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 | September 30, 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.
Yesx 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 companyx |
Emerging growth companyx |
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 November 13, 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
2 |
Part I – Financial Information
Item 1. Interim Financial Statements (Unaudited)
Community Savings Bancorp, Inc.
Condensed Consolidated Balance Sheets
September 30, 2017 and June 30, 2017
(In thousands except share data)
September 30, | June 30, | |||||||
2017 | 2017 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 2,057 | $ | 2,647 | ||||
Interest-earning demand deposits in other financial institutions | 587 | 6,052 | ||||||
Cash and cash equivalents | 2,644 | 8,699 | ||||||
Interest-earning time deposits in other financial institutions | 5,082 | 4,580 | ||||||
Investment securities available-for-sale, at fair value | 8,218 | 8,798 | ||||||
Other investment securities | 940 | 940 | ||||||
Loans | 32,458 | 31,953 | ||||||
Less: allowance for loan losses | (253 | ) | (253 | ) | ||||
Loans, net | 32,205 | 31,700 | ||||||
Premises and equipment, net | 441 | 458 | ||||||
Foreclosed assets, net | 17 | 17 | ||||||
Accrued interest receivable | 137 | 152 | ||||||
Bank owned life insurance | 751 | - | ||||||
Other assets | 242 | 265 | ||||||
Total assets | $ | 50,677 | $ | 55,609 | ||||
Liabilities and Shareholders' Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 9,242 | $ | 9,907 | ||||
Savings and money market | 22,582 | 23,477 | ||||||
Time | 8,212 | 8,135 | ||||||
Total deposits | 40,036 | 41,519 | ||||||
Federal Home Loan Bank advances | 1,000 | 4,500 | ||||||
Payments by borrowers for taxes and insurance | 156 | 88 | ||||||
Other liabilities | 178 | 109 | ||||||
Total liabilities | 41,370 | 46,216 | ||||||
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 | 4 | 4 | ||||||
Additional paid in capital | 3,258 | 3,258 | ||||||
Unearned employee stock ownership plan (ESOP) shares | (327 | ) | (327 | ) | ||||
Retained earnings | 6,354 | 6,433 | ||||||
Accumulated other comprehensive income | 18 | 25 | ||||||
Total shareholders' equity | 9,307 | 9,393 | ||||||
Total liabilities and shareholders' equity | $ | 50,677 | $ | 55,609 |
See Notes to Condensed Consolidated Financial Statements
3 |
Community Savings Bancorp, Inc.
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2017 and 2016
(In thousands except share data)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Interest Income | ||||||||
Loans, including fees | $ | 346 | $ | 356 | ||||
Taxable securities | 31 | 33 | ||||||
Tax exempt securities | 10 | 18 | ||||||
Interest-earning deposits | 39 | 32 | ||||||
Total interest income | 426 | 439 | ||||||
Interest Expense | ||||||||
Deposits | 32 | 30 | ||||||
Federal Home Loan Bank advances | 15 | 22 | ||||||
Total interest expense | 47 | 52 | ||||||
Net Interest Income | 379 | 387 | ||||||
Provision for Loan Losses | - | - | ||||||
Net Interest Income After Provision for Loan Losses | 379 | 387 | ||||||
Noninterest Income | ||||||||
Service charges and fees | 65 | 65 | ||||||
Gain on sale of foreclosed assets, net | - | 29 | ||||||
Increase in cash surrender value-bank owned life insurance | 1 | - | ||||||
Other operating | - | 5 | ||||||
Total noninterest income | 66 | 99 | ||||||
Noninterest Expense | ||||||||
Salaries, employee benefits and directors fees | 223 | 200 | ||||||
Occupancy and equipment | 25 | 25 | ||||||
Data processing | 86 | 62 | ||||||
Correspondent bank service charges | 54 | 47 | ||||||
Franchise taxes | 13 | 12 | ||||||
FDIC insurance premiums | 3 | 8 | ||||||
Professional services | 80 | 60 | ||||||
Advertising | 7 | 3 | ||||||
Office supplies | 25 | 18 | ||||||
Other | 39 | 49 | ||||||
Total noninterest expense | 555 | 484 | ||||||
Income (Loss) Before Federal Income Tax Expense (Benefits) | (110 | ) | 2 | |||||
Federal Income Tax Expense (Benefits) | (31 | ) | (2 | ) | ||||
Net Income (Loss) | $ | (79 | ) | $ | 4 | |||
(Loss) per share - basic and diluted | $ | (0.20 | ) | N/A | ||||
Weighted-average shares outstanding - basic and diluted | 408,602 | - |
See Notes to Condensed Consolidated Financial Statements
4 |
Community Savings Bancorp, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended September 30, 2017 and 2016
(In thousands)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Net income (loss) | $ | (79 | ) | $ | 4 | |||
Other comprehensive income (loss): | ||||||||
Unrealized holding gains (losses) on securities available for sale | (10 | ) | 9 | |||||
Tax effect | 3 | (3 | ) | |||||
Total other comprehensive income (loss) | (7 | ) | 6 | |||||
Comprehensive income (loss) | $ | (86 | ) | $ | 10 |
See Notes to Condensed Consolidated Financial Statements
5 |
Community Savings Bancorp, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended September 30, 2017 and 2016
(In thousands)
Three Months Ended September 30, 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, 2017 | $ | - | $ | 4 | $ | 3,258 | $ | (327 | ) | $ | 6,433 | $ | 25 | $ | 9,393 | |||||||||||||
Net loss | - | - | - | - | (79 | ) | - | (79 | ) | |||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (7 | ) | (7 | ) | |||||||||||||||||||
Balance at September 30, 2017 | $ | - | $ | 4 | $ | 3,258 | $ | (327 | ) | $ | 6,354 | $ | 18 | $ | 9,307 |
Three Months Ended September 30, 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, 2016 | $ | - | $ | - | $ | - | $ | - | $ | 6,567 | $ | 88 | $ | 6,655 | ||||||||||||||
Net income | - | - | - | - | 4 | - | 4 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 6 | 6 | |||||||||||||||||||||
