UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2018

OR

For the transition period from   to                to           

Commission file number: 001-37981

 

HV BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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.

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.

 

 

 

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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)

 

See Notes to the Unaudited Consolidated Financial Statements

 

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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)

See Notes to the Unaudited Consolidated Financial Statements

 

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HV BANCORP, INC. AND SUBSIDIARY

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

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

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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)

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

 

 

 

 

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HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

 

 

See Notes to Unaudited Consolidated Financial Statements

 

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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.

 

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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 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.

 

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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

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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

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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

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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.

 

 

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2. INVESTMENT SECURITIES

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

 

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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:

 

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At September 30, 2018 and June 30, 2018, the investment portfolio included three U.S. Government securities, respectively, with total fair values of $915,000 and $1.0 million, respectively. Of these securities, three were in an unrealized loss position as of September 30, 2018 and June 30, 2018, respectively. These securities are zero risk weighted for capital purposes and are guaranteed for repayment of principal and interest. As of September 30, 2018 and June 30, 2018, management found no evidence of other-than-temporary (“OTTI”) on any of the U.S. Governmental securities in an unrealized loss position held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2018 and June 30, 2018, the investment portfolio included fifteen corporate notes with total fair values of $8.2 million at the end of each of period, respectively. Of these securities, thirteen and twelve were in an unrealized loss position as of September 30, 2018 and June 30, 2018. At the time of purchase and as of September 30, 2018 and June 30, 2018, these bonds in an unrealized loss position continue to maintain investment grade ratings. As of September 30, 2018 and June 30, 2018, management found no evidence of OTTI on any of the corporate notes held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2018 and June 30, 2018, the investment portfolio included forty-one collateralized mortgage obligations (“CMOs”) with total fair values of $13.2 million and $13.8 million, respectively. Of these securities, forty-one were in an unrealized loss position as of September 30, 2018 and June 30, 2018, respectively. The CMO portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of September 30, 2018 and June 30, 2018, management found no evidence of OTTI on any of the CMOs held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2018 and June 30, 2018, the investment portfolio included fifteen mortgage backed securities (“MBS”) with a total fair value of $3.6 million and $3.8 million, respectively. Of these securities, thirteen and twelve were in an unrealized loss position as of September 30, 2018 and June 30, 2018, respectively. The MBS portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of September 30, 2018 and June 30, 2018, management found no evidence of OTTI on any of the MBS held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

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At September 30, 2018 and June 30, 2018, the investment portfolio included twenty-seven and twenty-eight municipal securities with a total fair value of $12.5 million and $12.9 million, respectively. Of these securities, twenty-three and twenty-one were in an unrealized loss position as of September 30, 2018 and June 30, 2018, respectively. The Company’s municipal portfolio issuers are located in Pennsylvania and at the time of purchase, and as of September 30, 2018 and June 30, 2018, continue to maintain investment grade ratings. As of September 30, 2018 and June 30, 2018, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2018 and June 30, 2018, the investment portfolio included eighteen and twenty Bank Certificate of Deposits (“CDs”) with a total fair value of $4.4 million and $4.9 million, respectively. Of these securities, eighteen and nineteen were in an unrealized loss position as of September 30, 2018 and June 30, 2018, respectively. The Bank CDs are fully insured by the FDIC. As of September 30, 2018 and June 30, 2018, management found no evidence of OTTI on any of the Bank CDs held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

 

3. EQUITY SECURITIES

 

During September 2018, the Company purchased an equity security for $500,000. The Company determined that the equity investment did not have a readily determinable fair value measure and is carrying the equity investment at cost, less impairment, adjusted for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

 

The following table presents the carrying amount of the Company’s equity investment at September 30, 2018:

 

 

At September 30, 2018, the Company performed a qualitative assessment considering impairment indictors to evaluate whether the investment was impaired and determined the investment was not impaired.

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4. LOANS RECEIVABLE

Loans receivable were comprised of the following:

 

 

 

In November 2017, the Bank entered into a loan purchase agreement with a broker to purchase a portfolio of private education loans made to American citizens attending American Medical Association (“AMA”) approved medical schools in Caribbean Nations. The broker serves as a lender, holder, program designer and developer, administrator, and secondary market for the loan portfolios they generate. At September 30, 2018, the balance of the private education loans was $7.0 million. The private student loans are made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. Recourse includes a fully paid insurance wrap for the life of the loan provided by an insurance company who is required to repurchase loans delinquent over 180 days. However, in June 2018, the Company was informed that the insurance company was declared insolvent by state insurance regulators and adopted a plan of liquidation. The default claims will continue to be filed with the insurance company’s liquidator if accounts reach the 180^th day of delinquency. At September 30, 2018, there were no delinquent loans which required filing a claim. Any future claims that may be submitted would be subject to the available liquidated assets at that time. As such, there is no assurance that the future claims will be paid in part or in full.

 

Overdraft deposits are reclassified as other consumer and are included in the total loans on the statements of financial condition. Overdrafts were $3,000 and $31,000 at September 30, 2018 and June 30, 2018, respectively.

 

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The following tables summarize the activity in the allowance for loan losses by loan class for the three months ended September 30, 2018 and 2017.

