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

March 31, 2017

 

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 x       No ¨

 

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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Emerging growth company x

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

 

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

Yes ¨                No  x

 

As of May 12, 2017, the latest practicable date, 441,290 shares of the registrant’s common stock, $0.01 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)	3
	Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2017 and 2016	5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended March 31, 2017 and 2016	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4	Controls and Procedures	46
PART II – OTHER INFORMATION
Item 1	Legal Proceedings	47
Item 1A	Risk Factors	47
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3	Defaults Upon Senior Securities	47
Item 4	Mine Safety Disclosures	47
Item 5	Other Information	47
Item 6	Exhibits	47
SIGNATURES		48

 

 

Part I – Financial Information

Item 1. Interim Financial Statements (Unaudited)

Community Savings Bancorp, Inc.

Condensed Consolidated Balance Sheets

March 31, 2017 and June 30, 2016

(In thousands except share data)

 

		March 31,				June 30,
		2017				2016
		(Unaudited)
Assets
Cash and due from banks		$	2,510			$	1,969
Interest-earning demand deposits in other financial institutions			5,537				1,215
Cash and cash equivalents			8,047				3,184
Interest-earning time deposits in other financial institutions			5,329				5,567
Investment securities available-for-sale, at fair value			9,009				11,097
Other investment securities			940				940
Loans			31,610				32,882
Less: allowance for loan losses			(253	)			(253	)
Loans, net			31,357				32,629
Premises and equipment, net			453				452
Foreclosed assets, net			21				34
Accrued interest receivable			147				185
Other assets			285				191
Total assets		$	55,588			$	54,279
Liabilities and Shareholders' Equity
Liabilities
Deposits
Demand		$	10,162			$	9,058
Savings and money market			23,380				23,127
Time			7,939				7,917
Total deposits			41,481				40,102
Federal Home Loan Bank advances			4,500				7,250
Payments by borrowers for taxes and insurance			148				82
Other liabilities			78				190
Total liabilities			46,207				47,624
Shareholders' Equity
Preferred stock - par value $0.01 per share, 5,000,000 shares authorized, none issued			-				-
Common stock - par value $0.01 per share, 50,000,000 shares authorized, 441,290 shares issued and outstanding at March 31, 2017			4				-
Additional paid in capital			3,258				-
Unearned employee stock ownership plan (ESOP) shares			(327	)			-
Retained earnings			6,473				6,567
Accumulated other comprehensive income (loss)			(27	)			88
Total shareholders' equity			9,381				6,655
Total liabilities and shareholders' equity		$	55,588			$	54,279

 

See Notes to Condensed Consolidated Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended March 31, 2017 and 2016

(In thousands)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
		(Unaudited)
Interest Income
Loans, including fees		$	346			$	349				1,055			$	1,039
Taxable securities			35				47				109				158
Tax exempt securities			13				14				41				49
Interest-earning deposits			36				33				97				100
Total interest income			430				443				1,302				1,346
Interest Expense
Deposits			32				31				94				103
Federal Home Loan Bank advances			21				23				65				58
Total interest expense			53				54				159				161
Net Interest Income			377				389				1,143				1,185
Provision for Loan Losses			-				-				-				-
Net Interest Income After Provision for Loan Losses			377				389				1,143				1,185
Noninterest Income
Service charges and fees			58				61				188				209
Gain on sale of foreclosed assets, net			-				-				29				1
Gain on sale of branch offices			-				-				-				810
Other operating			1				5				11				8
Total noninterest income			59				66				228				1,028
Noninterest Expense
Salaries, employee benefits and directors fees			216				191				621				593
Occupancy and equipment			26				22				76				93
Data processing			87				61				242				251
Correspondent bank service charges			57				42				175				142
Franchise taxes			13				14				34				38
FDIC insurance premiums			2				8				12				47
Professional services			49				38				141				142
Advertising			1				2				9				8
Office supplies			19				16				54				54
Impairment of foreclosed assets			2				-				2				26
Other			43				50				155				135
Total noninterest expense			515				444				1,521				1,529
Income (Loss) Before Federal Income Taxes			(79	)			11				(150	)			684
Federal Income Taxes (Benefits)			(35	)			5				(56	)			32
Net Income (Loss)		$	(44	)		$	6			$	(94	)		$	652

 

See Notes to Condensed Consolidated Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended March 31, 2017 and 2016

(In thousands)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
		(Unaudited)
Net income (loss)		$	(44	)		$	6			$	(94	)		$	652
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale			53				84				(175	)			257
Tax effect			(17	)			(29	)			60				(88	)
Total other comprehensive income (loss)			36				55				(115	)			169
Comprehensive income (loss)		$	(8	)		$	61			$	(209	)		$	821

 

See Notes to Condensed Consolidated Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended March 31, 2017 and 2016

(In thousands)

 

Nine Months Ended March 31, 2017

 