Balance at September 30, 2016 | $ | - | $ | - | $ | - | $ | - | $ | 6,571 | $ | 94 | $ | 6,665 |
See Notes to Condensed Consolidated Financial Statements
6 |
Community Savings Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2017 and 2016
(In thousands)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Cash Flows from Operating Activities | ||||||||
Net income (loss) | $ | (79 | ) | $ | 4 | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||
Depreciation and amortization | 17 | 17 | ||||||
Deferred income tax expense | (31 | ) | (5 | ) | ||||
Amortization of premiums and discounts on securities, net | 35 | 55 | ||||||
Provision for loan losses | - | - | ||||||
Gain on sale of foreclosed assets | - | (29 | ) | |||||
Net changes in: | ||||||||
Accrued interest receivable | 15 | 11 | ||||||
Bank owned life insurance-cash surrender value | (1 | ) | - | |||||
Other assets | 57 | (384 | ) | |||||
Other liabilities | 69 | 140 | ||||||
Net cash provided by (used in) operating activities | 82 | (191 | ) | |||||
Cash Flows from Investing Activities | ||||||||
Net change in interest-earning time deposits in other financial institutions | (502 | ) | 998 | |||||
Purchase of available for sale securities | - | (1,507 | ) | |||||
Proceeds from maturities of available for sale securities | - | 1,960 | ||||||
Principal repayments of available for sale mortgage-backed securities | 535 | - | ||||||
Net change in loans | (505 | ) | 421 | |||||
Purchase of premises and equipment | - | (7 | ) | |||||
Purchase of bank owned life insurance | (750 | ) | - | |||||
Proceeds from sale of foreclosed assets | - | 40 | ||||||
Net cash provided by (used in) investing activities | (1,222 | ) | 1,905 | |||||
Cash Flows from Financing Activities | ||||||||
Net change in deposits | (1,483 | ) | 178 | |||||
Proceeds from Federal Home Loan Bank advances | - | 3,700 | ||||||
Repayment of Federal Home Loan Bank advances | (3,500 | ) | (4,750 | ) | ||||
Payments by borrowers for taxes and insurance | 68 | 51 | ||||||
Net cash provided by (used in) financing activities | (4,915 | ) | (821 | ) | ||||
Net Change in Cash and Cash Equivalents | (6,055 | ) | 893 | |||||
Beginning Cash and Cash Equivalents | 8,699 | 3,184 | ||||||
Ending Cash and Cash Equivalents | $ | 2,644 | $ | 4,077 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Cash paid during the period for: | ||||||||
Interest on deposits and borrowings | $ | 47 | $ | 52 | ||||
Supplemental Disclosure of Noncash Investing Activities | ||||||||
Transfers from loans to foreclosed assets | $ | - | $ | - |
See Notes to Condensed Consolidated Financial Statements
7 |
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 September 30, 2017 and the results of operations and cash flows for the three months ended September 30, 2017 and 2016. All interim amounts have not been audited and the results of operations for the three months ended September 30, 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, 2017 has been derived from audited financial statements included in the Company’s Form 10-K. 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, 2017 included in the Company’s Form 10-K.
Principles of Consolidation
The condensed consolidated financial statements as of and for the periods ended September 30, 2017 and at June 30, 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 for the three months ended September 30, 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 reporting periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of deferred tax assets, and fair values of financial instruments.
8 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 2: | Securities |
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Available-for-sale Securities: | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | $ | 5,066 | $ | 35 | $ | (24 | ) | $ | 5,077 | |||||||
Collateralized mortgage obligations of government sponsored entities - residential | 276 | 4 | - | 280 | ||||||||||||
State and political subdivisions | ||||||||||||||||
Taxable | 1,385 | 7 | (8 | ) | 1,384 | |||||||||||
Nontaxable | 1,464 | 15 | (2 | ) | 1,477 | |||||||||||
$ | 8,191 | $ | 61 | $ | (34 | ) | $ | 8,218 | ||||||||
June 30, 2017 | ||||||||||||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | $ | 5,595 | $ | 44 | $ | (26 | ) | $ | 5,613 | |||||||
Collateralized mortgage obligations of government sponsored entities - residential | 307 | 6 | - | 313 | ||||||||||||
State and political subdivisions | ||||||||||||||||
Taxable | 1,393 | 8 | (8 | ) | 1,393 | |||||||||||
Nontaxable | 1,466 | 16 | (3 | ) | 1,479 | |||||||||||
$ | 8,761 | $ | 74 | $ | (37 | ) | $ | 8,798 |
9 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The amortized cost and fair value of available-for-sale securities at September 30, 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 | 1,121 | 1,128 | ||||||
Five to ten years | 291 | 293 | ||||||
Beyond ten years | 1,437 | 1,440 | ||||||
2,849 | 2,861 | |||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | 5,066 | 5,077 | ||||||
Collateralized mortgage obligations of government sponsored entities - residential | 276 | 280 | ||||||
Totals | $ | 8,191 | $ | 8,218 |
The Company had no sales of investment securities during the three-month periods ended September 30, 2017 and 2016.
The Company had pledged $2.6 million and $2.6 million of its investment securities at September 30, 2017 and June 30, 2017, respectively, and $885,000 of interest-earning time deposits at September 30, 2017 and June 30, 2017. The Company also had pledged $225,000 of interest-earning demand deposits at September 30, 2017 and June 30, 2017, primarily to secure public deposits.
