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Section 1: 10-Q (10-Q)

hvbc-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to                to           

Commission file number: 001-37981

 

HV BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania

 

46-4351868

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3501 Masons Mill Road Suite 401 Huntingdon Valley, Pennsylvania  19006

(Address of Principal Executive Offices and Zip Code)

(267) 280-4000

(Registrant's Telephone Number, Including Area Code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  As of November 10, 2018, there were 2,259,125 outstanding shares of the issuer’s common stock.

 

 

 


 

INDEX

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

1

 

 

 

 

 

 

Item 1 – Consolidated Financial Statements – Unaudited

1

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

 

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

49

 

 

 

 

 

 

Item 4 – Controls and Procedures

49

 

 

 

 

 

 

PART II- OTHER INFORMATION

50

 

 

 

 

Item 1 – Legal Proceedings

50

 

 

 

 

 

 

Item 1A – Risk Factors

50

 

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

 

Item 3 – Defaults upon Senior Securities

50

 

 

 

 

Item 4 – Mine Safety Disclosures

50

 

 

 

 

Item 5 – Other Information

50

 

 

 

 

Item 6 – Exhibits

50

 

 

 

SIGNATURES

51

 

 

 


PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements – Unaudited

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Financial Condition as of September 30, 2018 and June 30, 2018 (Dollars in thousands, except share and per share data)

 

 

At September 30,

 

 

At June 30,

 

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,490

 

 

$

1,345

 

Interest-earning deposits with banks

 

 

4,530

 

 

 

13,400

 

Cash and cash equivalents

 

 

6,020

 

 

 

14,745

 

Investment securities available-for-sale, at fair value

 

 

29,243

 

 

 

30,847

 

Investment securities held-to-maturity

 

 

13,898

 

 

 

13,905

 

Equity securities

 

 

500

 

 

 

 

Loans held for sale, at fair value

 

 

15,853

 

 

 

13,558

 

Loans receivable, net of allowance for loan losses of $931 at

   September 30, 2018 and $871 at June 30, 2018

 

 

225,177

 

 

 

212,696

 

Bank-owned life insurance

 

 

6,056

 

 

 

6,016

 

Restricted investment in bank stock

 

 

900

 

 

 

1,190

 

Premises and equipment, net

 

 

1,976

 

 

 

1,873

 

Accrued interest receivable

 

 

968

 

 

 

940

 

Prepaid income taxes

 

 

182

 

 

 

254

 

Deferred income taxes, net

 

 

568

 

 

 

526

 

Prepaid expenses

 

 

323

 

 

 

267

 

Mortgage banking derivatives

 

 

430

 

 

 

817

 

Other assets

 

 

216

 

 

 

128

 

Total Assets

 

$

302,310

 

 

$

297,762

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

$

251,059

 

 

$

235,403

 

Advances from the Federal Home Loan Bank

 

 

14,000

 

 

 

22,000

 

Securities sold under agreements to repurchase

 

 

3,215

 

 

 

5,739

 

Advances from borrowers for taxes and insurance

 

 

1,307

 

 

 

2,276

 

Deferred gain on sale - leaseback of building

 

 

290

 

 

 

294

 

Other liabilities

 

 

1,436

 

 

 

1,329

 

Total Liabilities

 

 

271,307

 

 

 

267,041

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred  Stock, $0.01 par value, 2,000,000 shares authorized; no shares

   issued and outstanding as of September 30, 2018 and June 30, 2018

 

 

 

 

 

 

Common Stock, $0.01 par value, 20,000,000 shares authorized;

   2,259,125 shares issued and outstanding as of September 30, 2018

   and June 30, 2018

 

 

23

 

 

 

23

 

Additional paid-in capital

 

 

20,435

 

 

 

20,368

 

Retained earnings

 

 

13,547

 

 

 

13,277

 

Accumulated other comprehensive loss

 

 

(734

)

 

 

(648

)

Unearned Employee Stock Option Plan

 

 

(2,268

)

 

 

(2,299

)

Total Shareholders' Equity

 

 

31,003

 

 

 

30,721

 

Total Liabilities and Shareholders' Equity

 

$

302,310

 

 

$

297,762

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

1


HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income for the Three Months Ended September 30, 2018 and 2017; (Dollars in thousands, except per share data)