																						Accumulated
										Additional				Unearned								Other
		Preferred				Common				Paid in				ESOP				Retained				Comprehensive
		Stock				Stock				Capital				Shares				Earnings				Income (Loss)				Total
														(Unaudited)
Balance at July 1, 2016		$	-			$	-			$	-			$	-			$	6,567			$	88			$	6,655
Net loss			-				-				-				-				(94	)			-				(94	)
Proceeds from issuance of common stock			-				4				3,258				(327	)			-				-				2,935
Other comprehensive loss			-				-				-				-				-				(115	)			(115	)
Balance at March 31, 2017		$	-			$	4			$	3,258			$	(327	)		$	6,473			$	(27	)		$	9,381

 

Nine Months Ended March 31, 2016

 

																						Accumulated
										Additional				Unearned								Other
		Preferred				Common				Paid in				ESOP				Retained				Comprehensive
		Stock				Stock				Capital				Shares				Earnings				Income (Loss)				Total
														(Unaudited)
Balance at July 1, 2015		$	-			$	-			$	-			$	-			$	5,888			$	(110	)		$	5,778
Net income			-				-				-				-				652				-				652
Other comprehensive income			-				-				-				-				-				169				169
Balance at March 31, 2016		$	-			$	-			$	-			$	-			$	6,540			$	59			$	6,599

 

See Notes to Condensed Consolidated Financial Statements

 

 

Community Savings Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended March 31, 2017 and 2016

(In thousands)

 

		Nine Months Ended March 31,
		2017				2016
		(Unaudited)
Cash Flows from Operating Activities
Net income (loss)		$	(94	)		$	652
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization			49				49
Deferred income tax expense			(56	)			32
Amortization of premiums and discounts on securities, net			116				149
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			38				44
Other assets			(45	)			16
Other liabilities			(45	)			(103	)
Net cash provided by (used in) operating activities			(64	)			54
Cash Flows from Investing Activities
Net change in interest-earning deposits in other financial institutions			238				(13	)
Purchase of available for sale securities			(1,507	)			(656	)
Proceeds from maturities of available-for-sale securities			2,060				2,260
Proceeds from the sales of available-for-sale securities			-				500
Principal repayments of available-for-sale mortgage-backed securities			1,242				1,693
Purchase of loans			-				(3,017	)
Net change in loans			1,274				176
Purchase of premises and equipment			(50	)			(19	)
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			3,297				(11,600	)
Cash Flows from Financing Activities
Net change in deposits			1,379				(972	)
Proceeds from Federal Home Loan Bank advances			1,700				6,750
Repayment of Federal Home Loan Bank advances			(4,450	)			(250	)
Advances by borrowers for taxes and insurance			66				84
Proceeds from sale of common stock			2,935				-
Net cash provided by financing activities			1,630				5,612
Net Change in Cash and Cash Equivalents			4,863				(5,934	)
Beginning Cash and Cash Equivalents			3,184				10,148
Ending Cash and Cash Equivalents		$	8,047			$	4,214
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest on deposits and borrowings		$	159			$	161
Supplemental Disclosure of Noncash Investing Activities
Transfers from loans to foreclosed assets		$	-			$	18

 

See Notes to Condensed Consolidated Financial Statements

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Note 1:

Basis of Presentation

 

Community Savings Bancorp, Inc. (the “Company”), headquartered in Caldwell, Ohio, was formed to serve as the stock holding company for Community Savings (the “Bank”) following its mutual-to-stock conversion. The conversion was completed effective January 10, 2017.  The Company issued 441,290 shares at an offering price of $10.00 per share.

 

The Company’s condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. 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 March 31, 2017 and the results of operations and cash flows for the three and nine months ended March 31, 2017 and 2016. All interim amounts have not been audited and the results of operations for the three and nine months ended March 31, 2017, herein are not necessarily indicative of the results of operations to be expected for the entire fiscal year.

 

The accompanying condensed consolidated balance sheet as of June 30, 2016 has been derived from audited financial statements included in the registrant’s Form S-1. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. Accordingly, these condensed consolidated 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.

 

Principles of Consolidation

 

The condensed consolidated financial statements as of and for the periods ended March 31, 2017, include Community Savings Bancorp, Inc. and its wholly-owned subsidiary, Community Savings (the “Bank”), together referred to as the “Company.” Intercompany transactions and balances have been eliminated in consolidation. The financial statements as of June 30, 2016 and for the three and nine months ended March 31, 2016 represent the Bank only, as the conversion to stock form, including the formation of Community Savings Bancorp, Inc., was completed on January 10, 2017. References herein to the “Company” for periods prior to the completion of the stock conversion should be deemed to refer to the “Bank.”

 

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.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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.

 

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:
March 31, 2017
Mortgage-backed securities of U.S. government sponsored entities -  residential		$	5,847			$	35			$	(63	)		$	5,819
Collateralized mortgage obligations of government sponsored entities -  residential			342				6				(1	)			347
State and political subdivisions
Taxable			1,401				9				(11	)			1,399
Nontaxable			1,461				3				(20	)			1,444
		$	9,051			$	53			$	(95	)		$	9,009
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

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

The amortized cost and fair value of available-for-sale securities at March 31, 2017, 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.

