cash provided by (used in) investing activities		1,919			(9,696	)
Cash flows from financing activities:
Net decrease in deposits		(2,703	)		(7,023	)
Net decrease in short-term borrowings		(425	)		-
Net increase in mortgagors' escrow accounts		30			63
Net cash used in financing activities		(3,098	)		(6,960	)
Net change in cash and cash equivalents		(743	)		(15,926	)
Cash and cash equivalents at beginning of period		6,861			31,667
Cash and cash equivalents at end of period	$	6,118		$	15,741
Supplemental information:
Interest paid on deposits and short-term borrowings	$	913		$	242
Income taxes paid	$	65		$	435
Adoption of ASU 2016-02	$	-		$	1,044
Adoption of ASU 2016-13	$	223		$	-

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, 2023.

Reclassification

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

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 and 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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

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
(Dollars In thousands)	September 30, 2023			September 30, 2022
Net income	$	123		$	645

Weighted average number of common shares outstanding		6,632,642			6,521,642
Less: Average unallocated ESOP shares		(239,439	)		(249,665	)
Less: Average non-vested restricted shares		(111,000	)		-
Weighted average number of common shares outstanding used to calculate basic earnings per common share		6,282,203			6,271,977
Dilutive effect of share-based compensation		-			-
Weighted average number of common shares outstanding used to calculate diluted earnings per common share		6,282,203			6,271,977

Earnings per common share
Basic	$	0.02		$	0.10
Diluted	$	0.02		$	0.10

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 credit losses and deferred income taxes.

Management believes that the allowance for credit losses was adequate as of September 30, 2023 and June 30, 2023. While management uses current information and reasonable and supportable forecasts to recognize losses on loans, future additions to the allowance for credit 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 credit losses, and as a result of such reviews, management may have to adjust the allowance for credit losses. However, regulatory agencies are not directly involved in establishing the allowance for credit 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 September 30, 2023 and June 30, 2023. 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 July 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments, which requires the recognition of the allowance for credit losses to be estimated using the current expected credit loss ("CECL") methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases (See Notes 3 and 4 to our unaudited consolidated financial statements for further information).

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 September 30, 2023 or June 30, 2023.

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 and allowance for credit losses, follows:


	September 30, 2023
(In thousands)	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	140	$	-	$	140	$	-	$	(3	)	$	137
Collateralized mortgage obligations		2		-		2		-		-			2
Total securities available for sale	$	142	$	-	$	142	$	-	$	(3	)	$	139

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	996	$	-	$	996	$	-	$	(33	)	$	963
Mortgage-backed securities		48,239		-		48,239		-		(4,291	)		43,948
Municipal bonds		42,926		2		42,924		-		(8,126	)		34,798
Corporate bonds		55,609		231		55,378		-		(6,361	)		49,017
Total securities held to maturity	$	147,770	$	233	$	147,537	$	-	$	(18,811	)	$	128,726


	June 30, 2023
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	147	$	-	$	(5	)	$	142
Collateralized mortgage obligations		4		-		-			4
Total securities available for sale	$	151	$	-	$	(5	)	$	146

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	996	$	-	$	(34	)		962
Mortgage-backed securities		46,619		-		(3,500	)		43,119
Collateralized mortgage obligations		1		-		-			1
Municipal bonds		43,865		3		(6,423	)		37,445
Corporate bonds		56,421		-		(5,675	)		50,746
Total securities held to maturity	$	147,902	$	3	$	(15,632	)	$	132,273

Securities with an amortized cost of $14,010,000 and a fair value of $11,199,000 at September 30, 2023 were pledged to secure a credit line with the Federal Reserve Bank. See Note 7 of these unaudited consolidated financial statements.

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.


	September 30, 2023
	Due in One Year or Less				Due After One Year to Five Years				Due after Five Years to Ten Years				Due After 10 Years				Total
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	-	$	-	$	12	$	12	$	70	$	68	$	58	$	57	$	140	$	137
Collateralized mortgage obligations		2		2		-		-		-		-		-		-		2		2
Total securities available for sale		2		2		12		12		70		68		58		57		142		139

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	-	$	-	$	996	$	963	$	-	$	-	$	-	$	-	$	996	$	963
Mortgage-backed securities		22		22		4,030		3,848		18,806		16,981		25,381		23,097		48,239		43,948
Municipal bonds		3,890		3,833		7,760		7,455		12,444		10,080		18,832		13,432		42,926		34,800
Corporate bonds		4,449		4,406		23,390		21,414		26,066		22,191		1,704		1,237		55,609		49,248
Total securities held to maturity	$	8,361	$	8,261	$	36,176	$	33,680	$	57,316	$	49,252	$	45,917	$	37,766	$	147,770	$	128,959

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2023
	Due in One Year or Less				Due After One Year to Five Years				Due after Five Years to Ten Years				Due After 10 Years				Total
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	-	$	-	$	13	$	13	$	64	$	62	$	70	$	67		147		142
Collateralized mortgage obligations		4		4		-		-		-		-		-		-		4		4
Total securities available for sale		4		4		13		13		64		62		70		67		151		146

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	-	$	-	$	996	$	962	$	-	$	-	$	-	$	-	$	996	$	962
Mortgage-backed securities		22		22		4,360		4,161		19,713		18,008		22,524		20,928		46,619		43,119
Collateralized mortgage obligations		1		1		-		-		-		-		-		-		1		1
Municipal bonds		2,570		2,559		9,444		9,303		10,998		9,597		20,853		15,986		43,865		37,445
Corporate bonds		5,200		5,127		21,298		19,723		28,216		24,588		1,707		1,308		56,421		50,746
Total securities held to maturity	$	7,793	$	7,709	$	36,098	$	34,149	$	58,927	$	52,193	$	45,084	$	38,222	$	147,902	$	132,273

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

On July 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and securities held to maturity. In addition, ASC 326 made changes to the accounting for securities available for sale.

Allowance for Credit Losses - Securities Available for Sale

The Company measures expected credit losses on securities available for sale based upon the gain or loss position of the security. For securities available for sale in an unrealized loss position which the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost, the Company evaluates qualitative criteria to determine any expected loss. This includes among other items the financial health of, and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. The Company also evaluates quantitative criteria including determining whether there has been an adverse change in expected future cash flows of the security. Securities available for sale which are guaranteed by government agencies do not currently have an allowance for credit loss, as the Company determined these securities are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full to investors when a debt security reaches maturity. In assessing the Company’s investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), or Government National Mortgage Association (“GNMA”). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company’s investments. The Company will evaluate this position no less than annually, however, certain items which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s implicit guarantee on such securities. Accrued interest receivable on securities available for sale guaranteed by government agencies totaled $1,000 at September 30, 2023 and is excluded from the estimate of credit losses. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses would be recorded, with a related charge to earnings, limited by the amount of the fair value of the security less its amortized cost. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, the Company recognizes the entire difference between the amortized cost basis of the security and its fair value in earnings. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. There were no securities available for sale not guaranteed by government agencies at September 30, 2023.

