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:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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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:
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margin or reduce the fair value of financial instruments;
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adverse changes in the securities markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate acquired entities, if any;
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changes in consumer spending, borrowing and savings habits;
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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;
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changes in our organization, compensation and benefit plans;
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changes in our financial condition or results of operations that reduce capital available to pay dividends; and
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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, 2019, Standard AVB Financial Corp. had total assets of $984.4 million, total loans receivable, net of  $713.0 million, total deposits of  $734.4 million and stockholders’ equity of  $141.8 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, 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.
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  $984.4 million at December 31, 2019, 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, while still relatively low in the Bank’s market area and the state of Pennsylvania, have risen over the past year and continue to be higher than the national unemployment rate. Within the Pittsburgh PA MSA, Allegheny County continues to have the lowest unemployment rate due to the stability
and impact of healthcare facilities, universities, and strong technology industries. The unemployment rate in Allegany County, Maryland continues to improve though still lags in comparison to the state of Maryland.
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 continues to decline in contrast to the growth in Maryland and the nation. The median age throughout the Bank’s market area is significantly older than that of the nation and respective states. Areas outside Allegheny County, Pennsylvania continue to increase in median age at a rapid rate, however, the median age has begun to decline 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 most 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, 2019, the Bank ranked 16th in deposit market share out of 20 bank and thrift institutions with offices in Allegheny County, Pennsylvania with a market share of 0.3%, 9th in deposit market share out of 20 bank and thrift institutions in Westmoreland County, Pennsylvania with a market share of 2.9%, 8th in deposit market share out of 9 bank and thrift institutions in Bedford County, Pennsylvania, with a market share of 3.4% 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, 2019, $323.8 million, or 45.1%, 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, 2019, the Bank’s largest commercial real estate loan relationship (consisting of two separate commercial real estate loans) had a combined principal balance of  $5.8 million and was secured by one commercial office building and one manufacturing facility. These loans were performing in accordance with their terms and conditions at December 31, 2019.
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 seeks to originate loans to small- and medium-size businesses with principal balances between $50,000 and $5.0 million. At December 31, 2019, the Bank had commercial business loans totaling $47.5 million, or 6.6% of the total loan portfolio.
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, 2019, the Bank’s largest commercial business loan was to a municipality. The loan had a principal balance of  $4.2 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, 2019.
One- to Four-Family Residential Mortgage Loans. At December 31, 2019, $234.4 million, or 32.7%, 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 $510,400 for single-family homes. However, loans in excess of  $510,400 (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, 2019, the Bank originated $5.9 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 a 89% loan to value.
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, 2019, the Bank recognized loan servicing fees of  $312,000. As of December 31, 2019, the principal balance of loans serviced for others totaled $69.0 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, 2019, the Bank’s home equity loans and lines of credit totaled $111.5 million and represented 15.5% 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, 2019 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, 2019, commercial construction loans totaled $8.2 million and are included with commercial real estate loans. At December 31, 2019, the additional un-advanced portion of these construction loans totaled $5.7 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, 2019, residential construction loans totaled $1.2 million and are included with one-to-four family residential and construction loans. At December 31, 2019, the additional un-advanced portion of these construction loans totaled $900,000.
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, 2019, the Bank sold approximately 64.3% or $13.9 million of the fixed rate one-to-four family mortgage loans it originated. Of that total, 97.5% or $13.6 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 loan to a secondary market lender whereby the Bank does not originate the loan. In 2019, the Bank referred $5.0 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, 2019, the Bank was servicing one-to-four family mortgage loans owned by others with a principal balance of  $69.0 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, 2019, the Bank had $45.8 million in loan participations bought where another bank was the lead lender. Conversely, the Bank had $7.1 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 of  $250,000 or greater and commercial real estate loans of  $500,000 or greater. 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 $8.5 million at December 31, 2019.
Investments
The Bank’s Investment Committee, which is comprised of the Chief Executive Officer, President, Chief Financial Officer and Director of Finance, 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, 2019, all of the Company’s securities were classified as available for sale. The Company’s securities portfolio at December 31, 2019 consisted primarily of securities with the following fair values: $91.5 million of mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises; $58.8 million of municipal obligations;
$8.5 million of U.S. government and agency obligations; $2.6 million of corporate bonds and $3.0 million of equity securities. At December 31, 2019, 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, 2019 and December 31, 2018 - 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, 2019, there were no FHLB short-term borrowings and long-term advances totaled $96.0 million, or 11.4%, of total liabilities. Repurchase agreements totaled $3.7 million, or 0.4%, of total liabilities. Financing lease liabilities totaled $3.1 million, or 0.4%, of total liabilities at December 31, 2019. At December 31, 2019, the Bank had access to additional FHLB borrowings of up to $335.8 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 a 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.
Personnel
As of December 31, 2019, the Bank had 146 full time and 11 part time employees. The Bank’s employees are not represented by any collective bargaining group. Management believes they have a good working relationship with their employees.
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 also 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 much 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
ITEM 1A. Risk Factors
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, 2019, 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 decrease by approximately $3.8 million, or 2.42%, if there was an instantaneous 200 basis point increase in market interest rates.
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 economic conditions could adversely affect the Company’s financial condition and results of operations.
During the financial crisis, there were dramatic declines in the housing market, where falling real estate values and increasing foreclosures, unemployment, and under-employment negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions. The Bank’s lending business is tied, in large part, to the housing market and real estate markets in general. A return to these conditions or a general decline in economic conditions could result in more limited demand for the construction of new housing, and weakness in home pricing, and could ultimately result in increased delinquencies on the Bank’s residential real estate loans, commercial real estate loans, commercial business loans, home equity loans and lines of credit and consumer loans. These conditions may also cause a further reduction in loan demand, and increases in the Bank’s non-performing assets, net charge-offs and provisions for loan losses, as well as adversely affect the Company’s liquidity and the willingness of certain counterparties and customers to do business with the Company. Negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which the Company does business, the market for and value of the loans and investments, and ongoing operations, costs and profitability. Moreover, declines in the stock market in general, or stock values of financial institutions and their holding companies specifically, could adversely affect the Company’s stock performance.
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.
Changes in the valuation of the Company’s securities portfolio could adversely affect the Company.