The Company’s other investment securities consists of $915,000 of stock in the FHLB and $25,000 of stock in the Company’s data service provider at both September 30, 2017 and June 30, 2017.
10 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table shows 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 September 30, 2017 and June 30, 2017:
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) | ||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||
Available-for-sale Securities: | ||||||||||||||||||||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | $ | 2,419 | $ | (16 | ) | $ | 534 | $ | (8 | ) | $ | 2,953 | $ | (24 | ) | |||||||||
State and political subdivisions | ||||||||||||||||||||||||
Taxable | 255 | (1 | ) | 256 | (7 | ) | 511 | (8 | ) | |||||||||||||||
Nontaxable | 385 | (2 | ) | - | - | 385 | (2 | ) | ||||||||||||||||
$ | 3,059 | $ | (19 | ) | $ | 790 | $ | (15 | ) | $ | 3,849 | $ | (34 | ) | ||||||||||
June 30, 2017 | ||||||||||||||||||||||||
Available-for-sale Securities: | ||||||||||||||||||||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | $ | 2,161 | $ | (26 | ) | $ | - | $ | - | $ | 2,161 | $ | (26 | ) | ||||||||||
State and political subdivisions | ||||||||||||||||||||||||
Taxable | 256 | (1 | ) | 258 | (7 | ) | 514 | (8 | ) | |||||||||||||||
Nontaxable | 383 | (3 | ) | - | - | 383 | (3 | ) | ||||||||||||||||
$ | 2,800 | $ | (30 | ) | $ | 258 | $ | (7 | ) | $ | 3,058 | $ | (37 | ) |
Other-than-temporary Impairment
At September 30, 2017 and June 30, 2017, 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 September 30, 2017 and June 30, 2017.
11 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 3: | Loans and Allowance for Loan Losses |
Loans at September 30, 2017 and June 30, 2017 include:
September 30, | June 30, | |||||||
2017 | 2017 | |||||||
(In thousands) | ||||||||
Real estate | ||||||||
One- to four-family residential | $ | 24,949 | $ | 23,600 | ||||
Home equity lines of credit | 2,309 | 3,059 | ||||||
Commercial and multi-family | 1,870 | 1,683 | ||||||
Consumer and other | 3,330 | 3,611 | ||||||
Total loans | 32,458 | 31,953 | ||||||
Allowance for loan losses | (253 | ) | (253 | ) | ||||
Net loans | $ | 32,205 | $ | 31,700 |
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.
12 |
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.
13 |
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 months ended September 30, 2017 and the recorded investment in loans and impairment method as of September 30, 2017:
September 30, 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 September 30, 2017 Allowance for loan losses: | ||||||||||||||||||||||||
Balance, July 1, 2017 | $ | 162 | $ | 21 | $ | 8 | $ | 20 | 42 | $ | 253 | |||||||||||||
Provision for loan losses | 10 | (6 | ) | 1 | - | (5 | ) | - | ||||||||||||||||
Charge-offs | - | - | - | - | - | - | ||||||||||||||||||
Recoveries | - | - | - | - | - | - | ||||||||||||||||||
Balance, September 30, 2017 | $ | 172 | $ | 15 | $ | 9 | $ | 20 | $ | 37 | $ | 253 | ||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance, individually evaluated for impairment | $ | 9 | $ | - | $ | - | $ | - | $ | - | $ | 9 | ||||||||||||
Ending balance, collectively evaluated for impairment | $ | 163 | $ | 15 | $ | 9 | $ | 20 | $ | 37 | $ | 244 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 24,949 | $ | 2,309 | $ | 1,870 | $ | 3,330 | $ | 32,458 | ||||||||||||||
Ending balance; individually evaluated for impairment | $ | 410 | $ | 15 | $ | 92 | $ | 9 | $ | 526 | ||||||||||||||
Ending balance; collectively evaluated for impairment | $ | 24,539 | $ | 2,294 | $ | 1,778 | $ | 3,321 | $ | 31,932 |
14 |
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 months ended September 30, 2016:
September 30, 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 September 30, 2016 Allowance for loan losses: | ||||||||||||||||||||||||
Balance, July 1, 2016 | $ | 161 | $ | 22 | $ | 10 | $ | 24 | $ | 36 | $ | 253 | ||||||||||||
Provision for loan losses | - | - | (1 | ) | (1 | ) | 2 | - | ||||||||||||||||
Charge-offs | - | - | - | - | - | - | ||||||||||||||||||
Recoveries | - | - | - | - | - | - | ||||||||||||||||||
Balance, September 30, 2016 | $ | 161 | $ | 22 | $ | 9 | $ | 23 | $ | 38 | $ | 253 |
15 |
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, 2017:
June 30, 2017 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
1-4 Family | Home Equity | and Multi- | Consumer | |||||||||||||||||||||
Residential | Lines of Credit | Family | and Other | Unallocated | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance, individually evaluated for impairment | $ | 9 | $ | - | $ | - | $ | - | $ | - | $ | 9 | ||||||||||||
Ending balance, collectively evaluated for impairment | $ | 153 | $ | 21 | $ | 8 | $ | 20 | $ | 42 | $ | 244 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 23,600 | $ | 3,059 | $ | 1,683 | $ | 3,611 | $ | 31,953 | ||||||||||||||
Ending balance; individually evaluated for impairment | $ | 411 | $ | 17 | $ | 13 | $ | 2 | $ | 443 | ||||||||||||||
Ending balance; collectively evaluated for impairment | $ | 23,189 | $ | 3,042 | $ | 1,670 | $ | 3,609 | $ | 31,510 |
16 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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.
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.
