0000950170-22-018772.txt : 20220922 0000950170-22-018772.hdr.sgml : 20220922 20220922163129 ACCESSION NUMBER: 0000950170-22-018772 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 86 CONFORMED PERIOD OF REPORT: 20220630 FILED AS OF DATE: 20220922 DATE AS OF CHANGE: 20220922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFSB Bancorp, Inc. /MA/ CENTRAL INDEX KEY: 0001879103 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-41220 FILM NUMBER: 221259533 BUSINESS ADDRESS: STREET 1: 15 BEACH STREET CITY: QUINCY STATE: MA ZIP: 02170 BUSINESS PHONE: (617) 471-0750 MAIL ADDRESS: STREET 1: 15 BEACH STREET CITY: QUINCY STATE: MA ZIP: 02170 10-K 1 cfsb-20220630.htm 10-K 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended June 30, 2022

OR

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

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on at the end of the most recently completed second quarter was $0.

 

As of September 19, 2022, the registrant had 6,521,642 shares of common stock, $0.01 par value per share, outstanding.

 


 

Table of Contents

 

 

 

Page

PART I

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

27

Item 1B.

Unresolved Staff Comments

37

Item 2.

Properties

37

Item 3.

Legal Proceedings

37

Item 4.

Mine Safety Disclosures

37

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

38

Item 6.

Reserved

38

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

F-1

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

49

Item 9A.

Controls and Procedures

49

Item 9B.

Other Information

49

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

49

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

50

Item 11.

Executive Compensation

53

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

57

Item 13.

Certain Relationships and Related Transactions, and Director Independence

57

Item 14.

Principal Accounting Fees and Services

58

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

59

Item 16.

Form 10-K Summary

60

Signatures

 

61

 

 

 

1


 

PART I

This annual report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), 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 that are worse than expected;
general economic conditions, either nationally or in our market areas, that are worse than expected;
changes in the amount of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategy;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
adverse changes in the securities or secondary mortgage markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
the inability of third-party providers to perform as expected;
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;

 

2


 

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;
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 (the “SEC) 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.

Item 1. Business.

CFSB Bancorp, Inc.

CFSB Bancorp, Inc. (“CFSB Bancorp” or the “Company”) is a federal corporation that was formed in January 2022 to become the bank holding company of Colonial Federal Savings Bank (the “Bank”) as part of the mutual holding company reorganization of the Bank. Since being incorporated, other than holding the common stock of the Bank, CFSB Bancorp retaining approximately 50% of the net cash proceeds of the stock offering, making a loan to the employee stock ownership plan of the Bank, CFSB Bancorp has not engaged in any other business activities.

CFSB Bancorp completed its stock offering in connection with the mutual holding company reorganization of the Bank on January 12, 2022. The Company sold 2,804,306 shares of common stock at $10.00 per share for gross proceeds of $28.0 million. In connection with the reorganization, the Company also contributed 130,433 shares of common stock and $250,000 in cash to the Colonial Federal Savings Bank Charitable Foundation and issued 3,586,903 shares of common stock to 15 Beach, MHC, its federally-chartered mutual holding company. Shares of the Company’s common stock began trading on January 13, 2022 on The NASDAQ Stock Market under the trading symbol “CFSB.”

CFSB Bancorp, as the holding company of the Bank, is authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. We currently have no agreements to acquire other financial institutions or financial services companies, although we may determine to do so in the future.

CFSB Bancorp’s cash flows will depend on earnings from the investment of the net offering proceeds and from any dividends it receives from the Bank. The Bank is subject to regulatory limitations on the amount of dividends that it may pay. Initially, CFSB Bancorp will not own or lease any property, but instead will pay the Bank for the use of its premises, furniture and equipment. We intend to employ as officers of CFSB Bancorp only persons who are officers of the Bank. However, we will use the support staff of the Bank from time to time. We will pay the Bank for the time the Bank employees devote to CFSB Bancorp; however, these individuals will not be separately compensated by CFSB Bancorp. CFSB Bancorp may hire additional employees, as appropriate, to the extent it expands its business in the future.

15 Beach, MHC

15 Beach, MHC was formed in January 2022 as a federally-chartered mutual holding company in connection with the reorganization of the Bank into the “two-tier” mutual holding company form of organization. 15 Beach, MHC

 

3


 

will, for as long as it is in existence, own a majority of the outstanding shares of CFSB Bancorp’s common stock. As a mutual holding company, 15 Beach, MHC is a non-stock company.

15 Beach, MHC’s principal assets are the common stock of CFSB Bancorp it received in the reorganization and offering and $100,000 cash in initial capitalization. Presently, it is expected that the only business activity of 15 Beach, MHC is to own a majority of CFSB Bancorp’s common stock. 15 Beach, MHC is authorized to engage in any other business activities that are permissible for mutual holding companies under federal law, including investing in loans and securities. 15 Beach, MHC is subject to comprehensive regulation and examination by the Federal Reserve Board.

