Quarterly Report (10-q)

--06-30Q2 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☐☐

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended December 31, 2022


☐	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 February 6, 2023, the registrant had 6,521,642 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	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	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46

PART II.	OTHER INFORMATION	47

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49

Item 1. Financial Statements.

CFSB Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	December 31,			June 30,
	2022			2022
Assets:
Cash and due from banks	$	1,502		$	1,609
Short-term investments		9,072			30,058
Total cash and cash equivalents		10,574			31,667
Securities available for sale, at fair value		168			199
Securities held to maturity, at amortized cost, fair value of $132,624 at December 31, 2022 and $133,593 at June 30, 2022		149,473			145,239
Federal Home Loan Bank stock, at cost		191			191
Loans, net of allowance for loan losses of $1,747 at December 31, 2022 and $1,747 at June 30, 2022		178,569			172,593
Premises and equipment, net		3,272			3,334
Accrued interest receivable		1,303			1,265
Bank-owned life insurance		10,271			10,144
Deferred tax asset		1,001			1,079
Operating lease right of use asset		999			-
Other assets		1,012			472
Total assets	$	356,833		$	366,183

Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing	$	32,618		$	31,168
Interest-bearing		242,844			255,907
Total deposits		275,462			287,075
Mortgagors' escrow accounts		1,680			1,555
Operating lease liability		1,003			-
Accrued expenses and other liabilities		3,409			3,303
Total liabilities		281,554			291,933
Stockholders' Equity
Preferred Stock, $.01 par value, 10,000,000 shares authorized as of December 31, 2022 and June 30, 2022, none issued and outstanding as of December 31, 2022 and June 30, 2022	$	-		$	-
Common Stock, $.01 par value, 90,000,000 shares authorized as of December 31, 2022 and June 30, 2022, 6,521,642 issued and outstanding as of December 31, 2022 and June 30, 2022		65			65
Additional paid-in capital		27,714			27,720
Retained earnings		49,956			48,970
Accumulated other comprehensive income		(2	)		-
Unearned compensation - ESOP, 245,422 and 250,536 shares unallocated at December 31, 2022 and June 30, 2022, respectively		(2,454	)		(2,505	)
Total stockholders' equity		75,279			74,250
Total liabilities and stockholders' equity	$	356,833		$	366,183

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Net Income (Unaudited)

(In thousands, except per share data)


	For the Three Months Ended				For the Six Months Ended
	December 31,		December 31,		December 31,		December 31,
	2022		2021		2022		2021
Interest and dividend income:
Interest and fees on loans	$	1,657	$	1,640	$	3,276	$	3,294
Interest and dividends on debt securities:
Taxable		795		492		1,546		959
Tax-exempt		106		120		214		243
Interest on short-term investments and certificates of deposit		123		16		250		33
Total interest and dividend income		2,681		2,268		5,286		4,529

Interest expense:
Deposits		340		255		582		529
Borrowings		-		2		-		6
Total interest expense		340		257		582		535

Net interest income		2,341		2,011		4,704		3,994
Provision for loan losses		-		10		-		25
Net interest income after provision for loan losses		2,341		2,001		4,704		3,969

Non-interest income:
Customer service fees		36		31		73		61
Income on bank-owned life insurance		63		75		127		123
Gain on sale of securities available for sale		-		-		-		48
Other income		53		55		152		159
Total non-interest income		152		161		352		391

Non-interest expenses:
Salaries and employee benefits		1,250		1,167		2,268		2,121
Occupancy and equipment		255		208		498		418
Advertising		71		37		110		78
Data processing		84		91		178		171
Deposit insurance		22		21		43		43
Other general and administrative		405		372		738		691
Total non-interest expenses		2,087		1,896		3,835		3,522
Income before income taxes		406		266		1,221		838
Provision for income taxes		65		32		235		132
Net income	$	341	$	234	$	986	$	706

Net income per share:
Basic and diluted	$	0.05	N/A		$	0.16	N/A

Weighted average shares outstanding:
Basic and diluted		6,274,542	N/A			6,273,260	N/A

Reclassification

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

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2022			2021			2022			2021
Net income	$	341		$	234		$	986		$	706
Other comprehensive income:
Change in unrealized holding (losses) gains		(1	)		(1	)		(2	)		33
Reclassification adjustment for net realized gains		-			-			-			(48	)
Net change in unrealized losses		(1	)		(1	)		(2	)		(15	)
Tax effect		-			-			-			4
Net-of-tax amount		(1	)		(1	)		(2	)		(11	)
Comprehensive income	$	340		$	233		$	984		$	695

There were no sales of securities for the three and six months ended December 31, 2022. There were no sales of securities during the three months ended December 31, 2021. The tax effect related to the net realized gain on sale of securities available for sale was $14,000 for the six months ended December 31, 2021.

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(Dollars in thousands)


										Accumulated
					Additional					Other			Unearned
	Common Stock				Paid-in			Retained		Comprehensive			Compensation
	Shares		Amount		Capital			Earnings		Income (Loss)			ESOP			Total
Balance at September 30, 2022		6,521,642	$	65	$	27,718		$	49,615	$	(1	)	$	(2,480	)	$	74,917
Net income		-		-		-			341		-			-			341
Other comprehensive loss		-		-		-			-		(1	)		-			(1	)
ESOP shares committed to be released		-		-		(4	)		-		-			26			22
Balance at December 31, 2022		6,521,642	$	65	$	27,714		$	49,956	$	(2	)	$	(2,454	)	$	75,279

Balance at September 30, 2021		-	$	-	$	-		$	49,100	$	7		$	-		$	49,107
Net income		-		-		-			234		-			-			234
Other comprehensive loss		-		-		-			-		(1	)		-			(1	)
Balance at December 31, 2021		-	$	-	$	-		$	49,334	$	6		$	-		$	49,340

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(Dollars in thousands)


										Accumulated
					Additional					Other			Unearned
	Common Stock				Paid-in			Retained		Comprehensive			Compensation
	Shares		Amount		Capital			Earnings		Income (Loss)			ESOP			Total
Balance at June 30, 2022		6,521,642	$	65	$	27,720		$	48,970	$	-		$	(2,505	)	$	74,250
Net income		-		-		-			986		-			-			986
Other comprehensive loss		-		-		-			-		(2	)		-			(2	)
ESOP shares committed to be released		-		-		(6	)		-		-			51			45
Balance at December 31, 2022		6,521,642	$	65	$	27,714		$	49,956	$	(2	)	$	(2,454	)	$	75,279