Allowance for Credit Losses - Securities Held to Maturity

The Company measures expected credit losses on securities held to maturity on a collective basis by security type and risk rating where available. The reserve for each pool is calculated based on a Probability of Default/Loss Given Default basis taking into consideration the expected life of each security. Held-to-maturity securities which are issued by the United States Treasury or are guaranteed by government agencies do not currently have an allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full to investors when a debt security reaches maturity. In assessing the Company’s investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise FHLMC, FNMA, or GNMA. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company’s investments. The Company will evaluate this position no less than annually, however, certain items which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s implicit guarantee on such securities. Any expected credit losses on held-to-maturity securities would be presented as an allowance for credit loss. Accrued interest receivable on held-to-maturity securities totaled $883,000 at September 30, 2023 and is excluded from the estimate of credit losses.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes the activity in the allowance for credit losses for securities held to maturity by security type for the dates indicated:


	Government-sponsored Enterprises
(In thousands)	Debt Obligations		Mortgage-backed Securities		Municipal Bonds		Corporate Bonds			Total
Balance at June 30, 2023	$	-	$	-	$	-	$	-		$	-
Adoption of ASU 2016-13		-		-		2		274			276
Adjusted beginning balance		-		-		2		274			276
Provision for (reversal of) credit losses		-		-		-		(43	)		(43	)
Balance at September 30, 2023	$	-	$	-	$	2	$	231		$	233

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


	September 30, 2023
	Less Than Twelve Months									Over Twelve Months
(In thousands)	Number of Securities		Gross Unrealized Losses		Fair Value		Depreciation from Amortized Cost Basis (%)			Number of Securities		Gross Unrealized Losses		Fair Value		Depreciation from Amortized Cost Basis (%)
Securities available for sale:
Mortgage-backed securities		7	$	1	$	26		3.7	%		33	$	2	$	110		1.8	%
Total temporarily impaired securities available for sale		7	$	1	$	26		3.7	%		33	$	2	$	110		1.8	%

Securities held to maturity:
Government-sponsored enterprises:
Mortgage-backed securities		9	$	141	$	6,038		2.3	%		131	$	4,150	$	37,885		9.9	%
Debt obligations		-		-		-		-			1		33		963		3.3
Municipal bonds		14		229		6,678		3.3			38		7,897		27,911		22.1
Corporate bonds		3		127		4,415		2.8			44		6,234		44,834		12.2
Total temporarily impaired securities held to maturity		26	$	497	$	17,131		2.8	%		214	$	18,314	$	111,593		14.1	%

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2023
	Less Than Twelve Months									Over Twelve Months
(In thousands)	Number of Securities		Gross Unrealized Losses		Fair Value		Depreciation from Amortized Cost Basis (%)			Number of Securities		Gross Unrealized Losses		Fair Value		Depreciation from Amortized Cost Basis (%)
Securities available for sale:
Mortgage-backed securities		20	$	2	$	71		2.7	%		20	$	3	$	67		4.3	%
Total temporarily impaired securities available for sale		20	$	2	$	71		2.7	%		20	$	3	$	67		4.3	%

Securities held to maturity:
Government-sponsored enterprises:
Mortgage-backed securities		27	$	336	$	10,494		3.1	%		115	$	3,164	$	32,597		8.8	%
Debt obligations		1		34		962		3.4			-		-		-		-
Municipal bonds		11		111		6,280		1.7			35		6,312		27,676		18.6
Corporate bonds		9		317		9,534		3.2			38		5,358		40,213		11.8
Total temporarily impaired securities held to maturity		48	$	798	$	27,270		2.8	%		188	$	14,834	$	100,486		12.9	%

At September 30, 2023, 280 debt securities had unrealized losses with aggregate depreciation of 12.75% 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.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Credit Quality Indicators

The Company monitors the credit quality of securities through the use of credit ratings. The Company monitors the credit ratings on a quarterly basis. The following tables provide the amortized cost of securities available for sale and securities held to maturity at the dates indicated:


	September 30, 2023
(In thousands)	Aaa		Aa1		Aa2		Aa3		A1		A2		A3		Baa2		Total
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	140	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	140
Collateralized mortgage obligations		2		-		-		-		-		-		-		-		2
Total securities available for sale	$	142	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	142

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	996	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	996
Mortgage-backed securities		48,239		-		-		-		-		-		-		-		48,239
Municipal bonds		9,346		13,843		14,242		2,636		1,147		1,712		-		-		42,926
Corporate bonds		2,202		-		4,811		2,822		18,026		15,100		12,132		516		55,609
Total securities held to maturity	$	60,783	$	13,843	$	19,053	$	5,458	$	19,173	$	16,812	$	12,132	$	516	$	147,770


	June 30, 2023
(In thousands)	Aaa		Aa1		Aa2		Aa3		A1		A2		A3		Baa2		Not Rated		Total
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	147	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	147
Collateralized mortgage obligations		4		-		-		-		-		-		-		-		-		4
Total securities available for sale	$	151	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	151

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	996	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	996
Mortgage-backed securities		46,619		-		-		-		-		-		-		-		-		46,619
Collateralized mortgage obligations		1		-		-		-		-		-		-		-		-		1
Municipal bonds		9,349		12,811		14,108		2,943		2,178		1,710		-		-		766		43,865
Corporate bonds		2,205		-		4,826		2,825		19,449		16,377		10,222		517		-		56,421
Total securities held to maturity	$	59,170	$	12,811	$	18,934	$	5,768	$	21,627	$	18,087	$	10,222	$	517	$	766	$	147,902

There were no sales of securities during the three months ended September 30, 2023 or 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES

A summary of the balances of loans follows:


(In thousands)	September 30, 2023			June 30, 2023
Mortgage loans on real estate:
Residential:
1-4 family	$	137,743		$	140,109
Multifamily		12,883			12,638
Second mortgages and home equity lines of credit		3,129			2,699
Construction		-			-
Commercial		20,110			20,323
Total mortgage loans on real estate		173,865			175,769
Consumer loans:
Consumer		65			49
Home improvement		2,180			2,191
Total other loans		2,245			2,240
Total loans		176,110			178,009
Allowance for credit losses(1)		(1,649	)		(1,747	)
Net deferred loan fees		(381	)		(351	)
Loans, net	$	174,080		$	175,911

(1)

The Company adopted ASU 2016-13 on July 1, 2023 with a modified retrospective approach. Accordingly, at September 30, 2023, the allowance for credit losses was determined in accordance with ASC 326, “Financial Instruments-Credit Losses.”

