SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
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. 001-34893
Standard AVB Financial Corp.
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 27-3100949 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
2640 Monroeville Blvd. Monroeville, Pennsylvania |
15146 | |
(Address of Principal Executive Offices) | (Zip Code) |
(412) 856-0363
(Registrant’s Telephone Number, Including Area Code)
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 requirements for the past 90 days.
YES x NO¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES x NO¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer ¨ | Accelerated filer x | |
Non-accelerated filer ¨ | Smaller reporting company x | |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark 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
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes x No ¨
As of May 6, 2019, the registrant had 4,813,646 shares of common stock, $0.01 par value per share, outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | STND | The NASDAQ Stock Market, LLC |
Standard AVB Financial Corp.
Table of Contents
EXPLANATORY NOTE
The unaudited consolidated financial statements and other financial information contained in this quarterly report on Form 10-Q should be read in conjunction with the audited financial statements of Standard AVB Financial Corp. at and for the year ended December 31, 2018 contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 18, 2019.
1 |
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
March 31, | ||||||||
2019 | December 31, | |||||||
(Unaudited) | 2018 | |||||||
ASSETS | ||||||||
Cash on hand and due from banks | $ | 3,201 | $ | 3,371 | ||||
Interest-earning deposits in other institutions | 31,500 | 12,836 | ||||||
Cash and Cash Equivalents | 34,701 | 16,207 | ||||||
Investment securities available for sale, at fair value | 66,848 | 66,169 | ||||||
Equity securities, at fair value | 2,752 | 2,725 | ||||||
Mortgage-backed securities available for sale, at fair value | 87,771 | 81,794 | ||||||
Certificate of deposit | 249 | 249 | ||||||
Federal Home Loan Bank and other restricted stock, at cost | 7,463 | 7,900 | ||||||
Loans receivable, net of allowance for loan losses of $4,375 and $4,414 | 724,605 | 728,982 | ||||||
Loans held for sale | 198 | - | ||||||
Foreclosed real estate | 531 | 486 | ||||||
Office properties and equipment, net | 8,835 | 7,794 | ||||||
Bank-owned life insurance | 22,703 | 22,572 | ||||||
Goodwill | 25,836 | 25,836 | ||||||
Core deposit intangible | 2,315 | 2,508 | ||||||
Accrued interest receivable and other assets | 4,943 | 8,574 | ||||||
TOTAL ASSETS | $ | 989,750 | $ | 971,796 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Demand, savings and club accounts | $ | 496,515 | $ | 471,177 | ||||
Certificate accounts | 246,907 | 246,697 | ||||||
Total Deposits | 743,422 | 717,874 | ||||||
Federal Home Loan Bank short-term borrowings | - | 4,524 | ||||||
Long-term borrowings | 98,148 | 104,963 | ||||||
Securities sold under agreements to repurchase | 3,988 | 2,137 | ||||||
Advance deposits by borrowers for taxes and insurance | 38 | 45 | ||||||
Accrued interest payable and other liabilities | 4,010 | 4,363 | ||||||
TOTAL LIABILITIES | 849,606 | 833,906 | ||||||
Stockholders' Equity | ||||||||
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, none issued | - | - | ||||||
Common stock, $0.01 par value per share, 40,000,000 shares authorized, 4,822,646 and 4,812,991 shares outstanding, respectively | 48 | 48 | ||||||
Additional paid-in-capital | 75,663 | 75,571 | ||||||
Retained earnings | 66,441 | 65,301 | ||||||
Unearned Employee Stock Ownership Plan (ESOP) shares | (1,648 | ) | (1,686 | ) | ||||
Accumulated other comprehensive loss | (360 | ) | (1,344 | ) | ||||
TOTAL STOCKHOLDERS' EQUITY | 140,144 | 137,890 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 989,750 | $ | 971,796 |
See accompanying notes to the consolidated financial statements.
2 |
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest and Dividend Income | ||||||||
Loans, including fees | $ | 8,016 | $ | 7,916 | ||||
Mortgage-backed securities | 548 | 457 | ||||||
Investments: | ||||||||
Taxable | 115 | 100 | ||||||
Tax-exempt | 379 | 355 | ||||||
Federal Home Loan Bank and other restricted stock | 174 | 160 | ||||||
Interest-earning deposits and federal funds sold | 80 | 50 | ||||||
Total Interest and Dividend Income | 9,312 | 9,038 | ||||||
Interest Expense | ||||||||
Deposits | 1,593 | 974 | ||||||
Federal Home Loan Bank short-term borrowings | 28 | 158 | ||||||
Long-term borrowings | 536 | 497 | ||||||
Securities sold under agreements to repurchase | 6 | 2 | ||||||
Total Interest Expense | 2,163 | 1,631 | ||||||
Net Interest Income | 7,149 | 7,407 | ||||||
Provision for Loan Losses | 108 | - | ||||||
Net Interest Income after Provision for Loan Losses | 7,041 | 7,407 | ||||||
Noninterest Income | ||||||||
Service charges | 689 | 710 | ||||||
Earnings on bank-owned life insurance | 131 | 131 | ||||||
Net losses on sales of securities | (7 | ) | - | |||||
Net gains on sales of equities | - | 40 | ||||||
Net equity securities fair value adjustment gains | 27 | 50 | ||||||
Net loan sale gains | 34 | 4 | ||||||
Investment management fees | 202 | 132 | ||||||
Other income | 62 | 15 | ||||||
Total Noninterest Income | 1,138 | 1,082 | ||||||
Noninterest Expenses | ||||||||
Compensation and employee benefits | 3,221 | 3,430 | ||||||
Data processing | 177 | 154 | ||||||
Premises and occupancy costs | 673 | 685 | ||||||
Automatic teller machine expense | 137 | 129 | ||||||
Federal deposit insurance | 68 | 81 | ||||||
Core deposit amortization | 193 | 257 | ||||||
Other operating expenses | 998 | 1,017 | ||||||
Total Noninterest Expenses | 5,467 | 5,753 | ||||||
Income before Income Tax Expense | 2,712 | 2,736 | ||||||
Income Tax Expense | ||||||||
Federal | 357 | 476 | ||||||
State | 186 | 100 | ||||||
Total Income Tax Expense | 543 | 576 | ||||||
Net Income | $ | 2,169 | $ | 2,160 | ||||
Earnings Per Share: | ||||||||
Basic earnings per common share | $ | 0.47 | $ | 0.47 | ||||
Diluted earnings per common share | $ | 0.46 | $ | 0.46 | ||||
Cash dividends paid per common share | $ | 0.22 | $ | 0.22 | ||||
Basic weighted average shares outstanding | 4,659,335 | 4,622,384 | ||||||
Diluted weighted average shares outstanding | 4,765,175 | 4,738,280 |
See accompanying notes to the consolidated financial statements.
3 |
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net Income | $ | 2,169 | $ | 2,160 | ||||
Other comprehensive income (loss): | ||||||||
Change in unrealized gain (loss) on securities available for sale | 1,236 | (2,460 | ) | |||||
Tax effect | (260 | ) | 517 | |||||
Reclassification adjustment for security losses realized in income | 7 | - | ||||||
Tax effect | (1 | ) | - | |||||
Change in pension obligation for defined benefit plan | 2 | 3 | ||||||
Tax effect | - | (1 | ) | |||||
Total other comprehensive income (loss) | 984 | (1,941 | ) | |||||
Total Comprehensive Income | $ | 3,153 | $ | 219 |
See accompanying notes to the consolidated financial statements.
4 |
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands, except per share data)
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Unearned | Other | Total | |||||||||||||||||||||
Common | Paid-In | Retained | ESOP | Comprehensive | Stockholders' | |||||||||||||||||||
Stock | Capital | Earnings | Shares | Loss | Equity | |||||||||||||||||||
Balance, December 31, 2018 | $ | 48 | $ | 75,571 | $ | 65,301 | $ | (1,686 | ) | $ | (1,344 | ) | $ | 137,890 | ||||||||||
Net income | - | - | 2,169 | - | - | 2,169 | ||||||||||||||||||
Other comprehensive income | - | - | - | 984 | 984 | |||||||||||||||||||
Stock repurchases (5,557 shares) | - | (180 | ) | - | - | - | (180 | ) | ||||||||||||||||
Cash dividends ($0.22 per share) | - | - | (1,029 | ) | - | - | (1,029 | ) | ||||||||||||||||
Stock options exercised (10,665 shares) | - | 189 | - | - | - | 189 | ||||||||||||||||||
Compensation expense on stock awards | - | 13 | - | - | - | 13 | ||||||||||||||||||
Compensation expense on ESOP | - | 70 | - | 38 | - | 108 | ||||||||||||||||||
Balance, March 31, 2019 | $ | 48 | $ | 75,663 | $ | 66,441 | $ | (1,648 | ) | $ | (360 | ) | $ | 140,144 | ||||||||||
�� | ||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 48 | $ | 75,063 | $ | 60,172 | $ | (1,839 | ) | $ | 528 | $ | 133,972 | |||||||||||
Net income | - | - | 2,160 | - | - | 2,160 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (1,941 | ) | (1,941 | ) | ||||||||||||||||
Change in accounting principle ‘for adoption of ASU 2016-01 | - | - | 416 | - | (416 | ) | - | |||||||||||||||||
Stock repurchases (2,845 shares) | - | (86 | ) | - | - | - | (86 | ) | ||||||||||||||||
Cash dividends ($0.22 per share) | - | - | (1,059 | ) | - | - | (1,059 | ) | ||||||||||||||||
Stock options exercised (8,801 shares) | - | 155 | - | - | - | 155 | ||||||||||||||||||
Compensation expense on ESOP | - | 71 | - | 38 | - | 109 | ||||||||||||||||||
Balance, March 31, 2018 | $ | 48 | $ | 75,203 | $ | 61,689 | $ | (1,801 | ) | $ | (1,829 | ) | $ | 133,310 |
See accompanying notes to the consolidated financial statements.
