UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2020

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)

 

2005 South Easton Road, Suite 304, Doylestown, Pennsylvania  18901

(Address of Principal Executive Offices and Zip Code)

(267) 280-4000

(Registrant's Telephone Number, Including Area Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

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.  ☐

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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 May 10, 2020, there were 2,240,613 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 March 31, 2020 and December 31, 2019 (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 March 31, 2020 and 2019; (Dollars in thousands, except per share data)

 

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HV BANCORP, INC. AND SUBSIDIARY

 

Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019 (Dollars in thousands)

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

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HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (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)

 

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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. 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 and Securities (“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 and New Castle County, Delaware) 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 December 31, 2019 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-KT filed by the Company with the U.S. Securities and Exchange Commission on March 27, 2020. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year-ending December 31, 2020.

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

 

Significant Event

The COVID-19 pandemic has adversely affected economic activity globally, nationally and locally. It has caused substantial disruption in international and U.S. economies, markets, and employment. In response to the COVID-19 national emergency, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provides an estimated $2.2 trillion of economy-wide financial stimulus to combat the pandemic and stimulate the economy in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities through loans, grants, tax changes, and other types of relief. Some of the applicable provisions of the Cares Act to the Company include, but are not limited to:

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For further discussion, see COVID-19 update section of Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Principles of Consolidation

 

The unaudited interim consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

 

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 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

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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.

ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company. 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. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

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In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021.  Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

 

 

Adoption of New Accounting Standards

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.  The Company adopted the accounting standard on January 1, 2020. As ASU 2018-13 primarily affected disclosure requirements, it did not have a material impact on the Company’s consolidated statement of financial condition. We have included the additional disclosures in Note 6, Fair Value Presentation.

 

 

 

2. INVESTMENT SECURITIES

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

 

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

 

 

The scheduled maturities of securities available-for-sale at March 31, 2020 were as follows:

 

 

Securities with a fair value of $7.2 million and $7.4 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020. There were no gross realized gains or losses on sales for the three months ended March 31, 2020.

Proceeds from the sale of available-for-sale securities for the three months ended March 31, 2019 were $2.0 million. Gross realized gains on such sales were approximately $4,000 and gross realized losses were $0 for the three months ended March 31, 2019.

The following tables summarize the unrealized loss positions of securities available-for-sale as of March 31, 2020 and December 31, 2019:

 

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At March 31, 2020 and December 31, 2019, the investment portfolio included two U.S. Government securities with total fair values of $422,000 and $436,000, respectively. There were no securities in an unrealized loss position as of March 31, 2020. As of December 31, 2019, there were two securities in an unrealized loss position. These securities are zero risk weighted for capital purposes and are guaranteed for repayment of principal and interest. As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the investment portfolio included fifteen and nine corporate notes, respectively with total fair values of $9.2 million and $5.6 million at the end of each of period, respectively. Of these securities, seven and three were in an unrealized loss position as of March 31, 2020 and December 31, 2019, respectively. At the time of purchase and as of March 31, 2020 and December 31, 2019, these bonds in an unrealized loss position continue to maintain investment grade ratings. As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the investment portfolio included thirty collateralized mortgage obligations (“CMOs”) with total fair values of $6.2 million and $6.5 million, respectively. Of these securities, twelve and twenty-seven were in an unrealized loss position as of March 31, 2020 and December 31, 2019, respectively. The CMO portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the investment portfolio included thirteen mortgage backed securities (“MBS”) with a total fair value of $4.0 million and $4.1 million, respectively. There were no securities in an unrealized loss position as of March 31, 2020.  As of December 31, 2019, seven securities were in an unrealized loss position. The MBS portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of March 31, 2020 and December 31, 2019, 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.

At March 31, 2020 and December 31, 2019, the investment portfolio included five municipal securities with a total fair value of $2.1 million for both periods. Of these securities, zero were in an unrealized loss position as of March 31, 2020 and December 31, 2019, respectively. The Company’s municipal portfolio

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issuers are located in Pennsylvania and at the time of purchase, and as of March 31, 2020 and December 31, 2019, continue to maintain investment grade ratings. As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the investment portfolio included five and ten Bank Certificate of Deposits (“CDs”) with a total fair value of $1.3 million and $2.5 million, respectively. As of March 31, 2020, there were no securities in an unrealized loss position. As of December 31, 2019, one of these securities was in an unrealized loss position. The Bank CDs are fully insured by the FDIC. As of March 31, 2020 and December 31, 2019, 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

 

The Company maintains an equity security portfolio that consists of $500,000 at March 31, 2020 and December 31, 2019. As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019:

 

 

 

At March 31, 2020 and December 31, 2019, 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 March 31, 2020, the balance of the private education loans was $5.9 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At March 31, 2020, there were eight loans with a balance of approximately $460,000 that are past due 90 days or more.