Residential loans are subject to a blanket lien securing Federal Home Loan Bank (“FHLB”) advances. See Note 7 of these unaudited consolidated financial statements.

Effect of New Financial Accounting Standards

On July 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments, as amended, which requires the recognition of the allowance for credit losses be estimated using the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for securities available for sale. One such change is to require credit losses be presented as an allowance rather than as a write-down on securities available for sale that are determined to have impairment related to credit losses.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning July 1, 2023 are presented under ASC 326 while prior

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $223,000 as of July 1, 2023 for the cumulative effect of adopting ASC 326, which includes a net deferred tax liability of

The following table illustrates the impact of ASC 326:


	Pre-ASC Adoption			As Reported Under ASC 326
(In thousands)	June 30, 2023			July 1, 2023			Impact of ASC 326 Adoption
Assets
Allowance for credit losses on securities held to maturity	$	-		$	(276	)	$	(276	)
Allowance for credit losses on loans		(1,747	)		(1,759	)		(12	)
Deferred tax asset on allowance for credit losses		466			378			(88	)

Liabilities
Allowance for credit losses on off-balance sheet exposures	$	-		$	23		$	23

Shareholders' Equity
Retained earnings	$	50,416		$	50,193		$	(223	)

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Allowance for Credit Losses

The allowance for credit losses (“ACL”) is an estimate of expected losses inherent within the Company's existing loan portfolio. The ACL, as reported on our consolidated balance sheet, is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Accrued interest receivable on loans was $511,000 at September 30, 2023, and is excluded from the ACL.

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments, which are disaggregated by call code. For each of these pools, the Company collects historical loss data, dating back to March 2008, from a selection of peer banks and applies the annual historical loss rate over the estimated remaining average life of the loan portfolio segment. The use of peer banks historical loss rates is due to the lack of loss history experienced by the bank. The average remaining life of a loan portfolio segment is adjusted for estimated prepayment and curtailment expectations. The modeling for estimated prepayment speeds and curtailment rates is based on a combination of historical internal estimates and market estimates. The quantitative component of the ACL on loans is model-based and utilizes a forward-looking macroeconomic forecast. The Company uses a Weighted Average Remaining Maturity (“WARM”) method, incorporating historical loss data based on statistically derived economic variable loss drivers, to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, and considers historical experience, current conditions, and future expectations for segments of loans over a reasonable and supportable forecast period. The historical information is collected from a selection of peer banks and is derived from a combination of recessionary and non-recessionary performance periods for which data is available.

Residential one- to four-family: This segment consists of one- to four-family, owner-occupied, residential mortgage loans, virtually all of which are secured by properties in our market area. Generally, mortgages with loan-to-value ratios greater than 80% require private mortgage insurance, with limited exceptions. Underwriting approval is dependent on review of the borrower's ability to repay and credit history in accordance with the Company's policy. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit quality of this segment.

Multi-family: This segment consists of real estate loans secured by properties of five or more rental units within our market area. We consider a number of factors in originating multi-family loans. We evaluate the qualifications, income level and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality of this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.

Second mortgages and home equity lines of credit: Second mortgage loans and home equity lines of credit are multi-purpose loans used to finance various home or personal needs for which a one- to four-family primary or secondary residence serves as collateral. We generally originate home equity lines of credit with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 20 years. We originate second mortgage loans on owner-occupied properties with fixed rates of interest. We generally originate these loans with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 15 years. Underwriting approval is dependent on review of the borrower's ability to repay and credit history in accordance with the Company's policy. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit quality of this segment.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Commercial real estate: This segment consists of real estate loans generally secured by office buildings, small retail facilities, mixed-use facilities and warehouses within our market area. We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications, income level and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy due to diminished cash flows, which in turn, would have an effect on the credit quality of this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.

Consumer and home improvement: We offer a variety of consumer loans to individuals, including home improvement loans, new and used automobile loans. The overall health of the economy, including unemployment rates, will have an effect on the credit quality of this segment.

WARM method

In estimating the component of the ACL for loans that share similar credit characteristics with other loans, such loans are segregated into loan segments. Loans are designated into loan segments based on call code, for ease of use of historical peer bank data. In determining the ACL, we derive an estimated credit loss assumption from a model that categorizes loans to their call codes. The model calculates an expected loss percentage for each loan call code segment by considering the related historical annual net charge-off rate for that segment, based on historical averages from a select group of peer banks dating back to March 2008, and the average remaining life of the loan segment, based on estimated prepayment and curtailment rates. The historical loss rates over the remaining life of the loan segment are adjusted for differences between the historical net charge-off rates and the expected conditions over the remaining lives of the loans related to: (1) national, regional and local economic and business conditions and developments that effect the collectability of the portfolio; (2) changes in the volume and severity of past due loans and adversely classified or graded loans, the volume of nonaccrual loans and trends in charge-offs and recoveries; (3) changes in the nature and volume of the portfolio and the terms of loans; (4) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; (5) changes in the experience, ability and depth of lending management and other relevant staff; (6) changes in the quality of the institution's review system; (7) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution's existing portfolio; and (8) the existence of any concentrations of credit, and changes in the level of such concentrations. Such factors are used to adjust the historical net charge-off rates so that they reflect management expectations of future conditions based on a reasonable and supportable forecast. The Company uses regression analysis of historical peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime net charge-off rates. This analysis also determines how net charge-off rates will react to forecasted levels of the economic variables.