 

		Amortized				Fair
		Cost				Value
		(In thousands)
Within one year		$	-			$	-
One to five years			1,134				1,143
Five to ten years			285				285
Beyond ten years			1,443				1,415
			2,862				2,843
Mortgage-backed securities of U.S. government sponsored entities -  residential			5,847				5,819
Collateralized mortgage obligations of government sponsored entities -  residential			342				347
		$	9,051			$	9,009

 

The Company had no sales of investment securities during the three and nine-month periods ended March 31, 2017. The Company had gross proceeds of $-0- and $500,000 from the sale of investment securities resulting in no gain or loss during the three month and nine-month periods, respectively, ended March 31, 2016.

 

The Company had pledged $2.7 million and $3.3 million of its investment securities at March 31, 2017 and June 30, 2016, respectively.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated 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 March 31, 2017 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)
March 31, 2017
Available-for-sale Securities:
Mortgage-backed securities of U.S. government sponsored entities - residential		$	4,019			$	(63	)		$	-			$	-			$	4,019			$	(63	)
Collateralized mortgage obligations of government sponsored entities - residential			174				(1	)			-				-				174				(1	)
State and political subdivisions
Taxable			-				-				256				(11	)			256				(11	)
Nontaxable			702				(20	)			-				-				702				(20	)
		$	4,895			$	(84	)		$	256			$	(11	)		$	5,151			$	(95	)
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 March 31, 2017 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 March 31, 2017 and June 30, 2016.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Note 3:

Loans and Allowance for Loan Losses

 

Loans at March 31, 2017 and June 30, 2016 include:

 

		March 31,				June 30,
		2017				2016
		(In thousands)
Real estate
One- to four-family residential		$	22,869			$	23,066
Home equity lines of credit			3,107				3,312
Commercial and multi-family			1,703				1,641
Consumer and other			3,931				4,863
Total loans			31,610				32,882
Allowance for loan losses			(253	)			(253	)
Net loans		$	31,357			$	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 Consolidated 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 Consolidated Financial Statements (unaudited)

 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended March 31, 2017 and the recorded investment in loans and impairment method as of March 31, 2017:

 

		March 31, 2017
		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 March 31, 2017
Allowance for loan losses:
Balance, January 1, 2017		$	165			$	22			$	9			$	22				35			$	253
Provision for loan losses			(5	)			(1	)			-				(1	)			7				-
Charge-offs			-				-				-				-				-				-
Recoveries			-				-				-				-				-				-
Balance, March 31, 2017		$	160			$	21			$	9			$	21			$	42			$	253
Nine Months Ended March 31, 2017
Allowance for loan losses:
Balance, July 1, 2016		$	161			$	22			$	10			$	24			$	36			$	253
Provision for loan losses			(1	)			(1	)			(1	)			(3	)			6				-
Charge-offs			-				-				-				-				-				-
Recoveries			-				-				-				-				-				-
Balance, March 31, 2017		$	160			$	21			$	9			$	21			$	42			$	253
Allowance for loan losses:
Ending balance, individually evaluated for impairment		$	9			$	-			$	-			$	-			$	-			$	9
Ending balance, collectively  evaluated for impairment		$	151			$	21			$	9			$	21			$	42			$	244
Loans:
Ending balance		$	22,869			$	3,107			$	1,703			$	3,931							$	31,610
Ending balance; individually evaluated for impairment		$	394			$	18			$	-			$	-							$	412
Ending balance; collectively evaluated for impairment		$	22,475			$	3,089			$	1,703			$	3,931							$	31,198

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended March 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 March 31, 2016
Allowance for loan losses:
Balance, January 1, 2016		$	142			$	18			$	6			$	18			$	83			$	267
Provision for loan losses			(5	)			1				4				19				(19	)			-
Charge-offs			-				-				-				(18	)			-				(18	)
Recoveries			-				-				-				4				-				4
Balance, March 31, 2016		$	137			$	19			$	10			$	23			$	64			$	253
Nine Months Ended March 31, 2016
Allowance for loan losses:
Balance, July 1, 2015		$	154			$	21			$	3			$	8			$	102			$	288
Provision for loan losses			(4	)			(2	)			7				37				(38	)			-
Charge-offs			(13	)			-				-				(26	)			-				(39	)
Recoveries			-				-				-				4				-				4
Balance, March 31, 2016		$	137			$	19			$	10			$	23			$	64			$	253

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated 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 Consolidated 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 March 31, 2017 and June 30, 2016:

 

		March 31, 2017
		Real Estate
										Commercial
		1-4 Family				Home Equity				and Multi-				Consumer
		Residential				Lines of Credit				Family				and Other				Total
		(In thousands)
Pass		$	21,961			$	3,001			$	1,703			$	3,931			$	30,596
Special mention			-				-				-				-				-
Substandard			908				106				-				-				1,014
Doubtful			-				-				-				-				-
Total		$	22,869			$	3,107			$	1,703			$	3,931			$	31,610

 