 

Overdraft deposits are reclassified as other consumer and are included in the total loans on the statements of financial condition. Overdrafts were $4,000 and $8,000 at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and 2019.

 

 

 

 

 

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

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based upon factors and trends identified by management at the time the financial statements are prepared. Due to uncertainty of economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the calculation of the allowance for loan losses. However, due to the uncertainty of the impact, the Company will continue to monitor and additional adjustments to the allowance for loan losses may be necessary.

 

 

The following tables summarize information in regard to the recorded investment in loans receivable by loan class as of March 31, 2020 and December 31, 2019:

 

 

 

 

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The following table summarizes information about impaired loans by loan portfolio class as of March 31, 2020 and December 31, 2019:

 

 

The following table presents additional information regarding the impaired loans for the three months ended March 31, 2020 and March 31, 2019:

 

 

 

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If these loans were performing under the original contractual rate, interest income on such loans would

have increased approximately $24,000 and $22,000 for the three months ended March 31, 2020 and

2019, respectively.

 

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2020 and December 31, 2019:

 

 

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. Included in the non-performing medical education loans are non-accrual loans that have been brought current through a status change to deferred status. The deferred status generally means the student is in medical residency.  Generally, the loan may be restored to accrual status when the obligation is in accordance with the contractual terms for a reasonable period of time, generally six months.

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 March 31, 2020 and December 31, 2019:

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The following tables present the segments of the loan portfolio summarized by aging categories as of March 31, 2020 and December 31, 2019:

 

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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.

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The Company began offering short-term loan modifications to provide assistance to borrowers during the COVID-19 pandemic. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made on a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. Therefore, the Company does not account for these loan modifications as TDRs. See Note 1 Significant Event for more information.

As of March 31, 2020 and December 31, 2019, the Company had two loans identified as TDRs totaling $251,000 and $259,000, respectively.  At March 31, 2020 and December 31, 2019, the two 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 March 31, 2020 and 2019. No additional loan commitments were outstanding to these borrowers at March 31, 2020 and December 31, 2019. At March 31, 2020, there was no specific reserves related to the TDRs. At December 31, 2019, there was a specific reserve of $12,000 related to one TDR.

 

The following table details the Company’s TDRs that are on accrual status and non-accrual status at March 31, 2020:

 

 

The following table details the Company’s TDRs that are on accrual status and non-accrual status at December 31, 2019:

 

 

The carrying amount of residential mortgage loans in the process of foreclosure was $394,000 and $403,000 at March 31, 2020 and December 31, 2019, respectively.

 

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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 March 31, 2020 and December 31, 2019. 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 March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

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 March 31, 2020 and 2019 (in thousands):

 

 

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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.

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.

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The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:

 

 

 

 

The following tables provide the fair value for liabilities required to be measured and reported at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

 

 

 

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The following tables represent the change in the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three ended March 31, 2020 and 2019:

 

 

 

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At March 31, 2020, the Company has classified $3.0 million of Corporate notes as Level 3. The fair value of $1.0 million of Corporate notes includes an adjustable rate corporate security and sub-debt bond. The Company’s methodology for valuing these Corporate notes is to obtain market quotes through a third-party pricing model. The weighted average of the market quotes applied range from $92.37 to $104.66.  In addition, classified as Level 3 are two sub-debt bonds with a fair value of $2.0 million. The Company’s methodology to value the two sub-debt bonds is to obtain from a broker/investment firm market values of similar sub-debt bonds issuances over the past twelve months. The weighted average of the market quotes applied is $102. Since the Corporate notes are not widely traded, the Company considered the inputs as unobservable.

 

At March 31, 2020, the Company has classified $1.9 million of net derivative assets and liabilities related to IRLC as Level 3. The fair value of IRLCs is based on prices obtained for loans with similar characteristics from third parties, adjusted by the pull-through rate, which represents the Company’s best estimate of the probability that a committed loan will fund. The weighted average pull-through rates applied ranging from 25% to 98%.