For all WARM models, management has determined that eight quarters represents a reasonable and supportable forecast period and reverts back to the historical net charge-off rates thereafter. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

Individually evaluated financial assets

For a loan that does not share risk characteristics with other loans, expected credit loss is measured on a net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan costs and fees), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit losses is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than on the operation) of the collateral.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Allowance for credit losses on off-balance sheet credit exposures, including unfunded loan commitments

The Company maintains a separate allowance for credit losses for off-balance sheet credit exposures, including unfunded loan commitments, which is included in accrued expenses and other liabilities on the balance sheet. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancelable by the Company and applying the loss factors used in the ACL methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No estimate for credit losses is reported for off-balance sheet exposures that are unconditionally cancelable by the Company, such as undrawn amounts under such arrangements that may be drawn prior to the cancellation of the agreement. The allowance for credit losses on off-balance sheet credit exposures is adjusted as credit loss expense. Categories of off-balance sheet credit exposures correspond to the loan portfolio segment described above. Management evaluates the need for a reserve on unfunded loan commitments in a manner consistent with loans. Upon adoption of ASU 2016-13 on July 1, 2023, the Company recorded a transition adjustment related to the reserve for unfunded loan commitments of $23,000, which is recorded in accrued expenses and other liabilities.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table presents activity in the allowance for credit losses by loan segment for the three months ended September 30, 2023 and for the allowance for loan losses for the three months ended September 30, 2022 is as follows:


(In thousands)	Residential 1-4 Family			Multifamily			Second Mortgages and Home Equity Lines of Credit			Construction		Commercial Real Estate			Consumer			Home Improvement			Unallocated			Total
Allowance for credit losses for loans
Balance at June 30, 2023	$	974		$	190		$	29		$	-	$	346		$	-		$	64		$	144		$	1,747
Adoption of ASU 2016-13(1)		139			2			23			-		(19	)		2			9			(144	)		12
Adjusted beginning balance	$	1,113		$	192		$	52		$	-	$	327		$	2		$	73		$	-		$	1,759
Provision (benefit) for credit losses		(42	)		(11	)		(9	)		-		(36	)		-			(12	)		-			(110	)
Loans charged-off		-			-			-			-		-			-			-			-			-
Recoveries		-			-			-			-		-			-			-			-			-
Balance at September 30, 2023(2)	$	1,071		$	181		$	43		$	-	$	291		$	2		$	61		$	-		$	1,649

Allowance for credit losses for off-balance sheet exposures
Balance at June 30, 2023	$	-		$	-		$	-		$	-	$	-		$	-		$	-		$	-		$	-
Adoption of ASU 2016-13		5			7			-			-		7			4			-			-			23
Adjusted beginning balance		5			7			-			-		7			4			-			-			23
Provision (benefit) for credit losses		(1	)		(1	)		-			-		(7	)		(4	)		-			-			(13	)
Balance at September 30, 2023	$	4		$	6		$	-		$	-	$	-		$	-		$	-		$	-		$	10

Allowance for loan losses
Balance at June 30, 2022	$	986		$	215		$	22		$	4	$	252		$	-		$	61		$	207		$	1,747
Provision (credit) for loan losses		4			(19	)		5			-		15			-			4			(9	)		-
Loans charged-off		-			-			-			-		-			-			-			-			-
Recoveries		-			-			-			-		-			-			-			-			-
Balance at September 30, 2022	$	990		$	196		$	27		$	4	$	267		$	-		$	65		$	198		$	1,747

(1)

Represents the net adjustment needed to reflect the cumulative day one impact pursuant to the Company's adoption of ASU 2016-13 (i.e., the cumulative effect adjustment related to the adoption of ASU 2016-13 as of July 1, 2023).

(2)

The balance of $511,000 in accrued interest receivable is excluded from amortized cost and the calculation of the allowance for credit losses at September 30, 2023.

The $110,000 reversal for credit losses for loans was primarily a result of changes in the economic forecast. The $13,000 reversal for credit losses for off-balance sheet exposures was primarily due to a decrease of $977,000 in unfunded commitments for the three months ended September 30, 2023.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Individually Evaluated Loans

In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. A loan is considered individually evaluated when, based on current information and events, the loan is rated special mention or worse. At September 30, 2023, the Company had $1.4 million in individually evaluated residential one- to four-family loans. These four loans are current but individually evaluated due to the borrowers failure to provide financial documents to the bank.

The allocation of the allowance for credit losses on loans to each category is presented as of September 30, 2023.


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

September 30, 2023
Allowance for credit losses on loans:
Individually evaluated for credit losses	$	1	$	-	$	-	$	1
Collectively evaluated for credit losses		1,294		291		63		1,648
Total	$	1,295	$	291	$	63	$	1,649
Loans
Individually evaluated for credit losses	$	1,420	$	-	$	-	$	1,420
Collectively evaluated for credit losses		155,373		17,076		1,860	$	174,309
	$	156,793	$	17,076	$	1,860		175,729

The allocation of the allowance for loan losses to each category is presented as of June 30, 2023 under the incurred loss model.


(In thousands)	Residential 1-4 Family		Multifamily		Second Mortgages and Home Equity Lines of Credit		Construction		Commercial Real Estate		Consumer		Home Improvement		Unallocated		Total
June 30, 2023
Allowance for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Allowance for non-impaired loans		974		190		29		-		346		-		64		144		1,747
Total allowance for loan losses	$	974	$	190	$	29	$	-	$	346	$	-	$	64	$	144	$	1,747

Impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-impaired loans		140,109		12,638		2,699		-		20,323		49		2,191		-		178,009
Total loans	$	140,109	$	12,638	$	2,699	$	-	$	20,323	$	49	$	2,191	$	-	$	178,009

At September 30, 2023 and June 30, 2023, there were no past due loans or loans on non-accrual. At September 30, 2023 and June 30, 2023, there were no loans past due ninety days or more and still accruing.

During the three months ended September 30, 2022, there were no troubled debt restructurings or troubled debt restructurings that defaulted in the first twelve months after restructuring. Management performed a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required was recorded through the provision for loan losses.

Modified Loans

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Loans are designated as modified when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Company grants the borrower a concession on the terms that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Company’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination.