		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 Consolidated Financial Statements (unaudited)

 

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of March 31, 2017 and June 30, 2016:

 

		March 31, 2017
										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		$	153			$	-			$	66			$	219			$	22,650			$	22,869
Home equity lines of credit			-				-				-				-				3,107				3,107
Commercial and multi-family			-				-				-				-				1,703				1,703
Consumer and other			2				-				-				2				3,929				3,931
Total		$	155			$	-			$	66			$	221			$	31,389			$	31,610

 

		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 Consolidated Financial Statements (unaudited)

 

The following table presents impaired loan information as of and for the three and nine months ended March 31, 2017:

 

														For the Three Months Ended								For the Nine Months Ended
		As of March 31, 2017												March 31, 2017								March 31, 2017
						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		$	335			$	335			$	-			$	317			$	-				311			$	1
Home equity lines of credit			18				18				-				18				-				17				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Loans with an allowance recorded:
Real estate
1-4 family residential			94				96				9				95				1				97				3
Home equity lines of credit			-				-				-				-				-				-				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Totals		$	447			$	449			$	9			$	430			$	1			$	425			$	4

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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

 

														For the Three Months Ended								For the Nine Months Ended
		As of June 30, 2016												March 31, 2016								March 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		$	306			$	306			$	-			$	136			$	1			$	137			$	2
Home equity lines of credit			14				14				-				16				-				18				-
Commercial and multi-family			-				-				-				61				-				97				-
Consumer and other			-				-				-				1				-				2				-
Loans with an allowance recorded:
Real estate
1-4 family residential			100				102				10				102				1				104				3
Home equity lines of credit			-				-				-				-				-				-				-
Commercial and multi-family			-				-				-				-				-				-				-
Consumer and other			-				-				-				-				-				-				-
Totals		$	420			$	422			$	10			$	316			$	2			$	358			$	5

 

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 Consolidated Financial Statements (unaudited)

 

The following table presents the Company’s nonaccrual loans at March 31, 2017 and June 30, 2016. The table excludes performing troubled debt restructurings.

 

		March 31,				June 30,
		2017				2016
		(In thousands)
Real estate
1-4 family residential		$	354			$	310
Home equity lines of credit			18				14
Commercial and multi-family			-				-
Consumer and other			-				-
Total nonaccrual		$	372			$	324

 

At March 31, 2017 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 $86,000 and $92,000 at March 31, 2017 and June 30, 2016, respectively. Troubled debt restructured loans had specific allowances totaling $6,000 and $7,000 at March 31, 2017 and June 30, 2016, respectively. At March 31, 2017, 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 nine months ended March 31, 2017 or 2016.

 

The Company had no troubled debt restructurings modified during the twelve months ended March 31, 2017 or 2016 that subsequently defaulted during the nine-month periods ended March 31, 2017 or 2016. 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 Consolidated Financial Statements (unaudited)

 

Note 4:        Regulatory Matters

 

The Bank 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Furthermore, the Bank’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 Bank 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 March 31, 2017 and June 30, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

 

Basel III was effective for the Bank on January 1, 2015. Basel III requires the Bank 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 Bank 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 Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital.

 

As of March 31, 2017 and June 30, 2016, the most recent notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank 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 Bank’s category.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated 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 March 31, 2017
Total Capital
(to Risk-Weighted Assets)		$	8,600				35.4	%		$	1,945				8.0	%		$	2,431				10.0	%
Tier I Capital
(to Risk-Weighted Assets)		$	8,347				34.3	%		$	1,459				6.0	%		$	1,945				8.0	%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)		$	8,347				34.3	%		$	1,094				4.5	%		$	1,580				6.5	%
Leverage Capital
(to Adjusted Average Total Assets)		$	8,347				14.9	%		$	2,247				4.0	%		$	2,809				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 Tier 1 Capital
(to Risk-Weighted Assets)		$	6,567				26.7	%		$	1,108				4.5	%		$	1,600				6.5	%
Leverage 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 Consolidated 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 Consolidated Financial Statements (unaudited)

 

Recurring Measurements

 

The following table presents the fair value measurement of assets recognized in the accompanying condensed consolidated 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 March 31, 2017 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)
March 31, 2017
Mortgage-backed securities of U.S. government sponsored entities - residential		$	5,819			$	-			$	5,819			$	-
Collateralized mortgage obligations of government sponsored entities - residential			347				-				347				-
State and political subdivisions
Taxable			1,399				-				1,399				-
Nontaxable			1,444				-				1,444				-
		$	9,009			$	-			$	9,009			$	-
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 nine-month periods ended March 31, 2017 and 2016.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated 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 March 31, 2017 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)
March 31, 2017
Impaired loans
Real estate
One-to-four family residential		$	85			$	-			$	-			$	85
Forclosed 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 nonrecurring basis and recognized in the accompanying condensed consolidated 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 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

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the borrower and borrower’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 Consolidated Financial Statements (unaudited)

 

		Fair Value				Valuation Technique		Unobservable Inputs		Range (Weighted Average)
		(In thousands)
March 31, 2017 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 March 31, 2017 and June 30, 2016.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated 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)
March 31, 2017
Financial assets
Cash and cash equivalents		$	8,047			$	8,047			$	-			$	-			$	8,047
Interest-earning time deposits			5,329				5,329				-				-				5,329
Other investment securities			940				-				-				940				940
Loans, net			31,357				-				-				32,384				32,384
Accrued interest receivable			147				-				147				-				147
Financial liabilities
Deposits			41,481				33,542				7,821				-				41,363
Federal Home Loan Bank advances			4,500				-				4,540				-				4,540
Payments by borrowers for taxes and insurance			148				-				148				-				148
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 condensed consolidated 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.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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 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.