As of December 31, 2019, the Company’s investment securities portfolio, which includes government agency securities, mortgage-backed securities, municipal obligations, corporate bonds and marketable equity securities totaled $164.3 million, or 16.7% 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.
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.
A New Accounting Standard May Require the Bank to Increase the Allowance For Loan Losses and May Have a Material Adverse Effect on the Company’s Financial Condition and Results of Operations.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company for the 2023 fiscal year. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require the Bank to increase the allowance for loan losses, and to greatly increase the types of data it would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in the Bank’s allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on the Company’s financial condition and operating results.
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 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. In 2019, the Federal Reserve decreased the federal funds target rate by 75 basis points. Nevertheless, the yield curve continued to remain flat. A flat yield curve combined with low interest rates generally leads to lower revenue and reduced margins because it tends to limit the Company’s ability to increase the spread between asset yields and funding costs. Sustained periods of time with a flat yield curve coupled with low interest rates, or an inversion of the yield curve, could have a material effect on the Company’s net interest margin and earnings.
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 662∕3% 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 will continue to incur significant costs to ensure compliance with corporate governance and accounting requirements.
The Company expects to continue to incur significant costs associated with public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. The Company expects all of these applicable rules and regulations will continue to increase legal and financial compliance costs and to make some activities more time-consuming and costly.
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.
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.”
The Company may be adversely affected by recent changes in U.S. tax laws.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for certain home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.
The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in the Bank’s loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in the Bank’s provision for loan losses, which would reduce the Company’s profitability and could materially adversely affect business, financial condition and results of operations.
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.
The Company’s stock price may be volatile due to limited trading volume.
The Company’s common stock is quoted on the NASDAQ market place. However, the average daily trading volume in the Company’s common stock has been relatively small. As a result, trades involving a relatively small number of shares may have a significant effect on the market price of the common stock, and it may be difficult for investors to acquire or dispose of large blocks of stock without significantly affecting the market price.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
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 $9.9 million at December 31, 2019.
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 1/31/2020)
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
Branch Name
Address
Owned or Leased
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
ITEM 3.
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, 2019, 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.
ITEM 4.
ITEM 4. Mine Safety Disclosures
Not Applicable.
PART II
ITEM 5.
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, 2019, the Company had 4,689,354 shares of common stock outstanding and 558 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, 2019 regarding equity compensation plans that have been approved by stockholders. The Company has no equity based benefit plans that were not approved by stockholders.
(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, 2019.
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 2019:
(1)
On December 19, 2018, the Company announced that the Board of Directors authorized the repurchase of up to 240,000 shares, or approximately 5% of the Company’s outstanding common stock. 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 will 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. The stock repurchase program has an expiration date of May 26, 2020.
On January 29, 2020, the Company announced that its Board of Directors approved a new stock repurchase program. The new stock repurchase program is to be implemented upon the completion of the
Company’s current stock repurchase program which had 101,211 shares available for repurchased at December 31, 2019. Pursuant to the new stock repurchase program, the Company may repurchase up to an additional 230,000 shares of its common stock, or approximately 5% of its current outstanding shares.
ITEM 6.
ITEM 6. Selected Financial Data
Not applicable.
ITEM 7.
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, 2019 and December 31, 2018, and the Company’s consolidated results of operations for the year ended December 31, 2019. 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 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. 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 totaled approximately $371.4 million, or 51.7% of the gross loan portfolio at December 31, 2019. 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. A program is in place to evaluate all existing locations as well as digital and web-based service delivery channels. The objective is to ensure an efficient service delivery system that balances the use of technology and personal customer service. The Bank also evaluates additional community banking office expansion opportunities, primarily through purchases of offices, to enhance its presence in its current market and adjacent areas.
•
Pursuing future expansion and whole-bank acquisitions, although there are no current arrangements or agreements with respect to any such acquisitions. The Company intends to evaluate acquisitions of other financial institutions on an on-going basis as industry consolidation continues, strategic transactions are identified and other opportunities present themselves.
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 a 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.
Balance Sheet Analysis: December 31, 2019 and December 31, 2018
General. The Company’s total assets as of December 31, 2019 increased $12.6 million, or 1.3%, to $984.4 million from $971.8 million at December 31, 2018. The increase in total assets included an increase in cash and cash equivalents of  $16.2 million, or 100.1%, and an increase in investment and mortgage-backed securities of  $13.4 million, or 9.1%, partially offset by a decrease in loans receivable of  $16.0 million, or 2.2%, for the year ended December 31, 2019.
Cash and Cash Equivalents. Cash and cash equivalents increased $16.2 million, or 100.1%, to $32.4 million at December 31, 2019 from $16.2 million at December 31, 2018. The increase primarily resulted from customer deposits and loan repayments, partially offset by purchases of investment and mortgage-backed securities and repayments of short-term and long-term borrowings during the period.
Investment Securities. Investment securities available for sale increased $3.7 million, or 5.6%, to $69.9 million at December 31, 2019 from $66.2 million at December 31, 2018. Purchases of investment securities totaled $13.9 million, partially offset by calls and maturities of  $5.3 million and sales of  $6.3 million during the year ended December 31, 2019. Additionally, there was a $1.5 million increase in the unrealized gain on investment securities during the period.
Equity Securities. Equity securities were $3.0 million and $2.7 million at December 31, 2019 and December 31, 2018, respectively. There were no purchases or sales of equity securities during the year ended December 31, 2019.
Mortgage-Backed Securities. The Company’s mortgage-backed securities available for sale increased $9.7 million, or 11.8%, to $91.5 at December 31, 2019 from $81.8 million at December 31, 2018. Purchases of mortgage-backed securities totaled $30.4 million, partially offset by repayments of  $20.3 million and sales of  $1.3 million during the year ended December 31, 2019. Additionally, there was a $1.7 million increase in the unrealized gain on mortgage-backed securities during the period.
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, 2019 and December 31, 2018, all of the Company’s investment, equity, and mortgage-backed securities were classified as available for sale and recorded at current fair value.
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. During the year ended December 31, 2018, $40.2 million of securities purchased were partially offset by $6.7 million of securities sales and $13.4 million of securities calls and repayments. For the year ended December 31, 2018, there was a net realized gain of  $377,000 on the sale of securities.