 

 

 

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The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared. The Company allocated increased allowance for loan loss provisions to the residential one-to-four family for the three months ended September 30, 2018 compared to the same period in 2017, due primarily to the significant increase in the loan balance. In November 2017, the Bank entered into a loan purchase agreement for a portfolio of private medical education loans. The Company allocated increased allowance for loan loss provisions to the medical education loans for the three months ended September 30, 2018 primarily as a result of the increase in quantitative factors impacted by increased past due loan balances.

 

The following tables summarize information in regards to the recorded investment in loans receivable by loan class as of September 30, 2018 and June 30, 2018:

 

 

 

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The following table summarizes information in regard to impaired loans by loan portfolio class as of September 30, 2018 and June 30, 2018:

 

 

The following table presents additional information regarding the impaired loans for the three months ended September 30, 2018 and September 30, 2017:

 

 

If these loans were performing under the original contractual rate, interest income on such loans would have increased approximately $21,000 and $22,000 for the three months ended September 30, 2018 and 2017, respectively.

 

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The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2018 and June 30, 2018:

 

 

Credit quality risk ratings include regulatory classifications of Special Mention, Substandard, Doubtful and Loss.  Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

The following tables summarize the aggregate Pass and criticized categories of Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of September 30, 2018 and June 30, 2018:

 

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The following tables present the segments of the loan portfolio summarized by aging categories as of September 30, 2018 and June 30, 2018:

 

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The Company may grant a concession or modification for economic or legal reasons related to a borrower's financial condition that it would not otherwise consider resulting in a modified loan that is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers' operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company's allowance for loan losses. TDRs are restored to accrual status when the obligation is brought current, has performed in accordance with the modified contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower's financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.

As of September 30, 2018 and June 30, 2018, the Company had two loans identified as TDRs totaling $296,000 and $304,000, respectively.  At September 30, 2018 and June 30, 2018, all of the TDRs were performing in compliance with their restructured terms and on accrual status. There were no modifications to loans classified as TDRs during the three months ended September 30, 2018. No additional loan commitments were outstanding to these borrowers at September 30, 2018 and June 30, 2018. At both September 30, 2018 and June 30, 2018, there was a specific reserve of $14,000 related to one TDR.

 

The following table details the Company’s TDRs that are on accrual status and non-accrual status at September 30, 2018:

 

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The following table details the Company’s TDRs that are on accrual status and non-accrual status at June 30, 2018:

 

 

The carrying amount of residential mortgage loans in the process of foreclosure was $562,000 and $565,000 at September 30, 2018 and June 30, 2018, respectively.

 

5. DERIVATIVES AND RISK MANAGEMENT ACTIVITIES

The Company did not have any derivative instruments designated as hedging instruments or subject to master netting and collateral agreements as of September 30, 2018 and June 30, 2018 and for the three months ended September 30, 2018 and 2017. The following tables summarize the amounts recorded in the Company’s consolidated statements of financial condition for derivatives not designated as hedging instruments as of September 30, 2018 and June 30, 2018 (in thousands):

 

 

 

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The following table summarizes the amounts recorded in the Company’s consolidated statements of income for derivative instruments not designated as hedging instruments for the three months ended September 30, 2018 and September 30, 2017 (in thousands):

 

 

 

6. FAIR VALUE PRESENTATION

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is determined at a reasonable point within the range that is most representative of fair value under current market conditions. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends, and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

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In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of September 30, 2018 and June 30, 2018:

 

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The following tables provide the fair value for liabilities required to be measured and reported at fair value on a recurring basis as of September 30, 2018 and June 30, 2018.

 

 

Liabilities measured at fair value on a recurring basis at June 30, 2018 are summarized below.

 

 

The following tables represent the change in the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2018 and 2017:

 

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There were no assets measured at fair value on a nonrecurring basis at September 30, 2018 and June 30, 2018.

 

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Statements of Financial Condition as of September 30, 2018 and June 30, 2018:

 

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The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. There were no changes in methodologies or transfers between levels at September 30, 2018. During the three months ended June 30, 2018, a Bank CD was transferred out of Level 3 as the Company determined there were the significant observable inputs to classify the Bank CD as sufficiently observable. Therefore, at June 30, 2018, the Bank CD was transferred into a Level 2 valuation.

 

The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2018 and June 30, 2018:

 

Cash and Cash Equivalents

These short-term assets are valued at their face value, which approximate fair value.

Investments (Available- for- Sale and Held- to- Maturity)

Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain Mortgage Backed Securities (MBS), Collateralized Mortgage Obligations (CMO), Corporate notes, and Municipal and U.S government securities. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Investment securities classified within Level 3 include certain equity securities that do not have readily available market prices, certain corporate notes, certain Bank CDS and other less liquid investment securities. If observable market-based inputs are not available, we use unobservable inputs to determine appropriate valuation adjustments by reviewing valuation reports provided by a third-party (Level 3).

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Loans Held for Sale at Fair Value

All mortgage loans held for sale are carried at fair value which is determined on a recurring basis by utilizing quoted prices from dealers in such loans.

The Company's mortgage loans held for sale are generally classified within Level 2 of the valuation hierarchy.

