EDGAR 10-K Filing

Company CIK: 1492915
Filing Year: 2021
Filename: 1492915_10-K_2021_0001558370-21-003787.json

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ITEM 1. BUSINESS
ITEM 1. Business
Forward-Looking Statements
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
● statements of our goals, intentions and expectations;
● statements regarding our business plans, prospects, growth and operating strategies;
● statements regarding the asset quality of our loan and investment portfolios; and
● estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and unless required under the federal securities laws, we do not undertake any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
● general economic conditions, either nationally or in our market areas, that are worse than expected;
● the scope and duration of the COVID-19 pandemic, including the effects on the Company’s credit quality and operations as well as its impact on general economic conditions;
● legislative and regulatory changes, including actions taken by governmental authorities in response to the COVID-19 pandemic;
● changes in interest rates, deposit flows, the cost of funds, demand for loan products and the demand for financial services, in each case as may be affected by the COVID-19 pandemic;
● competition among depository and other financial institutions;
● inflation and changes in the interest rate environment that reduce our margin or reduce the fair value of financial instruments;
● adverse changes in the securities markets;
● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
● our ability to enter new markets successfully and capitalize on growth opportunities;
● our ability to successfully integrate acquired entities, if any;
● changes in consumer spending, borrowing and savings habits;
● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”) and the Public Company Accounting Oversight Board;
● changes in our organization, compensation and benefit plans;
● changes in our financial condition or results of operations that reduce capital available to pay dividends; and
● changes in the financial condition or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Standard AVB Financial Corp.
Standard AVB Financial Corp. (“Standard” or the “Company”), is a Maryland corporation that owns all of the outstanding shares of common stock of Standard Bank PaSB, a Pennsylvania chartered savings bank (the “Bank”). Standard’s common stock is quoted on the NASDAQ market place under the symbol “STND.” The Company’s executive offices are located at 2640 Monroeville Boulevard, Monroeville, Pennsylvania 15146. The telephone number at this address is (412) 856-0363.
On August 29, 2016, Standard Financial Corp. and Allegheny Valley Bancorp, Inc. (“Allegheny Valley”) entered into an Agreement and Plan of Merger, which contemplated that Allegheny Valley would merge with and into Standard Financial Corp., with Standard Financial Corp. as the surviving entity to be known as “Standard AVB Financial Corp.” On April 7, 2017, Allegheny Valley merged with and into Standard Financial Corp. and the Company was renamed as “Standard AVB Financial Corp.” In conjunction with the merger and the filing of the Form S-4 Registration Statement, Standard AVB Financial Corp. became an SEC reporting company.
On a consolidated basis, as of December 31, 2020, Standard AVB Financial Corp. had total assets of $1.1 billion, total loans receivable, net of $734.8 million, total deposits of $809.2 million and stockholders’ equity of $146.0 million.
Standard Bank
The Bank is a Pennsylvania chartered savings bank headquartered in Murrysville, Pennsylvania with executive offices in Monroeville, Pennsylvania. The Bank was organized in 1913, and reorganized into the mutual holding company structure in 1998. Following the completion of a stock conversion in 2010, the Bank became the wholly owned subsidiary of Standard. The Bank provides financial services to individuals, families and businesses through seventeen banking offices located in Allegheny, Westmoreland and Bedford counties in Pennsylvania and Allegany County, Maryland.
The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in commercial real estate loans, commercial business loans, one- to four-family residential mortgage loans, home equity loans and lines of credit and investment securities. To a much lesser extent, the Bank also originates construction loans and consumer loans. The Bank offers a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and individual retirement accounts.
Merger
On September 25, 2020 the Company and Dollar Mutual Bancorp (“Dollar”) announced they had entered into a definitive agreement under which Dollar will acquire the Company in an all cash transaction valued at approximately $158.0 million. The Company’s stockholders will receive $33.00 for each share of Company common stock that they own. The transaction was approved by the Company’s stockholders on January 19, 2021 and is expected to close in the first half of 2021. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all. In connection with the acquisition, the Company had incurred $1.1 million ($1.0 million after tax) of merger-related expenses for the year ended December 31, 2020, primarily legal and investment banker costs, which are included in the Consolidated Statements of Income.
Available Information
The Company maintains a website at www.standardbankpa.com. Copies of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and proxy materials are available through that website, free of charge, as soon as is reasonably practical after the Company electronically files those materials with or furnishes them to the SEC. You may access those reports by following the links under “Investor Relations” at the Company’s website. Information on this website is not and should not be considered a part of this document.
Market Area
The Company, with total assets of $1.1 billion at December 31, 2020, is the parent company of the Bank, a Pennsylvania chartered savings bank which operates seventeen offices serving individuals and small to mid-sized businesses in Allegheny, Westmoreland, and Bedford counties in Pennsylvania and Allegany County in Maryland. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and an Equal Housing Lender.
The Bank’s market area has a broad range of private and public employers, and has transitioned from heavy industry to more specialized industries and service providers, including technology, health care, education, energy and finance. Westmoreland County is east of Allegheny County and is part of the Pittsburgh metropolitan area. Allegany County, Maryland is part of the Cumberland, Maryland-West Virginia metropolitan area, which is equidistant from Pittsburgh and Baltimore, and its economy includes information technology, biotechnology, medical services and manufacturing.
Unemployment rates have increased substantially due to the COVID-19 pandemic. Any significant reduction in the unemployment rate will be largely dependent on the rollout of the vaccines and the inoculation of a large percentage of the public.
Median household income, as a percentage change since 2010, for the Bank’s market area remains strong with the addition of higher paying technology and energy jobs. While in dollar terms each of the region’s median household income is lower than their respective states and the nation, the lower cost of living in the regions continue to offset some of the disparity. The Bank’s market area continues to be one of the most affordable housing markets in the country.
The population in the Bank’s market area as well as both Pennsylvania and Maryland has been relatively stable over the last several years while increasing at the national level. The median age in some counties in the Bank’s market area is significantly older than that of the nation and respective states. Areas outside of Allegheny County, Pennsylvania continue to increase in median age, however, the median age has declined in the greater Pittsburgh area due to neighborhood revitalization along with an influx of technology jobs that have attracted a younger demographic. Nonetheless, there remains a significant difference in the median age between some of the Bank’s market area and that of Pennsylvania, Maryland, and the nation; the largest disparity being over eight years between Westmoreland County, Pennsylvania and the nation.
Competition
The Bank faces intense competition in its market areas both in making loans and attracting deposits. The Bank competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and investment banking firms. Some of the Bank’s larger competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that the Bank does not or cannot provide.
The Bank’s deposit sources are primarily concentrated in the communities surrounding its community banking offices, located in the Pennsylvania counties of Allegheny, Westmoreland and Bedford and Allegany County, Maryland. As of December 31, 2020, the Bank ranked 16th in deposit market share out of 34 bank and thrift institutions with offices in Allegheny County, Pennsylvania with a market share of 0.3%, 9th in deposit market share out of 25 bank and thrift institutions in Westmoreland County, Pennsylvania with a market share of 2.7%, 8th in deposit market share out of 9 bank and thrift institutions in Bedford County, Pennsylvania, with a market share of 3.2% and 4th in deposit market share out of 4 bank and thrift institutions in Allegany County, Maryland with a market share of 11.5%
Lending Activities
The Bank’s primary lending activities are the origination of commercial real estate loans, commercial business loans, one- to four-family residential mortgage loans and home equity loans and lines of credit. To a lesser extent, the Bank also originates construction loans and consumer loans.
Commercial Real Estate Loans. At December 31, 2020, $375.6 million, or 50.6%, of the Bank’s total loan portfolio, consisted of commercial real estate loans. Properties securing the Bank’s commercial real estate loans primarily include loans to lessors of residential buildings and dwellings, lessors of non-residential buildings, properties for single family home construction, small office buildings and warehouse/industrial facilities. The Bank generally seeks to originate commercial real estate loans with initial principal balances not to exceed $6.0 million. Substantially all of the Bank’s commercial real estate loans are secured by properties located in its primary market area. At December 31, 2020, the Bank’s largest commercial real estate loan relationship (consisting of two separate $4.0 million commercial real estate loans) had a combined principal balance of $8.0 million and was secured by one apartment complex and one commercial office building. These two loans were performing in accordance with their terms and conditions at December 31, 2020.
In the underwriting of commercial real estate loans, the Bank generally lends up to the lower of 80% of the property’s appraised value or purchase price. The Bank bases its decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, the Bank emphasizes the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a preferred ratio of 1.25x), computed after deductions for a vacancy factor and property expenses that the Bank deems appropriate. Personal guarantees are usually obtained from commercial real estate borrowers. The Bank generally requires title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect its security interest in the underlying property. Almost all of the Bank’s commercial real estate loans are generated internally by its Commercial Relationship Managers.
Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Commercial real estate loans entail greater credit risks compared to the one- to four-family residential mortgage loans Standard originates, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income generated from the property to cover both operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.
Commercial Business Loans. The Bank makes various types of secured and unsecured commercial business loans to customers in its market area for working capital and other general business purposes. The terms of these loans generally range from less than one year to a maximum of ten years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a market rate index. The Bank generally seeks to originate loans to small- and medium-size businesses with principal balances between $50,000 and $5.0 million. At December 31, 2020, the Bank had commercial business loans outstanding of $78.0 million, or 10.5% of the total loan portfolio. Included in the $78.0 million were Paycheck Protection Program loans of $37.7 million. See “The Paycheck Protection Program” for additional information.
Commercial credit decisions are based upon the Bank’s credit assessment of the loan applicant. The Bank evaluates the applicant’s ability to repay in accordance with the proposed terms of the loan and the Bank assesses the risks involved. Personal guarantees of the principals are typically obtained. In addition to evaluating the loan applicant’s financial statements, the Bank considers the adequacy of the primary and secondary sources of repayment for the loan and debt service coverage. Credit agency reports of the applicant’s personal credit history supplement the Bank’s analysis of the applicant’s creditworthiness. Collateral supporting a secured transaction is also analyzed to determine its value and marketability. Commercial business loans generally carry higher interest rates than residential loans of like duration due to a higher risk of default as repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral. At December 31, 2020, the Bank’s largest commercial business loan was to a municipality. The loan had a principal balance of $3.9 million and was secured by the full faith and credit and taxing authority of the borrower. This loan was performing in accordance with its terms and conditions at December 31, 2020.
One- to Four-Family Residential Mortgage Loans. At December 31, 2020, $192.4 million, or 25.9%, of the Bank’s total loan portfolio, consisted of one- to four-family residential mortgage loans. The Bank offers fixed-rate and adjustable-rate residential mortgage loans with maturities up to 30 years. One- to four-family residential mortgage loans are generally underwritten according to secondary market guidelines, and the Bank refers to loans that conform to such guidelines as “conforming loans.” The Bank generally originates both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is currently $548,250 for single-family homes. However, loans in excess of $548,250 (which are referred to as “jumbo loans”) are generally originated for retention in the Bank’s loan portfolio or may be sold servicing released. The Bank’s portfolio maximum loan amount for these loans is generally $750,000. The Bank underwrites jumbo portfolio loans in the same manner as conforming loans. Most of the Bank’s one- to four-family residential mortgage loan originations are generated by its mortgage loan officers.
The Bank will originate loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value ratio of 97%. The Bank requires private mortgage insurance for loans with loan-to-value ratios in excess of 80%. During the year ended December 31, 2020, the Bank originated $9.6 million of one- to four-family residential mortgage loans with loan-to-value ratios in excess of 80%. The Bank offers special programs for low- and moderate-income home purchasers within low to moderate income census tracts. The property must be located within the Bank’s lending assessment area. Household income must be less than 80% of the median income of the Metropolitan Statistical Area in order to qualify for the special low-to moderate-income program. Loans under this program may be originated up to an 89% loan-to-value. Under this program, for loans exceeding an 80% loan-to-value up to an 89% loan-to-value, mortgage insurance is not required if the borrower’s FICO scores are 700 or greater and the debt to income ratio does not exceed 45%.
The Bank generally sells fixed rate conforming loans with terms greater than 15 years and retains the servicing rights on loans sold to generate fee income. For the year ended December 31, 2020, the Bank recognized loan servicing fees of $565,000. As of December 31, 2020, the principal balance of loans serviced for others totaled $116.1 million.
Other than the Bank’s loans for the construction of one- to four-family residential mortgage loans (described under “Construction Loans”) and home equity lines of credit (described under “Home Equity Loans and Lines of Credit”), the Bank does not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). The Bank also does not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. The Bank does
not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
Home Equity Loans and Lines of Credit. In addition to traditional one- to four-family residential mortgage loans, the Bank offers home equity loans and home equity lines of credit that are secured by the borrower’s primary residence or secondary residence. At December 31, 2020, the Bank’s home equity loans and lines of credit totaled $96.1 million and represented 12.9% of the total loan portfolio. The Bank’s home equity loans are originated with fixed rates of interest and with terms of up to 15 years. Home equity lines of credit have a maximum term of 20 years. The Bank offers interest only lines of credit with a 10-year draw period in which interest is due monthly. After the initial 10-year draw period, the borrower is required to make principal and interest payments based on a 10-year amortization. The Bank’s home equity lines of credit are currently originated with adjustable rates of interest. Home equity loans and lines of credit are generally underwritten with the same criteria that the Bank uses to underwrite one- to four-family residential mortgage loans. For a borrower’s primary residence, home equity loans and lines of credit may be underwritten with a loan-to-value ratio of 89.9% and 85.0%, respectively, when combined with the principal balance of the existing mortgage loan. At the time the Bank closes a home equity loan or line of credit, the Bank records a mortgage to protect its security interest in the underlying collateral. At December 31, 2020 the Bank’s in-house maximum limit for home equity loans and lines of credit was $750,000. Loans over $400,000 require title insurance.
Home equity loans and lines of credit entail greater credit risks compared to the one- to four-family residential mortgage loans the Bank originates, as they typically involve higher loan-to-value ratios. Therefore, any decline in real estate values may have a more detrimental effect on home equity loans and lines of credit compared to one- to four-family residential mortgage loans.
Construction Loans. The Bank makes commercial construction loans for rental properties, commercial buildings and homes built by developers on speculative, undeveloped property. The terms of commercial construction loans are made in accordance with the Bank’s commercial loan policy. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to an 80% loan-to-completed-appraised-value ratio. Repayment of construction loans on non-residential properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity or the sale of the subject property. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. The Bank typically provides the permanent mortgage financing on construction loans. Construction loans are interest-only loans during the construction period, which typically do not exceed 12 months, and convert to permanent, amortizing financing following the completion of construction. At December 31, 2020, commercial construction loans totaled $7.8 million and are included with commercial real estate loans. At December 31, 2020, the additional un-advanced portion of these construction loans totaled $2.4 million.
The Bank makes residential construction loans for one- to four-family owner-occupied properties. Advances on residential construction loans are made in accordance with a schedule reflecting the cost of construction. The terms of residential construction loans are made in accordance with the Bank’s one- to four-family residential lending policy (described under “One- to Four-Family Residential Mortgage Loans”). At December 31, 2020, residential construction loans totaled $200,000 and are included with one-to-four family residential and construction loans. At December 31, 2020, the additional un-advanced portion of these construction loans totaled $300,000.
Generally, before making a commitment to fund a construction loan, the Bank requires an appraisal of the property by a state-certified or state-licensed appraiser. The Bank reviews and inspects properties before disbursement of funds during the term of the construction loan. Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, the Bank may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. In the event the
Bank makes a land acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also expose the Bank to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
Loan Originations, Sales, Participations and Servicing. All loans that the Bank originates are underwritten pursuant to its policies and procedures, which incorporate standard underwriting and secondary market guidelines. The Bank originates both adjustable-rate and fixed-rate loans. The Bank’s loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand.
During the year ended December 31, 2020, the Bank sold approximately 86.4% or $68.4 million of the fixed rate one-to-four family mortgage loans it originated. Of that total, 93.7% or $64.1 million had terms greater than 15 years. The loans were originated by the Bank and sold on the secondary market as well as to the Federal Home Loan Bank of Pittsburgh (“FHLB”) through its Mortgage Partnership Finance (“MPF”) program. The Bank also receives fees related to the referral of a loan to a secondary market lender whereby the Bank does not originate the loan. In 2020, the Bank referred $2.2 million of fixed rate one-to-four family mortgage loans. The Bank determines on a loan by loan basis whether or not to retain the loan servicing rights. At December 31, 2020, the Bank was servicing one-to-four family mortgage loans owned by others with a principal balance of $116.1 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The Bank retains a portion of the interest paid by the borrower on the loans it services as consideration for servicing activities.
From time to time, banks enter into participation agreements with other banks on commercial loans in order to spread credit risk and manage customer expectations. In these circumstances, the Bank will generally follow its customary loan underwriting and approval policies. At December 31, 2020, the Bank had $62.7 million in loan participations bought where another bank was the lead lender. Conversely, the Bank had $5.3 million related to loan participations sold where the Bank acted as the lead lender and serviced the loan relationship.
Loan Approval Procedures and Authority. The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, the Bank reviews the borrower’s employment and credit history, and historical and projected income and expenses. The Bank requires “full documentation” on all loan applications. The Bank requires a full appraisal of all real property securing 1st lien residential mortgage loans. The Bank also requires appraisals on home equity loans and lines of credit for loans greater than $250,000 and commercial real estate loans greater than $500,000. For loan amounts under these thresholds, an appraisal may be required or other objective methods of property valuations are utilized. All appraisers are state-licensed or state-certified appraisers, and it is Bank practice to have local appraisers approved by the Board of Directors annually.
The Bank’s policies and loan approval limits are established by the Board of Directors. The approval authority necessary to decision all loan applications regardless of loan type is based on the resulting total exposure of the relationship. Secured loan requests with a relationship exposure of $3.0 million or less can be approved by designated individual officers, officers acting together with specific lending approval authority, and/or the Officer Loan Committee. Secured loan requests with a relationship exposure in excess of $3.0 million can be approved by the Board Loan Committee. Unsecured loan requests utilize a similar authority breakdown with the Board Loan Committee decisioning transaction for relationships with unsecured exposures in excess of $750,000. The Board of Directors approves all loan requests subject to Regulation O, and those that result in a relationship exposure that exceeds the Bank’s internal House Limit. The Bank’s House Limit was $8.9 million at December 31, 2020.
Investments
The Bank’s Investment Committee, which is comprised of the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Director of Finance and Investment Specialist, has primary responsibility for implementing the
Bank’s Investment Policy, which is established by the Bank’s Audit Committee. The general investment strategies are developed and authorized by the Investment Committee in consultation with the Audit Committee. The Investment Committee is responsible for the execution of specific investment actions. These officers are authorized to execute investment transactions without the Audit Committee’s prior approval (provided the transactions are within the scope of the established Investment Policy). The Investment Policy is reviewed annually by the Investment Committee, and any changes to the policy are subject to approval by the Audit Committee. The overall objectives of the Investment Policy are to maintain a portfolio of high quality and diversified investments to maximize interest income over the long term and to minimize risk, to provide collateral for borrowings, to provide additional earnings when loan production is low, and, when appropriate, to reduce the Bank’s tax liability. The policy dictates that investment decisions give consideration to the safety of principal, liquidity requirements and interest rate risk management. All securities transactions are reported to the Board of Directors on a monthly basis.
The Bank’s current Investment Policy permits investments in securities issued by the U.S. government as well as mortgage-backed securities, municipal securities, corporate bonds and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae. The Investment Policy also permits, with certain limitations, investments in certificates of deposit, collateralized mortgage obligations, mutual funds and equity securities. The Bank’s current Investment Policy does not permit investment in stripped mortgage-backed securities or derivatives as defined in federal banking regulations or in other high-risk securities. The Bank’s Investment Policy expressly prohibits the use of the investment portfolio for market-oriented trading activities or speculative purposes unless otherwise approved by the Audit Committee. The Bank does not currently have a trading account for investment securities.
The Company designates a security as either trading, held to maturity, or available for sale, based upon the Company’s ability and intent. Securities bought and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with unrealized gains and losses included in earnings. Held-to-maturity securities are debt securities acquired with the intent and ability to hold to maturity and are stated at amortized cost. Available-for-sale securities are other debt and equity securities that are not classified as trading or held-to-maturity securities and serve principally as a source of liquidity. Available-for-sale debt securities are stated at fair value, with unrealized holding gains and losses reported as a separate component of stockholders’ equity, net of tax, until realized. Available-for-sale equity securities are stated at fair value, with unrealized holding gains and losses reported as equity fair value adjustments in the income statement.
A periodic review and evaluation of the available for sale and held to maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. At December 31, 2020, all of the Company’s securities were classified as available for sale. The Company’s securities portfolio at December 31, 2020 consisted primarily of securities with the following fair values: $95.5 million of mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises; $80.7 million of municipal obligations; $4.0 million of U.S. government and agency obligations; $5.2 million of corporate bonds and $2.6 million of equity securities. At December 31, 2020, none of the collateral underlying the Company’s securities portfolio was considered subprime or Alt-A. See “Item 7 - Management’s Discussion of Financial Condition and Results of Operations - Balance Sheet Analysis: December 31, 2020 and December 31, 2019 - Investment Securities Portfolio” for a discussion of the recent performance of the Company’s securities portfolio.
Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities are typically collateralized by pools of one- to four-family or multifamily (loans on properties with 5 or more units) mortgages, although the Bank invests primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as the Bank. The interest rate on the security is lower than the interest rates on the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, a U.S. government agency, and government sponsored enterprises, such as Fannie Mae and Freddie Mac, guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize borrowings and public deposits. Investments in mortgage-backed securities involve a risk that actual
payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Sources of Funds
General. Deposits traditionally have been the primary source of funds for investment and lending activities. The Bank also borrows from the FHLB to supplement cash flow needs. Additional sources of funds include scheduled loan payments, maturing investments, loan repayments, customer repurchase agreements, income on other earning assets and the proceeds of loan sales.
Deposits. Deposits are accepted primarily from the areas in which the Bank’s offices are located. The Bank relies on competitive pricing and products, convenient locations and quality customer service to attract and retain deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposit accounts consist of savings accounts, certificates of deposit and checking 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 the Bank’s deposit growth goals.
Borrowings. Borrowings consist of short-term borrowings and long term advances from the FHLB, funds borrowed from customers under repurchase agreements, and financing lease liabilities. At December 31, 2020, there were no FHLB short-term borrowings and long-term advances totaled $86.4 million, or 9.5%, of total liabilities. Repurchase agreements totaled $3.6 million, or 0.4%, of total liabilities. Financing lease liabilities totaled $3.0 million, or 0.3%, of total liabilities at December 31, 2020. At December 31, 2020, the Bank had access to additional FHLB borrowings of up to $315.2 million. Short-term borrowings and long-term advances from the FHLB are collateralized by certain qualifying collateral such as loans, with weighted average collateral values determined by the FHLB equal to at least the unpaid amount of outstanding borrowings. Repurchase agreements are secured by municipal and U.S. government obligations.
Subsidiary Activities
The Bank has one active subsidiary, Westmoreland Investment Company, which is a Delaware corporation that holds residential mortgage loans originated and serviced by the Bank.