At December 31, 2019 and December 31, 2018, the Company held 42 securities and 118 securities in unrealized loss positions of  $471,000 and $1.9 million, 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, 2019 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.
Loans. At December 31, 2019, net loans were $713.0 million, or 72.4% of total assets, compared to $729.0 million, or 75.0% of total assets at December 31, 2018. The $16.0 million, or 2.2%, decrease in total loans was the result of loan payoffs and amortization exceeding loan production during the period. Commercial real estate and construction loans and commercial business loans increased $15.1 million or 4.9%, and $1.3 million or 2.9%, respectively. These increases were offset by decreases in the one-to-four family residential and construction, home equity loans and lines of credit, and other loan segments of  $19.5 million or 7.7%, $11.9 million or 9.6%, and $569,000 or 50.0%, respectively.
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):
*
The Company changed its fiscal year end from September to December in 2016.
Loan Portfolio Maturities. The following table summarizes the maturity of the loan portfolio at December 31, 2019 (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.
Fixed and Adjustable Rate Loans. The following table summarizes the maturity of the Bank’s fixed- and adjustable-rate loans at December 31, 2019 (dollars in thousands):
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 $802,000, or 3.6%, to $23.4 million at December 31, 2019, from $22.6 million at December 31, 2018.
Goodwill. Goodwill represents the excess of the purchase price over the cost of net assets purchased. Goodwill was $25.8 million at December 31, 2019 and December 31, 2018.
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 $16.5 million, or 2.3%, to $734.4 million at December 31, 2019 from $717.9 million at December 31, 2018. The increase resulted from increases in money market and interest-bearing checking accounts of  $19.0 million or 21.7%, and $11.3 million or 11.3%, respectively. These increases were partially offset by decreases in non-interest-bearing checking accounts, savings accounts and time deposits of $8.5 million or 6.3%, $3.6 million or 2.4%, and $1.6 million or 0.6%, 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):
At December 31, 2019, the scheduled maturities of time deposits in denominations of  $100,000 or more was $112.7 million. The following table summarizes the maturity of those certificates at December 31, 2019 (dollars in thousands):
Borrowings. Borrowed funds decreased by $8.8 million, or 7.9%, to $102.8 million at December 31, 2019 from $111.6 million at December 31, 2018. The decrease was primarily due to the repayment of maturing long term advances as well as pay downs on both amortizing long term advances and the overnight borrowing line. These decreases were partially offset by new advances entered into and the recording of financing lease liabilities during the year. Federal Home Loan Bank advances decreased $9.0 million, or 8.5%, to $96.0 million from $105.0 million at December 31, 2018. The decrease in advances was due to $34.2 million in principal repayments made on existing advances partially offset by $25.2 million in additional advances entered into during the period. The Bank adopted ASU 2016-02 and its related amendments as of January 1, 2019 which resulted in the recognition of financing lease liabilities on the Consolidated Statements of Financial Condition. Financing lease liabilities, which are included in the long-term borrowings, were $3.1 million at December 31, 2019 compared to $0 at December 31, 2018. There were no short-term borrowings at December 31, 2019 compared to $4.5 million at December 31, 2018. During the year ended December 31, 2019, proceeds from short-term borrowings were $105.0 million, offset by repayments of $109.5 million.
The following table summarizes short-term balances and weighted average interest rates at the dates indicated (dollars in thousands):
Total Stockholders’ Equity. Stockholders’ equity increased $4.0 million, or 2.9%, to $141.8 million at December 31, 2019 from $137.9 million at December 31, 2018. The increase was the result of net income of $8.8 million earned during the year ended December 31, 2019 as well as a $2.5 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 $4.1 million in dividends paid during the
year ended December 31, 2019. Additionally, in accordance with the Company’s stock repurchase program, 138,789 shares of the Company’s outstanding stock were repurchased for $3.8 million during the year ended December 31, 2019.
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.
(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, 2019 and December 31, 2018 (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.
Comparison of Operating Results for the Years Ended December 31, 2019 and December 31, 2018
General. Net income was $8.8 million for each of the years ended December 31, 2019 and December 31, 2018. Earnings per share for the current period was $1.91 for basic and $1.90 for fully diluted compared to $1.90 for basic and $1.88 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, 2019 were 0.90% and 6.28%, respectively, compared to 0.90% and 6.55%, respectively, for the year ended December 31, 2018.
Net Interest Income. Net interest income for the year ended December 31, 2019 was $28.4 million, a decrease of  $899,000, or 3.1%, compared to $29.3 million for the year ended December 31, 2018. The decrease was primarily the result of an increase in the cost of interest-bearing deposits partially offset by an increase in the yield on interest-earning assets. The net interest rate spread and net interest margin were 2.77% and 3.10%, respectively, for the year ended December 31, 2019, compared to 2.90% and 3.21%, respectively, for the year ended December 31, 2018.
Interest and Dividend Income. Total interest and dividend income increased by $909,000, or 2.5%, to $37.7 million for the year ended December 31, 2019 compared to $36.8 million for the year ended December 31, 2018. The increase was primarily the result of a 13 basis point increase in the average yield on interest-earning assets to 4.08% for the year ended December 31, 2019 from 3.95% for the prior year.
Interest income on loans increased $454,000, or 1.4%, to $32.5 million for the year ended December 31, 2019 compared to $32.0 million for the year ended December 31, 2018. The increase was primarily the result
of a 16 basis point increase in the average yield on loans receivable to 4.41% for the year ended December 31, 2019 from 4.25% for the prior year. The increase in the average yield was attributable to some adjustable rate loans resetting higher as a result of increases in general market rates earlier in the year and the continued repositioning of the loan portfolio to emphasize commercial real estate and business lending compared to the prior year. The increase in interest income resulting from the increase in the average yield was partially offset by a decrease in the average balance of loans receivable of  $9.3 million, or 1.3%, to $731.1 million for the year ended December 31, 2019 compared to the prior year.
