CFSB BANCORP, INC. This discussion and analysis reflects our unaudited consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements, which appear beginning on page F-1 of Annual Report on Form 10-K.
Overview
Our results of operations depend primarily on our net interest income and, to a lesser extent, non-interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits. Non-interest income consists primarily of earnings on bank-owned life insurance, service charges on deposit accounts and other income. Our results of operations also are affected by our provision for loan losses and non-interest expense. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment, data processing costs, advertising,Federal Deposit Insurance Corporation deposit insurance premiums and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "believe," "contemplate," "continue," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
•
statements of our goals, intentions and expectations; • statements regarding our business plans, prospects, growth and operating strategies; • statements regarding the quality of our loan and investment portfolios; and • estimates of our risks and future costs and benefits. These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
•
conditions relating to the COVID-19 pandemic, including the severity and
duration of any associated economic slowdown either nationally or in our market
areas, that are worse than expected, including potential recessionary
conditions;
•
general economic conditions, either nationally or in our market areas, that are
worse than expected;
•
changes in the level and direction of loan delinquencies and write-offs and
changes in estimates of the adequacy of the allowance for loan losses;
•
our ability to access cost-effective funding;
•
fluctuations in real estate values and both residential and commercial real
estate market conditions;
•
demand for loans and deposits in our market area;
•
our ability to implement and change our business strategy;
•
competition among depository and other financial institutions;
30
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inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make; • adverse changes in the securities or secondary mortgage markets; • changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums or changes in the fiscal or monetary policies of theU.S. Treasury orBoard of Governors of theFederal Reserve System ; • changes in the quality or composition of our loan or investment portfolios; • technological changes that may be more difficult or expensive than expected; • the inability of third-party providers to perform as expected; • a failure or breach of our operational or security systems or infrastructure, including cyberattacks; • our ability to manage market risk, credit risk and operational risk; • our ability to enter new markets successfully and capitalize on growth opportunities; • our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto; • changes in consumer spending, borrowing and savings habits; • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, theFinancial Accounting Standards Board , theSecurities and Exchange Commission or thePublic Company Accounting Oversight Board ; • the current or anticipated impact of military conflict, terrorism or other geopolitical event; • our ability to retain key employees; • our compensation expense associated with equity allocated or awarded to our employees; and • changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our unaudited consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used inthe United States of America . The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company," we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our unaudited consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards. 31 -------------------------------------------------------------------------------- Allowance for Loan Losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. No portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as a critical accounting policy. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a given borrower's ability to repay, the estimated value of any underlying collateral, the size and composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not separately identify consumer loans for impairment disclosure unless such loans are subject to a troubled debt restructuring agreement. The general component covers pools of loans by loan class not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: (1) levels and trends in delinquent, classified, non-accrual and impaired loans, as well as loan modifications; (2) trends in the nature and volume of the portfolio and terms of loans and the existence and effect of any concentrations of credit and changes in level of such concentrations; (3) effects of the changes in risk selection and lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (4) experience, ability, and depth of lending department management and other relevant staff; and (5) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimated specific and general losses in the portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, theOffice of the Comptroller of the Currency , as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. Deferred Income Taxes. AtDecember 31, 2022 , we had a net deferred tax asset totaling$1.0 million . In accordance with Accounting Standards Codification ("ASC") Topic 740 "Income Taxes," we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established if it is not more likely than not realizable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax 32 -------------------------------------------------------------------------------- assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize its federal and state deferred tax asset.
There have been no material changes to our critical accounting policies during
the three and six months ended
For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the audited consolidated financial statements within our Annual Report on Form 10-K.