Balance at June 30, 2021		-	$	-	$	-		$	48,628	$	17		$	-		$	48,645
Net income		-		-		-			706		-			-			706
Other comprehensive loss		-		-		-			-		(11	)		-			(11	)
Balance at December 31, 2021		-	$	-	$	-		$	49,334	$	6		$	-		$	49,340

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

CFSB Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes of Cash Flows (Unaudited)

(In thousands)


	For the Six Months Ended
	December 31,
	2022			2021
Cash flows from operating activities:
Net income	$	986		$	706
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		-			25
Gain on sales of securities available for sale, net		-			(48	)
Amortization of securities, net		225			205
Net change in deferred loan costs and fees		34			23
Increase in cash surrender value of bank-owned life insurance		(127	)		(123	)
Depreciation and amortization, net		122			130
ESOP expense		45			-
Net (increase) decrease in accrued interest receivable		(38	)		34
Other, net		(350	)		(982	)
Net cash provided by (used in) operating activities		897			(30	)
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		29			42
Sales		-			2,031
Activity in securities held to maturity:
Maturities, prepayments and calls		8,255			9,620
Purchases		(12,715	)		(27,718	)
Loan originations and payments, net		(6,010	)		1,477
Additions to premises and equipment		(61	)		(6	)
Purchase of bank-owned life insurance		-			(635	)
Net cash used in investing activities		(10,502	)		(15,189	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(11,613	)		22,926
Net decrease in short-term borrowings		-			(630	)
Net increase in mortgagors' escrow accounts		125			78
Net cash (used in) provided by financing activities		(11,488	)		22,374
Net change in cash and cash equivalents		(21,093	)		7,155
Cash and cash equivalents at beginning of period		31,667			40,678
Cash and cash equivalents at end of period	$	10,574		$	47,833
Supplemental information:
Interest paid on deposits and short-term borrowings	$	583		$	535
Income taxes paid	$	520		$	175

Reclassification

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

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS

Basis of presentation and consolidation

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

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

Business

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

Reorganization and Offering

On January 12, 2022, the Bank reorganized from a federally chartered mutual savings bank to a two-tier mutual holding company structure. As part of the reorganization, a mutual holding company (the “MHC”) was formed as a federal corporation, into which all of the current voting rights of the members of the Bank were transferred. As part of the reorganization, the Bank converted to a federal stock savings bank. A stock holding company (the “Holding Company”) was established as a federal corporation and a majority-owned subsidiary of the MHC at all times so long as the MHC remains in existence. Concurrently with the reorganization, the Holding Company offered for sale 43% of its common stock in a stock offering and contributed 2% of its common stock to a charitable foundation established as a part of the reorganization. The remainder of the Holding Company common stock is held by the MHC. The Holding Company offered shares of common stock for sale on a priority basis to depositors of the Bank and the tax qualified employee plans of the Bank. The Company sold 2,804,306 shares of common stock at $10.00 per share for gross offering proceeds of $28.0 million.

Employee Stock Ownership Plan (the "ESOP")

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Earnings Per Share

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


	For the Three Months Ended					For the Six Months Ended
	December 31, 2022			December 31, 2021		December 31, 2022			December 31, 2021
Net income	$	341		$	234	$	986		$	706
Weighted average number of common shares outstanding		6,521,642		N/A			6,521,642		N/A
Less: Average unallocated ESOP shares		(247,100	)	N/A			(248,383	)	N/A
Weighted average number of common shares outstanding, net		6,274,542		N/A			6,273,260		N/A
Basic and diluted earnings per common share	$	0.05		N/A		$	0.16		N/A

Use of estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the unaudited consolidated balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the allowance for loan losses and deferred income taxes.

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

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Recent accounting pronouncements

On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU, as amended, is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Management is currently evaluating the impact of adopting this ASU to the unaudited consolidated financial statements, which may be material.

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 December 31, 2022 or June 30, 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

SECURITIES

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


	December 31, 2022
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
Government-sponsored enterprises:
Mortgage-backed securities	$	163	$	-	$	(3	)	$	160
Collateralized mortgage obligations		8		-		-			8
Total securities available for sale	$	171	$	-	$	(3	)	$	168

Securities held to maturity:
Government-sponsored enterprises:
Debt obligations	$	994	$	-	$	(27	)	$	967
Mortgage-backed securities		49,703		9		(3,674	)		46,038
Collateralized mortgage obligations		3		-		-			3
Municipal bonds		44,777		8		(7,308	)		37,477
Corporate bonds		53,996		1		(5,858	)		48,139
Total securities held to maturity	$	149,473	$	18	$	(16,867	)	$	132,624


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

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

Securities with an amortized cost of $14,667,000 and a fair value of $12,096,000 at December 31, 2022 were pledged to secure a credit line with the Federal Reserve Bank. See Note 7.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The amortized cost and fair value of debt securities, by contractual maturity, is shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	December 31, 2022
	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	-	$	-	$	3,394	$	3,356
Over 1 year through 5 years		-		-		31,647		30,451
Over 5 years through 10 years		-		-		39,640		34,230
Over 10 years		-		-		25,086		18,546
		-		-		99,767		86,583
Mortgage-backed securities		163		160		49,703		46,038
Collateralized mortgage obligations		8		8		3		3
	$	171	$	168	$	149,473	$	132,624


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

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


	December 31, 2022
	Less Than Twelve Months				Over Twelve Months
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available for sale:
Mortgage-backed securities	$	3	$	154	$	-	$	-
Total temporarily impaired securities available for sale	$	3	$	154	$	-	$	-

Securities held to maturity:
Mortgage-backed securities	$	1,788	$	31,561	$	1,886	$	13,455
Debt obligations		27		967		-		-
Municipal bonds		2,644		20,025		4,664		12,493
Corporate bonds		3,105		31,887		2,753		14,251
Total temporarily impaired securities held to maturity	$	7,564	$	84,440	$	9,303	$	40,199

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)


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

At December 31, 2022, 278 debt securities had unrealized losses with aggregate depreciation of 11.92% from the Bank’s amortized cost basis. These unrealized losses are the result of changes in the interest rate environment and there have been no downgrades in the investment quality of these securities. The contractual terms of these securities do not permit the entities to settle the security at a price less than par value. Because the Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell the securities before recovery of their amortized cost basis, which may be maturity, it does not consider these securities to be other-than-temporarily impaired at December 31, 2022.