 

 

For the Three Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Interest Income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

2,299

 

 

$

1,350

 

Interest and dividends on investments:

 

 

 

 

 

 

 

 

Taxable

 

 

101

 

 

 

118

 

Nontaxable

 

 

75

 

 

 

65

 

Interest on mortgage-backed securities and collateralized

   mortgage obligations

 

 

103

 

 

 

85

 

Interest on interest-earning deposits

 

 

73

 

 

 

126

 

Total Interest Income

 

 

2,651

 

 

 

1,744

 

Interest Expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

514

 

 

 

216

 

Interest on advances from the Federal Home Loan Bank

 

 

99

 

 

 

30

 

Interest on securities sold under agreements to repurchase

 

 

1

 

 

 

1

 

Total Interest Expense

 

 

614

 

 

 

247

 

Net interest income

 

 

2,037

 

 

 

1,497

 

Provision (credit) for Loan Losses

 

 

59

 

 

 

(1

)

Net interest income after provision (credit) for loan losses

 

 

1,978

 

 

 

1,498

 

Non-Interest Income

 

 

 

 

 

 

 

 

Fees for customer services

 

 

72

 

 

 

45

 

Increase in cash surrender value of bank-owned life insurance

 

 

40

 

 

 

34

 

Gain on sale of loans, net

 

 

901

 

 

 

1,236

 

Gain on sale of available-for-sale securities

 

 

 

 

 

34

 

Loss from derivative instruments

 

 

(317

)

 

 

(390

)

Change in fair value of loans held-for-sale

 

 

61

 

 

 

45

 

Other

 

 

1

 

 

 

1

 

Total Non-Interest Income

 

 

758

 

 

 

1,005

 

Non-Interest Expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,260

 

 

 

1,155

 

Occupancy

 

 

254

 

 

 

265

 

Federal deposit insurance premiums

 

 

70

 

 

 

30

 

Data processing related operations

 

 

171

 

 

 

152

 

Real estate owned expense

 

 

 

 

 

21

 

Professional fees

 

 

201

 

 

 

172

 

Other expenses

 

 

422

 

 

 

384

 

Total Non-Interest Expense

 

 

2,378

 

 

 

2,179

 

Income before income taxes

 

 

358

 

 

 

324

 

Income Tax Expense

 

 

88

 

 

 

88

 

Net Income

 

$

270

 

 

$

236

 

Net Income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.11

 

Diluted

 

$

0.13

 

 

$

0.11

 

See Notes to the Unaudited Consolidated Financial Statements

 

2


HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income for the Three Ended September 30, 2018 and 2017 (Dollars in thousands)

 

 

 

For the Three Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Comprehensive Income, Net of Taxes

 

 

 

 

 

 

 

 

Net Income

 

$

270

 

 

$

236

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Unrealized losses on available-for-sale securities (pre-tax

   ($122) and ($28), respectively)

 

 

(86

)

 

 

(12

)

Less: Reclassification for gains included in income (pre-tax $0

   and $34, respectively) (1)

 

 

 

 

 

25

 

Other comprehensive loss

 

 

(86

)

 

 

(37

)

Comprehensive Income

 

$

184

 

 

$

199

 

 

(1)

Amounts are included in gain on sale of available-for-sale securities on the Consolidated Statements of Income as a separate element within non-interest income. Income tax expense is included in the Consolidated Statements of Income.

See Notes to the Unaudited Consolidated Financial Statements

 

3


HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Shareholders’ Equity for the Three Months Ended September 30, 2018 and 2017 (Dollars in thousands, except per share data)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Unearned

ESOP

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Total

 

Balance, July 1, 2018

 

 

2,259,125

 

 

$

23

 

 

$

20,368

 

 

$

13,277

 

 

$

(648

)

 

$

(2,299

)

 

$

30,721

 

ESOP shares committed to be

   released

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

31

 

 

 

34

 

Stock option expense

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Restricted stock expense

 

 

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Net income

 

 

 

 

 

 

 

 

 

 

 

270

 

 

 

 

 

 

 

 

 

270

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86

)

 

 

 

 

 

(86

)

Balance, September 30, 2018

 

 

2,259,125

 

 

$

23

 

 

$

20,435

 