Comparison of Financial Condition at
Total Assets. Total assets decreased$9.4 million , or 2.6%, to$356.8 million atDecember 31, 2022 from$366.2 million atJune 30, 2022 . The decrease resulted primarily from decreases in cash and cash equivalents of$21.1 million , or 66.6%, partially offset by increases in securities held to maturity of$4.3 million , or 3.0%, and net loans of$6.0 million , or 3.5%. The Company adopted Accounting Standard Update ("ASU") 2016-02-Leases (Topic 842) onJuly 1, 2022 and began recognizing operating leases on its consolidated balance sheet by recording a Right-Of-Use asset, representing the Company's legal right to use the leased assets and a net lease liability, representing the Company's legal obligation to make these lease payments, which resulted in an increase of$1.0 million in total assets and total liabilities atDecember 31, 2022 . Cash and Cash Equivalents. Cash and cash equivalents decreased$21.1 million , or 66.6%, to$10.6 million atDecember 31, 2022 from$31.7 million atJune 30, 2022 , because we invested excess cash into securities and loans to increase our overall yield on interest-earning assets. Net Loans. Net loans increased$6.0 million , or 3.5%, to$178.6 million atDecember 31, 2022 from$172.6 million atJune 30, 2022 . The increase was due primarily to increases in commercial real estate loans of$6.3 million , or 42.8%, and$620,000 , or 31.5%, in second mortgages and home equity lines of credit, partially offset by a decrease of$1.1 million , or 7.5%, in multi-family real estate loans. The growth in commercial real estate loans was the result of increased loan originations and the Bank's continued focus on growing and diversifying the loan portfolio. Securities Available for Sale. Securities available for sale decreased$31,000 , or 15.6%, to$168,000 atDecember 31, 2022 from$199,000 atJune 30, 2022 . The decrease was due to prepayments and the decline in fair value due to the rising interest rate environment. Securities Held to Maturity. Securities held to maturity increased$4.3 million , or 3.0%, to$149.5 million atDecember 31, 2022 from$145.2 million atJune 30, 2022 , as we invested excess cash into securities to increase our overall yield on interest-earning assets. Total Liabilities. Total liabilities decreased$10.3 million , or 3.5%, to$281.6 million atDecember 31, 2022 from$291.9 million atJune 30, 2022 . The decrease was the result of decreases in deposits of$11.6 million , or 4.0%, partially offset by the new operating lease liability of$1.0 million . Deposits. Deposits decreased$11.6 million , or 4.0%, to$275.5 million atDecember 31, 2022 from$287.1 million atJune 30, 2022 . The decrease was primarily due to decreases of$5.8 million , or 7.7%, in savings accounts, and$9.5 million , or 20.2%, in money market accounts, partially offset by increases of$696,000 , or 1.1%, in negotiable order of withdrawal and demand deposit accounts and$3.1 million , or 3.1%, in term certificates. The decrease reflects management's decision not to increase interest rates for savings and money market accounts, due to excess liquidity for the first quarter of the fiscal year. During the second quarter of the fiscal year, the Bank held term certificate promotions, which contributed to the increase in the balance of term certificates.
Stockholders' Equity. Total stockholders' equity increased
Comparison of Operating Results for the Three Months Ended
General. We reported net income of$341,000 for the three months endedDecember 31, 2022 , compared to net income of$234,000 for the three months endedDecember 31, 2021 , an increase of$107,000 , or 45.7%. The 33 -------------------------------------------------------------------------------- increase in net income was primarily due to an increase in net interest income of$330,000 , or 16.4%, partially offset by an increase in non-interest expense of$191,000 , or 10.1%, and an increase in income tax expense of$33,000 . Interest and Dividend Income. Interest and dividend income increased$413,000 , or 18.2%, to$2.7 million for the three months endedDecember 31, 2022 from$2.3 million for the three months endedDecember 31, 2021 . The increase was attributable to an increase of$289,000 , or 47.2%, in interest on securities, an increase of$107,000 , in interest on short-term investments, and an increase of$17,000 , or 1.0%, in interest on loans. Interest income on securities increased due to an increase in the average balance of securities of$33.8 million to$151.2 million for the three months endedDecember 31, 2022 , from$117.4 million for the three months endedDecember 31, 2021 , and an increase in the average yield on securities of 26 basis points to 2.45% for the three months endedDecember 31, 2022 from 2.19% for the three months endedDecember 31, 2021 . Interest