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EX-32 - EX-32 - HV Bancorp, Inc.hvbc-ex32_7.htm
EX-31.2 - EX-31.2 - HV Bancorp, Inc.hvbc-ex312_8.htm
EX-31.1 - EX-31.1 - HV Bancorp, Inc.hvbc-ex311_6.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 December 31, 2017

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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

 

  (Do not check if a smaller reporting company)

  

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 February 10, 2018, there were 2,182,125 outstanding shares of the issuer’s common stock.

 

 

 

1


 

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

32

 

 

 

 

 

 

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 December 31, 2017 and June 30, 2017 (Dollars in thousands)

 

 

At December 31,

 

 

At June 30,

 

 

 

2017

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,070

 

 

$

1,514

 

Interest-earning deposits with banks

 

 

13,732

 

 

 

27,063

 

Cash and cash equivalents

 

 

14,802

 

 

 

28,577

 

Investment securities available-for-sale, at fair value

 

 

32,863

 

 

 

42,820

 

Investment securities held-to-maturity (fair value of $12,490 at

   December 31, 2017 and $11,896 at June 30, 2017)

 

 

12,433

 

 

 

11,809

 

Loans held for sale, at fair value

 

 

12,266

 

 

 

12,784

 

Loans receivable, net of allowance for loan losses of $683 at

   December 31, 2017 and $593 at June 30, 2017

 

 

159,702

 

 

 

111,811

 

Bank-owned life insurance

 

 

5,936

 

 

 

4,005

 

Restricted investment in bank stock

 

 

749

 

 

 

643

 

Premises and equipment, net

 

 

1,834

 

 

 

1,835

 

Accrued interest receivable

 

 

773

 

 

 

620

 

Prepaid income taxes

 

 

38

 

 

 

171

 

Deferred income taxes, net

 

 

397

 

 

 

257

 

Prepaid expenses

 

 

266

 

 

 

272

 

Mortgage banking derivatives

 

 

519

 

 

 

1,001

 

Other assets

 

 

78

 

 

 

160

 

Total Assets

 

$

242,656

 

 

$

216,765

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

$

193,108

 

 

$

170,481

 

Advances from the Federal Home Loan Bank

 

 

12,000

 

 

 

9,000

 

Securities sold under agreements to repurchase

 

 

2,967

 

 

 

2,883

 

Advances from borrowers for taxes and insurance

 

 

1,428

 

 

 

1,402

 

Deferred gain on sale - leaseback of building

 

 

302

 

 

 

310

 

Other liabilities

 

 

1,138

 

 

 

1,248

 

Total Liabilities

 

 

210,943

 

 

 

185,324

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

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

   issued and outstanding as of December 31, 2017 and June 30, 2017

 

 

 

 

 

 

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

   2,182,125 shares issued and outstanding as of December 31,

   2017 and June 30, 2017

 

 

22

 

 

 

22

 

Additional paid in capital

 

 

20,369

 

 

 

20,369

 

Retained earnings

 

 

13,962

 

 

 

13,547

 

Accumulated other comprehensive loss

 

 

(301

)

 

 

(111

)

Unearned Employee Stock Option Plan

 

 

(2,339

)

 

 

(2,386

)

Total Shareholders' Equity

 

 

31,713

 

 

 

31,441

 

Total Liabilities and Shareholders' Equity

 

$

242,656

 

 

$

216,765

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

1


HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income for the Three and Six Months Ended December 31, 2017 and 2016; (Dollars in thousands, except per share data)

 

 

For the Three Months Ended December 31,

 

 

For the Six Months Ended December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

1,517

 

 

$

1,132

 

 

$

2,867

 

 

$

2,338

 

Interest and dividends on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

91

 

 

 

72

 

 

 

209

 

 

 

132

 

Nontaxable

 

 

65

 

 

 

41

 

 

 

130

 

 

 

83

 

Interest on mortgage-backed securities and collateralized

   mortgage obligations

 

 

94

 

 

 

48

 

 

 

179

 

 

 

111

 

Interest on interest-earning deposits

 

 

97

 

 

 

53

 

 

 

202

 

 

 

83

 

Total Interest Income

 

 

1,864

 

 

 

1,346

 

 

 

3,587

 

 

 

2,747

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

231

 

 

 

163

 

 

 

447

 

 

 

329

 

Interest on advances from the Federal Home Loan Bank

 

 

45

 

 

 

40

 

 

 

75

 

 

 

86

 

Interest on securities sold under agreements to repurchase

 

 

1

 

 

 

1

 

 

 

2

 

 

 

2

 

Total Interest Expense

 

 

277

 

 

 

204

 

 

 

524

 

 

 

417

 

Net interest income

 

 

1,587

 

 