The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that the Company is contractually entitled to receive at maturity as of September 30, 2018 and June 30, 2018 (in thousands):

 

 

The Company did not have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at September 30, 2018 or June 30, 2018.

Interest Rate Lock Commitments (“IRLC”)

The fair value of the Company’s IRLC instruments are based upon the underlying mortgage loan adjusted for the probability of such commitments being exercised and estimated costs to complete and originate the loan. The Company’s IRLCs are classified within Level 3 of the valuation hierarchy as a result of unobservable market data inputs.

Forward Loan Sale Commitments

Fair values for forward loan sales commitments are based on forward prices with dealers in such securities. Due to the observable inputs used by the Company, the Company’s forward loan sales commitments are classified within Level 2 of the valuation hierarchy.

To Be Announced Securities (“TBAs”)

TBAs are valued based on forward dealer marks from the Company’s approved counterparties.  The Company utilizes a third party market pricing service which compiles current prices for instruments from market sources, and those prices represent the current executable price. Due to the observable inputs used by the Company, the Company’s TBAs are classified within Level 2 of the valuation hierarchy.

Loan Receivable, Net

Fair values are estimated for portfolios of loans with similar financial characteristics. For loans that reprice frequently, the carrying value approximates fair value. The fair value of other type of loans is estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities.

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Impaired Loans

The Company has measured impairment on impaired loans generally based on the fair value of the loan's collateral.  The fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Company. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed.   Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value.  If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included as a Level III measurement. At September 30, 2018 and June 30, 2018, the fair value of the collateral exceeded the carrying amount of the loan; therefore there are no impaired loans currently being carried at its fair value.

Bank-Owned Life Insurance

The carrying amount of the investment in bank-owned life insurance approximates its cash surrender value under the insurance policies.

Restricted Investment in Bank Stock

The stock is carried at cost; which approximates fair value and considers the limited marketability of such securities.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amount of accrued interest receivable and payable approximates their respective fair values.

Deposits

The carrying amount of demand deposits, savings accounts and money market deposits approximate their fair value. The discount rate is estimated using the rates currently offered for deposits with comparable remaining maturities. The fair value of certificates of deposit is estimated discounting the contractual cash flows. The discount rate is estimated using the rates currently offered for deposits with comparable remaining maturities.

Advances from the FHLB

The fair value of advances is estimated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for borrowings with comparable terms, credit, and remaining maturities.

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase are carried at the amounts at which the securities will be subsequently repurchased as specified in the agreements and the carrying amount is a reasonable estimate of the fair value. The Company values the collateral on a daily basis and obtains additional collateral, if necessary, to protect the Company in the event of default by the counterparties.

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Commitments to Extend Credit

The majority of the Company's commitments to extend credit carry current market interest rates if converted to loans. Because commitments to extend credit are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties and is not considered material for disclosure.

 

7. CHANGES IN AND RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following tables present the changes in the balances of each component of accumulated other comprehensive income (“AOCI”) for the three months ended September 30, 2018 and September 30, 2017.  All amounts are presented net of tax.

 

 

The following table present reclassifications out of AOCI by component for the three months ended September 30, 2018 and September 30, 2017.

 

 

8. EARNINGS PER SHARE

Earnings per share ("EPS") consist of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for

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each period presented. The diluted EPS calculation reflects the EPS if all outstanding instruments convertible to common stock were exercised. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. At September 30, 2018, there were 198,000 stock options outstanding and 77,000 restricted stock shares outstanding which none of the stock options and restricted stock shares were vested and exercisable at September 30, 2018. The 198,000 stock options outstanding were not included in the computation of diluted net income per share for the three months ended September 30, 2018 as their effect would have been anti-dilutive. For the three months ended September 30, 2017, there were no stock options or other convertible instruments outstanding for the year. Therefore, there is no effect of dilution on the Company’s earnings per share for the three months ended September 30, 2017.

The calculation of EPS for the three months ended September 30, 2018 and 2017 is as follows (in thousands, except per share data):

 

 

 

9. EMPLOYEE BENFITS

The Company adopted the Huntingdon Valley Bank Employee Stock Ownership Plan (the “ESOP”) for eligible employees. Eligible employees who have attained age 21 may participate in the ESOP on the later of the effective date of the ESOP or upon the first entry date commencing on or after the eligible employee’s completion of 1,000 hours of service during a continuous 12-month period.

During the year ended June 30, 2017, the ESOP purchased 8% of the total shares issued in the Company’s initial public offering which equates to 174,570 shares of the Company’s common stock in the open market ranging from $12.50 per share to $14.21 per share for a weighted average price per share of $13.92, and a total purchase price of $2,430,000.

The following table presents the components of the ESOP Shares at September 30, 2018:

 

Equity Incentive Plan

 

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The Company’s shareholders approved the HV Bancorp, Inc. 2018 Equity Incentive Plan (the “2018 Equity Incentive Plan”) at a Special Meeting of shareholders on June 13, 2018. An aggregate of 305,497 shares of authorized but unissued common stock of the Company was reserved for future grants of incentive and non-qualified stock options, restricted stock awards and restricted stock units under the 2018 Equity Incentive Plan. Of the 305,497 authorized shares, the maximum number of shares of the Company’s common stock that may be issued under the 2018 Equity Incentive Plan pursuant to the exercise of stock options is 218,212 shares, and the maximum number of shares of the Company’s common stock that may be issued as restricted stock awards or restricted stock units is 87,285 shares.