There were no loan modifications during the three months ended September 30, 2023 or for the year ended June 30, 2023. During the three months ended September 30, 2023 and 2022, no modified loans defaulted (defined as 30 days or more past due) within 12 months of restructuring. There were no charge-offs on modified loans during the three months ended September 30, 2023 or 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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 details the amortized cost balances of the Company's loan portfolio presented by risk rating and origination year as of the periods presented:


													Revolving		Revolving Loans
	Term Loans at Amortized Cost by Fiscal Origination Year												Loans		Converted to
(In thousands)	2024		2023		2022		2021		2020		Prior		Amortized Cost		Term Loans		Total
September 30, 2023
Residential 1-4 family:
Pass	$	1,933	$	10,907	$	30,003	$	17,328	$	18,934	$	56,656		328		240	$	136,329
Special Mention		-		-		-		-		363		1,058		-		-		1,421
Total residential 1-4 family		1,933		10,907		30,003		17,328		19,297		57,714		328		240		137,750

Multifamily:
Pass		-		-		3,876		2,308		1,140		4,707		851		-		12,882
Total multifamily		-		-		3,876		2,308		1,140		4,707		851		-		12,882

Second mortgages and home equity lines of credit:
Pass		399		934		131		239		60		336		1,029		-		3,128
Total second mortgages and home equity lines of credit		399		934		131		239		60		336		1,029		-		3,128

Commercial:
Pass		-		8,832		1,081		935		887		7,909		50		417		20,111
Total commercial		-		8,832		1,081		935		887		7,909		50		417		20,111

Consumer:
Pass		23		-		-		-		13		26		-		-		62
Total consumer		23		-		-		-		13		26		-		-		62

Home improvement:
Pass		122		447		433		434		198		162		-		-		1,796
Total home improvement		122		447		433		434		198		162		-		-		1,796

Total loans
Pass		2,477		21,120		35,524		21,244		21,232		69,796		2,258		657		174,308
Special Mention		-		-		-		-		363		1,058		-		-		1,421
Net deferred fees		4		123		57		73		32		92		-		-		381
Total loans	$	2,481	$	21,243	$	35,581	$	21,317	$	21,627	$	70,946	$	2,258	$	657	$	176,110

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table presents information on the Company’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
June 30, 2023
Pass	$	138,678	$	12,638	$	2,699	$	-	$	20,323	$	49	$	2,191	$	176,578
Special mention		1,431		-		-		-		-		-		-		1,431
Total loans	$	140,109	$	12,638	$	2,699	$	-	$	20,323	$	49	$	2,191	$	178,009

At September 30, 2023 and June 30, 2023, there were no loans rated substandard, doubtful or loss. At June 30, 2023, there were $1.4 million of 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)	September 30, 2023			June 30, 2023
Land	$	1,553		$	1,553
Bank buildings		1,066			1,066
Building improvements		937			937
Furniture, fixtures and equipment		1,239			1,239
Leasehold improvements		321			321
		5,116			5,116
Accumulated depreciation and amortization		(1,762	)		(1,703	)
	$	3,354		$	3,413

Depreciation and amortization expense for the three months ended September 30, 2023 and 2022 amounted to $59,000 and $64,000, 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)	September 30, 2023		June 30, 2023
NOW and demand	$	61,820	$	61,538
Regular and other		60,389		64,184
Money market deposits		24,877		26,995
Total non-certificate accounts		147,086		152,717
Term certificates of $250,000 or more		22,737		24,340
Term certificates less than $250,000		90,850		86,319
Total certificate accounts		113,587		110,659
Total deposits	$	260,673	$	263,376

A summary of certificate accounts by maturity is as follows:


	September 30, 2023					June 30, 2023
(Dollars in thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due within 3 months	$	31,975		2.88	%	$	11,171		1.11	%
Over 3 months to 1 year		71,540		3.59			83,590		3.23
Over 1 year to 2 years		6,483		1.54			11,813		2.33
Over 2 years to 3 years		1,389		0.62			1,900		0.61
Over 3 years to 5 years		2,200		2.50			2,185		2.49
	$	113,587		3.22	%	$	110,659		2.86	%

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Overnight advances or advances having a one-month maturity totaled $3.3 million at September 30, 2023 at a weighted average rate of 5.52%. Overnight advances or advances having a one-month maturity totaled $3.7 million at June 30, 2023 at a weighted average rate of 5.25%.

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 September 30, 2023 and June 30, 2023, 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 September 30, 2023 and June 30, 2023, the Bank has pledged certain qualifying securities with a fair market value of $11,199,000 and $12,410,000, respectively. The line bears a variable interest rate equal to the federal funds rate plus 0.50%. At September 30, 2023 and June 30, 2023, 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 September 30, 2023, the Bank met the required capital conservation buffer.

As of September 30, 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 receiving this notification that management believes has changed the Bank’s categorization.

The Bank’s actual capital amounts and ratios as of September 30, 2023 and June 30, 2023 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
September 30, 2023
Total capital (to risk weighted assets)	$	65,372		33.3	%	$	15,715		8.0	%	$	19,643		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		63,481		32.3			8,839		4.5			12,768		6.5
Tier 1 capital (to risk weighted assets)		63,481		32.3			11,786		6.0			15,715		8.0
Tier 1 capital (to adjusted total assets)		63,481		18.3			13,840		4.0			17,300		5.0

June 30, 2023
Total capital (to risk weighted assets)	$	65,141		32.9	%	$	15,850		8.0	%	$	19,813		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		63,394		32.0			8,916		4.5			12,878		6.5
Tier 1 capital (to risk weighted assets)		63,394		32.0			11,888		6.0			15,850		8.0
Tier 1 capital (to adjusted total assets)		63,394		18.2			13,950		4.0			17,438		5.0

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 September 30, 2023 and June 30, 2023, the following financial instruments were outstanding:


(In thousands)	September 30, 2023		June 30, 2023
Commitments to grant loans	$	215	$	608
Unadvanced funds on equity lines of credit		3,987		4,089
Unadvanced funds on commercial and other lines of credit		389		871

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 September 30, 2023, the Company had 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. At September 30, 2023, the weighted average remaining lease term for operating leases was 8.63 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.56%.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Pursuant to the terms of these lease agreements in effect at September 30, 2023 pertaining to premises, future minimum rent commitments for the fiscal years ending 2024 through 2028 and thereafter are as follows:


	Years ending
(In thousands)	June 30,
2024	$	89
2025		117
2026		117
2027		119
2028		134
Thereafter		521
Total minimum lease payments	$	1,097
Less: Imputed interest		(156	)
Total lease liability	$	941

The cost of the lease payments is not included above. Total lease expense for the three months ended September 30, 2023 amounted to $34,000. Total lease expense for the three months ended September 30, 2022 amounted to $34,000.

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 September 30, 2023, the principal balance on the ESOP loan was $2.50 million.


	September 30, 2023
Shares held by the ESOP include the following:
Committed to be allocated		17,894
Unallocated		237,754
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 $195,000 and $195,000 for the three months ended September 30, 2023 and 2022, respectively. There were no contributions made to the Pentegra DB Plan during the three months ended September 30, 2023 and 2022, respectively.

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 $6,000 for the three months ended September 30, 2023 and 2022, respectively.