5 |
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income | $ | 2,169 | $ | 2,160 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 446 | 305 | ||||||
Provision for loan losses | 108 | - | ||||||
Amortization of core deposit intangible | 193 | 257 | ||||||
Net loss on sale of securities available for sale | 7 | - | ||||||
Net gain on sale of equity securities | - | (40 | ) | |||||
Origination of loans held for sale | (1,780 | ) | (1,116 | ) | ||||
Proceeds from sale of loans held for sale | 1,814 | 1,120 | ||||||
Net equity securities fair value adjustment gains | (27 | ) | (50 | ) | ||||
Net loan sale gains | (34 | ) | (4 | ) | ||||
Compensation expense on ESOP | 108 | 109 | ||||||
Compensation expense on stock awards | 13 | - | ||||||
Deferred income taxes | 743 | 635 | ||||||
Increase in accrued interest receivable | (181 | ) | (70 | ) | ||||
Earnings on bank-owned life insurance | (131 | ) | (131 | ) | ||||
Increase (decrease) in accrued interest payable | 9 | (47 | ) | |||||
Other, net | 1,989 | 890 | ||||||
Net Cash Provided by Operating Activities | 5,446 | 4,018 | ||||||
Cash Flows Used In Investing Activities | ||||||||
Net decrease in loans | 4,026 | 4,239 | ||||||
Purchases of investment securities | (3,221 | ) | (2,556 | ) | ||||
Purchases of equity securities | - | (387 | ) | |||||
Purchases of mortgage-backed securities | (9,112 | ) | (16,147 | ) | ||||
Proceeds from maturities of certificates of deposits | - | 250 | ||||||
Proceeds from maturities/principal repayments/calls of investment securities | 35 | 30 | ||||||
Proceeds from maturities/principal repayments/calls of mortgage-backed securities | 3,523 | 2,377 | ||||||
Proceeds from sales of investment securities | 3,696 | - | ||||||
Proceeds from sales of equity securities | - | 178 | ||||||
Purchase of Federal Home Loan Bank stock | (1,033 | ) | (2,207 | ) | ||||
Redemption of Federal Home Loan Bank stock | 1,470 | 2,255 | ||||||
Net purchases of office properties and equipment | (203 | ) | (93 | ) | ||||
Net Cash Used in Investing Activities | (819 | ) | (12,061 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Net increase (decrease) in demand, savings and club accounts | 25,338 | (2,378 | ) | |||||
Net increase (decrease) in certificate accounts | 210 | (381 | ) | |||||
Net increase in securities sold under agreements to repurchase | 1,851 | 319 | ||||||
Repayments of Federal Home Loan Bank short-term borrowings | (57,961 | ) | (84,500 | ) | ||||
Proceeds from Federal Home Loan Bank short-term borrowing | 53,437 | 80,362 | ||||||
Repayments of Federal Home Loan Bank advances | (7,879 | ) | (6,356 | ) | ||||
Proceeds from Federal Home Loan Bank advances | - | 20,000 | ||||||
Lease liabilies payments | (102 | ) | - | |||||
Net decrease in advance deposits by borrowers for taxes and insurance | (7 | ) | (68 | ) | ||||
Exercise of stock options | 189 | 155 | ||||||
Dividends paid | (1,029 | ) | (1,059 | ) | ||||
Stock repurchases | (180 | ) | (86 | ) | ||||
Net Cash Provided by Financing Activities | 13,867 | 6,008 | ||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 18,494 | (2,035 | ) | |||||
Cash and Cash Equivalents - Beginning | 16,207 | 16,265 | ||||||
Cash and Cash Equivalents - Ending | $ | 34,701 | $ | 14,230 | ||||
Supplementary Cash Flows Information: | ||||||||
Interest paid | $ | 2,154 | $ | 1,678 | ||||
Income taxes paid | $ | 273 | $ | 36 | ||||
Investment security purchased not settled | $ | 496 | $ | - | ||||
Loans held for sale | $ | 198 | $ | - | ||||
Right-of-use asset | $ | (1,132 | ) | $ | - | |||
Lease liability | $ | 1,158 | $ | - | ||||
Prepaid lease payments | $ | (26 | ) | $ | - |
See accompanying notes to the consolidated financial statements.
6 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(1) | Consolidation |
The accompanying consolidated financial statements include the accounts of Standard AVB Financial Corp. (the “Company”) and its direct and indirect wholly owned subsidiaries, Standard Bank, PaSB (the “Bank”), and Westmoreland Investment Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Standard AVB Financial Corp. owns all of the outstanding shares of common stock of the Bank.
(2) | Basis of Presentation |
The accompanying consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles in the United States. All adjustments (consisting of normal recurring adjustments), which, in the opinion of management are necessary for a fair presentation of the financial statements and to make the financial statements not misleading have been included. The unaudited consolidated financial statements and other financial information contained in this quarterly report on Form 10-Q should be read in conjunction with the audited financial statements of Standard AVB Financial Corp. at and for the year ended December 31, 2018 contained in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on March 18, 2019. The results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future interim period. Certain amounts in the 2018 financial statements have been reclassified to conform to the 2019 presentation format. These reclassifications had no effect on stockholders’ equity or net income.
(3) | Earnings per Share |
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The following table sets forth the computation of basic and diluted EPS for the three months ended March 31, 2019 and March 31, 2018 (dollars in thousands, except per share data):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income available to common stockholders | $ | 2,169 | $ | 2,160 | ||||
Basic EPS: | ||||||||
Weighted average shares outstanding | 4,659,335 | 4,622,384 | ||||||
Basic EPS | $ | 0.47 | $ | 0.47 | ||||
Diluted EPS: | ||||||||
Weighted average shares outstanding | 4,659,335 | 4,622,384 | ||||||
Dilutive effect of common stock equivalents | 105,840 | 115,896 | ||||||
Total diluted weighted average shares outstanding | 4,765,175 | 4,738,280 | ||||||
Diluted EPS | $ | 0.46 | $ | 0.46 |
(4) | Recent Accounting Pronouncements |
Accounting Standards Adopted in 2019
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. Additionally, in July 2018, the FASB issued ASU 2018-11,Leases (Topic 842) – Targeted Improvements,which, among other things, provided an additional transition method that allows entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU 2016-02 and its related amendments as of January 1, 2019, which resulted in the recognition of finance right-of-use assets and finance lease liabilities totaling $1.1 million and $1.2 million, respectively. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. Additional lease disclosures can be found in Note 10 contained herein. There was no cumulative effect adjustment to the opening balance of retained earnings required.
7 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(4) | Recent Accounting Pronouncements (Continued) |
Accounting Standards Pending Adoption
In June 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19,Codification Improvements to Topic 326, Financial Instruments – Credit Losses,which amended the effective date of ASU 2016-13 for entities other than public business entities. The ASU also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Rather, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842,Leases.With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. The Company has been working with a third party to evaluate the various CECL methodologies and decided to utilize the vintage method. The Company is continuing to work through implementation of that method and determine what impact it will have on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,Simplifying the Test for Goodwill Impairment.To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
ASU 2018-06, Codification Improvements to Topic 942, Financial Services-Depository and Lending, amends the guidance in Subtopic 942-740, Financial Services-Depository and Lending-Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and no longer is relevant. This Update is not expected to have a significant impact on the Company’s financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
8 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(4) | Recent Accounting Pronouncements (Continued) |
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2019, the FASB issued ASU 2019-01,Leases (Topic 842): Codification Improvements,which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.
In April 2019, the FASB issued ASU 2019-04,Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. This Update is not expected to have a significant impact on the Company’s financial statements.
9 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(5) | Investment Securities |
Investment securities available for sale at March 31, 2019 and December 31, 2018 are as follows (dollars in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
March 31, 2019: | ||||||||||||||||
U.S. government and agency obligations due: | ||||||||||||||||
Beyond 1 year but within 5 years | $ | 7,435 | $ | 1 | (48 | ) | $ | 7,388 | ||||||||
Beyond 5 year but within 10 years | 942 | 3 | - | 945 | ||||||||||||
Corporate bonds due: | ||||||||||||||||
Within 1 year | 1,755 | - | (7 | ) | 1,748 | |||||||||||
Beyond 1 year but within 5 years | 1,474 | 22 | - | 1,496 | ||||||||||||
Beyond 5 years but within 10 years | 996 | 26 | - | 1,022 | ||||||||||||
Municipal obligations due: | ||||||||||||||||
Beyond 1 year but within 5 years | 5,215 | 296 | - | 5,511 | ||||||||||||
Beyond 5 years but within 10 years | 20,123 | 327 | (1 | ) | 20,449 | |||||||||||
Beyond 10 years | 28,184 | 216 | (111 | ) | 28,289 | |||||||||||
$ | 66,124 | $ | 891 | $ | (167 | ) | $ | 66,848 | ||||||||
December 31, 2018: | ||||||||||||||||
U.S. government and agency obligations due: | ||||||||||||||||
Beyond 1 year but within 5 years | $ | 7,428 | $ | - | $ | (81 | ) | $ | 7,347 | |||||||
Beyond 5 year but within 10 years | 940 | - | (17 | ) | 923 | |||||||||||
Corporate bonds due: | ||||||||||||||||
Within 1 year | 1,758 | - | (15 | ) | 1,743 | |||||||||||
Beyond 1 year but within 5 years | 1,472 | 2 | (10 | ) | 1,464 | |||||||||||
Beyond 5 years but within 10 years | 996 | - | (2 | ) | 994 | |||||||||||
Municipal obligations due: | ||||||||||||||||
Beyond 1 year but within 5 years | 6,658 | 298 | - | 6,956 | ||||||||||||
Beyond 5 years but within 10 years | 22,384 | 132 | (81 | ) | 22,435 | |||||||||||
Beyond 10 years | 24,504 | 82 | (279 | ) | 24,307 | |||||||||||
$ | 66,140 | $ | 514 | $ | (485 | ) | $ | 66,169 |
For the three months ended March 31, 2019, losses on sales of investment securities were $7,000 and proceeds from such sales were $3.7 million. There were no sales of investment securities for the three months ended March 31, 2018.
Investment securities with a carrying value of $11.6 million were pledged to secure repurchase agreements and public funds accounts at both March 31, 2019 and December 31, 2018.