 

$

13,547

 

 

$

(734

)

 

$

(2,268

)

 

$

31,003

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Unearned

ESOP

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Total

 

Balance, July 1, 2017

 

 

2,182,125

 

 

$

22

 

 

$

20,369

 

 

$

13,547

 

 

$

(111

)

 

$

(2,386

)

 

$

31,441

 

ESOP share to be committed

   to be released

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

24

 

Net income

 

 

 

 

 

 

 

 

 

 

 

236

 

 

 

 

 

 

 

 

 

236

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

(37

)

Balance, September 30, 2017

 

 

2,182,125

 

 

$

22

 

 

$

20,369

 

 

$

13,783

 

 

$

(148

)

 

$

(2,362

)

 

$

31,664

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

 

 

 

 

4


HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

 

Three Months Ended September 30,

 

2018

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

270

 

 

$

236

 

Adjustments to reconcile net income to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

75

 

 

 

53

 

Amortization of net deferred loan costs

 

 

42

 

 

 

21

 

Amortization of net securities premiums

 

 

29

 

 

 

44

 

Gain on sale of available-for-sale securities

 

 

 

 

 

(34

)

Loss from derivative instruments

 

 

317

 

 

 

390

 

Provision (credit)  for loan losses

 

 

59

 

 

 

(1

)

Deferred income taxes

 

 

(6

)

 

 

(82

)

Amortization of deferred gain on sale-leaseback transaction

 

 

(4

)

 

 

(4

)

Earnings on bank owned life insurance

 

 

(40

)

 

 

(34

)

Stock base compensation

 

 

64

 

 

 

 

ESOP compensation expense

 

 

34

 

 

 

24

 

Loans held for sale:

 

 

 

 

 

 

 

 

Originations, net of prepayments

 

 

(44,160

)

 

 

(42,481

)

Proceeds from sales

 

 

42,827

 

 

 

46,011

 

Gain on sales

 

 

(901

)

 

 

(1,236

)

Change in fair value of loans held for sale

 

 

(61

)

 

 

(45

)

(Increase) decrease in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(28

)

 

 

(34

)

Prepaid federal income taxes

 

 

72

 

 

 

155

 

Prepaid and other assets

 

 

(144

)

 

 

(17

)

Other liabilities

 

 

177

 

 

 

(9

)

Net cash (used in) provided by operating activities

 

 

(1,378

)

 

 

2,957

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Net Increase in loans receivable

 

 

(12,582

)

 

 

(26,650

)

Activity in available-for-sale securities:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

 

 

 

11,158

 

Maturities and repayments

 

 

1,460

 

 

 

423

 

Activity in held-to-maturity securities:

 

 

 

 

 

 

 

 

Maturities and repayments

 

 

 

 

 

7

 

Purchase of equity securities

 

 

(500

)

 

 

 

Purchases of restricted investment in bank stock

 

 

(1,257

)

 

 

 

Redemption of restricted investment in bank stock

 

 

1,547

 

 

 

14

 

Purchases of bank-owned life insurance

 

 

 

 

 

(1,856

)

Purchases of premises and equipment

 

 

(178

)

 

 

(26

)

Net cash used in investing activities

 

 

(11,510

)

 

 

(16,930

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

15,656

 

 

 

778

 

Net decrease in advances from borrowers for taxes and insurance

 

 

(969

)

 

 

(605

)

Net (decrease) increase in securities sold under agreements to repurchase

 

 

(2,524

)

 

 

830

 

Net (decrease) increase in short-term borrowing from Federal Home Loan Bank

 

 

(7,000

)

 

 

 

Proceeds from long-term borrowings from Federal Home Loan Bank

 

 

 

 

 

3,000

 

Repayment of long-term borrowings from Federal Home Loan Bank

 

 

(1,000

)

 

 

(3,000

)

Net cash provided by financing activities

 

 

4,163

 

 

 

1,003

 

Decrease in Cash and Cash Equivalents

 

 

(8,725

)

 

 

(12,970

)

Cash and Cash Equivalents, beginning of year

 

 

14,745

 

 

 

28,577

 

Cash and Cash Equivalents, end of year

 

$

6,020

 

 

$

15,607

 

Supplementary Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid during the year of interest

 

$

579

 

 