Colonial Federal Savings Bank

We conduct our operations from our three full-service banking offices and one limited-service banking office located in Norfolk County. We consider our primary lending market area to be Norfolk and Plymouth Counties; however, we occasionally make loans secured by properties located outside of our primary lending market. Our 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, home equity lines of credit, and consumer loans. Subject to market conditions, we will continue our focus on growing our 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.

At June 30, 2022, we had total assets of $366.2 million, total deposits of $287.1 million and total equity of $74.3 million. We had net income of $442,000 for the year ended June 30, 2022 compared to net income of $1.4 million for the year ended June 30, 2021.

Corporate Information

Our principal executive offices are located at 15 Beach Street Quincy, MA 02170, and our telephone number is (617) 471-0750. Our website address is www.colonialfed.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated by reference into, this Form 10-K.

Available Information

We file annual, quarterly and current reports, proxy statements and other documents with the SEC, under the Exchange Act. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov. Copies of each of our filings with the SEC can also be viewed and downloaded free of charge at our website, www.colonialfed.com, after the reports and amendments are electronically filed with or furnished to the SEC.

Market Area

We conduct our operations from our three full-service banking offices and one limited-service banking office located in Norfolk County, Massachusetts. We consider our primary lending market area to be Norfolk and Plymouth Counties, Massachusetts; however, we occasionally make loans secured by properties located outside of our primary lending market.

Norfolk County is located directly south of the city of Boston, Massachusetts. The county includes 28 eastern Massachusetts communities, all of which are residential suburbs of Boston. Norfolk County is the wealthiest county in the Commonwealth of Massachusetts and is characterized by a high concentration of white-collar professionals who work in the Boston Metropolitan Statistical Area. According to the United States Census Bureau, the total population of Norfolk County was 724,505 as of July 1, 2021. The annual population growth rate within Norfolk County has decreased 0.2% from 2020 to 2021.

According to the United States Census Bureau from 2016 through 2020:

The median household income in Norfolk County was $105,320 compared to a median household income for Massachusetts of $84,385 and $64,994 for the United States;

 

4


 

The median home value was $491,000, compared to $398,800 in Massachusetts and $229,800 for the United States;
Approximately 54.6% of the population of Norfolk County held a bachelor’s degree or higher, compared to 44.5% for Massachusetts and 32.9% for the United States; and
Approximately 5.9% of the population of Norfolk County had incomes below the poverty level, compared to 9.4% for Massachusetts and 11.4% for the United States.

Additionally, according to the U.S. Bureau of Labor Statistics, the unemployment rate at June 2022 was 3.1% for Norfolk County, compared to 3.7% for Massachusetts and 3.5% for the United States.

Competition

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money centers and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.

As of June 30, 2021 (the latest date for which information is available), our market share was 0.78% of total deposits in Norfolk County, Massachusetts, making us the 23rd largest out of 43 banks operating in Norfolk County.

Lending Activities

Our principal lending activity is 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, home equity lines of credit and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to increase our focus on the origination of multi-family and commercial real estate loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our portfolio. We compete by focusing on personalized service for consumers as well as businesses. Due to our structure, we are able to move quickly on customer requests and are able to price competitively compared to our competitors. Our responsiveness has historically enabled us to grow and retain our customer base.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. At June 30, 2022 and 2021, we had no loans held for sale.

 

 

 

At June 30,

 

 

2022

 

 

2021

 

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

141,073

 

 

 

80.76

%

 

$

139,687

 

 

 

79.15

%

 

One- to four- family construction

 

 

375

 

 

 

0.21

%

 

 

-

 

 

 

-

 

 

Multi-family

 

 

14,310

 

 

 

8.19

%

 

 

15,868

 

 

 

8.99

%

 

Second mortgages and home equity lines of credit

 

 

1,970

 

 

 

1.13

%

 

 

2,454

 

 

 

1.39

%

 

Commercial

 

 

14,761

 

 

 

8.45

%

 

 

16,366

 

 

 

9.27

%

 

Consumer

 

 

2,200

 

 

 

1.26

%

 

 

2,111

 

 

 

1.20

%

 

 

 

$

174,689

 

 

 

100.00

%

 

$

176,486

 

 

 

100.00

%

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for losses

 

 

(1,747

)

 

 

 

 

 

(1,722

)

 

 

 

 

Net deferred loan fees

 

 

(349

)

 

 

 

 

 

(331

)

 

 

 

 

Total loans

 

$

172,593

 

 

 

 

 

$

174,433

 

 

 

 

 

 

 

5


 

Contractual Maturities. The following tables set forth the contractual maturities of our loan portfolio at June 30, 2022. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.