There were no sales of securities during the three and six months ended December 31, 2022. There were no sales of securities during the three months ended December 31, 2021. Proceeds from the sale of securities available for sale was $2.0 million for the six months ended December 31, 2021, resulting in realized gains of $48,000.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

LOANS

A summary of the balances of loans follows:


(In thousands)	December 31, 2022			June 30, 2022
Mortgage loans on real estate:
Residential:
1-4 family	$	140,898		$	141,073
Multifamily		13,239			14,310
Second mortgages and home equity lines of credit		2,590			1,970
Construction		600			375
Commercial		21,077			14,761
Total mortgage loans on real estate		178,404			172,489
Consumer loans:
Consumer		63			84
Home improvement		2,232			2,116
Total other loans		2,295			2,200
Total loans		180,699			174,689
Allowance for loan losses		(1,747	)		(1,747	)
Net deferred loan fees		(383	)		(349	)
Loans, net	$	178,569		$	172,593

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table presents activity in the allowance for loan losses by loan category for the three and six months ended December 31, 2022 and 2021.


(In thousands)	Residential Real Estate			Residential Real Estate Construction		Commercial Real Estate			Consumer			Unallocated			Total
Balance at September 30, 2022	$	1,213		$	4	$	266		$	65		$	199		$	1,747
Provision (credit) for loan losses		(19	)		2		93			-			(76	)		-
Loans charged-off		-			-		-			-			-			-
Recoveries		-			-		-			-			-			-
Balance at December 31, 2022	$	1,194		$	6	$	359		$	65		$	123		$	1,747

Balance at September 30, 2021	$	1,225		$	-	$	275		$	59		$	178		$	1,737
Provision (credit) for loan losses		23			-		(10	)		(1	)		(2	)		10
Loans charged-off		-			-		-			-			-			-
Recoveries		-			-		-			-			-			-
Balance at December 31, 2021	$	1,248		$	-	$	265		$	58		$	176		$	1,747

Balance at June 30, 2022	$	1,223		$	3	$	252		$	61		$	208		$	1,747
Provision (credit) for loan losses		(29	)		3		107			4			(85	)		-
Loans charged-off		-			-		-			-			-			-
Recoveries		-			-		-			-			-			-
Balance at December 31, 2022	$	1,194		$	6	$	359		$	65		$	123		$	1,747

Balance at June 30, 2021	$	1,262		$	-	$	279		$	58		$	123		$	1,722
Provision (credit) for loan losses		(14	)		-		(14	)		-			53			25
Loans charged-off		-			-		-			-			-			-
Recoveries		-			-		-			-			-			-
Balance at December 31, 2021	$	1,248		$	-	$	265		$	58		$	176		$	1,747

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

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


(In thousands)	Residential Real Estate		Residential Real Estate Construction		Commercial Real Estate		Consumer		Unallocated		Total
December 31, 2022
Allowance for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-
Allowance for non-impaired loans		1,194		6		359		65		123		1,747
Total allowance for loan losses	$	1,194	$	6	$	359	$	65	$	123	$	1,747

Impaired loans	$	-	$	-	$	-	$	-	$	-	$	-
Non-impaired loans		156,727		600		21,077		2,295		-		180,699
Total loans	$	156,727	$	600	$	21,077	$	2,295	$	-	$	180,699

June 30, 2022
Allowance for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-
Allowance for non-impaired loans		1,223		3		252		61		208		1,747
Total allowance for loan losses	$	1,223	$	3	$	252	$	61	$	208	$	1,747

Impaired loans	$	-	$	-	$	-	$	-	$	-	$	-
Non-impaired loans		157,353		375		14,761		2,200		-		174,689
Total loans	$	157,353	$	375	$	14,761	$	2,200	$	-	$	174,689

At December 31, 2022 and June 30, 2022, there were no past due loans. At December 31, 2022 and June 30, 2022, there were no loans on non-accrual or loans past due 90 days or more and still accruing.

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

During the three and six months ended December 31, 2022 and 2021, there were no troubled debt restructurings or troubled debt restructurings that defaulted in the first twelve months after restructuring. Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.

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.

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


(In thousands)	Residential 1-4 Family		Multifamily		Second Mortgages and Home Equity Lines of Credit		Construction		Commercial Real Estate		Consumer		Home Improvement		Total
December 31, 2022
Pass	$	139,446	$	13,239	$	2,590	$	600	$	21,077	$	63	$	2,232	$	179,247
Special mention		1,452		-		-		-		-		-		-		1,452
Total loans	$	140,898	$	13,239	$	2,590	$	600	$	21,077	$	63	$	2,232	$	180,699

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

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

PREMISES AND EQUIPMENT

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


(In thousands)	December 31, 2022			June 30, 2022
Land	$	1,553		$	1,553
Bank buildings		1,066			1,066
Building improvements		926			926
Furniture, fixtures and equipment		1,268			1,225
Leasehold improvements		167			167
		4,980			4,937
Accumulated depreciation and amortization		(1,708	)		(1,603	)
	$	3,272		$	3,334

Depreciation and amortization expense for the three and six months ended December 31, 2022 amounted to $58,000 and $122,000, respectively. Depreciation expense for the three and six months ended December 31, 2021 amounted to $65,000 and $130,000, 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)	December 31, 2022		June 30, 2022
NOW and demand	$	64,859	$	64,163
Regular and other		69,924		75,774
Money market deposits		37,470		47,010
Total non-certificate accounts		172,253		186,947
Term certificates of $250,000 or more		24,010		24,608
Term certificates less than $250,000		79,199		75,520
Total certificate accounts		103,209		100,128
Total deposits	$	275,462	$	287,075

A summary of certificate accounts by maturity is as follows:


	December 31, 2022					June 30, 2022
(Dollars in thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due within 1 year	$	77,466		1.48	%	$	78,847		0.67	%
Over 1 year to 2 years		21,170		2.33			14,307		0.96
Over 2 years to 3 years		3,197		0.64			5,277		0.92
Over 3 years to 5 years		1,376		0.65			1,697		0.65
	$	103,209		1.62	%	$	100,128		0.73	%

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

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

The Bank has an available line of credit in the amount of $2,354,000 with the FHLB of Boston at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank’s total assets. At December 31, 2022 and June 30, 2022, there were no funds advanced under the line of credit. All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as first mortgage loans on owner-occupied 1-4 family residential property.

The Bank has an available line of credit under the Federal Reserve Bank Borrower-in-Custody program offered through the Discount Window. Under the terms of the credit line at December 31, 2022 and June 30, 2022, the Bank has pledged certain qualifying securities with a fair market value of $12,096,000 and $12,777,000, respectively, and the line bears a variable interest rate equal to the federal funds rate plus 0.50%. At December 31, 2022 and June 30, 2022, there was no outstanding balance under this program.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's unaudited consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Federal banking regulations require minimum capital requirements for community banking institutions as set forth in the following table. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. At December 31, 2022, the Bank met the required capital conservation buffer.