10 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(5) | Investment Securities (Continued) |
The following table shows the fair value and gross unrealized losses on investment securities and the length of time that the securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018 (dollars in thousands):
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
March 31, 2019: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | - | $ | - | $ | 6,897 | $ | (48 | ) | $ | 6,897 | $ | (48 | ) | ||||||||||
Corporate bonds | - | - | 1,748 | (7 | ) | 1,748 | (7 | ) | ||||||||||||||||
Municipal obligations | 950 | (1 | ) | 7,332 | (111 | ) | 8,282 | (112 | ) | |||||||||||||||
Total | $ | 950 | $ | (1 | ) | $ | 15,977 | $ | (166 | ) | $ | 16,927 | $ | (167 | ) | |||||||||
December 31, 2018: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | - | $ | - | $ | 8,270 | $ | (98 | ) | $ | 8,270 | $ | (98 | ) | ||||||||||
Corporate bonds | 1,490 | (12 | ) | 1,743 | (15 | ) | 3,233 | (27 | ) | |||||||||||||||
Municipal obligations | 10,049 | (55 | ) | 11,730 | (305 | ) | 21,779 | (360 | ) | |||||||||||||||
Total | $ | 11,539 | $ | (67 | ) | $ | 21,743 | $ | (418 | ) | $ | 33,282 | $ | (485 | ) |
At March 31, 2019, the Company held 20 investment securities in an unrealized loss position. The decline in the fair value of these securities resulted primarily from interest rate fluctuations. The Company does not intend to sell these securities nor is it more likely than not that the Company would be required to sell these securities before their anticipated recovery. Additionally, the Company believes the collection of the investment principal and related interest is probable. Based on the above, the Company considers all of the unrealized losses to be temporary impairment losses.
(6) | Equity Securities |
The following table presents the net gains and losses on equity investments recognized in earnings during the three months ended March 31, 2019 and March 31, 2018, and the portion of unrealized gains and losses for those periods that relate to equity investments held (dollars in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net equity securities fair value adjustment gains | $ | 27 | $ | 50 | ||||
Net gains realized on the sale of equity securities during the period | - | 40 | ||||||
Gains recognized on equity securities during the period | $ | 27 | $ | 90 |
There were no sales of equity securities for the three months ended March 31, 2019. During the three months ended March 31, 2018, gains on sales of equity securities were $40,000 and proceeds from such sales were $178,000.
11 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(7) | Mortgage-Backed Securities |
Mortgage-backed securities available for sale at March 31, 2019 and December 31, 2018 are as follows (dollars in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
March 31, 2019: | ||||||||||||||||
Government pass-throughs: | ||||||||||||||||
Ginnie Mae | $ | 19,618 | $ | 23 | $ | (231 | ) | $ | 19,410 | |||||||
Fannie Mae | 20,107 | 47 | (164 | ) | 19,990 | |||||||||||
Freddie Mac | 12,291 | 12 | (110 | ) | 12,193 | |||||||||||
Private pass-throughs | 23,819 | - | (308 | ) | 23,511 | |||||||||||
Collateralized mortgage obligations | 12,813 | 4 | (150 | ) | 12,667 | |||||||||||
$ | 88,648 | $ | 86 | $ | (963 | ) | $ | 87,771 | ||||||||
December 31, 2018: | ||||||||||||||||
Government pass-throughs: | ||||||||||||||||
Ginnie Mae | $ | 19,213 | $ | 1 | $ | (324 | ) | $ | 18,890 | |||||||
Fannie Mae | 13,952 | 7 | (339 | ) | 13,620 | |||||||||||
Freddie Mac | 12,662 | - | (252 | ) | 12,410 | |||||||||||
Private pass-throughs | 25,064 | - | (349 | ) | 24,715 | |||||||||||
Collateralized mortgage obligations | 12,328 | 11 | (180 | ) | 12,159 | |||||||||||
$ | 83,219 | $ | 19 | $ | (1,444 | ) | $ | 81,794 |
Private pass-throughs include Small Business Administration (SBA) securities that are each an aggregation of SBA guaranteed portions of loans made by SBA lenders under section 7(a) of the Small Business Act. The guaranty is backed by the full faith and credit of the United States.
There were no sales of mortgage-backed securities for the three months ended March 31, 2019 and March 31, 2018, respectively.
The amortized cost and fair value of mortgage-backed securities at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to repay obligations with or without prepayment penalties (dollars in thousands):
Amortized Cost | Fair Value | |||||||
Due after one year through five years | $ | 817 | $ | 817 | ||||
Due after five years through ten years | 6,250 | 6,233 | ||||||
Due after ten years | 81,581 | 80,721 | ||||||
Total Mortgage-Backed Securities | $ | 88,648 | $ | 87,771 |
12 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(7) | Mortgage-Backed Securities (Continued) |
The following table shows the fair value and gross unrealized losses on mortgage-backed securities and the length of time that the securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018 (dollars in thousands):
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
March 31, 2019: | ||||||||||||||||||||||||
Government pass-throughs: | ||||||||||||||||||||||||
Ginnie Mae | $ | - | $ | - | $ | 14,367 | (231 | ) | $ | 14,367 | $ | (231 | ) | |||||||||||
Fannie Mae | - | - | 10,736 | (164 | ) | 10,736 | (164 | ) | ||||||||||||||||
Freddie Mac | - | - | 8,660 | (110 | ) | 8,660 | (110 | ) | ||||||||||||||||
Private pass-throughs | 2,085 | (19 | ) | 20,613 | (289 | ) | 22,698 | (308 | ) | |||||||||||||||
Collateralized mortgage obligations | 1,884 | (11 | ) | 8,005 | (139 | ) | 9,889 | (150 | ) | |||||||||||||||
Total | $ | 3,969 | $ | (30 | ) | $ | 62,381 | $ | (933 | ) | $ | 66,350 | $ | (963 | ) | |||||||||
December 31, 2018: | ||||||||||||||||||||||||
Government pass-throughs: | ||||||||||||||||||||||||
Ginnie Mae | $ | 4,850 | $ | (26 | ) | $ | 13,794 | $ | (298 | ) | $ | 18,644 | $ | (324 | ) | |||||||||
Fannie Mae | 403 | (2 | ) | 12,152 | (337 | ) | 12,555 | (339 | ) | |||||||||||||||
Freddie Mac | 680 | (24 | ) | 11,699 | (228 | ) | 12,379 | (252 | ) | |||||||||||||||
Private pass-throughs | 14,436 | (134 | ) | 9,359 | (215 | ) | 23,795 | (349 | ) | |||||||||||||||
Collateralized mortgage obligations | 4,091 | (40 | ) | 6,048 | (140 | ) | 10,139 | (180 | ) | |||||||||||||||
Total | $ | 24,460 | $ | (226 | ) | $ | 53,052 | $ | (1,218 | ) | $ | 77,512 | $ | (1,444 | ) |
At March 31, 2019, the Company held 61 mortgage-backed securities in an unrealized loss position. The decline in the fair value of these securities resulted primarily from interest rate fluctuations. The Company does not intend to sell these securities nor is it more likely than not that the Company would be required to sell these securities before their anticipated recovery. Additionally, the Company believes the collection of the investment principal and related interest is probable. Based on the above, the Company considers all of the unrealized loss to be temporary impairment loss.
Mortgage-backed securities with a carrying value of $10.3 million and $10.4 million were pledged to secure repurchase agreements and public funds accounts at March 31, 2019 and December 31, 2018, respectively.
13 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(8) | Loans Receivable and Related Allowance for Loan Losses |
The following table summarizes the primary segments of the loan portfolio, and the related allowance for loan losses, as of March 31, 2019 and December 31, 2018 (dollars in thousands):
Real Estate Loans | ||||||||||||||||||||||||
One-to-four- | Home | |||||||||||||||||||||||
family | Commercial | Equity Loans | ||||||||||||||||||||||
Residential and | Real | and Lines | Commercial | Other | ||||||||||||||||||||
Construction | Estate | of Credit | Business | Loans | Total | |||||||||||||||||||
March 31, 2019: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 252,071 | $ | 308,999 | $ | 120,129 | $ | 47,274 | $ | 507 | $ | 728,980 | ||||||||||||
Individually evaluated for impairment | - | - | - | - | - | - | ||||||||||||||||||
Total loans before allowance for loan losses | $ | 252,071 | $ | 308,999 | $ | 120,129 | $ | 47,274 | $ | 507 | $ | 728,980 | ||||||||||||
December 31, 2018: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 253,913 | $ | 308,775 | $ | 123,373 | $ | 46,196 | $ | 1,139 | $ | 733,396 | ||||||||||||
Individually evaluated for impairment | - | - | - | - | - | - | ||||||||||||||||||
Total loans before allowance for loan losses | $ | 253,913 | $ | 308,775 | $ | 123,373 | $ | 46,196 | $ | 1,139 | $ | 733,396 |
Total loans at March 31, 2019 and December 31, 2018 were net of deferred loan fees of $247,000 and $226,000 respectively. The Company’s primary business activity is with customers located within its local trade area. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The three segments are: real estate, commercial business and other. The real estate loan segment is further disaggregated into three classes. One-to-four family residential mortgages (including residential construction loans) includes loans to individuals secured by residential properties having maturities up to 30 years. Commercial real estate consists of loans to commercial borrowers secured by commercial or residential real estate. The repayment of commercial real estate loans is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Home equity loans and lines of credit include loans having maturities up to 20 years. The commercial business loan segment consists of loans to finance the activities of commercial business customers. The other loan segment consists primarily of consumer loans and overdraft lines of credit. The portfolio segments utilized in the calculation of the allowance for loan losses are disaggregated at the same level that management uses to monitor risk in the portfolio. Therefore the portfolio segments and classes of loans are the same.