 

1,142

 

 

 

3,063

 

 

 

2,330

 

Provision for Loan Losses

 

 

80

 

 

 

12

 

 

 

79

 

 

 

135

 

Net interest income after provision for loan losses

 

 

1,507

 

 

 

1,130

 

 

 

2,984

 

 

 

2,195

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees for customer services

 

 

185

 

 

 

51

 

 

 

230

 

 

 

105

 

Increase in cash surrender value of bank owned life insurance

 

 

41

 

 

 

28

 

 

 

75

 

 

 

57

 

Gain on sale of loans, net

 

 

909

 

 

 

2,136

 

 

 

2,145

 

 

 

3,705

 

Gain on sale of available-for-sale securities

 

 

 

 

 

 

 

 

34

 

 

 

11

 

Loss from hedging instruments

 

 

(74

)

 

 

(560

)

 

 

(464

)

 

 

(939

)

Change in fair value of loans held-for-sale

 

 

(140

)

 

 

(778

)

 

 

(95

)

 

 

(695

)

Other

 

 

2

 

 

 

1

 

 

 

3

 

 

 

2

 

Total Non-Interest Income

 

 

923

 

 

 

878

 

 

 

1,928

 

 

 

2,246

 

Non-Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,286

 

 

 

1,146

 

 

 

2,457

 

 

 

2,297

 

Occupancy

 

 

260

 

 

 

254

 

 

 

525

 

 

 

500

 

Federal deposit insurance premiums

 

 

26

 

 

 

32

 

 

 

56

 

 

 

70

 

Data processing related operations

 

 

125

 

 

 

138

 

 

 

277

 

 

 

285

 

Loss on sale of other real estate owned

 

 

3

 

 

 

12

 

 

 

3

 

 

 

12

 

Real estate owned expense

 

 

6

 

 

 

5

 

 

 

27

 

 

 

16

 

Professional fees

 

 

113

 

 

 

135

 

 

 

285

 

 

 

270

 

Other expenses

 

 

338

 

 

 

285

 

 

 

685

 

 

 

619

 

Total Non-Interest Expense

 

 

2,157

 

 

 

2,007

 

 

 

4,315

 

 

 

4,069

 

Income before income taxes

 

 

273

 

 

 

1

 

 

 

597

 

 

 

372

 

Income Tax Expense (Benefit)

 

 

94

 

 

 

(38

)

 

 

182

 

 

 

80

 

Net Income

 

$

179

 

 

$

39

 

 

$

415

 

 

$

292

 

Net Income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

 

$

N/A

 

 

$

0.19

 

 

$

N/A

 

Diluted

 

$

0.08

 

 

$

N/A

 

 

$

0.19

 

 

$

N/A

 

 

See Notes to the Unaudited Consolidated Financial Statements

2


 

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2017 and 2016 (Dollars in thousands)

 

 

 

For the Three Months Ended  December 31,

 

 

For the Six Months Ended December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Comprehensive Income, Net of Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

179

 

 

$

39

 

 

$

415

 

 

$

292

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   ($176) and ($490); $(205) and $(537), respectively)

 

 

(153

)

 

 

(288

)

 

 

(165

)

 

 

(309

)

Less: Reclassification for gains included in income (pre-tax $0 and $0; $(34) and $(11), respectively) (1)

 

 

 

 

 

 

 

 

25

 

 

 

7

 

Other comprehensive (loss)

 

 

(153

)

 

 

(288

)

 

 

(190

)

 

 

(316

)

Comprehensive Income (Loss)

 

$

26

 

 

$

(249

)

 

$

225

 

 

$

(24

)

 

(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 Six Months Ended December 31, 2017 and 2016 (Dollars in thousands, except per share data)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

 

Additional Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Unearned ESOP

Shares

 

 

Total

 

Balance, July 1, 2017

 

 

2,182,125

 

$

22

 

 

$

20,369

 

 

$

13,547

 

 

$

(111

)

 

$

(2,386

)

 

$

31,441

 

ESOP shares committed to be

   released

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 

 

 

47

 

Net income

 

 

 

 

 

 

 

 

 

 

415

 

 

 

 

 

 

 

 

 

415

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(190

)

 

 

 

 

 

(190

)

Balance, December 31, 2017

 

 

2,182,125

 

$

22

 

 

$

20,369

 

 

$

13,962

 

 

$

(301

)

 

$

(2,339

)

 

$

31,713

 

 

 

 

Shares (1)

 

Amount (1)

 

 

Additional Paid-in

Capital (1)

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Unearned ESOP

Shares (1)

 

 

Total

 

Balance, July 1, 2016

 

 

 

$

 

 

$

 

 

$

12,978

 

 

$

(7

)

 

$

 

 

$

12,971

 

Net income

 

 

 

 

 

 

 

 

 

 

292

 

 

 

 

 

 

 

 

 

292

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(316

)

 

 

 

 

 

(316

)

Balance, December 31, 2016

 

 

 

$

 

 

$

 

 

$

13,270

 

 

$

(323

)

 

$

 

 

$

12,947

 

 

 

(1)

No common stock or ESOP shares were issued and outstanding during the six months ended December 31, 2016.