As of December 31, 2022, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios as of December 31, 2022 and June 30, 2022 are also presented in the table below.


	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2022
Total capital (to risk weighted assets)	$	64,203		32.6	%	$	15,775		8.0	%	$	19,719		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		62,456		31.7			8,874		4.5			12,817		6.5
Tier 1 capital (to risk weighted assets)		62,456		31.7			11,832		6.0			15,775		8.0
Tier 1 capital (to adjusted total assets)		62,456		17.4			14,334		4.0			17,917		5.0

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

COMMITMENTS AND CONTINGENCIES

Loan commitments

The Bank is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds on lines of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited consolidated balance sheets.

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

At December 31, 2022 and June 30, 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:


(In thousands)	December 31, 2022		June 30, 2022
Commitments to grant loans	$	597	$	5,551
Unadvanced funds on construction loans		235		460
Unadvanced funds on equity lines of credit		4,060		4,305
Unadvanced funds on commercial and other lines of credit		1,024		1,188

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

Operating lease commitments

The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2022 and began recognizing operating leases on its consolidated balance sheet by recording a Right-Of-Use ("ROU") asset, representing the Company's legal right to use the leased assets and a net lease liability, representing the Company's legal obligation to make these lease payments. The Company, by policy, does not include renewal options for leases as part of its ROU asset and lease liabilities unless they are deemed reasonably certain to exercise. At December 31, 2022, the weighted average remaining lease term for operating leases was 9.38 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.56%.

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Pursuant to the terms of these lease agreements in effect at December 31, 2022 pertaining to premises, future minimum rent commitments for the fiscal years ending 2023 through 2027 and thereafter are as follows:


	Years ending
(In thousands)	June 30,
2023	$	59
2024		117
2025		117
2026		117
2027		119
Thereafter		655
Total minimum lease payments	$	1,184
Less: Interest		(181	)
Total lease liability	$	1,003

The cost of the lease payments is not included above. Total lease expense for the three and six months ended December 31, 2022 amounted to $34,000 and $68,000, respectively. Total lease expense for the three and six months ended December 31, 2021 amounted to $23,000 and $45,000, respectively.

Other contingencies

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

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

10.

EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan

As part of the stock offering, the Bank established the Colonial Federal Savings Bank Employee Stock Ownership Plan 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 December 31, 2022, the principal balance on the ESOP loan was $2.5 million.


	December 31, 2022
Shares held by the ESOP include the following:
Committed to be allocated		10,226
Unallocated		245,422
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 $130,000 and $325,000 for the three and six months ended December 31, 2022, respectively. Pension expense under the Pentegra DB Plan amounted to $180,000 and $375,000 for the three and six months ended December 31, 2021, respectively. Contributions made to the Pentegra DB Plan during the three and six months ended December 31, 2022 amounted to $675,000. Contributions made to the Pentegra DB Plan during the three and six months ended December 31, 2021 amounted to $715,000.

401(k) plan

The Bank has a savings plan which is intended to qualify under Section 401(k) of the Internal Revenue Code. The plan provides for voluntary contributions by participating employees ranging from 2% to 15% of their compensation, subject to certain limitations. The Bank matches 10% of the employee’s voluntary contributions up to 3% of their compensation. Employer 401(k) contribution expense amounted to $4,000 and $10,000 for the three and six months ended December 31, 2022, respectively. Employer 401(k) contribution expense amounted to $9,000 and $20,000 for the three and six months ended December 31, 2021, respectively.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental compensation plan

The Bank has entered into a Supplemental Executive Retirement Plan (the “SERP”) with certain officers, which provides for payments upon attaining the retirement age noted in the SERP. The present value of these future payments is provided over the remaining terms of the officers’ employment and at December 31, 2022 and June 30, 2022, the accrued liability amounted to $845,000 and $814,000, respectively. SERP expense amounted to $16,000 and $31,000 for the three and six months ended December 31, 2022, respectively. SERP expense amounted to $19,000 and $35,000 for the three and six months ended December 31, 2021, respectively. In connection with these SERPs, the Bank purchased life insurance policies, which had a cash surrender value of $5.8 million and $5.7 million at December 31, 2022 and June 30, 2022, respectively.

In addition, the Bank provides death benefits for officers and directors of the Bank under the terms of Split Dollar Agreements. The Bank has purchased life insurance contracts in connection with these agreements and the cash surrender value of the policies at December 31, 2022 and June 30, 2022 amounted to $4.5 million and $4.4 million, respectively. For the three and six months ended December 31, 2022, post-retirement expense related to these obligations amounted to $29,000 and $58,000, respectively, and $14,000 and $27,000 for the three and six months ended December 31, 2021, 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 December 31, 2022 and June 30, 2022, securities available for sale were measured at Level 2 with a fair value of $168,000 and $199,000, respectively. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no securities measured at fair value in Levels 1 and 3.

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

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

The Bank may also be required, from time to time, to measure certain other financial assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There are no assets or liabilities measured at fair value on a non-recurring basis at December 31, 2022 or June 30, 2022.

CFSB Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and June 30, 2022.


	December 31, 2022
(In thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	10,574	$	10,574	$	-	$	-	$	10,574
Securities available for sale		168		-		168		-		168
Securities held to maturity		149,473		-		132,624		-		132,624
Federal Home Loan Bank of Boston stock		191		-		-		191		191
Loans, net		178,569		-		-		161,781		161,781
Accrued interest receivable		1,303		-		-		1,303		1,303

Liabilities:
Deposits		275,462		-		-		259,368		259,368

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

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

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

This discussion and analysis reflects our unaudited consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements, which appear beginning on page F-1 of Annual Report on Form 10-K.

Overview

Our results of operations depend primarily on our net interest income and, to a lesser extent, non-interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits. Non-interest income consists primarily of earnings on bank-owned life insurance, service charges on deposit accounts and other income. Our results of operations also are affected by our provision for loan losses and non-interest expense. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment, data processing costs, advertising, Federal Deposit Insurance Corporation deposit insurance premiums and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities.

Cautionary Note Regarding Forward-Looking Statements

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

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

•

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

•

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

•

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

•

our ability to access cost-effective funding;

•

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

•

demand for loans and deposits in our market area;

•

our ability to implement and change our business strategy;

•

competition among depository and other financial institutions;

•

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

•

adverse changes in the securities or secondary mortgage markets;

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums or changes in the fiscal or monetary policies of the U.S. Treasury or Board of Governors of the Federal Reserve System;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

changes in consumer spending, borrowing and savings habits;

•

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

•

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

•

our ability to retain key employees;

•

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

•

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

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

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our unaudited consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our unaudited consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.