There are various risks associated with lending to each portfolio segment. One-to-four family residential mortgage loans are typically longer-term loans which generally entail greater interest rate risk than consumer and commercial loans. Under certain economic conditions, housing values may decline, which may increase the risk that the collateral values are insufficient. Commercial real estate loans generally present a higher level of risk than loans secured by residences. This greater risk is due to several factors including but not limited to concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty in monitoring these types of loans. Furthermore, the repayment of commercial real estate loans is typically dependent upon successful operation of the related real estate project. If the cash flow from the project is reduced by such occurrences as leases not being obtained, renewed or not entirely fulfilled, the borrower’s ability to repay the loan may be impaired. Commercial business loans are primarily secured by business assets, inventories and accounts receivable which present collateral risk. The other loan segment generally has higher interest rates and shorter terms than one-to-four family residential mortgage loans, however, they can have additional credit risk due to the type of collateral securing the loan.
14 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(8) | Loans Receivable and Related Allowance for Loan Losses (Continued) |
Management evaluates individual loans in all of the commercial segments for possible impairment if the relationship is greater than $200,000, and the loan is in nonaccrual status, risk-rated Substandard or Doubtful, greater than 90 days past due or represents a troubled debt restructuring (“TDR”). Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial business or commercial real estate loan. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loan is part of a larger relationship that is impaired, has a classified risk rating, or is a TDR.
Once the decision has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is calculated by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The appropriate method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
Consistent with accounting and regulatory guidance, the Company recognizes a TDR when the Bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Company's objective in offering a TDR is to increase the probability of repayment of the borrower's loan. To be considered a TDR, the borrower must be experiencing financial difficulties and the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would not otherwise be considered. The Company did not modify any loans as TDRs during the three month periods ended March 31, 2019 or 2018 nor did it have any TDRs within the preceding year where a concession had been made that then defaulted during the three month periods ending March 31, 2019 or 2018.
There were no impaired loans at March 31, 2019 or December 31, 2018. The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2019 and March 31, 2018 (dollars in thousands):
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Average investment in impaired loans: | ||||||||
Commercial real estate | $ | - | $ | 295 | ||||
$ | - | $ | 295 | |||||
Interest income recognized on impaired loans | $ | - | $ | - |
Management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently performing but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the collection of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any loan that has a specific allocation of the allowance for loan losses and is in the process of liquidation of the collateral is placed in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolio at origination. Commercial relationships are periodically reviewed internally for credit deterioration or improvement in order to confirm that the relationship is appropriately risk rated. The Audit Committee of the Company also engages an external consultant to conduct loan reviews. The scope of the annual external engagement, which is performed through semi-annual loan reviews, includes reviewing approximately the top 50 to 60 loan relationships, all watchlist loans greater than $100,000, all commercial Reg O loans, and a random sampling of new loan originations between $200,000 and $500,000 during the year. Status reports are provided to management for loans classified as Substandard on a quarterly basis, which results in a proactive approach to resolution. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
15 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(8) | Loans Receivable and Related Allowance for Loan Losses (Continued) |
The following table presents the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized ratings of Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of March 31, 2019 and December 31, 2018 (dollars in thousands):
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
March 31, 2019: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
One-to-four-family residential and construction | $ | 250,464 | $ | - | $ | 1,607 | $ | - | $ | 252,071 | ||||||||||
Commercial real estate | 306,559 | 1,784 | 656 | - | 308,999 | |||||||||||||||
Home equity loans and lines of credit | 119,816 | 60 | 253 | - | 120,129 | |||||||||||||||
Commercial business loans | 46,992 | 226 | 56 | - | 47,274 | |||||||||||||||
Other loans | 497 | - | 10 | - | 507 | |||||||||||||||
Total | $ | 724,328 | $ | 2,070 | $ | 2,582 | $ | - | $ | 728,980 | ||||||||||
December 31, 2018: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
One-to-four-family residential and construction | $ | 252,186 | $ | - | $ | 1,727 | $ | - | $ | 253,913 | ||||||||||
Commercial real estate | 303,161 | 4,851 | 763 | - | 308,775 | |||||||||||||||
Home equity loans and lines of credit | 123,053 | 62 | 258 | - | 123,373 | |||||||||||||||
Commercial business loans | 45,902 | 232 | 62 | - | 46,196 | |||||||||||||||
Other loans | 1,120 | - | 19 | - | 1,139 | |||||||||||||||
Total | $ | 725,422 | $ | 5,145 | $ | 2,829 | $ | - | $ | 733,396 |
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due based on the loans’ contractual due dates. Management considers nonperforming loans to be those loans that are past due 90 days or more and are still accruing as well as all nonaccrual loans. At March 31 2019, there were 11 loans on non-accrual status that were less than 90 days past due totaling $1.2 million. The following table presents the segments of the loan portfolio summarized by the past due status of the loans still accruing and nonaccrual loans as of March 31, 2019 and December 31, 2018 (dollars in thousands):
16 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(8) | Loans Receivable and Related Allowance for Loan Losses (Continued) |
30-59 Days | 60-89 Days | 90 Days Past | Total | |||||||||||||||||||||
Current | Past Due | Past Due | Non-Accrual | Due & Accruing | Loans | |||||||||||||||||||
March 31, 2019: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
One-to-four-family residential and construction | $ | 249,086 | $ | 1,379 | $ | - | $ | 1,606 | $ | - | $ | 252,071 | ||||||||||||
Commercial real estate | 307,954 | 469 | - | 576 | - | 308,999 | ||||||||||||||||||
Home equity loans and lines of credit | 119,573 | 264 | 39 | 253 | - | 120,129 | ||||||||||||||||||
Commercial business loans | 47,171 | 47 | - | 56 | - | 47,274 | ||||||||||||||||||
Other loans | 490 | 4 | 3 | 10 | - | 507 | ||||||||||||||||||
Total | $ | 724,274 | $ | 2,163 | $ | 42 | $ | 2,501 | $ | - | $ | 728,980 | ||||||||||||
December 31, 2018: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
One-to-four-family residential and construction | $ | 250,691 | $ | 1,341 | $ | 154 | $ | 1,727 | $ | - | $ | 253,913 | ||||||||||||
Commercial real estate | 307,740 | 374 | - | 661 | - | 308,775 | ||||||||||||||||||
Home equity loans and lines of credit | 122,929 | 163 | 23 | 258 | - | 123,373 | ||||||||||||||||||
Commercial business loans | 45,434 | 690 | 10 | 62 | - | 46,196 | ||||||||||||||||||
Other loans | 1,111 | 3 | 3 | 19 | 3 | 1,139 | ||||||||||||||||||
Total | $ | 727,905 | $ | 2,571 | $ | 190 | $ | 2,727 | $ | 3 | $ | 733,396 |
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. Management tracks the historical net charge-off activity for the loan segments which may be adjusted for qualitative factors. Pass rated credits are segregated from criticized credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors are evaluated using information obtained from internal, regulatory, and governmental sources such as national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, depth and ability of management; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Management utilizes an internally developed spreadsheet to track and apply the various components of the allowance. During the three months ended March 31, 2019, there was an increase in the provision for the Commercial Real Estate, Commercial Business and Other loan classes. The increase for the Commercial Real Estate loan class was primarily due to charge-offs incurred during the period as well as growth in the loan balances included in the allowance calculation for that loan class. The increase for the Commercial Business loan class was the result of both an increase in the loan balances included in the allowance calculation for that loan class as well as an increase in the qualitative factors for the period. The Other loan class increased primarily due to the charge-offs incurred during the period. The provision for One-to-four family Residential and Construction and Home Equity Loans and Lines of credit loan classes decreased primarily as a result of fluctuations in the qualitative factors as well as decreases in the loan balances included in the allowance calculation for those loan classes during the period. The following tables summarize the activity in the primary segments of the ALL for the three months ended March 31, 2019 and March 31, 2018 as well as the allowance required for loans individually and collectively evaluated for impairment as of March 31, 2019 and December 31, 2018 (dollars in thousands):
17 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(8) | Loans Receivable and Related Allowance for Loan Losses (Continued) |
Real Estate Loans | ||||||||||||||||||||||||
One-to-four- | Home | |||||||||||||||||||||||
family | Commercial | Equity Loans | ||||||||||||||||||||||
Residential and | Real | and Lines | Commercial | Other | ||||||||||||||||||||
Construction | Estate | of Credit | Business | Loans | Total | |||||||||||||||||||
Three Months Ended: | ||||||||||||||||||||||||
Balance December 31, 2018 | $ | 1,051 | $ | 2,761 | $ | 312 | $ | 286 | $ | 4 | $ | 4,414 | ||||||||||||
Charge-offs | - | (121 | ) | - | - | (27 | ) | (148 | ) | |||||||||||||||
Recoveries | - | - | 1 | - | - | 1 | ||||||||||||||||||
Provision | (191 | ) | 114 | (15 | ) | 175 | 25 | 108 | ||||||||||||||||
Balance March 31, 2019 | $ | 860 | $ | 2,754 | $ | 298 | $ | 461 | $ | 2 | $ | 4,375 | ||||||||||||
Balance at December 31, 2017 | $ | 1,384 | $ | 2,003 | $ | 400 | $ | 333 | $ | 7 | $ | 4,127 | ||||||||||||
Charge-offs | - | - | - | (9 | ) | (2 | ) | (11 | ) | |||||||||||||||
Recoveries | 69 | - | - | - | - | 69 | ||||||||||||||||||
Provision | (54 | ) | 119 | (10 | ) | (54 | ) | (1 | ) | - | ||||||||||||||
Balance at March 31, 2018 | $ | 1,399 | $ | 2,122 | $ | 390 | $ | 270 | $ | 4 | $ | 4,185 |
Real Estate Loans | ||||||||||||||||||||||||
One-to-four- | Home | |||||||||||||||||||||||
family | Commercial | Equity Loans | ||||||||||||||||||||||
Residential and | Real | and Lines | Commercial | Other | ||||||||||||||||||||
Construction | Estate | of Credit | Business | Loans | Total | |||||||||||||||||||
Evaluated for Impairment: | ||||||||||||||||||||||||
Individually | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively | 860 | 2,754 | 298 | 461 | 2 | 4,375 | ||||||||||||||||||
Balance at March 31, 2019 | $ | 860 | $ | 2,754 | $ | 298 | $ | 461 | $ | 2 | $ | 4,375 | ||||||||||||
Evaluated for Impairment: | ||||||||||||||||||||||||
Individually | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively | 1,051 | 2,761 | 312 | 286 | 4 | 4,414 | ||||||||||||||||||
Balance at December 31, 2018 | $ | 1,051 | $ | 2,761 | $ | 312 | $ | 286 | $ | 4 | $ | 4,414 |
The ALL is based on estimates and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the loan portfolio at any given date. In addition, federal regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to make changes to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to Management. Based on Management’s comprehensive analysis of the loan portfolio, they believe the current level of the allowance for loan losses is adequate.
(9) | Foreclosed Assets Held For Sale |
Foreclosed assets acquired in the settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate on the Consolidated Statement of Financial Condition. As of March 31, 2019 and December 31, 2018, foreclosed real estate totaled $531,000 and $486,000, respectively. As of March 31, 2019, the $531,000 included two residential properties and two commercial real estate properties. As of March 31, 2019, the Company had initiated formal foreclosure procedures on $362,000 of loans, consisting of $194,000 in commercial real estate loans, $97,000 in one-to-four family residential loans and $70,000 in home equity loans.
18 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(10) | Leases |
The Company currently has four financing lease agreements for branch offices. In conjunction with the implementation of ASU 2016-02, the Company recognized right-of-use assets totaling $1.1 million and lease liabilities totaling $1.2 million related to those financing leases. One of the leases includes an option to extend which was recognized as part of the Company’s right-of-use asset and corresponding lease liability for that property because the Company believes that it is more likely than not to exercise the extension option.
The right-of-use assets are included with office properties and equipment while lease liabilities are included in long-term borrowings on the March 31, 2019 Consolidated Statements of Financial Condition. Amortization of right-of-use assets is included in premises and occupancy costs while interest expense on the lease liabilities is included in the interest expense on long-term borrowings on the Consolidated Statements of Income. The following table presents the financing lease costs during the three months ended March 31, 2019 (dollars in thousands):
Quarter Ended | ||||
March 31, 2019 | ||||
Financing lease costs | ||||
Amortization of right-of-use asset | $ | 94 | ||
Interest expense | 8 | |||
Total financing lease costs | $ | 102 |
The discount rates utilized to determine the interest expense portion of the lease liability were obtained by utilizing FHLB advance rates for a similar term borrowings as of January 1, 2019. The following table presents the weighted-average remaining term and discount rates for financing leases outstanding as of March 31, 2019:
Financing | ||||
Weighted-average term (years) | 4.7 | |||
Weighted-average discount rate | 2.81 | % |
The following table presents the undiscounted cash flows due related to financing leases as of March 31, 2019, along with a reconciliation to the discounted amount recorded on the March 31, 2019 Consolidated Statements of Financial Condition (dollars in thousands):
Financing | ||||
Undiscounted cash flows due within: | ||||
2019 | $ | 305 | ||
2020 | 292 | |||
2021 | 124 | |||
2022 | 102 | |||
2023 | 102 | |||
2024 and thereafter | 212 | |||
Total undiscounted cash flows | 1,137 | |||
Impact of present value discount | (73 | ) | ||
Amount reported on balance sheet | $ | 1,064 |
(11) | Stock Based Compensation |
The Company currently has two stock plans that allow for the issuance of stock based compensation, the Allegheny Valley Bancorp, Inc. 2011 Stock Incentive Plan (the “2011 Plan”) and the Standard Financial Corp. 2012 Equity Incentive Plan (the “2012 Plan”). On February 26, 2019, 1,820 shares of restricted stock were awarded to directors out of the 2011 Plan. The awards vest on December 31, 2019 and the related compensation expense is being recognized straight line over the 11 month vesting period. On March 12, 2019, 2,727 shares of restricted stock were awarded to employees out of the 2011 Plan. The awards vest over 34 months and the related compensation expense is being recognized straight line over the vesting period. At March 31, 2019, there were 72,588 and 101,144 shares available to be issued under the 2011 Plan and the 2012 Plan, respectively.
For each of the three months ended March 31, 2019 and March 31, 2018, there was no recorded compensation expense on the options. As of March 31, 2019, all outstanding options were fully vested and there was no unrecognized compensation cost.
19 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(11) | Stock Based Compensation (Continued) |
The following table summarizes transactions regarding the options under the Plans:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | ||||||||||
Outstanding at December 31, 2018 | 266,695 | $ | 17.12 | 3.32 | ||||||||
Granted | - | - | ||||||||||
Exercised | (10,665 | ) | 17.75 | |||||||||
Forfeited | - | - | ||||||||||
Outstanding at March 31, 2019 | 256,030 | $ | 17.09 | 3.17 | ||||||||
Exercisable at March 31, 2019 | 256,030 | $ | 17.09 |
For the three months ended March 31, 2019, there was $13,000 of compensation expense recorded on restricted stock grants. For the three months ended March 31, 2018, there was no recorded compensation expense on restricted stock. As of March 31, 2019, there was $68,000 of unrecognized compensation expense that will be recognized over the remaining vesting periods.
The following table summarizes transactions regarding the restricted stock under the Plans:
Number of Restricted Shares | Weighted Average Grant Date Price Per Share | |||||||
Non-vested shares at December 31, 2018 | 250 | $ | 31.10 | |||||
Granted | 4,547 | 29.13 | ||||||
Vested | - | - | ||||||
Forfeited | - | - | ||||||
Non-vested shares at March 31, 2019 | 4,797 | $ | 29.24 |
(12) | Employee Stock Ownership Plan |
The Company established a tax qualified Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees in conjunction with the stock conversion on October 6, 2010. Eligible employees begin to participate in the plan after one year of service and become 20% vested in their accounts after two years of service, 40% after three years of service, 60% after four years of service, 80% after five years of service and 100% after six years of service, or earlier, upon death, disability or attainment of normal retirement age.
In connection with the stock conversion, the purchase of the 278,254 shares of the Company stock by the ESOP was funded by a loan from the Company through the Bank. Unreleased ESOP shares collateralize the loan payable, and the cost of the shares is recorded as a contra-equity account in the stockholders’ equity of the Company. Shares are released as debt payments are made by the ESOP to the loan. The ESOP’s sources of repayment of the loan can include dividends, if any, on the unallocated stock held by the ESOP and discretionary contributions from the Company to the ESOP and earnings thereon.
Compensation expense is equal to the fair value of the shares committed to be released and unallocated ESOP shares are excluded from outstanding shares for purposes of computing earnings per share. Compensation expense related to the ESOP of $108,000 and $109,000 was recognized during the three months ended March 31, 2019 and 2018, respectively. Dividends on unallocated shares are not treated as ordinary dividends and are instead used to repay the ESOP loan and recorded as compensation expense.
As of March 31, 2019, the ESOP held a total of 254,610 released shares of the Company’s stock. Of the 254,610 shares, there were 159,003 unallocated as of March 31, 2019 with a fair market value of $4.3 million.
20 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(13) | Pension Information |
The Company sponsors a pension plan which is a noncontributory defined benefit retirement plan. Effective August 1, 2005, the annual benefit provided to employees under this defined benefit pension plan was frozen by the Bank. Freezing the plan eliminated all future benefit accruals; however, the accrued benefit as of August 1, 2005 remained.
The net periodic pension cost for the three months ended March 31, 2019 and March 31, 2018 are as follows (dollars in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest Cost | $ | 31 | $ | 33 | ||||
Expected return on plan assets | (32 | ) | (41 | ) | ||||
Amortization of net loss | 2 | 3 | ||||||
Net periodic pension cost | $ | 1 | $ | (5 | ) |
(14) | Fair Value of Assets and Liabilities |
Fair Value Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value. | |
Level 2: | Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market. | |
Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed. | |
Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.
Assets Measured at Fair Value on a Recurring Basis
Investment, Mortgage-Backed and Equity Securities
Fair values of investment and mortgage-backed securities were primarily measured using information from a third-party pricing service. This service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications. Level 1 securities are comprised of equity securities. As quoted prices were available, unadjusted, for identical securities in active markets, these securities were classified as Level 1 measurements. Level 2 securities were primarily comprised of debt securities issued by government agencies, states and municipalities, corporations, as well as mortgage-backed securities issued by government agencies. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
21 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(14) Fair Value of Assets and Liabilities (Continued)
On a quarterly basis, management reviews the pricing information received from the Company’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Company’s third-party pricing service. Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. As of March 31, 2019 and December 31, 2018, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets. On a quarterly basis, management also reviews a sample of securities priced by the Company’s third-party pricing service to review significant assumptions and valuation methodologies used. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted.
The following table presents the assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 by level within the fair value hierarchy (dollars in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
March 31, 2019: | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. government and agency obligations | $ | - | $ | 8,333 | $ | - | $ | 8,333 | ||||||||
Corporate bonds | - | 4,266 | - | 4,266 | ||||||||||||
Municipal obligations | - | 54,249 | - | 54,249 | ||||||||||||
Total investment securities available for sale | - | 66,848 | - | 66,848 | ||||||||||||
Equity securities | 2,752 | - | - | 2,752 | ||||||||||||
Mortgage-backed securities available for sale | - | 87,771 | - | 87,771 | ||||||||||||
Total recurring fair value measurements | $ | 2,752 | $ | 154,619 | $ | - | $ | 157,371 | ||||||||
December 31, 2018: | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. government and agency obligations | $ | - | $ | 8,270 | $ | - | $ | 8,270 | ||||||||
Corporate bonds | - | 4,201 | - | 4,201 | ||||||||||||
Municipal obligations | - | 53,698 | - | 53,698 | ||||||||||||
Total investment securities available for sale | - | 66,169 | - | 66,169 | ||||||||||||
Equity securities | 2,725 | - | - | 2,725 | ||||||||||||
Mortgage-backed securities available for sale | - | 81,794 | - | 81,794 | ||||||||||||
Total recurring fair value measurements | $ | 2,725 | $ | 147,963 | $ | - | $ | 150,688 |
Assets Measured at Fair Value on a Nonrecurring Basis
The following table presents the assets measured at fair value on a nonrecurring basis as of March 31, 2019 and December 31, 2018 by level within the fair value hierarchy (dollars in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
March 31, 2019: | ||||||||||||||||
Foreclosed real estate | $ | - | $ | - | $ | 531 | $ | 531 | ||||||||
Total nonrecurring fair value measurements | $ | - | $ | - | $ | 531 | $ | 531 | ||||||||
December 31, 2018: | ||||||||||||||||
Foreclosed real estate | $ | - | $ | - | $ | 486 | $ | 486 | ||||||||
Total nonrecurring fair value measurements | $ | - | $ | - | $ | 486 | $ | 486 |
22 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(14) | Fair Value of Assets and Liabilities (continued) |
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Company uses level 3 inputs to determine fair value (dollars in thousands):
Quantitative Information about Level 3 Fair Value Measurements | |||||||||||||||
March 31, | December 31, | Valuation | Unobservable | ||||||||||||
2019 | 2018 | Techniques | Input | Range | |||||||||||
Foreclosed real estate | $ | 531 | $ | 486 | Appraisal of collateral (1) | Appraisal adjustments (2) | 0% to 30 | % | |||||||
Liquidation expenses (2) | 0% to 15 | % |
(1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable. |
(2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. |
The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. |
23 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(14) | Fair Value of Assets and Liabilities (Continued) |
The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2019 and December 31, 2018 (dollars in thousands):
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
March 31, 2019: | ||||||||||||||||||||
Financial Instruments - Assets: | ||||||||||||||||||||
Cash on hand and due from banks(1) | $ | 3,201 | $ | 3,201 | $ | 3,201 | $ | - | $ | - | ||||||||||
Interest-earning deposits in other institutions(1) | 31,500 | 31,500 | 31,500 | - | - | |||||||||||||||
Investment securities(2) | 66,848 | 66,848 | - | 66,848 | - | |||||||||||||||
Equity Securities(3) | 2,752 | 2,752 | 2,752 | - | - | |||||||||||||||
Mortgage-backed securities(2) | 87,771 | 87,771 | - | 87,771 | - | |||||||||||||||
Certificate of deposit(1) | 249 | 249 | 249 | - | - | |||||||||||||||
Federal Home Loan Bank and other restricted stocks(1) | 7,463 | 7,463 | 7,463 | - | - | |||||||||||||||
Loans receivable(1) (4) | 724,605 | 724,301 | - | - | 724,301 | |||||||||||||||
Bank-owned life insurance(1) | 22,703 | 22,703 | 22,703 | - | - | |||||||||||||||
Accrued interest receivable(1) | 3,004 | 3,004 | 3,004 | - | - | |||||||||||||||
Financial Instruments - Liabilities: | ||||||||||||||||||||
Demand, savings and club accounts(1) | $ | 496,515 | $ | 496,515 | $ | 496,515 | $ | - | $ | - | ||||||||||
Certificate deposit accounts(1) | 246,907 | 247,322 | - | - | 247,322 | |||||||||||||||
Long-term borrowings(1) | 98,148 | 98,058 | - | - | 98,058 | |||||||||||||||
Securities sold under agreements to repurchase(1) | 3,988 | 3,988 | 3,988 | - | - | |||||||||||||||
Accrued interest payable(1) | 1,163 | 1,163 | 1,163 | - | - | |||||||||||||||
December 31, 2018: | ||||||||||||||||||||
Financial Instruments - Assets: | ||||||||||||||||||||
Cash on hand and due from banks(1) | $ | 3,371 | $ | 3,371 | $ | 3,371 | $ | - | $ | - | ||||||||||
Interest-earning deposits in other institutions(1) | 12,836 | $ | 12,836 | 12,836 | - | - | ||||||||||||||
Investment securities(2) | 66,169 | $ | 66,169 | - | 66,169 | - | ||||||||||||||
Equity Securities(3) | 2,725 | $ | 2,725 | 2,725 | - | |||||||||||||||
Mortgage-backed securities(2) | 81,794 | $ | 81,794 | - | 81,794 | - | ||||||||||||||
Certificate of deposit(1) | 249 | $ | 249 | 249 | - | - | ||||||||||||||
Federal Home Loan Bank and other restricted stocks(1) | 7,900 | $ | 7,900 | 7,900 | - | - | ||||||||||||||
Loans receivable(1) (4) | 728,982 | 717,491 | - | - | 717,491 | |||||||||||||||
Bank-owned life insurance(1) | 22,572 | $ | 22,572 | 22,572 | - | - | ||||||||||||||
Accrued interest receivable(1) | 2,823 | $ | 2,823 | 2,823 | - | - | ||||||||||||||
Financial Instruments - Liabilities: | - | |||||||||||||||||||
Demand, savings and club accounts(1) | $ | 471,177 | $ | 471,177 | $ | 471,177 | $ | - | $ | - | ||||||||||
Certificate deposit accounts(1) | 246,697 | 245,740 | - | - | 245,740 | |||||||||||||||
Federal Home Loan Bank short-term borrowings(1) | 4,524 | 4,524 | 4,524 | - | - | |||||||||||||||
Federal Home Loan Bank advances(1) | 104,963 | 104,345 | - | - | 104,345 | |||||||||||||||
Securities sold under agreements to repurchase(1) | 2,137 | $ | 2,137 | 2,137 | - | - | ||||||||||||||
Accrued interest payable(1) | 1,154 | $ | 1,154 | 1,154 | - | - |
(1) The financial instrument is carried at amortized cost.
(2) The financial instrument is carried at fair value through other comprehensive income.
(3) The financial instrument is carried at fair value through net income.
(4) In accordance with the adoption of ASU 2016-01, the fair value of loans was measured using an exit price notion.
24 |
STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(15) | Accumulated Other Comprehensive (Loss) Income |
The following tables present the significant amounts reclassified out of accumulated other comprehensive income (loss) and the changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2019 and March 31, 2018 (dollars in thousands):
Unrealized Gains (Losses) | Unrecognized | |||||||||||
on Available for Sale | Pension | |||||||||||
Securities | Costs | Total | ||||||||||
Balance as of December 31, 2018 | $ | (1,103 | ) | $ | (241 | ) | $ | (1,344 | ) | |||
Other comprehensive income before reclassification | 976 | - | 976 | |||||||||
Amount reclassified from accumulated other comprehensive loss | 6 | 2 | 8 | |||||||||
Total other comprehensive income | 982 | 2 | 984 | |||||||||
Balance as of March 31, 2019 | $ | (121 | ) | $ | (239 | ) | $ | (360 | ) |
Amount Reclassified | ||||||
from Accumulated | Affected Line on | |||||
Other Comprehensive | the Consolidated | |||||
Income (Loss) | Statements of Income | |||||
Three months ended March 31, 2019: | ||||||
Unrealized losses on available for sale securities | $ | 7 | Net loss on sales of securities | |||
(1 | ) | Income tax expense | ||||
$ | 6 | Net of tax | ||||
Amortization of defined benefit items: Actuarial loss | $ | 2 | Other operating expenses | |||
- | Income tax expense | |||||
$ | 2 | Net of tax | ||||
Total reclassification for the period | $ | 8 | Net income |
Unrealized Gains (Losses) | Unrecognized | |||||||||||
on Available for Sale | Pension | |||||||||||
Securities | Costs | Total | ||||||||||
Balance as of December 31, 2017 | $ | 840 | $ | (312 | ) | $ | 528 | |||||
Other comprehensive loss before reclassification | (1,943 | ) | - | (1,943 | ) | |||||||
Amount reclassified from accumulated other comprehensive income | - | 2 | 2 | |||||||||
Total other comprehensive (loss) income | (1,943 | ) | 2 | (1,941 | ) | |||||||
Change in accounting principle for adoption of ASU 2016-01 | (416 | ) | - | (416 | ) | |||||||
Balance as of March 31, 2018 | $ | (1,519 | ) | $ | (310 | ) | $ | (1,829 | ) |
Amount Reclassified | ||||||
from Accumulated | Affected Line on | |||||
Other Comprehensive | the Consolidated | |||||
Income (Loss) | Statements of Income | |||||
Three months ended March 31, 2018: | ||||||
Amortization of defined benefit items: Actuarial gains | $ | 3 | Other operating expenses | |||
(1 | ) | Income tax expense | ||||
$ | 2 | Net of tax | ||||
Total reclassification for the period | $ | 2 | Net income |
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STANDARD AVB FINANCIAL CORP. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) |
March 31, 2019 |
(16) | Revenue Recognition |
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2019 and March 31, 2018.
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Noninterest income | ||||||||
In scope of Topic 606: | ||||||||
Service charges on deposit accounts | $ | 672 | $ | 692 | ||||
Investment management fees | 202 | 132 | ||||||
Noninterest income (in-scope of Topic 606) | 874 | 824 | ||||||
Noninterest income (out-of-scope of Topic 606) | 264 | 258 | ||||||
Total noninterest income | $ | 1,138 | $ | 1,082 |
(17) | Goodwill and Other Intangibles |
The Company has recorded goodwill associated with mergers totaling $25.8 million. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the three months ended March 31, 2019 or March 31, 2018.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives of such assets. The balance of the core deposit intangible at March 31, 2019 was $2.3 million net of $1.8 million of accumulated amortization as of that date.
As of March, 2019, the remaining current year and estimated future amortization expense for the core deposit intangible is (dollars in thousands):
2019 | 435 | |||
2020 | 472 | |||
2021 | 352 | |||
2022 | 325 | |||
2023 | 325 | |||
2024 | 325 | |||
2025 | 81 | |||
$ | 2,315 |
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. This section should be read in conjunction with the Notes to Consolidated Financial Statements (Unaudited) presented elsewhere in this report.
The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2019 have remained unchanged from the disclosures presented in the Company’s audited financial statements for the year ended December 31, 2018 contained in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on March 18, 2019.
Standard AVB Financial Corp. is a Maryland corporation that provides a wide array of retail and commercial financial products and services to individuals, families and businesses through 17 banking offices located in the Pennsylvania counties of Allegheny, Westmoreland and Bedford and Allegany County, Maryland through its wholly-owned subsidiary Standard Bank.
Comparison of Financial Condition at March 31, 2019 and December 31, 2018
General.The Company’s total assets as of March 31, 2019 increased $18.0 million, or 1.8% to $989.8 million, from $971.8 million at December 31, 2018. The increase in total assets included an increase in cash and cash equivalents as well as an increase in mortgage-backed securities partially offset by a decrease in net loans receivable.
Cash and Cash Equivalents.Cash and cash equivalents increased $18.5 million, or 114.1%, to $34.7 million at March 31, 2019 from $16.2 million at December 31, 2018. The increase primarily resulted from the receipt of a large deposit from a new commercial relationship established late in the quarter.
Investment Securities.Investment securities available for sale increased $679,000, or 1.0%, to $66.8 million at March 31, 2019 from $66.2 million at December 31, 2018. Purchases of municipal bonds totaling $3.7 million were offset by calls of $35,000 and sales of $3.7 million during the three months ended March 31, 2019. Additionally, there was a $695,000 increase in the unrealized gain on investment securities during the period.
Equity Securities.Equity securities available for sale were $2.7 million at March 31, 2019 and December 31, 2018, respectively. There were no purchases or sales of equity securities during the three months ended March 31, 2019.
Mortgage-Backed Securities.The Company’s mortgage-backed securities available for sale increased $6.0 million, or 7.3%, to $87.8 million at March 31, 2019 from $81.8 million at December 31, 2018. Purchases of mortgage-backed securities totaled $9.1 million, partially offset by repayments of $3.5 million during the three month period. There were no sales of mortgage-backed securities during the three months ended March 31, 2019. Additionally, there was a $548,000 decrease in the unrealized loss on mortgage-backed securities during the period.
Loans.At March 31, 2019, net loans were $724.6 million, or 73.2% of total assets compared to $729.0 million, or 75.0% of total assets at December 31, 2018. The $4.4 million, or 0.6%, decrease in loans receivable was the result of loan payoffs and amortization exceeding loan production during the period. Home equity loans and lines of credit, 1-4 family residential and construction, and other loans decreased $3.2 million or 2.6%, $1.8 million or 0.7%, and $632,000 or 55.5%, respectively. These decreases were partially offset by an increase in commercial real estate loans and commercial business loans of $224,000 or 0.1%, and $1.1 million or 2.3%, respectively.
Office Properties and Equipment. Office properties and equipment increased $1.0 million, or 13.4%, to $8.8 million at March 31, 2019 from $7.8 million at December 31, 2018. The increase was primarily due to the implementation of ASU 2016-02,Leases (Topic 842) as of January 1, 2019. See Footnote 10 in the Notes to Consolidated Financial Statements (Unaudited) for additional information.
Deposits. The Company accepts deposits primarily from the areas in which the offices are located. The Company has consistently focused on building broader customer relationships and targeting small business customers to increase core deposits. The Company also relies on customer service to attract and retain deposits. The Company offers a variety of deposit accounts with a range of interest rates and terms. Deposit accounts consist of savings accounts, certificates of deposit, money market accounts, commercial and consumer checking accounts and individual retirement accounts. Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements and deposit growth goals.
Deposits increased $25.5 million, or 3.6%, to $743.4 million at March 31, 2019 from $717.9 million at December 31, 2018. Money market and interest-bearing checking accounts increased $19.3 million or 22.0% and $8.4 million or 8.4%, respectively. The increase in money market accounts includes $20.0 million received late in the quarter as a result of a new commercial relationship. These increases were partially offset by a decrease in non-interest demand accounts of $2.1 million, or 1.5%, during the three months ended March 31, 2019.
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Borrowings.Borrowed funds decreased $9.5 million, or 8.5%, to $102.1 million at March 31, 2019 from $111.6 million at December 31, 2018. The decrease in borrowed funds was primarily due to the repayment of a maturing long term advance and pay downs on both amortizing long term advances and the overnight borrowing line. Federal Home Loan Bank advances decreased $7.9 million, or 7.5%, to $97.1 million from $105.0 million at December 31, 2018. No additional advances were entered into during the three months ended March 31, 2019. Included in the long-term borrowings on the March 31, 2019 Consolidated Statements of Financial Condition were $1.1 million in financing lease liabilities booked in the accordance with the implementation of ASU 2016-02,Leases (Topic 842). There were no short-term borrowings at March 31, 2019 compared to $4.5 million at December 31, 2018. During the three months ended March 31, 2019, proceeds from short-term borrowings were $53.5 million, offset by repayments of $58.0 million.
Stockholders’ Equity.Stockholders’ equity increased $2.2 million or 1.6%, to $140.1 million at March 31, 2019 from $137.9 million at December 31, 2018. The increase was a result of net income of $2.2 million earned during the three months ended March 31, 2019 and a $984,000 decrease in accumulated other comprehensive loss resulting from fair value adjustments on available for sale securities during the period partially offset by $1.0 million of dividends paid during the period.
Average Balance and Yields
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made. All average balances are daily average balances. Non-accrual 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 deferred fees, discounts and premiums that are amortized or accreted to interest income or expense (dollars in thousands).
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For the Three Months Ended March 31, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average Outstanding Balance | Interest | Yield/ Rate | Average Outstanding Balance | Interest | Yield/ Rate | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 731,294 | $ | 8,016 | 4.39 | % | $ | 750,658 | $ | 7,916 | 4.23 | % | ||||||||||||
Investment and mortgage-backed securities | 151,209 | 1,042 | 2.76 | % | 141,083 | 912 | 2.58 | % | ||||||||||||||||
FHLB and other restricted stocks | 7,849 | 174 | 9.02 | % | 9,432 | 160 | 6.90 | % | ||||||||||||||||
Interest-earning deposits | 12,230 | 80 | 2.67 | % | 16,204 | 50 | 1.25 | % | ||||||||||||||||
Total interest-earning assets | 902,582 | 9,312 | 4.14 | % | 917,377 | 9,038 | 3.95 | % | ||||||||||||||||
Noninterest-earning assets | 66,353 | 62,703 | ||||||||||||||||||||||
Total assets | $ | 968,935 | $ | 980,080 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 146,703 | 54 | 0.15 | % | 152,417 | 51 | 0.14 | % | |||||||||||||||
Certificates of deposit | 246,854 | 1,245 | 2.05 | % | 212,477 | 777 | 1.48 | % | ||||||||||||||||
Money market accounts | 88,833 | 219 | 1.00 | % | 96,546 | 99 | 0.42 | % | ||||||||||||||||
Demand and NOW accounts | 102,799 | 75 | 0.30 | % | 96,056 | 47 | 0.20 | % | ||||||||||||||||
Total interest-bearing deposits | 585,189 | 1,593 | 1.10 | % | 557,496 | 974 | 0.71 | % | ||||||||||||||||
Borrowings | 105,153 | 564 | 2.15 | % | 146,355 | 655 | 1.79 | % | ||||||||||||||||
Securities sold under agreements to repurchase | 3,861 | 6 | 0.59 | % | 5,887 | 2 | 0.13 | % | ||||||||||||||||
Total interest-bearing liabilities | 694,203 | 2,163 | 1.26 | % | 709,738 | 1,631 | 0.93 | % | ||||||||||||||||
Noninterest-bearing deposits | 133,016 | 132,885 | ||||||||||||||||||||||
Noninterest-bearing liabilities | 3,222 | 3,823 | ||||||||||||||||||||||
Total liabilities | 830,441 | 846,446 | ||||||||||||||||||||||
Stockholders' equity | 138,494 | 133,634 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 968,935 | $ | 980,080 | ||||||||||||||||||||
Net interest income | $ | 7,149 | $ | 7,407 | ||||||||||||||||||||
Net interest rate spread(1) | 2.88 | % | 3.02 | % | ||||||||||||||||||||
Net interest-earning assets(2) | $ | 208,379 | $ | 207,639 | ||||||||||||||||||||
Net interest margin(3) | 3.21 | % | 3.27 | % | ||||||||||||||||||||
Average interest-earning assets to interest- bearing liabilities | 130.02 | % | 129.26 | % |
(1) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(2) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
(3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
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Comparison of Operating Results for the Three Months Ended March 31, 2019 and 2018
General. Net income was $2.2 million for the quarters ended March 31, 2019 and March 31, 2018, respectively. Earnings per share for each of the quarters ended March 31, 2019 and March 31, 2018 was $0.47 for basic and $0.46 for fully diluted, respectively.
The Company’s annualized return on average assets (ROA) and return on average equity (ROE) for the quarter ended March 31, 2019 were 0.91% and 6.35%, respectively, compared to 0.89% and 6.56%, respectively, for the quarter ended March 31, 2018.
Net Interest Income. Net interest income for the quarter ended March 31, 2019 was $7.1 million, a decrease of 3.5% compared to $7.4 million for the quarter ended March 31, 2018. The decrease was primarily due to an increase in the average balance and the cost of interest-bearing deposits as well as a decrease in the average balance of loans receivable. These decreases were partially offset by an increase in the yield on interest-earning assets. The net interest rate spread and net interest margin were 2.88% and 3.21%, respectively for the three months ended March 31, 2019, compared to 3.02% and 3.27%, respectively for the three months ended March 31, 2018.
Interest and Dividend Income. Total interest and dividend income increased by $274,000, or 3.0%, to $9.3 million for the three months ended March 31, 2019 compared to $9.0 million for the three months ended March 31, 2018. The increase was primarily due to a 19 basis point increase in the average yield on interest-earning assets to 4.14% for the three months ended March 31, 2019 from 3.95% for the same period in the prior year. The decrease in the average balance of loans receivable was partially offset by an increase in the average balance of investments and mortgage-backed securities.
Interest income on loans increased $100,000, or 1.3%, to $8.0 million for the three months ended March 31, 2019 compared to $7.9 million for the three months ended March 31, 2018. The average yield on loans receivable increased by 16 basis points to 4.39% for the three months ended March 31, 2019 from 4.23% for the same period in the prior year. The increase in the average yield was primarily attributable to adjustable rate loans resetting higher as a result of increases in general market rates as well as new loan originations at higher interest rates during the period. Average loans receivable decreased by $19.4 million, or 2.6%, to $731.3 million for the three months ended March 31, 2019 from $750.7 million for the same period in the prior year.