Expense and Tax Allocation
The Bank has entered into an agreement with the Company to provide it with certain administrative support services, whereby the Bank will be compensated at not less than the fair market value of the services provided. In addition, the Bank and the Company have entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
Human Capital Resources
As of December 31, 2020, the Bank had 141 full time and 11 part time employees. The Bank’s employees are not represented by any collective bargaining group. The success of our business is highly dependent on our employees, who provide value through their dedication to our mission of establishing and maintaining mutually beneficial long-term relationships with customers, businesses, professionals and the communities we serve. Management believes they have a good working relationship with their employees. Our workplace culture is grounded in a set of core values - a concern for others, trust, respect, hard work, and a dedication to our customers and communities. We seek to hire well-qualified employees who are also a good fit for our value system. Our selection and promotion processes are without bias.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual training and career development is advanced through regular performance discussions between employees and their managers, internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is
available to employees enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to our business, and for seminars, conferences, and other training events employees attend in connection with their job duties.
The safety, health and wellness of our employees is a top priority. While the Company’s banking operations were not restricted by the government stay-at-home orders resulting from the COVID-19 pandemic, the Company took steps to protect its employees and customers by providing for remote working for many employees, enhancing cleaning procedures for the Company’s offices, requiring face masks to be worn by employees and maintaining appropriate social distancing in our offices. The Company continues to assess and monitor the COVID-19 pandemic and will take additional such steps as are necessary to protect its employees and assist its customers during this difficult time.
SUPERVISION AND REGULATION
General
The Bank is supervised and examined by the Pennsylvania Department of Banking and Securities as the issuer of its charter, and by the FDIC as the insurer of its deposits and its primary federal regulator. The Bank is regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against deposits and other matters. The Bank is also subject to consumer protection rules and regulations issued by the Consumer Finance Protection Bureau although, because it has less than $10.0 billion in total consolidated assets, the FDIC and Pennsylvania Department of Banking and Securities are responsible for examining and supervising the Bank’s compliance with these laws. This system of state and federal regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund, depositors, and other customers, and not for the protection of security holders. The Bank is periodically examined by the Pennsylvania Department of Banking and Securities and the FDIC to ensure that it satisfies applicable standards with respect to its capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following examinations, the Pennsylvania Department of Banking and Securities and the FDIC prepare reports for the consideration of the Bank’s Board of Directors on any operating deficiencies. The Bank’s relationship with its depositors is also regulated to a great extent by federal law and, to a lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents.
As a bank holding company, the Company. is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Pennsylvania Department of Banking and Securities and the Federal Reserve Board.
Any change in the applicable laws or regulations, whether by the FDIC, the Pennsylvania Department of Banking and Securities, the Federal Reserve Board or Congress, could have a material adverse impact on the Company, the Bank and their operations.
Set forth below is a brief description of certain regulatory requirements that are applicable to the Bank and the Company. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on the Bank and the Company.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), has significantly changed the bank regulatory structure and affected the lending, investment, trading and operating activities of depository institutions and their holding companies. See “Item 1A - Risk Factors - The Dodd-Frank Act may have a material impact on the Bank’s operations and the cost of operations.” Many of the provisions of the Dodd-Frank Act required various federal agencies to promulgate numerous and extensive implementing regulations over a period of years. Although the effect of all of these regulations cannot be completely determined at this time, it is expected that the legislation and implementing regulations will continue to increase the Bank’s operating and compliance costs.
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act maintained most of the regulatory structure established by the Dodd-Frank Act, it amended certain aspects of the regulatory framework for small depository institutions with assets of less than $10.0 billion and for large banks with assets of more than $50.0 billion.
Banking Regulation
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965, as amended (the “Banking Code”), contains detailed provisions governing the organization, operations, corporate powers, savings and investment authority, branching rights and responsibilities of directors, officers and employees of Pennsylvania savings banks. Under the Banking Code, a Pennsylvania savings bank may operate its banking business out of its principal office and may establish and maintain branch offices anywhere in Pennsylvania, or in other states, with the prior approval of the Pennsylvania Department of Banking and Securities. The Banking Code delegates extensive rulemaking power and administrative discretion to the Pennsylvania Department of Banking and Securities in its supervision and regulation of state-chartered savings banks. The Pennsylvania Department of Banking and Securities may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any trustee, officer, attorney, or employee of a savings bank engaged in an objectionable activity, after the Pennsylvania Department of Banking and Securities has ordered the activity to be terminated, to show cause at a hearing before the Pennsylvania Department of Banking and Securities why such person should not be removed. The Department of Banking and Securities may also appoint a receiver or conservator for an institution in appropriate cases.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015, and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital generally is defined as common stockholders’ equity and retained earnings. Tier 1 capital generally is defined as common equity Tier 1 plus additional Tier 1 capital, such as certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and certain other items. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in and became fully effective on December 31, 2020.
As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets). Institutions may elect to utilize the community bank leverage ratio in lieu of the generally applicable leverage and risk-based capital requirements noted above. The federal banking agencies adopted 9% as the
applicable ratio, however, in response to federal legislation dealing with the effects of COVID-19, the ratio was temporarily reduced to 8% effective March 31, 2020. The agencies established a community bank leverage ratio of 8.5% for calendar 2021 and the ratio will revert to 9% effective January 1, 2022. Institutions with capital meeting the specified requirements and electing to follow the alternative framework are considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well-capitalized” for purposes of prompt corrective action, discussed below. The Bank did not utilize the community bank leverage ratio frame work in its December 31, 2020 Call Report and maintains the right to opt-in or opt-out of the framework in any subsequent quarter.
The Bank is also subject to capital guidelines of the Pennsylvania Department of Banking and Securities. The Pennsylvania Department of Banking and Securities requires 4.0% leverage capital and incorporates the federal risk-based requirements. The components of capital are substantially the same as those defined by the FDIC. At December 31, 2020, the Bank’s capital exceeded all applicable requirements.
Prompt Corrective Action. Under federal regulations, as amended to incorporate the previously referenced revised capital requirements, a bank is considered to be (i) “well capitalized” if it has total risk-based capital of 10.0% or more, Tier 1 risk-based capital of 8.0% or more, common equity Tier 1 risk-based capital of 6.5% or more and Tier 1 leverage capital of 5.0% or more and is not subject to any written capital order or directive; (ii) “adequately capitalized” if it has total risk-based capital of 8.0% or more, Tier 1 risk-based capital of 6.0% or more, common equity Tier 1 risk-based capital of 4.5% or more and Tier 1 leverage capital of 4.0% or more and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if it has total risk-based capital of less than 8.0%, Tier 1 risk-based capital of less than 6.0%, common equity Tier 1 risk-based capital of 4.5% or less or Tier 1 leverage capital of less than 4.0%; (iv) “significantly undercapitalized” if it has total risk-based capital of less than 6.0%, Tier 1 risk-based capital less than 4.0% common equity Tier 1 risk-based capital of less than 3.0, or Tier 1 leverage capital of less than 3.0%; and (v) “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2.0%. Federal regulations also specify circumstances under which a federal banking agency may reclassify a well-capitalized institution as adequately capitalized, and may require an adequately capitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 2020, the Bank was “well-capitalized” for this purpose and exceeded all applicable capital requirements.
Federal law provides for certain supervisory measures for undercapitalized institutions including restrictions on capital distributions and asset growth and the requirement that a capital restoration plan be filed with the FDIC within 45 days of the date an institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the institution will engage in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the institution. Any holding company for an institution required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the institution’s assets at the time it was notified or deemed to be undercapitalized by the FDIC or the amount necessary to restore the institution to adequately capitalized status. This guarantee remains in place until the FDIC notifies the institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the FDIC has the authority to require payment and collect payment under the guarantee. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Generally, the FDIC is required to appoint a receiver or conservator for an institution that is “critically undercapitalized” within specific time frames.
Loans-to-One-Borrower Limitation. Under applicable regulations, with certain limited exceptions, a Pennsylvania chartered savings bank may lend to a single or related group of borrowers on an “unsecured” basis an amount equal to 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate. As a prudent lending practice, however, Management and the Board of Directors have established an internal limitation for approval purposes based on the total exposure of a relationship. The formula to determine the Bank’s internal limitation is Tangible Capital times 15% times 50%. This
limitation is a rolling number based on the Bank’s capital balance, and is measured at the end of each calendar quarter. The internal limitation as of December 31, 2020 was $8.9 million. Any new loan request that results in an exposure for approval purposes that exceeds this limitation must be presented to the full Board of Directors for decisioning.
Activities and Investments of Insured State-Chartered Banks. Federal law generally limits the types and amounts of equity investments of state-chartered banks insured by the FDIC to those that are permissible for national banks. An insured state bank is not prohibited from, among other things: (i) acquiring or retaining a majority interest in a subsidiary that is engaged in permissible activities; (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets; (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures liability insurance for directors, trustees or officers, or blanket bond group insurance coverage for insured depository institutions; and (iv) acquiring or retaining the voting shares of a depository institution owned exclusively by other depository institutions if certain requirements are met. The direct or indirect activities of a state-chartered bank are similarly generally limited to those of a national bank. Exceptions include where approval is received for the activity from the FDIC.
Capital Distributions. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the FDIC Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Federal banking regulators have the authority to prohibit banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice. The Bank is also subject to regulatory restrictions on the payment and amounts of dividends under the Banking Code. The Banking Code states, among other things, that dividends may be declared and paid by the Bank only out of accumulated net earnings.
Community Reinvestment Act and Fair Lending Laws. Under the Community Reinvestment Act of 1977 (“CRA”), the FDIC is required to assess the record of all financial institutions regulated by it to determine if such institutions are meeting the credit needs of the community (including low-and moderate-income areas) which they serve. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. The Bank has a current CRA rating of “Satisfactory.”
Transactions with Related Parties. Transactions between banks and their related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank.
Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to non-affiliates. The term “covered transaction” includes the making of a loan to, purchase of assets from, issuance of a guarantee on behalf of and similar transactions with an affiliate. In addition, loans or other extensions of credit by the institution to the affiliate must be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws, assuming such loans are also permitted under the law of the institution’s chartering state. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities under such person’s control, is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board of directors, approval procedures to be followed. Such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are further limited to specific categories.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action.
Insurance of Deposit Accounts. The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in the Bank are insured by the FDIC up to a maximum of $250,000 for each separately insured depositor.
The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions with less than $10.0 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years. That system, effective July 1, 2016, replaced the previous system under which institutions were placed into risk categories.
The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund’s reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10.0 billion of total assets to a range of 1.5 basis points to 30 basis points, effective July 1, 2016.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The Dodd-Frank Act required insured institutions with assets of $10.0 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions were subject to a surcharge to achieve that goal. In November 2018, the FDIC announced that the 1.35% ratio had been achieved. Institutions with less than $10 billion in assets began receiving credits to the extent that their assessment payments contributed to raising the ratio between 1.15% and 1.35%. The FDIC announced that such credits were fully remitted by September 30, 2020. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC; the FDIC has exercised that discretion by establishing a long-term fund ratio of 2.0%.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of by the Bank. Future insurance assessments cannot be predicted.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not currently know of any practice, condition or violation that may lead to termination of its deposit insurance.
Enforcement. The FDIC has extensive enforcement authority over insured state savings banks, including the Bank. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and
desist orders and capital directives and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Pittsburgh, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2020, the Bank was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions.
Bank Holding Company Regulations. As a bank holding company, the Company is subject to regulation and examination by the Pennsylvania Department of Banking and Securities and the Federal Reserve Board. The Company is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank. Such a transaction may also require approval of the Pennsylvania Department of Banking and Securities.
Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, the Company may only engage in or own companies that engage in activities deemed by the Federal Reserve Board to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. The holding company must obtain permission from the Federal Reserve Board prior to engaging in most new business activities. A bank holding company that meets certain criteria may become a “financial holding company” and thereby engage in a broader range of financial activities, including insurance underwriting and investment banking. The Company has not elected to become a financial holding company.
The Dodd-Frank Act required the Federal Reserve Board to revise its holding company consolidated capital requirements so that they are no less stringent than those applicable to insured depository institutions. The previously referenced regulatory capital requirements applicable to banks also apply to bank holding companies with consolidated assets of $3.0 billion or more. Such capital requirements would apply to the Company at such time as its size met that threshold.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Federal Reserve Board policies require a bank holding company to consult with and receive the nonobjection of the agency prior to paying dividends or repurchasing its stock under certain circumstances. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory requirements and policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
Change in Control Regulations. Under the Change in Bank Control Act, no person may acquire control of a bank holding company unless the Federal Reserve Board has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal
regulations, means ownership, control of or holding more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances, including where the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934. In addition, federal regulations provide that no company may acquire control of a bank holding company (as “control” is defined in the BHCA Act) without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.
Federal Securities Laws
The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. The Company is subject to the information and other requirements under the Securities Exchange Act of 1934.
The Company’s common stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal control over financial reporting; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about internal control over financial reporting; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been changes in the Company’s internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)
The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19) and stimulate the economy. The law had several provisions relevant to depository institutions, including:
Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as troubled debt restructurings and also allowing them to suspend the corresponding impairment determination for accounting purposes;
As previously noted, temporarily reducing to 8% the community bank leverage ratio alternative available to institutions with less than $10 billion of assets.
The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the
60-day period beginning March 18, 2020. The Biden Administration has indicated its intent that the federal mortgage backing agencies will extent the forbearance program and the foreclosure moratorium to at least June 30, 2021.
The ability of a borrower of a multi-family federally backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. A forbearance would be granted for up to 30 days, which could be extended for up to two additional 30-day periods upon the request of the borrower. Later extensions were made available, for a total of six months, for certain federally backed multi-family mortgage loans. During the time of the forbearance, the multi-family borrower could not evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multi-family borrower that received a forbearance could not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provided the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.
The Paycheck Protection Program
The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided $659 billion to fund loans by depository institutions to eligible small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. These loans are 100% federally guaranteed (principal and interest). An eligible business could apply under the Paycheck Protection Program (“PPP”) during the applicable covered period and receive a loan up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term (or five-year loan term for loans made after June 5, 2020) to maturity; and (c) principal and interest payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or, alternatively, notifies the lender no loan forgiveness is allowed. If the borrower did not submit a loan forgiveness application to the lender within 10 months following the end of the 24-week loan forgiveness covered period (or the 8-week loan forgiveness covered period with respect to loans made prior to June 5, 2020 if such covered period is elected by the borrower), the borrower would begin paying principal and interest on the PPP loan immediately after the 10-month period. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be fully reduced by the loan forgiveness amount under the PPP so long as, during the applicable loan forgiveness covered period, employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. Through December 31, 2020 the Company had processed over 400 PPP loan applications totaling over $43.2 million.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “Relief Act”) became law and provides an additional $284 billion for the PPP, and extended the PPP through at least March 31, 2021. PPP changes as a result of the Relief Act included: (1) an opportunity for a second PPP forgivable loan for small businesses and nonprofits with 300 or fewer employees that can demonstrate a loss of 25 percent of gross receipts in any quarter during 2020 compared to the same quarter in 2019; (2) allowing qualified borrowers to apply for a PPP loan up to 2.5 times (or 3.5 times for small businesses in the restaurant and hospitality industries) the borrower’s average monthly payroll costs in the one-year period prior to the date on which the loan is made or calendar year 2019, limited to a loan amount of $2.0 million; (3) the addition of personal protective equipment expenses, costs associated with outdoor dining, uninsured costs related to property damaged and vandalism or looting due to 2020 public disturbances and supplier costs as eligible and forgivable expenses; (4) simplifying the loan forgiveness process for loans of $150,000 or less; and (5) eliminating the requirement that Economic Injury Disaster Loan (EIDL) Advances will reduce the borrower’s PPP loan forgiveness amount. Additionally, expenses paid with the proceeds of PPP loans that are forgiven became tax-deductible, reversing previous guidance from the U.S. Department of the Treasury and the Internal Revenue Service, which did not allow deductions on expenses paid for with PPP loan proceeds.
TAXATION
Federal Taxation
General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company and the Bank.
Method of Accounting. For federal income tax purposes, the Bank will file a consolidated tax return with the Company and will report income and expenses on the accrual method of accounting and use a calendar year ending December 31st for filing their consolidated federal income tax returns.
Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2020, the Company had no alternative minimum tax credit carryforward.
Net Operating Loss Carryovers. At December 31, 2020, the Company had no net operating loss carryovers for federal income tax purposes.
Corporate Dividends. The Company will be able to exclude from income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns. The 2014 federal tax return was audited by the Internal Revenue Service in 2016 with no changes to the return as filed. There are no audits of any open tax years currently underway.
State Taxation
The Bank is subject to the Pennsylvania, Maryland and West Virginia Corporate Net Income tax which is allocated between the states and calculated at 11.50%, 8.25% and 6.50%, respectively, based on taxable income applicable to the individual states. The Company’s state income tax returns, as applicable, have not been audited in the most recent five year period.

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ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
Economic and Market Area
The recent global coronavirus outbreak could adversely affect our business and results of operations.
The COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen and remain open, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, including real estate, accounts receivable, inventory, equipment and investment securities, may decline in value or dissipate, which could cause loan charge offs to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; expenses may increase as a result of an escalation in the number of troubled credits; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.
Downturns in the local real estate market or economy could adversely affect the Company’s earnings.
A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. If the Company is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, the earnings and shareholders’ equity could be adversely affected. The declines in real estate prices in the Company’s markets also may result in increases in delinquencies and losses in the loan portfolios. Unexpected decreases in real estate prices coupled with a prolonged economic recovery and elevated levels of unemployment could drive losses beyond that which is provided for in the Company’s allowance for loan losses. In that event, the Company’s earnings could be adversely affected.
A worsening of national or local economic conditions could adversely affect our financial condition and results of operations.
Deteriorating economic or business conditions could significantly affect the markets in which we do business, the value of our loans and investments, the value of real estate collateral securing our mortgage loans, the financial strength of our borrowers and our on-going operations, costs and profitability. Declines in real estate values, sales volumes and unemployment levels together with increased vacancy rates may result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services. These events may cause us to increase our credit loss reserves, incur credit losses and may adversely affect our financial condition and results of operations.
Acts of terrorism, severe weather, natural disasters, pandemics, public health issues and other external events could impact the Company’s ability to conduct business.
The Company’s business is subject to risk from external events that could affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. For example, financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising their operating and communication systems. Additionally, there could be sudden increases in electrical, telecommunications or other major physical infrastructure outages, natural disasters, the emergence of widespread health emergencies or pandemics, events arising from local or larger scale political or social matters, including terrorist acts, and cyber-attacks. Events such as these may become more common in the future and could cause significant damage, such as disrupt power and communication services, impact the stability of the Company’s facilities and result in additional expenses, impair the ability of the Bank’s borrowers to repay their loans and reduce the value of collateral securing the repayment of the Bank’s loans, which could result in the loss of revenue. While the Company has established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, operations and financial condition.
Strong competition within the Company’s market areas may limit growth and profitability.
Competition in the banking and financial services industry is intense. In the Company’s market areas it competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of the Company’s competitors have greater name recognition and market presence that benefits them in attracting business, and offer certain services that the Company does not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than the Company does, which could affect the ability to grow and remain profitable on a long-term basis. The Company’s profitability depends upon its continued ability to successfully compete
in its market areas. This could become increasingly difficult if some competitors in the Bank’s market areas price loans and deposits irrationally. If the Company must raise interest rates paid on deposits or lower interest rates charged on loans, the net interest margin and profitability could be adversely affected. For additional information see “Item 1 - Business - Standard Bank - Competition.”
Interest Rate and Asset Quality
Because the Bank intends to emphasize commercial real estate and commercial business loan originations, the Company’s credit risk could increase and continued weakness in the local real estate market or economy could adversely affect its earnings.
The Bank intends to emphasize originating commercial real estate and commercial business loans. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans generally have more risk than one- to four-family residential real estate loans. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. Any continued weakness or downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As the Bank’s commercial real estate portfolio increases, the corresponding risks and potential for losses from these loans may also increase.
If the Bank’s allowance for loan losses is not sufficient to cover actual loan losses, the Company’s earnings will decrease.
The Bank makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of the loans. In determining the amount of the allowance for loan losses, management reviews the Bank’s loans and the loss and delinquency experience and evaluates economic conditions. If management’s assumptions are incorrect, the Bank’s allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the Bank’s allowance. Material additions to the Bank’s allowance could materially decrease the Company’s net income.
In addition, bank regulators periodically review the Bank’s allowance for loan losses and may require the Bank to increase the allowance for loan losses or recognize further loan charge-offs. Any increase in the Bank’s allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on the Company’s financial condition and results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted Accounting Standard Update (“ASU”) 2016-13. This standard, often referred to as “CECL” (reflecting a current expected credit loss model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance sheet date. This new standard will require the Bank to collect and review increased types and amounts of data for management to determine the appropriate level of the allowance for loan losses, and may require the Bank to increase the allowance for loan losses. Any increase in the Bank’s allowance for loan losses or expenses may have a material adverse effect on the Company’s financial condition and results of operations. In November 2019, the FASB issued ASU 2019-10 which defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Bank’s management will continue to work through the provisions of the ASU to determine what impact it will have on the consolidated financial statements.
Future changes in interest rates could reduce the Company’s profits.
The Company’s ability to make a profit largely depends on the Company’s net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between the interest income the
Company earns on interest-earning assets, such as loans and investment securities, and the interest expense the Company pays on interest-bearing liabilities, such as deposits and borrowings.
The majority of the Bank’s portfolio loans have fixed interest rates. Additionally, many of the Company’s investment securities have fixed interest rates. Like many financial institutions, the Bank’s focus on deposit accounts as a source of funds, which have no stated maturity date or short contractual maturities, results in the Company’s liabilities having a shorter duration than its assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on assets, such as loans and investments, may not increase as rapidly as the interest paid on liabilities, such as deposits. In a period of declining interest rates, the interest income earned on assets may decrease more rapidly than the interest paid on liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring the Company to reinvest the cash flows at lower interest rates.
Changes in interest rates creates reinvestment risk, which is the risk that the Company may not be able to reinvest prepayments at rates that are comparable to the rates earned on the prepaid loans or investment securities in a declining interest rate environment. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. Changes in interest rates also affect the current fair value of the Company’s interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2020, a “rate shock” analysis indicated that the Company’s net portfolio value (the difference between the present value of assets and the present value of liabilities) would increase by approximately $11.5 million, or 7.65%, if there was an instantaneous 200 basis point increase in market interest rates.
Changes in the valuation of the Company’s securities portfolio could adversely affect the Company.
As of December 31, 2020, the Company’s investment securities portfolio, which includes government agency securities, mortgage-backed securities, municipal obligations, corporate bonds and marketable equity securities totaled $188.0 million, or 17.9% of the Company’s total assets. The Company’s securities portfolio may be impacted by fluctuations in market value, potentially reducing earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in the Company’s debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. Changes in interest rates can also have an adverse effect on the Company’s financial condition, as the Company’s available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. The declines in fair value could result in charges to earnings that could have a material adverse effect on the Company’s net income and capital levels.
The flattening or inversion of the yield curve may adversely affect the Company’s net interest income and profitability.
In 2017 and 2018 the Federal Reserve Board increased the federal funds target rate by 200 basis points, which resulted in increased in short-term rates, such as the cost of deposits the cost of overnight borrowings, while long-term rates on loans and securities did not rise as much, resulting in a flattening of the yield curve. Due to a slowdown in the economy and an inverted yield curve, the Federal Reserve Board reduced the target rate 75 basis points in 2019 to a range of 1.50% to 1.75% and, in response to the national emergency caused by the pandemic, reduced the rate an additional 150 basis points in March 2020 to its current range of 0% to .25%.