 

 

 

One- to Four-
Family
Residential Real
Estate

 

 

One- to Four-
Family
Construction

 

 

Multi-family

 

 

Second
Mortgages and
Home Equity
Lines of Credit

 

 

Commercial
Real Estate

 

 

Consumer

 

 

Total

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1

 

 

$

-

 

 

$

80

 

 

$

81

 

 

 

More than one to five years

 

 

2,155

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

670

 

 

 

783

 

 

 

3,617

 

 

 

More than five to 15 years

 

 

32,473

 

 

 

-

 

 

 

978

 

 

 

1,195

 

 

 

2,808

 

 

 

1,337

 

 

 

38,791

 

 

 

More than 15 years

 

 

106,445

 

 

 

375

 

 

 

13,332

 

 

 

765

 

 

 

11,283

 

 

 

-

 

 

 

132,200

 

 

 

Total

 

$

141,073

 

 

$

375

 

 

$

14,310

 

 

$

1,970

 

 

$

14,761

 

 

$

2,200

 

 

$

174,689

 

 

 

 

Fixed Versus Adjustable-Rate Loans. The following table sets forth our fixed- and adjustable-rate loans at June 30, 2022 that are contractually due after June 30, 2023.

 

 

 

Due After June 30, 2023

 

 

 

 

 

 

 

Fixed

 

 

Adjustable

 

 

Total

 

 

 

(Dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

133,030

 

 

$

8,043

 

 

$

141,073

 

One- to four-family construction

 

 

375

 

 

 

-

 

 

 

375

 

Multi-family

 

 

2,033

 

 

 

12,277

 

 

 

14,310

 

Second mortgages and home equity lines of credit

 

 

1,012

 

 

 

957

 

 

 

1,969

 

Commercial

 

 

2,037

 

 

 

12,724

 

 

 

14,761

 

Consumer

 

 

2,120

 

 

 

-

 

 

 

2,120

 

Total loans

 

$

140,607

 

 

$

34,001

 

 

$

174,608

 

 

One- to Four-Family Residential Real Estate Lending. Our historical primary lending activity has been the origination of one- to four-family, owner-occupied, residential mortgage loans, virtually all of which are secured by properties located in our market area. At June 30, 2022, one- to four-family residential real estate loans totaled $141.1 million, or 80.8% of our total loan portfolio. The average principal loan balance of our one- to four-family residential real estate loans was $241,000 at June 30, 2022.

We currently offer one- to four-family residential real estate loans with terms of up to 30 years. The one- to four-family residential real estate loans that we originate are generally underwritten to Fannie Mae and Freddie Mac guidelines. We currently retain in our portfolio all of the one- to four-family residential real estate loans we originate. We primarily originate fixed-rate one- to four-family residential real estate loans, but, on a much more limited basis, also originate adjustable-rate loans. At June 30, 2022, $133.0 million, or 94.3%, of our one- to four-family residential real estate loans had fixed rates of interest, and $8.0 million, or 5.7%, of our one- to four-family residential real estate loans, had adjustable rates of interest. One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans. We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower.

 

6


 

Our adjustable-rate one- to four-family residential real estate loans carry terms to maturity ranging from 10 to 30 years and generally have fixed rates for initial terms of one, three or five years, and adjust annually thereafter at a margin, which in recent years has been tied to the one-year constant maturity U.S. Treasury rate. The maximum amount by which the interest rate may be increased or decreased is, subject to a contractual floor (which is generally the initial interest rate on the loan), generally 2% annually, with a lifetime interest rate cap of generally 6% over the initial interest rate of the loan.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in market interest rates may be limited.

At June 30, 2022, $18.8 million, or 13.3%, of the one- to four-family residential real estate loan portfolio, was secured by non-owner-occupied properties. We generally originate these loans to individuals to whom we have had a previous borrowing relationship. Generally, we require personal guarantees on these properties if the loan is made to an entity other than individual borrowers. We will not make loans in excess of 80% loan-to-value on non-owner- occupied properties.

Our construction loans are generally one- to four-family residential owner occupied properties where the borrower is improving the property. Construction credit risk is affected by cost overruns and market conditions. At June 30, 2022 $375,000, or 0.3% of our one- to four- family residential real estate loans were construction loans.

We have not offered “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also have not offered loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We have not offered “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income). We also do not originate subprime loans to customers with weakened credit histories.

We require title insurance on all of our one- to four-family residential real estate mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. We do not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified in the appraisal conducted in connection with the origination of the loan.

When underwriting residential real estate loans, we review and verify each loan applicant’s employment, income and credit history and, if applicable, our experience with the borrower. Our policy is to obtain credit reports on all borrowers and guarantors. We also obtain tax returns and financial statements for non-owner-occupied loans. Generally, all properties securing residential real estate loans are appraised by independent appraisers.