 

Significant unobservable inputs for assets and liabilities measured at fair value on a recurring basis at March 31, 2020:

 

There were no assets measured at fair value on a nonrecurring basis at March 31, 2020 and December 31, 2019.

 

 

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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 March 31, 2020 and December 31, 2019:

 

 

 

 

 

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

 

The following tables present the changes in the balances of each component of accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2020 and March 31, 2019.  All amounts are presented net of tax.

 

 

 

The following table present reclassifications out of AOCI by component for the three months ended March 31, 2020 and March 31, 2019.  

 

 

 

 

 

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 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 March 31, 2020, there were 216,400 stock options outstanding of which 30,080 of the stock options were vested and exercisable at March 31, 2020. At March 31, 2020, there 87,000 restricted stock shares outstanding of which 12,320 restricted stock shares were vested and exercisable at March 31, 2020. The 216,400 stock options outstanding and 65,981 restricted stock shares outstanding were not included in the computation of diluted net income per share for the three months ended March 31, 2020 as their effect would have been anti-dilutive. At March 31, 2019, there were 198,000 stock options outstanding

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and 77,000 restricted stock shares outstanding which none of the stock options and restricted stock shares were vested and exercisable at March 31, 2019. The 198,000 stock options outstanding were not included in the computation of diluted net income per share for the three months ended March 31, 2019, as their effect would have been anti-dilutive.

The calculation of basic and diluted EPS for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

9. EMPLOYEE BENFITS

Equity Incentive Plan

 

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.

 

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 March 31, 2020, there were 497 shares available for future awards under this plan, which includes 212 shares available for incentive and non-qualified stock options and 285 shares available for restricted stock awards. The restricted shares and stock options vest over a seven year period.

 

Stock option expense was $15,000 and $14,000 for the three months ended March 31, 2020 and March 31, 2019, respectively. At March 31, 2020, total unrecognized compensation cost related to stock options was $323,000.

 

 

 

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A summary of the Company’s stock option activity and related information for the three months ended March 31, 2020 and March 31, 2019 was as follows:

 

 

Restricted stock expense for the three months ended March 31, 2020 and March 31, 2019 was $47,000 and $45,000, respectively. At March 31, 2020, the expected future compensation expense relating to non-vested restricted stock outstanding was $984,000.

A summary of the Company’s restricted stock activity and related information for the three months ended March 31, 2020 and 2019 was as follows:

 

 

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 $11.9 million at March 31, 2020 for which the Company received fees for customer services totaling approximately $2,000 and $5,000 in the three months ended March 31, 2020 and March 31, 2019, respectively.  

 

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 terminated on December 31, 2019. The Company has paid $15,000 in consulting fees to the director for three months ended March 31, 2019.

 

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

 

 

 

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The following table presents noninterest income for the three months ended March 31, 2020 and March 31, 2019:

 

12. Leases

 

On July 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. The Company elected to adopt the transition relief under ASC Topic 842 using the modified retrospective transition method. All lease agreements are accounted for as operating leases.

 

The majority of the Company’s leases are comprised of operating leases for real estate property for branches and office spaces with terms extending through 2036. The operating lease agreements are recognized on the consolidated statements of financial condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Company elected not to include short-term leases with initial terms of twelve months or less on the consolidated statements of financial condition.

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The following table represents the classification of the Company’s ROU assets and lease liabilities in the consolidated statements of financial condition:

 

 

The Company’s lease agreements frequently include one or more options to renew at the Company’s discretion. If at the beginning of the lease, the Company is reasonably certain that the renewal option will be exercised, the Company will include the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. If the rate is not readily determinable in the lease, the Company used its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

 

 

The components of the lease expense are as follows:

 

Future minimum payments for operating leases as of March 31, 2020 and December 31, 2019 were as follows:

 

 

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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, the negative impact of severe and wide-ranging disruptions caused by the spread of coronavirus COVID-19 on current customers and the economy in general, changes in the interest rate environment, increases in nonperforming loans, 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 Doylestown, Pennsylvania, and from our 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 Philadelphia, Pennsylvania, a sales office in Doylestown, Pennsylvania and Wilmington, Delaware and a loan origination office in Montgomeryville, Pennsylvania. Our business banking office is located in Philadelphia, Pennsylvania. Our primary market area includes Montgomery, Bucks and Philadelphia Counties in Pennsylvania and New Castle Counties in Delaware. 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.  