 

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.

 

Note 6: Accumulated Other Comprehensive Income (Loss)

 

Changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended March 31, 2017 and 2016 are as follows:

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

  

		Three Months Ended March 31,
		2017				2016
		(In thousands)
Balance, January 1		$	(63	)		$	4
Other comprehensive income			36				55
Balance, March 31		$	(27	)		$	59

 

		Nine Months Ended March 31,
		2017				2016
		(In thousands)
Balance, July 1		$	88			$	(110	)
Other comprehensive income (loss)			(115	)			169
Balance, March 31		$	(27	)		$	59

 

There were no material items reclassified from accumulated other comprehensive income (loss) to the condensed consolidated statement of income for the three- and nine-month periods ended March 31, 2017 and 2016.

 

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.

 

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

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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.

 

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

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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:        Loss Per Share

 

Loss per share disclosures are not applicable to the three and nine-month periods ended March 31, 2017 and 2016, because the Company did not complete the conversion to stock form until January 10, 2017.

 

Note 9:        Employee Stock Ownership Plan (ESOP)

 

As part of the Company’s stock conversion, shares were purchased by the ESOP with a loan from Community Savings Bancorp, Inc. All employees of the Bank meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $0 for both the three and nine-month periods ended March 31, 2017.

 

The stock price at the formation date was $10.00. The aggregate fair value of the 32,688 unallocated shares was $449,460 based on the $13.75 closing price of our common stock on March 31, 2017.

 

Note 10:      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.

 

 

Community Savings Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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.  

 

The cost of the Conversion and issuing the capital stock totaled $1.15 million and was deducted from the proceeds of the offering.

 

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 March 31, 2017 and results of operations for the three and nine months ended March 31, 2017 and 2016, 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 consolidated 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.

ITEM 2. 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.

ITEM 2. 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 Company 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 Company 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 March 31, 2017 and June 30, 2016

 

Total Assets. Total assets increased $1.3 million, or 2.4%, to $55.6 million at March 31, 2017 from $54.3 million at June 30, 2016. The increase was due primarily to an increase in cash and due from banks as deposits increased $1.4 million, including $735,000 in deposits owned by Community Savings Bancorp, which were received in our stock offering which was consummated on January 10, 2017.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $4.9 million, or 152.7%, to $8.0 million at March 31, 2017. The increase in cash and cash equivalents was primarily due to proceeds from maturities and sales of investment securities of $2.1 million, proceeds from net loan repayments of $1.3 million and the increase in deposits of $1.4 million.

 

Interest-earning Time Deposits in Other Financial Institutions. Interest-earning time deposits in other financial institutions decreased $238,000, or 4.3%, to $5.3 million at March 31, 2017 from $5.6 million at June 30, 2016. The decrease was due to net maturities of these deposits during the period.

 

Securities available-for-sale. Investment securities available-for-sale decreased $2.1 million, or 18.8%, to $9.0 million at March 31, 2017 from $11.1 million at June 30, 2016. The decrease in securities available-for-sale was primarily due to maturities of securities of $2.1 million and principal repayments on mortgage-backed securities totaling $1.2 million, partially offset by purchases of $1.5 million.

 

Net Loans. Net loans decreased $1.3 million, or 3.9%, to $31.4 million at March 31, 2017 compared to June 30, 2016. The decrease in net loans was due primarily to a decrease of $1.0 million, or 19.2%, in consumer loans to $3.9 million at March 31, 2017 from $4.9 million at June 30, 2016. Loans originated during the nine months ended March 31, 2017 totaled $3.0 million, of which $2.7 million were loans secured by one-to four-family residential real estate.

 

 

Community Savings Bancorp, Inc.

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

 

Deposits. Deposits increased $1.4 million or 3.4%, to $41.5 million at March 31, 2017 from $40.1 million at June 30, 2016. The increase was comprised primarily of growth in demand deposits of $1.1 million, or 12.2%, and savings and money market accounts of $253,000, or 1.1%.

 

FHLB Advances. FHLB advances decreased $2.8 million, or 37.9%, to $4.5 million at March 31, 2017 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.

 

Shareholders’ Equity. Shareholders’ equity increased $2.7 million, or 41.0%, to $9.4 million at March 31, 2017 from $6.7 million at June 30, 2016. The increase was due primarily to net proceeds from the common stock offering of $2.9 million, which was offset by the net loss of $94,000 and an increase in the accumulated other comprehensive loss of $115,000 during the period.

