UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended

December 31, 2016

 

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 No. 000-55732

 

 

COMMUNITY SAVINGS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland		81-3840964
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
425 Main Street
Caldwell, Ohio		43724
(Address of principal		(Zip Code)
executive office)

 

(740) 732-5678

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address, if changed since last report)

 

 

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 x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes     ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨    Accelerated filer ¨     Non-accelerated filer ¨     Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

Yes ¨                No  x 

 

As of February 12, 2017, the latest practicable date, 441,290 shares of the registrant’s common stock, $.01 par value, were issued and outstanding.

 

 

Community Savings Bancorp, Inc.

 

Index to Quarterly Report on Form 10-Q

 

PART I – FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Condensed Balance Sheets as of December 31, 2016 and June 30, 2016	4
Condensed Statements of Operations for the Three and Six Months Ended December 31, 2016 and 2015	5
Condensed Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2016 and 2015	6
Condensed Statements of Changes in Equity for the Six Months Ended December 31, 2016 and 2015	7
Condensed Statements of Cash Flows for the Six Months Ended December 31, 2016 and 2015	8
Notes to Condensed Financial Statements	9
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3 Quantitative and Qualitative Disclosures About Market Risk	47
Item 4 Controls and Procedures	47
PART II – OTHER INFORMATION
Item 1  Legal Proceedings	48
Item 1A  Risk Factors	48
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3  Defaults Upon Senior Securities	48
Item 4  Mine Safety Disclosures	48
Item 5  Other Information	48
Item 6  Exhibits	48
SIGNATURES	50

 

 

EXPLANATORY NOTE

 

Community Savings Bancorp, Inc., a Maryland corporation (the “Company” or the “Registrant”), was formed on August 24, 2016 to serve as the savings and loan holding company for Community Savings (the “Bank”) as part of the Bank’s mutual-to-stock conversion. As of December 31, 2016, the conversion had not been completed, and, as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, financial and other information of the Bank is included in this Quarterly Report.

 

 

Part I – Financial Information

Item 1. Interim Financial Statements (Unaudited)

Community Savings Bancorp, Inc.

Condensed Balance Sheets

December 31, 2016 and June 30, 2016

(In thousands)

 

		December 31,				June 30,
		2016				2016
		(Unaudited)
Assets
Cash and due from banks		$	5,612			$	1,969
Interest-earning demand deposits in other financial institutions			2,141				1,215
Cash and cash equivalents			7,753				3,184
Interest-earning time deposits in other financial institutions			4,827				5,567
Investment securities available-for-sale, at fair value			9,952				11,097
Other investment securities			940				940
Loans			32,691				32,882
Less: allowance for loan losses			(253	)			(253	)
Loans, net			32,438				32,629
Premises and equipment, net			454				452
Foreclosed assets, net			21				34
Accrued interest receivable			179				185
Other assets			911				191
Total assets		$	57,475			$	54,279
Liabilities and Equity
Liabilities
Deposits
Demand		$	8,655			$	9,058
Savings and money market			23,974				23,127
Time			8,082				7,917
Total deposits			40,711				40,102
Federal Home Loan Bank advances			6,200				7,250
Stock subscription proceeds in escrow			3,572				-
Payments by borrowers for taxes and insurance			207				82
Other liabilities			331				190
Total liabilities			51,021				47,624
Equity
Retained earnings			6,517				6,567
Accumulated other comprehensive income (loss)			(63	)			88
Total equity			6,454				6,655
Total liabilities and equity		$	57,475			$	54,279

 

See Notes to Condensed Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Statements of Operations

For the Three and Six Months Ended December 31, 2016 and 2015

(In thousands)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2016				2015				2016				2015
		(Unaudited)
Interest Income
Loans, including fees		$	353			$	351			$	709			$	690
Taxable securities			41				52				74				111
Tax exempt securities			10				22				28				35
Interest-bearing deposits			29				33				61				67
Total interest income			433				458				872				903
Interest Expense
Deposits			32				33				62				72
Federal Home Loan Bank advances			22				19				44				35
Total interest expense			54				52				106				107
Net Interest Income			379				406				766				796
Provision for Loan Losses			-				-				-				-
Net Interest Income After Provision for Loan Losses			379				406				766				796
Noninterest Income
Service charges and fees			65				65				130				148
Gain on sale of foreclosed assets, net			-				2				29				1
Gain on sale of branch offices			-				-				-				810
Other operating			5				2				10				3
Total noninterest income			70				69				169				962
Noninterest Expense
Salaries, employee benefits and directors fees			205				197				405				402
Occupancy and equipment			25				24				50				71
Data processing			93				75				155				190
Correspondent bank service charges			71				44				118				100
Franchise taxes			9				12				21				24
FDIC insurance premiums			2				15				10				39
Professional services			32				47				92				104
Advertising			5				1				8				6
Office supplies			17				16				35				38
Other			63				36				112				111
Total noninterest expense			522				467				1,006				1,085
Income (Loss) Before Federal Income Taxes			(73	)			8				(71	)			673
Federal Income Taxes (Benefits)			(19	)			(10	)			(21	)			27
Net Income (Loss)		$	(54	)		$	18			$	(50	)		$	646

 

See Notes to Condensed Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Statements of Comprehensive Income (Loss)

For the Three and Six Months Ended December 31, 2016 and 2015

(In thousands)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2016				2015				2016				2015
		(Unaudited)
Net income (loss)		$	(54	)		$	18			$	(50	)		$	646
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale			(237	)			(3	)			(228	)			173
Tax effect			80				1				77				(59	)
Total other comprehensive income (loss)			(157	)			(2	)			(151	)			114
Comprehensive income (loss)		$	(211	)		$	16			$	(201	)		$	760

 

See Notes to Condensed Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Statements of Changes in Equity

For the Six Months Ended December 31, 2016 and 2015

(In thousands)

 

						Accumulated
						Other
		Retained				Comprehensive
		Earnings				Loss				Total
		(Unaudited)
Balance at July 1, 2016		$	6,567			$	88			$	6,655
Net loss			(50	)			-				(50	)
Other comprehensive loss			-				(151	)			(151	)
Balance at December 31, 2016		$	6,517			$	(63	)		$	6,454

 

						Accumulated
						Other
		Retained				Comprehensive
		Earnings				Loss				Total
		(Unaudited)
Balance at July 1, 2015		$	5,888			$	(110	)		$	5,778
Net income			646				-				646
Other comprehensive income			-				114				114
Balance at December 31, 2015		$	6,534			$	4			$	6,538

 

See Notes to Condensed Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Statements of Cash Flows

For the Six Months Ended December 31, 2016 and 2015

(In thousands)

 