Interest income on investment and mortgage-backed securities increased by $377,000, or 9.8%, to $4.2 million for the year ended December 31, 2019 from $3.9 million for the year ended December 31, 2018. The increase was primarily the result of an increase in the average balance of investment and mortgage-backed securities of  $14.5 million, or 9.9%, to $160.4 million for year ended December 31, 2019 compared to the prior year. In addition, the average yield earned on investment and mortgage-backed securities increased eight basis points to 2.63% for the year ended December 31, 2019 from 2.55% for the prior year. The increase in the average yield was due to new security purchases made at higher interest rates during the period.
Interest income on FHLB stock and other restricted stock increased $28,000 or 4.8% to $618,000 for the year ended December 31, 2018 compared to $590,000 for the year ended December 31, 2018. The increase was primarily the result of an increase in the average yield to 8.05% for the year ended December 31, 2019 from 6.85% for the prior year. The FHLB increased the dividend yield on both activity and membership stock as of the fourth quarter of 2018. The additional dividend income to true up the 2018 quarter was received in 2019. The increase in interest income resulting from the increase in the average yield was partially offset by a decrease in the average balance of FHLB stock and other restricted stock of  $936,000, or 10.9%, to $7.7 million for the year ended December 31, 2019 compared to the prior year.
Interest income on interest-earning deposits increased $50,000 or 15.5% to $372,000 for the year ended December 31, 2019 compared to $322,000 for the year ended December 31, 2018. The increase was primarily the result of a 44 basis point increase in the average yield on interest-earning deposits to 2.08% for the year ended December 31, 2019 from 1.64% for the prior year as a result of higher short-term interest rates for much of the year. The increase in interest income resulting from the increase in the average yield was partially offset by a decrease in the average balance of interest-earning deposits of  $1.8 million, or 9.1%, to $17.9 million for the year ended December 31, 2019 compared to the prior year.
Interest Expense. Total interest expense increased by $1.8 million, or 24.3%, to $9.3 million for the year ended December 31, 2019 from $7.5 million for the year ended December 31, 2018. The increase was primarily the result of a 26 basis point increase in the average cost of interest-bearing liabilities to 1.31% for the year ended December 31, 2019 from 1.05% for the prior year.
Interest expense on deposits increased by $2.0 million, or 40.9%, to $7.0 million for the year ended December 31, 2019 from $5.0 million for the year ended December 31, 2018. The increase was primarily the result of a 31 basis point increase in the average cost of interest-bearing deposits to 1.17% for the year ended December 31, 2019 compared to 0.86% for the prior year due to a rising interest rate market for much of the year. In addition, the average balance of interest-bearing deposits increased $25.6 million, or 4.5%, for the year ended December 31, 2019 compared to the prior year.
Interest expense on borrowed funds decreased $228,000, or 9.2%, to $2.3 million for the year ended December 31, 2019 from $2.5 million for the year ended December 31, 2018. The decrease was primarily the result of a $22.9 million, or 18.1%, decrease in the average balance of borrowings to $103.4 million for the year ended December 31, 2019 compared to the prior year. The decrease in interest expense resulting from the decrease in the average balance was partially offset by a 20 basis point increase in the cost of borrowings to 2.18% for the year ended December 31, 2019 from 1.98% for the year ended December 31, 2018 due to the repayment of lower cost borrowings and new advances entered into at higher rates during the period as a result of increases in general market rates for much of the year.
Provision for Loan Losses. Provision for loan losses increased $153,000, or 26.8%, to $725,000 for the year ended December 31, 2019, compared to $572,000 for the year ended December 31, 2018. 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. See “Non-Performing and Problem Assets” for additional information.
Noninterest Income. Noninterest income increased $705,000, or 16.2%, to $5.1 million for the year ended December 31, 2019 compared to $4.3 million for the year ended December 31, 2018. The increase was primarily the result of a $714,000, or 147.5%, change in net equity securities fair value adjustments from a loss of  $484,000 for the year ended December 31, 2018 to a gain of  $230,000 for the year ended December 31, 2019 related to fluctuations in the market prices of the equity securities. Additionally, there were increases in loan sale gains, service charges and investment management fees of  $202,000 or 284.5%, $76,000 or 2.6%, and $51,000 or 7.9%, respectively, for the year ended December 31, 2019 compared to the prior year. The increase in loan sale gains for the year was reflective of the Bank’s business strategy to continue to expand it’s product mix and capacity to sell residential loans in the secondary mortgage market. Those increases were partially offset by there being no gains on the sales of equity securities during the twelve months ended December 31, 2019 compared to $394,000 in the prior year.
Noninterest Expense. Noninterest expenses decreased $442,000, or 2.0%, to $21.6 million for the year ended December 31, 2019 from $22.1 million for the year ended December 31, 2018. Included in the fluctuation for the year were decreases in other operating expenses, core deposit amortization, premises and occupancy expenses, and federal deposit insurance of  $385,000 or 8.1%, $209,000 or 25.0%, $210,000 or 8.0%, and $188,000 or 64.2%, respectively, compared to the prior year. These decreases were offset to a large extent by increases in compensation and benefits of  $394,000, or 3.2%, as well as increases in automatic teller machine and data processing expenses of  $83,000 or 16.2% and $73,000 or 11.3%, respectively, compared to the prior year. The lower federal deposit insurance was due to the application of small bank credits to the third and fourth quarter’s assessment.
Income Tax Expense. The Company recorded a provision for income tax of  $2.3 million for the year ended December 31, 2019 compared to $2.2 million for the year ended December 31, 2018. The effective tax rate was 21.0% for the year ended December 31, 2019 and 20.3% for the year ended December 31, 2018.
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). During the year ended December 31, 2019, there were two loans modified as TDRs. At December 31, 2018, 2017, and 2016 and September 30, 2016, there were no TDRs.
Loans in process of foreclosure totaled $1.1 million at December 31, 2019.
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, 2019, 2018, 2017, and 2016 and September 30, 2016, foreclosed real estate totaled $404,000, $486,000,
$419,000, and $251,000 and $281,000, respectively. Foreclosed real estate at December 31, 2019 consisted of two residential properties and one commercial real estate property.
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, 2019 (dollars in thousands):
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 such as national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, depth and ability of management; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or
part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. 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):
The allowance for loan losses at December 31, 2019 represented 0.68% of total loans, compared to 0.60% at December 31, 2018.