17 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of September 30, 2017 and June 30, 2017:
Real Estate | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
1-4 Family | Home Equity | and Multi- | Consumer | |||||||||||||||||
Residential | Lines of Credit | Family | and Other | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Pass | $ | 24,131 | $ | 2,234 | $ | 1,778 | $ | 3,321 | $ | 31,464 | ||||||||||
Special mention | - | - | - | - | - | |||||||||||||||
Substandard | 818 | 75 | 92 | 9 | 994 | |||||||||||||||
Doubtful | - | - | - | - | - | |||||||||||||||
Total | $ | 24,949 | $ | 2,309 | $ | 1,870 | $ | 3,330 | $ | 32,458 | ||||||||||
June 30, 2017 | ||||||||||||||||||||
Pass | $ | 22,824 | $ | 2,989 | $ | 1,670 | $ | 3,609 | $ | 31,092 | ||||||||||
Special mention | - | - | - | - | - | |||||||||||||||
Substandard | 776 | 70 | 13 | 2 | 861 | |||||||||||||||
Doubtful | - | - | - | - | - | |||||||||||||||
Total | $ | 23,600 | $ | 3,059 | $ | 1,683 | $ | 3,611 | $ | 31,953 |
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.
18 |
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 September 30, 2017 and June 30, 2017:
September 30, 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 | $ | 243 | $ | - | $ | 65 | $ | 308 | $ | 24,641 | $ | 24,949 | ||||||||||||
Home equity lines of credit | - | - | - | - | 2,309 | 2,309 | ||||||||||||||||||
Commercial and multi-family | 79 | - | 13 | 92 | 1,778 | 1,870 | ||||||||||||||||||
Consumer and other | - | - | 7 | 7 | 3,323 | 3,330 | ||||||||||||||||||
Total | $ | 322 | $ | - | $ | 85 | $ | 407 | $ | 32,051 | $ | 32,458 |
June 30, 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 | $ | - | $ | 127 | $ | 65 | $ | 192 | $ | 23,408 | $ | 23,600 | ||||||||||||
Home equity lines of credit | - | 11 | - | 11 | 3,048 | 3,059 | ||||||||||||||||||
Commercial and multi-family | - | - | 13 | 13 | 1,670 | 1,683 | ||||||||||||||||||
Consumer and other | - | - | - | - | 3,611 | 3,611 | ||||||||||||||||||
Total | $ | - | $ | 138 | $ | 78 | $ | 216 | $ | 31,737 | $ | 31,953 |
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.
19 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents impaired loan information as of and for the three months ended September 30, 2017:
For the Three Months Ended | ||||||||||||||||||||
As of September 30, 2017 | September 30, 2017 | |||||||||||||||||||
Unpaid | Allowance for Loan | Average | Interest | |||||||||||||||||
Recorded Investment | Principal Balance | Losses Allocated | Recorded Investment | Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
1-4 family residential | $ | 320 | $ | 321 | $ | - | $ | 320 | $ | - | ||||||||||
Home equity lines of credit | 15 | 15 | - | 16 | - | |||||||||||||||
Commercial and multi-family | 92 | 92 | - | 92 | - | |||||||||||||||
Consumer and other | 9 | 9 | - | 4 | - | |||||||||||||||
Loans with an allowance recorded: | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
1-4 family residential | 90 | 92 | 9 | 90 | 1 | |||||||||||||||
Home equity lines of credit | - | - | - | - | - | |||||||||||||||
Commercial and multi-family | - | - | - | - | - | |||||||||||||||
Consumer and other | - | - | - | - | - | |||||||||||||||
Totals | $ | 526 | $ | 529 | $ | 9 | $ | 522 | $ | 1 |
20 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents impaired loan information as of June 30, 2017 and for the three months ended September 30, 2016:
For the Three Months Ended | ||||||||||||||||||||
As of June 30, 2017 | September 30, 2016 | |||||||||||||||||||
Unpaid | Allowance for Loan | Average | Interest | |||||||||||||||||
Recorded Investment | Principal Balance | Losses Allocated | Recorded Investment | Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
1-4 family residential | $ | 319 | $ | 319 | $ | - | $ | 307 | $ | 1 | ||||||||||
Home equity lines of credit | 17 | 17 | - | 13 | - | |||||||||||||||
Commercial and multi-family | 13 | 13 | - | - | - | |||||||||||||||
Consumer and other | 2 | 2 | - | - | - | |||||||||||||||
Loans with an allowance recorded: | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
1-4 family residential | 92 | 94 | 9 | 98 | - | |||||||||||||||
Home equity lines of credit | - | - | - | - | - | |||||||||||||||
Commercial and multi-family | - | - | - | - | - | |||||||||||||||
Consumer and other | - | - | - | - | - | |||||||||||||||
Totals | $ | 443 | $ | 445 | $ | 9 | $ | 418 | $ | 1 |
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.
21 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents the Company’s nonaccrual loans at September 30, 2017 and June 30, 2017. The table excludes performing troubled debt restructurings.
September 30, | June 30, | |||||||
2017 | 2017 | |||||||
(In thousands) | ||||||||
Real estate | ||||||||
1-4 family residential | $ | 338 | $ | 337 | ||||
Home equity lines of credit | 15 | 17 | ||||||
Commercial and multi-family | 92 | 13 | ||||||
Consumer and other | 9 | 2 | ||||||
Total nonaccrual | $ | 454 | $ | 369 |
At September 30, 2017 and June 30, 2017, the Company had certain loans that were modified in previous years 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 $82,000 and $85,000 at September 30, 2017 and June 30, 2017, respectively. Troubled debt restructured loans had specific allowances totaling $7,000 and $6,000 at September 30, 2017 and June 30, 2017, respectively. At September 30, 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 months ended September 30, 2017 or 2016.
The Company had no troubled debt restructurings modified during the twelve months ended September 30, 2017 or 2016 that subsequently defaulted during the three-month periods ended September 30, 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.