income on short-term investments increased due to an increase in the average yield of 357 basis points to 3.74% for the three months endedDecember 31, 2022 from 0.17% for the three months endedDecember 31, 2021 , partially offset by a decrease in the average balance of short-term investments of$24.0 million to$13.2 million for the three months endedDecember 31, 2022 from$37.2 million for the three months endedDecember 31, 2021 . Interest income on loans increased primarily due to an increase in the average balance of loans of$5.1 million to$177.6 million for the three months endedDecember 31, 2022 , from$172.5 million for the three months endedDecember 31, 2021 , partially offset by a decrease in the average yield on loans of 7 basis points to 3.73% for the three months endedDecember 31, 2022 from 3.80% for the three months endedDecember 31, 2021 . The increase in the average yields on securities and other interest-earning assets resulted from the investments that were purchased during the past nine months, as interest rates increased. The increase in the average loan balances was due to originations exceeding loan payoffs. The decrease in loan yields was due to higher interest rate loan payoffs exceeding loan originations in a high interest rate environment with reduced loan demand. Interest Expense. Interest expense increased$83,000 , or 32.3%, to$340,000 for the three months endedDecember 31, 2022 from$257,000 for the three months endedDecember 31, 2021 . The increase was due to an increase in the average rate paid on certificates of deposit of 43 basis points, to 1.18%, for the three months endedDecember 31, 2022 , from 0.75% for the three months endedDecember 31, 2021 due to the higher interest rate environment, partially offset by a decrease in the average balance of certificates of deposit of$10.6 million , to$99.0 million for the three months endedDecember 31, 2022 , from$109.6 million for the three months endedDecember 31, 2021 . The decrease in the average balance of certificates of deposit reflected the maturity of certificates of deposit before the Bank held certificates of deposit rate specials late during the three months endedDecember 31, 2022 . Net Interest Income. Net interest income increased$330,000 , or 16.4%, to$2.3 million for the three months endedDecember 31, 2022 , from$2.0 million for the three months endedDecember 31, 2021 . The increase was due to an increase in average net interest-earning assets of$14.9 million combined with an increase in our net interest rate spread of 21 basis points to 2.62% for the three months endedDecember 31, 2022 , from 2.41% for the three months endedDecember 31, 2021 . Our net interest margin increased 27 basis points to 2.77% for the three months endedDecember 31, 2022 compared to 2.50% for the three months endedDecember 31, 2021 . The increase in the net interest rate spread was a result of an increase in the yield on interest-earning assets exceeding the increase in the cost of interest-bearing liabilities. Provision for Loan Losses. No provision for loan losses for the three months endedDecember 31, 2022 was recorded compared to a provision for loan losses of$10,000 for the three months endedDecember 31, 2021 . The absence of a provision for the three months endedDecember 31, 2022 reflected continued strong asset quality. The allowance for loan losses was$1.7 million , or 0.97% of total loans, atDecember 31, 2022 , compared to$1.7 million , or 1.00% of total loans, atDecember 31, 2021 . The allowance for loan losses was$1.7 million , or 0.99% of total loans atJune 30, 2022 . AtDecember 31, 2022 , we had four loans totaling$1.5 million designated as special mention, as we await receipt from the borrowers of their current financials and tax returns as required by loan covenants. We had no loans categorized as substandard, doubtful or loss atDecember 31, 2022 or 2021. We did not have any non-performing loans at eitherDecember 31, 2022 or 2021. We had no charge-offs or recoveries for the three months endedDecember 31, 2022 or 2021. 34 --------------------------------------------------------------------------------
Non-Interest Income. Non-interest income information is as follows.
Three Months Ended
December 31, Change
(Dollars in thousands) 2022 2021 Amount Percent
Customer service fees $ 36 $ 31 $ 5 16.1 %
Income on bank-owned life insurance 63 75 (12 ) (16.0 %)
Other income 53 55 (2 ) (3.6 %)
Total non-interest income $ 152 $ 161 $ (9 ) (5.6 %)
Non-interest income decreased $9,000 , or 5.6%, to $152,000 for the three months
ended December 31, 2022 from $161,000 for the three months ended December 31,
2021 . The decrease was primarily due to a $12,000 decrease in income on
bank-owned life insurance.
Non-Interest Expense. Non-interest expense information is as follows.