COVID-19 Update

From the beginning of the COVID-19 crisis, our focus has been and remains on navigating the complexities, impact and ongoing challenges of the COVID-19 pandemic. The safety and well-being of

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our employees and customers has been our focus while continuing to provide our customers with full access to our banking services. The Company took the following preemptive measures as the COVID-19 pandemic evolved:

 

Business Continuity Plan

During March 2020, management launched its previously developed Business Continuity Plan, taking the following steps to protect the safety and well-being of our employees and customers, while continuing to provide superior customer service:

 

 

To date, the Company has not made any employee layoffs or furloughs and presently does not anticipate future furloughs or layoffs related to the COVID-19 pandemic.

Paycheck Protection Program

In April 2020, our team in business banking and retail began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) implemented by the Small Business Association (“SBA”) with support from the Department of Treasury under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As of April 30, 2020, the Company had received over 330 applications from new and existing customers disbursed approximately $48 million in funds, with an estimated processing fee of approximately $1.5 million. The Company plans to fund these short-term loans through short-term Federal Home Loan Bank (“FHLB”) advances, and through participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

Liquidity Sources

The Company has reviewed all sources of liquidity in anticipation of any potential funding needs due to the COVID-19 pandemic and prioritized based on available capacity, terms, and cost of funds. As of March 31, 2020, the Company had the following sources of liquidity (excluding the Company’s ability to participate in the PPPLF):

 

In addition to the above primary sources of liquidity, as of March 31, 2020, the Company also had access to unused borrowing capacity of $125.8 million at Federal Home Loan Bank of Pittsburgh, $3.0 million unused borrowing capacity from the Atlantic Community Bankers Bank and $1.4 million line of credit with Federal Reserve Bank. The Company also has access to brokered certificate of deposits as an additional funding source.

 

 

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Capital Strength

At March 31, 2020, the Bank’s exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

Deferral Requests

As of March 31, 2020, the Company had processed 17 deferral requests, representing $10.9 million in total outstanding loans. As of April 30, 2020, the Company had processed a total of 54 deferral requests, representing $20.3 million in total outstanding loans. Management expects deferral requests could continue throughout the second quarter of 2020 and beyond.

Under Section 4013 of the CARES Act, a financial institution may elect to temporarily suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a Troubled Debt Restructuring (“TDR”) and (2) does not need to determine impairment associated with loan modifications. As of March 31, 2020, the Company entered into four loan modification agreements with an outstanding balance of $1.2 million. As of April 20, 2020, the Company entered into a total of 19 loan modification agreements with respect to $6.9 million of loans outstanding.

Loan Portfolio Analysis

Certain industries are anticipated to suffer greater economic impact as a result of the COVID-19 pandemic. The following table provides information in regards to the Company’s commercial loan portfolio by type as of March 31, 2020.

The extent of the impact of the COVID-19 pandemic to the Company’s loan portfolio is uncertain and cannot be predicted as it will depend on certain developments including the duration of the pandemic as well as the local and national economies as a whole.

 

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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 March 31, 2020 have remained unchanged from the disclosures presented in our Annual Report on Form 10-KT, for the six-month transition period ended December 31, 2019.

The Jumpstart Our Business Startups Act (“JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public 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 March 31, 2020 and December 31, 2019, 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-KT, for the six-month transition period ended December 31, 2019.

Comparison of Statements of Financial Condition at March 31, 2020 and at December 31, 2019

Total Assets

Total assets increased $1.0 million to $355.6 million at March 31, 2020 from $354.6 million at December 31, 2019.

Cash and cash equivalents

Cash and cash equivalents decreased $110,000, to $20.5 million at March 31, 2020 from $20.6 million at December 31, 2019.

Investment Securities

Investment securities increased $2.0 million or 9.4%, to $23.2 million at March 31, 2020 from $21.2 million at December 31, 2019. The increase was primarily due to purchase of $4.3 million offset by $2.4 million in maturities and principal repayments during the three months ended March 31, 2020 and $101,000 in net unrealized gain on available-for-sale.