		Six Months Ended December 31,
		2016				2015
		(Unaudited)
Cash Flows from Operating Activities
Net income (loss)		$	(50	)		$	646
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization			34				34
Deferred income tax expense			(21	)			27
Amortization of premiums and discounts on securities, net			82				101
Provision for loan losses			-				-
Gain on sale of foreclosed assets			(29	)			(1	)
Impairment of foreclosed real estate			2				26
Gain on sale of branch offices			-				(810	)
Net changes in:
Accrued interest receivable			6				32
Other assets			(688	)			79
Other liabilities			207				(48	)
Net cash provided by (used in) operating activities			(457	)			86
Cash Flows from Investing Activities
Net change in interest-bearing deposits in other financial institutions			740				(10	)
Purchase of available for sale securities			(1,507	)			(656	)
Proceeds from maturities of available-for-sale securities			1,500				1,670
Proceeds from the sales of available-for-sale securities			-				500
Principal repayments of available-for-sale mortgage-backed securities			841				1,170
Purchase of loans			-				(2,572	)
Net change in loans			192				(73	)
Purchase of premises and equipment			(36	)			(15	)
Proceeds from sale of foreclosed assets			40				44
Cash paid in sale of branch offices			-				(12,568	)
Net cash provided by (used in) investing activities			1,770				(12,510	)
Cash Flows from Financing Activities
Net change in deposits			609				(849	)
Proceeds from Federal Home Loan Bank advances			1,750				6,750
Repayment of Federal Home Loan Bank advances			(2,800	)			(250	)
Advances by borrowers for taxes and insurance			125				137
Proceeds from stock subscriptions			3,572				-
Net cash provided by financing activities			3,256				5,788
Net Change in Cash and Cash Equivalents			4,569				(6,636	)
Beginning Cash and Cash Equivalents			3,184				10,148
Ending Cash and Cash Equivalents		$	7,753			$	3,512
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest on deposits and borrowings		$	106			$	107
Supplemental Disclosure of Noncash Investing Activities
Transfers from loans to foreclosed assets		$	-			$	18

 

See Notes to Condensed Financial Statements

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Note 1:

Basis of Presentation

 

Community Savings Bancorp, Inc. (the “Registrant”), headquartered in Caldwell, Ohio, was formed to serve as the stock holding company for Community Savings (the “Company”) following its mutual-to-stock conversion. As of December 31, 2016, the stock conversion had not been completed, and as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, financial and other information of the Company is included in this quarterly report. The Registrant’s registration statement on Form S-1, as amended, was declared effective as of November 14, 2016.  The conversion was completed effective January 11, 2017.  The Company issued 441,290 shares at an offering price of $10.00 per share.

 

The accompanying unaudited condensed balance sheet of the Company as of June 30, 2016, which has been derived from audited financial statements, and unaudited condensed financial statements of the Company as of December 31, 2016 and for the three and six months ended December 31, 2016 and 2015, were prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed financial statements should be read in conjunction with the audited financial statements and notes thereto of the Company as of and for the year ended June 30, 2016 included in the Registrant’s Form S-1. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Form S-1.

 

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of December 31, 2016 and the results of operations and cash flows for the three and six months ended December 31, 2016 and 2015. All interim amounts have not been audited and the results of operations for the three and six months ended December 31, 2016, herein are not necessarily indicative of the results of operations to be expected for the entire fiscal year.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of deferred tax assets and fair values of financial instruments.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Note 2:

Securities

 

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Available-for-sale Securities:
December 31, 2016
Mortgage-backed securities of U.S. government sponsored entities - residential		$	6,239			$	28			$	(81	)		$	6,186
Collateralized mortgage obligations of government sponsored entities - residential			376				7				(2	)			381
State and political subdivisions
Taxable			1,409				10				(13	)			1,406
Nontaxable			2,023				2				(46	)			1,979
		$	10,047			$	47			$	(142	)		$	9,952
June 30, 2016
U. S. Government agency bonds		$	1,500			$	-			$	(3	)		$	1,497
Mortgage-backed securities of U.S. government sponsored entities - residential			5,492				81				-				5,573
Collateralized mortgage obligations of government sponsored entities - residential			515				17				-				532
State and political subdivisions
Taxable			1,425				20				(7	)			1,438
Nontaxable			2,032				25				-				2,057
		$	10,964			$	143			$	(10	)		$	11,097

 

The amortized cost and fair value of available-for-sale securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

		Amortized				Fair
		Cost				Value
		(In thousands)
Within one year		$	-			$	-
One to five years			1,142				1,150
Five to ten years			285				285
Beyond ten years			2,005				1,950
			3,432				3,385
Mortgage-backed securities of U.S.  government sponsored entities - residential			6,239				6,186
Collateralized mortgage obligations  of government sponsored entities - residential			376				381
		$	10,047			$	9,952

 

The Company had no sales of investment securities during the three and six-month periods ended December 31, 2016. The Company had gross proceeds of $500,000 from the sale of investment securities resulting in no gain or loss during the three and six-month periods ended December 31, 2015.

 

The Company had pledged $3.2 million and $3.3 million of its investment securities at December 31, 2016 and June 30, 2016, respectively.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following tables show the Company’s investments’ gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016 and June 30, 2016:

 

		Less than 12 Months								12 Months or Longer								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
December 31, 2016
Available-for-sale Securities:
Mortgage-backed securities of U.S. government sponsored entities - residential		$	4,308			$	(81	)		$	-			$	-			$	4,308			$	(81	)
Collateralized mortgage obligations of government sponsored entities - residential			186				(2	)			-				-				186				(2	)
State and political subdivisions
Taxable			-				-				255				(13	)			255				(13	)
Nontaxable			1,189				(46	)			-				-				1,189				(46	)
		$	5,683			$	(129	)		$	255			$	(13	)		$	5,938			$	(142	)
June 30, 2016
Available-for-sale Securities:
U. S. Government agency bonds		$	-			$	-			$	997			$	(3	)		$	997			$	(3	)
State and political subdivisions
Taxable			-				-				263				(7	)			263				(7	)
		$	-			$	-			$	1,260			$	(10	)		$	1,260			$	(10	)

 

Other-than-temporary Impairment

 

At December 31, 2016 and June 30, 2016, the decline in fair value of the Company’s investment securities is attributable to changes in interest rates and not credit quality. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before recovery of their amortized cost bases, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2016 and June 30, 2016.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Note 3:

Loans and Allowance for Loan Losses

 

Loans at December 31, 2016 and June 30, 2016 include:

 

		December 31,				June 30,
		2016				2016
		(In thousands)
Real estate loans
One- to four-family residential		$	23,432			$	23,066
Home equity lines of credit			3,254				3,312
Commercial and multi-family			1,725				1,641
Consumer and other			4,280				4,863
Total loans			32,691				32,882
Allowance for loan losses			(253	)			(253	)
Net loans		$	32,438			$	32,629

 

The risk characteristics applicable to each segment of the loan portfolio are described below:

 

Residential Real Estate and Home Equity Lines of Credit

 

Residential mortgage loans and home equity lines of credit are secured by one-to four-family residences and are comprised of owner-occupied and non-owner-occupied loans. Construction real estate loans (immaterial for the periods presented) are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. The Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values or residential properties. Risk is mitigated by the fact that loans are of smaller individual amounts and spread over a large number of borrowers.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Multi-family Residential Real Estate

 

Multi-family real estate loans generally involve a greater degree of credit risk than one-to four- family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

 

Commercial Real Estate

 

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk.