Multi-Family and Commercial Real Estate Lending. At June 30, 2022, multi-family real estate loans totaled $14.3 million, or 8.2% of our loan portfolio. Our multi-family real estate loans are generally secured by properties consisting of five or more rental units within our market area. At June 30, 2022, commercial real estate loans totaled $14.8 million, or 8.5% of our loan portfolio. Our commercial real estate loans are generally secured by office buildings, small retail facilities, mixed-use facilities and warehouses within our market area. We currently offer multi-family and commercial real estate loans with terms of up to 30 years. We currently retain in our portfolio all of the multi-family and commercial real estate loans we originate.

We primarily originate adjustable-rate multi-family and commercial real estate loans, but we do, on a much more limited basis, originate fixed-rate loans. At June 30, 2022, $12.3 million, or 86.0%, of multi-family real estate loans had adjustable rates of interest, and $2.0 million, or 14.0%, of our multi-family real estate loans, had fixed rates of interest. At June 30, 2022, $12.8 million, or 86.5%, of commercial real estate loans had adjustable rates of interest, and $2.0 million, or 13.5%, of our commercial real estate loans, had fixed rates of interest. Interest rates on our adjustable-rate multi-family and commercial real estate loans are generally fixed for the first five years and adjust annually thereafter based on the one-year U.S. Treasury constant maturity rate, plus a margin.

 

7


 

At June 30, 2022, the average loan size of our outstanding multi-family real estate loans was $622,000, and our largest multi-family residential real estate loan had an outstanding balance of $1.9 million and is secured by an apartment building located in our primary market area. At June 30, 2022, this loan was performing according to its original terms. At June 30, 2022, the average loan size of our outstanding commercial real estate loans was $476,000, and our largest commercial real estate loan had an outstanding balance of $2.4 million and is secured by three properties related to an ambulance dispatching and maintenance center located in our primary market area. At June 30, 2022, this loan was performing according to its original terms.

We consider a number of factors in originating multi-family and commercial real estate loans. We evaluate the qualifications, income level and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.20x. Multi-family and commercial real estate loans have loan-to-value ratios of up to 80% of the appraised value of the property securing the loans. When underwriting multi-family and commercial real estate loans, we review and verify each loan applicant’s employment, income and credit history. Our policy is to obtain credit reports, financial statements and tax returns on all borrowers and guarantors. Generally, all properties securing real estate loans are appraised by independent appraisers. Generally, we require personal guaranties from the principals on the loans.

Multi-family and commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties. If we foreclose on a multi-family or commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on multi-family and commercial real estate loans can be both unpredictable and substantial.

Second Mortgage Loans and Home Equity Lines of Credit. At June 30, 2022, second mortgage loans and home equity lines of credit totaled $2.0 million, or 1.1% of our loan portfolio. Second mortgage loans and home equity lines of credit are multi-purpose loans used to finance various home or personal needs for which a one- to four-family primary or secondary residence serves as collateral. We generally originate home equity lines of credit on owner-occupied properties with adjustable rates of interest based on the prime interest rate published in The Wall Street Journal, plus a margin. We generally originate home equity lines of credit with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 20 years. We originate second mortgage loans on owner-occupied properties with fixed rates of interest. We generally originate these loans with a maximum loan-to-value ratio of 80% (including the value of the underlying mortgage loan) and with terms of up to 15 years.

The procedures for underwriting these loans include assessing the applicant’s payment history on other indebtedness, the applicant’s ability to meet existing obligations and payments on the proposed loan, and the loan-to-value ratio. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Consumer Lending. We offer a variety of consumer loans to individuals, including home improvement loans, new and used automobile loans. At June 30, 2022, our consumer loan portfolio totaled $2.2 million, or 1.3% of our total loan portfolio, $2.1 million of which were home improvement loans. Home improvement loans are unsecured fixed-rate loans that must be used to improve a one- to four-family residential real estate or multi-family real estate

 

8


 

loan with a maximum amount of $15,000 and a term of five years. Automobile loans are made with a term of five years for vehicles that are two years old or less and up to four years for vehicles that are more than two years old. These loans will be originated with loan-to-value ratios of up to 90% of the value of the vehicle.

Consumer loans generally entail greater risk than one- to four-family residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value. As a result, consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower.

Originations, Sales, Participations and Purchases of Loans

Most of our loan originations are generated by our loan personnel and from referrals from existing customers, real estate brokers, accountants and other professionals. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and pricing levels established by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our loan originations can vary from period to period. We do not sell any of the loans we originate.

From time to time, we may purchase loan participations in which we are not the lead lender. From time to time, we may also purchase whole loans. In both of these situations, we follow our customary loan underwriting and approval policies. At June 30, 2022, the outstanding balances of our loan participations where we are not the lead lender totaled $1.5 million, or 0.8% of our loan portfolio, and consisted of five borrower relationships secured by multi-family and commercial real estate located in Connecticut. All such loans were performing in accordance with their original terms. We did not purchase any whole loans during the years ended June 30, 2022 or June 30, 2021. We also have not participated out portions of loans during the years ended June 30, 2022 or 2021.