22 |
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 September 30, 2017 and June 30, 2017, that the Bank meets all capital adequacy requirements to which it is subject.
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 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 September 30, 2017 and June 30, 2017, 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 I 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.
23 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The Company’s and 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 September 30, 2017 | ||||||||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
(to Risk-Weighted Assets) | ||||||||||||||||||||||||
Company | $ | 9,542 | 40.0 | % | $ | 1,906 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,480 | 35.6 | % | $ | 1,906 | 8.0 | % | $ | 2,383 | 10.0 | % | ||||||||||||
Tier I Capital | ||||||||||||||||||||||||
(to Risk-Weighted Assets) | ||||||||||||||||||||||||
Company | $ | 9,289 | 39.0 | % | $ | 1,430 | 6.0 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,227 | 34.5 | % | $ | 1,430 | 6.0 | % | $ | 1,906 | 8.0 | % | ||||||||||||
Common Equity Tier I Capital | ||||||||||||||||||||||||
(to Risk-Weighted Assets) | ||||||||||||||||||||||||
Company | $ | 9,289 | 39.0 | % | $ | 1,072 | 4.5 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,227 | 34.5 | % | $ | 1,072 | 4.5 | % | $ | 1,549 | 6.5 | % | ||||||||||||
Leverage Capital | ||||||||||||||||||||||||
(to Adjusted Average Total Assets) | ||||||||||||||||||||||||
Company | $ | 9,289 | 17.8 | % | $ | 2,091 | 4.0 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,227 | 15.7 | % | $ | 2,091 | 4.0 | % | $ | 2,614 | 5.0 | % | ||||||||||||
As of June 30, 2017 | ||||||||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
(to Risk-Weighted Assets) | ||||||||||||||||||||||||
Company | $ | 9,621 | 39.1 | % | $ | 1,970 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,560 | 34.8 | % | $ | 1,970 | 8.0 | % | $ | 2,463 | 10.0 | % | ||||||||||||
Tier I Capital | ||||||||||||||||||||||||
(to Risk-Weighted Assets) | ||||||||||||||||||||||||
Company | $ | 9,368 | 38.0 | % | $ | 1,478 | 6.0 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,307 | 33.7 | % | $ | 1,478 | 6.0 | % | $ | 1,970 | 8.0 | % | ||||||||||||
Common Equity Tier I Capital | ||||||||||||||||||||||||
(to Risk-Weighted Assets) | ||||||||||||||||||||||||
Company | $ | 9,368 | 38.0 | % | $ | 1,108 | 4.5 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,307 | 33.7 | % | $ | 1,108 | 4.5 | % | $ | 1,601 | 6.5 | % | ||||||||||||
Leverage Capital | ||||||||||||||||||||||||
(to Adjusted Average Total Assets) | ||||||||||||||||||||||||
Company | $ | 9,368 | 16.9 | % | $ | 2,211 | 4.0 | % | N/A | N/A | ||||||||||||||
Bank | $ | 8,307 | 15.0 | % | $ | 2,211 | 4.0 | % | $ | 2,764 | 5.0 | % |
24 |
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. |
25 |
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 September 30, 2017 and June 30, 2017:
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) | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | $ | 5,077 | $ | - | $ | 5,077 | $ | - | ||||||||
Collateralized mortgage obligations of government sponsored entities - residential | 280 | - | 280 | - | ||||||||||||
State and political subdivisions | ||||||||||||||||
Taxable | 1,384 | - | 1,384 | - | ||||||||||||
Nontaxable | 1,477 | - | 1,477 | - | ||||||||||||
$ | 8,218 | $ | - | $ | 8,218 | $ | - | |||||||||
June 30, 2017 | ||||||||||||||||
Mortgage-backed securities of U.S. government sponsored entities - residential | $ | 5,613 | $ | - | $ | 5,613 | $ | - | ||||||||
Collateralized mortgage obligations of government sponsored entities - residential | 313 | - | 313 | - | ||||||||||||
State and political subdivisions | ||||||||||||||||
Taxable | 1,393 | - | 1,393 | - | ||||||||||||
Nontaxable | 1,479 | - | 1,479 | - | ||||||||||||
$ | 8,798 | $ | - | $ | 8,798 | $ | - |
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 condensed consolidated 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 three-month periods ended September 30, 2017 and 2016.
26 |
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 September 30, 2017 and June 30, 2017:
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) | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Impaired loans | ||||||||||||||||
Real estate | ||||||||||||||||
1-4 family residential | $ | 81 | $ | - | $ | - | $ | 81 | ||||||||
Foreclosed assets | ||||||||||||||||
Residential real estate | $ | 17 | $ | - | $ | - | $ | 17 | ||||||||
June 30, 2017 | ||||||||||||||||
Impaired loans | ||||||||||||||||
Real estate | ||||||||||||||||
1-4 family residential | $ | 83 | $ | - | $ | - | $ | 83 | ||||||||
Foreclosed assets | ||||||||||||||||
Residential real estate | $ | 17 | $ | - | $ | - | $ | 17 |
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.
27 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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 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.
28 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements:
Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | |||||||||
(In thousands) | ||||||||||||
September 30, 2017 | ||||||||||||
Impaired loans (collateral dependent) - residential real estate | $ | 81 | Sales comparison approach | Adjustment for differences between the comparable real estate sales | 10 | % | ||||||
Foreclosed assets - residential real estate | $ | 17 | Sales comparison approach | Adjustment for differences between the comparable real estate sales | 10 | % | ||||||
June 30, 2017 | ||||||||||||
Impaired loans (collateral dependent) - residential real estate | $ | 83 | Sales comparison approach | Adjustment for differences between the comparable real estate sales | 10 | % | ||||||
Foreclosed assets - residential real estate | $ | 17 | Sales comparison approach | Adjustment for differences between the comparable real estate sales | 10 | % |
29 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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 September 30, 2017 and June 30, 2017.