Interest income on investment and mortgage-backed securities increased by $130,000, or 14.3%, to $1.0 million for the three months ended March 31, 2019 compared to $912,000 for the three months ended March 31, 2018. The increase was due primarily to an increase in the average yield earned on investment and mortgage-backed securities by 18 basis points to 2.76% for the three months ended March 31, 2019 from 2.58% for the same period in the prior year. The increase in the average yield was due to new security purchases at higher interest rates during the period as well as variable rate securities resetting higher as a result of increases in general market rates. In addition, the average balance of investment and mortgage backed securities increased by $10.1 million, or 7.2%, to $151.2 million for the three months ended March 31, 2019 compared to the prior period.
Interest income on FHLB stock and other restricted stock increased $14,000, or 8.8%, to $174,000 for the three months ended March 31, 2019 compared to $160,000 for the three months ended March 31, 2018. The increase is primarily due to the increase in the average yield to 9.02% for the three months ended March 31, 2019 from 6.90% for the same period in the prior year. The FHLB increased the dividend yield on both activity and membership stock as of the fourth quarter of 2018. The additional dividend income to true up the 2018 quarter was received in 2019. The average balance of FHLB stock and other restricted stock decreased $1.6 million, or 16.8%, to $7.8 million for the three months ended March 31, 2019 compared to the prior period.
Interest income on interest-earning deposits increased $30,000, or 60.0%, to $80,000 for the three months ended March 31, 2019 compared to $50,000 for the three months ended March 31, 2018. The increase is primarily due to a 142 basis point increase in the average yield to 2.67% for the three months ended March 31, 2019 from 1.25% for the same period in the prior year as a result of the rising short-term interest rates. The average balance of interest-earning deposits decreased $4.0 million, or 24.5%, to $12.2 million for the three months ended March 31, 2019 compared to the prior period.
Interest Expense. Total interest expense increased by $532,000, or 32.6%, to $2.2 million for the three months ended March 31, 2019 from $1.6 million for the three months ended March 31, 2018. The increase in interest expense was due to a 33 basis point increase in the average cost of interest-bearing liabilities to 1.26% for the three months ended March 31, 2019 from 0.93% for the same prior year period. The average balance of interest-bearing liabilities decreased by $15.5 million, or 2.2%, to $694.2 million for the three months ended March 31, 2019 from $709.7 million for the same period in the prior year. The decrease includes a decrease in the average balance of borrowed funds partially offset by an increase in the average balance of certificates of deposit.
Interest expense on deposits increased by $619,000, or 63.6%, to $1.6 million for the three months ended March 31, 2019 from $974,000 for the three months ended March 31, 2018. The increase was the result of an increase in both the average balance and the cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $27.7 million, or 5.0% for the three months ended March 31, 2019 compared to the same period in the prior year. Additionally, the cost of interest-bearing deposits increased by 39 basis points to 1.10% for the three months ended March 31, 2019 from 0.71% for the three months ended March 31, 2018 due to a rising interest rate market.
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Interest expense on borrowed funds decreased $91,000 or 13.9%, to $564,000 for the three months ended March 31, 2019 from $655,000 for the three months ended March 31, 2018. The decrease is the result of a $41.2 million, or 28.2%, decrease in the average balance of borrowings to $105.2 million for the three months ended March 31, 2019 compared to the same period in the prior year. Included in the decrease in the average balance of borrowings is a $33.6 million decrease in the average balance of FHLB short term borrowings for the quarter ended March 31, 2019 compared to the same period in the prior year. The cost of borrowings increased by 36 basis points to 2.15% for the quarter ended March 31, 2019 from 1.79% for the quarter ended March 31, 2018 due to the repayment of lower cost borrowings.
Provision for Loan Losses. Provision for loan losses was $108,000 for the three months ended March 31, 2019. No provision for loan losses were recorded for the three months ended March 31, 2018. In management’s judgment, the allowance for loan losses is at a sufficient level that reflects the losses inherent in the loan portfolio relative to loan mix, economic conditions and historical loss experience. See Footnote 8 in the Notes to Consolidated Financial Statements (Unaudited) for additional information.
Noninterest Income. Noninterest income totaled $1.1 million for each of the three months ended March 31, 2019 and March 31, 2018. For the three months ended March 31, 2019, there was an increase in investment management fees and net loan sale gains of $70,000 or 53.0% and $30,000 or 750.0%, respectively, compared to the same period in the prior year. These increases were partially offset by a $40,000 decrease in the net gains on the sales of equity securities as there were no sales during the quarter ended March 31, 2019 compared to the quarter ended March 31, 2018.
Noninterest Expenses. Noninterest expenses decreased $286,000, or 5.0%, to $5.5 million for the three months ended March 31, 2019 compared to $5.8 million for the three months ended March 31, 2018. The decrease was primarily the result of a decrease in compensation and employee benefits in the current period. The quarter ended March 31, 2018 included $510,000 related to severance paid during the period.
Income Tax Expense. The Company recorded a provision for income tax of $543,000 for the three months ended March 31, 2019 compared to $576,000 for the three months ended March 31, 2018. The effective tax rate was 20.0% for the three months ended March 31, 2019 and 21.0% for the three months ended March 31, 2018.
Non-Performing and Problem Assets
The table below sets forth the amounts and categories of non-performing assets at the dates indicated. At March 31, 2019 and December 31, 2018, there were no TDRs (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates).
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Non-accrual loans: | ||||||||
One-to-four family residential and construction | $ | 1,606 | $ | 1,727 | ||||
Commercial real estate | 576 | 661 | ||||||
Home equity loans and lines of credit | 253 | 258 | ||||||
Commercial business | 56 | 62 | ||||||
Other | 10 | 19 | ||||||
Total nonaccrual loans | 2,501 | 2,727 | ||||||
Loans past due 90 days and still accruing | - | 3 | ||||||
Total non-performing loans | 2,501 | 2,730 | ||||||
Foreclosed real estate | 531 | 486 | ||||||
Total non-performing assets | $ | 3,032 | $ | 3,216 | ||||
Ratios: | ||||||||
Non-accrual loans to total loans | 0.34 | % | 0.37 | % | ||||
Non-performing loans to total loans | 0.34 | % | 0.37 | % | ||||
Non-performing assets to total assets | 0.31 | % | 0.33 | % | ||||
Allowance for loan losses to non-performing loans | 174.93 | % | 161.68 | % |
At March 31, 2019, loans in process of foreclosure totaled $362,000.
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Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. The Company’s primary sources of funds consist of deposit inflows, loan repayments and sales, borrowings from the Federal Home Loan Bank of Pittsburgh, repurchase agreements and maturities, principal repayments and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company’s Asset/Liability Management Committee, under the direction of the Chief Financial Officer, is responsible for establishing and monitoring liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of the Bank’s customers as well as unanticipated contingencies. At March 31, 2019, the Company’s cash and cash equivalents amounted to $34.7 million. Management believes there is enough sources of liquidity to satisfy short- and long-term liquidity needs as of March 31, 2019.
Certificates of deposit due within one year of March 31, 2019 totaled $83.2 million, or 11.2% of total deposits. If these deposits do not remain with the Bank, it may be required to seek other sources of funds, including loan and securities sales, repurchase agreements and Federal Home Loan Bank advances. Management believes, however, based on historical experience and current market interest rates, the Bank will retain upon maturity a large portion of the certificates of deposit with maturities of one year or less. The Company’s maximum borrowing capacity at the FHLB at March 31, 2019 was $420.1 million.
Stockholders’ equity was $140.1 million at March 31, 2019, an increase of $2.2 million or 1.6% from $137.9 million at December 31, 2018. The increase was a result of net income of $2.2 million earned during the three months ended March 31, 2019 as well as a $984,000 decrease in accumulated other comprehensive loss resulting from fair value adjustments on available for sale securities during the period partially offset by $1.0 million dividends paid during the period.
Current regulatory requirements specify that the Bank and similar institutions must maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00% and 8.00%, respectively. At March 31, 2019, the Bank was in compliance with all regulatory capital requirements ratios of 11.7%, 16.6%, 16.6% and 17.2%, respectively, and was considered “well capitalized” under regulatory guidelines.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, the Company routinely is a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans the Bank makes. At March 31, 2019, the Company had $139.2 million in loan commitments outstanding, $70.1 million of which were for commercial loan originations and $7.5 million which were for one- to four-family and construction loan originations. In addition to those commitments to originate loans, loan commitments outstanding included $35.1 million in unused home equity lines of credit to borrowers and $26.5 million in other commitments.
Contractual Obligations. In the ordinary course of operations, the Company enters into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
ITEM 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of March 31, 2019, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, the President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based on that evaluation, the Company’s management, including the Chief Executive Officer, the President and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019.
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Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed by the Company in reports filed and submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2019, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15-d15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 1. | Legal Proceedings |
As of March 31, 2019, the Company was not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. As of March 31, 2019, the Company was not involved in any legal proceedings the outcome of which would be material to its financial condition or results of operations.
Item 1A. | Risk Factors |
In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed under the heading “Risk Factors” contained in the Company’s annual report on Form 10-K filed with the SEC on March 18, 2019. The Company’s evaluation of the risk factors applicable to it has not changed materially from those disclosed in the Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Exhibit | ||
Number | Description | |
3.1 | Articles of Incorporation of Standard AVB Financial Corp., as amended (1) | |
3.2 | Bylaws of Standard AVB Financial Corp., as amended (2) | |
4.1 | Form of common stock certificate of Standard AVB Financial Corp. (3) | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.0 | The following materials for the three months ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Financial Condition, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Changes in Stockholder’s Equity, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements. |
(1) | Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K as filed with the Securities and Exchange Commission on April 12, 2017. |
(2) | Incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K as filed with the Securities and Exchange Commission on August 24, 2017. |
(3) | Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K, as filed on April 2, 2018. |
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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.
STANDARD AVB FINANCIAL CORP. | |
Date: May 10, 2019 | /s/ Timothy K. Zimmerman |
Timothy K. Zimmerman | |
Chief Executive Officer | |
Date: May 10, 2019 | /s/ Susan A. Parente |
Susan A. Parente | |
Executive Vice President and Chief Financial Officer |
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