 

Consumer Loans

 

Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and six months ended December 31, 2016 and the recorded investment in loans and impairment method as of December 31, 2016:

 

		December 31, 2016
		Real Estate
										Commercial
		1-4 Family				Home Equity				and Multi-				Consumer
		Residential				Lines of Credit				Family				and Other				Unallocated				Total
		(In thousands)
Three Months Ended December 31, 2016
Allowance for loan losses:
Balance, October 1, 2016		$	161			$	22			$	9			$	23				38			$	253
Provision for loan losses			4				-				-				(1	)			(3	)			-
Charge-offs			-				-				-				-				-				-
Recoveries			-				-				-				-				-				-
Balance, December 31, 2016		$	165			$	22			$	9			$	22			$	35			$	253
Six Months Ended December 31, 2016
Allowance for loan losses:
Balance, July 1, 2016		$	161			$	22			$	10			$	24			$	36			$	253
Provision for loan losses			4				-				(1	)			(2	)			(1	)			-
Charge-offs			-				-				-				-				-				-
Recoveries			-				-				-				-				-				-
Balance, December 31, 2016		$	165			$	22			$	9			$	22			$	35			$	253
Allowance for loan losses:
Ending balance, individually evaluated for impairment		$	11			$	-			$	-			$	-			$	-			$	11
Ending balance, collectively evaluated for impairment		$	154			$	22			$	9			$	22			$	35			$	242
Loans:
Ending balance		$	23,432			$	3,254			$	1,725			$	4,280							$	32,691
Ending balance; individually evaluated for impairment		$	395			$	19			$	-			$	-							$	414
Ending balance; collectively evaluated for impairment		$	23,037			$	3,235			$	1,725			$	4,280							$	32,277

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and six months ended December 31, 2015:

 

		Real Estate
										Commercial
		1-4 Family				Home Equity				and Multi-				Consumer
		Residential				Lines of Credit				Family				and Other				Unallocated				Total
		(In thousands)
Three Months Ended December 31, 2015
Allowance for loan losses:
Balance, October 1, 2015		$	160			$	19			$	6			$	9				81			$	275
Provision for loan losses			(18	)			(1	)			-				17				2				-
Charge-offs			-				-				-				(8	)			-				(8	)
Recoveries			-				-				-				-				-				-
Balance, December 31, 2015		$	142			$	18			$	6			$	18			$	83			$	267
Six Months Ended December 31, 2015
Allowance for loan losses:
Balance, July 1, 2015		$	154			$	21			$	3			$	8			$	102			$	288
Provision for loan losses			1				(3	)			3				18				(19	)			-
Charge-offs			(13	)			-				-				(8	)			-				(21	)
Recoveries			-				-				-				-				-				-
Balance, December 31, 2015		$	142			$	18			$	6			$	18			$	83			$	267

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following table presents, by portfolio segment, the allowance for loan losses, the recorded investment in loans and impairment method as of June 30, 2016:

 

		Real Estate
										Commercial
		1-4 Family				Home Equity				and Multi-				Consumer
		Residential				Lines of Credit				Family				and Other				Unallocated				Total
		(In thousands)
June 30, 2016
Allowance for loan losses:
Ending balance, individually evaluated for impairment		$	10			$	-			$	-			$	-			$	-			$	10
Ending balance, collectively evaluated for impairment		$	151			$	22			$	10			$	24			$	36			$	243
Loans:
Ending balance		$	23,066			$	3,312			$	1,641			$	4,863							$	32,882
Ending balance; individually evaluated for impairment		$	406			$	14			$	-			$	-							$	420
Ending balance; collectively evaluated for impairment		$	22,660			$	3,298			$	1,641			$	4,863							$	32,462

 

 

Internal Risk Categories

 

The Company has adopted a standard loan grading system for all loans. Loans are selected for a grading review based on certain characteristics, including credit concentrations, subprime criteria and delinquency of 90 days or more. Definitions are as follows:

 

Pass: These are higher quality loans that do not fit any of the other categories described below.

 

Special Mention: The loans identified as special mention have an obvious flaw or a potential weakness that deserves special management attention, but which has not yet impacted collectability. These flaws or weaknesses, if left uncorrected, may result in the deterioration of the prospects of repayment or the deterioration of the Company’s credit position.

 

Substandard: These are loans with a well-defined weakness, where the Company has a serious concern about the borrower’s ability to make full repayment if the weaknesses are not corrected. The loan may contain a flaw, which could impact the borrower’s ability to repay, or the borrower’s continuance as a “going concern.” When collateral values are not sufficient to secure the loan and other weaknesses are present, the loan may be rated substandard. A loan will also be rated substandard when full repayment is expected, but it must come from the liquidation of collateral.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

One-to-four family residential real estate loans and home equity loans that are past due 90 days or more with loan to value ratios greater than 60 percent are classified as substandard.

 

Doubtful: These are loans with major defined weaknesses, where future charge-off of a part of the credit is highly likely. The primary repayment source is no longer viable and the viability of the secondary source of repayment is in doubt. The amount of loss is uncertain due to circumstances within the credit that are not yet fully developed and the loan is rated “Doubtful” until the loss can be accurately estimated.

 

Loss: These are near term charge-offs. Loans classified as loss are considered uncollectible and of such little value that it is not desirable to continue carrying them as assets on the Company’s financial statements, even though partial recovery may be possible at some future time.

 

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of December 31, 2016 and June 30, 2016:

 

		December 31, 2016
		Real Estate
										Commercial
		1-4 Family				Home Equity				and Multi-				Consumer
		Residential				Lines of Credit				Family				and Other				Total
		(In thousands)
Pass		$	22,454			$	3,206			$	1,725			$	4,280			$	31,665
Special mention			-				-				-				-				-
Substandard			978				48				-				-				1,026
Doubtful			-				-				-				-				-
Total		$	23,432			$	3,254			$	1,725			$	4,280			$	32,691

 

		June 30, 2016
		Real Estate
										Commercial
		1-4 Family				Home Equity				and Multi-				Consumer
		Residential				Lines of Credit				Family				and Other				Total
		(In thousands)
Pass		$	22,259			$	3,238			$	1,641			$	4,863			$	32,001
Special mention			-				-				-				-				-
Substandard			807				74				-				-				881
Doubtful			-				-				-				-				-
Total		$	23,066			$	3,312			$	1,641			$	4,863			$	32,882

 

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2016 and June 30, 2016:

 

		December 31, 2016
										90 Days and
		30-59 Days				60-89 Days				Greater				Total								Total Loans
		Past Due				Past Due				Past Due				Past Due				Current				Receivable
		(In thousands)
Real estate
1-4 family residential		$	126			$	-			$	167			$	293			$	23,139			$	23,432
Home equity lines of credit			32				-				4				36				3,218				3,254
Commercial and multi-family			14				-				-				14				1,711				1,725
Consumer and other			-				-				-				-				4,280				4,280
Total		$	172			$	-			$	171			$	343			$	32,348			$	32,691

 

		June 30, 2016
										90 Days and
		30-59 Days				60-89 Days				Greater				Total								Total Loans
		Past Due				Past Due				Past Due				Past Due				Current				Receivable
		(In thousands)
Real estate
1-4 family residential		$	97			$	97			$	46			$	240			$	22,826			$	23,066
Home equity lines of credit			-				-				-				-				3,312				3,312
Commercial and multi-family			15				-				-				15				1,626				1,641
Consumer and other			-				-				-				-				4,863				4,863
Total		$	112			$	97			$	46			$	255			$	32,627			$	32,882

 

A loan is considered impaired when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include loans modified in troubled debt restructurings.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following table presents impaired loan information as of and for the three and six months ended December 31, 2016:

 