During the year ended December 31, 2019, there was an increase in the provision for the commercial real estate and construction loan class primarily due to growth in the loan balances included in the allowance calculation for that loan class as well as charge-offs incurred during the year; there was a decrease in the provision for the one-to-four family residential and construction loan class primarily due to a decline in the loan balances included in the allowance calculation for that loan class as well as a decrease in the qualitative factors; and there was an increase in the provision for the commercial business loan class due to both an increase in the balance of loans included in the allowance calculation for that loan class as well as an
increase in the qualitative factors. The allowance for the home equity loans and lines of credit and the other loan classes remained consistent with the previous 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.
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, 2019.
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, 2019, cash and cash equivalents totaled $32.4 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, 2019, there were $121.7 million in loan commitments outstanding of which $58.6 million were for commercial loans and lines, $40.5 million were for one-to-four-family and construction loans and $22.6 million were for standby letters of credit and other commitments including consumer overdraft lines. Certificates of deposit due within one year of December 31, 2019 totaled $127.6 million, or 17.4% 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, 2019, the Bank had a net decrease in loans of  $16.0 million as a result of loan payoffs exceeding loan production during the year. During the year ended December 31, 2018, the Bank had a net decrease in loans of  $18.1 million. Purchases of investment securities totaled $44.2 million and $40.2 million for the years ended December 31, 2019 and 2018, 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  $16.5 million and $23.0 million during the years ended December 31, 2019 and December 31, 2018, 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  $9.0 million and $2.7 million for the years ended December 31, 2019 and December 31, 2018, respectively. There were net decreases in FHLB short term borrowings of  $4.5 million and $22.5 million for the years ended December 31, 2019 and December 31, 2018, respectively. At December 31, 2019, the Bank had the ability to borrow up to an additional $335.8 million from the FHLB.
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, 2019, the Company had unused commitments totaling $121.7 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.
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, 2019 and 2018, changes in market interest rates were the primary reasonfor 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, 2019, 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.
(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.
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, 2019 and 2018; 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, 2019 and 2018, 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 16, 2020, which expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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. 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.
We have served as the Company’s auditor since 2008.
Cranberry Township, Pennsylvania
March 16, 2020
S.R. Snodgrass, P.C. • 2009 Mackenzie Way, Suite 340 • Cranberry Township, Pennsylvania 16066 • Phone: 724-934-0344 • Fax: 724-934-0345
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Standard AVB Financial Corp.
Opinion on Internal Control over Financial Reporting
We have audited Standard AVB Financial Corp. and subsidiaries’ (the “Company”) internal
control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, of the Company; and our report dated March 10, 2020, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
S.R. Snodgrass, P.C. • 2009 Mackenzie Way, Suite 340 • Cranberry Township, Pennsylvania 16066 • Phone: 724-934-0344 • Fax: 724-934-0345
that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Cranberry Township, Pennsylvania
March 16, 2020
S.R. Snodgrass, P.C. • 2009 Mackenzie Way, Suite 340 • Cranberry Township, Pennsylvania 16066 • Phone: 724-934-0344 • Fax: 724-934-0345
Standard AVB Financial Corp.
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statements of Income
(Dollars in thousands, except per share data)
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
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)
See accompanying notes to the consolidated financial statements.
Standard AVB Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
See accompanying notes to the consolidated financial statements.
STANDARD AVB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies
The following comprise the significant accounting policies, which Standard AVB Financial Corp. and subsidiaries (the “Company”) follow in preparing and presenting their consolidated financial statements:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Standard AVB Financial Corp. and its direct and indirect wholly owned subsidiaries, Standard Bank, PaSB (the “Bank”), and Westmoreland Investment Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Standard AVB Financial Corp. owns all of the outstanding shares of common stock of the Bank.
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 2020, 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.
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, mortgage-backed and equity securities by classifying them into one of three categories at the time of purchase: trading, held to maturity, and available for sale.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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 2019 or 2018.
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 2019 or 2018.
Available-for-sale securities are 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.
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 2019, 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 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, 2019 or December 31, 2018.
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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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 losses 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.
Allowance for Loan Losses
The allowance for loan and lease losses represents the amount which management estimates is necessary to provide for probable losses in its loan and lease portfolio. The Company uses the allowance method in providing for loan and lease losses. Accordingly, all loan and lease losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan and lease 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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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. There was no impairment at December 31, 2019 or December 31, 2018.
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.
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.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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, 2019 and December 31, 2018, 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. The balance of core deposit intangibles was $1.9 million and $2.5 million, net of accumulated amortization of $2.2 million and $1.6 million, for the years ended December 31, 2019 and December 31, 2018, respectively.
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 Company accounts for income taxes in accordance with GAAP.
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.
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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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, 2019 or December 31, 2018. 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, 2019 and December 31, 2018 totaled $262,000 and $289,000, 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.
On January 1, 2018, the Company adopted ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity securities to be measured at fair value with net unrealized gains and losses recognized in noninterest income on the Consolidated Statements of Income. As a result of the adoption of this guidance, there was a one-time cumulative effect adjustment of  $416,000 between retained earnings and accumulated other comprehensive income on the Consolidated Statement of Financial Condition for December 31, 2018. The adjustment had no impact on net income for the year ended December 31, 2018.
Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands except share and per share data):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
Options to purchase 247,781 and 266,695 shares of common stock were outstanding as of December 31, 2019 and December 31, 2018, respectively, with an average exercise price of  $17.07 and $17.12, respectively. There were no anti-dilutive options as of December 31, 2019 or December 31, 2018.
As of December 31, 2019 and December 31, 2018, there were 1,944 and 250 shares of outstanding restricted stock, respectively, that were not fully vested and included in the computation of 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 Adopted in 2019
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. Additionally, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which, among other things, provided an additional transition method that allows entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU 2016-02 and its related amendments as of January 1, 2019, which resulted in the recognition of finance right-of-use assets and finance lease liabilities totaling $1.1 million and $1.2 million, respectively.
The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. Additional lease disclosures can be found in Note 7 contained herein. There was no cumulative effect adjustment to the opening balance of retained earnings required.