 

On June 13, 2018, the Compensation Committee of the Board of Directors authorized the grant of 275,000 shares which included 43,000 incentive stock options to employees, 125,000 incentive stock options to officers, 30,000 non-qualified stock options to outside directors, 12,000 shares of restricted stock to employees, 50,000 shares of restricted stock to officers and 15,000 shares of restricted stock to outside directors under the 2018 Equity Incentive Plan. The restricted shares and stock options vest over a seven year period.

 

The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock under the Company’s 2018 Equity Incentive plan. Management recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the requisite service period for the entire award. As of September 30, 2018, there were 30,497 shares available for future awards under this plan, which includes 10,285 shares available for restricted stock awards.

 

Stock option expense was $18,000 for the three months ended September 30, 2018. The Company did not record any stock option expense for the three months ended September 30, 2017. At September 30, 2018, total unrecognized compensation cost related to stock options was $341,000.

 

 

 

A summary of the Company’s stock option activity and related information for the three months ended September 30, 2018 was as follows:

 

The weighted average remaining contractual life was 9.7 years at September 30, 2018 and the grant-date fair value of stock options of $1.81 was estimated using the Black-Scholes Option-Pricing Model.

Restricted stock expense for the three months ended September 30, 2018 was $46,000.  The Company did not record any restricted stock expense for the three months ended September 30, 2017.  At September 30, 2018, the expected future compensation expense relating to non-vested restricted stock outstanding was $1.1 million.

A summary of the Company’s restricted stock activity and related information for the three months ended September 30, 2018 was as follows:

 

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10. RELATED PARTY TRANSACTIONS

In November 2017, the Company engaged a third party to provide services for certain customers with large deposit balances, by offering both a competitive rate of return and FDIC insurance. Related party balances in this program totaled $20.4 million at September 30, 2018 for which we received approximately $37,000 in fees for customer services which is included in the three months ended September 30, 2018.

 

In January 2018, the Company entered into a business consulting agreement with one of our directors to provide deposit sales training, grow deposit market share and identify deposit opportunities. This agreement will terminate on December 31, 2019. The Company has paid $15,000 in consulting fees to the director for the three months ended September 30, 2018.

 

11. REVENUE RECOGNITION

 

On July 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 implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after July 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

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 income from bank owned life insurance, sales of investment securities, mortgage banking activities, and certain items within other income are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such deposit related fees, interchange fees, and fees income received in exchange for customer’s deposits sourced with a deposit placement network. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606.

 

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The following table presents noninterest income for the three months ended September 30, 2018 and 2017:

 

 

The following is a discussion of key revenues of fees for customer services that are within the scope of the new revenue guidance:

 

 

 

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business of the Company, and changes in the securities markets. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Overview

The Bank provides financial services to individuals and businesses from our main office in Huntingdon Valley, Pennsylvania, and from our three additional full-service banking offices located in Plumsteadville, Warrington and Huntingdon Valley, Pennsylvania. We also operate a limited service branch in Philadelphia, Pennsylvania. We have a loan production office located in Warminster, Pennsylvania and a loan origination office in Montgomeryville, Pennsylvania. Our primary market area includes Montgomery, Bucks and Philadelphia Counties in Pennsylvania. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential mortgage loans, commercial real estate loans (including multi-family loans), home equity loans and lines of credit and, to a lesser extent, consumer and construction loans. We retain our loans in portfolio depending on market conditions, but we primarily sell our fixed-rate one- to four-family residential mortgage loans in the secondary market. We also invest in various investment securities. Our revenue is derived principally from interest on loans and investments and loan sales. Our primary sources of funds are deposits, Federal Home Loan Bank advances and principal and interest payments on loans and securities.

Our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities.  Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense.  Non-interest income consists primarily of gains recognized from the sale of residential mortgage loans in the secondary market, fees for customer services, gain or loss from derivative instruments and change in fair value of loans held for sale. Non-interest expense primarily consists of expenses related to salaries and employee benefits, occupancy, data processing related operations, professional fees, and other expenses.  

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.  

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Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2018 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K, for the year ended June 30, 2018.

The Jumpstart Our Business Startups Act (“JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of September 30, 2018 and June 30, 2018, there is not a significant difference in the presentation of our consolidated financial statements as compared to other public companies as a result of this transition guidance.  The complete list of Critical Accounting Policies are described in the Annual Report on Form 10-K, for the year ended June 30, 2018.

Comparison of Statements of Financial Condition at September 30, 2018 and at June 30, 2018

Total Assets

Total assets increased $4.5 million, or 1.5%, to $302.3 million at September 30, 2018 from $297.8 million at June 30, 2018.  The increase was primarily the result of increases of $12.5 million in loans receivable, and $2.3 million in loans held for sale, partially offset by decreases in cash and cash equivalents of $8.7 million and $1.7 million in investment securities.

