Executive Summary / Key Takeaways

• Imminent Acquisition Provides Clear Shareholder Value: CFSB Bancorp, Inc. is set to be acquired by Hometown Financial Group, Inc. for $14.25 per share in cash, a transaction unanimously approved by both boards and CFSB shareholders, expected to close in the fourth quarter of 2025. This offers a definitive cash exit and a premium over recent trading prices for shareholders.
• Community Banking Model with Local Focus: Colonial Federal Savings Bank, CFSB's subsidiary, has historically served individuals and small businesses in Norfolk and Plymouth Counties, Massachusetts, emphasizing personalized service and local relationships as its core competitive advantage.
• Recent Financial Performance Reflects Market Pressures and Merger Costs: For the fiscal year ended June 30, 2025, CFSB reported a net loss of $265,000, a decline from the prior year's net income. This was primarily due to increased provision for credit losses and merger-related non-interest expenses, partially offset by a modest increase in net interest income and margin.
• Strategic Shift in Lending and Funding Dynamics: The company has been strategically growing its loan portfolio, particularly in multi-family and commercial real estate, while facing intense competition for deposits, leading to a shift towards higher-rate term certificates.
• Operational Resilience Through Technology and Risk Management: CFSB leverages standard banking technologies for e-banking and maintains a robust, multi-layered cybersecurity strategy, including third-party audits and employee training, to ensure operational continuity and data protection in an evolving digital threat landscape.

A Legacy of Local Service Culminates in Strategic Consolidation

CFSB Bancorp, Inc. (NASDAQ:CFSB) has long been a fixture in the Massachusetts banking landscape through its subsidiary, Colonial Federal Savings Bank, founded in 1889 in Quincy. The institution has built its business on a traditional community banking model, primarily gathering deposits from the public and deploying these funds into a diversified loan portfolio, with a strong emphasis on real estate lending within its core market areas of Norfolk and Plymouth Counties. This localized approach, characterized by personalized service and deep community ties, has been a foundational strength, fostering customer loyalty and enabling competitive pricing.

A pivotal moment in CFSB's recent history occurred in January 2022, when the Bank reorganized into a two-tier mutual holding company structure. This transformation led to the formation of CFSB Bancorp, Inc. as the stock holding company, with 15 Beach, MHC as its mutual holding company parent. The subsequent stock offering generated $28 million in gross proceeds, providing capital for strategic initiatives and marking its entry onto the Nasdaq Stock Market.

The broader banking industry is currently experiencing significant shifts, driven by evolving customer expectations for digital services, a dynamic interest rate environment, and ongoing consolidation. Regional banks like CFSB operate within a highly competitive landscape, contending with larger money centers, other community banks, credit unions, and increasingly, fintech companies offering specialized digital solutions. This environment necessitates a delicate balance between maintaining traditional relationship-based banking and adopting modern technological capabilities to remain relevant and efficient.

Operational Backbone: Technology and Cybersecurity

While CFSB Bancorp does not highlight proprietary, differentiated technology in its core banking products, it strategically leverages standard banking technologies to enhance operational efficiency and customer experience. The company offers online banking services, a fundamental offering in today's financial landscape, which supports its goal of meeting evolving customer needs.

A critical aspect of CFSB's operational resilience is its robust cybersecurity framework. The company has implemented a multi-layered "defense-in-depth" cybersecurity strategy, integrating people, technology, and processes. This includes comprehensive employee training, the deployment of innovative technologies, and adherence to stringent policies across information security, data governance, business continuity, disaster recovery, privacy, third-party risk management, and incident response.

CFSB's commitment to cybersecurity is further evidenced by its engagement of third-party consultants and independent auditors to conduct penetration tests and audits. The Board of Directors receives monthly threat intelligence reports and a Cybersecurity Executive Dashboard, with the Chief Information Officer (ISO) providing direct oversight. This structured approach to cybersecurity is not merely a compliance exercise but a foundational element that protects sensitive customer and company information, mitigates operational risks, and underpins trust in its digital services. While not a revenue driver in itself, this strong security posture is essential for maintaining customer confidence and operational continuity in an era of escalating cyber threats.

Financial Performance and Strategic Evolution

CFSB Bancorp's financial results for the fiscal year ended June 30, 2025, reflect a period of transition and external pressures. The company reported a net loss of $265,000, a notable shift from the net income of $33,000 recorded in the prior fiscal year. This decline was primarily driven by an increase in the provision for credit losses and higher non-interest expenses, partially offset by an improvement in net interest income.