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 September 30, 2023 and June 30, 2023, the accrued liability amounted to $893,000 and $877,000, respectively. SERP expense amounted to $16,000 and $16,000 for the three months ended September 30, 2023 and 2022, respectively. In connection with these SERPs, the Bank purchased life insurance policies, which had a cash surrender value of $6.0 million and $5.9 million at September 30, 2023 and June 30, 2023, 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 September 30, 2023 and June 30, 2023 amounted to $4.5 million and $4.5 million, respectively. For the three months ended September 30, 2023 and 2022, post-retirement expense related to these obligations amounted to $19,000 and $29,000, 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 September 30, 2023 and June 30, 2023, securities available for sale were measured at Level 2 with a fair value of $139,000 and $146,000, 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 or 3.

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

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 September 30, 2023 or June 30, 2023.

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 September 30, 2023 and June 30, 2023.


	September 30, 2023
(In thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	6,118	$	6,118	$	-	$	-	$	6,118
Securities available for sale		139		-		139		-		139
Securities held to maturity		147,537		-		128,726		-		128,726
Federal Home Loan Bank of Boston stock		405		-		-		405		405
Loans, net		174,080		-		-		152,877		152,877
Accrued interest receivable		1,395		-		-		1,395		1,395

Liabilities:
Deposits		260,673		-		-		237,793		237,793
Short-term borrowings		3,250		-		-		3,243		3,243

	June 30, 2023
(In thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	6,861	$	6,861	$	-	$	-	$	6,861
Securities available for sale		146		-		146		-		146
Securities held to maturity		147,902		-		132,273		-		132,273
Federal Home Loan Bank of Boston stock		381		-		-		381		381
Loans, net		175,911		-		-		157,856		157,856
Accrued interest receivable		1,363		-		-		1,363		1,363

Liabilities:
Deposits		263,376		-		-		249,208		249,208
Short-term borrowings		3,675		-		-		3,667		3,667

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.

There were no grants of options to purchase shares of common stock during the three months ended September 30, 2023 or 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

A summary of stock option activity for the three months ended September 30, 2023 is presented in the table below:


	Stock Option Grants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance at July 1, 2023		273,000	$	8.33		9.45
Granted		-	$	-		-
Exercised		-		-		-
Forfeited		-		-		-
Balance at September 30, 2023		273,000	$	8.33		9.45	$	-
Exercisable at September 30, 2023		-	$	-		-	$	-
Unrecognized compensation cost	$	769,000
Weighted average remaining recognition period (years)		4.45

For the three months ended September 30, 2023, stock-based compensation expense applicable to stock options was $43,000. There was no stock-based compensation expense applicable to stock options for the three months ended September 30, 2022. There were no tax benefits related to stock-based compensation expense applicable to stock-options for the three months ended September 30, 2023 or 2022, respectively.

Restricted Stock

Shares issued may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will become available for reissuance under the 2023 Equity Plan. The fair market value of shares awarded, based on the market price at the date of 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 three months ended September 30, 2023:


	Restricted Stock Awards		Weighted Average Grant Price
Restricted stock awards at July 1, 2023		111,000	$	8.35
Granted		-		-
Vested		-		-
Forfeited		-		-
Restricted stock awards at September 30, 2023		111,000	$	8.35
Unrecognized compensation cost	$	824,000
Weighted average remaining recognition period (years)		4.45

For the three months ended September 30, 2023, stock-based compensation applicable to restricted stock was $47,000. There was no stock-based compensation expense applicable to restricted stock for the three months ended September 30, 2022. There were no tax benefits related to stock-based compensation expense applicable to restricted stock for the three months ended September 30, 2023 or 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 for the year ended June 30, 2023.

Overview

Our results of operations depend primarily on our net interest income and, to a lesser extent, non-interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits and, to a lesser extent, borrowings. Non-interest income consists primarily of earnings on bank-owned life insurance, service charges on deposit accounts and other income. Our results of operations also are affected by our provision for loan losses and non-interest expense. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment, data processing costs, advertising, 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:

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

•

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

•

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;

•

a potential government shutdown;

•

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;

•

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 policy discussed below to be a critical accounting policy. 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.

On July 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the recognition of the allowance for credit losses be estimated using the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that are determined to have impairment related to credit losses. For further discussion related to the implementation of CECL please refer to Notes 1, 3 and 4 of the unaudited consolidated financial statements.

There have been no additional material changes to our critical accounting policies during the three months ended September 30, 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 for the year ended June 30, 2023.

Comparison of Financial Condition at September 30, 2023 and June 30, 2023

Total Assets. Total assets decreased $2.8 million, or 0.8%, to $346.2 million at September 30, 2023 from $349.0 million at June 30, 2023. The decrease resulted primarily from decreases in cash and cash equivalents of $743,000, or 10.8%, decreases in securities held to maturity of $365,000, or 0.2%, and decreases in loans of $1.8 million, or 1.0%.

Cash and Cash Equivalents. Cash and cash equivalents decreased $743,000, or 10.8%, to $6.1 million at September 30, 2023 from $6.9 million at June 30, 2023, as the funding of deposit outflows and a reduction in short-term borrowings were partially offset by reduced funding obligations in securities held to maturity and loans.

Net Loans. Net loans decreased $1.8 million, or 1.0%, to $174.1 million at September 30, 2023 from $175.9 million at June 30, 2023. The decrease was due primarily to a decrease in one-to four- family residential real estate loans of $2.4 million, or 1.7%, partially offset by increases of $430,000, or 15.9%, in second mortgages and home equity lines of credit, and an increase of $245,000, or 1.9%, in multi-family real estate loans. The decrease in one-to four- family residential real estate loans was the result of borrower prepayments exceeding new originations.

Securities Available for Sale. Securities available for sale decreased $7,000, or 4.8%, to $139,000 at September 30, 2023 from $146,000 at June 30, 2023. The decrease was due to prepayments.

Securities Held to Maturity. Securities held to maturity decreased $365,000, or 0.2%, to $147.5 million at September 30, 2023 from $147.9 million at June 30, 2023, as prepayments of securities exceeded new purchases of securities and the addition of an allowance for credit losses for securities held to maturity, which totaled $233,000 at September 30, 2023.

Total Liabilities. Total liabilities decreased $2.8 million, or 1.0%, to $270.3 million at September 30, 2023 from $273.1 million at June 30, 2023. The decrease was the result of decreases in deposits of $2.7 million, or 1.0% and decreases in short-term borrowings of $425,000, or 11.6%.