 

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2017 and 2016

 

General. For the three months ended March 31, 2017, we had a net loss of $44,000 compared to net income of $6,000 for the three months ended March 31, 2016, a decrease of $50,000. The net loss resulted primarily from a decrease in net interest income of $12,000, a decrease in noninterest income of $7,000, and an increase of $71,000 in noninterest expense, which were offset in part by an increase of $40,000 in federal income tax benefit.

 

Average Balance Sheets. The following table sets forth average balance sheets, average yields and costs, and certain other information for the three month period ended March 31, 2017 and 2016. 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.

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

 

		Three Months Ended March 31,
	2017													2016
		Average Outstanding Balance				Interest				Yield/ Rate (1)				Average Outstanding Balance				Interest				Yield/ Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	32,207			$	346				4.30	%		$	31,824			$	349				4.39	%
Investment securities			9,423				48				2.04	%			12,947				61				1.88	%
Other interest-earning assets (2)			11,002				36				1.31	%			8,460				33				1.56	%
Total interest-earning assets			52,632				430				3.27	%			53,231				443				3.33	%
Noninterest-earning assets			6,546												2,679
Allowance for loan losses			(253	)											(268	)
Total assets		$	58,925											$	55,642
Interest-bearing liabilities:
Interest-bearing demand		$	2,122				1				0.19	%		$	2,607				1				0.15	%
Savings accounts			23,615				17				0.29	%			23,972				17				0.28	%
Certificates of deposit			8,002				14				0.70	%			7,818				13				0.67	%
Total deposits			33,739				32				0.38	%			34,397				31				0.36	%
FHLB advances			4,998				21				1.68	%			7,522				23				1.22	%
Total interest-bearing liabilities			38,737				53				0.55	%			41,919				54				0.52	%
Noninterest-bearing liabilities			11,120												7,280
Total liabilities			49,857												49,199
Equity			9,068												6,443
Total liabilities and equity		$	58,925											$	55,642
Net interest income						$	377											$	389
Net interest rate spread (3)											2.72	%											2.81	%
Net interest-earning assets (4)		$	13,895											$	11,312
Net interest margin (5)											2.87	%											2.92	%
Average interest-earning assets to interest-bearing liabilities			135.87	%											126.99	%

 

(1) Yields and rates are annualized.

(2) Consists of stock in the FHLB and interest-earning 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.

 

Interest Income. Interest income decreased $13,000, or 2.9%, to $430,000 for the three months ended March 31, 2017 from $443,000 for the three months ended March 31, 2016. The decrease resulted primarily from a $13,000 decrease in interest on investment securities. The average balance of investment securities decreased $3.5 million, or 27.2%, to $9.4 million during the three months ended March 31,

 

 

Community Savings Bancorp, Inc.

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

 

2017 from $12.9 million during the three months ended March 31, 2016, partially offset by an increase in the average yield on investment securities of 16 basis points to 2.04% for the 2017 period from 1.88% for the 2016 period. The average balance of loans receivable increased $383,000, or 1.2%, to $32.2 million during the three months ended March 31, 2017 from $31.8 million during the three months ended March 31, 2016, while the average yield on loans decreased nine basis points to 4.30% during the three months ended March 31, 2017 from 4.39% during the year earlier period, reflecting lower market interest rates.

 

Interest Expense. Interest expense decreased $1,000, or 1.9%, to $53,000 for the three months ended March 31, 2017 from $54,000 for the three months ended March 31, 2016. Interest expense on deposits increased $1,000, or 3.2%, to $32,000 for the three months ended March 31, 2017 from $31,000 for the three months ended March 31, 2016. The increase was primarily due to an increase in the average cost of deposits of two basis points to 0.38% from 0.36% for the three months ended March 31, 2017 and 2016, respectively, which was partially offset by a decrease of $658,000, or 1.9%, in the average balance of interest-bearing deposits to $33.7 million for the three month period in 2017 from $34.4 million for the comparable period in 2016. Interest expense on borrowings decreased $2,000, or 8.7%, to $21,000 for the three months ended March 31, 2017 from $23,000 for the three months ended March 31, 2016. The average balance of FHLB advances decreased $2.5 million to $5.0 million for the three months ended March 31, 2017 from $7.5 million for the three months ended March 31, 2016, while the average cost of these advances increased 46 basis points to 1.68% from 1.22% period-to-period.

 

Net Interest Income. Net interest income decreased $12,000, or 3.1%, to $377,000 for the three months ended March 31, 2017 from $389,000 for the three months ended March 31, 2016. Our net interest rate spread decreased to 2.72% for the three months ended March 31, 2017 from 2.81% for the three months ended March 31, 2016, and our net interest margin decreased to 2.87% for the three months ended March 31, 2017 from 2.92% for the comparable three-month period in 2016.