The provision for credit losses saw a significant increase of $368,000, including a $55,000 provision for credit losses on investments. This was primarily attributed to a change in Moody's baseline economic forecast for June 2025, which indicated an increased probability of default for most corporate bonds, necessitating a higher reserve. Conversely, the company recorded reversals for credit losses on off-balance sheet exposures and loans, totaling $3,000 and $6,000 respectively. These reversals were due to a decrease in unfunded commitments for multi-family and residential first-lien real estate loans, coupled with strong asset quality, improving economic factors, and reduced loan balances.

Non-interest expenses rose by $207,000, or 2.70%, to $7.90 million for the year ended June 30, 2025. This increase was largely due to $366,000 in merger-related costs, along with higher data processing fees and deposit insurance premiums. These increases were partially mitigated by a $197,000 decrease in salaries and employee benefits, resulting from a reduced headcount.

Despite the net loss, CFSB demonstrated resilience in its core banking operations. Net interest income increased by $274,000, or 4.10%, reaching $7.0 million for the year ended June 30, 2025. This improvement was a result of a $10.30 million increase in the average balance of interest-earning assets and a 30 basis point increase in the average rate earned on these assets. However, this was partially offset by an increase in the average balance and cost of certificates of deposit, as customers sought higher interest rates. The net interest margin also saw a slight increase to 2.04% for the year ended June 30, 2025, from 2.03% in the prior year.

The loan portfolio expanded by 4%, with net loans increasing by $6.80 million to $177.20 million at June 30, 2025. This growth was primarily driven by increases in one-to-four-family residential real estate loans (up 3.10%), multi-family real estate loans (up 35.60%), and second mortgages and home equity lines of credit (up 24.40%). This growth aligns with management's strategy to diversify the loan portfolio and enhance overall yield, particularly through an increased focus on multi-family and commercial real estate lending.

In terms of funding, deposits increased by 1.2% to $274.20 million. However, the composition shifted, with core deposits (non-certificate accounts) representing 48.8% of total deposits, while higher-cost term certificates grew by $8.10 million, or 6.10%, to comprise 51.2% of total deposits. This trend reflects the intense competition for deposits in the market. The Bank maintained a strong liquidity position, with $10.40 million in Federal Home Loan Bank (FHLB) advances outstanding and an additional borrowing capacity of $53 million, ensuring sufficient funds to meet commitments.

Competitive Landscape and Strategic Positioning

CFSB operates in a highly competitive banking environment within its primary market area of Norfolk and Plymouth Counties, Massachusetts. This region is characterized by a high concentration of financial institutions, including large money centers, regional banks, community banks, and credit unions. As of June 30, 2024, CFSB held a modest 0.80% market share of total deposits in Norfolk County, ranking 22nd out of 39 banks.

The competitive landscape presents both challenges and opportunities. Larger competitors often possess substantially greater resources, higher lending limits, and offer a broader range of services, such as trust services and private banking, which CFSB currently does not provide. CFSB's smaller asset size can make it more challenging to invest in marketing and advanced technologies at the same scale as its larger rivals, potentially limiting its ability to offer new products as quickly or attract a broader customer base.

However, CFSB has carved out a niche by emphasizing personalized service for both consumers and businesses. Its community-focused approach allows for quicker responses to customer requests and competitive pricing, which has historically been instrumental in growing and retaining its customer base. This relationship-driven model is a key differentiator against larger, more impersonal institutions.

Comparing CFSB to its peers, such as Brookline Bancorp (BRKL), Cambridge Bancorp (CATC), and Hingham Institution for Savings (HIFS), reveals a common theme among community banks. While CFSB excels in local customer relationships, it generally lags in scalability and the breadth of specialized services offered by some larger regional players. For instance, Brookline Bancorp's wider geographic footprint and Cambridge Bancorp's expertise in wealth management represent areas where CFSB's more traditional model faces limitations. M&T Bank (MTB), a larger regional player with an acquisition-driven growth strategy, further underscores the scale disadvantage CFSB faces in terms of resources and technological capabilities.

The increasing adoption of digital banking services and the rise of fintech companies also pose an indirect competitive threat. Online banks and fintech platforms can attract customers with convenient, often lower-cost digital solutions, potentially eroding CFSB's deposit base and loan volumes if its digital offerings do not keep pace. CFSB's operational resilience, supported by its cybersecurity investments, is crucial in this evolving digital environment, but its ability to innovate at the speed of dedicated tech players remains a challenge.

The Definitive Outlook: A Merger of Strengths

The overarching strategic initiative for CFSB Bancorp is its impending merger with Hometown Financial Group, Inc. On May 20, 2025, the companies announced a definitive merger agreement, which received approval from CFSB shareholders on September 16, 2025. Under the terms of this agreement, CFSB Bancorp shareholders will receive $14.25 in cash for each share of common stock. The transaction, valued at approximately $44 million, is anticipated to close in the fourth quarter of 2025, subject to regulatory approvals.

This merger represents a strategic decision to join a larger, more diversified financial institution. Upon completion, Colonial Federal Savings Bank will merge into North Shore Bank, a wholly-owned subsidiary of Hometown Financial. This consolidation will significantly boost Hometown Financial's presence in eastern Massachusetts, creating a $3.3 billion bank with 29 retail locations and elevating Hometown's consolidated assets to nearly $6.9 billion across 56 branches in Massachusetts, southern New Hampshire, and northeastern Connecticut.

Michael E. McFarland, President and CEO of Colonial Federal Savings Bank, noted that this transaction partners two outstanding banking organizations and ensures long-term success. He highlighted that Colonial Federal customers would benefit from enhanced products and services, innovative digital banking tools, and an expanded branch network.

In anticipation of this merger, CFSB's board of directors approved resolutions to freeze its Employee Stock Ownership Plan (ESOP), Pentegra Defined Benefit Plan, and 401k Plan as of October 31, 2025. These actions are indicative of the strategic realignment occurring as the company prepares for integration into Hometown Financial Group.

Risks and Considerations for Investors

While the merger offers a clear exit strategy for current shareholders, several risks were associated with the process. Business uncertainties and contractual restrictions during the pendency of the merger could have impacted CFSB Bancorp's ability to attract and retain key personnel and could have led customers to seek alternative banking relationships. The merger agreement also restricted CFSB from pursuing other attractive business opportunities prior to its completion.

Furthermore, the company incurred significant, non-recurring costs related to negotiating the merger agreement and closing the transaction, including legal and financial advisory fees. A $1.60 million termination fee was also stipulated, payable to Hometown Financial under certain circumstances if the merger were not completed.

Prior to the merger announcement, CFSB faced inherent risks common to community banks. Its high concentration of loans secured by real estate, with approximately 98.9% of its total loan portfolio at June 30, 2025, made it particularly vulnerable to downturns in the local real estate market. Such declines could have impaired collateral values and necessitated increased allowances for credit losses, directly impacting earnings.

Interest rate risk also posed a significant challenge. With assets generally having longer maturities than liabilities, CFSB was exposed to earnings volatility from changes in market interest rates. An instantaneous 100 basis point increase in interest rates was estimated to result in a 10.30% decrease in Economic Value of Equity (EVE) and a 7.10% decrease in net interest income as of June 30, 2025. Conversely, a 200 basis point decrease in interest rates was projected to increase EVE by 13.90%.

The company's reliance on technology also presented operational risks, including potential failures, interruptions, or security breaches of its information technology systems. The evolving nature of cyber threats meant that proactive measures might not always be sufficient.

Conclusion

CFSB Bancorp, Inc. has reached a definitive inflection point in its long history as a community bank. Its journey, marked by a commitment to personalized service and strategic growth in its local Massachusetts markets, has culminated in a strategic merger with Hometown Financial Group, Inc. This acquisition, approved by shareholders and expected to close in the fourth quarter of 2025, provides a clear and immediate cash return of $14.25 per share to CFSB shareholders.

While CFSB demonstrated resilience in its core banking operations, achieving a modest increase in net interest income and margin in fiscal year 2025, the net loss for the period underscored the pressures from rising credit loss provisions and merger-related expenses. The decision to merge reflects the broader trend of consolidation in the regional banking sector, where smaller institutions seek to gain scale, enhance product offerings, and leverage greater resources to compete effectively. For investors, the investment thesis for CFSB has transitioned from evaluating its standalone growth prospects and operational efficiency to the certainty of a cash payout, marking the successful conclusion of its independent public market tenure.