Deposits. Deposits decreased $2.7 million, or 1.0%, to $260.7 million at September 30, 2023 from $263.4 million at June 30, 2023. The decrease was primarily due to decreases of $3.8 million, or 5.9%, in savings accounts and $2.1 million, or 7.8%, in money market accounts, partially offset by an increase of $2.9 million, or 2.6%, in term certificates. The decrease reflects management's decision not to increase interest rates for savings and money market accounts. Since the second quarter of the previous fiscal year, the Bank held term certificate promotions, which contributed to the increase in the balance of term certificates.

Borrowings. Borrowings, consisting entirely of Federal Home Loan Bank advances, were $3.3 million at September 30, 2023 compared to $3.7 million at June 30, 2023. The decrease was primarily due to a reduction of deposit outflows during the quarter ended September 30, 2023.

Stockholders' Equity. Total stockholders' equity increased $8,000, to $75.9 million at September 30, 2023 from $75.9 million at June 30, 2023. The increase was primarily due to net income of $123,000, the change in unearned ESOP compensation of $18,000, and stock-based compensation of $90,000, partially offset by the adoption of ASU 2016-13, net of taxes, of $223,000 for the three months ended September 30, 2023.

Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022

General. We reported net income of $123,000 for the three months ended September 30, 2023, compared to net income of $645,000 for the three months ended September 30, 2022, a decrease of $522,000, or 80.9%. Net interest income decreased $557,000, or 23.6%, non-interest expense increased by $168,000, or 9.6%, and non-interest income decreased $40,000, or 20.0%.

Interest and Dividend Income. Interest and dividend income increased $127,000, or 4.9%, to $2.7 million for the three months ended September 30, 2023 from $2.6 million for the three months ended September 30, 2022. The increase was attributable to an increase of $106,000, or 12.3%, in interest on securities and an increase of $103,000, or 6.4%, in interest on loans, partially offset by a decrease of $82,000, or 64.6%, in interest on short-term investments and certificates of deposit. Interest income on securities primarily increased due to an increase in the average balance of securities of $485,000 to $149.3 million for the three months ended September 30, 2023, from $148.8 million for the three months ended September 30, 2022, and an increase in the average yield on securities of 27 basis points to 2.66% for the three months ended September 30, 2023 from 2.39% for the three months ended September 30, 2022. Interest income on loans increased due to an increase in the average yield of 23 basis points to 3.90% for the three months ended September 30, 2023

from 3.67% for the three months ended September 30, 2022, and an increase in the average balance of loans of $30,000 to $176.7 million for the three months ended September 30, 2023 from $176.6 million for the three months ended September 30, 2022. Interest income on short-term investments decreased due to a decrease in the average balance of short-term investments of $17.9 million to $3.9 million for the three months ended September 30, 2023, from $21.7 million for the three months ended September 30, 2022, partially offset by an increase in the average yield on short-term investments of 233 basis points to 4.67% for the three months ended September 30, 2023 from 2.34% for the three months ended September 30, 2022. The increase in the average yields on interest-earning assets resulted from the higher interest rate environment.

Interest Expense. Interest expense increased $684,000, or 282.6%, to $926,000 for the three months ended September 30, 2023 from $242,000 for the three months ended September 30, 2022. The increase was due to an increase in the average rate paid on certificates of deposit of 223 basis points, to 3.00% for the three months ended September 30, 2023, from 0.77% for the three months ended September 30, 2022 due to the higher interest rate environment, partially offset by a decrease in the average balance of interest-bearing deposits of $20.8 million, or 8.3% to $230.4 million for the three months ended September 30, 2023, from $251.2 million for the three months ended September 30, 2022. The decrease in the average balance of interest-bearing deposits reflected management's decision not to raise interest rates on non-maturity deposits in the high interest rate environment.

Net Interest Income. Net interest income decreased $557,000, or 23.6%, to $1.8 million for the three months ended September 30, 2023, from $2.4 million for the three months ended September 30, 2022. The decrease was due to an increase in average rate paid on interest-bearing liabilities of 119 basis points, which contributed to a decrease in the net interest rate spread of 88 basis points to 1.77% for the three months ended September 30, 2023, from 2.65% for the three months ended September 30, 2022. The net interest margin decreased 54 basis points to 2.22% for the three months ended September 30, 2023 compared to 2.76% for the three months ended September 30, 2022. The decrease in the net interest rate spread was a result of the increase in the average rate paid on interest-bearing liabilities exceeding the increase in the average yield on interest-bearing assets.

Provision for Credit Losses. A reversal of credit losses of $166,000 was recorded for the three months ended September 30, 2023, due to improvements in forecasted economic conditions. No provision for loan losses was recorded for the three months ended September 30, 2022. The absence of a provision for the three months ended September 30, 2022 reflected continued strong asset quality. The allowance for credit losses was $1.6 million, or 0.94% of total loans, at September 30, 2023, compared to $1.7 million, or 0.99% of total loans, at September 30, 2022. The allowance for credit losses was $1.7 million, or 0.98% of total loans at June 30, 2023. At September 30, 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 September 30, 2023 or 2022. We did not have any non-performing loans at either September 30, 2023 or 2022. We had no charge-offs or recoveries for the three months ended September 30, 2023 or 2022. There were no loans past due 30 days or more at September 30, 2023 and 2022.

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


	Three Months Ended
	September 30,				Change
(Dollars in thousands)	2023		2022		Amount			Percent
Customer service fees	$	40	$	37	$	3			8.1	%
Income on bank-owned life insurance		66		64		2			3.1	%
Other income		54		99		(45	)		(45.5	%)
Total non-interest income	$	160	$	200	$	(40	)		(20.0	%)

Non-interest income decreased $40,000, or 20.0%, to $160,000 for the three months ended September 30, 2023 from $200,000 for the three months ended September 30, 2022. The decrease was primarily due to an $45,000 decrease in other income, primarily related to safe deposit box fees.

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


	Three Months Ended
	September 30,				Change
(Dollars in thousands)	2023		2022		Amount			Percent
Salaries and employee benefits	$	1,144		1,018	$	126			12.4	%
Occupancy and equipment		254		243		11			4.5	%
Advertising		38		39		(1	)		(2.6	%)
Data processing		89		94		(5	)		(5.3	%)
Deposit insurance		33		21		12			57.1	%
Other		358		333		25			7.5	%
Total non-interest expense	$	1,916	$	1,748	$	168			9.6	%

Non-interest expense increased $168,000, or 9.6%, to $1.9 million for the three months ended September 30, 2023 from $1.7 million for the three months ended September 30, 2022. The increase was due a $126,000 increase in salaries and employee benefit expense due to normal employee annual merit salary benefit increases, an increase in headcount, and stock-based compensation expenses, an $11,000 increase in occupancy and equipment expenses due primarily to service contracts expenses, and a $25,000 increase in other expenses due primarily to stock-based compensation expenses paid to the board of directors.

Provision for Income Taxes. The Company recorded a provision for income taxes of $93,000 for the three months ended September 30, 2023, which was a $77,000, or 45.3% decrease from a provision for income taxes of $170,000 for the three months ended September 30, 2022. The decrease in the provision for income taxes for the three months ended September 30, 2023 was due to the decrease 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 $381,000 and $351,000 at September 30, 2023 and 2022, respectively.


	For the Three Months Ended September 30,
	2023							2022
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	176,668	$	1,722		3.90	%	$	176,638	$	1,619		3.67	%
Securities(1)		149,259		991		2.66	%		148,774		888		2.39	%
Other		3,852		45		4.67	%		21,717		127		2.34	%
Total interest-earning assets		329,779		2,758		3.35	%		347,129		2,634		3.04	%
Non-interest-earning assets		16,655							15,933
Total assets	$	346,434						$	363,062
Interest-bearing liabilities:
Interest-bearing demand deposits	$	29,912	$	4		0.05	%	$	33,133	$	4		0.05	%
Savings deposits		62,446		16		0.10	%		75,444		19		0.10	%
Money market deposits		26,271		17		0.26	%		45,493		31		0.27	%
Certificates of deposit		111,812		839		3.00	%		97,153		188		0.77	%
Total interest-bearing deposits		230,441		876		1.52	%		251,223		242		0.39	%
FHLB advances		3,571		50		5.60	%		-		-		-	%
Total interest-bearing liabilities		234,012		926		1.58	%		251,223		242		0.39	%
Noninterest-bearing liabilities
Non-interest-bearing demand deposits		30,971							32,522
Other non-interest-bearing liabilities		5,740							3,195
Total liabilities		270,723							286,940
Stockholders' equity		75,711							76,122
Total liabilities and stockholders' equity	$	346,434						$	363,062
Net interest income - FTE			$	1,832						$	2,392
Net interest rate spread(2)						1.77	%						2.65	%
Net interest-earning assets(3)	$	95,767						$	95,906
Net interest margin - FTE(4)						2.22	%						2.76	%
Average interest-bearing assets to interest-bearing liabilities						140.92	%						138.18	%

(1)

Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of $26,000 and $29,000 for the three months ended September 30, 2023 and 2022, respectively.

(2)

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

(3)

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

(4)

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

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


	For the Three Months Ended
	September 30,		September 30,
	2023		2022
Securities interest income (no tax adjustment)	$	965	$	859
Tax-equivalent adjustment		26		29
Securities (tax-equivalent basis)	$	991	$	888
Net interest income (no tax adjustment)		1,806		2,363
Tax-equivalent adjustment		26		29
Net interest income (tax-equivalent adjustment)	$	1,832	$	2,392

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
	September 30, 2023 vs. 2022
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	-		$	103		$	103
Securities		3			100			103
Other		(104	)		22			(82	)
Total interest-earning assets		(101	)		225			124
Interest-bearing liabilities:
Interest-bearing demand deposits		-			-			-
Savings deposits		(3	)		-			(3	)
Money market deposits		(13	)		(1	)		(14	)
Certificates of deposit		28			623			651
Total deposits		12			622			634
FHLB advances		-			50			50
Total interest-bearing liabilities		12			672			684
Change in net interest income	$	(113	)	$	(447	)	$	(560	)

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 September 30, 2023 resulting from potential changes in interest rates, expressed in basis points. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.

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


Change in Interest Rates (basis points)(1)	Net Interest Income Year 1 Forecast (In thousands)		Year 1 Change from Level
+400	$	5,057		(29.2	%)
+300		5,573		(22.0	%)
+200		6,090		(14.8	%)
+100		6,620		(7.3	%)
Level		7,144		-
-100		7,431		4.0	%
-200		7,658		7.2	%
-300		7,830		9.6	%
-400		7,982		11.7	%

(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 September 30, 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 September 30, 2023
			Estimated Increase (Decrease) in EVE						EVE as a Percentage of Present Value of Assets(3)
Change in Interest Rates (basis points)(1)	Estimated EVE(2) (In thousands)		Amount (In thousands)			Percent			EVE Ratio(4)			Decrease (basis points)
+400	$	27,104	$	(20,708	)		(43.3	%)		10.2	%		(540	)
+300		31,894		(15,918	)		(33.3	%)		11.6	%		(400	)
+200		36,978		(10,834	)		(22.7	%)		13.0	%		(260	)
+100		42,424		(5,388	)		(11.3	%)		14.4	%		(120	)
Level		47,812		-			-			15.6	%		-
-100		52,768		4,956			10.4	%		16.6	%		100
-200		57,251		9,439			19.7	%		17.4	%		180
-300		61,180		13,368			28.0	%		18.0	%		240
-400		63,979		16,167			33.8	%		18.3	%		270

(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 $63.5 million at September 30, 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 September 30, 2023, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 22.7% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 19.7% 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 September 30, 2023, we had $3.3 million of outstanding advances from the Federal Home Loan Bank of Boston. At September 30, 2023, we had the ability to borrow $61.2 million in Federal Home Loan Bank of Boston advances. Additionally, at September 30, 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 September 30, 2023.

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $436,000 and $730,000 for the three months ended September 30, 2023 and 2022, respectively. Net cash provided by (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 $1.9 million and $(9.7) million for the three months ended September 30, 2023 and 2022, respectively. Net cash used in financing activities was $3.1 million and $7.0 million for the three months ended September 30, 2023 and 2022, respectively. Changes in net cash related to financing activities were primarily related to changes in deposit balances for the three months ended September 30, 2023.

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 September 30, 2023 and June 30, 2023, 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 September 30, 2023, we had $215,000 of commitments to originate loans, $4.0 million of unadvanced funds under home equity lines of credit and $389,000 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 for the year ended June 30, 2023. 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 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 September 30, 2023, the Company’s Chief Executive Officer and Treasurer and Chief Operating Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, 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 September 30, 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))

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 months ended September 30, 2023, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in 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: November 14, 2023	By:	/s/ Michael E. McFarland
		Michael E. McFarland
		President and Chief Executive Officer
		(Principal Executive Officer)




Date: November 14, 2023	By:	/s/ Susan Shea
		Susan Shea
		Treasurer and Chief Operating Officer
		(Principal Financial and Accounting Officer)