Business Overview and History

CFSB Bancorp, Inc. (CFSB) is a community bank holding company that has served the financial needs of its local markets in Massachusetts for over a century. With a focus on personalized service and deep community ties, CFSB has weathered economic cycles and industry changes, positioning itself as a reliable partner for its customers. As the banking landscape evolves, CFSB continues to adapt, leveraging its strengths to navigate the challenges and capitalize on emerging opportunities.

CFSB Bancorp, Inc. was originally founded in 1879 as Colonial Federal Savings Bank, a federally chartered mutual savings bank. For over 140 years, the bank has served the community of Quincy, Massachusetts and the surrounding Norfolk and Plymouth counties. The bank has demonstrated remarkable resilience throughout its long history, successfully navigating through various economic challenges, including the Great Depression and the Great Recession.

In 2022, the bank underwent a significant reorganization, converting from a mutual savings bank to a two-tier mutual holding company structure. As part of this reorganization, the bank offered 43% of its common stock to the public in an initial public offering, raising $28 million. The remaining 57% of the common stock is held by the newly formed mutual holding company.

The company's primary operating subsidiary is Colonial Federal Savings Bank, which operates three full-service banking offices and one limited-service banking office, all located within Norfolk County, Massachusetts. The bank's core business activities have traditionally focused on residential mortgage lending, supplemented by commercial real estate, consumer, and other lending. Over the years, the bank has grown its deposit base and expanded its branch network in its local market area.

As of June 30, 2024, CFSB Bancorp reported total assets of $363.44 million, total deposits of $270.84 million, and total stockholders' equity of $76.05 million. The company's net income for the fiscal year ended June 30, 2024 was $33,000, or $0.01 per basic and diluted share, compared to net income of $1.45 million, or $0.23 per basic and diluted share, for the fiscal year ended June 30, 2023.

Financial Performance and Ratios

CFSB Bancorp's financial performance has been mixed in recent years, with the company reporting net losses in several quarters. For the six months ended December 31, 2024, the company reported a net loss of $168,000, or $0.03 per basic and diluted share, compared to a net loss of $87,000, or $0.01 per basic and diluted share, for the six months ended December 31, 2023.

The company's net interest margin has been under pressure, declining from 2.12% for the six months ended December 31, 2023 to 1.95% for the six months ended December 31, 2024, as the increase in the company's cost of funds has outpaced the increase in yields on interest-earning assets. The company's efficiency ratio, a measure of non-interest expense as a percentage of net interest income plus non-interest income, has also been elevated, rising from 42.8% for the fiscal year ended June 30, 2023 to 52.3% for the fiscal year ended June 30, 2024.

Financials

Despite the recent financial challenges, CFSB Bancorp remains well-capitalized, with a total risk-based capital ratio of 34.40% and a Tier 1 leverage ratio of 17.70% as of December 31, 2024, well above regulatory minimums. The company's liquidity position also remains strong, with cash and cash equivalents totaling $28.83 million, or 7.9% of total assets, as of December 31, 2024.

For the most recent quarter, CFSB reported revenue of $3.26 million and a net loss of $162,000. Year-over-year, revenue increased due to growth in the core deposit portfolio and wider net interest margins. However, net income decreased due to higher interest expense and provision for credit losses.

Liquidity

CFSB Bancorp's liquidity position remains robust, with ample cash and cash equivalents to meet its operational needs and regulatory requirements. The company's strong liquidity position provides flexibility in managing its balance sheet and responding to changing market conditions.

As of December 31, 2024, CFSB had cash and cash equivalents of $28.83 million. The company also had available credit lines of $2.35 million with the Federal Home Loan Bank of Boston and $26.40 million with the Federal Reserve Bank of Boston, neither of which were drawn upon at that date. The company's debt-to-equity ratio stood at 0.15, indicating a conservative capital structure.

Product Segments and Offerings

CFSB Bancorp operates primarily through its subsidiary, Colonial Federal Savings Bank, offering a range of banking products and services to individuals and businesses in its local market area. The company's key product segments include:

Loans: CFSB's loan portfolio is comprised primarily of mortgage loans on real estate, including residential 1-4 family, multifamily, second mortgages and home equity lines of credit, as well as commercial real estate loans. As of December 31, 2024, the company's total loans stood at $168.94 million, down from $172.38 million at June 30, 2024. This decrease was driven by reductions in 1-4 family residential, multifamily, and commercial real estate loans, partially offset by an increase in second mortgages and home equity lines of credit. The allowance for credit losses on loans was $1.41 million, or 0.83% of total loans, at December 31, 2024, down from $1.55 million, or 0.90% of total loans, at June 30, 2024, primarily due to improved economic forecasted conditions and lower loan balances.