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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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 Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. The Company has been working with a third party to evaluate the various CECL methodologies and decided to utilize the vintage method. The Company is continuing to work through implementation of that method and determine what impact it will have on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. 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 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
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 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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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, 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 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates 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. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs with the exception of the ASU on leases which was adopted January 1, 2019 as noted in the Accounting Standards Adopted in 2019 section above.
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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 1 - Summary of Significant Accounting Policies - (continued)
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.
Note 2 - Investment Securities
Investment securities available for sale at December 31, 2019 and December 31, 2018 were as follows (dollars in thousands):
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. For the year ended December 31, 2018, gains on sales of investment securities were $1,000 and losses were $18,000 with total proceeds from such sales of  $4.8 million.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 2 - Investment Securities - (continued)
Investment securities with a carrying value of  $11.9 million and $11.6 million were pledged to secure repurchase agreements and public funds accounts at December 31, 2019 and December 31, 2018, respectively.
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, 2019 and December 31, 2018 (dollars in thousands):
At December 31, 2019, 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, 2019 and December 31, 2018, and the portion of unrealized gains and losses for those periods that relate to equity investments held (dollars in thousands):
There were no sales of equity securities during the year ended December 31, 2019. During the year ended December 31, 2018, gains on sales of equity securities were $427,000 and losses were $33,000 with total proceeds from such sales of  $1.9 million.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 4 - Mortgage-Backed Securities
Mortgage-backed securities available for sale at December 31, 2019 and December 31, 2018 were as follows (dollars in thousands):
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, 2019, losses on sales of mortgage-backed securities were $1,000 and proceeds from such sales were $1.3 million. There were no sales of mortgage-backed securities during the year ended December 31, 2018.
Mortgage-backed securities with a carrying value of  $13.3 million and $10.4 million were pledged to secure repurchase agreements and public funds accounts at December 31, 2019 and December 31, 2018, respectively.
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, 2019 and December 31, 2018 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 4 - Mortgage-Backed Securities - (continued)
At December 31, 2019, the Company held 34 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.
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, 2019 and December 31, 2018 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
Total loans at December 31, 2019 and December 31, 2018 were net of deferred loan fees of  $233,000 and $226,000, respectively. The Company’s primary business activity is with customers located within its local trade area. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The three segments are: real estate, commercial business and other. The real estate loan segment is further disaggregated into three classes. One-to-four family residential mortgages (including residential construction loans) 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 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.
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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
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 borrower’s loan. 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 remain on accrual status and there were no specific reserves established. The loans are included in the impaired loan table below. The Company did not modify any loans as TDRs during the year ended December 31, 2018. The Company did not have any TDRs where a concession had previously been made that then defaulted during the years ended December 31, 2019 or December 31, 2018.
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, 2019 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
There were no impaired loans at December 31, 2018.
The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
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.
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, 2019 and December 31, 2018 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
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. The following table presents the segments of the loan portfolio summarized by the past due status of the loans still accruing and nonaccrual loans as of December 31, 2019 and December 31, 2018 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. Management tracks the historical net charge-off activity for the loan segments which may be adjusted for qualitative factors. Pass rated credits are segregated from criticized credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors are evaluated using information obtained from internal, regulatory, and governmental sources such as national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, depth and ability of management; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Management utilizes an internally developed spreadsheet to track and apply the various components of the allowance. During the year ended December 31, 2019, there was an increase in the provision for the commercial real estate and construction loan class primarily due to growth in the loan balances included in the allowance calculation for that loan class as well as charge-offs incurred during the year; there was a decrease in the provision for the one-to-four family residential and construction loan class primarily due to a
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
decline in the loan balances included in the allowance calculation for that loan class as well as a decrease in the qualitative factors; and there was an increase in the provision for the commercial business loan segment primarily due to an increase in both the historical loss factor and the qualitative factor related to trends in volume as well as an increase in the balance of loans included in the allowance calculation for that loan segment. The allowance for the home equity loans and lines of credit class and the other loan segment remained consistent with the previous year.
The following tables summarize the activity in the primary segments of the ALL for the years ended December 31, 2019 and December 31, 2018 as well as the allowance required for loans individually and collectively evaluated for impairment as of December 31, 2019 and December 31, 2018 (dollars in thousands):
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.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 5 - Loans Receivable - (continued)
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.
Loans serviced for others were $69.0 million and $66.3 million at December 31, 2019 and December 31, 2018, respectively. Net mortgage servicing rights were $487,000 and $454,000 at December 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, foreclosed real estate totaled $404,000 and $486,000, respectively. As of December 31, 2019, included within the foreclosed assets totaling $404,000 were two residential properties and one commercial real estate property. As of December 31, 2018, included within the foreclosed assets totaling $486,000 were two residential properties and one commercial real estate property. Additionally, the Company had initiated formal foreclosure procedures on $1.1 million in one-to-four family residential loans and $53,000 in home equity loans as of December 31, 2019.
Note 7 - Office Properties and Equipment
Office properties and equipment at December 31, 2019 and December 31, 2018 are summarized by major classifications as follows (dollars in thousands):
Depreciation expense was $1.1 million and $771,000 for the years ended December 31, 2019 and December 31, 2018, respectively.
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 $3.4 million and lease liabilities totaling $3.4 million related to those financing leases. Some of the leases includes 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, 2019 Consolidated Statements of Financial Condition.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 7 - Office Properties and Equipment - (continued)
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 year ended December 31, 2019 (dollars in thousands):
The discount rates utilized to determine the interest expense portion of the lease liability were obtained by utilizing FHLB advance rates for a similar term borrowings as of January 1, 2019. The following table presents the weighted-average remaining term and discount rates for financing leases outstanding as of December 31, 2019:
The following table presents the undiscounted cash flows due related to financing leases as of December 31, 2019, along with a reconciliation to the discounted amount recorded in long-term borrowings on the December 31, 2019 Consolidated Statements of Financial Condition (dollars in thousands):
Note 8 - Deposits
Deposit balances at December 31, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 8 - Deposits - (continued)
At December 31, 2019, the scheduled maturities of time deposit are as follows (dollars in thousands):
At December 31, 2019, the scheduled maturities of time deposit in denominations of  $100,000 or more are as follows (dollars in thousands):
Time deposits include certificates of deposit in denominations of  $250,000 or more. Such deposits aggregated $46.0 million and $35.2 million at December 31, 2019 and December 31, 2018, respectively.