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

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

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

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Deferred Income Taxes. At December 31, 2022, we had a net deferred tax asset totaling $1.0 million. In accordance with Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes,” we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established if it is not more likely than not realizable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax

assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize its federal and state deferred tax asset.

There have been no material changes to our critical accounting policies during the three and six months ended December 31, 2022.

For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the audited consolidated financial statements within our Annual Report on Form 10-K.

Comparison of Financial Condition at December 31, 2022 and June 30, 2022

Total Assets. Total assets decreased $9.4 million, or 2.6%, to $356.8 million at December 31, 2022 from $366.2 million at June 30, 2022. The decrease resulted primarily from decreases in cash and cash equivalents of $21.1 million, or 66.6%, partially offset by increases in securities held to maturity of $4.3 million, or 3.0%, and net loans of $6.0 million, or 3.5%. The Company adopted Accounting Standard Update ("ASU") 2016-02-Leases (Topic 842) on July 1, 2022 and began recognizing operating leases on its consolidated balance sheet by recording a Right-Of-Use asset, representing the Company's legal right to use the leased assets and a net lease liability, representing the Company's legal obligation to make these lease payments, which resulted in an increase of $1.0 million in total assets and total liabilities at December 31, 2022.

Cash and Cash Equivalents. Cash and cash equivalents decreased $21.1 million, or 66.6%, to $10.6 million at December 31, 2022 from $31.7 million at June 30, 2022, because we invested excess cash into securities and loans to increase our overall yield on interest-earning assets.

Net Loans. Net loans increased $6.0 million, or 3.5%, to $178.6 million at December 31, 2022 from $172.6 million at June 30, 2022. The increase was due primarily to increases in commercial real estate loans of $6.3 million, or 42.8%, and $620,000, or 31.5%, in second mortgages and home equity lines of credit, partially offset by a decrease of $1.1 million, or 7.5%, in multi-family real estate loans. The growth in commercial real estate loans was the result of increased loan originations and the Bank's continued focus on growing and diversifying the loan portfolio.

Securities Available for Sale. Securities available for sale decreased $31,000, or 15.6%, to $168,000 at December 31, 2022 from $199,000 at June 30, 2022. The decrease was due to prepayments and the decline in fair value due to the rising interest rate environment.

Securities Held to Maturity. Securities held to maturity increased $4.3 million, or 3.0%, to $149.5 million at December 31, 2022 from $145.2 million at June 30, 2022, as we invested excess cash into securities to increase our overall yield on interest-earning assets.

Total Liabilities. Total liabilities decreased $10.3 million, or 3.5%, to $281.6 million at December 31, 2022 from $291.9 million at June 30, 2022. The decrease was the result of decreases in deposits of $11.6 million, or 4.0%, partially offset by the new operating lease liability of $1.0 million.

Deposits. Deposits decreased $11.6 million, or 4.0%, to $275.5 million at December 31, 2022 from $287.1 million at June 30, 2022. The decrease was primarily due to decreases of $5.8 million, or 7.7%, in savings accounts, and $9.5 million, or 20.2%, in money market accounts, partially offset by increases of $696,000, or 1.1%, in negotiable order of withdrawal and demand deposit accounts and $3.1 million, or 3.1%, in term certificates. The decrease reflects management's decision not to increase interest rates for savings and money market accounts, due to excess liquidity for the first quarter of the fiscal year. During the second quarter of the fiscal year, the Bank held term certificate promotions, which contributed to the increase in the balance of term certificates.

Stockholders' Equity. Total stockholders' equity increased $1.0 million, or 1.4%, to $75.3 million at December 31, 2022 from $74.3 million at June 30, 2022. The increase was primarily due to net income of $986,000 and earned ESOP compensation of $51,000 for the six months ended December 31, 2022.

Comparison of Operating Results for the Three Months Ended December 31, 2022 and 2021

General. We reported net income of $341,000 for the three months ended December 31, 2022, compared to net income of $234,000 for the three months ended December 31, 2021, an increase of $107,000, or 45.7%. The

increase in net income was primarily due to an increase in net interest income of $330,000, or 16.4%, partially offset by an increase in non-interest expense of $191,000, or 10.1%, and an increase in income tax expense of $33,000.

Interest and Dividend Income. Interest and dividend income increased $413,000, or 18.2%, to $2.7 million for the three months ended December 31, 2022 from $2.3 million for the three months ended December 31, 2021. The increase was attributable to an increase of $289,000, or 47.2%, in interest on securities, an increase of $107,000, in interest on short-term investments, and an increase of $17,000, or 1.0%, in interest on loans. Interest income on securities increased due to an increase in the average balance of securities of $33.8 million to $151.2 million for the three months ended December 31, 2022, from $117.4 million for the three months ended December 31, 2021, and an increase in the average yield on securities of 26 basis points to 2.45% for the three months ended December 31, 2022 from 2.19% for the three months ended December 31, 2021. Interest income on short-term investments increased due to an increase in the average yield of 357 basis points to 3.74% for the three months ended December 31, 2022 from 0.17% for the three months ended December 31, 2021, partially offset by a decrease in the average balance of short-term investments of $24.0 million to $13.2 million for the three months ended December 31, 2022 from $37.2 million for the three months ended December 31, 2021. Interest income on loans increased primarily due to an increase in the average balance of loans of $5.1 million to $177.6 million for the three months ended December 31, 2022, from $172.5 million for the three months ended December 31, 2021, partially offset by a decrease in the average yield on loans of 7 basis points to 3.73% for the three months ended December 31, 2022 from 3.80% for the three months ended December 31, 2021. The increase in the average yields on securities and other interest-earning assets resulted from the investments that were purchased during the past nine months, as interest rates increased. The increase in the average loan balances was due to originations exceeding loan payoffs. The decrease in loan yields was due to higher interest rate loan payoffs exceeding loan originations in a high interest rate environment with reduced loan demand.

Interest Expense. Interest expense increased $83,000, or 32.3%, to $340,000 for the three months ended December 31, 2022 from $257,000 for the three months ended December 31, 2021. The increase was due to an increase in the average rate paid on certificates of deposit of 43 basis points, to 1.18%, for the three months ended December 31, 2022, from 0.75% for the three months ended December 31, 2021 due to the higher interest rate environment, partially offset by a decrease in the average balance of certificates of deposit of $10.6 million, to $99.0 million for the three months ended December 31, 2022, from $109.6 million for the three months ended December 31, 2021. The decrease in the average balance of certificates of deposit reflected the maturity of certificates of deposit before the Bank held certificates of deposit rate specials late during the three months ended December 31, 2022.

Net Interest Income. Net interest income increased $330,000, or 16.4%, to $2.3 million for the three months ended December 31, 2022, from $2.0 million for the three months ended December 31, 2021. The increase was due to an increase in average net interest-earning assets of $14.9 million combined with an increase in our net interest rate spread of 21 basis points to 2.62% for the three months ended December 31, 2022, from 2.41% for the three months ended December 31, 2021. Our net interest margin increased 27 basis points to 2.77% for the three months ended December 31, 2022 compared to 2.50% for the three months ended December 31, 2021. The increase in the net interest rate spread was a result of an increase in the yield on interest-earning assets exceeding the increase in the cost of interest-bearing liabilities.

Provision for Loan Losses. No provision for loan losses for the three months ended December 31, 2022 was recorded compared to a provision for loan losses of $10,000 for the three months ended December 31, 2021. The absence of a provision for the three months ended December 31, 2022 reflected continued strong asset quality. The allowance for loan losses was $1.7 million, or 0.97% of total loans, at December 31, 2022, compared to $1.7 million, or 1.00% of total loans, at December 31, 2021. The allowance for loan losses was $1.7 million, or 0.99% of total loans at June 30, 2022. At December 31, 2022, we had four loans totaling $1.5 million designated as special mention, as we await receipt from the borrowers of their current financials and tax returns as required by loan covenants. We had no loans categorized as substandard, doubtful or loss at December 31, 2022 or 2021. We did not have any non-performing loans at either December 31, 2022 or 2021. We had no charge-offs or recoveries for the three months ended December 31, 2022 or 2021.

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


	Three Months Ended
	December 31,				Change
(Dollars in thousands)	2022		2021		Amount			Percent
Customer service fees	$	36	$	31	$	5			16.1	%
Income on bank-owned life insurance		63		75		(12	)		(16.0	%)
Other income		53		55		(2	)		(3.6	%)
Total non-interest income	$	152	$	161	$	(9	)		(5.6	%)

Non-interest income decreased $9,000, or 5.6%, to $152,000 for the three months ended December 31, 2022 from $161,000 for the three months ended December 31, 2021. The decrease was primarily due to a $12,000 decrease in income on bank-owned life insurance.

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


	Three Months Ended
	December 31,				Change
(Dollars in thousands)	2022		2021		Amount			Percent
Salaries and employee benefits	$	1,250		1,167	$	83			7.1	%
Occupancy and equipment		255		208		47			22.6	%
Advertising		71		37		34			91.9	%
Data processing		84		91		(7	)		(7.7	%)
Deposit insurance		22		21		1			4.8	%
Other		405		372		33			8.9	%
Total non-interest expense	$	2,087	$	1,896	$	191			10.1	%

Non-interest expense increased $191,000, or 10.1%, to $2.1 million for the three months ended December 31, 2022 from $1.9 million for the three months ended December 31, 2021. The increase was due primarily to an $83,000 increase in salaries and employee benefit expense due to normal employee annual merit salary benefit increases and the expense recognized in connection with the Employee Stock Ownership Plan (the "ESOP"), a $47,000 increase in occupancy and equipment expenses due primarily to increased lease and service contracts expenses, a $34,000 increase in advertising expense related to an employment agency fee and a $33,000 increase in other expenses due primarily to increased professional expenses.

Provision for Income Taxes. The Company recorded a provision for income taxes of $65,000 for the three months ended December 31, 2022, which was a $33,000, or 103.1%, increase from income taxes of $32,000 for the three months ended December 31, 2021. Our effective tax rate was 16.0% and 12.0% for the quarters ended December 31, 2022 and 2021, respectively. The higher effective tax rate for the three months ended December 31, 2022 compared to the three months ended December 31, 2021 was due to changes in the composition of tax-advantaged municipal securities and bank-owned life insurance. The increase in the provision for income taxes for the three months ended December 31, 2022 was due to the increase in income before income taxes.

Average Balance and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Tax-equivalent adjustments have been made for tax-advantaged municipal securities income. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $383,000 and $354,000 at December 31, 2022 and 2021, respectively.


	For the Three Months Ended December 31,
	2022							2021
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	177,648	$	1,657		3.73	%	$	172,505	$	1,640		3.80	%
Securities(1)		151,249		927		2.45	%		117,441		644		2.19	%
Other		13,153		123		3.74	%		37,190		16		0.17	%
Total interest-earning assets		342,050		2,707		3.17	%		327,136		2,300		2.81	%
Non-interest-earning assets		16,747							14,340
Total assets	$	358,797						$	341,476
Interest-bearing liabilities:
Interest-bearing demand deposits	$	33,557	$	4		0.05	%	$	30,903	$	4		0.05	%
Savings deposits		72,708		18		0.10	%		72,233		18		0.10	%
Money market deposits		39,876		27		0.27	%		41,411		27		0.26	%
Certificates of deposit		99,041		291		1.18	%		109,563		206		0.75	%
Total interest-bearing deposits		245,182		340		0.55	%		254,110		255		0.40	%
FHLB advances		-		-		-	%		345		2		2.32	%
Total interest-bearing liabilities		245,182		340		0.55	%		254,455		257		0.40	%
Noninterest-bearing liabilities
Non-interest-bearing demand deposits		32,887							34,168
Other non-interest-bearing liabilities		5,554							3,515
Total liabilities		283,623							292,138
Stockholders' equity		75,174							49,338
Total liabilities and stockholders' equity	$	358,797						$	341,476
Net interest income - FTE			$	2,367						$	2,043
Net interest rate spread(2)						2.62	%						2.41	%
Net interest-earning assets(3)	$	96,868						$	72,681
Net interest margin - FTE(4)						2.77	%						2.50	%
Average interest-bearing assets to interest-bearing liabilities						139.51	%						128.56	%

(1)

Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of $26,000 and $32,000 for the three months ended December 31, 2022 and 2021, 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
	December 31,		December 31,
	2022		2021
Securities interest income (no tax adjustment)	$	901	$	612
Tax-equivalent adjustment		26		32
Securities (tax-equivalent basis)	$	927	$	644
Net interest income (no tax adjustment)		2,341		2,011
Tax-equivalent adjustment		26		32
Net interest income (tax-equivalent adjustment)	$	2,367	$	2,043

Rate/Volume Analysis

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


	For the Three Months Ended
	December 31, 2022 vs. 2021
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	49		$	(32	)	$	17
Securities		185			98			283
Other		(10	)		117			107
Total interest-earning assets		224			183			407
Interest-bearing liabilities:
Interest-bearing demand deposits		-			-			-
Savings deposits		-			-			-
Money market deposits		(1	)		1			-
Certificates of deposit		(20	)		105			85
Total deposits		(21	)		106			85
FHLB advances		(2	)		-			(2	)
Total interest-bearing liabilities		(23	)		106			83
Change in net interest income	$	247		$	77		$	324

Comparison of Operating Results for the Six Months Ended December 31, 2022 and 2021

General. We reported net income of $986,000 for the six months ended December 31, 2022, compared to net income of $706,000 for the six months ended December 31, 2021, an increase of $280,000, or 39.7%. The increase in net income was primarily due to an increase in net interest income of $710,000, or 17.8%, partially offset by an increase in non-interest expense of $287,000, or 8.1%, and an increase in income tax expense of $103,000, or 78.0%.