Net Loans

 

Net loans decreased $2.3 million to $252.7 million at March 31, 2020 from $255.0 million at December 31, 2019. One- to four-family residential real estate loans decreased $9.8 million to $187.7 million at March 31, 2020 from $197.5 million at December 31, 2019. Commercial real estate loans increased by $3.6 million to $38.8 million at March 31, 2020 from $35.2 million at December 31, 2019 primarily as a result of originations from the business banking division, whose continued focus is growth of the commercial lending and commercial business loan portfolios. Commercial business loans increased by $3.2 million to $14.3 million at March 31, 2020 from $11.1 million at December 31, 2019. The Construction loans increased $1.3 million to $2.1 million at March 31, 2020 from $784,000 at December

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31, 2019 as a result of the origination of new commercial construction loans. Home equity and HELOC loans decreased by $277,000 from $4.4 million at December 31, 2019 to $4.1 million at March 31, 2020.

 

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 March 31, 2020, the balance of the private education loans was $5.9 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At March 31, 2020, there were eight loans with a balance of approximately $460,000 that are past due 90 days or more.

 

Loans Held For Sale

Loans held for sale decreased $508,000 to $37.4 million at March 31, 2020 from $37.9 million at December 31, 2019.

Deposits

 

Deposits decreased $5.6 million, or 2.0%, to $278.2 million at March 31, 2020 from $283.8 million at December 31, 2019. The decrease was primarily because of a $6.5 million, or 9.5% decrease in certificates of deposit to $61.8 million at March 31, 2020 from $68.3 million at December 31, 2019. The decrease of $6.5 million in certificate in deposits was primarily the result of a pay-off of $7.5 million certificate of deposit issued through a broker, offset by a $1.0 million increase in retail certificates of deposits. Offsetting this decrease of $6.5 million in certificate in deposits, was a $901,000 increase in our core deposits (consisting of demand deposits, money market, passbook and statement and checking accounts) to $216.4 million at March 31, 2020 from $215.5 million at December 31, 2019.

 

Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank increased by $5.0 million, or 18.5%, from $27.0 million at December 31, 2019 to $32.0 million at March 31, 2020 as a result of a net increase of $5.0 million in short-term borrowings.

Total Shareholders’ Equity

Total shareholders’ equity increased $214,000 to $33.8 million at March 31, 2020 compared to $33.6 million at December 31, 2019 primarily as a result of net income of $149,000 for the three months ended March 31, 2020, share based compensation expense of $62,000, other comprehensive gain of $89,000 due to the fair value adjustments, net of deferred tax, on the investment securities available-for-sale portfolio.  In addition, ESOP shares committed to be released of $35,000 and a stock option exercise of $24,000 contributed to the increase of total shareholders’ equity. Offsetting these increases was $145,000 in treasury stock repurchases primarily as part of the stock repurchase plan approved in April 2019.

Comparison of Statements of Income for the Three Months Ended March 31, 2020 and March 31, 2019

General

Net income increased $87,000 to $149,000 for the three months ended March 31, 2020 from $62,000 for the three months ended March 31, 2019.  The increase in net income for the three months ended March 31, 2020 was primarily due to an increase of $1.1 million in non-interest income, $130,000 decrease in provision for loan losses, and an increase of $100,000 in net interest income offset by increases of $1.2 million in non-interest expense and $72,000 in income tax expense.

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Interest Income

Total interest income increased $298,000, or 10.9%, to $3.0 million for the three months ended March 31, 2020 from $2.7 million for the three months ended March 31, 2019.  The increase was primarily the result of an increase in interest and fees on loans of $446,000 offset by a decrease in interest on investment securities of $138,000 and a decrease in interest on interest-earning deposits with banks of $25,000.  Total average interest-earning assets increased $31.5 million to $331.7 million for the three months ended March 31, 2020 from $300.2 million for the same period in 2019. The increase was primarily as a result of an increase in the average balance of loans of $44.8 million and $8.2 million in average balance of interest-earning deposits with banks partially offset by a $22.3 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 2 basis points to 3.65% for the three months ended March 31, 2020 as compared to 3.63% for the three months ended March 31, 2019.

Interest and fees on loans increased $446,000 to $2.8 million for the three months ended March 31, 2020 from $2.3 million for the same period in 2019. This increase was primarily due to an increase in average loans outstanding of $44.8 million, which increased to $284.0 million for the three months ended March 31, 2020 from $239.2 million for the three months ended March 31, 2019 primarily as a result of an increase in the average balance of loans held for sale, commercial real estate and other commercial business offset by a decrease in the average balance in one-to four-family residential real estate loans.  The average yield on loans was relatively flat at 3.91% for the three months ended March 31, 2020 versus 3.90% for the three months ended March 31, 2019.