In a period of rising interest rates, the interest income earned on the Bank’s assets may not increase as rapidly as the interest paid on its liabilities. The Bank’s cost of funds is expected to increase more rapidly than interest earned on its loan and investment portfolios as its primary source of funds is deposits with generally shorter maturities than the maturities of its loans and investments. This makes the balance sheet more liability sensitive in the short-term.
When interest rates decline, borrowers may refinance higher rate loans at lower rates causing prepayments on mortgage loans and mortgage-backed securities to be elevated. Under those circumstances, the Bank may not be able to
reinvest the resulting cash flows in new interest-earning assets with rates as favorable as those that prepaid. In addition, subject to the floors contained in many of the Bank’s loan agreements, the Bank’s loans at variable interest rates may adjust to lower rates at their reset dates. While lower rates may reduce the Bank’s cost of funds on non-maturity deposits, certificates of deposits and FHLB advances, the cost savings could be somewhat constrained because decreases in the Bank’s funding rates may occur more slowly than decreases in yields earned on the Bank’s assets and a significant portion of the Bank’s funding is currently derived from noninterest bearing checking deposits and capital. In addition, in a prolonged low interest rate environment, the Bank’s deposit products could reach an effective floor rate close to zero which would not allow for any further reduction in its cost of funds.
In addition to the risks arising from changes in interest rates, the current level of interest rates and shape of the yield curve could create downward pressure on net interest income and net interest margin. In a low interest rate environment with a flat or inverted yield curve, the Bank’s earnings and profitability metrics could be negatively impacted by asset growth. As a result, the Bank may be unable to increase earnings, or maintain the current level of earnings, until the shape of the yield curve improves.
Regulatory Matters
Financial reform legislation has increased the Company’s costs of operations.
The Dodd-Frank Act has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act required various federal agencies and regulators to adopt a broad range of new rules and regulations intended to place significant restrictions and requirements on financial institutions and to prepare numerous studies and reports for Congress. Almost immediately following the 2016 election, the Administration indicated they would support plans for Dodd-Frank reform. In 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (“S. 2155”) was passed by Congress and signed by the President. While S. 2155 provided some regulatory relief for mortgage lending, regulatory reporting and length of examination cycles, capital requirements and appraisals, among others, it did not impact most of the restrictions and requirements in the Dodd-Frank Act. While there are efforts for more reform of Dodd-Frank, the Company cannot predict whether those efforts will be successful and the extent to how those changes will impact business, operations or financial condition. However, compliance with the remaining provisions of the Dodd-Frank Act and its implementing regulations and policies continue to have a significant impact on the Company’s business and operations, as well as additional costs, and have diverted management's time from other business activities, which adversely affects the Company’s financial condition and results of operations.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules may adversely affect the Company’s returns on equity and ability to pay dividends or repurchase stock.
In July 2013, the FDIC and the other federal bank regulatory agencies revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the leverage ratio at a uniform 4% of total assets, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to certain exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. The final rule became effective January 1, 2015. The “capital conservation buffer was fully phased in at 2.50% on January 1, 2019.
The application of these more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if the Company was to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in the Company having to lengthen the term of funding, restructure business models, and/or increase holdings of liquid assets.
Government responses to economic conditions may adversely affect the Company’s operations, financial condition and earnings.
The Company is subject to extensive regulation, supervision and examination by the Pennsylvania Department of Banking and Securities, the FDIC and the Federal Reserve Board. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of the Company’s common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on the Company’s operations, the classification of assets and determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on the Company’s operations.
Financial reform legislation has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. The legislation has also resulted in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty regarding the effect of new legislation and regulatory actions may adversely affect the Company’s operations by restricting business activities, including the ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to increase the Company’s costs of doing business and may have a significant adverse effect on lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of the Company’s loan and investment securities portfolios, which also would negatively affect the Company’s financial performance.
In addition, there have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting the Company’s rights as a creditor, to be implemented, the Company could experience increased credit losses or increased expense in pursuing remedies as a creditor.
Business Matters
The Company’s business is reliant on outside vendors.
The Company’s business is highly dependent on the use of certain outside vendors for day-to-day operations. The Company’s operations are exposed to risk that a vendor may not perform in accordance with established performance standards required in the agreements for any number of reasons including a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or a simple change in their strategic focus. While the Company has comprehensive policies and procedures in place to mitigate risk at all phases of vendor management from selection, to performance monitoring and renewals, the failure of a vendor to perform in accordance with contractual agreements could be disruptive to business, which could have a material adverse effect on the financial condition and results of operations.
Development of new products and services may impose additional costs on the Company and may expose it to increased operational risk.
The Company’s financial performance depends, in part, on the ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate products or provide cost efficiencies, while avoiding increased related expenses. This dependency is exacerbated in the current “FinTech” environment, where financial institutions are investing significantly in evaluating new technologies, such as artificial intelligence and digital delivery channels, and developing potentially industry-changing new products, services and industry standards. The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry. The Company’s ability to access technical and other information from clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of
marketing, sales and other materials that fully and accurately describe the product or service and underlying risks. The Company’s failure to manage these risks and uncertainties also exposes it to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to the Company’s clients. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on the Company’s business and reputation, as well as on consolidated results of operations and financial condition.
The Company’s ability to pay dividends is subject to limitations.
The merger agreement between the Standard and Allegheny Valley contemplated that, unless 75% of the Board of Directors determines otherwise for the two years following the closing of the merger and 66.33% of the Board of Directors for the three years thereafter, the combined company will pay a quarterly cash dividend in an amount no less than $0.221 per share for five years after the effective time of the merger, provided that sufficient funds are legally available, and that the Company and the Bank remain “well-capitalized” in accordance with applicable regulatory guidelines.
The Company’s ability to pay dividends depends on the receipt of dividends from direct and indirect subsidiaries. The Bank is the Company’s primary source of dividends. As a state-chartered bank, the Bank is subject to regulatory restrictions on the payment and amounts of dividends under the Pennsylvania Banking Code.
Further, the ability of banking subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements. There is no assurance that the Company’s subsidiaries will be able to pay the dividends contemplated by the merger agreement or other dividends in the future or that the Company will generate adequate cash flow to pay dividends in the future. The Company’s failure to pay dividends on common stock could have a material adverse effect on the market price of the common stock.
The Company’s success will depend upon the ability of management to attract and retain talent.
The business success of the Company and the Bank depends to a great extent upon the services of their directors and executive officers. Management’s ability to operate the Company profitably will require the acquisition of new knowledge and skills. In particular, if the Company expands geographically or expands to provide non-banking services through the acquisition or formation of additional subsidiaries, current management may not have the necessary experience for successful operation in these new areas. There is no guarantee that management would be able to meet these new challenges or that the Company would be able to retain new directors or personnel with the appropriate background and expertise.
Security
A failure in or breach of the Company’s operational or security systems or infrastructure, or those of third parties, could disrupt the Company’s businesses, and adversely impact the results of operations, liquidity and financial condition, as well as cause reputational harm.
The Company collects, processes and stores sensitive consumer data by utilizing computer systems and telecommunications networks operated by both the Bank and third-party service providers. The Company’s operational and security systems, infrastructure, including computer systems, data management, and internal processes, as well as those of third parties, are integral to the Company’s business. The Company relies on employees and third parties in day-to-day and ongoing operations, who may, as a result of human error, misconduct or malfeasance, or failure or breach of third- party systems or infrastructure, expose the Company to risk. The Company has taken measures to implement backup systems and other safeguards to support operations, but the ability to conduct business may be adversely affected by any significant disruptions to the Company or to third parties with whom it interacts. In addition, the Company’s ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with its own systems.
The Company handles a substantial volume of customer and other financial transactions every day. The Company’s financial, accounting, data processing, check processing, electronic funds transfer, loan processing, online and mobile banking, automated teller machines, or ATMs, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond its control. This could adversely affect the Company’s ability to process these transactions or provide these services. There could be sudden increases in customer transaction volume, electrical, telecommunications or other major physical infrastructure outages, natural disasters, events arising from local or larger scale political or social matters, including terrorist acts, and cyber attacks. The Company continuously updates these systems to support operations and growth. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact the Company’s results of operations, liquidity and financial condition, and cause reputational harm.
A cyber attack, information or security breach, or a technology failure of the Company’s or of a third-party could adversely affect the Company’s ability to conduct business or manage exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase the Company’s costs to maintain and update operational and security systems and infrastructure, and adversely impact the Company’s results of operations, liquidity and financial condition, as well as cause reputational harm.
The Company’s business is highly dependent on the security and efficacy of its infrastructure, computer and data management systems, as well as those of third parties with whom it interacts. Cyber security risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors. The Company’s operations rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in computer and data management systems and networks, and in the computer and data management systems and networks of third parties. The Company relies on digital technologies, computer, database and email systems, software, and networks to conduct operations. In addition, to access the Company’s network, products and services, customers and third parties may use personal mobile devices or computing devices that are outside of the Company’s network environment.
Financial services institutions have been subject to, and are likely to continue to be the target of, cyber attacks, including computer viruses, malicious or destructive code, phishing attacks, denial of service or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of the institution, employees or customers of third parties, or otherwise materially disrupt network access or business operations. For example, denial of service attacks have been launched against a number of large financial institutions and several large retailers have disclosed substantial cyber security breaches affecting debit and credit card accounts of their customers. The Company has experienced cyber security incidents in the past, although not material, and it anticipates that, as a larger bank, it could experience further incidents. There can be no assurance that the Company will not suffer material losses or other material consequences relating to technology failure, cyber attacks or other information or security breaches.
Misconduct by employees could also result in fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information. The Company may not be able to prevent employee errors or misconduct, and the precautions the Company takes to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject the Company to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on business.
In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. The recent massive breach of the systems of a credit bureau presents additional threats as criminals now have more information about a larger portion of the population of the United States than past breaches have involved, which could be used by criminals to pose as customers initiating transfers of money from customer accounts. Although the Company has policies and procedures in place to verify the authenticity of customers, the Company cannot assure that such policies and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to its reputation.
As cyber threats and other fraudulent activity continues to evolve, the Company may be required to expend significant additional resources to continue to modify and enhance protective measures or to investigate and remediate any information security vulnerabilities or incidents. Any of these matters could result in the Company’s loss of customers and business opportunities, significant disruption to operations and business, misappropriation or destruction of confidential information and/or that of its customers, or damage to customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs. In addition, any of the matters described above could adversely impact the Company’s results of operations and financial condition.
Merger
If the merger is not completed, we will have incurred significant expenses without realizing the expected benefits of the merger and could be subject to additional risks.
Prior to completion of the merger, we will incur or have incurred substantial expenses in connection with the completion of the transactions contemplated by the merger agreement. If the merger is not completed, we would have to recognize these expenses without receiving the merger consideration. In addition, if the merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. The market price of our common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be consummated. We also could be subject to litigation related to any failure to complete the merger or to proceedings commenced by Dollar Mutual Bancorp against us seeking damages or to compel us to perform our obligations under the merger agreement. These factors and similar risks could have an adverse effect on the results of operations, business and stock prices of the Company.
We will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees, customers, suppliers and vendors may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to retain and motivate key personnel pending the consummation of the merger, as such personnel may experience uncertainty about their future roles following the consummation of the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Dollar Mutual Bancorp our business could be harmed. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.
The pursuit of the merger and the preparation for the integration may place a burden on our management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition and results of operations.
In addition, in the merger agreement we have agreed to operate our business in the ordinary course prior to closing, but are restricted from taking certain actions without Dollar Mutual Bancorp’s consent while the merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the merger agreement, entering into other transactions or making other changes to our business prior to consummation of the merger or termination of the merger agreement. These restrictions could have a material adverse effect on our business, financial condition and results of operations.
Our stockholders will not be entitled to dissenters’ or appraisal rights in the merger.
Dissenters’ or appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in
connection with the extraordinary transaction. Under the Maryland law, holders of our common stock do not have the right to dissent from the merger agreement and seek an appraisal in connection with the merger.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
ITEM 2. Properties
The Bank operates from seventeen full service branches located in Allegheny, Westmoreland and Bedford counties in Pennsylvania and Allegany County, Maryland. The Bank considers its primary market area to be eastern Allegheny, Westmoreland, northern Fayette and southern Bedford counties in Pennsylvania and Allegany County, Maryland. The net book value of its office, properties and equipment was $9.4 million at December 31, 2020.
The following table sets forth information with respect to the full-service banking offices, including the expiration date of leases with respect to leased facilities.
Branch Name
Address
Owned or Leased
Cumberland
200 N. Mechanic Street Cumberland, MD 21502
Owned
LaVale
1275 National Highway LaVale, MD 21502
Owned
Blawnox
201 Freeport Road Pittsburgh, PA 15238
Owned
Green Tree
Four Parkway Center #100 875 Greentree Road Pittsburgh, PA 15220
Leased (expires 8/31/2022)
Greensburg
5150 Route 30 Greensburg, PA 15601
Leased (expires 4/30/2026)
Hyndman
3945 Center Street Hyndman, PA 15545
Owned
Lawrenceville
5137 Butler Street Pittsburgh, PA 15201
Owned
Ligonier
211 W. Main Street Ligonier, PA 15658
Owned
McKnight Road
7703 McKnight Road Pittsburgh, PA 15237
Leased (expires 6/30/2030)
Monroeville (Corporate Headquarters)
2640 Monroeville Boulevard Monroeville, PA 15146
Owned
Mount Pleasant
659 W. Main Street Mt Pleasant, PA 15666
Owned
Mt. Troy
2000 Mt. Troy Road Pittsburgh, PA 15212
Owned
Murrysville
4785 Old William Penn Highway Murrysville, PA 15668
Owned
Pittsburgh (downtown)
Lawyers Building 428 Forbes Avenue Pittsburgh, PA 15219
Leased (expires 10/31/2025)
Scottdale
100 Pittsburgh Street Scottdale, PA 15683
Owned
Shaler
900 Mt. Royal Boulevard Pittsburgh, PA 15223
Owned
Shaler Drive-Thru
1100 Mt. Royal Boulevard Pittsburgh, PA 15223
Owned

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. Legal Proceedings
From time to time, the Company is involved as plaintiff or defendant in various legal proceedings arising in the ordinary course of business At December 31, 2020, the Company was not involved in any legal proceedings, the outcome of which management believes would be material to the Company’s financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. Mine Safety Disclosures
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock trades on the NASDAQ market place under the symbol “STND.” As of December 31, 2020, the Company had 4,773,995 shares of common stock outstanding and 543 stockholders of record. Certain shares of the Company are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Equity Compensation Plan Information
Set forth below is information as of December 31, 2020 regarding equity compensation plans that have been approved by stockholders. The Company has no equity based benefit plans that were not approved by stockholders.
Number of securities to be
issued upon exercise of
Number of securities available
Equity compensation plans
outstanding options, warrants,
Weighted average
for future issuance under
approved by stockholders
and rights
exercise price(1)
equity compensation plans
Standard Financial Corp. 2012 Equity Incentive Plan
29,790
$
16.50
101,144
Allegheny Valley Bankcorp, Inc 2011 Stock Incentive Plan
2,083
$
20.02
66,235
(1) Reflects exercise price of options only.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the year ended December 31, 2020.
Issuer Purchases of Equity Securities
The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the fourth quarter of 2020:
Maximum
Total Number of
Number of
Shares Purchased
Shares That May
as Part of
Yet Be
Publically
Purchased Under
Total Number of
Average Price
Announced Plans
the Plans or
Period
Shares Purchased
Paid Per Share
or Programs
Programs (1)
October 1-31, 2020
-
$
-
-
230,000
November 1-30, 2020
-
-
-
230,000
December 1-31, 2020
-
-
-
230,000
Totals
-
$
-
-
(1) On January, 29, 2020, the Company announced that its Board of Directors approved a new stock repurchase program. Pursuant to the new stock repurchase program, the Company may repurchase up to 230,000 shares of its common stock, or approximately 5% of its current outstanding shares. The stock repurchase program may be carried out through open market purchases, block trades, negotiated private transactions or pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission rules. The stock may be repurchased on an ongoing basis and will be subject to the availability of stock, general market conditions, the trading prices of the stock, alternative uses for capital and the Company’s financial performance. On March 19, 2020, the Company temporarily suspended its stock repurchase plan. To date, no shares have been repurchased under this program.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. Selected Financial Data
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section is intended to help potential investors understand the Company’s financial performance through a discussion of the factors affecting its financial condition at December 31, 2020 and December 31, 2019, and the Company’s consolidated results of operations for the year ended December 31, 2020. This section should be read in conjunction with the audited consolidated financial statements and notes that appear elsewhere in this Annual Report.
Overview
The Company provides a wide array of consumer and commercial financial products and services to individuals, families and small to medium-sized 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. In addition to providing traditional banking services, the Bank offers enhanced investment advisory, brokerage, and insurance services.
The COVID-19 pandemic has caused significant volatility and disruption in the financial markets worldwide. The Company has continued to provide assistance to residential and commercial borrowers to help them meet the unexpected financial challenges stemming from the COVID-19 pandemic.
Despite the challenging current market and economic conditions, the Company continues to maintain capital in excess of regulatory requirements.
The primary sources of funds consist of deposit inflows, loan repayments and sales, advances and short-term borrowings from the FHLB and repurchase agreements and maturities, principal repayments and sales of available for sale securities.
Building shareholder value through consistent earnings remains the Company’s primary focus. The Company’s key performance metrics are net income, return on average assets, return on average equity, the efficiency ratio and non-performing assets to total assets.
The primary source of earnings is net interest income. Operational results can be affected by a wide range of factors including general and local economic and competitive conditions, changes in market interest rates and actions of regulatory authorities. The Company continues to focus on managing the interest rate margin and maximizing earnings from sources other than interest income, controlling non-interest expenses and maintaining strong asset quality.
Business Strategy
The Bank’s primary objective is to operate as a profitable, community-oriented financial institution serving customers in its market areas. The Bank is seeking to accomplish this objective by pursuing a business strategy that is designed to maintain core profitability, strong capital and high asset quality. This business strategy includes the following elements:
● Remaining a community-oriented financial institution while continuing to increase the customer base of small and medium-size businesses in the market area. The Bank was established in 1913 and has operated continuously in southwestern Pennsylvania since that date. In 2017, the Bank merged with Allegheny Valley and expanded its footprint in the Pittsburgh market area. Pursuant to the terms of the merger agreement entered into with Dollar in September 2020, the Bank will operate as a separate wholly owned subsidiary of Dollar after the transaction. Both the Company and Dollar have a long history of providing community banking services in their market areas. The Bank is committed to meeting the financial needs of the communities in which it
operates, and is dedicated to providing quality personal service to customers. The Bank provides a broad range of business and consumer financial services from seventeen community banking offices. Relationship banking is the core focus with a strong emphasis to increase small and medium-sized businesses in the market area.
● Increasing commercial real estate and business lending while maintaining conservative loan underwriting standards. The largest increase in the Bank’s loan portfolio balance in recent years has been to the growth in the commercial loan portfolio. Commercial real estate and business loans outstanding totaled approximately $453.6 million, or 61.1% of the gross loan portfolio at December 31, 2020, including $37.7 million of PPP loans. In growing the commercial loan portfolio, the Bank has emphasized maintaining strong asset quality by following conservative loan underwriting guidelines. All commercial loans are underwritten in a central location in the Lawrenceville office to ensure uniformity and consistency in underwriting decisions.
● Expanding the product mix and capacity to sell residential loans in the secondary mortgage market. The Bank has expanded offerings of residential lending products to include more saleable government sponsored loans (e.g. USDA, FHA, PHFA and VA). These loans, which generally have longer terms and fixed rates, can be originated and sold to avoid increasing the Bank’s interest rate risk exposure while establishing customer deposit and other relationships. Notwithstanding the emphasis on sales of residential mortgages, the Bank continues to originate fixed and adjustable rate mortgage loans for its portfolio.
● Emphasizing core deposits by attracting new customers and enhancing existing customer relationships. In an effort to grow the banking franchise, the Bank has enhanced direct marketing efforts to local businesses and consumers and established a stronger culture of cross-selling products to existing customers. In addition, the Bank has worked to enhance treasury management products and services. This line of business provides higher balance, lower cost accounts which use more sophisticated electronic cash management services than the consumer or average small business. A comprehensive strategy has been developed to attract and retain deposits by offering enhanced technology, such as mobile and online banking, remote check deposit, positive pay, People Pay and remote deposit capture, with a consistent emphasis on quality customer service.
● Rationalizing delivery channels as customer preferences evolve. The Bank currently operates seventeen community banking offices. The banking industry is experiencing rapid changes in technology. The Bank is focused on improving customer services and addressing our customer’s needs by using technology. The objective is to ensure an efficient service delivery system that balances the use of technology and personal customer service.
Critical Accounting Policies
The Company considers accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. The Company considers the following to be its critical accounting policies.
Allowance for Loan Losses. The Bank maintains an allowance for loan losses in an amount it believes is appropriate to absorb probable losses inherent in the portfolio at the balance sheet date. Management’s periodic determination of the adequacy of the allowance is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in relevant industries and other pertinent factors such as regulatory guidance and general economic conditions. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an appraisal or other estimate of the value of collateral on impaired loans and estimated losses on pools of homogenous loans based on the balance of loans in each loan category, changes in the inherent credit risk due to portfolio growth, historical loss experience and consideration of current economic trends. Based on management’s estimate of the level of allowance for loan losses required, the Bank records a provision for loan losses to maintain the allowance for loan losses at an appropriate level.
The determination of the allowance for loan losses is based on management’s current judgments about the loan portfolio credit quality and management’s consideration of all known relevant internal and external factors that affect
loan collectability, as of the reporting date. Management cannot predict with certainty the amount of loan charge-offs that will be incurred. Management does not currently determine a range of loss with respect to the allowance for loan losses. In addition, various banking regulatory agencies, as an integral part of their examination processes, periodically review the Bank’s allowance for loan losses. Such agencies may require that the Bank recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.
Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of investment securities, securities are evaluated periodically, and at least quarterly, to determine whether a decline in their value is other than temporary. The Company considers numerous factors when determining whether potential other-than-temporary impairment exists and the period over which a debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of a security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
For debt securities, other-than-temporary impairment is considered to have occurred if (1) the Company intends to sell the security, (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining the present value of expected cash flows, the Company discounts the expected cash flows at the effective interest rate implicit in the security at the date of acquisition or, for debt securities that are beneficial interests in securitized financial assets, at the current rate used to accrete the beneficial interest. In estimating cash flows expected to be collected, the Company uses available information with respect to security prepayment speeds, expected deferral rates and severity, whether subordinated interests, if any, are capable of absorbing estimated losses and the value of any underlying collateral.
Deferred Tax Assets. The Company uses an estimate of future earnings to support the position that the benefit of its deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and the Company’s net income will be reduced.
Goodwill and Other Intangible Assets. The Company must assess goodwill and other intangible assets for impairment. This assessment involves estimating the fair value of its reporting units. If the fair value of the reporting unit is less than the carrying value including goodwill, the Company would be required to take a charge against earnings to write down the assets to the lower value.