See Notes to the Unaudited Consolidated Financial Statements

 

 

 

 

 

4


HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 (Dollars in thousands)

 

Six Months Ended December 31,

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

415

 

 

$

292

 

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

106

 

 

 

96

 

Impairment of real estate owned, net

 

 

14

 

 

 

5

 

Amortization of net deferred loan costs

 

 

67

 

 

 

3

 

Amortization of net securities premiums

 

 

73

 

 

 

210

 

Loss on sale of real estate owned

 

 

3

 

 

 

12

 

Gain on sale of available-for-sale securities

 

 

(34

)

 

 

(11

)

Loss from hedging instruments

 

 

464

 

 

 

1,123

 

Provision for loan losses

 

 

79

 

 

 

135

 

Deferred income tax benefit

 

 

(91

)

 

 

(327

)

Amortization of deferred gain on sale-leaseback transaction

 

 

(8

)

 

 

(8

)

Earnings on bank owned life insurance

 

 

(75

)

 

 

(57

)

ESOP compensation expense

 

 

47

 

 

 

 

Loans held for sale:

 

 

 

 

 

 

 

 

Originations, net of prepayments

 

 

(80,066

)

 

 

(90,831

)

Proceeds from sales

 

 

82,634

 

 

 

112,336

 

Gain on sales

 

 

(2,145

)

 

 

(3,705

)

Change in fair value of loans held for sale

 

 

95

 

 

 

695

 

(Increase) decrease in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(153

)

 

 

2

 

Prepaid federal income taxes

 

 

133

 

 

 

78

 

Prepaid and other assets

 

 

88

 

 

 

(1,039

)

Other liabilities

 

 

(90

)

 

 

(512

)

Net cash provided by operating activities

 

 

1,556

 

 

 

18,497

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Net Increase in loans receivable

 

 

(48,178

)

 

 

(2,465

)

Activity in available-for-sale securities:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

11,158

 

 

 

2,054

 

Maturities and repayments

 

 

1,186

 

 

 

2,101

 

Purchases

 

 

(2,665

)

 

 

(5,200

)

Activity in held-to-maturity securities:

 

 

 

 

 

 

 

 

Maturities and repayments

 

 

11

 

 

 

 

Purchases

 

 

(635

)

 

 

 

Redemption of restricted investment in bank stock

 

 

(106

)

 

 

450

 

Purchases of bank owned life insurance

 

 

(1,856

)

 

 

 

Proceeds from sales of real estate owned

 

 

124

 

 

 

98

 

Purchases of premises and equipment

 

 

(107

)

 

 

(178

)

Net cash used in investing activities

 

 

(41,068

)

 

 

(3,140

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

22,627

 

 

 

71,317

 

Net increase (decrease) in advances from borrowers for taxes and insurance

 

 

26

 

 

 

(480

)

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

 

 

84

 

 

 

(2,176

)

Proceeds from borrowings from Federal Home Loan Bank

 

 

15,000

 

 

 

19,000

 

Repayment of borrowings from Federal Home Loan Bank

 

 

(12,000

)

 

 

(30,000

)

Net cash provided by financing activities

 

 

25,737

 

 

 

57,661

 

(Decrease) increase in Cash and Cash Equivalents

 

 

(13,775

)

 

 

73,018

 

Cash and Cash Equivalents, beginning of year

 

 

28,577

 

 

 

15,427

 

Cash and Cash Equivalents, end of year

 

$

14,802

 

 

$

88,445

 

Supplementary Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid during the year of interest

 

$

598

 

 

$

413

 

Cash paid during the year for income taxes

 

$

65

 

 

$

 

Supplementary Schedule of Noncash Investing Activities

 

 

 

 

 

 

 

 

Transfer of loans to real estate owned

 

$

127

 

 

$

65

 

 

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, 2017 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 28, 2017. The results of operations for the three and six months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018 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. Prior to January 11, 2017, all financial information reflects the Bank’s transactions and balances only. All significant intercompany transactions and balances have been eliminated in consolidation.