														For the Three Months Ended								For the Six Months Ended
		As of December 31, 2016												December 31, 2016								December 31, 2016
						Unpaid				Allowance for Loan				Average				Interest				Average				Interest
		Recorded Investment				Principal Balance				Losses Allocated				Recorded Investment				Income Recognized				Recorded Investment				Income Recognized
		(In thousands)
Loans with no related allowance recorded:
Real estate
1-4 family residential		$	299			$	299			$	-			$	301			$	-				302			$	-
Home equity lines of credit			19				19				-				20				-				20				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Loans with an allowance recorded:
Real estate
1-4 family residential			96				98				11				97				1				98				2
Home equity lines of credit			-				-				-				-				-				-				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Totals		$	414			$	416			$	11			$	418			$	1			$	420			$	2

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following table presents impaired loan information as of June 30, 2016 and for the three and six months ended December 31, 2015:

 

														For the Three Months Ended								For the Six Months Ended
		As of June 30, 2016												December 31, 2015								December 31, 2015
						Unpaid				Allowance for Loan				Average				Interest				Average				Interest
		Recorded Investment				Principal Balance				Losses Allocated				Recorded Investment				Income Recognized				Recorded Investment				Income Recognized
		(In thousands)
Loans with no related allowance recorded:
Real estate
1-4 family residential		$	306			$	306			$	-			$	235			$	-			$	248			$	-
Home equity lines of credit			14				14				-				18				-				19				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Loans with an allowance recorded:
Real estate
1-4 family residential			100				102				10				104				1				105				2
Home equity lines of credit			-				-				-				2				-				2				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Totals		$	420			$	422			$	10			$	359			$	1			$	374			$	2

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.  Interest income recognized on a cash basis was not materially different than interest income recognized. 

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The following table presents the Company’s nonaccrual loans at December 31, 2016 and June 30, 2016. The table excludes performing troubled debt restructurings.

 

		December 31,				June 30,
		2016				2016
		(In thousands)
Real estate
1-4 family residential		$	320			$	310
Home equity lines of credit			19				14
Commercial and multi-family			-				-
Consumer and other			-				-
Total nonaccrual		$	339			$	324

 

At December 31, 2016 and June 30, 2016, the Company had certain loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan. The Company had loans modified, in previous years, in a troubled debt restructuring totaling $88,000 and $92,000 at December 31, 2016 and June 30, 2016, respectively. Troubled debt restructured loans had specific allowances totaling $8,000 and $7,000 at December 31, 2016 and June 30, 2016, respectively. At December 31, 2016, the Company had no commitments to lend additional funds to borrowers with troubled debt restructured loans.

 

No loans were modified as troubled debt restructurings during either the three and six months ended December 31, 2016 or 2015.

 

The Company had no troubled debt restructurings modified during the twelve months ended December 31, 2016 or 2015 that subsequently defaulted during the six-month periods ended December 31, 2016 or 2015. A troubled debt restructured loan is considered to be in payment default once it is 30 days contractually past due under the loan’s modified terms.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Note 4:

Regulatory Matters

 

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Furthermore, the Company’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier I capital and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of leverage capital to adjusted average total assets (as defined).

 

Management believes, as of December 31, 2016 and June 30, 2016, that the Company meets all capital adequacy requirements to which it is subject.

 

Basel III was effective for the Company on January 1, 2015. Basel III requires the Company to maintain minimum amounts and ratios of common equity Tier 1 capital to risk-weighted assets, as defined in the regulation. Under the new Basel III rules, in order to avoid limitations on capital distributions, including dividends, the Company must hold a capital conservation buffer above the adequately capitalized common equity Tier 1 capital to risk-weighted assets ratio. The capital conservation buffer is being phased in from zero percent to 2.50 percent by 2019. Under Basel III, the Company elected to opt-out of including accumulated other comprehensive income in regulatory capital.

 

As of December 31, 2016 and June 30, 2016, the most recent notification categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total capital, Tier I capital, common equity Tier 1 capital and leverage capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company’s category.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The Bank’s actual capital amounts and ratios are presented in the following table:

 

		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2016
Total Capital
(to Risk-Weighted Assets)		$	6,771				26.1	%		$	2,077				8.0	%		$	2,596				10.0	%
Tier I Capital
(to Risk-Weighted Assets)		$	6,518				25.1	%		$	1,558				6.0	%		$	2,077				8.0	%
Common Equity
(to Risk-Weighted Assets)		$	6,518				25.1	%		$	1,168				4.5	%		$	1,688				6.5	%
Tier I Capital
(to Adjusted Average Total Assets)		$	6,518				12.0	%		$	2,168				4.0	%		$	2,710				5.0	%
As of June 30, 2016
Total Capital
(to Risk-Weighted Assets)		$	6,820				27.7	%		$	1,969				8.0	%		$	2,462				10.0	%
Tier I Capital
(to Risk-Weighted Assets)		$	6,567				26.7	%		$	1,477				6.0	%		$	1,969				8.0	%
Common Equity
(to Risk-Weighted Assets)		$	6,567				26.7	%		$	1,108				4.5	%		$	1,600				6.5	%
Tier I Capital
(to Adjusted Average Total Assets)		$	6,567				11.9	%		$	2,205				4.0	%		$	2,756				5.0	%

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Note 5:

Disclosures about Fair Value of Assets and Liabilities

 

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

Level 1

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3

Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Recurring Measurements

 

The following table presents the fair value measurement of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2016 and June 30, 2016:

 

						Fair Value Measurement Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
December 31, 2016
Mortgage-backed securities of U.S. government sponsored entities - residential		$	6,186			$	-			$	6,186			$	-
Collateralized mortgage obligations of government sponsored entities - residential			381				-				381				-
State and political subdivisions
Taxable			1,406				-				1,406				-
Nontaxable			1,979				-				1,979				-
		$	9,952			$	-			$	9,952			$	-
June 30, 2016
U. S. Government agency bonds		$	1,497			$	-			$	1,497			$	-
Mortgage-backed securities of U.S. government sponsored entities - residential			5,573				-				5,573				-
Collateralized mortgage obligations of government sponsored entities - residential			532				-				532				-
State and political subdivisions
Taxable			1,438				-				1,438				-
Nontaxable			2,057				-				2,057				-
		$	11,097			$	-			$	11,097			$	-

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There were no assets classified within Level 3 of the fair value hierarchy measured on a recurring basis. There were no transfers between Level 1 and Level 2 during the six-month periods ended December 31, 2016 and 2015.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Available-for-sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flow. Such securities are classified within Level 2 of the valuation hierarchy.