Cash and cash equivalents

Cash and cash equivalents decreased $8.7 million, or 59.2%, to $6.0 million at September 30, 2018 from $14.7 million at June 30, 2018, primarily as a result of funding loans as part of our continued strategic emphasis on growing our adjustable-rate jumbo one- to four-family residential real estate loan portfolio. We originated approximately $9.7 million in adjustable-rate jumbo one- to four-family residential real estate loans for the three months ended September 30, 2018.

Investment Securities

Investment securities decreased by $1.7 million or 3.68%, to $43.1 million at September 30, 2018 from $44.8 million at June 30, 2018. The decrease was primarily due to maturities and principal repayments of $1.5 million during the three months ended September 30, 2018. At September 30, 2018, our held-to-maturity portion of the securities portfolio, at amortized cost, was $13.9 million, and our available-for-sale portion of the securities portfolio, at fair value, was $29.2 million compared to our held-to-maturity portion of the securities portfolio of $13.9 million and our available-for-sale portion of the securities portfolio of $30.9 million at June 30, 2018.

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During September 2018, the Company purchased an equity security for $500,000 (see note 4 Equity securities for further discussion.)

Net Loans

Net loans increased $12.5 million, or 5.9%, to $225.2 million at September 30, 2018 from $212.7 million at June 30, 2018. One- to four-family residential real estate loans increased $13.6 million, or 7.5%, to $195.8 million at September 30, 2018 from $182.2 million at June 30, 2018 as a result of our continued strategic emphasis on growing our adjustable-rate jumbo one- to four-family residential real estate loan portfolio. Commercial real estate loans decreased by $366,000 from $10.8 million at June 30, 2018 to $10.4 million at September 30, 2018. Commercial business loans decreased by $330,000 from $4.1 million at June 30, 2018 to $3.7 million at September 30, 2018. Construction loans increased $323,000 to $3.2 million at September 30, 2018 from $2.9 million at June 30, 2018. Home equity and HELOC loans decreased by $691,000 from $4.9 million at June 30, 2018 to $4.2 million at September 30, 2018 primarily as a result of payoff of loans.

 

In November 2017, the Bank entered into a loan purchase agreement with a broker to purchase a portfolio of private education loans made to American citizens attending American Medical Association (“AMA”) approved medical schools in Caribbean Nations. The broker serves as a lender, holder, program designer and developer, administrator, and secondary market for the loan portfolios they generate. At September 30, 2018, the balance of the private education loans was $7.0 million. The private student loans are made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. The purchased private student loans had recourse which included a fully paid insurance wrap for the life of the loan provided by an insurance company who is required to repurchase loans delinquent over 180 days. However, in June 2018, the Company was informed that the insurance company who is required to repurchase loans delinquent over 180 days was declared insolvent and adopted a plan of liquidation. The default claims will continue to be filed with the insurance company’s liquidator once accounts reach the 180^th day of delinquency. At September 30, 2018, there were no delinquent loans which required filing a claim. Any future claims that may be submitted would be subject to the available liquidated assets at that time. As such, there is no assurance that the future claims will be paid in part or in full.

 

Loans Held For Sale

Loans held for sale increased $2.3 million, or 16.9%, to $15.9 million at September 30, 2018 from $13.6 million at June 30, 2018 as the pipeline of one- to four-family residential real estate loans increased during the three months ended September 30, 2018.

Deposits

 

Deposits increased $15.7 million, or 6.7%, to $251.1 million at September 30, 2018 from $235.4 million at June 30, 2018. Our core deposits (consisting of demand deposits, money market, pass book and statement and checking accounts) decreased $14.3 million, or 7.4%, to $177.7 million at September 30, 2018 from $192.0 million at June 30, 2018. This decrease during the three months ended September 30, 2018 was primarily a result of a decrease in organic core deposit growth. Certificates of deposit increased $29.9 million, or 68.7%, to $73.4 million at September 30, 2018 from $43.5 million at June 30, 2018. The increase in certificate of deposits was primarily the result of the purchase of $29.0 million in certificates of deposit issued through brokers during the three months ended September 30, 2018 which had a total balance of $31.0 million at September 30, 2018. The proceeds of $29.0 million from the certificates of deposit issued through brokers during the three months ended September 30, 2018 was used in part to fund the loan growth of the portfolio and to repay advances from the Federal Home Loan Bank.

 

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Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank decreased by $8.0 million, or 36.4%, from $22.0 million at June 30, 2018 to $14.0 million at September 30, 2018 as a result of net decreases in short-term borrowings of $7.0 million and repayments of $1.0 million in long-term borrowing.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase decreased approximately $2.5 million, or 43.9%, to $3.2 million at September 30, 2018 from $5.7 million at June 30, 2018 as a result of an increase in the underlying deposit balances, which are primarily held by title companies.

Total Shareholders’ Equity

Total shareholders’ equity increased $282,000 to $31.0 million at September 30, 2018 compared to $30.7 million at June 30, 2018 primarily as a result of net income of $270,000 for the three months ended September 30, 2018, share based compensation expense of $64,000 and ESOP shares committed to be released of $34,000 partially offset by other comprehensive losses of $86,000 due to the fair value adjustments, net of deferred tax, on the investment securities available-for-sale portfolio as a result of rising interest rates during the three months ended September 30, 2018.

Comparison of Statements of Income for the Three Months Ended September 30, 2018 and 2017

General

Net income increased $34,000 to $270,000 for the three months ended September 30, 2018 from $236,000 for the three months ended September 30, 2017.  The increase in net income for the three months ended September 30, 2018 was primarily due to an increase of $540,000 in net interest income partially offset by a decrease in non-interest income of $247,000 and increases of $199,000 in non-interest expense and $60,000 in provision for loan losses compared to the same period in 2017.

Interest Income

Total interest income increased $907,000, or 52.0%, to $2.6 million for the three months ended September 30, 2018 from $1.7 million for the three months ended September 30, 2017. The increase was primarily the result of an increase in interest and fees on loans of $949,000 and an increase in interest on mortgage-backed securities and collateralized mortgage obligations of $18,000 partially offset by a decrease in interest on interest-earning deposits with banks of $53,000.  Total average interest-earning assets increased $84.2 million to $291.5 million for the three months ended September 30, 2018 from $207.3 million for the same period in 2017 primarily as a result of an increase in the average balance of loans of $96.2 million partially offset by a $7.6 million decrease in the average balance of interest-earning deposits with banks and a decrease in the average balance of investment securities of $4.9 million. The average yield on our interest-earning assets increased 27 basis points to 3.64% for the three months ended September 30, 2018 as compared to 3.37% for the three months ended September 30, 2017 primarily as a result of a higher average yield on investment securities and restricted investment in bank stock.

Interest and fees on loans increased $949,000 to $2.3 million for the three months ended September 30, 2018 from $1.4 million for the same period in 2017. This increase was primarily due to an increase in average loans outstanding of $96.2 million, which increased to $234.5 million for the three months ended September 30, 2018 from $138.3 million for the three months ended September 30, 2017 as a result of an increase in the average balance of one-to four-family residential loans.  The average yield on loans remained relatively flat at 3.92% for the three months ended September 30, 2018 and 3.90% for the three months ended September 30, 2017.

Interest income on interest-earning deposits decreased by $53,000 to $73,000 for the three months ended September 30, 2018, from $126,000 for the three months ended September 30, 2017. The decrease was primarily due to a decrease in the average balance of interest-earning deposits of $7.6

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million to $11.6 million for the three months ended September 30, 2018 from $19.2 million for the three months ended September 30, 2017 primarily as the result of the deployment of liquidity into loans. In addition, there was a decrease in the average yield on interest-earning deposits with banks which decreased 10 basis points, to 2.52% for the three months ended September 30, 2018 from 2.62% for the three months ended September 30, 2017.  

 

Interest on investment securities remained flat at $261,000 for the three months ended September 30, 2018 and 2017, respectively. Interest on investment securities remained flat as a result of an increase in interest income on mortgage backed securities and collateralized mortgage obligation securities which increased by $18,000 or 21.1%, to $103,000 for the three months ended September 30, 2018, from $85,000 for the three months ended September 30, 2017 offset by a decrease in interest income on U.S. Government Agency securities, corporate bonds and municipal securities of $18,000 or 10.2% to $158,000 for the three months ended September 30, 2018, from $176,000 for the three months ended September 30, 2017. The average yield on total securities increased 24 basis points to 2.36% for the three months ended September 30, 2018 from 2.12% for the same period in 2017, as increased market rates resulted in higher yielding investments.  The average balance of investment securities decreased by $4.9 million to $44.2 million for the three months ended September 30, 2018, from $49.1 million for the three months ended September 30, 2017.

Interest Expense

Total interest expense increased $367,000 to $614,000 for the three months ended September 30, 2018 from $247,000 for the three months ended September 30, 2017, primarily due to a $298,000 increase in interest expense on deposits and a $69,000 increase in interest expense on advances from the Federal Home Loan Bank.  

Interest expense on deposits increased $298,000 to $514,000 for the three months ended September 30, 2018 from $216,000 for the three months ended September 30, 2017 primarily as a result of an increase in average interest bearing deposits of $65.4 million to $224.3 million during the three months ended September 30, 2018 as compared to $158.9 million for the three months ended September 30, 2017. The increase in the average balance of interest bearing deposits was primarily as a result of a $36.7 million increase in the average balance of our core deposit accounts and a $28.7 million increase in the average balance of our certificates of deposit. The increase in the average balance of our core deposits was primarily a result of core deposits obtained through a deposit placement network on a reciprocal basis, such that amounts are under the standard FDIC insurance maximum of $250,000 making the deposits eligible for FDIC insurance. The average cost of deposits was 92 basis points for the three months ended September 30, 2018 compared to 54 basis points for the three months ended September 30, 2017. The average rate paid on money market deposits increased 24 basis points from 0.34% for the three months ended September 30, 2017 to 0.58% for the three months ended September 30, 2018. During the fiscal year 2018, the Company updated our product offerings and phased out offering NOW accounts to our customers and currently is offering demand deposits. The increase in the balance of our certificates of deposits of $28.8 million from $28.2 million for the three months ended September 30, 2017 to $57.0 million for the three months ended September 30, 2018 was primarily the result of the Company issuing certificates of deposit through brokers. The average cost of certificates of deposit increased by 73 basis points to 1.79% for the three months ended September 30, 2018 as compared to 1.06% for the three months ended September 30, 2017. The increase in the average cost of certificates of deposit for the three months ended September 30, 2018 was the result of increases in short term market interest rates as compared to the three months ended September 30, 2017.