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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 balance sheet 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, interest rate lock commitments (“IRLCs”), mandatory sales commitments, the valuation of mortgage loans held-for-sale, other real estate owned, 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries following U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate and construction industries. The revenue standard’s core principal is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation. Three basic transition methods are available - full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings.  In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.  In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). While the ASU does not change the core provisions of Topic 606, it clarifies the implementation guidance on principal versus agent considerations. Namely, the ASU clarifies and offers guidance to help determine when the reporting entity is providing goods or services to a customer itself (i.e., the entity is a principal), or merely arranging for that good or service to be provided by the other party (i.e., the reporting entity is an agent). If the entity is a principal, it recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When the reporting entity is an agent, it recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The guidance includes indicators to assist in determining whether the control criteria are met. If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others.  In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. This ASU clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The ASU includes targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. The ASU seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at

7


implementation and on an ongoing basis. The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which will be effective for fiscal years beginning after December 31, 2017 for public entities.  In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. This ASU clarifies certain aspects of Topic 606 guidance as follows:

 

The objective of the collectability assessment is to determine whether the contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services transferred.

 

An entity can recognize revenue in the amount of consideration received when it has transferred control of the goods or services, has no additional obligation to transfer goods or services, and the consideration received is nonrefundable.

 

A reporting entity is permitted to make the accounting policy election to exclude amounts collected from customers for all sales taxes from the transaction price.

 

The measurement date is specified as being the contract inception, and variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.

 

As a practical expedient, a reporting entity is permitted to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with Topic 606 when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.

 

The ASU clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application. Accounting for elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments in this ASU permit an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts.

The amendments in this ASU clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted.

The guidance in the revenue recognition ASUs listed above is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the various revenue recognition ASUs. The guidance does not apply to revenue associated with financial instruments, including loans and securities. The Company evaluated its non-interest revenue sources and the adoption of these ASUs will not have a material impact on its financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Topic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 amends the guidance on the classification and measurement of financial instruments.  Some of the amendments in ASU 2016-01 include the following: 1) requires 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; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires 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; among others.  ASU 2016-01 also clarifies that an entity should assess the need for a valuation

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allowance on a deferred tax asset related to unrealized losses of investments in debt instruments recognized in OCI in combination with the entity’s other deferred tax assets. Prior to this guidance, the alternative approach used in practice evaluated the need for a valuation allowance for a deferred tax asset related to unrealized losses on debt instruments recognized in other comprehensive income separately from other deferred tax assets. This alternative approach will no longer be acceptable. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  As of December 31, 2017 we do not hold material equity investments for which fair value is accounted through other comprehensive income.  We are analyzing ASU 2016-01 and do not believe that it will have a material effect on our financial statements.

In March 2017, the FASB issued Accounting Standards Update (ASU) 2017-08, Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 shortens the amortization for premiums on purchased callable debt securities to the earliest call date (i.e. yield-to-earliest call amortization), rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount.

The amendments apply to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates. If a security may be prepaid based on prepayments of the underlying loans, not because the issuer has exercised a date specific call option, it is excluded from the scope of the new standard. However, for instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the amendment. Further, the amendments apply to all premiums on callable debt securities, regardless of how they were generated.

The amendments require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. For all other entities, including emerging growth entities as further described above, the amendments are effective for fiscal periods beginning after December 15, 2019, and interim periods within fiscal periods beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted this standard on July 1, 2017 with no material impact on our consolidated financial statements.  

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.

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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. The Company is currently evaluating other impacts of the pending adoption of the new standard on our 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. The Company is currently evaluating the impact of adoption of the new standard on the consolidated financial statements.

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2. Investment Securities

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

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Governmental securities

 

$

1,455

 

 

$

9

 

 

$

(17

)

 

$

1,447

 

Corporate notes

 

 

6,308

 

 

 

15

 

 

 

(47

)

 

 

6,276

 

Collateralized mortgage obligations - agency

   residential

 

 

13,736

 

 

 

4

 

 

 

(265

)

 

 

13,475

 

Mortgage-backed securities - agency

   residential

 

 

4,234

 

 

 

 

 

 

(81

)

 

 

4,153

 

Municipal securities

 

 

2,065

 

 

 

 

 

 

(19

)

 

 

2,046

 

Bank CDs

 

 

5,492

 

 

 

5

 

 

 

(31

)

 

 

5,466

 

 

 

$

33,290

 

 

$

33

 

 

$

(460

)

 

$

32,863

 

 

 

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

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Corporate notes

 

$

2,000

 

 

$

8

 

 

$

 

 

$

2,008

 

Municipal securities

 

 

10,433

 

 

 

85

 

 

 

(36

)

 

 

10,482

 

 

 

$

12,433

 

 

$

93

 

 

$

(36

)

 

$

12,490

 

 

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

 

 

 

June 30, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Governmental securities

 

$

4,330

 

 

$

26

 

 

$

(16

)