Interest income on interest-earning deposits decreased by $25,000 to $90,000 for the three months ended March 31, 2020, from $115,000 for the three months ended March 31, 2019. The decrease was primarily due to a decrease average yield on interest-earning deposits with banks decreased 137 basis points, to 1.48% for the three months ended March 31, 2020 from 2.85% for the three months ended March 31, 2019 due to decline in interest rates following the COVID-19 pandemic. The targeted federal funds rate was cut to 0% on March 16^th and the 10-year Treasury bond falling below 1.00% on March 3, 2020. Offsetting this decrease, was an increase in the average balance of interest-earning deposits of $8.2 million to $24.4 million for the three months ended March 31, 2020 from $16.2 million for the three months ended March 31, 2019.

 

Interest on investment securities decreased by $138,000 to $133,000 for the three months ended March 31, 2020 from $271,000 for the three months ended March 31, 2019, respectively. Interest on investment securities decreased as a result of a $89,000 decrease in income on taxable and non-taxable interest and dividend investments as well as a $49,000 decrease in interest income on mortgage backed securities and collateralized mortgage obligation securities which decreased to $53,000 for the three months ended March 31, 2020, from $102,000 for the three months ended March 31, 2019. The average yield on total securities decreased to 2.44% for the three months ended March 31, 2020 from 2.46% for the same period in 2019.  The average balance of investment securities decreased by $22.3 million to $21.8 million for the three months ended March 31, 2020, from $44.1 million for the three months ended March 31, 2019.

Interest Expense

Total interest expense increased $198,000 to $933,000 for the three months ended March 31, 2020 from $735,000 for the three months ended March 31, 2019, primarily due to an $111,000 increase in interest expense on advances from the Federal Home Loan Bank and an $88,000 increase in interest expense on deposits.  

Interest expense on deposits increased $88,000 to $777,000 for the three months ended March 31, 2020 from $689,000 for the three months ended March 31, 2019 primarily as a result of an increase of 11 basis points in the average cost of deposits from March 31, 2019 as well as an increase of $4.9 million in the average balance of interest bearing deposits from March 31, 2019. The increase in the average balance of interest bearing deposits of $4.9 million from $246.9 million as of March 31, 2019 to $251.8 million as of March 31, 2020 was primarily as a result of a $12.1 million increase in the average balance of our core

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deposit accounts offset by a decrease of $7.2 million in the average balance of our certificates of deposit. The average cost of deposits was 123 basis points for the three months ended March 31, 2020 compared to 112 basis points for the three months ended March 31, 2019. The average rate paid on money market deposits increased 17 basis points to 0.87% for the three months ended March 31, 2020 from 0.70% for the three months ended March 31, 2019. The decrease in the balance of our certificates of deposits of $7.2 million from $73.3 million for the three months ended March 31, 2019 to $66.1 million for the three months ended March 31, 2020 was primarily the result of a $8.2 million decrease in the average balance of certificates of deposit issued through brokers from $28.5 million for the three months ended March 31, 2019 to $20.3 million for the three months ended March 31, 2020 offset by an increase of $1.0 million in the average balance in retail certificate of deposits. The average cost of certificates of deposit was 2.03% for the three months ended March 31, 2020 as compared to 1.98% for the three months ended March 31, 2019.

Interest expense on advances from the Federal Home Loan Bank increased $111,000 to $156,000 for the three months ended March 31, 2020 from $45,000 for the three months ended March 31, 2019 primarily as a result of an increase in the average balance of the Federal Home Loan Bank advances. The average balance of the Federal Home Loan Bank advances increased $17.1 million to $27.1 million for the three months ended March 31, 2020 from $10.0 million for the three months ended March 31, 2019 primarily due to funding of the loan portfolio. In addition, the average rate on Federal Home Loan Bank advances increased 50 basis points from 1.80% for the three months ended March 31, 2019 to 2.30% for the three months ended March 31, 2020.

Net Interest Income

Net interest income increased $100,000 to $2.1 million for the three months ended March 31, 2020 from $2.0 million for the three months ended March 31, 2019. Our net interest-earning assets increased $11.5 million to $52.8 million for the three months ended March 31, 2020 from $41.3 million for the three months ended March 31, 2019. Our interest rate spread decreased by 18 basis points to 2.31% for the three months ended March 31, 2020 from 2.49% for the three months ended March 31, 2019.  Our net interest margin decreased by 14 basis points from 2.66% for the three months ended March 31, 2019 to 2.52% for the three months ended March 31, 2020.  