Interest expense on advances from the Federal Home Loan Bank increased $69,000 to $99,000 for the three months ended September 30, 2018 from $30,000 for the three months ended September 30, 2017 as a result of increases in the average balance of the Federal Home Loan Bank advances as well as the average rate on the Federal Home Loan Bank advances. The average balance of the Federal Home Loan Bank advances increased $10.3 million to $19.8 million for the three months ended September 30, 2018 from $9.5 million for the three months ended September 30, 2017 primarily due to an increase in loan funding requirements. In addition, the average rate on the Federal Home Loan Bank advances increased

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to 2.00% for the three months ended September 30, 2018 from 1.27% for the three months ended September 30, 2017 due to increases in advance rates.  

Net Interest Income

Net interest income increased approximately $540,000 or 36.1%, to $2.0 million for the three months ended September 30, 2018 from $1.5 million for the three months ended September 30, 2017 as a result of our net interest-earning assets increasing $8.5 million to $45.3 million for the three months ended September 30, 2018 from $36.8 million for the three months ended September 30, 2017. Our interest rate spread decreased by 15 basis points to 2.64% for the three months ended September 30, 2018 from 2.79% for the three months ended September 30, 2017.  Our net interest margin decreased by 10 basis points from 2.89% for the three months ended September 30, 2017 to 2.79% for the three months ended September 30, 2018.  

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.  All average balances are based on daily balances.

 

 

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Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated.  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). The net column represents the sum of the prior columns.

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.

 

 

Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available or economic conditions change.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance.

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Provision for loan losses increased by $60,000 to $59,000 for the three months ended September 30, 2018, from a credit of $1,000 for the three months ended September 30, 2017 primarily as a result of an increase in average loans outstanding of $96.2 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. During the three months ended September 30, 2018, there were no total charge-offs and recoveries of $1,000 were received. During the three months ended September 30, 2017, total charge-offs of $22,000 were recorded and $45,000 of recoveries were received.

Non-Interest Income

Non-interest income decreased $247,000, or 24.6%, to $758,000 for the three months ended September 30, 2018 from $1.0 million for the three months ended September 30, 2017. The decrease in non-interest income was primarily due to a decrease in the gain on sales of loans of $335,000 to $901,000 for the three months ended September 30, 2018 from $1.2 million for the three months ended September 30, 2017. This was primarily due to lower sales of loans and reduced margin on loans sold when compared to the same period in 2017. This decrease in non-interest income was partially offset by a decrease in loss from derivative instruments which decreased $73,000 to a loss of ($317,000) for the three months ended September 30, 2018 from a loss of ($390,000) for the three months ended September 30, 2017 due to decreased volume of locked loans associated with hedging. In addition, fees for customer services increased $27,000 to $72,000 for the three months ended September 30, 2018 from $45,000 for the three months ended September 30, 2017 primarily as a result of income received in exchange for customers’ deposits sourced with a deposit placement network.

Non-Interest Expense

Non-interest expense increased $199,000, or 9.1% to $2.4 million for the three months ended September 30, 2018 from $2.2 million for the three months ended September 30, 2017 primarily as a result of an $105,000 increase in salaries and employee benefits, a $67,000 increase in professional and other expenses and a $40,000 increase in federal deposit insurance premiums. Salaries and employee benefits expense increased by $105,000 to $1.3 million for the three months ended September 30, 2018 from $1.2 million for the three months ended September 30, 2017 primarily as a result of the expansion in our administration department to support our operations as well as share based compensation expense of approximately $52,000 for the three months ended September 30, 2018. The professional fees and other expenses increased $67,000, or 12.1%, to $623,000 for the three months ended September 30, 2018 from $556,000 for the three months ended September 30, 2017 due to increases in consulting fees for strategic planning, accounting and auditing fees and fees related to deposits obtained through a deposit placement network on a reciprocal basis. In addition, included in other expenses is share based compensation expense of approximately $12,000 related to our board of directors. Federal deposit insurance premiums increased approximately $40,000 to $70,000 for the three months ended September 30, 2018 from $30,000 for the three months ended September 30, 2017 as a result of the increase in the deposit balance which was $251.1 million at September 30, 2018 compared to $171.3 million at September 30, 2017.

Income Tax Expense

Income tax expense remained flat at $88,000 for the three months ended September 30, 2018 and 2017, respectively. Federal income taxes included in total taxes for the three months ended September 30, 2018 were $66,000 with an effective federal tax rate of 19.6% as compared to $73,000 with an effective federal tax rate of 23.6% for the three months ended September 30, 2017. The decrease in the effective tax rate for the three months ended September 30, 2018 compared to the same period a year ago was primarily due to the passage of the Tax Cuts and Jobs Act which was enacted on December 22, 2017 and lowered the federal corporate tax rate to 21% from 35%.

 

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Pennsylvania state tax expense increased $7,000 to $22,000 for the three months ended September 30, 2018 from $15,000 for the three months ended September 30, 2017 with effective rates of 6.1% and 4.6%, respectively.