Pension Plan. The Bank maintains a noncontributory defined benefit pension plan covering employees whose benefits were frozen effective August 1, 2005. No future benefits are accrued, however the plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank.
Non-GAAP Financial Measures. In addition to the results of operations presented in accordance with generally accepted accounting principles (GAAP), Management uses, and this exhibit contains, certain non-GAAP financial measures. Management believes these non-GAAP financial measures provide information useful to investors in understanding the Company’s underlying operational performance, business and performance trends, and facilitate comparisons with the performance of others in the financial service industry. Although Management believes these non-GAAP financial measures enhance investors’ understanding of the Company’s business and performance, they should not be considered an alternative to GAAP.
Net income, basic earnings per share, diluted earnings per share, return on average assets and return on average equity excluding merger-related expenses are all non-GAAP measures. The following table reconciles net income to net income excluding merger-related expenses and presents basic earnings per share, diluted earnings per share, return on average assets and return on average equity utilizing both net income and net income excluding merger-related expenses for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands, except per share data):
Year Ended December 31,
Noninterest Expense (GAAP)
$
22,604
$
21,625
Merger-related expenses (GAAP)
(1,075)
-
Noninterest expense, excluding merger-related expenses
$
21,529
$
21,625
Net Income (GAAP)
$
6,932
$
8,806
After tax merger-related expenses (GAAP)
1,005
-
Net income, excluding merger-related expenses
$
7,937
$
8,806
Earnings Per Share - Basic
GAAP
$
1.52
$
1.91
Excluding merger-related expenses
$
1.74
n/a
Earnings Per Share - Diluted
GAAP
$
1.50
$
1.90
Excluding merger-related expenses
$
1.71
n/a
Average Assets (GAAP)
$
1,031,734
$
983,042
Return on Average Assets
GAAP
0.67
%
0.90
%
Excluding merger-related expenses
0.77
%
n/a
Average Equity (GAAP)
$
142,984
$
140,189
Return on Average Equity
GAAP
4.85
%
6.28
%
Excluding merger-related expenses
5.55
%
n/a
Balance Sheet Analysis: December 31, 2020 and December 31, 2019
General. The Company’s total assets as of December 31, 2020 increased $67.2 million, or 6.8%, to $1.1 billion from $984.4 million at December 31, 2019. The increase in total assets included an increase in cash and cash equivalents of $18.1 million, or 55.8%, an increase in investment and mortgage-backed securities of $24.1 million, or 15.0%, and an increase in loans receivable of $21.8 million, or 3.1%, for the year ended December 31, 2020.
Cash and Cash Equivalents. Cash and cash equivalents increased $18.1 million, or 55.8%, to $50.5 million at December 31, 2020 from $32.4 million at December 31, 2019. The increase was primarily the result of a $74.8 million, or 10.2%, increase in deposits, partially offset by an increase in loans receivable of $21.8 million, or 3.1%, and an increase in investment and mortgage-backed securities of $24.1 million, or 15.0%, during the period.
Investment Securities. Investment securities available for sale increased $20.1 million, or 28.7%, to $90.0 million at December 31, 2020 from $69.9 million at December 31, 2019. Purchases of investment securities totaled $39.3 million, partially offset by calls and maturities of $19.0 million and sales of $874,000 during the year ended December 31, 2020.
Equity Securities. Equity securities were $2.6 million and $3.0 million at December 31, 2020 and December 31, 2019, respectively. The decrease of $403,000 was a result of changes in the market prices of the community bank stocks held in the investment portfolio due to the current economic environment. There were no purchases or sales of equity securities during the year ended December 31, 2020.
Mortgage-Backed Securities. The Company’s mortgage-backed securities available for sale increased $4.0 million, or 4.4%, to $95.5 at December 31, 2020 from $91.5 million at December 31, 2019. Purchases of mortgage-backed securities totaled $40.5 million, partially offset by repayments of $33.0 million and sales of $3.5 million during the year ended December 31, 2020.
Investment, Equity and Mortgage-Backed Securities Composition. The composition of the investment, equity, and mortgage-backed securities portfolio is summarized in the following table (dollars in thousands). At December 31, 2020 and December 31, 2019, all of the Company’s investment, equity, and mortgage-backed securities were classified as available for sale and recorded at current fair value.
At December 31,
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Municipal obligations
$
78,877
$
80,716
$
57,506
$
58,816
U.S. government and agency obligations
4,000
4,007
8,404
8,489
Corporate bonds
4,975
5,230
2,477
2,579
Mortgage-backed securities:
Ginnie Mae pass-through certificates
20,079
20,495
21,386
21,504
Fannie Mae pass-through certificates
24,051
24,553
20,537
20,795
Freddie Mac pass-through certificates
21,317
21,624
13,986
14,086
Private pass-through certificates
17,528
17,371
21,904
21,603
Collateralized mortgage obligations
11,287
11,482
13,406
13,490
Equity securities
2,686
2,552
2,686
2,955
Total securities
$
184,800
$
188,030
$
162,292
$
164,317
During the year ended December 31, 2020, $79.9 million of securities purchased were partially offset by $4.4 million of securities sales and $52.0 million of securities calls and repayments. For the year ended December 31, 2020, there was a net realized gain of $23,000 on the sale of securities. During the year ended December 31, 2019, $44.2 million of securities purchased were partially offset by $7.6 million of securities sales and $25.6 million of securities calls and repayments. For the year ended December 31, 2019, there was a net realized loss of $1,000 on the sale of securities.
At December 31, 2020 and December 31, 2019, the Company held 39 securities and 42 securities in unrealized loss positions of $414,000 and $471,000, respectively. 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 and the Company believes the collection of the investment and related interest is probable. Based on this analysis, the Company considers all of the unrealized losses to be temporary impairment losses.
Investment, Equity and Mortgage-Backed Securities Maturities and Yields. The maturities and weighted average yields of the investment, equity and mortgage-backed securities portfolio at December 31, 2020 are summarized in the following table (dollars in thousands). Maturities are based on the final contractual payment dates, and do not reflect the
impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax- equivalent basis.
Due 1 Year or Less
Due 1 - 5 Years
Due 5 - 10 Years
Due Over 10 Years
Total Securities
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Municipal obligations
$
4,657
5.14
%
$
1,640
2.74
%
$
18,571
2.66
%
$
54,009
2.38
%
$
78,877
2.62
%
U.S. government and agency obligations
-
-
1,000
0.75
%
3,000
1.08
%
-
-
4,000
1.00
%
Corporate bonds
1,000
3.00
%
3,975
2.84
%
-
-
-
-
4,975
2.87
%
Mortgage-backed securities:
Ginnie Mae pass through certificates
-
-
-
-
-
-
20,079
1.31
%
20,079
1.31
%
Fannie Mae pass through certificates
-
-
-
-
3.11
%
23,224
1.50
%
24,051
1.56
%
Freddie Mac pass through certificates
-
-
-
-
-
-
21,317
1.58
%
21,317
1.58
%
Collateralized mortgage obligations
-
-
-
-
-
-
11,287
0.76
%
11,287
0.76
%
Private pass through certificates
-
-
1.70
%
3,727
1.68
%
13,083
1.15
%
17,528
1.29
%
Equity securities
2,686
3.60
%
-
-
-
-
-
-
2,686
3.60
%
Total
$
8,343
4.39
%
$
7,333
2.42
%
$
26,125
2.35
%
$
142,999
1.73
%
$
184,800
1.97
%
Loans. At December 31, 2020, net loans were $734.8 million, or 69.9% of total assets, compared to $713.0 million, or 72.4% of total assets at December 31, 2019. The $21.8 million, or 3.1%, increase in total loans was due in large part to a $51.8 million, or 16.0%, increase in commercial real estate and construction loans and a $30.4 million, or 64.1%, increase in commercial business loans. The increase in commercial business loans was primarily the result of funded SBA PPP loans totaling $42.4 million partially offset by loan repayments. These increases were partially offset by decreases in the one-to-four family residential and construction, home equity loans and lines of credit, and other loan segments of $42.0 million or 17.9%, $15.4 million or 13.8%, and $66,000 or 11.6%, respectively. The decrease in residential and construction loans and home equity loans and lines of credit were the result of residential loan sales and loan repayments during the period.
Loan Portfolio Composition. The following table summarizes the composition of the loan portfolio at the dates indicated, excluding loans held for sale (dollars in thousands):
December 31,
One-to-four family residential and construction
$
192,402
$
234,421
$
253,913
$
261,715
$
174,740
Commercial real estate and construction
375,621
323,843
308,775
300,997
116,691
Home equity loans and lines of credit
96,116
111,499
123,373
130,915
77,913
Commercial business
77,950
47,514
46,196
56,122
15,505
Other
1,139
1,413
Total loans
$
742,593
$
717,847
$
733,396
$
751,162
$
385,369
Loan Portfolio Maturities. The following table summarizes the maturity of the loan portfolio at December 31, 2020 (dollars in thousands). Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
Due Under
Due 1 - 5
Due Over
1 Year
Years
5 Years
One-to-four family residential and construction
$
1,100
$
5,745
$
186,841
Commercial real estate and construction
19,534
43,495
312,040
Home equity loans and lines of credit
3,472
12,833
79,935
Commercial business
11,461
47,903
17,729
Other
-
Total loans
$
35,744
$
110,304
$
596,545
Fixed and Adjustable Rate Loans. The following table summarizes the maturity of the Bank’s fixed- and adjustable-rate loans at December 31, 2020 (dollars in thousands):
Due Under
Due 1 - 5
Due Over
1 Year
Years
5 Years
Fixed
$
6,755
$
87,020
$
211,010
Adjustable
28,989
23,284
385,535
Total loans
$
35,744
$
110,304
$
596,545
Bank Owned Life Insurance. The Company invests in bank owned life insurance to provide a funding source for benefit plan obligations. Bank owned life insurance also generally provides noninterest income that is non-taxable. Bank owned life insurance increased $1.6 million, or 6.7%, to $24.9 million at December 31, 2020, from $23.4 million at December 31, 2019.
Goodwill. Goodwill represents the excess of the purchase price over the cost of net assets purchased. Goodwill was $25.8 million at December 31, 2020 and December 31, 2019.
Deposits. The Company accepts deposits primarily from the areas in which the Bank’s 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 $74.7 million, or 10.2%, to $809.2 million at December 31, 2020 from $734.5 million at December 31, 2019. The increase resulted from a $113.7 million, or 23.2%, increase in demand and savings accounts partially offset by a $39.0 million, or 15.9%, decrease in time deposits during the year ended December 31, 2020. The increase in demand and savings accounts resulted from increases in both business and consumer products. The increases were primarily the result of inflows from several sources including PPP loan proceeds, government stimulus and maturing time deposits as well as reductions in business and consumer spending during the period. Non-interest-bearing checking accounts, savings accounts, interest-bearing checking accounts and money market accounts increased $49.2 million or 38.7%, $29.1 million or 20.2%, $18.4 million or 16.6%, and $17.0 million or 16.0%, respectively.
The following table summarizes the average balance and weighted average rates of total deposits, by account type, at the dates indicated (dollars in thousands):
Year Ended
Year Ended
December 31, 2020
December 31, 2019
Average
Yield /
Average
Yield/
Balance
Rate
Balance
Rate
Savings accounts
$
154,184
0.12
%
$
142,116
0.16
%
Time Deposits
228,065
1.94
%
246,553
2.13
%
Money market accounts
117,497
0.38
%
106,001
1.16
%
Demand and NOW accounts
123,663
0.18
%
105,545
0.29
%
Total deposits
$
623,409
0.85
%
$
600,215
1.17
%
At December 31, 2020, the scheduled maturities of time deposits in denominations of $100,000 or more was $99.1 million. The following table summarizes the maturity of those certificates at December 31, 2020 (dollars in thousands):
Three months or less
$
17,442
Over three to six months
8,576
Over six to twelve months
19,044
Over twelve months
54,081
Total
$
99,143
Borrowings. Borrowed funds, which includes short and long-term borrowings and securities sold under agreements to repurchase, decreased by $9.9 million, or 9.6%, to $93.0 million at December 31, 2020 from $102.8 million at December 31, 2019. The decrease was primarily due to a $9.6 million, or 10.0%, decrease in long-term borrowings resulting from $22.2 million in maturities and an additional $12.4 million in principal repayments partially offset by new FHLB advances entered into the period totaling $25.0 million. Financing lease liabilities, which are also included in long-term borrowings, were $3.0 million at December 31, 2020 and $3.1 million at December 31, 2019. There were no short-term borrowings at December 31, 2020 or December 31, 2019.
Total Stockholders’ Equity. Stockholders’ equity increased $4.1 million, or 2.9%, to $146.0 million at December 31, 2020 from $141.8 million at December 31, 2019. The increase was the result of net income of $6.9 million earned during the year ended December 31, 2020 as well as a $1.1 million increase in accumulated other comprehensive income resulting from fair value adjustments on available for sale debt securities during the period. These increases were partially offset by $4.0 million in dividends paid during the year ended December 31, 2020. During the year ended December 31, 2020, 43,700 shares of the Company’s outstanding stock were repurchased in accordance with the Company’s stock repurchase program. On March 19, 2020, the Company temporarily suspended its stock repurchase plan. Additionally, 215,910 shares were exercised and 93,922 shares were repurchased in conjunction with stock options exercised.
Average Balance and Yields
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years and the periods indicated (dollars in thousands). No tax-equivalent yield adjustments were made, as the effect thereof was not material. 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.
For the Year Ended December 31,
Average
Average
Outstanding
Outstanding
Balance
Interest
Yield/ Rate
Balance
Interest
Yield/ Rate
Interest-earning assets:
Loans
$
737,939
$
30,964
4.15
%
$
731,098
$
32,487
4.41
%
Investment and mortgage-backed securities
166,090
3,710
2.23
%
160,445
4,227
2.63
%
FHLB and other restricted stock
8,443
5.98
%
7,680
8.05
%
Interest-earning deposits
50,852
0.26
%
17,906
2.08
%
Total interest-earning assets
963,324
35,315
3.63
%
917,129
37,704
4.08
%
Noninterest-earning assets
68,410
65,913
Total assets
$
1,031,734
$
983,042
Interest-bearing liabilities:
Savings accounts
$
154,184
0.12
%
142,116
0.16
%
Time Deposits
228,065
4,437
1.94
%
246,553
5,242
2.13
%
Money market accounts
117,497
0.38
%
106,001
1,227
1.16
%
Demand and NOW accounts
123,663
0.18
%
105,545
0.29
%
Total interest-bearing deposits
623,409
5,283
0.85
%
600,215
6,991
1.17
%
Borrowings
101,085
2,091
2.07
%
103,414
2,254
2.18
%
Securities sold under agreements to repurchase
6,123
0.21
%
3,488
0.48
%
Total interest-bearing liabilities
730,617
7,387
1.01
%
707,117
9,262
1.31
%
Noninterest-bearing deposits
154,245
132,510
Noninterest-bearing liabilities
3,888
3,226
Total liabilities
888,750
842,853
Stockholders' equity
142,984
140,189
Total liabilities and stockholders' equity
$
1,031,734
$
983,042
Net interest income
$
27,928
$
28,442
Net interest rate spread (1)
2.62
%
2.77
%
Net interest-earning assets (2)
$
232,707
$
210,012
Net interest margin (3)
2.89
%
3.10
%
Average interest-earning assets to interest-bearing liabilities
131.85
%
129.77
%
(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.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the Company’s net interest income for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
Year Ended December 31, 2020
vs.
Year Ended December 31, 2019
Increase (decrease) due to
Volume
Rate
Total
Interest-earning assets:
Loans receivable
$
$
(1,825)
$
(1,523)
Investment and mortgage-backed securities
(662)
(517)
FHLB and other restricted stock
(169)
(112)
Interest-earning deposits
(516)
(237)
Total interest-earning assets
(3,172)
(2,389)
Interest-bearing liabilities:
Savings accounts
(58)
(40)
Time Deposits
(408)
(397)
(805)
Money market accounts
(905)
(784)
Demand and NOW accounts
(125)
(79)
Borrowings
(50)
(113)
(163)
Securities sold under agreements to repurchase
(13)
(4)
Total interest-bearing liabilities
(264)
(1,611)
(1,875)
Change in net interest income
$
1,047
$
(1,561)
$
(514)
Comparison of Operating Results for the Years Ended December 31, 2020 and December 31, 2019
General. Net income for the year ended December 31, 2020 was $6.9 million compared to $8.8 million for the year ended December 31, 2019, a decrease of $1.9 million, or 21.3%. Merger-related expenses during the period were $1.1 million ($1.0 million after tax) related to the pending merger with Dollar. Excluding the after tax impact of the merger-related expenses, net income would have been $7.9 million. Earnings per share for the current period was $1.52 for basic and $1.50 for fully diluted ($1.74 and $1.71, respectively, excluding the merger-related expenses) compared to $1.91 for basic and $1.90 for fully diluted for the prior year.
The Company’s annualized return on average assets (ROA) and return on average equity (ROE) for the year ended December 31, 2020 were 0.67% and 4.85%, respectively, (0.77% and 5.55%, respectively, excluding the merger-related expenses) compared to 0.90% and 6.28%, respectively, for the year ended December 31, 2019.
Net Interest Income. Net interest income for the year ended December 31, 2020 was $27.9 million, a decrease of 514,000, or 1.8%, compared to $28.4 million for the year ended December 31, 2019. The decrease was primarily the result of an decrease in the yield on interest-earning assets partially offset by a decrease in the cost of interest-bearing liabilities and an increase in the balance of interest-earning assets. The net interest rate spread and net interest margin were 2.62% and 2.89%, respectively, for the year ended December 31, 2020, compared to 2.77% and 3.10%, respectively, for the year ended December 31, 2019.
Interest and Dividend Income. Total interest and dividend income decreased by $2.4 million, or 6.3%, to $35.3 million for the year ended December 31, 2020 compared to $37.7 million for the year ended December 31, 2019. The decrease was primarily the result of a 45 basis point decrease in the average yield on interest-earning assets to 3.63% due to lower short-term interest rates for much of the year ended December 31, 2020 from 4.08% for the year ended December 31, 2019. The decrease in total interest and dividend income resulting from the decrease in the average yield was partially offset by an increase in the average balance of interest-earning assets of $46.2 million, or 5.0%, to $963.3 million for the year ended December 31, 2020 compared to the prior year.
Interest income on loans decreased $1.5 million, or 4.7%, to $31.0 million for the year ended December 31, 2020 compared to $32.5 million for the year ended December 31, 2019. The decrease was primarily the result of a 26 basis point decrease in the average yield on loans receivable to 4.15% for the year ended December 31, 2020 from 4.41% for the year ended December 31, 2019. The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of loans receivable of $6.8 million , or 0.9%, to $737.9 million for the year ended December 31, 2020 compared to the prior year.
Interest income on investment and mortgage-backed securities decreased by $517,000, or 12.2%, to $3.7 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019. The decrease was primarily the result of a 40 basis point decrease in the average yield earned on investment and mortgage-backed securities to 2.23% for the year ended December 31, 2020 from 2.63% for the year ended December 31, 2019. The decrease in the average yield was the result of purchases made during the year at a lower rate than those being called and sold due to the declining rate environment. The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of investment and mortgage-backed securities of $5.6 million, or 3.5%, to $166.1 million for the year ended December 31, 2020 compared to the prior year.
Interest income on FHLB stock and other restricted stock decreased $112,000 or 18.1% to $506,000 for the year ended December 31, 2020 compared to $618,000 for the year ended December 31, 2019. The decrease was primarily the result of a 207 basis point decrease in the average yield to 5.98% for the year ended December 31, 2020 from 8.05% for the year ended December 31, 2019. The FHLB decreased the dividend yield on both activity and membership stock as of the first quarter of 2020. The true up that was required for the dividend received was booked in the second quarter of 2020. The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of FHLB stock and other restricted stock of $763,000, or 9.9%, to $8.4 million for the year ended December 31, 2020 compared to the prior year. The overall increase in the average balance of FHLB stock required was due to an increase in the outstanding balance of MPF loans during the year.
Interest income on interest-earning deposits decreased $237,000 or 63.7% to $135,000 for the year ended December 31, 2020 compared to $372,000 for the year ended December 31, 2019. The decrease was primarily the result of a 182 basis point decrease in the average yield on interest-earning deposits to 0.26% due to lower short-term interest rates for much of the year ended December 31, 2020 from 2.08% for the year ended December 31, 2019. The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of interest-earning deposits of $32.9 million, or 184.0%, to $50.9 million for the year ended December 31, 2020 compared to the prior year.
Interest Expense. Total interest expense decreased by $1.9 million, or 20.2%, to $7.4 million for the year ended December 31, 2020 from $9.3 million for the year ended December 31, 2019. The decrease was primarily the result of a 30 basis point decrease in the average cost of interest-bearing liabilities to 1.01% due to lower short-term interest rates for much of the year ended December 31, 2020 from 1.31% for the prior year.
Interest expense on deposits decreased by $1.7 million, or 24.4%, to $5.3 million for the year ended December 31, 2020 from $7.0 million for the year ended December 31, 2019. The decrease was primarily the result of a 32 basis point decrease in the cost of interest-bearing deposits to 0.85% due to lower short-term interest rates for much of the year ended December 31, 2020 from 1.17% for the year ended December 31, 2019. Additionally, the average balance of time deposits decreased $18.5 million, or 7.5%, for the year ended December 31, 2020 compared to the prior year. Partially offsetting those decreases was an increase in the average balance of demand and NOW deposit accounts, savings accounts, and money market accounts of $18.2 million or 17.2%, $12.1 million or 8.5%, and $11.5 million or 10.9%, respectively, for the year ended December 31, 2020 compared to the prior year.
Interest expense on borrowed funds decreased $167,000, or 7.4%, to $2.1 million for the year ended December 31, 2020 from $2.3 million for the year ended December 31, 2019. The decrease was primarily the result of an 11 basis point decrease in the average cost of borrowings to 2.07% for the year ended December 31, 2020 from 2.18% for year ended December 31, 2019. The decrease in the average cost of borrowed funds was primarily the result of new FHLB advances being entered into at rates lower than the average rate on existing borrowings as well as maturities during the period.
Additionally, there was a decrease in the average balance of borrowings of $2.3 million, or 2.3%, to $101.1 million for the year ended December 31, 2020 compared to the prior year.
Provision for Loan Losses. Provision for loan losses increased $2.3 million, or 321.8%, to $3.1 million for the year ended December 31, 2020, compared to $725,000 for the year ended December 31, 2019. In management’s judgement, the allowance for loan losses is at a sufficient level that reflects the losses inherent in the Bank’s loan portfolio relative to loan mix, economic conditions and historical loss experience. The increased provision for loan losses for the year ended December 31, 2020 was impacted by the increasing concern over the pandemic’s impact on the local, regional and national economy as well as the hotel sector where it was determined necessary to build reserves. See “Non-Performing and Problem Assets” for additional information.