 

Nonrecurring Measurements

 

The following table presents fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which fair value measurements fall at December 31, 2016 and June 30, 2016:

 

						Fair Value Measurement Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
December 31, 2016
Impaired loans
Real estate
One-to-four family residential		$	85			$	-			$	-			$	85
Foreclosed assets		$	21			$	-			$	-			$	21
June 30, 2016
Impaired loans
Real estate
One-to-four family residential		$	90			$	-			$	-			$	90

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

 

Impaired Loans (Collateral Dependent)

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Foreclosed Assets

 

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Appraisals for collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

 

Unobservable (Level 3) Inputs

 

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements:

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

		Fair Value				Valuation Technique		Unobservable Inputs		Range (Weighted Average)
		(In thousands)
December 31, 2016
Impaired loans (collateral dependent) - residential real estate		$	85			Sales comparison approach		Adjustment for differences between the comparable real estate sales			11	%
Foreclosed assets		$	21			Sales comparison approach		Adjustment for differences between the comparable real estate sales			9	%
June 30, 2016
Impaired loans (collateral dependent) - residential real estate		$	90			Sales comparison approach		Adjustment for differences between the comparable real estate sales			10	%

 

Fair Value of Financial Instruments

 

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2016 and June 30, 2016.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

						Fair Value Measurement Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
		(In thousands)
December 31, 2016
Financial assets
Cash and cash equivalents		$	7,753			$	7,753			$	-			$	-			$	7,753
Interest-earning time deposits			4,827				4,827				-				-				4,827
Other investment securities			940				-				-				940				940
Loans, net			32,438				-				-				32,977				32,977
Accrued interest receivable			179				-				179				-				179
Financial liabilities
Deposits			40,711				32,629				7,968				-				40,597
Federal Home Loan Bank advances			6,200				-				6,243				-				6,243
Stock subscription proceeds in escrow			3,572				3,572				-				-				3,572
Payments by borrowers for taxes and insurance			207				-				207				-				207
June 30, 2016
Financial assets
Cash and cash equivalents		$	3,184			$	3,184			$	-			$	-			$	3,184
Interest-earning time deposits			5,567				5,567				-				-				5,567
Other investment securities			940				-				-				940				940
Loans, net			32,629				-				-				34,368				34,368
Accrued interest receivable			185				-				185				-				185
Financial liabilities
Deposits			40,102				32,185				7,932				-				40,117
Federal Home Loan Bank advances			7,250				-				7,316				-				7,316
Payments by borrowers for taxes and insurance			82				-				82				-				82

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and Cash Equivalents and Interest-earning Time Deposits

 

The carrying amount of cash, short-term instruments and time deposits approximate fair value and are classified as Level 1.

 

Other Investment Securities

 

Due to restrictions placed on their transferability, the FHLB and COCC stock are carried at cost, which approximates fair value based on redemption provisions resulting in a Level 3 classification.

 

Loans

 

Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, resulting in a

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value of collateral as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

Accrued Interest Receivable and Payable

 

The carrying amounts of accrued interest approximate fair value, resulting in a Level 2 classification.

 

Deposits

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

 

Federal Home Loan Bank Advances

 

The fair values of FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.

 

Stock Subscription Proceeds in Escrow

 

The carrying amounts of stock subscription proceeds in escrow approximate fair value resulting in a Level 1 classification.

 

Payments by Borrowers for Taxes and Insurance

 

The fair value of escrow accounts is estimated to approximate the carrying amount resulting in a Level 2 classification.

 

Off Balance Sheet Instruments

 

Fair values of off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Note 6:

Accumulated Other Comprehensive Loss

 

Changes in accumulated other comprehensive loss by component, net of tax, for the three and six months ended December 31, 2016 and 2015 are as follows:

 

		Three Months Ended December 31,
		2016				2015
		(In thousands)
Balance, October 1		$	94			$	6
Other comprehensive loss			(157	)			(2	)
Balance, December 31		$	(63	)		$	4

 

		Six Months Ended December 31,
		2016				2015
		(In thousands)
Balance, July 1		$	88			$	(110	)
Other comprehensive income (loss)			(151	)			114
Balance, December 31		$	(63	)		$	4

 

 

There were no material items reclassified from accumulated other comprehensive loss to the statement of income for the three- and six-month periods ended December 31, 2016 and 2015.

 

Note 7:

Recent Accounting Pronouncements

 

FASB ASU 2014-09, Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within the reporting period, and should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Early adoption is prohibited. Management is currently in the process of evaluating the impact of the amended guidance on the Company’s financial statements.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

FASB ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

 

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the amendments in this update is not permitted, except that early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance are permitted as of the beginning of the fiscal year of adoption for the following amendment: An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. An entity should apply the amendments to this update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Management is currently evaluating the impact of adopting this guidance on the Company’s financial statements.

 

FASB ASU 2016-02, Leases. In February 2016 the FASB issued ASU 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

●

A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and

 

●

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.

 

The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the impact of adopting this guidance on the Company’s financial statements.

 

FASB ASU 2016-13 Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU 2016-13. The amendments in this ASU replace the incurred loss model for recognition of credit losses with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations.

 

Note 8:

Plan of Conversion and Change in Corporate Form

 

On August 25, 2016, the Board of Directors adopted a Plan of Conversion (the “Plan”) to convert from a federal mutual savings bank to a federal stock savings bank (the “Conversion”).  A new Maryland-chartered corporation, Community Savings Bancorp, Inc. (the “Company”), was formed in August 2016, which, upon consummation of the Conversion and offering, became the savings and loan holding company of Community Savings (the “Bank”). The Plan was subject to approval of the members of the Bank, which approval was received at a Special Meeting of Members on December 21, 2016.

 

Additionally, the Plan was subject to the final approval of the Office of the Comptroller of the Currency (“OCC”) and the formation of the Company as the holding company of the Bank, upon consummation of the Conversion, was subject to the approval of the Board of Governors of the Federal Reserve System (“FRB”). As part of the Conversion and offering, the Company filed a registration statement with the U.S. Securities and Exchange Commission.  Upon receipt of the final approval of the OCC and the FRB and the consummation of the Conversion and offering, the Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock to eligible depositors and borrowers of the Bank and the public pursuant to an independent valuation appraisal of the Bank and the Company on a converted basis that has been conducted by an independent appraisal firm that is experienced in appraising financial institutions in connection with mutual to stock conversions. The Conversion was completed on January 10, 2017 and resulted in the issuance of 441,290 common shares by the Company.  

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Financial Statements (unaudited)

 

The cost of the Conversion and issuing the capital stock was deferred and deducted from the proceeds of the offering. Through December 31, 2016, we had incurred approximately $723,000 in conversion costs, which are included in other assets on the condensed balance sheet.

 

In accordance with OCC regulations, at the time of the Conversion, the Bank substantially restricted retained earnings by establishing a liquidation account.  The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after the Conversion.  The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.  In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.  The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

 

 

Community Savings Bancorp, Inc.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis of the financial condition at December 31, 2016 and results of operations for the three and six months ended December 31, 2016 and 2015, is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

 

Forward-Looking Statements

 

This document contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions. These forward-looking statements include: statements of goals, intentions and expectations, statements regarding prospects and business strategy, statements regarding asset quality and market risk, and estimates of future costs, benefits and results.

 

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following: (1) general economic conditions, (2) competitive pressure among financial services companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand, (6) changes in legislation or regulation, (7) changes in accounting principles, policies and guidelines and (8) other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We have no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.

 

Critical Accounting Policies

 

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these 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 Jumpstart Our Business Startups Act of 2012 (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 financial statements may not be comparable to companies that comply with such new or revised accounting standards.

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following represent our critical accounting policies:

 

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

 

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

 

The analysis has two components, specific and general allowances. The specific percentage allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allowance, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

 

Deferred Tax Assets. 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. 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. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Determining the proper valuation allowance for deferred taxes is critical in properly valuing the deferred tax asset and the related recognition of income tax expense or benefit. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Bank estimates the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Bank estimates fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by the Company can be found in Note 13 of the Financial Statements “– Disclosures About Fair Value of Assets and Liabilities,” included in the Registrant’s S-1 filing.

 

Comparison of Financial Condition at December 31, 2016 and June 30, 2016

 

Total Assets. Total assets increased $3.2 million, or 5.9%, to $57.5 million at December 31, 2016 from $54.3 million at June 30, 2016. The increase was due primarily to an increase in cash and due from banks as we received subscription funds for our stock offering which was consummated on January 10, 2017.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $4.6 million, or 143.5%, to $7.8 million at December 31, 2016 from $3.2 million at June 30, 2016. The increase in cash and cash equivalents was primarily due to those funds received as a result of the sale of stock and maturities of interest-earning time deposits in other financial institutions and available-for-sale securities.

 

Interest-earning Time Deposits in Other Financial Institutions. Interest-earning time deposits in other financial institutions decreased $740,000, or 13.3%, to $4.8 million at December 31, 2016 from $5.6 million at June 30, 2016. The decrease was due to maturities of these deposits during the period.

 

Securities available-for-sale. Investments in securities available-for-sale decreased $1.1 million, or 10.3%, to $10.0 million at December 31, 2016 from $11.1 million at June 30, 2016. The decrease in securities available-for-sale was primarily due to calls of securities of $1.5 million and principal repayments on mortgage-backed securities totaling $841,000, partially offset by purchases of $1.5 million.

 

Net Loans. Net loans decreased $191,000, or 0.6%, to $32.4 million at December 31, 2016 from $32.6 million at June 30, 2016. The decrease in net loans was due primarily to a decrease of $583,000, or 12.0%, in consumer loans to $4.3 million at December 31, 2016 from $4.9 million at June 30, 2016. Partially offsetting these decreases, commercial and multi-family loans increased $84,000, or 5.1% and one-to four-family residential loans increased $366,000 during the six months ended December 31, 2016. Loans originated during the six months ended December 31, 2016 totaled $2.4 million, of which $2.2 million were loans secured by one-to four-family residential real estate.

 

Other Assets. Other assets increased $720,000, or 377.0%, to $911,000 at December 31, 2016 from $191,000 at June 30, 2016. The increase was due primarily to conversion costs incurred of $723,000.

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

These costs have been deferred and will ultimately be offset against the proceeds of the sale of common stock upon completion of the stock offering.

 

Deposits. Deposits increased $609,000 or 1.5%, to $40.7 million at December 31, 2016 from $40.1 million at June 30, 2016. The increase was comprised of growth in savings and money market accounts of $847,000 and in certificates of deposit of $165,000.

 

FHLB Advances. FHLB advances decreased $1.1 million, or 14.5%, to $6.2 million at December 31, 2016 from $7.3 million at June 30, 2016, as we utilized funds from maturing interest-earning time deposits in other financial institutions and investment securities available for sale to repay certain FHLB advances.

 

Stock Subscription Proceeds in Escrow. Stock subscription proceeds in escrow totaled $3.6 million at December 31, 2016, which represented funds received and held at the Bank for stock subscription orders received related to the Bank’s conversion from mutual to stock form. As the conversion was not completed as of December 31, 2016, the proceeds were held in escrow. Upon completion of the conversion on January 10, 2017, these funds were transferred to shareholders’ equity on the balance sheet of the Bank’s newly formed holding company Community Savings Bancorp, Inc. The conversion resulted in the issuance of 441,290 shares of common stock at an offering price of $10.00 per share.

 

Total Equity. Total equity decreased $201,000, or 3.0%, to $6.5 million at December 31, 2016 from $6.7 million at June 30, 2016. The decrease resulted from the net loss of $50,000 and increase in the other comprehensive loss of $151,000 during the period.

 

Comparison of Operating Results for the Three-Month Periods Ended December 31, 2016 and 2015

 

General. For the three months ended December 31, 2016, we had a net loss of $54,000 compared to net income of $18,000 for the three months ended December 31, 2015, a decrease of $72,000. The net loss resulted primarily from a decrease in net interest income of $27,000 and an increase of $55,000 in non-interest expense, offset in part by an increase of $9,000 in federal income tax benefits.

 

Average Balance Sheets. 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. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are accreted to interest income.

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

		Three Months Ended December 31,
		2016												2015
		Average Outstanding Balance				Interest				Yield/ Rate (1)				Average Outstanding Balance				Interest				Yield/         Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	32,506			$	353				4.34	%		$	31,217			$	351				4.50	%
Investment securities			10,223				51				2.00	%			14,211				74				2.08	%
Other interest-earning assets (2)			7,799				29				1.49	%			7,712				33				1.71	%
Total interest-earning assets			50,528				433				3.43	%			53,140				458				3.45	%
Non-interest-earning assets			3,918												2,955
Allowance for loan losses			(253	)											(275	)
Total assets		$	54,193											$	55,820
Interest-bearing liabilities:
Interest-bearing demand		$	2,481				1				0.16	%		$	2,471				1				0.16	%
Savings accounts			23,322				17				0.29	%			24,040				18				0.30	%
Certificates of deposit			7,824				14				0.72	%			7,990				14				0.70	%
Total deposits			33,627				32				0.38	%			34,501				33				0.38	%
FHLB advances			6,200				22				1.42	%			7,677				19				0.99	%
Total interest-bearing liabilities			39,827				54				0.54	%			42,178				52				0.49	%
Non-interest-bearing liabilities			7,777												7,089
Total liabilities			47,604												49,267
Equity			6,589												6,553
Total liabilities and equity		$	54,193											$	55,820
Net interest income						$	379											$	406
Net interest rate spread (3)											2.89	%											2.96	%
Net interest-earning assets (4)		$	10,701											$	10,962
Net interest margin (5)											3.00	%											3.06	%
Average interest-earning assets to interest-bearing liabilities			126.87	%											125.99	%

 

(1)

Yields and rates are annualized.

(2)

Consists of stock in the FHLB and interest bearing demand and time deposits in other banks.

(3)

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

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

(5)

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

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Interest Income. Interest income decreased $25,000, or 5.5%, to $433,000 for the three months ended December 31, 2016 from $458,000 for the three months ended December 31, 2015. The decrease resulted primarily from a $23,000 decrease in interest on investment securities. The average balance of investment securities decreased $4.0 million, or 28.1%, to $10.2 million during the three months ended December 31, 2016 from $14.2 million during the three months ended December 31, 2015, and the average yield on investment securities decreased eight basis points to 2.00% for the 2016 period from 2.08% for the 2015 period. The average balance of loans receivable increased $1.3 million, or 4.1%, to $32.5 million during the three months ended December 31, 2016 from $31.2 million during the three months ended December 31, 2015, but the average yield on loans decreased 16 basis points to 4.34% during the three months ended December 31, 2016 from 4.5% during the year earlier period, reflecting lower market interest rates.

 

Interest Expense. Interest expense increased $2,000, or 3.8%, to $54,000 for the three months ended December 31, 2016 from $52,000 for the three months ended December 31, 2015. Interest expense on deposits decreased $1,000, or 3.0%, to $32,000 for the three months ended December 31, 2016 from $33,000 for the three months ended December 31, 2015. The decrease was primarily due to a decrease of $874,000, or 2.5%, in the average balance of interest-bearing deposits to $33.6 million for the three month period in 2016 from $34.5 million for the comparable period in 2015. The average cost of interest-bearing deposits remained steady at 0.38% for each of the three months ended December 31, 2016 and 2015. Interest expense on borrowings increased $3,000 to $22,000 for the three months ended December 31, 2016 from $19,000 for the three months ended December 31, 2015. The average balance of FHLB advances decreased $1.5 million to $6.2 million for the three months ended December 31, 2016 from $7.7 million for the three months ended December 31, 2015, while the average cost of these advances increased 43 basis points to 1.42% from 0.99% period-to-period.

 

Net Interest Income. Net interest income decreased $27,000, or 6.7%, to $379,000 for the three months ended December 31, 2016 from $406,000 for the three months ended December 31, 2015. Our net interest rate spread decreased to 2.89% for the three months ended December 31, 2016 from 2.96% for the three months ended December 31, 2015, and our net interest margin decreased to 3.00% for the three months ended December 31, 2016 from 3.06% for the comparable three-month period in 2015.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses,” we did not record a provision for loan losses for either of the three months ended December 31, 2016 or 2015. The allowance for loan losses was $253,000, or 0.77% of total loans, at December 31, 2016, compared to $267,000, or 0.84% of total loans, at December 31, 2015. Total nonperforming loans were $339,000 at December 31, 2016, compared to $222,000 at December 31, 2015. Classified (substandard, doubtful and loss) loans were $1.0 million at December 31, 2016, compared to $805,000 at December 31, 2015, and total loans past due greater than 30 days were $343,000 and $334,000 at December 31, 2016 and 2015, respectively. The Bank had no net charge-offs during the three months ended December 31, 2016 compared to $8,000 for the three months ended December 31, 2015. As a percentage of nonperforming loans, the allowance for loan losses was 74.6% at December 31, 2016 compared to 120.3% at December 31, 2015.

 

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at December 31, 2016 and 2015. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.

 

Noninterest Income. Noninterest income increased $1,000, or 1.4%, to $70,000 for the three months ended December 31, 2016 from $69,000 for the three months ended December 31, 2015. Service charges and fees of $65,000 during the three months ended December 31, 2016 remained unchanged compared to the same period in 2015. There were no foreclosed assets sold in the three months ending December 2016 compared to a gain of $2,000 on foreclosed assets sold during the same period in 2015. This decrease was partially offset by an increase of $3,000 in other operating income in the three months ended December 31, 2016, compared to the 2015 quarter.

 

Noninterest Expense. Noninterest expense increased $55,000, or 11.8%, to $522,000 for the three months ended December 31, 2016 compared to $467,000 for the three months ended December 31, 2015. Data processing increased by a one-time expense of $18,000 due to costs to enhance our cyber-security protection, and our correspondent bank service charges were up by $27,000 as a result of our switch from VISA to Master Card. We anticipate a reimbursement of most of that expense per our contract. Other expenses were up by $27,000 or 75.0%, to $63,000 from $36,000 during the three months ended December 31, 2015, due to charges incurred in connection with customers debit card fraud claims. We have implemented a process that we believe will greatly reduce any future losses. FDIC insurance premiums decreased by $13,000 due to a decrease in the insurance rates period-to-period.

 

Noninterest expense can be expected to increase because of costs associated with operating as a public company and increased compensation costs related to possible implementation of a stock-based benefit plan, if approved by our stockholders. Additionally, we intend to withdraw from our multiple-employer defined benefit plan following completion of the conversion and expect to incur a one-time charge of approximately $1.6 million in connection with this withdrawal.

 

Federal Income Taxes. We recognized a federal income tax benefit of $19,000 for the three months ended December 31, 2016, compared to a tax benefit of $10,000 recognized during the three months ended December 31, 2015.

 

Comparison of Operating Results for the Six-Month Periods Ended December 31, 2016 and 2015

 

General. For the six months ended December 31, 2016, we had net loss of $50,000 compared to net income of $646,000 for the six months ended December 31, 2015, a decrease of $696,000. The decrease in net income resulted primarily from a decrease of $793,000 in noninterest income, which included an $810,000 one-time gain on sale of branch offices realized in the 2015 period and a decrease of $30,000 in net interest income, which were offset in part by a decrease of $79,000 in noninterest expense and a decrease of $48,000 in federal income tax.

 

Average Balance Sheets. 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. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are accreted to interest income.

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

		Six Months Ended December 31,
		2016												2015
		Average Outstanding Balance				Interest				Yield/ Rate (1)				Average Outstanding Balance				Interest				Yield/ Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	32,599			$	709				4.35	%		$	30,374			$	690				4.54	%
Investment securities			10,468				102				1.95	%			15,150				146				1.93	%
Other interest-earning assets (2)			7,571				61				1.61	%			8,743				67				1.53	%
Total interest-earning assets			50,638				872				3.44	%			54,267				903				3.33	%
Non-interest-earning assets			3,484												3,428
Allowance for loan losses			(253	)											(267	)
Total assets		$	53,869											$	57,428
Interest-bearing liabilities:
Interest-bearing demand		$	2,564				2				0.16	%		$	2,630				3				0.23	%
Savings accounts			22,722				32				0.28	%			25,121				36				0.29	%
Certificates of deposit			7,849				28				0.71	%			8,671				33				0.76	%
Total deposits			33,135				62				0.37	%			36,422				72				0.40	%
FHLB advances			6,371				44				1.38	%			6,624				35				1.06	%
Total interest-bearing liabilities			39,506				106				0.54	%			43,046				107				0.50	%
Non-interest-bearing liabilities			7,731												7,937
Total liabilities			47,237												50,983
Equity			6,632												6,445
Total liabilities and equity		$	53,869											$	57,428
Net interest income						$	766											$	796
Net interest rate spread (3)											2.90	%											2.83	%
Net interest-earning assets (4)		$	11,132											$	11,221
Net interest margin (5)											3.03	%											2.93	%
Average interest-earning assets to interest-bearing liabilities			128.18	%											126.07	%

 

(1)

Yields and rates are annualized.

(2)

Consists of stock in the FHLB and interest bearing demand and time deposits in other banks.

(3)

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

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

(5)

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

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Interest Income. Interest income decreased $31,000, or 3.4%, to $872,000 for the six months ended December 31, 2016 from $903,000 for the six months ended December 31, 2015. The decrease resulted primarily from a $44,000 decrease in interest on investment securities offset in part by a $19,000 increase in interest on loans receivable. The average balance of investment securities decreased $4.7 million, or 30.9%, to $10.5 million during the six months ended December 31, 2016 from $15.2 million during the six months ended December 31, 2015, and the average yield on investment securities increased two basis points to 1.95% for the 2016 period from 1.93% for the 2015 period. The average balance of loans receivable increased $2.2 million, or 7.3%, to $32.6 million during the six months ended December 31, 2016 from $30.4 million during the six months ended December 31, 2015, but the average yield on loans decreased 19 basis points to 4.35% during the six months ended December 31, 2016 from 4.54% during the year earlier period, reflecting lower market interest rates.

 

Interest Expense. Interest expense decreased $1,000, or 0.9%, to $106,000 for the six months ended December 31, 2016 from $107,000 for the six months ended December 31, 2015. Interest expense on deposits decreased $10,000, or 13.9%, to $62,000 for the six months ended December 31, 2016 from $72,000 for the six months ended December 31, 2015. The decrease was primarily due to a decrease of $3.3 million, or 9.0%, in the average balance of interest-bearing deposits to $33.1 million for the six month period in 2016 from $36.4 million for the comparable period in 2015. The average cost of interest-bearing deposits decreased by three basis points to 0.37% for the six months ended December 31, 2016 from 0.40% for the six months ended December 31, 2015. Interest expense on borrowings increased $9,000 to $44,000 for the six months ended December 31, 2016 from $35,000 for the six months ended December 31, 2015. The average balance of FHLB advances decreased $253,000 to $6.4 million for the six months ended December 31, 2016 from $6.6 million for the six months ended December 31, 2015, while the average cost of these advances increased 32 basis points to 1.38% from 1.06% period-to-period.

 

Net Interest Income. Net interest income decreased $30,000, or 3.8%, to $766,000 for the six months ended December 31, 2016 from $796,000 for the six months ended December 31, 2015. Our net interest rate spread increased to 2.90% for the six months ended December 31, 2016 from 2.83% for the six months ended December 31, 2015, and our net interest margin increased to 3.03% for the six months ended December 31, 2016 from 2.93% for the comparable six-month period in 2015.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses,” we did not record a provision for loan losses for either of the six months ended December 31, 2016 or 2015. The allowance for loan losses was $253,000, or 0.77% of total loans, at December 31, 2016, compared to $267,000, or 0.84% of total loans, at December 31, 2015. Total nonperforming loans were $339,000 at December 31, 2016, compared to $222,000 at December 31, 2015. Classified (substandard, doubtful and loss) loans were $1.0 million at December 31, 2016, compared to $805,000 at December 31, 2015, and total loans past due greater than 30 days were $343,000 and $334,000 at December 31, 2016 and 2015, respectively. The Bank had no net charge-offs during the six months ended December 31, 2016 compared to $21,000 for the six months ended December 31, 2015. As a percentage of nonperforming loans, the allowance for loan losses was 74.6% at December 31, 2016 compared to 120.3% at December 31, 2015.

 

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at December 31, 2016 and 2015. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.

 

Noninterest Income. Noninterest income decreased $793,000, or 82.4%, to $169,000 for the six months ended December 31, 2016 from $962,000 for the six months ended December 31, 2015. This decrease is due to the gain on the sale of the branches of $810,000 during the 2015 period. Service charges and fees decreased $18,000 to $130,000 during the six months ended December 31, 2016 compared to $148,000 during the same period in 2015. This decrease was partially offset by foreclosed assets sold at a $29,000 net gain in the six months ending December 2016 compared to a net gain of $1,000 on foreclosed assets sold during the same period in 2015 and an increase of $7,000 in other operating income in the six months ended December 31, 2016, compared to the 2015 quarter.

 

Noninterest Expense. Noninterest expense decreased $79,000, or 7.3%, to $1.0 million for the six months ended December 31, 2016 compared to $1.1 million for the six months ended December 31, 2015. Occupancy and equipment decreased $21,000, or 29.6%, to $50,000 during the six months ended December 31, 2016 from $71,000 during the six months ended December 31, 2015. The decrease was attributable to non-recurring expense during the 2015 period. Our data processing decreased by $35,000 as a result of having two less branch offices, and our correspondent bank service charges were up by $18,000 as a result of our switch from VISA to Master Card. We anticipate reimbursement of most of that expense per our contract. FDIC insurance premiums decreased by $29,000 due to a decrease in the insurance rates period-to-period.

 

Noninterest expense can be expected to increase because of costs associated with operating as a public company and increased compensation costs related to possible implementation of a stock-based benefit plan, if approved by our stockholders. Additionally, we intend to withdraw from our multiple-employer defined benefit plan following completion of the conversion and expect to incur a one-time charge of approximately $1.6 million in connection with this withdrawal.

 

Federal Income Taxes. We recognized a federal income tax benefit of $21,000 for the six months ended December 31, 2016, compared to $27,000 in expense recognized during the six months ended December 31, 2015.

 

Liquidity and Capital Resources

 

Our primary sources of funds are deposits, principal and interest payments on loans and advances from the FHLB-Cincinnati. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-earning demand deposits. 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 (used in) operating activities was $(457,000) and $86,000 for the six months ended December 31, 2016 and 2015, respectively. Net cash

 

 

Community Savings Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

provided by (used in) investing activities was $1.8 million and $(12.5 million) for the six months ended December 31, 2016 and 2015, respectively. The change in cash flows in investing activities resulted primarily from the sale of two branch offices in July 2015 which resulted in cash paid of $12.6 million during the six months ended December 31, 2015. Cash provided by financing activities was $3.3 million and $5.8 million in the six months ended December 30, 2016 and 2015, respectively.

 

Community Savings is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2016, Community Savings exceeded all regulatory capital requirements and was categorized as “well-capitalized” under regulatory guidelines.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. At December 31, 2016, we had no outstanding commitments to originate loans, we had commitments under undisbursed construction loans of $305,000 and commitments under home equity lines of credit of $2.5 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments.

 

Certificates of deposit that are scheduled to mature in less than one year from December 30, 2016 totaled $4.0 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB-Cincinnati advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

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

 

 

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

ITEM 4

Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation of the Registrant’s management, including our Chief Executive Officer and Principal Financial Officer, the Registrant evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that the Company's disclosure controls and procedures were effective.

 

(b)

Changes in internal controls.

 

There has been no change made in the Registrant’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

 

 

Community Savings Bancorp, Inc.

 

Part II

 

Other Information

 

ITEM 1.

Legal Proceedings

 

We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. At December 31, 2016, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

 

ITEM 1A.

Risk Factors

 

Not applicable.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

There were no sales of unregistered securities during the period covered by this report.

 

(b)

Not applicable.

 

(c)

There were no issuer repurchases of securities during the period covered by this report.

 

ITEM 3.

Defaults Upon Senior Securities

 

None.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.

Other Information

 

None.

 

ITEM 6.		Exhibits
Exhibit
Number		Description
3.1		Articles of Incorporation of Community Savings Bancorp, Inc. (incorporated by reference to Registrant’s Form S-1 filed on November 10, 2016, Exhibit 3.1 (File No. 333-213561))
3.2		Bylaws of Community Savings Bancorp, Inc. (incorporated by reference to Registrant’s Form S-1 filed on November10, 2016, Exhibit 3.2 (File No. 333-213561))
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32		Written Statement of Chief Executive Officer and Principal Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

Community Savings Bancorp, Inc.

 

SIGNATURES

 

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

 

				Community Savings Bancorp, Inc.
Date:	February 14, 2017		By:	/s/Alvin B. Parmiter
				Alvin B. Parmiter
				President and Chief Executive Officer
Date:	February 14, 2017		By:	/s/Sherman E. Crum
				Sherman E. Crum
				Controller and Principal Financial Officer

 

INDEX TO EXHIBITS

 

Exhibit				Page
Number		Description		Reference
3.1		Articles of Incorporation of Community Savings Bancorp, Inc.		Incorporated by reference to registrant's Form S-1 filed on September 10, 2016, Exhibit 3.1 (File No. 333-213561).
3.2		Bylaws of Community Savings Bancorp, Inc.		Incorporated by reference to registrant's Form S-1 filed on September 10, 2016, Exhibit 3.2 (File No. 333-213561).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Included herewith.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Included herewith.
32		Written Statement of Chief Executive Officer and Principal Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Included herewith.
101.INS		XBRL Instance Document		Included herewith.
101.SCH		XBRL Taxonomy Extension Schema Document		Included herewith.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document		Included herewith.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document		Included herewith.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document		Included herewith.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document		Included herewith.