$

331

 

Cash paid during the year for income taxes

 

$

 

 

$

 

Supplementary Schedule of Noncash Investing Activities

 

 

 

 

 

 

 

 

Transfer of loans to real estate owned

 

$

 

 

$

127

 

 

See Notes to Unaudited Consolidated Financial Statements

 

5


HV BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

 

1. ORGANIZATION, BASIS OF PRESENTATION and RECENT ACCOUNTING PRONOUNCEMENTS

Organization

HV Bancorp, Inc., a Pennsylvania Corporation (the “Company”) is the holding company of Huntingdon Valley Bank (the “Bank”) and was formed in connection with the conversion of the Bank from the mutual to the stock form of organization. On January 11, 2017, the mutual to stock conversion of the Bank was completed and the Company became the parent holding company for the Bank. A total of 2,182,125 shares of common stock were sold to depositors at $10.00 per share through which the Company received gross offering proceeds of approximately $21.8 million. Offering costs from the sale of the common stock totaled $1.4 million, resulting in net proceeds of $20.4 million.  Shares of the Company began trading on the Nasdaq Capital Market on January 12, 2017. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Bank”).

The Bank is a stock savings bank organized under the laws of the Commonwealth of Pennsylvania and is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“PADOB”).  The Bank was organized in 1871, and currently provides residential and commercial loans to its general service area (Montgomery, Bucks and Philadelphia Counties of Pennsylvania) as well as offering a wide variety of savings, checking and certificate of deposit accounts to its retail and business customers.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company.  Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof.  The balances as of June 30, 2018 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Annual Report on Form 10-K filed by the Company with the U.S. Securities and Exchange Commission on September 27, 2018. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity. The results of operations for the three months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending June 30, 2019 or any other period.

The Company has evaluated subsequent events through the date of issuance of the financial statements included herein.

Principles of Consolidation

 

The unaudited interim consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank.  In January 2017, the mutual to stock conversion of the Bank was completed and the Company became the parent holding company for the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

 

6


Use of Estimates in the Preparation of Financial Statements

In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Statement of Financial Condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairments of securities (“OTTI”), interest rate lock commitments (“IRLCs”), mandatory sales commitments, the valuation of mortgage loans held-for-sale and the valuation of deferred tax assets.

Recent Accounting Pronouncements

The Company qualifies under the Jumpstart Our Business Startups Act (the “JOBS Act”) as an emerging growth company. As an emerging growth company, the Company has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements until such pronouncements are made applicable to private companies.

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases. The new leases standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.

The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606.

Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The new leases standard addresses other considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback transactions, modifications, combining contracts, reassessment of the lease term, and re-measurement of lease payments. It also contains comprehensive implementation guidance with practical examples.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments are effective for all other entities (including emerging growth entities as further described above) for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. Specific transition requirements apply. The Company’s leases are operating leases and ASU 2016-02 will require us to add them to our balance sheet. The Company’s operating leases are predominantly related to real estate.

 

7


In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

The ASU is effective for public business entities for fiscal years after December 15, 2019, including interim periods within those fiscal years. The amendments are effective for all other entities (including emerging growth companies as further described above for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. In anticipation of the ASU, the Company has entered into a contract with a third party, compiled data for the modeling and is working on developing an estimate using historically and qualitative data based on the requirements of ASU 2016-13.

 

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01.   (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer.  Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.  (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.  (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.  (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the

8


liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.  (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements.  The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

 

Adoption of New Accounting Standards.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Subsequent to the issuance of ASU 2014-09, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue

9


streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on its evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs previously recorded as expense is now recorded as contra-revenue, and vice versa). These classification changes resulted in immaterial changes to both revenue and expense. The Company also determined that certain costs related to ATMs should be recorded as an expense rather than a reduction of revenue. This change did not have a material effect to noninterest income or expense. The Company adopted ASU 2014-09 and its related amendments on its required effective date of July 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the debit and credit card costs and the ATM costs reclassifications noted above. See Note 10 Revenue Recognition for more information.

 

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on July 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion (see Note 5 Fair Value of Assets and Liabilities).