Interest and Dividend Income. Interest and dividend income increased $757,000, or 16.7%, to $5.3 million for the six months ended December 31, 2022 from $4.6 million for the six months ended December 31, 2021. The increase was attributable to an increase of $558,000, or 46.4%, in interest on securities, and an increase of $217,000, in interest on short-term investments, partially offset by a decrease of $18,000, or 0.5%, in interest on loans. Interest income on securities increased due to an increase in the average balance of securities of $38.1 million to $150.0 million for the six months ended December 31, 2022, from $112.0 million for the six months ended December 31, 2021, and an increase in the average yield on securities of 16 basis points to 2.42% for the six months ended December 31, 2022 from 2.26% for the six months ended December 31, 2021. Interest income on short-term investments increased due to an increase in the average yield of 270 basis points to 2.87% for the six months ended December 31, 2022 from 0.17% for the six months ended December 31, 2021, partially offset by a decrease in the average balance of cash and short-term investments of $21.7 million to $17.4 million for the six months ended December 31, 2022 from $39.1 million for the six months ended December 31, 2021. Interest income on loans decreased primarily due to a decrease in the average yield earned on loans of nine basis points, to 3.70% for the six months ended December 31, 2022, from 3.79% for the six months ended December 31, 2021, partially offset by an increase in the average balance of loans of $3.4 million to $177.1 million for the six months ended December 31, 2022, from $173.7 million for the six months ended December 31, 2021. The increase in the average yields on securities and other interest-earning assets resulted from the investments that were purchased during the past nine months, as interest rates increased. The increase in average loan balances was due to originations exceeding loan payoffs. The decrease in loan yields was due to higher interest rate loan payoffs exceeding loan originations in a high interest rate environment with reduced loan demand.

Interest Expense. Interest expense increased $47,000, or 8.8%, to $582,000 for the six months ended December 31, 2022 from $535,000 for the six months ended December 31, 2021. The increase was due to an increase in the average rate paid on certificates of deposit of 20 basis points to 0.98% for the six months ended December 31, 2022, from 0.78% for the six months ended December 31, 2021, partially offset by a decrease in the average balance of certificates of deposit of $12.0 million, to $98.1 million for the six months ended December 31, 2022, from $110.1 million for the six months ended December 31, 2021. The decrease in the average balance of certificates of deposit reflected the maturity of certificates of deposit before the Bank held certificates of deposit rate specials late during the second fiscal quarter of 2023.

Net Interest Income. Net interest income increased $710,000, or 17.8%, to $4.7 million for the six months ended December 31, 2022, from $4.0 million for the six months ended December 31, 2021. The increase was due to an increase in average interest-earning assets of $19.8 million combined with an increase in our net interest rate spread of 22 basis points to 2.63% for the six months ended December 31, 2022, from 2.41% for the six months ended December 31, 2021. Our net interest margin increased 26 basis points to 2.76% for the six months ended December 31, 2022 compared to 2.50% for the six months ended December 31, 2021. The increase in the net interest rate spread was a result of an increase in the yield on interest-earning assets exceeding the increase in the cost of interest-bearing liabilities.

Provision for Loan Losses. No provision for loan losses for the six months ended December 31, 2022 was recorded compared to a provision for loan losses of $25,000 for the six months ended December 31, 2021. The absence of a provision for the six months ended December 31, 2022 reflected continued strong asset quality.

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


	Six Months Ended
	December 31,				Change
(Dollars in thousands)	2022		2021		Amount			Percent
Customer service fees	$	73	$	61	$	12			19.7	%
Income on bank-owned life insurance(1)		127		123		4			3.3	%
Gain on sale of securities available for sale		-		48		(48	)		(100.0	%)
Other income		152		159		(7	)		(4.4	%)
Total non-interest income	$	352	$	391	$	(39	)		(10.0	%)

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

Non-interest income decreased $39,000, or 10.0%, to $352,000 for the six months ended December 31, 2022 from $391,000 for the six months ended December 31, 2021. The decrease was primarily due to the absence of a $48,000 gain on the sale of securities available for sale during the six months ended December 31, 2021, partially offset by increases in customer service fees of $12,000.

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


	Six Months Ended
	December 31,				Change
(Dollars in thousands)	2022		2021		Amount		Percent
Salaries and employee benefits(1)	$	2,268	$	2,121	$	147		6.9	%
Occupancy and equipment		498		418		80		19.1	%
Advertising		110		78		32		41.0	%
Data processing		178		171		7		4.1	%
Deposit insurance		43		43		-
Other		738		691		47		6.8	%
Total non-interest expense	$	3,835	$	3,522	$	313		8.9	%

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

Non-interest expense increased $313,000, or 8.9%, to $3.8 million for the six months ended December 31, 2022 from $3.5 million for the six months ended December 31, 2021. The increase was due primarily to a $147,000 increase in salaries and employee benefit expense due to normal employee annual merit salary and benefit increases and the expense recognized in connection with the ESOP, an $80,000 increase in occupancy and equipment expenses due primarily to increased lease and service contracts expenses, a $32,000 increase in advertising expense related to an employment agency fee and a $47,000 increase in other expenses due primarily to increased professional expenses.

Provision for Income Taxes. The Company recorded a provision for income taxes of $235,000 for the six months ended December 31, 2022, a $103,000, or 78.0%, increase from income taxes of $132,000 for the six months ended December 31, 2021. Our effective tax rate was 19.2% and 15.8% for the six months ended December 31, 2022 and 2021, respectively. The higher effective tax rate for the six months ended December 31, 2022 compared to the six months ended December 31, 2021 was due to changes in the composition of tax-advantaged municipal securities and bank-owned life insurance. The increase in the provision for income taxes for the six months ended December 31, 2022 was due to the increase in income before income taxes.