Note 9 - Short-term and 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, 2019, the Bank had approximately $431.8 million in maximum borrowing capacity available as collateral for existing and future borrowings. Included in the $431.8 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, 2019. At December 31, 2018, the outstanding balance under this agreement was approximately $4.5 million with an interest rate in effect on that borrowing of 2.64%.
The outstanding balances and related information for short-term borrowings at or for the years ended December 31, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 9 - Short-term and Long-term Borrowings - (continued)
Advances, which are typically more long-term in nature, are also available from the FHLB. At December 31, 2019 and December 31, 2018, the Bank had long-term borrowings including FHLB advances as well as lease liabilities as follows (dollars in thousands):
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, 2019 AND DECEMBER 31, 2018
Note 10 - Securities Sold Under Agreement to Repurchase - (continued)
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, 2019 and December 31, 2018 are presented in the following tables (dollars in thousands):
The outstanding balances and related information for repurchase agreements at or for the years ended December 31, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 11 - Income Taxes
Total income tax expense for the years ended December 31, 2019 and December 31, 2018 was as follows (dollars in thousands):
The difference between the expected and actual tax provision expressed as a percentage of earnings before income tax provision are as follows:
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, 2019 and December 31, 2018 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 11 - Income Taxes - (continued)
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 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 2015 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania and Maryland taxing authorities.
Note 12 - Regulatory Capital Requirements
Included in interest-earning deposits with other institutions are required federal reserves of  $11.7 million and $11.5 million at December 31, 2019 and December 31, 2018, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System. 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.
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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 12 - Regulatory Capital Requirements - (continued)
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, 2019 and December 31, 2018, 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 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).
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
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 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 straight line over the 11 month vesting period. On March 12, 2019, 2,727 shares of restricted stock were awarded to employees out of the 2011 Plan. The awards vest over 34 months and the related compensation expense is being recognized straight line over the vesting period. On September 28, 2018, 250 shares of restricted stock were awarded out of the 2011 Plan. The award vests over two years and the related compensation expense will be recognized straight line over the vesting period. At December 31, 2019, there were 72,588 and 101,144 shares available to be issued under the 2011 Plan and the 2012 Plan, respectively.
For both the years ended December 31, 2019 and December 31, 2018, there was no recorded compensation expense related to stock options. As of December 31, 2019, all outstanding stock options were fully vested and there was no unrecognized compensation cost.
The following table summarizes transactions regarding the options under the Plan:
For the year ended December 31, 2019, there was $81,000 of compensation expense recorded on restricted stock grants. For the year ended December 31, 2018, there was $972 of compensation expense recorded on restricted stock grants. As of December 31, 2019, there was $59,000 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, 2019 AND DECEMBER 31, 2018
Note 13 - Stock Based Compensation - (continued)
The following table summarizes transactions regarding restricted stock under the Plan:
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  $410,000 and $440,000 was recognized during the years ended December 31, 2019 and December 31, 2018, 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, 2019, the ESOP held a total of 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. As of December 31, 2018, the ESOP held 254,610 shares of the Company’s stock. Of the 254,610 shares, there were 173,458 unallocated as of December 31, 2018 with a fair market value of $5.2 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, 2019 AND DECEMBER 31, 2018
Note 15 - Employee Benefit Plans - (continued)
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, 2019 and December 31, 2018 (dollars in thousands):
The accumulated benefit obligation for the defined benefit pension plan was approximately $3.5 million and $3.4 million at December 31, 2019 and December 31, 2018, respectively.
Components of Net Periodic Benefit Cost
The net periodic pension cost for the years ended December 31, 2019 and December 31, 2018 was as follows (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 15 - Employee Benefit Plans - (continued)
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 2020 are as follows (dollars in thousands):
Assumptions
The weighted-average assumptions used to determine benefit obligations at December 31, 2019 and December 31, 2018 were as follows:
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2019 and December 31, 2018 were as follows:
The long-term rate of return on plan assets was assumed to be 5.00% for December 31, 2019 and December 31, 2018 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, 2019 and December 31, 2018 by assets category are as follows:
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. A portion of the equity portfolio can be moved into a cash equivalent investment based on market signals to provide some protection when equity markets sell-off, like they did in December 2018.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 15 - Employee Benefit Plans - (continued)
The following tables set forth by level, within the fair value hierarchy, the plan’s assets at fair value as of December 31, 2019 and December 31, 2018 (dollars in thousands):
Cash Flows
There is an expected contribution of  $100,000 to the defined benefit pension plan during 2020.
The following benefit payments which reflect expected future service, as appropriate, are expected to be paid subsequent to December 31, 2019 (dollars in thousands):
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 $309,000 and $306,000 for the years ended December 31, 2019 and December 31, 2018, respectively.
The Company sponsors a Supplemental Executive Retirement Plan (“SERP”) to provide certain additional retirement benefits to participating executive officers. During the year ended December 31, 2019 and December 31, 2018, the Company had service cost of  $102,000 and $114,000 and interest cost of  $3,000 and $4,000 related to the SERP, respectively.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
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.
Financial instruments with off-balance sheet risk as of December 31, 2019 and December 31, 2018 were comprised of the following (dollars in thousands):
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.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 17 - Fair Value of Assets and Liabilities - (continued)
Level 2:
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.
Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed.
Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.
Assets Measured at Fair Value on a Recurring Basis
Investment, Mortgage-Backed and Equity Securities
Fair values of investment, 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, 2019 and December 31, 2018, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets. On a quarterly basis, management also reviews a sample of securities priced by the Company’s third-party pricing service to review significant assumptions and valuation methodologies used. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 17 - Fair Value of Assets and Liabilities - (continued)
The following table presents the assets measured at fair value on a recurring basis as of December 31, 2019 and December 31, 2018 by level within the fair value hierarchy (dollars in thousands):
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, 2019 and December 31, 2018 by level within the fair value hierarchy (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 17 - Fair Value of Assets and Liabilities - (continued)
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Company uses Level 3 inputs to determine fair value (dollars in thousands):
(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.