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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. Due to uncertainty of economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the calculation of the allowance for loan losses. However, due to the uncertainty of the impact, the Company will continue to monitor and additional adjustment to the allowance for loan losses may be necessary.

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 for loan losses.

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Provision for loan losses decreased by $130,000 to $111,000 for the three months ended March 31, 2020 from $241,000 for the three months ended March 31, 2019 primarily as result of net charge-offs of $141,000 related to the medical education loans during the three months ended March 31, 2019. Non-performing loans increased $80,000, or 2.2% from $3.7 million at December 31, 2019 to $3.8 million as of March 31, 2020, as a result of an increase of $139,000 in non-performing medical education loans offset by decreases of $30,000 in one-to four-family residential real estate loans and $29,000 in home equity and HELOCs loans compared to December 31, 2019. During the three months ended March 31, 2020, there were no charge-offs recorded and $1,000 received in recoveries. During the three months ended March 31, 2019, there were $142,000 in net charge-offs recorded. Due to uncertainty of the changes in economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the allowance for loan losses across the loan portfolio.

Non-Interest Income

 

Non-interest income increased $1.1 million to $2.1 million for the three months ended March 31, 2020 from $1.0 million for the three months ended March 31, 2019. The increase in non-interest income compared to the same period in 2019 was primarily due to a $739,000 increase in the gain on sale of loans, net and $382,000 increase in change in fair value of loans held for sale. The gain on sale of loans, net increased $739,000 to $1.6 million for the three months ended March 31, 2020 compared to $890,000 for the three months ended March 31, 2019 primarily as a result of higher loan sales which increased $50.9 million from $28.5 million for the three months ended March 31, 2019 to $79.4 million for the three months ended March 31, 2020. The increase in change in fair value of loans held for sale of $382,000 for three months end March 31, 2020 compared to same period in 2019 was primarily due to an increase in the loans held for sale balance, from $4.5 million at March 31, 2019 to $37.4 million at March 31, 2020.

Non-Interest Expense

Non-interest expense increased $1.2 million or 44.4% to $3.9 million for the three months ended March 31, 2020 from $2.7 million for the three months ended March 31, 2019. The increase for the three months ended March 31, 2020 compared to the three months of March 31, 2019 was primarily as a result of an increase of $822,000 in salaries and employee benefits, $261,000 in professional fees and other expenses and $111,000 in occupancy expenses.

 

Salaries and employee benefits expense increased by $822,000 to $2.4 million for the three months ended March 31, 2020 from $1.6 million for the three months ended March 31, 2019. Salaries increased as full time equivalent (FTE) employees increased to one hundred-one as of March 31, 2020 from eighty-one as of March 31, 2019 primarily as a result of the expansion of the Company’s lending and business banking operations. The professional fees and other expenses increased $261,000, or 48.7%, to $797,000 for the three months ended March 31, 2020 from $536,000 for the three months ended March 31, 2019 due to increased expenses related to other consulting fees and organizational expenses as we continue to grow and expand into new markets. Occupancy expenses increased approximately $111,000 to $433,000 for the three months ended March 31, 2020 from $322,000 for the three months ended March 31, 2019 primarily as a result of an increase in rental expense due to the move of our headquarters to Doylestown, PA as well as leases of additional offices space compared to the same period in 2019. In addition, depreciation expense increased approximately $41,000 primarily due to furniture and equipment placed in service during the three month ended March 31, 2020 compared to the same period in 2019.

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Income Tax Expense (Benefit)

Income tax expense increased from a benefit of ($24,000) for the three months ended March 31, 2019 to $48,000 in expense for the three months ended March 31, 2020. Federal income taxes included in total taxes for the three months ended March 31, 2020 was $38,000 with effective federal tax rates of 19.2% compared to a federal income tax benefit of ($2,000) for the three months ended March 31, 2019. The increase in the effective tax rate for the three months ended March 31, 2020 compared to the same period a year ago reflected an increase in income before taxes. Included in the income tax benefit for the three months ended March 31, 2019 was a credit for ESOP dividend payment.

 

Pennsylvania state tax expense increased $32,000 from a benefit of ($22,000) for the three months ended March 31, 2019 to expense of $10,000 for the three months ended March 31, 2020 with effective rate of 5.1%. The increase in the effective tax rate for the three months ended March 31, 2020 compared to the same period a year ago reflected an increase in income before taxes.