 

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 March 31, 2017 or 2016. The allowance for loan losses was $253,000, or 0.80% of total loans at March 31, 2017, compared to $253,000, or 0.79% of total loans at March 31, 2016. Total nonperforming loans were $372,000 at March 31, 2017, compared to $283,000 at March 31, 2016. Classified (substandard, doubtful and loss) loans were $1.0 million at March 31, 2017, compared to $792,000 at March 31, 2016, and total loans past due greater than 30 days were $221,000 and $177,000 at March 31, 2017 and 2016, respectively. The Bank had no net charge-offs during the three months ended March 31, 2017 compared to $14,000 for the three months ended March 31, 2016. As a percentage of nonperforming loans, the allowance for loan losses was 68.0% at March 31, 2017 compared to 89.4% at March 31, 2016.

 

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 March 31, 2017 and 2016. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the 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 $7,000, or 10.6%, to $59,000 for the three months ended March 31, 2017 from $66,000 for the three months ended March 31, 2016. Service charges and

 

 

Community Savings Bancorp, Inc.

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

 

fees decreased by $3,000 to $58,000 during the three months ended March 31, 2017 compared to $61,000 for the same period in 2016.

 

Noninterest Expense. Noninterest expense increased $71,000, or 16.0%, to $515,000 for the three months ended March 31, 2017 compared to $444,000 for the three months ended March 31, 2016. Salaries and benefits increased $25,000, or 13.1%, due primarily to the addition of a new loan officer. Data processing increased by $26,000, or 42.6% as we continue to improve our cyber-security protection, and our correspondent bank service charges were up by $15,000, or 35.7% due to increased interchange activity. Other expenses decreased by $7,000 or 14.0%, to $43,000 from $50,000 during the three months ended March 31, 2017, due to a decrease in foreclosure expense of $8,000. FDIC insurance premiums decreased by $6,000 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 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 $35,000 for the three months ended March 31, 2017, compared to a tax expense of $5,000 recognized during the three months ended March 31, 2016, due primarily to the $90,000 increase in the net loss period to period.

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2017 and 2016

 

General. For the nine months ended March 31, 2017, we had net loss of $94,000 compared to net income of $652,000 for the nine months ended March 31, 2016, a decrease of $746,000. The decrease in net income resulted primarily from a decrease of $800,000 in noninterest income, which included an $810,000 one-time gain on sale of branch offices realized in the 2016 period and a decrease of $42,000 in net interest income, which were offset in part by a decrease of $8,000 in noninterest expense and a decrease of $88,000 in federal income taxes.

 

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.

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

 

		Nine Months Ended March 31,
		2017												2016
		Average Outstanding Balance				Interest				Yield/ Rate (1)				Average Outstanding Balance				Interest				Yield/ Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	32,470			$	1,055				4.33	%		$	30,854			$	1,039				4.49	%
Investment securities			9,735				150				2.05	%			14,421				207				1.91	%
Other interest-earning assets(2)			8,698				97				1.49	%			8,593				100				1.55	%
Total interest-earning assets			50,903				1,302				3.41	%			53,868				1,346				3.33	%
Noninterest-earning assets			4,880												3,133
Allowance for loan losses			(253	)											(267	)
Total assets		$	55,530											$	56,734
Interest-bearing liabilities:
Interest-bearing demand		$	2,417				4				0.22	%		$	2,622				4				0.20	%
Savings accounts			23,015				47				0.27	%			24,741				53				0.29	%
Certificates of deposit			7,899				43				0.73	%			8,389				46				0.73	%
Total deposits			33,331				94				0.38	%			35,752				103				0.38	%
FHLB advances			5,920				65				1.46	%			6,921				58				1.12	%
Total interest-bearing liabilities			39,251				159				0.54	%			42,673				161				0.50	%
Noninterest-bearing liabilities			8,847												7,720
Total liabilities			48,098												50,393
Equity			7,432												6,341
Total liabilities and equity		$	55,530											$	56,734
Net interest income						$	1,143											$	1,185
Net interest rate spread (3)											2.87	%											2.83	%
Net interest-earning assets (4)		$	11,652											$	11,195
Net interest margin (5)											2.99	%											2.93	%
Average interest-earning assets to interest-bearing liabilities			129.69	%											126.23	%

 

(1) Yields and rates are annualized.

(2) Consists of stock in the FHLB and interest-earning 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

Interest Income. Interest income decreased $44,000, or 3.3%, to $1.3 million for the nine months ended March 31, 2017 compared to the nine months ended March 31, 2016. The decrease resulted primarily from a $57,000 decrease in interest on investment securities offset in part by a $16,000 increase in interest on loans receivable. The average balance of investment securities decreased $4.7 million, or 32.5%, to $9.7 million during the nine months ended March 31, 2017 from $14.4 million during the nine months ended March 31, 2016, and the average yield on investment securities increased 14 basis points to 2.05% for the 2017 period from 1.91% for the 2016 period. The average balance of loans receivable increased $1.6 million, or 5.2%, to $32.5 million during the nine months ended March 31, 2017 from $30.9 million during the nine months ended March 31, 2016, but the average yield on loans decreased 16 basis points to 4.33% during the nine months ended March 31, 2017 from 4.49% during the year earlier period, reflecting lower market interest rates.