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, 2019 and December 31, 2018 (dollars in thousands):
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 17 - Fair Value of Assets and Liabilities - (continued)
(1)
The financial instrument is carried at amortized cost.
(2)
The financial instrument is carried at fair value through other comprehensive income.
(3)
The financial instrument is carried at fair value through net income.
Note 18 - Parent Only Financial Information
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 18 - Parent Only Financial Information - (continued)
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
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, 2019 and December 31, 2018.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 20 - Revenue Recognition
Effective January 1, 2018, the Company adopted ASU No. 2014-09 Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified Topic 606. As stated in Note 1 Summary of Significant Accounting Policies, the Company elected to apply the standard utilizing the modified retrospective approach with a cumulative effect of adoption for the impact from uncompleted contracts at the date of adoption. However, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue of prior periods; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. 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 new guidance. As a result, no changes were made during the period related to these sources of revenue.
Topic 606 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 upon adoption of Topic 606. 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 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
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Note 20 - Revenue Recognition - (continued)
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, 2019 and December 31, 2018 (dollars in thousands).
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 customers, and therefore, does not experience significant contract balances. As of December 31, 2019 and December 31, 2018, 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.
STANDARD AVB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
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, 2019 and December 31, 2018.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives of such assets. The balance of the core deposit intangible at December 31, 2019 was $1.9 million net of $2.2 million of accumulated amortization as of that date. The balance of the core deposit intangible at December 31, 2018 was $2.5 million net of  $1.6 million of accumulated amortization as of that date.
As of December 31, 2019, the estimated future amortization expense for the core deposit intangible was (dollars in thousands):
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, the President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s management, including the Chief Executive Officer, the President and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.
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 Chief Executive Officer, the President and the Executive Vice President and 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, 2019. The effectiveness of the Bank’s internal control over financial reporting as of December 31, 2019 has been audited by S.R. Snodgrass, P.C., an independent registered public accounting firm, as stated in their attestation report which is included herein.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2019, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15-d15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
Not applicable.
PART III
ITEM 10.
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.”
ITEM 11.
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.”
ITEM 12.
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.”
ITEM 13.
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.”
ITEM 14.
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
ITEM 15.
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, 2019 and 2018
(C)
Consolidated Statements of Income - Years ended December 31, 2019 and 2018
(D)
Consolidated Statements of Comprehensive Income - Years ended December 31, 2019 and 2018
(E)
Consolidated Statement of Changes in Stockholders’ Equity - Years ended December 31, 2019 and 2018
(F)
Consolidated Statements of Cash Flows - Years ended December 31, 2019 and 2018
(G)
Notes to Consolidated Financial Statements - Years ended December 31, 2019 and 2018
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
 3.1
Articles of Incorporation of Standard AVB Financial Corp., as amended(1)
 3.2
Amended and Restated Bylaws of Standard AVB Financial Corp.(2)
 4.1
Form of Common Stock Certificate of Standard AVB Financial Corp.(3)
 4.6
Description of Standard AVB Financial Corp.’s Securities
10.1
Employment Agreement by and between Timothy K. Zimmerman, Standard AVB Financial Corp. and Standard Bank, PaSB, effective January 25, 2018(4)
10.2
Employment Agreement by and between Andrew W. Hasley, Standard AVB Financial Corp. and Standard Bank, PaSB, effective January 25, 2018(4)
10.3
Employment Agreement by and between Susan A. Parente, Standard AVB Financial Corp. and Standard Bank, PaSB, effective January 25, 2018(4)
10.4
Non-Compete Agreement between Standard Bank, PaSB and David C. Mathews(5)
10.5
2012 Equity Incentive Plan(5)
10.6
Supplemental Executive Retirement Agreement by and between Standard Bank and Andrew W. Hasley
10.7
Supplemental Executive Retirement Agreement by and between Standard Bank and Timothy K. Zimmerman
10.8
Form of Change in Control Agreement for certain executive officers
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 
XBRL Instance Document(6)
   101.SCH 
XBRL Taxonomy Extension Schema Document(6)
   101.CAL 
XBRL Taxonomy Calculation Linkbase Document(6)
  101 DEF
XBRL Taxonomy Extension Definition Linkbase Document(6)
  101 LAB
XBRL Taxonomy Label Linkbase Document(6)
  101.PRE
XBRL Taxonomy Presentation Linkbase Document(6)
(1)
Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K as filed with the Securities and Exchange Commission on April 12, 2017.
(2)
Incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K as filed with the Securities and Exchange Commission on February 26, 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 the Form 8-K of Standard AVB Financial Corp. (File No. 001-34893) filed with the Securities and Exchange Commission on January 26, 2018.
(5)
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.
(6)
We have attached these documents formatted in XBRL (Extensible Business Reporting Language) as Exhibit 101 to this report.
ITEM 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STANDARD AVB FINANCIAL CORP.
By:
/s/ Timothy K. Zimmerman
Timothy K. Zimmerman
Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Timothy K. Zimmerman
Timothy K. Zimmerman
Chief Executive Officer and Director
(Principal Executive Officer)
March 16, 2020
/s/ Andrew W. Hasley
Andrew W. Hasley
President and Director
(Principal Executive Officer)
March 16, 2020
/s/ Susan A. Parente
Susan A. Parente
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2020
/s Terence L. Graft
Terence L. Graft
Chairman of the Board
March 16, 2020
/s Gregory J. Saxton
Gregory J. Saxton
Vice Chairman of the Board
March 16, 2020
/s/ William T. Ferri
William T. Ferri
Director
March 16, 2020
/s/ Paul A. Iurlano
Paul A. Iurlano
Director
March 16, 2020
/s/ John M. Lally
John M. Lally
Director
March 16, 2020
/s/ Jennifer H. Lunden
Jennifer H. Lunden
Director
March 16, 2020
/s/ David C. Mathews
David C. Mathews
Director
March 16, 2020
/s/ Ronald J. Mock
Ronald J. Mock
Director
March 16, 2020
/s/ Thomas J. Rennie
Thomas J. Rennie
Director
March 16, 2020
/s/ Robert C. Thomasmeyer
Robert C. Thomasmeyer
Director
March 16, 2020
/s/ Dale A. Walker
Dale A. Walker
Director
March 16, 2020