Loan Approval Procedures and Authority

Pursuant to federal law, the aggregate amount of loans that Colonial Federal Savings Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Colonial Federal Savings Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At June 30, 2022, based on the 15% limitation, Colonial Federal Savings Bank’s loans-to-one-borrower limit was approximately $9.8 million. On the same date, Colonial Federal Savings Bank had no borrowers with outstanding balances in excess of this amount. At June 30, 2022, our largest loan relationship with one borrower was for $4.9 million and consisted of nine loans secured by multi-family real estate and mixed-use real estate. The loans were performing in accordance with their original terms on that date.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed information submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors or internal evaluations, where permitted by regulations.

The board of directors has granted loan approval authority to a Loan Committee that is comprised of our President and Chief Executive Officer, Treasurer and Chief Operating Officer, Vice President of Retail Lending, Vice President of Financial Markets and Assistant Vice President of Operations. The Loan Committee can approve individual loans up to prescribed limits, depending on the type of loan as follows:

For all real estate loans, the approval of two Loan Committee members is required for loans up to $400,000 and the approval of three Loan Committee members (one of which must be our President and Chief Executive Officer) is required for loans between $400,000 and $750,000. Real estate loans of greater than $750,000 require the approval of three Loan Committee members (one of which must be our President and Chief Executive Officer) and the board of directors.
For consumer loans, the approval of two Loan Committee members is required for loans up to $50,000 and the approval of three Loan Committee members is required for consumer loans greater than $50,000.

 

9


 

Loans that involve policy exceptions also must be approved by the Loan Committee and ratified by the board of directors.

Delinquencies and Non-Performing Assets

Delinquency Procedures. A late notice is sent to a borrower between the 16th and 18th day after a loan is past due. When the loan is 30 days past due, we mail the borrower a letter reminding the borrower of the delinquency and attempt to contact the borrower personally to determine the reason for the delinquency. If necessary, at 45 days past due, additional contact will be made with the borrower, which usually includes an in-person meeting and the account will be monitored on a regular basis thereafter. A property will be inspected between the 30th and 90th day of delinquency. When the loan reaches the 60th day of delinquency, we will send the borrower a letter informing the borrower of their rights and our intent to proceed with further collection efforts, including foreclosure, if the loan default is not cured within 90 days. At the end of the 90-day cure period, a decision will be made whether to begin foreclosure proceedings. Loans are charged off when we believe that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the board of directors each month.

Troubled Debt Restructurings. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months. We had no troubled debt restructurings at June 30, 2022 and 2021.

The CARES Act, in addition to providing financial assistance to both businesses and consumers, created a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The Federal banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board and provisions of the CARES Act, allows modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments on December 31, 2019, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. We worked with our customers affected by COVID-19 and accommodated 26 loan modifications totaling $9.5 million, none of which remained on modified payment status at June 30, 2022.

Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.

 

 

 

At June 30,

 

 

 

2022

 

 

2021

 

 

 

30-59 Days Past Due

 

 

60-89 Days Past Due

 

 

90 Days or More Past Due

 

 

30-59 Days Past Due

 

 

60-89 Days Past Due

 

 

90 Days or More Past Due

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Real estate loans

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Past Due and Non-performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the

 

10


 

underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and is in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans is recognized on a cash basis. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

We had no non-performing loans at June 30, 2022 or 2021.

Real Estate Owned. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal, or evaluation when acceptable, to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense, in either case during the applicable period of such determination. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. We had no real estate owned at June 30, 2022 or 2021.

Non-Performing Assets. There were no non-performing assets at June 30, 2022 or 2021. There was no additional interest income that would have been recorded for the year ended June 30, 2022 or the year ended June 30, 2021 had non-accruing loans been current according to their original terms.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses in the loan portfolio. General allowances represent loss allowances that have been established to cover probable accrued losses associated with lending activities, but that, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation.

 

11


 

Generally, loans 90 days or more past due are placed on non-accrual status and classified “substandard.” Management reviews the status of each impaired loan on our watch list on a quarterly basis.

On the basis of this review of our assets, our classified loans and special mention loans at the dates indicated were as follows:

 

 

At June 30,

 

 

 

2022

 

 

2021

 

 

 

(Dollar in thousands)

 

Substandard

 

$

-

 

 

$

-

 

Doubtful

 

 

-

 

 

 

-

 

Loss

 

 

-

 

 

 

-

 

Total classified

 

$

-

 

 

$

-

 

Special mention assets

 

$

-

 

 

$

2,024

 

 

 

 

 

 

 

 

The $2.0 million of special mention assets at June 30, 2021 consisted of one commercial real estate loan to a single borrower. This loan was removed from special mention assets as the borrower has shown improvement in his financial condition.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

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 the 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

 

12


 

losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

We will continue to monitor and modify our allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

As an integral part of their examination process, the Office of the Comptroller of the Currency 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 the process for 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.

Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.

 

 

At or For the Years Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(Dollars in thousands)

 

Allowance for loan losses at beginning of year

 

$

1,722

 

 

$

1,662

 

Provision for loan losses

 

 

26

 

 

 

60

 

Charge-offs:

 

 

 

 

 

 

Consumer

 

 

(1

)

 

 

-

 

Total charge-offs

 

 

(1

)

 

 

-

 

Allowance at end of year

 

$

1,747

 

 

$

1,722

 

Allowance to non-performing loans

 

NM

 

 

NM

 

Allowance to total loans outstanding at the end of the year

 

 

1.00

%

 

 

0.98

%

Net (charge-offs) recoveries to average loans outstanding during the year

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

13


 

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

 

 

At June 30,

 

 

 

2022

 

 

2021

 

 

 

Allowance
for Loan
Losses

 

 

Percent of
Allowance
in Each
Category to
Total
Allowance

 

 

Percent of Loans in
Each
Category to
Total Loans

 

 

Allowance
for Loan
Losses

 

 

Percent of
Allowance
in Each
Category to
Total
Allowance

 

 

Percent of Loans in
Each
Category to
Total Loans

 

 

 

(Dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

986

 

 

 

56.44

%

 

 

64.07

%

 

$

995

 

 

 

57.78

%

 

 

62.23

%

One- to four- family construction

 

 

3

 

 

 

0.17

%

 

 

0.19

%

 

 

-

 

 

 

-

 

 

 

-

 

Multi-family

 

 

215

 

 

 

12.31

%

 

 

13.97

%

 

 

240

 

 

 

13.94

%

 

 

15.01

%

Second mortgages and home equity lines of credit

 

 

22

 

 

 

1.26

%

 

 

1.43

%

 

 

27

 

 

 

1.57

%

 

 

1.69

%

Commercial

 

 

252

 

 

 

14.42

%

 

 

16.37

%

 

 

279

 

 

 

16.20

%

 

 

17.45

%

Consumer

 

 

61

 

 

 

3.49

%

 

 

3.96

%

 

 

58

 

 

 

3.37

%

 

 

3.63

%

Total allocated allowance

 

 

1,539

 

 

 

88.09

%

 

 

100.00

%

 

 

1,599

 

 

 

92.86

%

 

 

100.00

%

Unallocated

 

 

208

 

 

 

11.91

%

 

 

 

 

 

123

 

 

 

7.14

%

 

 

 

Total

 

$

1,747

 

 

 

100.00

%

 

 

 

 

$

1,722

 

 

 

100.00

%

 

 

 

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. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Investment Activities

General. The board of directors is responsible for approving and overseeing the investment policy, which is reviewed at least annually by the board. The objectives of our investment policy are: (1) to provide liquidity necessary to meet short- and long-term business needs in accordance with our liquidity policy; (2) maintain a balance of high-quality, diversified investments to minimize risk; (3) provide collateral for pledging requirements; (4) generate a reasonable rate of return within the context of our liquidity and credit risk objectives; and (5) help mitigate interest rate risk. The board has delegated to our President and Chief Executive Officer the primary responsibility for oversight and implementation of daily investment activities. The President and Chief Executive Officer has appointed investment officers to assist in overseeing our investing activities and strategies. The authorized officers are our President and Chief Executive Officer, Treasurer and Chief Operating Officer, and Vice President of Financial Markets. Investment officers may purchase or sell on our behalf up to $2.0 million of individual securities and up to $10.0 million in the aggregate per calendar month. Amounts that exceed those thresholds require the approval of the board of directors. The board of directors reviews the activities of the investment officers at each of its meetings.

Our current investment policy authorizes us to invest in various types of investment grade investment securities and liquid assets, including U.S. Treasury obligations (up to 55% of our total investment portfolio), securities of various government-sponsored enterprises (up to 55% of our total investment portfolio), corporate debt (up to 55% of our total investment portfolio), mortgage-backed securities (up to 75% of our total investment portfolio), collateralized mortgage obligations (up to 45% of our total investment portfolio), asset-backed securities (up to 10% of our total investment portfolio), municipal obligations (up to 55% of our total investment portfolio), mutual funds (up to 10% of our total investment portfolio) and certificates of deposit of federally insured institutions (up to 10% of our total investment portfolio). We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk mortgage derivative products, corporate junk bonds, or certain types of structured notes.

 

14


 

Generally accepted accounting principles require that, at the time of purchase, we designate a debt security as held to maturity, available for sale, or trading, depending on our ability and intent to hold such security. Debt securities designated as available for sale are reported at fair value, while debt securities designated as held to maturity are reported at amortized cost.