	For the Six Months Ended December 31,
	2022							2021
(Dollars in thousands)	Average Outstanding Balance		Interest		Average Yield/Rate			Average Outstanding Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans	$	177,143	$	3,276		3.70	%	$	173,701	$	3,294		3.79	%
Securities(1)		150,011		1,817		2.42	%		111,952		1,267		2.26	%
Other		17,435		250		2.87	%		39,107		33		0.17	%
Total interest-earning assets		344,589		5,343		3.10	%		324,760		4,594		2.83	%
Non-interest-earning assets		16,342							14,117
Total assets	$	360,931						$	338,877
Interest-bearing liabilities:
Interest-bearing demand deposits	$	33,346	$	8		0.05	%	$	30,786	$	8		0.05	%
Savings deposits		74,076		37		0.10	%		71,667		37		0.10	%
Money market deposits		42,685		58		0.27	%		41,266		54		0.26	%
Certificates of deposit		98,097		479		0.98	%		110,088		430		0.78	%
Total interest-bearing deposits		248,204		582		0.47	%		253,807		529		0.42	%
FHLB advances		-		-		-	%		456		6		2.63	%
Total interest-bearing liabilities		248,204		582		0.47	%		254,263		535		0.42	%
Noninterest-bearing liabilities
Non-interest-bearing demand deposits		32,702							32,018
Other non-interest-bearing liabilities		5,127							3,474
Total liabilities		286,033							289,755
Stockholders' equity		74,898							49,122
Total liabilities and stockholders' equity	$	360,931						$	338,877
Net interest income - FTE			$	4,761						$	4,059
Net interest rate spread(2)						2.63	%						2.41	%
Net interest-earning assets(3)	$	96,385						$	70,497
Net interest margin - FTE(4)						2.76	%						2.50	%
Average interest-bearing assets to interest-bearing liabilities						138.83	%						127.73	%

(1)

Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of $57,000 and $65,000 for the six months ended December 31, 2022 and 2021, respectively.

(2)

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

(3)

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

(4)

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

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


	For the Six Months Ended
	December 31,		December 31,
	2022		2021
Securities interest income (no tax adjustment)	$	1,760	$	1,202
Tax-equivalent adjustment		57		65
Securities (tax-equivalent basis)	$	1,817	$	1,267
Net interest income (no tax adjustment)		4,704		3,994
Tax-equivalent adjustment		57		65
Net interest income (tax-equivalent adjustment)	$	4,761	$	4,059

Rate/Volume Analysis


	For the Six Months Ended
	December 31, 2022 vs. 2021
(In thousands)	Increase (Decrease) Due to Volume			Increase (Decrease) Due to Rate			Total Increase (Decrease)
Interest-earning assets:
Loans	$	65		$	(83	)	$	(18	)
Securities		431			119			550
Other		(18	)		235			217
Total interest-earning assets		478			271			749
Interest-bearing liabilities:
Interest-bearing demand deposits		1			(1	)		-
Savings deposits		1			(1	)		-
Money market deposits		2			2			4
Certificates of deposit		(47	)		96			49
Total deposits		(43	)		96			53
FHLB advances		(6	)		-			(6	)
Total interest-bearing liabilities		(49	)		96			47
Change in net interest income	$	527		$	175		$	702

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The 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 December 31, 2022 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	$	7,255		(16.5	%)
+300		7,595		(12.6	%)
+200		7,934		(8.7	%)
+100		8,287		(4.7	%)
Level		8,692		-
-100		8,646		(0.5	%)
-200		8,523		(1.9	%)
-300		8,329		(4.2	%)
-400		8,281		(4.7	%)

(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 December 31, 2022, 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 December 31, 2022
			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	$	30,532	$	(22,925	)		(42.9	%)		11.0	%		(560	)
+300		35,826		(17,631	)		(33.0	%)		12.4	%		(420	)
+200		41,456		(12,001	)		(22.4	%)		13.9	%		(270	)
+100		47,472		(5,985	)		(11.2	%)		15.3	%		(130	)
Level		53,457		-			-			16.6	%		-
-100		58,552		5,095			9.5	%		17.5	%		90
-200		63,184		9,727			18.2	%		18.2	%		160
-300		66,994		13,537			25.3	%		18.7	%		210
-400		66,466		13,009			24.3	%		18.1	%		150

(1)

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

(2)

EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)

Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)

EVE Ratio represents EVE divided by the present value of assets.

The table above indicates that at December 31, 2022, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 22.4% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience an 18.2% 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. At December 31, 2022, we had no outstanding advances from the Federal Home Loan Bank of Boston. At December 31, 2022, we had the ability to borrow $66.8 million in Federal Home Loan Bank of Boston advances. Additionally, at December 31, 2022, we had a $2.4 million line of credit with the Federal Home Loan Bank of Boston, none of which was drawn at December 31, 2022.

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 $892,000 for the six months ended December 31, 2022, compared to $30,000 of net cash used in operating activities during the six months ended December 31, 2021. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on securities, was $10.5 million and $15.2 million for the six months ended December 31, 2022 and 2021, respectively. Net cash used in financing activities was $11.5 million for the six months ended December 31, 2022, compared to $22.4 million provided by financing activities for the six months ended December 31, 2021. Changes in net cash related to financing activities were primarily related to changes in deposit balances for the six months ended December 31, 2022 and 2021.

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

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

At December 31, 2022, we had $597,000 of commitments to originate loans, $4.1 million of unadvanced funds under home equity lines of credit, $235,000 in unadvanced funds on construction loans, and $1.0 million of unadvanced funds under commercial and other lines of credit. See Note 9 in the Notes to the unaudited consolidated financial statements for further information.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 1 in the Notes to the unaudited consolidated financial statements and note 1 of the notes to our consolidated financial statements beginning on page F-1 of our Annual Report on Form 10-K. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to non-public companies.

Impact of Inflation and Changing Prices

The unaudited financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Treasurer and Chief Operating Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of December 31, 2022, the Company’s Chief Executive Officer and Treasurer and Chief Operating Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at December 31, 2022, 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 and six months ended December 31, 2022, 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 and Retained Earnings, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements *

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

*Furnished, not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CFSB BANCORP, INC.

Date: February 8, 2023	By:	/s/ Michael E. McFarland
		Michael E. McFarland
		President and Chief Executive Officer
		(Principal Executive Officer)




Date: February 8, 2023	By:	/s/ Susan Shea
		Susan Shea
		Treasurer and Chief Operating Officer
		(Principal Financial and Accounting Officer)