Fair Value Measurement Using | ||||||||||||||||||||
Carrying Amount | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,644 | $ | 2,644 | $ | - | $ | - | $ | 2,644 | ||||||||||
Interest-earning time deposits | 5,082 | 5,082 | - | - | 5,082 | |||||||||||||||
Other investment securities | 940 | - | - | 940 | 940 | |||||||||||||||
Loans, net | 32,205 | - | - | 33,276 | 33,276 | |||||||||||||||
Accrued interest receivable | 137 | - | 137 | - | 137 | |||||||||||||||
Bank owned life insurance | 751 | - | 751 | - | 751 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 40,036 | 31,824 | 8,085 | - | 39,909 | |||||||||||||||
Federal Home Loan Bank advances | 1,000 | - | 1,030 | - | 1,030 | |||||||||||||||
Payments by borrowers for taxes and insurance | 156 | - | 156 | - | 156 | |||||||||||||||
June 30, 2017 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 8,699 | $ | 8,699 | $ | - | $ | - | $ | 8,699 | ||||||||||
Interest-earning time deposits | 4,580 | 4,580 | - | - | 4,580 | |||||||||||||||
Other investment securities | 940 | - | - | 940 | 940 | |||||||||||||||
Loans, net | 31,700 | - | - | 32,869 | 32,869 | |||||||||||||||
Accrued interest receivable | 152 | - | 152 | - | 152 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 41,519 | 33,384 | 8,014 | - | 41,398 | |||||||||||||||
Federal Home Loan Bank advances | 4,500 | - | 4,536 | - | 4,536 | |||||||||||||||
Payments by borrowers for taxes and insurance | 88 | - | 88 | - | 88 |
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.
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Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Cash and Cash Equivalents and Interest-earning Time Deposits
The carrying amount of cash, short-term instruments and time deposits approximate fair value and are classified as Level 1.
Other Investment Securities
Due to restrictions placed on their transferability, the FHLB and COCC stock are carried at cost, which approximates fair value based on redemption provisions resulting in a Level 3 classification.
Loans
Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, resulting in a 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.
Bank Owned Life Insurance
The fair value of bank owned life insurance approximates the cash surrender value of the policies, 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 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.
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Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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 months ended September 30, 2017 and 2016 are as follows:
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Balance, July 1 | $ | 25 | $ | 88 | ||||
Other comprehensive income (loss) before tax effect | (10 | ) | 9 | |||||
Tax effect | 3 | (3 | ) | |||||
Net current period other comprehensive income (loss) | (7 | ) | 6 | |||||
Balance, September 30 | $ | 18 | $ | 94 |
There were no material items reclassified from accumulated other comprehensive income (loss) to the condensed consolidated statement of operations for the three months ended September 30, 2017 and 2016.
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Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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, as to the Company, for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019, 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. ASU 2014-09 may require the Company to change how it recognizes certain components of noninterest income, but the Company does not believe it will have a material impact on the Company’s financial statements or disclosures.
FASB ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities.In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.
The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. 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. The Company does not believe it will have a material impact on the Company’s financial statements or disclosures.
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. |
33 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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.
The amendments in ASU 2016-02 are effective, as to the Company, for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the impact of adopting this guidance on the Company’s financial statements.
FASB ASU 2016-13,Financial Instruments-Credit Losses.In June 2016, the FASB issued ASU 2016-13. The amendments in this ASU replace the incurred loss model for recognition of credit losses with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The amendments are effective, as to the Company, for annual reporting periods beginning after December 15, 2020 and for interim periods beginning after December 31, 2021. The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations.
FASB ASU 2017-08,Receivables-Nonrefundable Fees and Other Costs.In March 2017, the FASB issued ASU 2017-08. The amendment shortens the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. This ASU will become effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. Management has not determined the expected effect of the adoption of ASU 2017-08 on the Company’s financial statements.
34 |
Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 8: | Loss Per Share |
Basic loss per share (“LPS”) is calculated by dividing net loss applicable to common stock by the weighted-average number of shares of common stock outstanding during the period. Unallocated common shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for basic and diluted LPS calculations until they are committed to be released.
Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period.
Loss per share for the three months ended September 30, 2017 was $(0.20), calculated using 441,290 shares issued, less 32,688 unallocated shares held by the ESOP. The Company had no dilutive or potentially dilutive securities at September 30, 2017.
Loss per share disclosures are not applicable to the three months ended September 30, 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 $6,000 for the three months ended September 30, 2017.
The stock price at the formation date was $10.00. The aggregate fair value of the 32,688 unallocated shares was $436,000 based on the $13.35 closing price of our common stock on September 30, 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.
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.
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Community Savings Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
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.
36 |
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 September 30, 2017 and results of operations for the three months ended September 30, 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.
37 |
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.
38 |
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 14 of the Financial Statements “– Disclosures About Fair Value of Assets and Liabilities,” included in the Company’s Form 10-K.
Comparison of Financial Condition at September 30, 2017 and June 30, 2017
Total Assets. Total assets decreased $4.9 million, or 8.9%, to $50.7 million at September 30, 2017 from $55.6 million at June 30, 2017. The decrease was due primarily to a decrease in cash and cash equivalents of $6.1 million, offset by a $750,000 increase in bank-owned life insurance and a $502,000 increase in interest-earning time deposits in other institutions.
Cash and Cash Equivalents.Cash and cash equivalents decreased $6.1 million, or 69.6%, to $2.6 million at September 30, 2017. The decrease in cash and cash equivalents was due primarily to the repayment of $3.5 million in FHLB advances, a $1.5 million decrease in deposits, and a $750,000 purchase of bank-owned life insurance policies.