At June 30, 2022, our investment portfolio totaled $145.4 million, which consisted of debt obligations, mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored enterprises as well as corporate and municipal bonds. At such date, $145.2 million was designated as held to maturity and $.2 million was designated as available for sale. At June 30, 2022, we also owned $191,000 of Federal Home Loan Bank of Boston stock. As a member of Federal Home Loan Bank of Boston, we are required to purchase stock in the Federal Home Loan Bank of Boston, which is carried at cost and classified as a restricted investment.

The following table sets forth the weighted average yield for each range of contractual maturities of the held to maturity securities portfolio at June 30, 2022. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields in the table below have been calculated based on the amortized cost of the security.

 

 

 

Mortgage-backed securities

 

 

Collateralized mortgage obligations

 

 

Corporate bonds

 

 

Municipal bonds

 

 

 

Weighted Average Yield

 

Within 1 year

 

 

1.63

%

 

 

2.44

%

 

 

2.03

%

 

 

2.78

%

Over 1 year through 5 years

 

 

2.95

%

 

 

2.20

%

 

 

2.87

%

 

 

2.86

%

Over 5 years through 10 years

 

 

1.82

%

 

 

-

 

 

 

2.25

%

 

 

2.93

%

Over 10 years

 

 

2.78

%

 

 

-

 

 

 

2.44

%

 

 

2.16

%

Total

 

 

2.25

%

 

 

2.27

%

 

 

2.44

%

 

 

2.51

%

For additional information regarding our investment securities portfolio, see Note 3 to the notes to our consolidated financial statements.

Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Boston advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, loan prepayments, maturities, pre-payments and calls of securities, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including non-interest-bearing checking accounts, interest-bearing checking accounts, money market accounts, savings accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. At June 30, 2022, our core deposits, which are deposits other than certificates of deposit, were $186.9 million, representing 65.1% of total deposits. As part of our business strategy, we intend to continue our effort to increase our core deposits while allowing higher-cost certificates of deposit to run off upon maturity.

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates.

 

15


 

The following table sets forth the distribution of total deposits by account type at the dates indicated.

 

 

 

At June 30,

 

 

 

2022

 

 

2021

 

 

 

Amount

 

 

Percent

 

 

Average Rate

 

 

Amount

 

 

Percent

 

 

Average Rate

 

 

 

(Dollars in thousands)

 

Non-interest bearing demand deposits

 

$

31,168

 

 

 

10.86

%

 

 

-

 

 

$

31,486

 

 

 

11.06

%

 

 

-

 

Interest-bearing demand deposits

 

 

32,995

 

 

 

11.49

%

 

 

0.05

%

 

 

31,299

 

 

 

10.99

%

 

 

0.05

%

Savings deposits

 

 

75,774

 

 

 

26.40

%

 

 

0.10

%

 

 

68,998

 

 

 

24.24

%

 

 

0.10

%

Money market deposits

 

 

47,010

 

 

 

16.38

%

 

 

0.27

%

 

 

41,319

 

 

 

14.51

%

 

 

0.26

%

Certificates of deposits

 

 

100,128

 

 

 

34.88

%

 

 

0.73

%

 

 

111,572

 

 

 

39.19

%

 

 

1.93

%

Total

 

$

287,075

 

 

 

100.00

%

 

 

0.33

%

 

$

284,674

 

 

 

100.00

%

 

 

0.98

%

 

At June 30, 2022 and 2021, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance) was $75.4 million and $64.4 million, respectively. In addition, as of June 30, 2022, the aggregate amount of all our uninsured certificates of deposit was $24.6 million. We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth the maturity of the uninsured certificates of deposit as of June 30, 2022.

 

 

 

At June 30, 2022

 

 

 

(Dollars in thousands)

 

Maturity Period:

 

 

 

Three months or less

 

$

7,160

 

Over three through six months

 

 

3,679

 

Over six through twelve months

 

 

8,153

 

Over twelve months

 

 

5,616

 

Total

 

$

24,608

 

Borrowed Funds. We may obtain advances from the Federal Home Loan Bank of Boston upon the security of our capital stock in the Federal Home Loan Bank of Boston and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. We use such advances to provide short-term funding as a supplement to our deposits. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. At June 30, 2022, we had no advances from the Federal Home Loan Bank of Boston. At June 30, 2022, we had the capacity to borrow $70.7 million in Federal Home Loan Bank of Boston advances.

Additionally, at June 30, 2022 we had a $2.4 million available line of credit with the Federal Home Loan Bank of Boston, none of which was drawn at June 30, 2022.

Human Capital Resources

Employees

As of June 30, 2022, we had 28 full-time employees. None of our employees are represented by a labor union or covered by collective bargaining agreements, and we believe our relationship with our employees is good.