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice.  Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities.  The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any

10


adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company adopted this standard on July 1, 2018 with no material impact on our consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01.   (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer.  Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.  (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.  (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.  (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.  (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Company adopted this standard on July 1, 2018 with no material impact on our consolidated financial statements.

 

 

11


2. INVESTMENT SECURITIES

Investment securities available-for-sale was comprised of the following:

 

 

 

September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Governmental securities

 

$

961

 

 

$

 

 

$

(46

)

 

$

915

 

Corporate notes

 

 

5,803

 

 

 

 

 

 

(99

)

 

 

5,704

 

Collateralized mortgage obligations - agency

   residential

 

 

13,799

 

 

 

 

 

 

(595

)

 

 

13,204

 

Mortgage-backed securities - agency

   residential

 

 

3,827

 

 

 

 

 

 

(216

)

 

 

3,611

 

Municipal securities

 

 

1,402

 

 

 

 

 

 

(21

)

 

 

1,381

 

Bank CDs

 

 

4,492

 

 

 

 

 

 

(64

)

 

 

4,428

 

 

 

$

30,284

 

 

$

 

 

$

(1,041

)

 

$

29,243

 

 

 

Investment securities held-to-maturity was comprised of the following:

 

 

 

September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Corporate notes

 

$

2,517

 

 

$

 

 

$

(5

)

 

$

2,512

 

Municipal securities

 

 

11,381

 

 

 

25

 

 

 

(271

)

 

 

11,135

 

 

 

$

13,898

 

 

$

25

 

 

$

(276

)

 

$

13,647

 

 

Investment securities available-for-sale was comprised of the following:

 

 

 

June 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Governmental securities

 

$

1,007

 

 

$

 

 

$

(40

)

 

$

967

 

Corporate notes

 

 

5,805

 

 

 

5

 

 

 

(102

)

 

 

5,708

 

Collateralized mortgage obligations - agency

   residential

 

 

14,297

 

 

 

 

 

 

(503

)

 

 

13,794

 

Mortgage-backed securities - agency

   residential

 

 

3,964

 

 

 

 

 

 

(186

)

 

 

3,778

 

Municipal securities

 

 

1,701

 

 

 

 

 

 

(21

)

 

 

1,680

 

Bank CDs

 

 

4,992

 

 

 

 

 

 

(72

)

 

 

4,920

 

 

 

$

31,766

 

 

$

5

 

 

$

(924

)

 

$

30,847

 

 

Investment securities held-to-maturity was comprised of the following:

 

 

 

June 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Corporate notes

 

$

2,519

 

 

$

 

 

$

(3

)

 

$

2,516

 

Municipal securities

 

 

11,386

 

 

 

34

 

 

 

(189

)

 

 

11,231

 

 

 

$

13,905

 

 

$

34

 

 

$

(192

)

 

$

13,747

 

 

12


The scheduled maturities of securities available-for-sale and held-to-maturity at September 30, 2018 were as follows:

 

 

 

September 30, 2018

 

 

 

Available-for-Sale

 

 

Held-to-Maturity

 

 

 

Amortized

 

 

 

 

 

 

Amortized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Due in one year or less

 

$

2,993

 

 

$

2,975

 

 

$

605

 

 

$

604

 

Due from one to five years

 

 

7,205

 

 

 

7,087

 

 

 

3,040

 

 

 

3,014

 

Due from after five to ten years

 

 

1,502

 

 

 

1,453

 

 

 

7,237

 

 

 

7,095

 

Due after ten years

 

 

18,584

 

 

 

17,728

 

 

 

3,016

 

 

 

2,934

 

 

 

$

30,284

 

 

$

29,243

 

 

$

13,898

 

 

$

13,647

 

 

Securities with a fair value of $9.1 million and $7.8 million at September 30, 2018 and June 30, 2018, respectively, were pledged to secure public deposits and for other purposes as required by law.

There were no proceeds from the sale of available-for-sale securities for the three months ended September 30, 2018. There were no gross realized gains or losses on such sales for the three months ended September 30, 2018.

Proceeds from the sale of available-for-sale securities for the three months ended September 30, 2017 were $11.2 million. Gross realized gains on such sales were approximately $39,000 and gross realized losses on such sales were $5,000 for the three months ended September 30, 2017.

The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of September 30, 2018 and June 30, 2018:

 

 

 

September 30, 2018

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair