CFSB Bancorp(CFSB) - 2023 Q4 - Annual Report

PART I Item 1. Business CFSB Bancorp, Inc. is the holding company for Colonial Federal Savings Bank, a federal savings bank operating in Norfolk County, Massachusetts, primarily focused on residential real estate loans and subject to extensive regulation Company Overview CFSB Bancorp, Inc. was formed in January 2022 following a mutual holding company reorganization, with its common stock beginning to trade on Nasdaq on January 13, 2022[80][53] Key Financials as of June 30, 2023 (in millions) | Metric | Amount | | :--- | :--- | | Total Assets | $349.0 | | Total Deposits | $263.4 | | Total Equity | $75.9 | The company operates three full-service and one limited-service banking office in Norfolk County, Massachusetts, which it considers its primary lending market area along with Plymouth County[59] The company faces significant competition, holding a 0.79% market share of total deposits in Norfolk County as of June 30, 2022, ranking 23rd out of 41 banks[86] Lending Activities The company's principal lending activity is one- to four-family residential real estate loans, which constituted 78.7% of the total loan portfolio at June 30, 2023. The company plans to increase its focus on originating multi-family and commercial real estate loans[87][91] Loan Portfolio Composition (in thousands) | Loan Type | Amount (June 30, 2023) | % of Total | | :--- | :--- | :--- | | 1-4 Family Residential | $140,109 | 78.71% | | Multi-family | $12,638 | 7.10% | | Commercial Real Estate | $20,323 | 11.42% | | Second Mortgages & HELOC | $2,699 | 1.52% | | Consumer Loans | $2,240 | 1.25% | | Total Loans | $178,009 | 100.00% | The company's loans-to-one-borrower limit was approximately $9.8 million as of June 30, 2023, and it had no borrowers exceeding this limit. The largest single borrower relationship was $7.4 million[95] As of June 30, 2023, the company had no non-performing loans, no loans past due more than 30 days, and no real estate owned (REO)[71][97][122] The allowance for loan losses remained stable at $1.7 million at both June 30, 2023 and June 30, 2022, representing 0.98% and 1.00% of total loans outstanding, respectively. No provision for loan losses was recorded in the year ended June 30, 2023[102][126] Investment Activities The company's investment policy authorizes investments in various types of investment-grade securities, including U.S. Treasury obligations, government-sponsored enterprise securities, corporate debt, and municipal obligations[105] Investment Portfolio Summary as of June 30, 2023 (in thousands) | Security Type | Amortized Cost | Fair Value | | :--- | :--- | :--- | | Available for Sale | | | | Mortgage-backed securities | $147 | $142 | | Collateralized mortgage obligations | $4 | $4 | | Total Available for Sale | $151 | $146 | | Held to Maturity | | | | Debt obligations (Gov't sponsored) | $996 | $962 | | Mortgage-backed securities | $46,619 | $43,119 | | Municipal bonds | $43,865 | $37,445 | | Corporate bonds | $56,421 | $50,746 | | Total Held to Maturity | $147,902 | $132,273 | Sources of Funds Deposits are the primary source of funds. At June 30, 2023, core deposits (all deposits other than certificates of deposit) were $152.7 million, representing 58.0% of total deposits[108] Total Deposits by Type (in thousands) | Deposit Type | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Non-certificate accounts | $152,717 | $186,947 | | Certificate accounts | $110,659 | $100,128 | | Total Deposits | $263,376 | $287,075 | The company utilizes advances from the Federal Home Loan Bank of Boston (FHLB) to supplement funding. As of June 30, 2023, there were $3.7 million in outstanding short-term FHLB advances, with an additional borrowing capacity of $63.5 million[111] Human Capital Resources As of June 30, 2023, the company had 29 full-time employees, none of whom are represented by a labor union[112] The company offers a total rewards package including competitive pay, healthcare benefits, a 401(k) plan with matching contributions, and an Employee Stock Ownership Plan (ESOP)[44] Supervision and Regulation The Bank is primarily regulated by the Office of the Comptroller of the Currency (OCC) and the FDIC. The holding companies, CFSB Bancorp and 15 Beach, MHC, are regulated by the Federal Reserve Board[46][14] The Bank must meet minimum capital standards, including a common equity Tier 1 ratio of 4.5%, Tier 1 ratio of 6.0%, and total capital ratio of 8.0%. At June 30, 2023, the Bank exceeded all applicable requirements and was considered "well capitalized"[26][32][115] As a federal savings bank, the Bank must satisfy the qualified thrift lender (QTL) test, requiring at least 65% of its portfolio assets to be in qualified thrift investments. The Bank was in compliance with the QTL test at June 30, 2023[115] The Dodd-Frank Act extended the "source of strength" doctrine, requiring savings and loan holding companies like CFSB Bancorp to serve as a source of financial and managerial strength to their subsidiary institutions[3] Item 1A. Risk Factors The company's primary risks stem from its heavy concentration in real estate lending within a specific geographic market, making it vulnerable to local economic downturns. It faces interest rate risk due to a mismatch in the maturities of its assets and liabilities. Intense competition from larger institutions, reliance on technology and third-party vendors, and the costs of regulatory compliance also pose significant challenges. Furthermore, as a mutual holding company, public stockholders have limited voting control - Lending Risk: A significant portion of the loan portfolio (98.8% at June 30, 2023) is secured by real estate, primarily in Norfolk and Plymouth Counties, Massachusetts, concentrating risk in the local real estate market[256] - Interest Rate Risk: The company's profitability is sensitive to interest rate fluctuations. In a rising rate environment, funding costs may increase faster than asset yields. An instantaneous 100 basis point increase in rates is estimated to decrease the Economic Value of Equity (EVE) by 10.4%[308][309] - Competition Risk: The company faces intense competition from larger financial institutions that have greater resources, economies of scale, and broader product offerings[280][310] - Regulatory and Compliance Risk: The company is subject to extensive regulation, and changes in laws or accounting standards, such as the implementation of CECL, could adversely affect operations and increase costs[313][481] - Operational Risk: The business relies heavily on technology and third-party vendors, exposing it to risks of system failure, interruption, or cybersecurity breaches[288][289] - Ownership Structure Risk: Public stockholders own a minority of the company's common stock, with the mutual holding company, 15 Beach, MHC, owning a majority. This limits public stockholders' ability to influence voting matters, including potential mergers or conversions[295] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[298][361] Item 2. Properties The company operates from its main office in Quincy, Massachusetts, two additional branches in Holbrook and Weymouth, and a limited-service branch in a senior housing facility in Quincy. The net book value of its real properties was $3.4 million as of June 30, 2023 - The company conducts operations from a main office and three branch offices, all located in Norfolk County, Massachusetts[331] - As of June 30, 2023, the net book value of the company's real properties, including land and buildings, was $3.4 million[331] Item 3. Legal Proceedings The company is not a party to any legal proceedings that are expected to have a material adverse effect on its business - The company is not presently a party to any material legal proceedings[299][362] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[300][332] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Stock Market under the symbol "CFSB." As of September 18, 2023, there were 208 stockholders of record. The company has never paid dividends and does not anticipate doing so in the foreseeable future. There were no share repurchases during the quarter ended June 30, 2023 - The company's common stock began trading on The Nasdaq Stock Market under the symbol "CFSB" on January 13, 2022[517] - As of September 18, 2023, there were 208 stockholders of record[302] - The company has never declared or paid cash dividends and does not plan to do so in the foreseeable future, intending to retain earnings for business operations and expansion[334] - There were no sales of unregistered securities or repurchases of common stock during the quarter ended June 30, 2023[303] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the fiscal year ended June 30, 2023, net income increased significantly to $1.4 million from $442,000 in the prior year, primarily due to a one-time charitable foundation funding in 2022 and higher interest income in 2023. Total assets decreased by 4.7% to $349.0 million, driven by a reduction in cash, while net loans grew by 1.9%. Total deposits decreased by 8.3% to $263.4 million. Net interest income grew by 6.7% to $8.8 million, and the net interest margin improved to 2.61%. The company's strategy remains focused on prudent loan growth, increasing core deposits, and managing credit risk Comparison of Financial Condition (in millions) | Account | June 30, 2023 | June 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $349.0 | $366.2 | (4.7%) | | Net Loans | $175.9 | $172.6 | 1.9% | | Deposits | $263.4 | $287.1 | (8.3%) | | Total Stockholders' Equity | $75.9 | $74.3 | 2.2% | Comparison of Operating Results (in thousands) | Account | Year Ended June 30, 2023 | Year Ended June 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $8,752 | $8,204 | 6.7% | | Provision for Loan Losses | $0 | $26 | (100.0%) | | Non-interest Income | $664 | $695 | (4.5%) | | Non-interest Expense | $7,669 | $8,483 | (9.6%) | | Net Income | $1,446 | $442 | 227.1% | The significant increase in net income for FY 2023 was primarily due to a $1.6 million contribution to a charitable foundation in FY 2022, which did not recur, and a 15.8% increase in interest and dividend income in FY 2023[345][350] The company's business strategy focuses on growing the balance sheet, particularly through residential, multi-family, and commercial real estate lending, while increasing core deposits and maintaining strong asset quality[371] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk. Disclosures regarding this risk are included in Item 7, under the section "Management of Market Risk" - Information regarding market risk is detailed in Item 7 under the heading "Management's Discussion and Analysis of Financial Conditions and Results of Operations—Management of Market Risk"[416] Item 8. Financial Statements and Supplementary Data This section includes the Report of Independent Registered Public Accounting Firm, the consolidated financial statements (Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows) for the years ended June 30, 2023 and 2022, and the accompanying Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Wolf & Company, P.C. issued an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[419] The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB). The firm has served as the company's auditor since 2004[393][394] Notes to Consolidated Financial Statements The company adopted ASU 2016-13 (CECL) on July 1, 2023, which will change the methodology for estimating credit losses from an incurred loss model to a lifetime expected loss model[451] Regulatory Capital Ratios as of June 30, 2023 | Ratio | Actual Ratio | Minimum Requirement | Well Capitalized Minimum | | :--- | :--- | :--- | :--- | | Total capital (to risk weighted assets) | 32.9% | 8.0% | 10.0% | | Tier 1 capital (to risk weighted assets) | 32.0% | 6.0% | 8.0% | | Common equity Tier 1 capital (to risk weighted assets) | 32.0% | 4.5% | 6.5% | | Tier 1 capital (to adjusted total assets) | 18.2% | 4.0% | 5.0% | The Employee Stock Ownership Plan (ESOP) held 255,648 shares, of which 240,310 were unallocated as of June 30, 2023. The ESOP loan balance was $2.5 million[161][528] Under the 2023 Equity Incentive Plan, the company granted 273,000 stock options and 111,000 restricted stock awards during the year ended June 30, 2023[168][169] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[175] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023. Management also concluded that the internal control over financial reporting was effective. There were no material changes to internal controls during the period - Based on an evaluation as of June 30, 2023, the CEO and COO concluded that the company's disclosure controls and procedures are effective[207] - Management's annual report on internal control over financial reporting concluded that such controls were effective as of June 30, 2023[177][545] - There were no changes in internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, such controls[178][208] Item 9B. Other Information The company reports no other information for this item - None[226] PART III Item 10. Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement[181] Item 11. Executive Compensation Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement[211] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information regarding security ownership is incorporated by reference from the company's 2023 Proxy Statement[549] Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement[223] Item 14. Principal Accounting Fees and Services Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information regarding principal accounting fees and services is incorporated by reference from the company's 2023 Proxy Statement[224] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item includes the consolidated financial statements and a list of exhibits filed with the report, such as the company's charter, bylaws, material contracts, and various certifications[186][553] Item 16. Form 10-K Summary The company indicates there is no Form 10-K summary provided - None[226]