Diversity and Inclusion

We are committed to creating and maintaining a workplace free from discrimination or harassment on the basis of color, race, sex, national origin, ethnicity, religion, age, disability, sexual orientation, gender identification or expression or any other status protected by applicable law. Our management team and employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a

 

16


 

code of conduct that sets standards for appropriate behavior and are required to attend annual training to help prevent, identify, report and stop any type of discrimination and harassment. Recruitment, hiring, development, training, compensation and advancement at our company are based on qualifications, performance, skills and experience without regard to gender, race and ethnicity.

Competitive Pay and Benefits

We strive to provide pay, comprehensive benefits and services that help meet the varying needs of our employees. Our total rewards package includes competitive pay, comprehensive healthcare benefits package for employees, family medical leave and flexible work schedules. We sponsor a 401(k) plan and we match employee contributions up to a certain limit. In addition, nearly all of our employees are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns stockholder interests by providing stock ownership on a tax-deferred basis at no cost to the employee.

Employee Development and Training

We focus on attracting, retaining, and cultivating talented individuals. We emphasize employee development and training by providing access to a wide range of online and instructor led development and continual learning programs. Employees are encouraged to attend meetings and conferences and have access to broad resources they need to be successful.

Safety

The safety, health and wellness of our employees is a top priority. In response to COVID-19, we maintain safety protocols including, recommending the wearing of masks and social distancing, increased cleaning procedures and readily available hand sanitizer. These protocols take into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

Supervision and Regulation

General

As a federal savings bank, Colonial Federal Savings Bank is subject to examination, supervision and regulation, primarily by the Office of the Comptroller of the Currency, and, secondarily, by the FDIC as deposit insurer. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Colonial Federal Savings Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund and not for the protection of security holders. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies. That includes with respect to the classification of assets and the establishment of loan loss reserves for regulatory purposes. In addition, Colonial Federal Savings Bank is a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the 11 regional banks in the Federal Home Loan Bank System.

Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; provide oversight for the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings, interest rate sensitivity and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.

 

17


 

As a savings and loan holding company, CFSB Bancorp is required to comply with the rules and regulations of the Federal Reserve Board. It is subject to examination and supervision by, and be required to file certain reports with, the Federal Reserve Board. CFSB Bancorp is also subject to the rules and regulations of the SEC under the federal securities laws.

Any change in applicable laws or regulations, whether by the Office of the Comptroller of the Currency, the FDIC, the Federal Reserve Board, the SEC or Congress, could have a material adverse impact on the operations and financial performance of CFSB Bancorp and Colonial Federal Savings Bank.

Set forth below are certain material regulatory requirements that are applicable to CFSB Bancorp and Colonial Federal Savings Bank. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on CFSB Bancorp and Colonial Federal Savings Bank. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on CFSB Bancorp, Colonial Federal Savings Bank and their operations.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Colonial Federal Savings Bank may generally invest in mortgage loans secured by residential and commercial real estate, commercial and industrial and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Colonial Federal Savings Bank may also establish, subject to specified investment limits, “operating subsidiaries” that may engage in certain activities not otherwise permissible for Colonial Federal Savings Bank, including real estate investment and securities and insurance brokerage.

The Office of the Comptroller of the Currency issued a final rule in 2019 implementing a section of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) that permits an eligible federal savings bank with assets of $20.0 billion or less as of December 31, 2017 to elect to operate with the business powers of a national bank, generally subject to the same limitations and restrictions, without converting to a national bank charter. A federal savings bank that makes the so-called “covered savings association” election must divest any activities or investments that are not permitted for a national bank. Colonial Federal Savings Bank had not made such an election as of June 30, 2022.

Capital Requirements. Federal regulations require federally-insured depository institutions, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0% and a Tier 1 capital to total assets leverage ratio of 4.0%.

In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.

 

18


 

EGRRCPA required the federal banking agencies, including the Office of the Comptroller of the Currency, to establish a “community bank leverage ratio” of between 8% and 10% for institutions with assets of less than $10 billion. Institutions with a capital level at or exceeding the ratio and otherwise meeting the specified requirements, and electing the alternative framework, are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. Final rules issued by the agencies established the community bank leverage ratio at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to regain compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable regulatory capital requirements.

The CARES Act lowered the community bank leverage ratio to 8%, with a federal regulation making the reduced ratio effective April 23, 2020. Another regulation was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter. The Company did not opt into the community bank leverage ratio framework.

At June 30, 2022, Colonial Federal Savings Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if secured by readily marketable collateral, which generally includes certain financial instruments (but not real estate). As of June 30, 2022, Colonial Federal Savings Bank was in compliance with the loans-to-one borrower limitations.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% and a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% and a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on the payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after

 

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notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more additional restrictions, including a regulatory order to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, ceasing receipt of deposits from correspondent banks, dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well-capitalized” for purposes of prompt corrective action.

At June 30, 2022, Colonial Federal Savings Bank met the criteria for being considered “well capitalized.”

Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application with the Office of the Comptroller of the Currency for approv