Interest-earning Time Deposits in Other Financial Institutions.Interest-earning time deposits in other financial institutions increased $502,000, or 11.0%, to $5.1 million at September 30, 2017 from $4.6 million at June 30, 2017. The increase was due to purchases of time deposits in other institutions during the period.
Securities available-for-sale.Investment securities available-for-sale decreased $580,000, or 6.6%, to $8.2 million at September 30, 2017 from $8.8 million at June 30, 2017. The decrease in securities available-for-sale was primarily due to principal repayments on mortgage-backed securities totaling $535,000.
Net Loans. Net loans increased $505,000, or 1.6%, to $32.2 million at September 30, 2017 compared to June 30, 2017. The increase in net loans was due primarily to an increase of $1.3 million, or 5.7%, in one-to four-family mortgages to $24.9 million from $23.6 million at June 30, 2017. This was partially offset by a decrease of $750,000 in home equity loans to $2.3 million at September 30, 2017 from $3.1 million at June 30, 2017. Loans originated during the three months ended September 30, 2017 totaled $1.9 million, of which $1.8 million were loans secured by one-to four-family residential real estate.
39 |
Community Savings Bancorp, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Deposits.Deposits decreased $1.5 million, or 3.6%, to $40.0 million at September 30, 2017 from $41.5 million at June 30, 2017. The decrease resulted primarily from a drop in demand deposits of $665,000, or 6.7%, and savings and money market accounts of $895,000, or 3.8%, partially offset by a gain in certificate of deposit accounts of $77,000, or 0.9%.
FHLB Advances.FHLB advances decreased $3.5 million, or 77.8%, to $1.0 million at September 30, 2017 from $4.5 million at June 30, 2017, as we utilized cash and cash equivalents to repay certain FHLB advances.
Shareholders’ Equity. Shareholders’ equity decreased $86,000, or 0.9%, to $9.3 million at September 30, 2017 from $9.4 million at June 30, 2017. The decrease was due primarily to a net loss of $79,000 and a decrease in accumulated other comprehensive income of $7,000 during the period.
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2017 and 2016
General. For the three months ended September 30, 2017, we had a net loss of $79,000 compared to net income of $4,000 for the three months ended September 30, 2016, a decrease of $83,000. The net loss resulted primarily from a decrease in net interest income of $8,000, a decrease in noninterest income of $33,000, and an increase of $71,000 in noninterest expense, which were offset in part by an increase of $29,000 in federal income tax benefits.
Average Balance Sheets.The following table sets forth average balance sheets, average yields and costs, and certain other information for the three month periods ended September 30, 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.
40 |
Community Savings Bancorp, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average Outstanding Balance | Interest | Yield/Rate | Average Outstanding Balance | Interest | Yield/Rate | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 32,276 | $ | 346 | 4.29 | % | $ | 32,691 | $ | 356 | 4.36 | % | ||||||||||||
Investment securities | 8,566 | 41 | 1.91 | % | 10,714 | 51 | 1.90 | % | ||||||||||||||||
Other interest-earning assets (1) | 8,666 | 39 | 1.80 | % | 7,343 | 32 | 1.74 | % | ||||||||||||||||
Total interest-earning assets | 49,508 | 426 | 3.44 | % | 50,748 | 439 | 3.46 | % | ||||||||||||||||
Noninterest-earning assets | 3,058 | 2,980 | ||||||||||||||||||||||
Allowance for loan losses | (253 | ) | (253 | ) | ||||||||||||||||||||
Total assets | $ | 52,313 | $ | 53,475 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Demand accounts | $ | 2,229 | 1 | 0.18 | % | $ | 2,590 | 1 | 0.15 | % | ||||||||||||||
Savings and money market accounts | 22,858 | 16 | 0.28 | % | 22,121 | 15 | 0.27 | % | ||||||||||||||||
Certificates of deposit | 8,203 | 15 | 0.73 | % | 7,874 | 14 | 0.71 | % | ||||||||||||||||
Total deposits | 33,290 | 32 | 0.38 | % | 32,585 | 30 | 0.37 | % | ||||||||||||||||
FHLB advances | 2,141 | 15 | 2.80 | % | 6,543 | 22 | 1.34 | % | ||||||||||||||||
Total interest-bearing liabilities | 35,431 | 47 | 0.53 | % | 39,128 | 52 | 0.53 | % | ||||||||||||||||
Noninterest-bearing liabilities | 7,504 | 7,682 | ||||||||||||||||||||||
Total liabilities | 42,935 | 46,810 | ||||||||||||||||||||||
Equity | 9,378 | 6,665 | ||||||||||||||||||||||
Total liabilities and equity | $ | 52,313 | $ | 53,475 | ||||||||||||||||||||
Net interest income | $ | 379 | $ | 387 | ||||||||||||||||||||
Net interest rate spread (2) | 2.91 | % | 2.93 | % | ||||||||||||||||||||
Net interest-earning assets (3) | $ | 14,077 | $ | 11,620 | ||||||||||||||||||||
Net interest margin (4) | 3.06 | % | 3.05 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 139.73 | % | 129.70 | % |
(1) | Consists of stock in the FHLB and interest-bearing deposits in other banks. |
(2) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(3) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
(4) | Net interest margin represents net interest income divided by average total interest-earning assets. |
41 |
Community Savings Bancorp, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest Income. Interest income decreased $13,000, or 3.0%, to $426,000 for the three months ended September 30, 2017 from $439,000 for the three months ended September 30, 2016. The decrease resulted primarily from a $10,000 decrease in loan interest income and a decrease of $10,000 in interest on investment securities, offset by an increase of $7,000 in income from interest-earning deposits. The average balance of investment securities decreased $2.1 million, or 20.0%, to $8.6 million during the three months ended September 30, 2017 from $10.7 million during the three months ended September 30, 2016, which was partially offset by an increase in the average yield on investment securities of one basis point to 1.91% for the 2017 period from 1.90% for the 2016 period. The average balance of loans receivable decreased $415,000, or 1.3%, to $32.3 million during the three months ended September 30, 2017 from $32.7 million during the three months ended September 30, 2016, while the average yield on loans decreased seven basis points to 4.29% during the three months ended September 30, 2017 from 4.36% during the year earlier period, reflecting lower market interest rates.