Non-Performing Assets We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and non-accruing troubled debt restructurings. Non-performing assets, including non-performing loans and other real estate owned, totaled $1.7 million, or 0.56% of total assets, at September 30, 2018. There were no non-accruing troubled debt restructurings at September 30, 2018 and June 30, 2018. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated.  We had three accruing loans past due 90 days or more at September 30, 2018 and one loan accruing past due 90 days or more at June 30, 2018.

 

 

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Allowance for Loan Losses  

The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

 

Liquidity and Capital Resources

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business.  Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.  Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sales of loans and securities, and matured loans and securities.  We also have the ability to borrow from the Federal Home Loan Bank of Pittsburgh.  Huntingdon Valley Bank had Federal Home Loan Bank of Pittsburgh advances of $14.0 million outstanding with unused borrowing capacity of $122.9 million as of September 30, 2018. Additionally, at September 30, 2018, we had the ability to borrow $3.0 million from the Atlantic Community Bankers Bank and we maintained a line of credit equal to 95% of the fair value of collateral held by the Federal Reserve Bank, which was $2.0 million at September 30, 2018. We have not borrowed against the credit lines with the Atlantic Community Bankers Bank and the Federal Reserve Bank during the three months ended September 30, 2018 and 2017.

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The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2018.

We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks.  The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2018, cash and cash equivalents totaled $6.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $29.2 million at September 30, 2018.  

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash (used in) provided by operating activities was ($1.4) million and $3.0 million for the three months ended September 30, 2018 and September 30, 2017, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $11.5 million and $16.9 million for the three months ended September 30, 2018 and September 30, 2017, respectively. During the three months ended September 30, 2018, there were no sales of available-for-sale securities compared to $11.2 million sold in securities available-for-sale for the three months ended September 30, 2017.  Net cash provided by financing activities was $4.2 million and $1.0 million for the three months ended September 30, 2018 and 2017, respectively, which consisted primarily of increases in deposits of $15.7 million and $778,000 offset by net repayments of $8.0 million for borrowing from the Federal Home Loan Bank and proceeds of $3.0 million and repayments of ($3.0) million from the Federal Home Loan Bank for the three months ended September 30, 2018 and 2017, respectively.

We are committed to maintaining a strong liquidity position.  We monitor our liquidity position on a daily basis.  We anticipate that we will have sufficient funds to meet our current funding commitments.  Certificates of deposit due within one year of September 30, 2018, totaled $58.4 million of total deposits which included brokered certificates of deposit of $31.0 million. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay.  We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.  

Capital Management.  Huntingdon Valley 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 September 30, 2018, Huntingdon Valley Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.  

Regulatory Capital

Information presented for September 30, 2018 and June 30, 2018, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

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Federal bank regulators require the Bank maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity Tier 1 capital to risk-weighted assets of 4.5%, Tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. At September 30, 2018, the Bank met all the capital adequacy requirements to which it was subject. At September 30, 2018, the Bank was “well capitalized” under the regulatory framework for prompt corrective action. To be “well capitalized,” the Bank must maintain minimum leverage, common equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. Management believes that no conditions or events have occurred since September 30, 2018 that would materially adversely change the Bank’s capital classifications.

The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):

 

 

As a licensed mortgagee, the Bank is subject to the rules and regulations of the Department of Housing and Urban Development (“HUD”), Federal Housing Authority (“FHA”) and state regulatory authorities with respect to originating, processing and selling loans. Those rules and regulations, among other things, require the maintenance of minimum net worth levels (which vary based on the portfolio of FHA loans originated by the Bank). Failure to meet the net worth requirements could adversely impact the ability of the Bank to originate loans and access secondary markets. As of September 30, 2018 and June 30, 2018, the Bank maintained the minimum required net worth levels.  

The Bank must hold a capital conservation buffer, subject to a phase-in from January 1, 2016 through December 31, 2019, above its minimum risk-based capital requirements. As of September 30, 2018, the Bank is required to maintain a capital conservation buffer of 1.875%. At September 30, 2018, the Bank met the capital conservation buffer requirements.  Failure to maintain the full amount of the buffer will result in restrictions on the Bank’s ability to make capital distributions and to pay discretionary bonuses to executive officers. The phase-in requires the Bank to increase its capital conservation buffer from 0.625% as of June 30, 2016 to 2.50% as of June 30, 2019 and thereafter.

 

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As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion.  A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.  The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%.  A financial institution can elect to be subject to this new definition.

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit.  While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2018, we had outstanding commitments to originate loans of $14.2 million, unused lines of credit totaling $11.9 million and $5.5 million in stand-by letters of credit outstanding. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2018 totaled $58.4 million of total deposits which included brokered certificates of deposit of $31.0 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies

Item 4 – Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of September 30, 2018.  Based on their evaluation of the Company's disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the first fiscal quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At September 30, 2018, the Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company.

Item 1A – Risk Factors

Not required for smaller reporting companies

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

Item 3 – Defaults upon Senior Securities

Not Applicable

Item 4 – Mine Safety Disclosures

Not Applicable

Item 5 – Other Information

None

Item 6 – Exhibits

 

 

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SIGNATURES

HV BANCORP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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