Three Months Ended
December 31, Change
(Dollars in thousands) 2022 2021 Amount Percent
Salaries and employee benefits$ 1,250 1,167$ 83 7.1 % Occupancy and equipment 255 208 47 22.6 % Advertising 71 37 34 91.9 % Data processing 84 91 (7 ) (7.7 %) Deposit insurance 22 21 1 4.8 % Other 405 372 33 8.9 % Total non-interest expense$ 2,087 $ 1,896 $ 191 10.1 % Non-interest expense increased$191,000 , or 10.1%, to$2.1 million for the three months endedDecember 31, 2022 from$1.9 million for the three months endedDecember 31, 2021 . The increase was due primarily to an$83,000 increase in salaries and employee benefit expense due to normal employee annual merit salary benefit increases and the expense recognized in connection with the Employee Stock Ownership Plan (the "ESOP"), a$47,000 increase in occupancy and equipment expenses due primarily to increased lease and service contracts expenses, a$34,000 increase in advertising expense related to an employment agency fee and a$33,000 increase in other expenses due primarily to increased professional expenses. Provision for Income Taxes. The Company recorded a provision for income taxes of$65,000 for the three months endedDecember 31, 2022 , which was a$33,000 , or 103.1%, increase from income taxes of$32,000 for the three months endedDecember 31, 2021 . Our effective tax rate was 16.0% and 12.0% for the quarters endedDecember 31, 2022 and 2021, respectively. The higher effective tax rate for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 was due to changes in the composition of tax-advantaged municipal securities and bank-owned life insurance. The increase in the provision for income taxes for the three months endedDecember 31, 2022 was due to the increase in income before income taxes. 35 -------------------------------------------------------------------------------- Average Balance and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Tax-equivalent adjustments have been made for tax-advantaged municipal securities income. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled$383,000 and$354,000 atDecember 31, 2022 and 2021, respectively. For the
Three Months Ended
2022 2021
Average Average
Outstanding Average Outstanding Average
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
Interest-earning assets:
Loans $ 177,648 $ 1,657 3.73 % $ 172,505 $ 1,640 3.80 %
Securities(1) 151,249 927 2.45 % 117,441 644 2.19 %
Other 13,153 123 3.74 % 37,190 16 0.17 %
Total interest-earning assets 342,050 2,707 3.17 % 327,136 2,300 2.81 %
Non-interest-earning assets 16,747 14,340
Total assets $ 358,797 $ 341,476
Interest-bearing liabilities:
Interest-bearing demand deposits $ 33,557 $ 4 0.05 % $ 30,903 $ 4 0.05 %
Savings deposits 72,708 18 0.10 % 72,233 18 0.10 %
Money market deposits 39,876 27 0.27 % 41,411 27 0.26 %
Certificates of deposit 99,041 291 1.18 % 109,563 206 0.75 %
Total interest-bearing deposits 245,182 340 0.55 % 254,110 255 0.40 %
FHLB advances - - - % 345 2 2.32 %
Total interest-bearing liabilities 245,182 340 0.55 % 254,455 257 0.40 %
Noninterest-bearing liabilities
Non-interest-bearing demand
deposits 32,887 34,168
Other non-interest-bearing
liabilities 5,554 3,515
Total liabilities 283,623 292,138
Stockholders' equity 75,174 49,338
Total liabilities and
stockholders' equity $ 358,797 $ 341,476
Net interest income - FTE $ 2,367 $ 2,043
Net interest rate spread(2) 2.62 % 2.41 %
Net interest-earning assets(3) $ 96,868 $ 72,681
Net interest margin - FTE(4) 2.77 % 2.50 %
Average interest-bearing assets to
interest-bearing liabilities 139.51 % 128.56 %
36--------------------------------------------------------------------------------
(1)
Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of$26,000 and$32,000 for the three months endedDecember 31, 2022 and 2021, respectively. (2) Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities. (3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets.
A reconciliation of income presented on a GAAP basis as compared to a fully tax-equivalent basis is below:
For the Three Months Ended
December 31 , December 31,
2022 2021Securities interest income (no tax adjustment) $ 901 $
612
Tax-equivalent adjustment 26
32
Securities (tax-equivalent basis) $ 927 $
644
Net interest income (no tax adjustment) 2,341
2,011
Tax-equivalent adjustment 26
32
Net interest income (tax-equivalent adjustment)
2,043
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately based on
the changes due to rate and the changes due to volume. There were no
out-of-period items or adjustments required to be excluded from the table below.
For the Three Months Ended
December 31, 2022 vs. 2021
Increase Increase
(Decrease) Due (Decrease) Total Increase
(In thousands) to Volume Due to Rate (Decrease)
Interest-earning assets:
Loans $ 49 $ (32 ) $ 17
Securities 185 98 283
Other (10 ) 117 107
Total interest-earning assets 224 183 407
Interest-bearing liabilities:
Interest-bearing demand deposits - - -
Savings deposits - - -
Money market deposits (1 ) 1 -
Certificates of deposit (20 ) 105 85
Total deposits (21 ) 106 85
FHLB advances (2 ) - (2 )
Total interest-bearing liabilities (23 ) 106 83
Change in net interest income $ 247 $ 77 $ 324
37--------------------------------------------------------------------------------
Comparison of Operating Results for the Six Months Ended
General. We reported net income of$986,000 for the six months endedDecember 31, 2022 , compared to net income of$706,000 for the six months endedDecember 31, 2021 , an increase of$280,000 , or 39.7%. The increase in net income was primarily due to an increase in net interest income of$710,000 , or 17.8%, partially offset by an increase in non-interest expense of$287,000 , or 8.1%, and an increase in income tax expense of$103,000 , or 78.0%. Interest and Dividend Income. Interest and dividend income increased$757,000 , or 16.7%, to$5.3 million for the six months endedDecember 31, 2022 from$4.6 million for the six months endedDecember 31, 2021 . The increase was attributable to an increase of$558,000 , or 46.4%, in interest on securities, and an increase of$217,000 , in interest on short-term investments, partially offset by a decrease of$18,000 , or 0.5%, in interest on loans. Interest income on securities increased due to an increase in the average balance of securities of$38.1 million to$150.0 million for the six months endedDecember 31, 2022 , from$112.0 million for the six months endedDecember 31, 2021 , and an increase in the average yield on securities of 16 basis points to 2.42% for the six months endedDecember 31, 2022 from 2.26% for the six months endedDecember 31, 2021 . Interest income on short-term investments increased due to an increase in the average yield of 270 basis points to 2.87% for the six months endedDecember 31, 2022 from 0.17% for the six months endedDecember 31, 2021 , partially offset by a decrease in the average balance of cash and short-term investments of$21.7 million to$17.4 million for the six months endedDecember 31, 2022 from$39.1 million for the six months endedDecember 31, 2021 . Interest income on loans decreased primarily due to a decrease in the average yield earned on loans of nine basis points, to 3.70% for the six months endedDecember 31, 2022 , from 3.79% for the six months endedDecember 31, 2021 , partially offset by an increase in the average balance of loans of$3.4 million to$177.1 million for the six months endedDecember 31, 2022 , from$173.7 million for the six months endedDecember 31, 2021 . The increase in the average yields on securities and other interest-earning assets resulted from the investments that were purchased during the past nine months, as interest rates increased. The increase in average loan balances was due to originations exceeding loan payoffs. The decrease in loan yields was due to higher interest rate loan payoffs exceeding loan originations in a high interest rate environment with reduced loan demand. Interest Expense. Interest expense increased$47,000 , or 8.8%, to$582,000 for the six months endedDecember 31, 2022 from$535,000 for the six months endedDecember 31, 2021 . The increase was due to an increase in the average rate paid on certificates of deposit of 20 basis points to 0.98% for the six months endedDecember 31, 2022 , from 0.78% for the six months endedDecember 31, 2021 , partially offset by a decrease in the average balance of certificates of deposit of$12.0 million , to$98.1 million for the six months endedDecember 31, 2022 , from$110.1 million for the six months endedDecember 31, 2021 . The decrease in the average balance of certificates of deposit reflected the maturity of certificates of deposit before the Bank held certificates of deposit rate specials late during the second fiscal quarter of 2023. Net Interest Income. Net interest income increased$710,000 , or 17.8%, to$4.7 million for the six months endedDecember 31, 2022 , from$4.0 million for the six months endedDecember 31, 2021 . The increase was due to an increase in average interest-earning assets of$19.8 million combined with an increase in our net interest rate spread of 22 basis points to 2.63% for the six months endedDecember 31, 2022 , from 2.41% for the six months endedDecember 31, 2021 . Our net interest margin increased 26 basis points to 2.76% for the six months endedDecember 31, 2022 compared to 2.50% for the six months endedDecember 31, 2021 . The increase in the net interest rate spread was a result of an increase in the yield on interest-earning assets exceeding the increase in the cost of interest-bearing liabilities. Provision for Loan Losses. No provision for loan losses for the six months endedDecember 31, 2022 was recorded compared to a provision for loan losses of$25,000 for the six months endedDecember 31, 2021 . The absence of a provision for the six months endedDecember 31, 2022 reflected continued strong asset quality. 38 --------------------------------------------------------------------------------
Non-Interest Income. Non-interest income information is as follows.
Six Months Ended
December 31, Change
(Dollars in thousands) 2022 2021 Amount Percent
Customer service fees $ 73 $ 61 $ 12 19.7 %
Income on bank-owned life insurance(1) 127 123 4 3.3 %
Gain on sale of securities available for sale - 48 (48 ) (100.0 %)
Other income 152 159 (7 ) (4.4 %)
Total non-interest income $ 352 $ 391 $ (39 ) (10.0 %)
(1) Certain amounts in the prior period have been reclassified to conform to the current period presentation.
Non-interest income decreased$39,000 , or 10.0%, to$352,000 for the six months endedDecember 31, 2022 from$391,000 for the six months endedDecember 31, 2021 . The decrease was primarily due to the absence of a$48,000 gain on the sale of securities available for sale during the six months endedDecember 31, 2021 , partially offset by increases in customer service fees of$12,000 .
Non-Interest Expense. Non-interest expense information is as follows.
Six Months Ended
December 31, Change
(Dollars in thousands) 2022 2021 Amount Percent
Salaries and employee benefits(1)
6.9 % Occupancy and equipment 498 418 80 19.1 % Advertising 110 78 32 41.0 % Data processing 178 171 7 4.1 % Deposit insurance 43 43 - Other 738 691 47 6.8 % Total non-interest expense$ 3,835 $ 3,522 $ 313 8.9 %
(1) Certain amounts in the prior period have been reclassified to conform to the current period presentation.
Non-interest expense increased$313,000 , or 8.9%, to$3.8 million for the six months endedDecember 31, 2022 from$3.5 million for the six months endedDecember 31, 2021 . The increase was due primarily to a$147,000 increase in salaries and employee benefit expense due to normal employee annual merit salary and benefit increases and the expense recognized in connection with the ESOP, an$80,000 increase in occupancy and equipment expenses due primarily to increased lease and service contracts expenses, a$32,000 increase in advertising expense related to an employment agency fee and a$47,000 increase in other expenses due primarily to increased professional expenses. Provision for Income Taxes. The Company recorded a provision for income taxes of$235,000 for the six months endedDecember 31, 2022 , a$103,000 , or 78.0%, increase from income taxes of$132,000 for the six months endedDecember 31, 2021 . Our effective tax rate was 19.2% and 15.8% for the six months endedDecember 31, 2022 and 2021, respectively. The higher effective tax rate for the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 was due to changes in the composition of tax-advantaged municipal securities and bank-owned life insurance. The increase in the provision for income taxes for the six months endedDecember 31, 2022 was due to the increase in income before income taxes. 39 -------------------------------------------------------------------------------- Average Balance and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Tax-equivalent adjustments have been made for tax-advantaged municipal securities income. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled$383,000 and$354,000 atDecember 31, 2022 and 2021, respectively. For the
Six Months Ended
2022 2021
Average Average
Outstanding Average Outstanding Average
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
Interest-earning assets:
Loans $ 177,143 $ 3,276 3.70 % $ 173,701 $ 3,294 3.79 %
Securities(1) 150,011 1,817 2.42 % 111,952 1,267 2.26 %
Other 17,435 250 2.87 % 39,107 33 0.17 %
Total interest-earning assets 344,589 5,343 3.10 % 324,760 4,594 2.83 %
Non-interest-earning assets 16,342 14,117
Total assets $ 360,931 $ 338,877
Interest-bearing liabilities:
Interest-bearing demand deposits $ 33,346 $ 8 0.05 % $ 30,786 $ 8 0.05 %
Savings deposits 74,076 37 0.10 % 71,667 37 0.10 %
Money market deposits 42,685 58 0.27 % 41,266 54 0.26 %
Certificates of deposit 98,097 479 0.98 % 110,088 430 0.78 %
Total interest-bearing deposits 248,204 582 0.47 % 253,807 529 0.42 %
FHLB advances - - - % 456 6 2.63 %
Total interest-bearing liabilities 248,204 582 0.47 % 254,263 535 0.42 %
Noninterest-bearing liabilities
Non-interest-bearing demand
deposits 32,702 32,018
Other non-interest-bearing
liabilities 5,127 3,474
Total liabilities 286,033 289,755
Stockholders' equity 74,898 49,122
Total liabilities and
stockholders' equity $ 360,931 $ 338,877
Net interest income - FTE $ 4,761 $ 4,059
Net interest rate spread(2) 2.63 % 2.41 %
Net interest-earning assets(3) $ 96,385 $ 70,497
Net interest margin - FTE(4) 2.76 % 2.50 %
Average interest-bearing assets to
interest-bearing liabilities 138.83 % 127.73 %
40--------------------------------------------------------------------------------
(1)
Includes tax equivalent adjustments for municipal securities, based on a statutory rate of 21%, of$57,000 and$65,000 for the six months endedDecember 31, 2022 and 2021, respectively. (2) Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities. (3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets.
A reconciliation of income presented on a GAAP basis as compared to a fully tax-equivalent basis is presented below:
For the Six Months Ended
December 31 , December 31,
2022 2021
Securities interest income (no tax adjustment)
1,202
Tax-equivalent adjustment 57
65
Securities (tax-equivalent basis)$ 1,817 $
1,267
Net interest income (no tax adjustment) 4,704
3,994
Tax-equivalent adjustment 57
65
Net interest income (tax-equivalent adjustment)
4,059
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately based on
the changes due to rate and the changes due to volume. There were no
out-of-period items or adjustments required to be excluded from the table below.
For the Six Months Ended
December 31, 2022 vs. 2021
Increase Increase
(Decrease) Due (Decrease) Total Increase
(In thousands) to Volume Due to Rate (Decrease)
Interest-earning assets:
Loans $ 65 $ (83 ) $ (18 )
Securities 431 119 550
Other (18 ) 235 217
Total interest-earning assets 478 271 749
Interest-bearing liabilities:
Interest-bearing demand deposits 1 (1 ) -
Savings deposits 1 (1 ) -
Money market deposits 2 2 4
Certificates of deposit (47 ) 96 49
Total deposits (43 ) 96 53
FHLB advances (6 ) - (6 )
Total interest-bearing liabilities (49 ) 96 47
Change in net interest income $ 527 $ 175 $ 702
41--------------------------------------------------------------------------------
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The Asset/Liability Committee establishes and monitors the amount, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
•
market our non-interest-bearing demand, money market, savings and demand accounts; • diversify our loan mix; • invest in short- to medium-term repricing and/or maturing securities whenever the market allows; and • maintain a strong capital position. We do not engage in hedging activities, such as engaging in futures, options or interest rate swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
We consider two types of simulations impacted by changes in interest rates, which are (1) net interest income and (2) changes in the economic value of equity.
Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model, the results of which are provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a one-year period based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. The following table shows the estimated impact on net interest income for the one-year period beginningDecember 31, 2022 resulting from potential changes in interest rates, expressed in basis points. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. Net Interest Income Year 1 Year 1 Forecast Change from Change in Interest Rates (basis points)(1) (In thousands) Level +400 $ 7,255 (16.5 %) +300 7,595 (12.6 %) +200 7,934 (8.7 %) +100 8,287 (4.7 %) Level 8,692 - -100 8,646 (0.5 %) -200 8,523 (1.9 %) -300 8,329 (4.2 %) -400 8,281 (4.7 %) (1)
Assumes an immediate uniform change in interest rates at all maturities.
42
--------------------------------------------------------------------------------
Economic Value of Equity. We monitor interest rate risk through the use of a
simulation model that estimates the amounts by which the fair value of our
assets and liabilities (our economic value of equity or "EVE") would change in
the event of a range of assumed changes in market interest rates. The quarterly
reports developed in the simulation model assist us in identifying, measuring,
monitoring and controlling interest rate risk to ensure compliance within our
policy guidelines.
The table below sets forth, as of
As of December 31, 2022
EVE as a Percentage of Present Value of
Estimated Increase (Decrease) in EVE Assets(3)
Amount Decrease
Change in Interest Rates (basis Estimated EVE(2) (In (basis
points)(1) (In thousands) thousands) Percent EVE Ratio(4) points)
+400 $ 30,532 $ (22,925 ) (42.9 %) 11.0 % (560 )
+300 35,826 (17,631 ) (33.0 %) 12.4 % (420 )
+200 41,456 (12,001 ) (22.4 %) 13.9 % (270 )
+100 47,472 (5,985 ) (11.2 %) 15.3 % (130 )
Level 53,457 - - 16.6 % -
-100 58,552 5,095 9.5 % 17.5 % 90
-200 63,184 9,727 18.2 % 18.2 % 160
-300 66,994 13,537 25.3 % 18.7 % 210
-400 66,466 13,009 24.3 % 18.1 % 150
(1)
Assumes an immediate uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash
flows on interest-earning assets.
(4)
EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurement. Modeling changes in EVE require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the EVE table
presented assumes that the composition of our interest-sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities. Accordingly, although the EVE
table provides an indication of our interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on EVE and
will differ from actual results.
EVE calculations also may not reflect the fair values of financial instruments.
For example, decreases in market interest rates can increase the fair values of
our loans, deposits and borrowings.
43
--------------------------------------------------------------------------------Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities and calls of securities. We also have the ability to borrow from theFederal Home Loan Bank of Boston . AtDecember 31, 2022 , we had no outstanding advances from theFederal Home Loan Bank of Boston . AtDecember 31, 2022 , we had the ability to borrow$66.8 million inFederal Home Loan Bank of Boston advances. Additionally, atDecember 31, 2022 , we had a$2.4 million line of credit with theFederal Home Loan Bank of Boston , none of which was drawn atDecember 31, 2022 . While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$892,000 for the six months endedDecember 31, 2022 , compared to$30,000 of net cash used in operating activities during the six months endedDecember 31, 2021 . Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on securities, was$10.5 million and$15.2 million for the six months endedDecember 31, 2022 and 2021, respectively. Net cash used in financing activities was$11.5 million for the six months endedDecember 31, 2022 , compared to$22.4 million provided by financing activities for the six months endedDecember 31, 2021 . Changes in net cash related to financing activities were primarily related to changes in deposit balances for the six months endedDecember 31, 2022 and 2021. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase loans with an increase in core deposits as supplemented by the use ofFederal Home Loan Bank of Boston advances as needed. Capital Resources. AtDecember 31, 2022 andJune 30, 2022 , the Bank exceeded all of its regulatory capital requirements. See Note 8 of the unaudited consolidated financial statements of this quarterly report.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. AtDecember 31, 2022 , we had$597,000 of commitments to originate loans,$4.1 million of unadvanced funds under home equity lines of credit,$235,000 in unadvanced funds on construction loans, and$1.0 million of unadvanced funds under commercial and other lines of credit. See Note 9 in the Notes to the unaudited consolidated financial statements for further information. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. 44 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 in the Notes to the unaudited consolidated financial statements and note 1 of the notes to our consolidated financial statements beginning on page F-1 of our Annual Report on Form 10-K. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to non-public companies.
Impact of Inflation and Changing Prices
The unaudited financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles inthe United States of America , which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution's performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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