 

Interest Expense. Interest expense decreased $2,000, or 1.2%, to $159,000 for the nine months ended March 31, 2017 from $161,000 for the nine months ended March 31, 2016. Interest expense on deposits decreased $9,000, or 8.7%, to $94,000 for the nine months ended March 31, 2017 from $103,000 for the nine months ended March 31, 2016. The decrease was primarily due to a decrease of $2.4 million, or 6.8%, in the average balance of interest-bearing deposits to $33.3 million for the nine month period in 2017 from $35.7 million for the comparable period in 2016. The average cost of interest-bearing deposits remained at 0.38% for the nine months ended March 31, 2017 and 2016. Interest expense on borrowings increased $7,000 to $65,000 for the nine months ended March 31, 2017 from $58,000 for the nine months ended March 31, 2016. The average balance of FHLB advances decreased $1.0 million to $5.9 million for the nine months ended March 31, 2017 from $6.9 million for the nine months ended March 31, 2016, while the average cost of these advances increased 34 basis points to 1.46% from 1.12% period-to-period.

 

Net Interest Income. Net interest income decreased $42,000, or 3.5%, to $1.1 million for the nine months ended March 31, 2017 from $1.2 million for the nine months ended March 31, 2016. Our net interest rate spread increased to 2.87% for the nine months ended March 31, 2017 from 2.83% for the nine months ended March 31, 2016, and our net interest margin increased to 2.99% for the nine months ended March 31, 2017 from 2.93% for the comparable nine-month period in 2016.

 

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 nine months ended March 31, 2017 or 2016. The allowance for loan losses was $253,000, or 0.80% of total loans at March 31, 2017, compared to $253,000, or 0.79% of total loans at March 31, 2016. Total nonperforming loans were $372,000 at March 31, 2017, compared to $283,000 at March 31, 2016. Classified (substandard, doubtful and loss) loans were $1.0 million at March 31, 2017, compared to $792,000 at March 31, 2016, and total loans past due greater than 30 days were $221,000 and $177,000 at March 31, 2017 and 2016, respectively. The Bank had no net charge-offs during the nine months ended March 31, 2017 compared to $35,000 for the nine months ended March 31, 2016. As a percentage of nonperforming loans, the allowance for loan losses was 68.0% at March 31, 2017 compared to 89.4% at March 31, 2016.

 

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 March 31, 2017 and 2016. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the

 

 

Community Savings Bancorp, Inc.

ITEM 2. 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 $800,000, or 77.8%, to $228,000 for the nine months ended March 31, 2017 from $1.0 million for the nine months ended March 31, 2016. The decrease was due to the gain on the sale of the branches of $810,000 during the 2016 period. Service charges and fees decreased $21,000, or 10.0%, to $188,000 during the nine months ended March 31, 2017 compared to $209,000 during the same period in 2016. This decrease was partially offset by a gain on the sale of foreclosed assets of $29,000 in the nine months ending March 2017 compared to a net gain of $1,000 on foreclosed assets sold during the same period in 2016 and an increase of $3,000 in other operating income in the nine months ended March 31, 2017, compared to the 2016 period.

 

Noninterest Expense. Noninterest expense decreased $8,000, or 0.5%, to $1.5 million for the nine months ended March 31, 2017 compared to the same period in 2016. The decrease was due primarily to a decrease in occupancy and equipment of $17,000, or 18.3% attributable to non-recurring expense during the 2016 period, a decrease in data processing of $9,000, or 3.6%, as a result of having two less branch offices, and a decrease in FDIC premiums of $35,000, due to a decrease in the insurance rates period to period. These decreases were partially offset by an increase in salaries, employee benefits and directors’ fees of $28,000 or 4.7%, and an increase in correspondent bank service charges of $33,000, or 23.2%, as a result of our switch from VISA to Master Card. We anticipate reimbursement of most of that expense per our contract.

 

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 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 $56,000 for the nine months ended March 31, 2017, compared to $32,000 in expense recognized during the nine months ended March 31, 2016.

 

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 $(64,000) and $54,000 for the nine months ended March 31, 2017 and 2016, respectively. Net cash

 

 

Community Savings Bancorp, Inc.

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

 

provided by (used in) investing activities was $3.3 million and $(11.6) million for the nine months ended March 31, 2017 and 2016, 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 nine months ended March 31, 2016. Cash provided by financing activities was $1.6 million and $5.6 million in the nine months ended March 31, 2017 and 2016, 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 March 31, 2017, 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 March 31, 2017, we had outstanding commitments to originate loans of $1.0 million, we had commitments under undisbursed construction loans of $83,000 and commitments under home equity lines of credit of $2.3 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 March 31, 2017 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 March 31, 2017, 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 September 9, 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 9, 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:	May 15, 2017		By:	/s/Alvin B. Parmiter
				Alvin B. Parmiter
				President and Chief Executive Officer
Date:	May 15, 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 9, 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 9, 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.