Securities: CFSB's securities portfolio consists of both available-for-sale and held-to-maturity securities. As of December 31, 2024, the available-for-sale portfolio totaled $103,000, down from $113,000 at June 30, 2024, while the held-to-maturity portfolio stood at $147.92 million, up from $146.99 million. The held-to-maturity portfolio is primarily composed of government-sponsored enterprise (GSE) mortgage-backed securities, as well as municipal bonds and corporate bonds. The company recorded a $30,000 reversal of credit losses on the held-to-maturity securities during the six months ended December 31, 2024.

Deposits: Deposits are a key funding source for the bank, totaling $270.36 million at December 31, 2024, down slightly from $270.84 million at June 30, 2024. The deposit portfolio consists of non-interest-bearing demand deposits, interest-bearing demand deposits, savings deposits, and certificates of deposit. During the period, the company saw a decrease in non-interest-bearing and savings deposits, offset by an increase in certificates of deposit as customers sought higher-yielding deposit products.

Navigating Changing Dynamics

CFSB Bancorp's performance has been impacted by the evolving banking landscape, including the rising interest rate environment, increased competition from larger regional and national banks, and shifting customer preferences. The company has responded by implementing various strategies to maintain its competitive edge and support profitability.

One key initiative has been the bank's focus on deposit gathering, particularly in higher-yielding certificate of deposit accounts. As of December 31, 2024, certificates of deposit represented 51.5% of the bank's total deposits, up from 48.9% a year earlier, as the bank has actively promoted these products to capture customer demand for higher yields. However, this shift in the deposit mix has also contributed to the compression in the company's net interest margin.

Additionally, CFSB Bancorp has been actively managing its loan portfolio, emphasizing residential mortgage lending while reducing its exposure to commercial real estate and other loan segments. As of December 31, 2024, residential mortgage loans comprised 80.7% of the bank's total loan portfolio, compared to 76.2% a year earlier. This strategic shift has helped mitigate credit risk and supported the overall asset quality of the loan book, with the company reporting a non-performing asset ratio of just 0.95% as of December 31, 2024.

The company has also been focused on enhancing its operational efficiency, investing in technology and process improvements to streamline workflows and reduce costs. These initiatives have helped offset some of the pressure on the company's profitability, with the efficiency ratio improving from 52.3% for the fiscal year ended June 30, 2024 to 51.6% for the six months ended December 31, 2024.

Risks and Challenges

As CFSB Bancorp navigates the evolving banking landscape, the company faces several risks and challenges that could impact its future performance:

1. Interest Rate Risk: The company's net interest margin and profitability are vulnerable to rising interest rates, as the cost of deposits and borrowings may increase at a faster pace than the yields on the company's interest-earning assets.

2. Competitive Pressure: CFSB Bancorp operates in a highly competitive environment, competing with larger regional and national banks, as well as non-bank financial institutions, for deposits and loans. This competitive landscape could pressure the company's pricing and margins.

3. Credit Risk: Although the company's asset quality has remained strong, a deterioration in economic conditions or a downturn in the real estate market could lead to increased delinquencies and loan losses, negatively impacting the company's financial performance.

4. Regulatory Compliance: As a regulated financial institution, CFSB Bancorp must comply with a complex and evolving regulatory environment, which could result in increased compliance costs and operational challenges.

5. Technological Disruption: The banking industry is undergoing a digital transformation, with customers increasingly expecting seamless digital experiences. CFSB Bancorp's ability to adapt and invest in technology will be critical to maintaining its competitiveness.

Geographic Markets and Industry Trends

CFSB operates primarily in the United States, specifically in the state of Massachusetts. The company does not have significant operations or sales outside of the US. As a community bank, CFSB's focus remains on serving its local market area, leveraging its deep understanding of the region's economic dynamics and customer needs.

Outlook and Conclusion

CFSB Bancorp's performance in recent quarters has been challenged by the evolving banking landscape, with pressure on the company's net interest margin and profitability. However, the company's strong capital position, liquidity, and focus on operational efficiency provide a solid foundation for navigating these challenges.

Looking ahead, CFSB Bancorp's success will depend on its ability to adapt its strategies, products, and services to meet the changing needs of its customers, while also maintaining discipline in its risk management and cost control efforts. The company's deep community ties, personalized service, and commitment to its local markets could be key competitive advantages in an increasingly competitive industry.

As CFSB Bancorp continues to evolve and adapt, investors will closely monitor the company's ability to drive sustainable profitability, maintain asset quality, and position itself for long-term growth and success in the rapidly changing banking landscape. The company's focus on traditional community banking activities, with a concentration in mortgage lending and investment in securities, primarily government-backed or investment-grade debt, provides a stable foundation for future growth. However, the ability to navigate the challenges posed by rising interest rates, increased competition, and evolving customer preferences will be crucial in determining CFSB's long-term success in the banking industry.