Interest Expense. Interest expense decreased $5,000, or 9.6%, to $47,000 for the three months ended September 30, 2017 from $52,000 for the three months ended September 30, 2016. Interest expense on deposits increased $2,000, or 6.7%, to $32,000 for the three months ended September 30, 2017 from $30,000 for the three months ended September 30, 2016. The increase was primarily due to an increase in the average cost of deposits of one basis point to 0.38% from 0.37% for the three months ended September 30, 2017 and 2016, respectively, and an increase of $705,000, or 2.2%, in the average balance of interest-bearing deposits to $33.3 million for the three month period in 2017 from $32.6 million for the comparable period in 2016. Interest expense on borrowings decreased $7,000, or 31.8%, to $15,000 for the three months ended September 30, 2017 from $22,000 for the three months ended September 30, 2016. The average balance of FHLB advances decreased $4.4 million to $2.1 million for the three months ended September 30, 2017 from $6.5 million for the three months ended September 30, 2016, while the average cost of these advances increased 146 basis points to 2.80% from 1.34% period-to-period.
Net Interest Income. Net interest income decreased $8,000, or 2.1%, to $379,000 for the three months ended September 30, 2017 from $387,000 for the three months ended September 30, 2016. Our net interest rate spread decreased to 2.91% for the three months ended September 30, 2017 from 2.93% for the three months ended September 30, 2016, and our net interest margin increased to 3.06% for the three months ended September 30, 2017 from 3.05% 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 September 30, 2017 or 2016. The allowance for loan losses was $253,000, or 0.78% of total loans at September 30, 2017, compared to $253,000, or 0.78% of total loans at September 30, 2016. Total nonperforming loans were $454,000 at September 30, 2017, compared to $324,000 at September 30, 2016. Classified (substandard, doubtful and loss) loans were $994,000 at September 30, 2017, compared to $855,000 at September 30, 2016, and total loans past due greater than 30 days were $407,000 and $264,000 at September 30, 2017 and 2016, respectively. The Bank had no net charge-offs during either of the three months ended September 30, 2017 and 2016. As a percentage of nonperforming loans, the allowance for loan losses was 55.7% at September 30, 2017 compared to 78.1% at September 30, 2016.
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Community Savings Bancorp, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 September 30, 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 $33,000, or 33.3%, to $66,000 for the three months ended September 30, 2017 from $99,000 for the three months ended September 30, 2016. There was no gain on the sale of foreclosed assets during the three months ended September 30, 2017 compared to $29,000 for the same period in 2016. Service charges and fees were $65,000 during the three months ended September 30, 2017 and 2016.
Noninterest Expense. Noninterest expense increased $71,000, or 14.7%, to $555,000 for the three months ended September 30, 2017 compared to $484,000 for the three months ended September 30, 2016. Salaries and benefits increased $23,000, or 11.5%, due primarily to the addition of a new loan officer. Data processing increased by $24,000, or 38.7% as we continue to improve our cyber-security protection, and professional services increased $20,000, or 33.3%, because of costs associated with operating as a public company. Correspondent bank service charges increased $7,000, or 14.9% due to increased interchange activity. Other expenses decreased $10,000 or 20.4%, to $39,000 from $49,000 during the three months ended September 30, 2017, due primarily to a decrease in foreclosure expense of $3,000, a decrease in miscellaneous operating expense of $3,000, and a decrease in real estate owned expense of $2,000. FDIC insurance premiums decreased $5,000 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 the implementation of a stock-based benefit plan. 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 $31,000 for the three months ended September 30, 2017, compared to a tax benefit of $2,000 recognized during the three months ended September 30, 2016, due primarily to the $112,000 increase in the net loss before taxes period to period.
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.
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Community Savings Bancorp, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 $82,000 and $(191,000) for the three months ended September 30, 2017 and 2016, respectively. Net cash provided by (used in) investing activities was $(1.2 million) and $1.9 million for the three months ended September 30, 2017 and 2016, respectively. The change in cash flows in investing activities resulted primarily from the purchase of $750,000 of bank owned life insurance and the purchase of time deposits in other financial institutions of $502,000 during the three months ended September 30, 2017. Cash used in financing activities was $(4.9 million) and $(821,000) in the three months ended September 30, 2017 and 2016, respectively. This change resulted primarily from the repayments of FHLB advances of $3.5 million and a decrease in deposits of $1.5 million for the three months ended September 30, 2017.
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 September 30, 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 September 30, 2017, we had outstanding commitments to originate loans of $225,000, we had commitments under undisbursed construction loans of $407,000 and commitments under home equity lines of credit of $1.8 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 September 30, 2017 totaled $3.9 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 agreements with respect to borrowed funds and deposit liabilities.
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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.
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Community Savings Bancorp, Inc.
Other Information
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ITEM 6. | Exhibits |
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Community Savings Bancorp, Inc.
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: | November 14, 2017 | By: | /s/Alvin B. Parmiter | |
Alvin B. Parmiter | ||||
President and Chief Executive Officer | ||||
Date: | November 14, 2017 | By: | /s/Sherman E. Crum | |
Sherman E. Crum | ||||
Controller and Principal Financial Officer |
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INDEX TO EXHIBITS
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