Noninterest Income. Noninterest income increased $559,000, or 11.1%, to $5.6 million for the year ended December 31, 2020 compared to $5.1 million for the year ended December 31, 2019. The increase was primarily the result of a $1.5 million, or 533.0%, increase in loan sales gains and referral fees for the year ended December 31, 2020. The increase in loan sale gains and referral fees was primarily the result of a historically low interest rate environment which caused a significant refinance market. The increase in noninterest income resulting from the increase in loan sale gains and referral fees was partially offset by a change in net equity securities fair value adjustments from a gain of $230,000 for the year ended December 31, 2020 to a loss of $403,000 for the year ended December 31, 2020 related to fluctuations in the market prices of the community bank stocks held in the investment portfolio due to the current economic environment. Additionally, there was a $195,000, or 71.7%, decrease in other income.
Noninterest Expense. Noninterest expenses totaled $22.6 million for the year ended December 31, 2020, compared to $21.6 million for the year ended December 31, 2019. Excluding merger-related expenses of $1.1 million, noninterest expenses were $21.6 million for both twelve month periods. Compensation expenses increased $174,000, or 1.4%, which were partially offset by a decrease in core deposit intangible amortization of $157,000, or 25.0%, during the year ended December 31, 2020 compared to the prior year.
Income Tax Expense. The Company recorded a provision for income tax of $945,000 for the year ended December 31, 2020 compared to $2.3 million for the year ended December 31, 2019. The effective tax rate was 12.0% for the year ended December 31, 2020 and 21.0% for the year ended December 31, 2019. The decrease in the effective tax rate was primarily the result of permanent deductions related to both non-taxable interest income and the exercise of a number of stock options during the year.
Non-Performing and Problem Assets
When a residential mortgage loan, home equity loan or line of credit or consumer loan is past due, the Company sends a late notice and contacts the borrower to inquire as to why the loan is past due. When a loan is 30 days or more past due, a second late notice is mailed and additional personal, direct contact with the borrower is attempted to determine the reason for the delinquency and establish the procedures by which the borrower will bring the loan current. When the loan is 45 days past due, the Company explores the customer’s situation and repayment options and inspects the collateral. In addition, when a loan reaches 90 days past due, management determines and recommends to the Loan Committee whether to initiate foreclosure proceedings, which will be initiated by counsel if the loan is not brought current. Procedures for avoiding foreclosure can include restructuring the loan in a manner that provides concessions to the borrower to facilitate payment.
Commercial business loans and commercial real estate loans are generally handled in the same manner as the loans discussed above. Additionally, when a loan is 30 days past due, the borrower is contacted, the property is visually inspected and inquiries are made with the principals as to the status of the loan and what actions are being implemented to bring the loan current. Depending on the type of loan, the borrower’s cash flow statements, internal financial statements, tax returns, rent rolls, new or updated independent appraisals, online databases and other relevant information in Bank and third-party loan reviews are analyzed to help determine a course of action. In addition, legal counsel is consulted and an approach for resolution is determined and aggressively pursued.
Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and interest is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. The loan may be returned to accrual status once it is brought current, six months of on-time payments have been received and full payment of principal and interest is expected.
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, 90 days or more past due or represents a troubled debt restructuring. 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 trouble debt restructuring (“TDR”).
The table below sets forth the amounts and categories of non-performing assets at the dates indicated (dollars in thousands). As of December 31, 2020 and December 31, 2019, there were two loans modified as TDRs. At December 31, 2018, 2017, and 2016, there were no TDRs.
December 31,
Non-accrual loans:
One-to-four family residential and construction
$
1,911
$
2,067
Commercial real estate and construction
2,196
Home equity loans and lines of credit
Commercial business
Other
Total nonaccrual loans
4,965
2,716
Loans past due 90 days and still accruing
-
-
Total non-performing loans
4,965
2,716
Foreclosed real estate
Total non-performing assets
$
5,453
$
3,120
Ratios:
Non-accrual loans to total loans
0.67
%
0.38
%
Non-performing loans to total loans
0.67
%
0.38
%
Non-performing assets to total assets
0.52
%
0.32
%
Allowance for loan losses to non-performing loans
157.93
%
179.75
%
Loans in process of foreclosure totaled $1.7 million at December 31, 2020.
Foreclosed Real Estate. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate on the Consolidated Statements of Financial Condition. When property is acquired, it is recorded at estimated fair value at the date of foreclosure less the cost to sell, establishing a new cost basis. Estimated fair value generally represents the sales price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs and declines in estimated fair market value result
in charges to expense after acquisition. At December 31, 2020, 2019, 2018, 2017, and 2016, foreclosed real estate totaled $488,000, $404,000, $486,000, $419,000, and $251,000, respectively. Foreclosed real estate at December 31, 2020 consisted of three residential properties.
Classification of Assets. 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 90 days or more 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.
The following table sets forth the amounts of classified and criticized assets (classified assets plus loans designated as special mention) at December 31, 2020 (dollars in thousands):
Classified assets:
Substandard
$
6,409
Doubtful
-
Loss
-
Total classified assets
6,409
Special mention
10,490
Total criticized assets
$
16,899
Allowance for Loan Losses
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 and include 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; effects of the COVID-19 pandemic; 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. Any future recoveries are credited back to the ALL. Management utilizes an internally developed spreadsheet to track and apply the various components of the allowance.
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.
The table below presents information regarding the activity in the allowance for loan losses for each of the periods presented (dollars in thousands):
For the Year Ended December 31,
Balance at beginning of year
$
4,882
$
4,414
$
4,127
$
3,837
$
3,800
Provision charged to operating expenses
3,058
Recoveries of loans previously charged-off:
One-to-four family residential and construction
-
Commercial real estate and construction
Home equity loans and lines of credit
-
-
-
Commercial business
-
-
Other
-
-
Total recoveries
Loans charged-off:
One-to-four family residential and construction
(24)
-
-
(185)
-
Commercial real estate and construction
-
(187)
(80)
-
-
Home equity loans and lines of credit
(16)
(2)
-
(51)
-
Commercial business
(70)
(37)
(244)
(1)
-
Other
(4)
(41)
(48)
(29)
(4)
Total charge-offs
(114)
(267)
(372)
(266)
(4)
Net charge-offs
(99)
(257)
(285)
(227)
(3)
Balance at end of year
$
7,841
$
4,882
$
4,414
$
4,127
$
3,837
Net charge-offs to average loans outstanding
0.01
%
0.04
%
0.04
%
0.03
%
-
%
Allowance for loan losses to total loans at year-end
1.06
%
0.68
%
0.60
%
0.55
%
1.00
%
The allowance for loan losses at December 31, 2020 represented 1.06% of total loans, compared to 0.68% at December 31, 2019.
During the year ended December 31, 2020, there was (1) a decrease in the provision for both the one-to four family residential and construction and the home equity loans and lines of credit loan classes primarily due to decreases in the loan balances in these categories as well as decreases in the qualitative factors related to changes in loan balances, lending policies and the experience, depth and ability of management partially offset by increases in the economic qualitative factor as a result of the COVID-19 pandemic and charge-offs incurred during the year; (2) an increase in the
provision for the commercial real estate and construction loan class primarily due to increases in the loan balances in this category as well as the addition of a new qualitative factor for the COVID-19 pandemic, additional reserves required for the hotel sector and increases in the qualitative factors related to changes in volume and severity of past due, nonaccrual and classified loans, loan concentrations and internal loan review partially offset by decreases in the qualitative factors related to changes in lending policies, the experience, depth and ability of management and other external factors; and (3) a decrease in the allowance for the commercial business loan class primarily due to decreases in the qualitative factors related to changes in loan balances, lending policies and the experience, depth and ability of management as well as charge-offs incurred during the year partially offset by the addition of a new qualitative factor due to the COVID-19 pandemic and increases in the qualitative factors related to balance changes in loan concentrations and internal loan review. The allowance for other loan segment remained consistent with the prior year.
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated (dollars in thousands). The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
December 31, 2020
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
Percent of
Percent of
Percent of
Percent of
Percent of
Loans in
Loans in
Loans in
Loans in
Loans in
Each
Each
Each
Each
Each
Category to
Category to
Category to
Category to
Category to
Amount
Total
Amount
Total
Amount
Total
Amount
Total
Amount
Total
One-to-four family residential and construction
$
2.6
%
$
32.7
%
$
1,051
34.6
%
$
1,384
34.8
%
$
1,280
45.4
%
Commercial real estate and construction
6,990
89.1
%
3,313
45.1
%
2,761
42.1
%
2,003
40.1
%
1,787
30.3
%
Home equity loans and lines of credit
2.4
%
15.5
%
16.8
%
17.4
%
20.2
%
Commercial business
5.8
%
6.6
%
6.3
%
7.5
%
4.0
%
Other
0.0
%
0.1
%
0.2
%
0.2
%
0.1
%
Total
$
7,841
100.0
%
$
4,882
100.0
%
$
4,414
100.0
%
$
4,127
100.0
%
$
3,837
100.0
%
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, advances and short-term borrowings from the FHLB, repurchase agreements and maturities, principal repayments and sales 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 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 its customers as well as unanticipated contingencies. Management believes there are sufficient sources of liquidity to satisfy short- and long-term liquidity needs as of December 31, 2020.
Management regularly monitors and adjusts the investments in liquid assets based upon an assessment of:
● expected loan demand;
● expected deposit flows and borrowing maturities;
● yields available on interest-earning deposits and securities; and
● the objectives of the asset/liability management program.
The most liquid assets are cash and cash equivalents. The level of these assets is dependent on the operating, financing, lending and investing activities during any given period. At December 31, 2020, cash and cash equivalents totaled $50.5 million. Cash flows are derived from operating activities, investing activities and financing activities as reported in the Company’s Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
At December 31, 2020, there were $126.6 million in loan commitments outstanding of which $57.1 million were for commercial loans and lines, $43.8 million were for one-to-four-family and construction loans and $25.7 million were for standby letters of credit and other commitments including consumer overdraft lines. Certificates of deposit due within one year of December 31, 2020 totaled $84.9 million, or 10.5% 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 FHLB advances and short-term borrowings. The Company believes, however, based on historical experience and current market interest rates, it will retain upon maturity a large portion of certificates of deposit with maturities of one year or less.
The Company’s primary investing activities include originating loans and purchasing investment securities. During the year ended December 31, 2020, the Bank had a net increase in loans of $21.8 million due in large part to a $51.8 million increase in commercial real estate loans and $42.4 million SBA PPP loans that were funded during the period partially offset by prepayments and residential loan sales. During the year ended December 31, 2019, the Bank had a net decrease in loans of $16.0 million. Purchases of investment securities totaled $79.9 million and $44.2 million for the years ended December 31, 2020 and 2019, respectively.
Financing activities generally consist of activity in deposit accounts and FHLB advances and short-term borrowings. The Company experienced net increases in deposits of $74.8 million and $16.5 million during the years ended December 31, 2020 and December 31, 2019, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB, which provides an additional source of funds. There were net decreases in FHLB advances of $9.6 million and $9.0 million for the years ended December 31, 2020 and December 31, 2019, respectively. There were no FHLB short term borrowings for the year ended December 31, 2020 and a net decrease of $4.5 million for the year ended December 31, 2019. At December 31, 2020, the Bank had the ability to borrow up to an additional $315.2 million from the FHLB.
The Company is committed to serving both its individual and commercial customers through these difficult and unprecedented times. In light of the COVID-19 pandemic, the Company has increased the monitoring of its current liquidity and anticipated funding needs. Additionally, the Company has been proactive in positioning itself with additional liquidity in anticipation of the need to assist customers. Finally, the Company has successfully tested all of its contingency funding sources.
The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2019, the Bank exceeded all regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. See “Item 1 Business-Supervision and Regulation - Banking Regulation - Capital Requirements” and Note 12 of the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
In the normal course of business, the Company extends credit in the form of various financial instruments with off-balance-sheet risks. These off-balance sheet instruments involve, to various degrees, elements of credit and interest rate risk not reported in the statement of financial condition. The Company uses the same credit policies in making commitments for off-balance sheet financial instruments as it does for on-balance sheet instruments. Collateral is generally required to support financial instruments with credit risk and it typically includes real estate property. The Company grants loan commitments at prevailing market rates of interest. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any conditions established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contract amount of the financial instrument and is limited by subjecting them to credit approval and monitoring procedures. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Sometimes commitments expire without being drawn upon. Therefore, the total contractual amounts presented do not necessarily represent future funding requirements. At December 31, 2020, the Company had unused commitments totaling $126.6 million.
The Company does not currently participate in any derivative activity for the purpose of managing interest rate sensitivity or risks associated with lending, deposit taking or borrowing activities.
Impact of Inflation and Changing Prices
The Company’s consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, the Company’s assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Management of Market Risk
General. The Company’s most significant form of market risk is interest rate risk because, as a financial institution, the majority of the assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of the Company’s operations is to manage interest rate risk and limit the exposure of net interest income to changes in market interest rates. The Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in assets and liabilities, for determining the level of risk that is appropriate, given the business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Historically, the Bank operated as a traditional savings bank. Therefore, the majority of assets consist of longer-term, fixed rate residential mortgage loans and mortgage backed securities, which were funded primarily with checking and savings accounts and short-term borrowings. In an effort to improve earnings and to decrease exposure to interest rate risk, the Bank generally sells fixed rate residential loans with terms over 15 years. In addition, the Bank has shifted the focus to originating more commercial real estate loans, which generally have shorter maturities than one- to four-family residential mortgage loans, and are usually originated with adjustable interest rates.
In addition to the above strategies with respect to lending activities, the Company has used the following strategies to reduce interest rate risk:
● increasing personal and business checking accounts, which are less rate-sensitive than certificates of deposit and which provide the Company with a stable, low-cost source of funds;
● repaying short-term borrowings; and
● maintaining relatively high levels of capital.
The Company has not conducted hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
In addition, changes in interest rates can affect the fair values of the Company’s financial instruments. During the years ended December 31, 2020 and 2019, changes in market interest rates were the primary reason for the fluctuations in the fair values of the Company’s loans, deposits and FHLB advances. For additional information, see Note 17 to the Notes to the Company’s Consolidated Financial Statements.
Net Portfolio Value. The table below sets forth, as of December 31, 2020, the estimated changes in the net portfolio value (“NPV”) that would result from the designated instantaneous changes in the interest rate yield curve (dollars in thousands). The NPV is the difference between the present value of an institution’s assets and liabilities. The institution’s NPV would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the model estimated the economic value of each type of asset, liability and off-balance sheet contract using the current interest rate yield curve with instantaneous increases or decreases of 100 to 300 basis points in 100 basis point increments. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared.
Net Portfolio Value(2)
Net Interest Income
Estimated Increase
Estimated Increase
(Decrease)
(Decrease)
Estimated Net
Estimated
Interest
Change in Interest Rates (basis points)
NPV(1)
Amount
Percent
Income(3)
Amount
Percent
December 31, 2020
+300
$
159,884
$
9,759
6.50
%
$
29,757
$
1,766
6.30
%
+200
$
161,612
$
11,487
7.65
%
$
29,429
$
1,438
5.10
%
+100
$
159,181
$
9,056
6.03
%
$
29,040
$
1,049
3.70
%
$
150,125
$
-
-
%
$
27,991
$
-
-
%
$
126,638
$
(23,486)
(15.64)
%
$
27,339
$
(652)
(2.30)
%
(1)
Assumes an instantaneous and parallel shift in interest rates at all maturities.
(2)
NPV, also referred to as economic value of equity, is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Assumes a gradual change in interest rates over a one year period at all maturities.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs, or loan repayments and deposit decay, respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of the Company’s interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Standard AVB Financial Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Standard AVB Financial Corp. and subsidiaries (the “Company”) as of December 31, 2020 and 2019; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Basis for Opinion (Continued)
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses (ALL) - Qualitative Factors
Description of the Matter
The Company’s loan portfolio totaled $742.6 million as of December 31, 2020, and the associated ALL was $7.8 million. As discussed in Note 5 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.
We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.
Furthermore, concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause borrowers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained loan repayment shortfalls, significant loan delinquencies, foreclosures, declines in collateral values, and credit losses could result in, and significantly impact, the overall adequacy of the ALL. The extent of COVID-19’s effects on business, operations, or the global economy as a whole is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, which increases the degree of subjectivity involved in estimating the related qualitative factors within the ALL.
Allowance for Loan Losses (ALL) - Qualitative Factors (Continued)
How We Addressed the Matter in Our Audit
We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.
To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments, including the potential effect of COVID-19 on the adjustments.
Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data, third-party macroeconomic data, and considered the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the COVID-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors.
We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.
We have served as the Company’s auditor since 2008.
Cranberry Township, Pennsylvania
March 31, 2021
Standard AVB Financial Corp.
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
December 31,
December 31,
ASSETS
Cash on hand and due from banks
$
3,543
$
3,396
Interest-earning deposits in other institutions
46,970
29,031
Cash and Cash Equivalents
50,513
32,427
Investment securities available for sale, at fair value
89,953
69,884
Equity securities, at fair value
2,552
2,955
Mortgage-backed securities available for sale, at fair value
95,525
91,478
Certificate of deposit
Federal Home Loan Bank and other restricted stock, at cost
9,008
7,486
Loans receivable, net of allowance for loan losses of $7,841 and $4,882
734,752
712,965
Loans held for sale
Foreclosed real estate
Office properties and equipment, net
9,357
9,930
Bank-owned life insurance
24,934
23,374
Goodwill
25,836
25,836
Core deposit intangible
1,411
1,881
Accrued interest receivable and other assets
6,639
5,145
TOTAL ASSETS
$
1,051,588
$
984,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Demand and savings accounts
$
603,077
$
489,339
Time deposits
206,163
245,114
Total Deposits
809,240
734,453
Long-term borrowings
89,382
99,098
Securities sold under agreements to repurchase
3,597
3,740
Accrued interest payable and other liabilities
3,418
5,248
TOTAL LIABILITIES
905,637
842,539
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, 4,773,995 and 4,689,354 shares issued and outstanding, respectively
Additional paid-in-capital
72,137
72,155
Retained earnings
72,938
70,037
Unearned Employee Stock Ownership Plan (ESOP) shares
(1,379)
(1,533)
Accumulated other comprehensive income
2,207
1,142
TOTAL STOCKHOLDERS’ EQUITY
145,951
141,848
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,051,588
$
984,387
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year Ended December 31,
Interest and Dividend Income
Loans, including fees
$
30,964
$
32,487
Mortgage-backed securities
1,482
2,183
Investments:
Taxable
Tax-exempt
1,787
1,580
Federal Home Loan Bank and other restricted stock
Interest-earning deposits and federal funds sold
Total Interest and Dividend Income
35,315
37,704
Interest Expense
Deposits
5,283
6,991
Federal Home Loan Bank short-term borrowings
-
Long-term borrowings
2,091
2,209
Securities sold under agreements to repurchase
Total Interest Expense
7,387
9,262
Net Interest Income
27,928
28,442
Provision for Loan Losses
3,058
Net Interest Income after Provision for Loan Losses
24,870
27,717
Noninterest Income
Service charges
2,948
3,046
Earnings on bank-owned life insurance
Net gains (losses) on sales of securities
(1)
Net equity securities fair value adjustment (losses) gains
(403)
Net loan sale gains and referral fees
1,728
Investment management fees
Other income
Total Noninterest Income
5,611
5,052
Noninterest Expenses
Compensation and employee benefits
12,986
12,812
Data processing
Premises and occupancy costs
2,420
2,427
Automatic teller machine expense
Federal deposit insurance
Core deposit amortization
Merger expenses
1,075
-
Other operating expenses
4,211
4,342
Total Noninterest Expenses
22,604
21,625
Income before Income Tax Expense
7,877
11,144
Income Tax Expense
Federal
1,704
State
Total Income Tax Expense
2,338
Net Income
$
6,932
$
8,806
Earnings Per Share:
Basic earnings per common share
$
1.52
$
1.91
Diluted earnings per common share
$
1.50
$
1.90
Cash dividends paid per common share
$
0.88
$
0.88
Basic weighted average shares outstanding
4,551,456
4,606,457
Diluted weighted average shares outstanding
4,630,586
4,642,775
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Year Ended December 31,
Net Income
$
6,932
$
8,806
Other comprehensive income:
Change in unrealized gain on securities available for sale
1,631
3,151
Tax effect
(342)
(663)
Reclassification adjustment for security (gains) losses realized in income
(23)
Tax effect
-
Change in pension obligation for defined benefit plan
(261)
(4)
Tax effect
Total other comprehensive income
1,065
2,486
Total Comprehensive Income
$
7,997
$
11,292
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statement of Changes in Stockholders’ Equity
(Dollars in thousands, except per share data)
Accumulated
Additional
Unearned
Other
Total
Common
Paid-In
Retained
ESOP
Comprehensive
Stockholders’
Stock
Capital
Earnings
Shares
Income (Loss)
Equity
Balance, December 31, 2018
$
$
75,571
$
65,301
$
(1,686)
$
(1,344)
$
137,890
Net income
-
-
8,806
-
-
8,806
Other comprehensive income
-
-
-
-
2,486
2,486
Stock repurchases (147,098 shares)
(1)
(4,011)
-
-
-
(4,012)
Cash dividends ($0.88 per share)
-
-
(4,070)
-
-
(4,070)
Stock options exercised (18,914 shares)
-
-
-
-
Compensation expense on stock awards
-
-
-
-
Compensation expense on ESOP
-
-
-
Balance, December 31, 2019
$
$
72,155
$
70,037
$
(1,533)
$
1,142
$
141,848
Net income
-
-
6,932
-
-
6,932
Other comprehensive income
-
-
-
-
1,065
1,065
Stock repurchases (137,622 shares)
(1)
(4,084)
-
-
-
(4,085)
Cash dividends ($0.88 per share)
-
-
(4,031)
-
-
(4,031)
Stock options exercised (215,910 shares)
3,694
-
-
-
3,696
Compensation expense on stock awards
-
-
-
-
Compensation expense on ESOP
-
-
-
Balance, December 31, 2020
$
$
72,137
$
72,938
$
(1,379)
$
2,207
$
145,951
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31,
Cash Flows From Operating Activities
Net income
$
6,932
$
8,806
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
2,657
1,940
Provision for loan losses
3,058
Amortization of core deposit intangible
Net (gain) loss on sale of securities available for sale
(23)
Net equity securities fair value adjustment losses (gains)
(230)
Net gain on sale of office properties and equipment
(24)
(29)
Net gain on sale of foreclosed real estate
(37)
-
Origination of loans held for sale
(68,101)
(13,981)
Proceeds from sale of loans held for sale
69,791
13,784
Net loan sale gains and referral fees
(1,728)
(273)
Compensation expense on ESOP
Compensation expense on stock awards
Deferred income taxes
(467)
(80)
(Increase) decrease in accrued interest receivable
(471)
Earnings on bank-owned life insurance
(560)
(537)
Decrease in accrued interest payable
(217)
(144)
Other, net
(2,593)
3,250
Net Cash Provided by Operating Activities
9,616
14,379
Cash Flows Used In Investing Activities
Net (increase) decrease in loans
(25,692)
15,230
Purchases of investment securities
(39,303)
(13,138)
Purchases of mortgage-backed securities
(40,547)
(30,351)
Proceeds from maturities/principal repayments/calls of investment securities
19,045
5,315
Proceeds from maturities/principal repayments/calls of mortgage-backed securities
32,972
20,252
Proceeds from sales of investment securities
6,328
Proceeds from sales of mortgage-backed securities
3,508
1,286
Purchase of Federal Home Loan Bank stock
(2,810)
(3,137)
Redemption of Federal Home Loan Bank stock
1,288
3,551
Proceeds from sales of foreclosed real estate
Purchase of bank-owned life insurance
(1,000)
(265)
Proceeds from sales of office properties and equipment
Purchases of office properties and equipment
(370)
(734)
Net Cash (Used) Provided by Investing Activities
(51,789)
5,417
Cash Flows From Financing Activities
Net increase in demand and savings accounts
113,738
18,117
Net decrease in time deposits
(38,951)
(1,583)
Net (decrease) increase in securities sold under agreements to repurchase
(143)
1,603
Net repayments of Federal Home Loan Bank short-term borrowings
-
(4,524)
Repayments of Federal Home Loan Bank advances
(34,581)
(34,165)
Proceeds from Federal Home Loan Bank advances
25,000
25,208
Lease liability payments
(384)
(407)
Exercise of stock options
3,696
Dividends paid
(4,031)
(4,070)
Stock repurchases
(4,085)
(4,012)
Net Cash Provided (Used) by Financing Activities
60,259
(3,576)
Net Increase in Cash and Cash Equivalents
18,086
16,220
Cash and Cash Equivalents - Beginning
32,427
16,207
Cash and Cash Equivalents - Ending
$
50,513
$
32,427
Supplementary Cash Flows Information:
Interest paid
$
7,604
$
9,406
Income taxes paid
$
1,778
$
2,923
Investment securities purchased not settled
$
-
$
Loans transferred to foreclosed real estate
$
$
Right-of-use asset
$
(169)
$
(3,423)
Lease liability
$
$
3,449
Prepaid lease payments
$
-
$
(26)
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Note 1 - Summary of Significant Accounting Policies
Principles of 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. The Company owns all of the outstanding shares of common stock of the Bank.
Proposed Merger with Dollar
On September 25, 2020 the Company, and Dollar Mutual Bancorp (“Dollar”) announced they had entered into a definitive agreement under which Dollar will acquire the Company in an all cash transaction valued at approximately $158.0 million. The Company’s stockholders will receive $33.00 for each share of Company common stock that they own. The transaction was approved by the Company’s stockholders on January 19, 2021 and is expected to close in the first half of 2021. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all. In connection with the acquisition, the Company had incurred $1.1 million ($1.0 million after tax) of merger-related expenses for the year ended December 31, 2020, primarily legal and investment banker costs, which are included in the Consolidated Statements of Income.
Nature of Operations
The Company’s primary asset is the stock of its wholly owned subsidiary, the Bank, a Pennsylvania-chartered state savings bank with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a retail-oriented financial institution, which offers traditional deposit and loan products through its seventeen offices in Allegheny, Westmoreland, and Bedford Counties of Pennsylvania and Allegany County of Maryland. Westmoreland Investment Company is a Delaware subsidiary, holding residential mortgage loans as the majority of its assets.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of related revenue and expenses during the reporting period. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2021, actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, obligations associated with the deferred benefit pension plan, valuation of deferred taxes, fair value of investments and mortgage-backed securities available for sale, and the valuation of intangible assets.
Significant Group Concentrations of Credit Risk
Most of the Bank’s activities are with customers located within Allegheny, Westmoreland, and Bedford Counties of Pennsylvania and Allegany County of Maryland. Notes 2, 3 and 4 discuss the types of securities in which the Company invests. Note 5 details the types of lending in which the Company engages. The Company does not have any significant concentrations in any one industry or customer.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Cash and Cash Equivalents
For the purposes of reporting cash flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions cash on hand and due from banks and interest-earning deposits in other institutions. Interest-earning deposits in other institutions includes balances with original maturities of 90 days or less. Account balances are insured by the FDIC up to at least $250,000. At times, the Company may maintain more than $250,000 in cash at a financial institution.
Investment, Mortgage-Backed and Equity Securities
The Company accounts for investment and mortgage-backed securities by classifying them into one of three categories at the time of purchase: trading, held to maturity, and available for sale.
Securities bought and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with unrealized gains and losses included in earnings. The Company had no trading securities in 2020 or 2019.
Held-to-maturity securities are debt securities acquired with the intent and ability to hold to maturity and are stated at amortized cost. The Company had no held-to-maturity securities in 2020 or 2019.
Available-for-sale securities are debt securities that are not classified as trading or held-to-maturity securities and serve principally as a source of liquidity. Available-for-sale debt securities are stated at fair value, with unrealized holding gains and losses reported as a separate component of stockholders’ equity, net of tax, until realized.
Equity securities are stated at fair value, with unrealized holding gains and losses reported as equity fair value adjustments in the income statement.
Declines in the fair value of individual securities below their cost that are other than temporary will result in write-downs of the individual securities to their fair value. The other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in accumulated other comprehensive income. In estimating other than-temporary losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Company plans to sell or will be forced to sell the security. Realized securities gains and losses are computed using the specific identification method. Amortization of premiums and accretion of discounts are recorded as interest income from investments over the life of the security utilizing the level yield method. Interest and dividends on investment securities are recognized as income when earned.
Federal Home Loan Bank Stock
The Company, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB. During 2020, the FHLB made quarterly dividend payments. Additionally, excess capital stock was repurchased weekly in an amount equal to the lesser of five percent of the member’s total capital stock outstanding or its excess capital stock outstanding.
FHLB stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost on the Consolidated Statements of Financial Condition, and evaluated for impairment. The determination of whether
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
the stock is impaired is based on the assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management evaluated the stock based on the above and determined that the stock was not impaired as of December 31, 2020 or December 31, 2019.
Loans Receivable
Loans which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balance, adjusted for any allowance for loan losses and any deferred loan fees or costs. Interest on loans is credited to income as earned. Interest income on loans is accrued at the contractual rate on the principal amount outstanding and includes the amortization of deferred loan fees and costs. Deferred loan fees and costs are netted and amortized to income over the life of the loan. Accrual of interest is discontinued when, in the opinion of management, collection is doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Amortization of any net deferred fees is discontinued when a loan is placed on nonaccrual status. Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six months of timely payments are received, and future payments are reasonably assured.
All loans are charged off when management determines that principal and interest are not collectible. Any excess of the Company’s recorded investment in impaired loans over the measured value of the loan is provided for in the allowance for loan losses.
Loans Acquired
Loans acquired, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan loss only when the required allowance exceeds any remaining credit discounts. The remaining difference between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is necessary to provide for probable losses in its loan portfolio. The Company uses the allowance method in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations.
Mortgage Loans Held for Sale and Mortgage Servicing Rights
Mortgage loans held for sale are valued at the lower of cost or fair value as determined by current investor yield requirements calculated on an aggregate basis. Mortgage servicing rights (“MSRs”) represent the right to service loans for third-party investors. MSRs are recognized as a separate asset for the right to service mortgage loans for others, regardless of how those servicing rights are acquired. MSRs are recognized upon the sale of mortgage loans to a third-party investor with the servicing rights retained by the Bank. Servicing loans for others generally consists of collecting mortgage payments from borrowers, maintaining escrow accounts, remitting payments to third-party investors and, when necessary, processing foreclosures. Serviced loans are not included in the Consolidated Statements of Financial Condition. Loan servicing income includes servicing fees received from the third-party investors. Originated MSRs are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition at allocated fair value at the time of the sale of the loans to the third-party investor. MSRs are amortized in proportion to and over the estimated period of net servicing income. MSRs are carried at amortized cost, less a valuation allowance for impairment, if any. Impairment exists if the carrying value of MSRs exceeds the estimated fair value of the MSRs. Impairment at December 31, 2020 was $174,000. There was no impairment at December 31, 2019.
Transfers of Financial Assets
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Bank; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Foreclosed Real Estate
Foreclosed real estate consists of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Foreclosed real estate is initially recorded at fair value, net of estimated selling costs, at the date of foreclosure establishing a new cost basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expense.
Office Properties and Equipment
Office properties and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are capitalized and depreciated to operating expense over the term of the lease or the useful life of the asset whichever is shorter. The cost of major additions and improvements is capitalized and depreciated to operating expense over the estimated remaining life of the asset. Expenditures for maintenance and repairs are charged to expense as incurred.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Bank-Owned Life Insurance
The Bank owns insurance on the lives of certain directors and officers. The policies were purchased to help offset the cost of various fringe benefit plans, including health care. The cash surrender value of these policies is included on the Consolidated Statements of Financial Condition and any increases in the cash surrender value are recorded in noninterest income in the Consolidated Statements of Income. In the event of the death of an insured individual under these policies, a portion of the death benefit would be payable to the Bank and recorded as other income in the Consolidated Statements of Income. The remainder of the death benefit would be payable to the beneficiary, assuming the insured was employed by the Bank at the time of death.
Goodwill and Core Deposit Intangible
Goodwill represents the excess of the purchase price over the cost of net assets purchased. Goodwill is not amortized, but is evaluated for impairment. At least annually, management reviews goodwill and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of goodwill. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the net assets, an impairment loss will be recognized. Impairment, if any, is measured on a discounted future cash flow basis. For December 31, 2020 and December 31, 2019, no impairment existed; however, for any future period, if the Company determines that there has been impairment in the carrying value of goodwill, the Company would record a charge to earnings, which could have a material adverse effect on net income.
Core deposit intangible assets represent the premiums paid to acquire the core deposits of another institution. The premium is the amount paid in excess of the dollar amount of the deposits acquired and it is carried at amortized cost on the Consolidated Statements of Financial Condition. The Company has core deposit intangible assets relating to the 2017 acquisition of Allegheny Valley Bancorp Inc. (“Allegheny Valley”). These intangible assets are being amortized on an accelerated basis over an 8-year period.
Pension Plan
The Bank maintains a noncontributory defined benefit pension plan covering employees whose benefits were frozen effective August 1, 2005. No future benefits are accrued, however, the plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank.
Interest on Deposits
Interest on deposits is accrued and charged to expense daily and is paid or credited in accordance with the terms of the respective accounts.
Income Taxes
The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. The Company had no uncertain tax positions at December 31, 2020 or December 31, 2019. If the Company were to incur interest and penalties on income taxes, it would be recognized as a component of income tax expense.
Stock Compensation
The Company accounts for share-based awards in accordance with GAAP, which requires companies to estimate the fair value of awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is included in compensation and employee benefits on the income statement. Compensation expense for share-based awards with graded vesting schedules is recognized on a straight-line basis over the requisite service period for the entire grant.
Advertising Expense
Advertising costs are expensed as incurred and included in other operating expense in the Consolidated Statements of Income. Advertising expense for the years ended December 31, 2020 and December 31, 2019 totaled $143,000 and $262,000, respectively.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive gain (loss). Other comprehensive gain (loss) includes the change in unrealized gains on debt securities available for sale, unrealized losses related to factors other than credit on debt securities, and the change in the pension benefit obligation for the defined benefit plan.
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
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
the computation of basic and diluted EPS for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands except share and per share data):
Year Ended December 31,
Net income available to common stockholders
$
6,932
$
8,806
Basic EPS:
Weighted average shares outstanding
4,551,456
4,606,457
Basic EPS
$
1.52
$
1.91
Diluted EPS:
Weighted average shares outstanding
4,551,456
4,606,457
Dilutive effect of common stock equivalents
79,130
36,318
Total diluted weighted average shares outstanding
4,630,586
4,642,775
Diluted EPS
$
1.50
$
1.90
Options to purchase 31,871 and 247,781 shares of common stock were outstanding as of December 31, 2020 and December 31, 2019, respectively, with an average exercise price of $16.73 and $17.07, respectively. There were no anti-dilutive options as of December 31, 2020 or December 31, 2019.
As of December 31, 2020 and December 31, 2019, there were 4,205 and 1,944 shares of outstanding restricted stock, respectively, that were not fully vested and were taken into consideration in the computation of both basic and diluted earnings per common share.
Reclassifications
Certain comparative amounts for the prior year have been reclassified to conform to current-year presentation. Such reclassifications had no effect on net income or stockholders’ equity.
Recent Accounting Pronouncements
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. 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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
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 had initially worked with a third party to evaluate the various CECL methodologies and decided to utilize the vintage method. Given the deferral of the effective date, the Company has delayed further efforts to 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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles - Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles - Goodwill and Other, for smaller reporting
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. 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. Topic 326, Financial Instruments - Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. This Update is not expected to have a significant impact on the Company’s financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial assets would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022,
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
including interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-09, Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, which codifies, as appropriate, the amended financial statement disclosure requirements in Regulation S-X Rules 13-01 and 13-02. The amendments are effective January 4, 2021. This Update did not have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which makes minor technical corrections and clarifications to the ASC. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Note 2 - Investment Securities
Investment securities available for sale at December 31, 2020 and December 31, 2019 were as follows (dollars in thousands):
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
December 31, 2020:
U.S. government and agency obligations due:
Beyond 1 year but within 5 years
$
1,000
$
$
-
$
1,002
Beyond 5 year but within 10 years
3,000
-
3,005
Corporate bonds due:
Within 1 year
1,000
-
-
1,000
Beyond 1 year but within 5 years
3,975
-
4,230
Municipal obligations due:
Within 1 year
4,657
-
4,764
Beyond 1 year but within 5 years
1,640
-
1,693
Beyond 5 years but within 10 years
18,571
-
19,096
Beyond 10 years
54,009
1,177
(23)
55,163
$
87,852
$
2,124
$
(23)
$
89,953
December 31, 2019:
U.S. government and agency obligations due:
Within 1 year
$
5,986
$
$
-
$
5,998
Beyond 1 year but within 5 years
1,470
-
1,499
Beyond 5 year but within 10 years
-
Corporate bonds due:
Beyond 1 year but within 5 years
2,477
-
2,579
Municipal obligations due:
Within 1 year
-
Beyond 1 year but within 5 years
5,085
-
5,329
Beyond 5 years but within 10 years
18,210
-
18,666
Beyond 10 years
33,951
(40)
34,559
$
68,387
$
1,537
$
(40)
$
69,884
For the year ended December 31, 2020 gains on sales of investment securities were $53,000 with total proceeds from such sales of $874,000. For the year ended December 31, 2019, gains on sales of investment securities were $11,000 and losses were $11,000 with total proceeds from such sales of $6.3 million.
Investment securities with a carrying value of $11.4 million and $11.9 million were pledged to secure repurchase agreements and public funds accounts at December 31, 2020 and December 31, 2019, respectively.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following table presents 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 December 31, 2020 and December 31, 2019 (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
December 31, 2020:
Municipal obligations
$
5,619
$
(23)
$
-
$
-
$
5,619
$
(23)
Total
$
5,619
$
(23)
$
-
$
-
$
5,619
$
(23)
December 31, 2019:
Municipal obligations
$
4,496
$
(40)
$
-
$
-
$
4,496
$
(40)
Total
$
4,496
$
(40)
$
-
$
-
$
4,496
$
(40)
At December 31, 2020, the Company held eight investment securities in an unrealized loss position. The unrealized losses on 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 and the Company believes the collection of the investment and related interest is probable. Based on this, the Company considers all of the unrealized losses to be temporary impairment losses.
Note 3 - Equity Securities
The following table presents the net gains and losses on equity investments recognized in earnings during the years ended December 31, 2020 and December 31, 2019, and the portion of unrealized gains and losses for those periods that relate to equity investments held (dollars in thousands):
Year Ended December 31,
Net equity securities fair value adjustment (losses) gains
$
(403)
$
Net gains realized on the sale of equity securities during the period
-
-
(Losses) gains recognized on equity securities during the period
$
(403)
$
There were no sales of equity securities during the years ended December 31, 2020 and December 31, 2019.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Note 4 - Mortgage-Backed Securities
Mortgage-backed securities available for sale at December 31, 2020 and December 31, 2019 were as follows (dollars in thousands):
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
December 31, 2020:
Government pass-throughs:
Ginnie Mae
$
20,079
$
$
(16)
$
20,495
Fannie Mae
24,051
(99)
24,553
Freddie Mac
21,317
(50)
21,624
Private pass-throughs
17,528
(212)
17,371
Collateralized mortgage obligations
11,287
(14)
11,482
$
94,262
$
1,654
$
(391)
$
95,525
December 31, 2019:
Government pass-throughs:
Ginnie Mae
$
21,386
$
$
(70)
$
21,504
Fannie Mae
20,537
-
20,795
Freddie Mac
13,986
(34)
14,086
Private pass-throughs
21,904
-
(301)
21,603
Collateralized mortgage obligations
13,406
(26)
13,490
$
91,219
$
$
(431)
$
91,478
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.
For the year ended December 31, 2020, losses on sales of mortgage-backed securities were $30,000 and proceeds from such sales were $3.5 million. During the year ended December 31, 2019, losses on sales of mortgage-backed securities were $1,000 and proceeds from such sales were $1.3 million.
Mortgage-backed securities with a carrying value of $17.0 million and $13.3 million were pledged to secure repurchase agreements and public funds accounts at December 31, 2020 and December 31, 2019, respectively.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following table presents 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 December 31, 2020 and December 31, 2019 (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
December 31, 2020:
Government pass-throughs:
Ginnie Mae
$
2,629
$
(15)
$
$
(1)
$
3,091
$
(16)
Fannie Mae
7,062
(99)
-
-
7,062
(99)
Freddie Mac
7,543
(50)
-
-
7,543
(50)
Private pass-throughs
-
-
15,539
(212)
15,539
(212)
Collateralized mortgage obligations
5,944
(14)
-
-
5,944
(14)
Total
$
23,178
$
(178)
$
16,001
$
(213)
$
39,179
$
(391)
December 31, 2019:
Government pass-throughs:
Ginnie Mae
$
4,070
$
(27)
$
3,516
$
(43)
$
7,586
$
(70)
Freddie Mac
5,537
(34)
-
-
5,537
(34)
Private pass-throughs
2,060
(29)
19,197
(272)
21,257
(301)
Collateralized mortgage obligations
(2)
3,526
(24)
4,088
(26)
Total
$
12,229
$
(92)
$
26,239
$
(339)
$
38,468
$
(431)
At December 31, 2020 the Company held 31 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. 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.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Note 5 - Loans Receivable
The following table summarizes the primary segments of the loan portfolio by the amounts collectively evaluated for impairment and the amounts individually evaluated for impairment, as of December 31, 2020 and December 31, 2019 (dollars in thousands):
Real Estate Loans
One-to-four-
Commercial
Home
family
Real Estate
Equity Loans
Residential and
and
and Lines
Commercial
Other
Construction
Construction
of Credit
Business
Loans
Total
December 31, 2020:
Collectively evaluated for impairment
$
192,402
$
372,558
$
96,116
$
77,332
$
$
738,912
Individually evaluated for impairment
-
3,063
-
-
3,681
Total loans before allowance for loan losses
$
192,402
$
375,621
$
96,116
$
77,950
$
$
742,593
December 31, 2019:
Collectively evaluated for impairment
$
234,421
$
323,008
$
111,499
$
46,907
$
$
716,405
Individually evaluated for impairment
-
-
-
1,442
Total loans before allowance for loan losses
$
234,421
$
323,843
$
111,499
$
47,514
$
$
717,847
Total loans at December 31, 2020 and December 31, 2019 were net of deferred loan fees of $1.3 million and $233,000, respectively. The increase in net deferred loan fees was primarily the result of fees booked related to Paycheck Protection Program (“PPP”) loans booked during the period which are discussed further below.
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) include loans to individuals secured by residential properties having maturities up to 30 years. Commercial real estate (including commercial construction loans) consists of loans to commercial borrowers secured by commercial or residential real estate. 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
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
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 repayment of the commercial business loan is dependent upon the ongoing cash flow of the operating entity and the ability of a guarantor to support the company. 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.
The following table provides additional information with respect to the Company’s commercial real estate and construction and commercial business loans by industry sector at December 31, 2020 (dollars in thousands):
Type of Loan (1)
Number of Loans
Balance
Real Estate Rental and Leasing
1,297
$
305,937
Construction
28,922
Accommodation and Food Services
22,864
Other Services (except Public Administration)
15,137
Health Care and Social Assistance
14,515
Retail Trade
13,408
Professional, Scientific, and Technical Services
10,054
Manufacturing
9,575
Wholesale Trade
7,163
Public Administration
6,303
Other
19,693
Total
2,360
$
453,571
(1) Loan types are based on the North American Industry Classification System (NAICS).
As of December 31, 2020, the real estate rental and leasing sector included the following industry categories:
Detail of Real Estate Rental and Leasing
Number of Loans
Balance
Lessors of Residential Buildings and Dwellings
$
156,110
Lessors of Nonresidential Buildings
111,621
Other Activities Related to Real Estate
11,459
Other General Government Support
6,466
Lessors of Mini Warehouses and Self-Storage Units
6,170
Lessors of Other Real Estate Property
5,375
Real Estate Property Managers
2,720
All Other Real Estate Rental and Leasing
6,016
Total
1,297
$
305,937
The Company’s primary business activity is with customers located within its local market 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 market area. It is anticipated that certain industries will continue to suffer losses as a result of the COVID-19 pandemic. At December 31, 2020, the Company’s largest commercial loan concentrations are to the lessors of residential properties and the lessors of nonresidential properties representing 34.4% and 24.6% of the commercial loan portfolio, respectively. The construction portfolio is very well diversified with no exposure to any NAICS above $3.4 million. Additionally, the Bank had approximately $15.6 million in hotel and motel loans and $6.5 million in restaurant loans at December 31, 2020. Included in the hotel and motel and restaurant loans were $153,000 and $2.9 million of PPP loans, respectively.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The Coronavirus Aid Relief and Economic Security Act, (the “CARES Act”), was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES act authorized the SBA to temporarily guarantee PPP loans under a new 7(a) loan program. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. As of December 31, 2020, the Company had received approval from the SBA for over 400 PPP loans totaling over $43.2 million which generated $1.7 million in fees to be recognized over the life of the loans. The initial PPP loan program closed on August 8, 2020. The Company is currently working with customers to submit the required information to the SBA in order to receive the maximum amount of loan forgiveness on those loans. On December 27, 2020, an additional round of PPP funding was established. The Company is continuing to participate in the program which opened mid-January 2021 for new loan applications.
Eligible businesses were able to apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity for loans made on or after June 5, 2020 ); loans made prior to June 5, 2020 have a two-year term, however borrowers and lenders may mutually agree to extend the maturity for such loans to five years); and (c) principal and interest payments deferred for nine months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
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, 90 days or more 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 a borrower is experiencing financial difficulties and 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
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
borrower's loan. The Company did not modify any loans as TDRs during the year ended December 31, 2020. During the year ended December 31, 2019, there was one modification determined to be a TDR. The modification to one customer relationship consisted of one commercial real estate loan and one commercial business loan. The modification extended the amortization period for each of the term loans which will result in a balloon payment at the maturity date of each loan. The loans were changed to nonaccrual status and a specific reserve was established during the year ended December 31, 2020. The Company did not have any TDRs where a concession had previously been made that then defaulted during the years ended December 31, 2020 or December 31, 2019. As of December 31, 2020, all TDRs were performing in accordance with their modified terms and are included in the impaired loan table below.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary at December 31, 2020 and December 31, 2019 (dollars in thousands):
Impaired Loans
Impaired Loans With
Without
Allowance
Allowance
Total Impaired Loans
Recorded
Related
Recorded
Recorded
Unpaid Principal
Investment
Allowance
Investment
Investment
Balance
December 31, 2020:
Commercial real estate and construction
$
$
$
2,210
$
3,063
$
3,063
Commercial business
-
Total impaired loans
$
1,471
$
$
2,210
$
3,681
$
3,681
December 31, 2019:
Commercial real estate and construction
$
-
$
-
$
$
$
Commercial business
-
-
Total impaired loans
$
-
$
-
$
1,442
$
1,442
$
1,442
The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
For the Year Ended December 31,
Average investment in impaired loans:
Commercial real estate and construction
$
2,454
$
Commercial business
$
3,065
$
Interest income recognized on impaired loans
$
$
The Company has elected to follow the loan modification guidance under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act on December 27, 2020, with regard to COVID-19 modifications made between March 1, 2020 and the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency. Under that guidance, any short-term loan modification that is done as a result of COVID-19 for a loan that was current prior to any relief, will not be categorized as a TDR. A modification of nine months or less is considered to be a short-term loan modification. The interagency guidance defines current as a loan that is less than 30 days past due on the contractual payments at the time of modification. The Company has developed loan payment deferral programs to provide assistance to both individuals and small business clients directly impacted by the COVID-19 pandemic. As of December 31, 2020, the Bank had existing payment deferrals for 8 commercial loans totaling $7.7 million and 17
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
consumer loans totaling $2.1 million as a result of COVID-19. All of these loans were initially provided a deferral period of 90 days and, if necessary, additional deferral periods were provided upon request. The Company remains fully committed to serving its customers and communities through this uncertain time.
The following table provides additional information with respect to the loans modified under Section 4013 of the CARES Act in the Company’s loan portfolio at December 31, 2020 (dollars in thousands):
Weighted Average
Type of Loan
Number of Loans
Balance
Interest Rate
One-to-four family and residential and construction
$
1,907
3.95
%
Commercial real estate and construction
6,136
4.49
%
Home equity loans and lines of credit
3.89
%
Commercial business
1,572
4.73
%
Total
$
9,821
4.41
%
Included in the commercial real estate and construction modifications were two hotel and motel loans totaling $5.0 million.
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 90 days or more 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.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of December 31, 2020 and December 31, 2019 (dollars in thousands):
Special
Pass
Mention
Substandard
Doubtful
Total
December 31, 2020:
Real estate loans:
One-to-four-family residential and construction
$
190,491
$
-
1,911
$
-
$
192,402
Commercial real estate and construction
361,961
10,020
3,640
-
375,621
Home equity loans and lines of credit
95,888
-
96,116
Commercial business loans
76,852
-
77,950
Other loans
-
-
Total
$
725,694
$
10,490
$
6,409
$
-
$
742,593
December 31, 2019:
Real estate loans:
One-to-four-family residential and construction
$
232,354
$
-
$
2,067
$
-
$
234,421
Commercial real estate and construction
320,988
2,544
-
323,843
Home equity loans and lines of credit
111,165
-
111,499
Commercial business loans
46,636
-
47,514
Other loans
-
-
Total
$
711,707
$
3,424
$
2,716
$
-
$
717,847
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 nonaccrual loans.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following table presents the segments of the loan portfolio summarized by the past due status of the loans as of December 31, 2020 and December 31, 2019 (dollars in thousands):
30-59 Days
60-89 Days
90 days
Total
Total
90 Days Past
Past Due
Past Due
or Greater
Past Due
Current
Loans
Due & Accruing
December 31, 2020:
Real estate loans:
One-to-four-family residential and construction
$
$
$
1,046
$
2,198
$
190,204
$
192,402
$
-
Commercial real estate and construction
-
1,161
1,349
374,272
375,621
-
Home equity loans and lines of credit
95,938
96,116
-
Commercial business loans
-
-
77,624
77,950
-
Other loans
-
-
-
Total
$
1,285
$
$
2,258
$
4,053
$
738,540
$
742,593
$
-
December 31, 2019:
Real estate loans:
One-to-four-family residential and construction
$
1,021
$
$
1,730
$
3,151
$
231,270
$
234,421
$
-
Commercial real estate and construction
-
323,121
323,843
-
Home equity loans and lines of credit
110,697
111,499
-
Commercial business loans
-
47,420
47,514
-
Other loans
-
-
-
Total
$
2,258
$
$
2,111
$
4,771
$
713,076
$
717,847
$
-
The following table presents nonaccrual loans summarized by the loan portfolio segments as of December 31, 2020 and December 31, 2019 (dollars in thousands):
Real estate loans:
One-to-four-family residential and construction
$
1,911
$
2,067
Commercial real estate and construction
2,196
Home equity loans and lines of credit
Commercial business loans
Other loans
Total
$
4,965
$
2,716
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
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
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 and include 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; effects of the COVID-19 pandemic; 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 year ended December 31, 2020, there was (1) a decrease in the provision for both the one-to four family residential and construction and the home equity loans and lines of credit loan classes primarily due to decreases in the loan balances in these categories as well as decreases in the qualitative factors related to changes in loan balances, lending policies and the experience, depth and ability of management partially offset by increases in the economic qualitative factor as a result of the COVID-19 pandemic and charge-offs incurred during the year; (2) an increase in the provision for the commercial real estate and construction loan class primarily due to increases in the loan balances in this category as well as the addition of a new qualitative factor for the COVID-19 pandemic, additional reserves required for the hotel sector and increases in the qualitative factors related to changes in volume and severity of past due, nonaccrual and classified loans, loan concentrations and internal loan review partially offset by decreases in the qualitative factors related to changes in lending policies, the experience, depth and ability of management and other external factors; and (3) a decrease in the allowance for the commercial business loan class primarily due to decreases in the qualitative factors related to changes in loan balances, lending policies and the experience, depth and ability of management as well as charge-offs incurred during the year partially offset by the addition of a new qualitative factor due to the COVID-19 pandemic and increases in the qualitative factors related to balance changes in loan concentrations and internal loan review. The allowance for other loan segment remained consistent with the prior year.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following tables summarize the activity in the primary segments of the ALL for the years ended December 31, 2020 and December 31, 2019 as well as the allowance required for loans individually and collectively evaluated for impairment as of December 31, 2020 and December 31, 2019 (dollars in thousands):
Real Estate Loans
One-to-four-
Commercial
Home
family
Real Estate
Equity Loans
Residential and
and
and Lines
Commercial
Other
Construction
Construction
of Credit
Business
Loans
Total
Year Ended :
Balance December 31, 2019
$
$
3,313
$
$
$
$
4,882
Charge-offs
(24)
-
(16)
(70)
(4)
(114)
Recoveries
-
Provision
(496)
3,669
(103)
(14)
3,058
Balance December 31, 2020
$
$
6,990
$
$
$
$
7,841
Balance at December 31, 2018
$
1,051
$
2,761
$
$
$
$
4,414
Charge-offs
-
(187)
(2)
(37)
(41)
(267)
Recoveries
-
Provision
(334)
(1)
Balance at December 31, 2019
$
$
3,313
$
$
$
$
4,882
Real Estate Loans
One-to-four-
Commercial
Home
family
Real Estate
Equity Loans
Residential and
and
and Lines
Commercial
Other
Construction
Construction
of Credit
Business
Loans
Total
Evaluated for Impairment:
Collectively
$
$
6,734
$
$
$
$
7,399
Individually
-
-
-
Balance at December 31, 2020
$
$
6,990
$
$
$
$
7,841
Evaluated for Impairment:
Collectively
$
$
3,313
$
$
$
$
4,882
Individually
-
-
-
-
-
-
Balance at December 31, 2019
$
$
3,313
$
$
$
$
4,882
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.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Loans serviced for others were $116.1 million and $69.0 million at December 31, 2020 and December 31, 2019, respectively. Net mortgage servicing rights were $698,000 and $487,000 at December 31, 2020 and December 31, 2019, respectively.
Note 6 - 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 December 31, 2020, included within the foreclosed assets were three residential properties. As of December 31, 2019, included within the foreclosed assets were two residential properties and one commercial real estate property. Additionally, the Company had initiated formal foreclosure procedures on $718,000 in one-to-four family residential loans and $934,000 in commercial real estate loans as of December 31, 2020.
Note 7 - Office Properties and Equipment
Office properties and equipment at December 31, 2020 and December 31, 2019 are summarized by major classifications as follows (dollars in thousands):
December 31
Estimated Useful Life
Land and land improvements
Indefinite - 10 years
$
2,402
$
2,402
Buildings and building improvements
10 - 50 years
10,014
10,322
Leasehold improvements
1 - 20 years
Right-of-use asset financing leases
1 - 12 years
2,853
3,050
Furniture, fixtures, and equipment
3 - 10 years
4,953
4,689
$
21,115
$
21,356
Less accumulated depreciation
(11,788)
(11,468)
Plus projects in progress
Premises and equipment, net
$
9,357
$
9,930
Depreciation expense was $1.1 million for each of the years ended December 31, 2020 and December 31, 2019.
The Company currently has four financing lease agreements for branch offices. In conjunction with those financing leases, the Company recognized Right-Of-Use (“ROU”) assets totaling $2.9 million and lease liabilities totaling $3.0 million related to those financing leases. Some of the leases include an option to extend which was recognized as part of the Company’s ROU asset and corresponding lease liability for that property if the Company believes that it is more likely than not to exercise the extension option.
The ROU assets are included with office properties and equipment while lease liabilities are included in long-term borrowings on the December 31, 2020 Consolidated Statements of Financial Condition. Amortization of ROU 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 years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Year Ended December 31,
Financing lease costs:
Amortization of right-of-use asset
$
$
Interest expense
Total financing lease costs
$
$
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
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, 2020. The following table presents the weighted-average remaining term and discount rates for financing leases outstanding as of December 31, 2020:
Financing
Weighted-average term (years)
8.7
Weighted-average discount rate
2.54
%
The following table presents the undiscounted cash flows due related to financing leases as of December 31, 2020, along with a reconciliation to the discounted amount recorded in long-term borrowings on the December 31, 2020 Consolidated Statements of Financial Condition (dollars in thousands):
Financing
Undiscounted cash flows due within:
$
2026 and thereafter
1,350
Total undiscounted cash flows
3,313
Impact of present value discount
(356)
Amount reported on balance sheet
$
2,957
Note 8 - Deposits
Deposit balances at December 31, 2020 and December 31, 2019 are summarized as follows (dollars in thousands):
December 31
Noninterest-bearing demand
$
176,366
$
127,168
Interest-bearing demand
129,872
111,428
Savings
173,251
144,167
Money market
123,588
106,576
Time deposits
206,163
245,114
Total deposits
$
809,240
$
734,453
At December 31, 2020, the scheduled maturities of time deposit are as follows (dollars in thousands):
One year or less
$
84,942
Over one through two years
57,018
Over two through three years
41,553
Over three through four years
9,942
Over four through five years
4,477
Over five years
8,231
Total
$
206,163
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
At December 31, 2020, the scheduled maturities of time deposit in denominations of $100,000 or more are as follows (dollars in thousands):
Three months or less
$
17,442
Over three to six months
8,576
Over six to twelve months
19,044
Over twelve months
54,081
Total
$
99,143
Time deposits include certificates of deposit in denominations of $250,000 or more. Such deposits aggregated $42.0 million and $46.0 million at December 31, 2020 and December 31, 2019, respectively.
Note 9 - Long-term Borrowings
The Bank is a member of the FHLB. This membership allows the Bank to borrow funds from the FHLB which are collateralized by qualifying securities and loans. At December 31, 2020, the Bank had approximately $401.7 million in maximum borrowing capacity available as collateral for existing and future borrowings. Included in the $401.7 million is a revolving line of credit agreement the Bank has established with the FHLB whereby it can borrow up to approximately $207.1 million on a short-term basis. The outstanding balance under this agreement was $0 at December 31, 2020 and December 31, 2019.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Advances, which are typically more long-term in nature, are also available from the FHLB. At December 31, 2020 and December 31, 2019, the Bank had long-term borrowings including FHLB advances as well as lease liabilities as follows (dollars in thousands):
December 31
Stated Maturity
Description
Interest Rate
January 8, 2020
Fixed Rate Advance
1.70
-
5,794
March 20, 2020
Fixed Rate Advance
2.51
-
1,278
July 29, 2020
Fixed Rate Advance
1.91
-
1,822
August 17, 2020
Fixed Rate Advance
1.63
-
5,635
September 8, 2020
Fixed Rate Amortizing
1.69
-
4,204
December 9, 2020
Fixed Rate Advance
1.92
-
3,500
January 26, 2021
Fixed Rate Advance
1.94
4,000
4,000
February 22, 2021
Fixed Rate Advance
1.95
3,365
3,365
March 8, 2021
Fixed Rate Amortizing
2.54
1,120
4,421
May 7, 2021
Fixed Rate Advance
2.38
5,000
5,000
August 18, 2021
Fixed Rate Amortizing
1.80
1,443
September 7, 2021
Fixed Rate Advance
2.17
5,000
5,000
September 8, 2021
Fixed Rate Amortizing
1.77
3,184
7,363
November 15, 2021
Fixed Rate Advance
3.23
3,000
3,000
June 6, 2022
Fixed Rate Advance
2.14
5,000
5,000
August 8, 2022
Fixed Rate Advance
1.85
5,000
5,000
September 8, 2022
Fixed Rate Amortizing
1.86
3,606
5,615
December 9, 2022
Fixed Rate Advance
2.26
3,212
3,212
December 29, 2022
Fixed Rate Amortizing
2.45
4,147
6,146
May 30, 2023
Fixed Rate Advance
2.93
10,000
10,000
August 8, 2023
Fixed Rate Advance
1.82
5,208
5,208
February 26, 2024
Fixed Rate Advance
1.47
5,000
-
February 26, 2025
Fixed Rate Advance
1.50
10,000
-
March 4, 2026
Fixed Rate Advance
1.24
10,000
-
Lease liabilities
2.81
2,957
3,092
$
89,382
$
99,098
Note 10 - Securities Sold Under Agreement to Repurchase
The Bank utilizes securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. Collateral levels are monitored on a continuous basis. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The collateral pledged to secure the borrowings based on the remaining contractual maturity of the securities sold under agreements to repurchase as of December 31, 2020 and December 31, 2019 are presented in the following tables (dollars in thousands):
Remaining Contractual Maturity of the Agreements
Overnight and
Up to
Greater than
Continuous
30 Days
30 - 90 Days
90 Days
Total
December 31, 2020:
U.S. government obligations
$
2,711
$
-
$
-
$
-
$
2,711
Municipal obligations
9,209
-
-
-
9,209
Total collateral pledged
$
11,920
$
-
$
-
$
-
$
11,920
Gross amount of recognized liabilities for securities sold under agreements to repurchase
$
3,597
Amounts related to agreements not included in offsetting disclosures above
$
8,324
December 31, 2019:
U.S. government obligations
$
4,435
$
-
$
-
$
-
$
4,435
Municipal obligations
5,011
-
-
-
5,011
Total collateral pledged
$
9,446
$
-
$
-
$
-
$
9,446
Gross amount of recognized liabilities for securities sold under agreements to repurchase
$
3,740
Amounts related to agreements not included in offsetting disclosures above
$
5,706
The outstanding balances and related information for repurchase agreements at or for the years ended December 31, 2020 and December 31, 2019 are summarized as follows (dollars in thousands):
December 31,
Balance
$
3,597
$
3,740
Average balance outstanding during the period
6,123
3,738
Maximum amount outstanding at any month-end
9,089
4,136
Weighted average interest rate at period end
0.15
%
0.48
%
Average interest rate during the period
0.21
0.45
Note 11 - Income Taxes
Total income tax expense for the years ended December 31, 2020 and December 31, 2019 was as follows (dollars in thousands):
Years Ended December 31
Federal:
Current
$
1,019
$
1,784
Deferred
(467)
(80)
$
$
1,704
State, current
$
$
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The difference between the expected and actual tax provision expressed as a percentage of earnings before income tax provision are as follows:
December 31
% of Pre-tax
% of Pre-tax
Amount
Income
Amount
Income
Expected federal tax rate
$
1,654
21.0
%
$
2,341
21.0
%
State taxes, net of federal tax benefit
3.9
4.5
Merger expenses
1.5
-
-
Stock option exercises
(616)
(7.8)
-
-
Nontaxable interest income
(414)
(5.3)
(393)
(3.5)
Bank-owned life insurance
(118)
(1.5)
(113)
(1.0)
Other items, net
0.2
-
Effective Tax Rate
$
12.0
%
$
2,338
21.0
%
The Bank is subject to the Pennsylvania, Maryland and West Virginia corporate net income tax which is allocated between the states and calculated at 11.50%, 8.25% and 6.50%, respectively, based on taxable income applicable to the individual states.
The net deferred tax asset consisted of the following components as of December 31, 2020 and December 31, 2019 (dollars in thousands):
December 31
Deferred Tax Assets:
Allowance for loan losses
$
1,647
$
1,025
Employee benefits
Equity security fair value adjustments
-
Capital lease adjustment
Other, net
Total Deferred Tax Assets
2,773
2,183
December 31
Deferred Tax Liabilities:
Net unrealized gains on debt securities
(706)
(369)
Premises and equipment
(210)
(172)
Purchase accounting
(141)
(61)
Equity security fair value adjustments
-
(57)
Capital lease adjustment
(599)
(640)
Other, net
(98)
(51)
Total Deferred Tax Liabilities
(1,754)
(1,350)
Net Deferred Tax Assets
$
1,019
$
U.S. generally accepted accounting principles prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions that
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Bank recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Income. The Bank’s federal and Pennsylvania and Maryland state tax returns for taxable years through 2016 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania and Maryland taxing authorities.
Note 12 - Regulatory Capital Requirements
The Federal Reserve Act authorizes the Board of Governors to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These reserves are held in the form of cash on-hand and a balance maintained with the Federal Reserve Bank. On March 15, 2020, the reserve requirement ratios were reduced to zero percent and, as such, there were no required reserves at December 31, 2020. Included in interest-earning deposits with other institutions were required reserves of $11.7 million at December 31, 2019.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the tables below) of Total and Tier I capital to risk-weighted assets and Tier I capital to average assets. The final Basel III rules require the Company to maintain a minimum amount and ratio of Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of December 31, 2020 and December 31, 2019, the Bank and the Company were categorized as “Well Capitalized” under the regulatory framework for prompt corrective action promulgated by the FDIC and the Federal Reserve, respectively. The Company believes that no conditions or events have occurred that would change this conclusion since such date. To
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
be categorized as Well Capitalized, the Bank must maintain minimum Total capital, Common Equity Tier I capital, Tier I capital, and Tier I leverage ratios as set forth in the tables below (dollars in thousands).
December 31, 2020
Bank
Company
Amount
Ratio
Amount
Ratio
Total capital (to risk weighted assets)
Actual
$
122,768
18.20
%
$
124,348
18.43
%
For capital adequacy purposes
53,961
8.00
53,983
8.00
To be well capitalized
67,451
10.00
67,479
10.00
Common equity tier I (to risk weighted assets)
Actual
$
114,917
17.04
%
$
116,497
17.26
%
For capital adequacy purposes
30,353
4.50
30,366
4.50
To be well capitalized
43,843
6.50
43,861
6.50
Tier I capital (to risk weighted assets)
Actual
$
114,917
17.04
%
$
116,497
17.26
%
For capital adequacy purposes
40,471
6.00
40,487
6.00
To be well capitalized
53,961
8.00
53,983
8.00
Tier I capital (to average assets)
Actual
$
114,917
11.18
%
$
116,497
11.29
%
For capital adequacy purposes
41,113
4.00
41,269
4.00
To be well capitalized
51,392
5.00
51,586
5.00
December 31, 2019
Bank
Company
Amount
Ratio
Amount
Ratio
Total capital (to risk weighted assets)
Actual
$
114,626
17.64
%
$
118,113
18.17
%
For capital adequacy purposes
51,989
8.00
52,014
8.00
To be well capitalized
64,986
10.00
65,017
10.00
Common equity tier I (to risk weighted assets)
Actual
$
109,747
16.89
%
$
113,234
17.42
%
For capital adequacy purposes
29,244
4.50
29,258
4.50
To be well capitalized
42,241
6.50
42,261
6.50
Tier I capital (to risk weighted assets)
Actual
$
109,747
16.89
%
$
113,234
17.42
%
For capital adequacy purposes
38,992
6.00
39,010
6.00
To be well capitalized
51,989
8.00
52,014
8.00
Tier I capital (to average assets)
Actual
$
109,747
11.46
%
$
113,234
11.76
%
For capital adequacy purposes
38,314
4.00
38,504
4.00
To be well capitalized
47,892
5.00
48,130
5.00
Note 13 - 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 5, 2020, 3,058 shares of restricted stock were awarded to directors out of the 2011 Plan. The awards vested on December 31, 2020 and the related compensation expense was recognized straight line over the 11 month vesting period. On March 10, 2020, 3,295 shares of restricted stock were awarded to employees
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
out of the 2011 Plan. The awards become 1/3 vested annually on the grant date for each of the next 3 years and the related compensation expense is being recognized using the straight line method over the vesting period. On February 26, 2019, 1,820 shares of restricted stock were awarded to directors out of the 2011 Plan. The awards vested quarterly through December 31, 2019 and the related compensation expense was recognized using the straight line method 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 using the straight line method over the vesting period. At December 31, 2020, there were 66,235 and 101,144 shares available to be issued under the 2011 Plan and the 2012 Plan, respectively.
For both the years ended December 31, 2020 and December 31, 2019, there was no recorded compensation expense related to stock options. As of December 31, 2020, all outstanding stock options were fully vested and there was no unrecognized compensation cost.
The following table summarizes transactions regarding the options under the Plans:
Weighted
Weighted
Average
Average
Exercise
Remaining
Options
Price
Contractual Term
Outstanding at December 31, 2018
266,695
$
17.12
3.32
Granted
-
-
Exercised
(18,914)
17.74
Forfeited
-
-
Outstanding at December 31, 2019
247,781
$
17.07
2.47
Granted
-
-
Exercised
(215,910)
17.12
Forfeited
-
-
Outstanding at December 31, 2020
31,871
$
16.73
1.47
Exercisable at December 31, 2019
247,781
$
17.07
Exercisable at December 31, 2020
31,871
$
16.73
For the year ended December 31, 2020, there was $147,000 of compensation expense recorded on restricted stock grants. For the year ended December 31, 2019, there was $81,000 of compensation expense recorded on restricted stock grants. As of December 31, 2020, there was $90,000 of unrecognized compensation expense that will be recognized over the remaining vesting periods.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following table summarizes transactions regarding restricted stock under the Plan:
Weighted
Average
Number of
Grant Date
Restricted
Price Per
Shares
Share
Non-vested shares at December 31, 2018
$
31.10
Granted
4,547
29.13
Vested
(2,853)
29.47
Forfeited
-
-
Non-vested shares at December 31, 2019
1,944
$
28.90
Granted
6,353
28.25
Vested
(4,092)
30.12
Forfeited
-
-
Non-vested shares at December 31, 2020
4,205
$
26.73
Note 14 - 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 $379,000 and $410,000 was recognized during the years ended December 31, 2020 and December 31, 2019, respectively. Dividends on unallocated shares are not treated as ordinary dividends but are instead used to repay the ESOP loan and recorded as compensation expense.
As of December 31, 2020, the ESOP held a total of 243,731 shares of the Company’s stock. Of the 243,731 shares, there were 144,548 unallocated as of December 31, 2020 with a fair market value of $4.7 million. As of December 31, 2019, the ESOP held 253,588 shares of the Company’s stock. Of the 253,588 shares, there were 159,003 unallocated as of December 31, 2019 with a fair market value of $4.8 million.
Note 15 - Employee Benefit Plans
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.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Obligations and Funded Status
The following table sets forth the change in the plan assets and the projected benefit obligations of the Standard Bank PaSB Defined Benefit Pension Plan and Trust at December 31, 2020 and December 31, 2019 (dollars in thousands):
December 31
Change in projected benefit obligation:
Benefit obligation at beginning of year
$
3,468
$
3,437
Interest cost
Settlement gains
(26)
(32)
Actuarial loss
Benefits paid
(37)
(37)
Settlement payments
(217)
(411)
Projected benefit obligation at end of year
3,670
3,468
Change in plan assets:
Fair value of plan assets at beginning of year
2,856
2,883
Actual return on plan assets
Employer contributions
-
Benefits paid
(37)
(37)
Administrative expenses
(23)
(33)
Settlement payments
(217)
(411)
Fair value of plan assets at end of year
2,880
2,856
Funded status
$
(790)
$
(612)
Amounts recognized in accumulated other comprehensive loss consists of:
Unrecognized actuarial loss
$
$
Total
$
$
The accumulated benefit obligation for the defined benefit pension plan was approximately $3.7 million and $3.5 million at December 31, 2020 and December 31, 2019, respectively.
Components of Net Periodic Benefit Cost
The net periodic pension cost for the years ended December 31, 2020 and December 31, 2019 was as follows (dollars in thousands):
Years Ended December 31
Interest Cost
$
$
Expected return on plan assets
(129)
(126)
Amortization of net loss
Settlement obligation
Net periodic pension cost
$
$
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income (loss) into the net periodic benefit cost in 2021 are as follows (dollars in thousands):
Net loss
$
Total
$
Assumptions
The weighted-average assumptions used to determine benefit obligations at December 31, 2020 and December 31, 2019 were as follows:
December 31
Discount rate
2.50
%
3.25
%
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2020 and December 31, 2019 were as follows:
December 31
Discount rate
2.50
%
3.25
%
The long-term rate of return on plan assets was assumed to be 5.00% for December 31, 2020 and December 31, 2019 and gives consideration to returns currently being earned on plan assets, as well as future rates expected to be earned.
Plan Assets
The Bank’s defined benefit pension plan weighted-average asset allocations at December 31, 2020 and December 31, 2019 by assets category are as follows:
December 31
Asset Category
Cash and Cash Equivalents
8.23
%
2.11
%
Equity Mutual Funds
50.00
55.68
Bond Mutual Funds
41.77
42.21
Total
100.00
%
100.00
%
The asset allocation and policy limits are evaluated periodically and may be changed at the discretion of the investment committee. The current strategic allocation for the defined benefit pension plan assets is to maintain 50% in equity mutual funds and 50% in bond mutual funds. This will move slightly in either direction as tactical adjustments are made quarterly.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following tables set forth by level, within the fair value hierarchy, the plan’s assets at fair value as of December 31, 2020 and December 31, 2019 (dollars in thousands):
Level I
Level II
Level III
Total
December 31, 2020:
Cash and Cash Equivalents
$
$
-
$
-
$
Domestic Stock Funds
1,151
-
-
1,151
International Stock Funds
-
-
Domestic Bond Funds
1,204
-
-
1,204
Total assets at fair value
$
2,881
$
-
$
-
$
2,881
December 31, 2019:
Cash and Cash Equivalents
$
$
-
$
-
$
Domestic Stock Funds
1,251
-
-
1,251
International Stock Funds
-
-
Domestic Bond Funds
1,205
-
-
1,205
Total assets at fair value
$
2,856
$
-
$
-
$
2,856
Cash Flows
There is no expected contribution to the defined benefit pension plan during 2021.
The following benefit payments which reflect expected future service, as appropriate, are expected to be paid subsequent to December 31, 2020 (dollars in thousands):
Year Ended December 31,
Plan Benefits
$
2026-2030
Total
$
2,140
The Company participates in the Pentegra Financial Institutions Thrift Plan, a multi-employer 401(k) plan, which provides benefits to substantially all of the Company’s employees. Employees’ contributions to the plan are matched by the Company up to a maximum of four percent of such employees’ pretax salaries. Expense recognized for the plan was $357,000 and $309,000 for the years ended December 31, 2020 and December 31, 2019, respectively.
The Company sponsors a Supplemental Executive Retirement Plan (“SERP”) to provide certain additional retirement benefits to participating officers. During the year ended December 31, 2020 and December 31, 2019, the Company had service cost of $34,000 and $102,000 and interest cost of $1,000 and $3,000 related to the SERP, respectively.
Note 16 - Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company extends credit in the form of various outstanding commitments that are not reflected in the accompanying Consolidated Financial Statements. These off-balance sheet instruments involve, to various degrees, elements of credit and interest rate risk not reported in the statement of financial condition.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Financial instruments with off-balance sheet risk as of December 31, 2020 and December 31, 2019 were comprised of the following (dollars in thousands):
December 31
One-to-four family and construction:
Loan commitments
$
8,561
$
5,869
Undisbursed home equity lines of credit
32,894
30,716
Undisbursed funds - construction loans in process
2,298
3,931
Commercial loan commitments
57,112
58,569
Standby letters of credit
3,915
4,012
Other
21,825
18,601
Total
$
126,605
$
121,698
The Company uses the same credit policies in making commitments for off-balance sheet financial instruments as it does for on-balance sheet instruments. Collateral is generally required to support financial instruments with credit risk and it typically includes real estate property. The Company grants loan commitments at prevailing market rates of interest.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.
The Company’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contract amount of the financial instrument and is limited by subjecting them to credit approval and monitoring procedures. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Sometimes commitments expire without being drawn upon. Therefore, the total contractual amounts presented do not necessarily represent future funding requirements.
Note 17 - 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.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
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, mortgage-backed and equity 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.
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 December 31, 2020 and December 31, 2019, 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.
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
The following table presents the assets measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 by level within the fair value hierarchy (dollars in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2020:
Investment securities available for sale:
U.S. government and agency obligations
$
-
$
4,007
$
-
$
4,007
Corporate bonds
-
5,230
-
5,230
Municipal obligations
-
80,716
-
80,716
Total investment securities available for sale
-
89,953
-
89,953
Equity securities
2,552
-
-
2,552
Mortgage-backed securities available for sale
-
95,525
-
95,525
Total recurring fair value measurements
$
2,552
$
185,478
$
-
$
188,030
December 31, 2019:
Investment securities available for sale:
U.S. government and agency obligations
$
-
$
8,489
$
-
$
8,489
Corporate bonds
-
2,579
-
2,579
Municipal obligations
-
58,816
-
58,816
Total investment securities available for sale
-
69,884
-
69,884
Equity securities
2,955
-
-
2,955
Mortgage-backed securities available for sale
-
91,478
-
91,478
Total recurring fair value measurements
$
2,955
$
161,362
$
-
$
164,317
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 December 31, 2020 and December 31, 2019 by level within the fair value hierarchy (dollars in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2020:
Foreclosed real estate
$
-
$
-
$
$
Impaired loans
-
-
1,029
1,029
Mortgage servicing rights
-
-
Total nonrecurring fair value measurements
$
-
$
-
$
1,885
$
1,885
December 31, 2019:
Foreclosed real estate
$
-
$
-
$
$
Mortgage servicing rights
-
-
Total nonrecurring fair value measurements
$
-
$
-
$
$
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
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
December 31,
December 31,
Valuation
Unobservable
Techniques
Input
Range
Foreclosed real estate
$
$
Appraisal of collateral (1)
Appraisal adjustments (2)
0% to 30%
Liquidation expenses (2)
Impaired loans
$
1,029
$
-
Fair value of collateral (1), (3)
Appraisal adjustments (2)
0% to 30%
Liquidation expenses (2)
Mortgage servicing rights
$
$
Discounted cash flow method
Discount rate
Constant prepayment rates
(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.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.
The following table presents the carrying value, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments not required to be carried at fair value as of December 31, 2020 and December 31, 2019 (dollars in thousands):
Carrying
Estimated
Value (1)
Fair Value
Level 1
Level 2
Level 3
December 31, 2020:
Financial Instruments - Assets:
Loans receivable
$
734,752
$
737,782
$
-
$
-
$
737,782
Financial Instruments - Liabilities:
Demand and savings accounts
$
603,077
$
603,077
$
603,077
$
-
$
-
Time deposits
206,163
210,892
-
-
210,892
Long-term borrowings
89,382
92,259
-
-
92,259
December 31, 2019:
Financial Instruments - Assets:
Loans receivable
$
712,965
$
721,197
$
-
$
-
$
721,197
Financial Instruments - Liabilities:
Demand and savings accounts
$
489,339
$
489,339
$
489,339
$
-
$
-
Time deposits
245,114
247,456
-
-
247,456
Long-term borrowings
99,098
100,032
-
-
100,032
(1) The financial instrument is carried at amortized cost
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Note 18 - Parent Only Financial Information
Statement of Financial Condition
December 31
(Dollars in thousands)
Assets
Cash
$
$
2,222
Interest-earning deposits with other institutions
Cash and cash equivalents
2,304
Equity securities
1,160
Accrued interest receivable and other assets
Investment in subsidiary
144,371
138,606
Total Assets
$
146,703
$
142,121
Liabilities and Stockholders’ Equity
Accrued interest payable and other liabilities
$
$
Stockholders’ equity
145,951
141,848
Total Liabilities and Stockholders’ Equity
$
146,703
$
142,121
Statement of Operations
Years Ended December 31
(Dollars in thousands)
Income
Dividends from subsidiary
$
2,064
$
7,126
Dividend Income
Other Income
-
Net equity securities fair value adjustment (losses) gains
(357)
Total Income
1,741
7,302
Operating expenses
Total Expense
Income before taxes
1,527
7,102
Credit for income taxes
(704)
(35)
Income before equity in undistributed net income of subsidiaries
2,231
7,137
Equity in undistributed income of Standard Bank
4,701
1,669
Net Income
$
6,932
$
8,806
Comprehensive Income
$
7,997
$
11,292
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Statement of Cash Flows
Years Ended December 31
(Dollars in thousands)
Net income
$
6,932
$
8,806
Adjustments to reconcile net income to net cash provided by operating activities:
Net equity securities fair value adjustment losses (gains)
(138)
Stock compensation expense
ESOP expense
Net change in other assets and liabilities
(185)
1,171
Equity in undistributed income of subsidiaries
(4,701)
(1,669)
Net cash provided by operating activities
2,929
8,661
Financing activities:
Proceeds from exercise of stock options
3,696
Stock repurchases
(4,085)
(4,012)
Dividends paid
(4,031)
(4,070)
Net cash used for financing activities
(4,420)
(7,825)
Net change in cash and cash equivalents
(1,491)
Cash and cash equivalents at the beginning of the year
2,304
1,468
Cash and cash equivalents at the end of the year
$
$
2,304
Note 19 - Accumulated Other Comprehensive Income (Loss)
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 years ended December 31, 2020 and December 31, 2019.
Unrealized Gains
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
2,448
(48)
2,440
Amount reclassified from accumulated other comprehensive income
Total other comprehensive income (loss)
2,489
(3)
2,486
Balance as of December 31, 2019
$
1,386
$
(244)
$
1,142
Other comprehensive income (loss) before reclassification
1,289
(241)
1,048
Amount reclassified from accumulated other comprehensive income
(18)
Total other comprehensive income (loss)
1,271
(206)
1,065
Balance as of December 31, 2020
$
2,657
$
(450)
$
2,207
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Amount Reclassified
from Accumulated
Affected Line on
Other Comprehensive
the Consolidated
Income (Loss) (a)
Statements of Income
December 31, 2020:
Unrealized gains on available for sale securities
$
Net gains on sales of securities
(5)
Income tax expense
$
Net of tax
Amortization of defined benefit items:
Actuarial loss
$
(10)
Other operating expenses
Distribution settlement
(34)
Other operating expenses
Income tax expense
$
(35)
Net of tax
Total reclassification for the period
$
(17)
Net income
December 31, 2019:
Unrealized losses on available for sale securities
$
(1)
Net losses on sales of securities
-
Income tax expense
$
(1)
Net of tax
Amortization of defined benefit items:
Actuarial loss
$
(9)
Other operating expenses
Distribution settlement
(48)
Other operating expenses
Income tax expense
$
(45)
Net of tax
Total reclassification for the period
$
(46)
Net income
(a) Amounts in parentheses indicate debits to net income
Note 20 - Revenue Recognition
Management has determined that the revenue guidance associated with financial instruments, including revenue from loans and securities, does not apply. In addition, certain noninterest income streams such as loan servicing fees, gains on the sale of loans, earnings on bank-owned life insurance, and gains on the sale of investments are also not within the scope of the guidance. As a result, no changes were made during the period related to these sources of revenue.
The revenue guidance is applicable to noninterest revenue streams such as service charges, which includes charges on deposit accounts, interchange fees, and other service fees, and investment management fees. However, the recognition of these revenue streams did not change significantly with the adoption of the guidance. Substantially all of the Company’s revenue is generated from contracts with customers.
The main types of noninterest revenue within the scope of the standard are as follows:
Service Charges
Service charges on deposit accounts consist of insufficient funds (NSF) fees, monthly service fees, minimum balance fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. NSF fees, minimum balance fees, and other deposit account related fees are largely transactional based, and therefore, the
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Income from debit and credit cards is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks. The Company’s performance obligation for interchange fees is largely satisfied, and related revenue recognized, when the services are rendered. Payment is typically received immediately.
Other fee income is primarily comprised of ATM fees and other service charges. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Other service charges include revenue from processing wire transfers, bill pay service, ACH origination, and other services. The Company’s performance obligation for ATM fees and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Investment Management Fees
Investment management fees include three basic components including brokerage commissions, trailers and advisory fees. Brokerage commissions are fees earned from the sale of annuities, stocks, bonds, mutual funds and insurance products and are recognized in the month following the settlement date, which is when the Company has satisfied its performance obligation (that is successful consummation of trade in a compliant manner) and is paid. The Company also receives periodic services fees (i.e. trailers) from mutual fund companies typically based on a percentage of market value and are paid quarterly. Advisory fees are earned over time and based on an annual percentage rate of the market value of the accounts. Advisory fees are charged to customer’s accounts, on a quarterly basis “in advance”, beginning in the first month of account opening and funding in accordance with a customer signed agreement. The first quarter’s pro-rated initial advisory fees are then paid to the Company the month after the account is opened and funded. Thereafter the first pro-rated quarter, the advisory fees are paid to the Company monthly with 1/3 of the quarterly fee being earned each month.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands).
Year Ended December 31,
Noninterest income
In scope of Topic 606:
Service charges
$
2,859
$
2,977
Investment management fees
Noninterest income (in-scope of Topic 606)
3,537
3,672
Noninterest income (out-of-scope of Topic 606)
2,074
1,380
Total noninterest income
$
5,611
$
5,052
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
customers, and therefore, does not experience significant contract balances. As of December 31, 2020 and December 31, 2019, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
Note 21 - 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 either of the years ended December 31, 2020 and December 31, 2019.
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 December 31, 2020 was $1.4 million net of $2.7 million of accumulated amortization as of that date. The balance of the core deposit intangible at December 31, 2019 was $1.9 million net of $2.2 million of accumulated amortization as of that date.
As of December 31, 2020, the estimated future amortization expense for the core deposit intangible was (dollars in thousands):
$
$
1,411
Note
Note 22 - Subsequent Events
Merger
On September 25, 2020 the Company and Dollar announced they had entered into a definitive agreement under which Dollar will acquire the Company in an all cash transaction valued at approximately $158.0 million. The Company’s stockholders will receive $33.00 for each share of Company common stock that they own. The transaction was approved by the Company’s stockholders on January 19, 2021 and is expected to close in the first half of 2021.
Litigation
On December 3, 2020, a purported shareholder of the Company filed a putative class action lawsuit against Standard and its directors in the United States District Court for the Southern District of New York, captioned Philip A. Pochinsky vs. Standard AVB Financial Corp., et al., Docket No. 1:20-cv-10176. The plaintiff generally alleged that the defendants
Standard AVB Financial Corp.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and December 31, 2019
breached their fiduciary duties and violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by disclosing materially incomplete and misleading information about the merger to Standard stockholders. The plaintiff sought injunctive relief, unspecified damages and an award of attorneys’ fees and expenses. On January 12, 2021 Standard filed a Form 8-K with the SEC, which supplemented the disclosures in the Proxy to include the omitted information identified in the complaint. The Plaintiff filed a notice of voluntary dismissal on January 28, 2021. On February 18, 2021, Standard reached an agreement with Plaintiff’s counsel to pay Plaintiff’s attorneys’ fees for having brought about an alleged benefit for Standard’s stockholders in the form of supplement disclosures to the Proxy.
On December 16, 2020, a complaint was filed against Standard and its directors, generally alleging breach of fiduciary duties on the basis of the dissemination of allegedly misleading and incomplete information in the Proxy. The plaintiff sought injunctive relief, unspecified damages and an award of attorneys’ fees and expenses. On January 12, 2021, Standard filed a Form 8-K with the SEC, which supplemented the disclosures in the Proxy to include additional information identified in the complaint. Defendants were never served and no other pleadings were filed in this matter. On March 23, 2021, Standard reached an agreement with Plaintiff’s counsel to pay Plaintiff’s attorneys’ fees and expenses for having brought about an alleged benefit for Standard’s stockholders in the form of supplement disclosures to the Proxy.
Risks and Uncertainties
The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Company’s customers. The pandemic and its associated impacts on trade, travel, employee productivity, unemployment, and consumer spending has resulted in less economic activity and volatility and disruption in the financial markets. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition, and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory, and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees, and vendors. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees, and communities during this difficult time.
.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the 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, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.
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 Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’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.
Management’s Report on Internal Control over Financial Reporting
The Bank’s management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, the Bank conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that the Bank’s system on internal control over financial reporting was effective and met the criteria of the “Internal Control - Integrated Framework (2013)” as of December 31, 2020.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, 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.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
Not applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers and Corporate Governance
Information concerning directors and executive officers of the Company is incorporated herein by reference from the Company’s definitive Proxy Statement (the “Proxy Statement”), specifically the section captioned “Proposal 1 - Election of Directors.”

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
Information concerning executive compensation is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Proposal 1 - Election of Directors.”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain owners and management is incorporated herein by reference from the Company’s Proxy Statement, specifically the sections captioned “Voting Securities and Principal Holders Thereof,” “Proposal 1 - Election of Directors - Director Compensation” and “Summary Compensation Table.”

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning relationships and transactions is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons.”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following documents are filed as part of this Annual Report on Form 10-K.
(A) Reports of Independent Registered Public Accounting Firm
(B) Consolidated Statements of Financial Condition - at December 31, 2020 and 2019
(C) Consolidated Statements of Income - Years ended December 31, 2020 and 2019
(D) Consolidated Statements of Comprehensive Income - Years ended December 31, 2020 and 2019
(E) Consolidated Statement of Changes in Stockholders’ Equity - Years ended December 31, 2020 and 2019
(F) Consolidated Statements of Cash Flows - Years ended December 31, 2020 and 2019
(G) Notes to Consolidated Financial Statements - Years ended December 31, 2020 and 2019
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
2.1
Agreement and Plan of Merger, dated September 24, 2020, by and among Standard AVB Financial Corp., Dollar Mutual Bancorp, and Dollar Acquisition Sub, Inc.(2)
3.1
Articles of Incorporation of Standard AVB Financial Corp., as amended(1)
3.2
Amended and Restated Bylaws of Standard AVB Financial Corp., as amended(2)
4.1
Form of Common Stock Certificate of Standard AVB Financial Corp.(3)
4.6
Description of Standard AVB Financial Corp.’s Securities(4)
10.1
Employment Agreement by and between Timothy K. Zimmerman, Standard AVB Financial Corp. and Standard Bank, PaSB, effective January 25, 2018(5)
10.2
Employment Agreement by and between Andrew W. Hasley, Standard AVB Financial Corp. and Standard Bank, PaSB, effective January 25, 2018(5)
10.3
Employment Agreement by and between Susan A. Parente, Standard AVB Financial Corp. and Standard Bank, PaSB, effective January 25, 2018(5)
10.4
2012 Equity Incentive Plan(6)
10.5
Supplemental Executive Retirement Agreement by and between Standard Bank and Andrew W. Hasley(7)
10.6
Supplemental Executive Retirement Agreement by and between Standard Bank and Timothy K. Zimmerman(7)
10.7
Form of Change in Control Agreement for Certain executive offers(8)
10.8
Amendment to Employment Agreement by and between Timothy K. Zimmerman, Standard AVB Financial Corp. and Standard Bank, PaSB(9)
10.9
Amendment to Employment Agreement by and between Andrew W. Hasley, Standard AVB Financial Corp. and Standard Bank, PaSB(9)
10.10
Amendment to Supplemental Executive Retirement Agreement by and between Standard Bank and Andrew W. Hasley(10)
10.11
Amendment to Supplemental Executive Retirement Agreement by and between Standard Bank and Timothy k. Zimmerman(10)
10.12
Offer Letter and Cancellation Agreement, dated September 24, 2020, by and among Andrew W. Hasley, Standard AVB Financial Corp. and Standard Bank PaSB(2)
10.13
Offer Letter and Cancellation Agreement, dated September 24, 2020, by and among Timothy K. Zimmerman, Standard AVB Financial Corp. and Standard Bank, PaSB(2)
10.14
Offer Letter and Cancellation Agreement, dated September 24, 2020, by and among Susan A. Parente,
Standard AVB Financial Corp. and Standard Bank, PaSB(2)
Subsidiaries of Registrant
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
iXBRL Instance Document(11)
101.SCH
iXBRL Taxonomy Extension Schema Document(11)
101.CAL
iXBRL Taxonomy Calculation Linkbase Document(11)
101.DEF
iXBRL Taxonomy Extension Definition Linkbase Document(11)
101.LAB
iXBRL Taxonomy Label Linkbase Document(11)
101.PRE
iXBRL Taxonomy Presentation Linkbase Document(11)
Cover Page Interactive Data File (formatted as Inline XBRL and continued in Exhibit 101)
(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 the Company’s Form 8-K as filed with the Securities and Exchange Commission on September 25, 2020.
(3) Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K as filed on April 2, 2018.
(4) Incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K as filed on March 16, 2020.
(5) Incorporated by reference to the Form 8-K of Standard AVB Financial Corp. (File No. 001-34893) filed with the Securities and Exchange Commission on January 26, 2018.
(6) Incorporated by reference to the Registration Statement on Form S-4 of Standard AVB Financial Corp. (File No. 333-215069), originally filed with the Securities and Exchange Commission on December 13, 2016, as amended.
(7) Incorporated by reference to the Company’s 8-K as filed with the Securities and Exchange Commission on March 13, 2019.
(8) Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2020.
(9) Incorporated by reference to the Company’s 8-K as filed with the Securities and Exchange Commission on May 5, 2020.
(10) Incorporated by reference to the Company’s 8-K as filed with the Securities and Exchange Commission on June 30, 2020.
(11) We have attached these documents formatted in Inline XBRL (Extensible Business Reporting Language) as Exhibit 101 to this report.