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 $3.8 million, or 1.1% of total assets, at March 31, 2020. There were no non-accruing troubled debt restructurings at March 31, 2020 and December 31, 2019. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated.  There were no accruing loans past due 90 days or more at March 31, 2020 and at December 31, 2019.

 

 

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Allowance for Loan Losses  

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

 

 

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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. In addition, we use brokered certificates of deposit as a funding source of our asset base. As of March 31, 2020 and December 31, 2019, the Company had $15.0 million, or 4.2% of total assets, and $22.5 million, or 6.3% of total assets, of brokered certificates of deposit, respectively.  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 $32.0 million outstanding and $18.0 million in letters of credit with unused borrowing capacity of $125.8 million as of March 31, 2020. Additionally, at March 31, 2020, 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 $1.4 million at March 31, 2020. We have not borrowed against the credit lines with the Atlantic Community Bankers Bank and the Federal Reserve Bank during the three months ended March 31, 2020.

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 March 31, 2020.

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 March 31, 2020, cash and cash equivalents totaled $20.5 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $23.2 million at March 31, 2020. Please refer to the section titled COVID-19 Update for additional information.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by operating activities was $985,000 and $10.6 million for the three months ended March 31, 2020 and March 31, 2019, 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 $190,000 and $325,000 for the three months ended March 31, 2020 and March 31, 2019, respectively. During the three months ended March 31, 2020, there were no available-for-sale securities sold compared to $2.0 million available-for-sale securities sold for the three months ended March 31, 2019.  Net cash used in financing activities was $905,000 and $14.4 million for the three months ended March 31, 2020 and 2019, respectively. Net cash used in financing activities for the three months ended March 31, 2020 consisted primarily of decreases in deposits of $5.6 million, $202,000 in advances from borrowers for taxes and insurance and purchases of treasury stock of $145,000 in offset by a $5.0 million increase in net short-term borrowings from the Federal Home Loan Bank and a stock option exercise of $24,000. Net cash provided by financing activities for the three months ended March 31, 2019 primarily consisted of $14.3 million decrease in deposits.

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 March 31, 2020, totaled $42.1 million of total deposits which included brokered certificates of deposit of $10.0 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

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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 March 31, 2020, Huntingdon Valley Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.  

Regulatory Capital

Information presented for March 31, 2020 and December 31 2019, 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.

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 March 31, 2020, the Bank met all the capital adequacy requirements to which it was subject. At March 31, 2020, 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 March 31, 2020 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

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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 March 31, 2020 and December 31, 2019, 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 March 31, 2020, the Bank is required to maintain a capital conservation buffer of 2.50%. At March 31, 2020, 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.

 

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. On September 17, 2019, the board of the Federal Deposit Insurance Corporation passed a final rule on the community bank leverage ratio, setting the minimum required community bank leverage ratio at 9%. The rule went into effect January 1, 2020. On April 6, 2020, the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System, and Office of the Comptroller of the Currency issued two interim final rules that make changes to the community bank leverage ratio framework and implemented Section 4012 of the CARES Act. These changes related to the minimum Tier 1 leverage ratio that can be used to take advantage of the simplified community bank leverage ratio framework. The two interim final rules are applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. The lower Tier 1 leverage ratio modification is temporary to 8% and will revert back to the existing 9 percent ratio effective January 1, 2022.

 

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 March 31, 2020, we had outstanding commitments to originate loans of $78.9 million, unused lines of credit totaling $22.2 million and $18.0 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 March 31, 2020 totaled $42.1 million of total deposits which included brokered certificates of deposit of $10.0 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.

 

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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 March 31, 2020.  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 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 15d-15(f) under the Exchange Act) occurred during the first fiscal quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At March 31, 2020, 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. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.

Item 1A – Risk Factors

Not required for smaller reporting companies

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

The Company’s repurchases of its common stock made during the quarter ended March 31, 2020 are set forth in the table below:

 

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(1) During the first quarter of 2020, 291 shares were acquired from an employee in connection with income tax withholdings related to the vesting of restricted stock issued as part of the 2018 Equity Incentive Plan. The issuance of these shares was made in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by Section 4(a) (2) thereof. The participants under the 2018 Equity Incentive Plan are “Accredited Investors”, as defined in Rule 501(a) under the Securities Act. These transactions did not involve a public offering and occurred without general solicitation or advertising. The shares were purchased at the closing price of the Company’s common stock on the dates of purchase.

 

(2) In April 2019, a stock repurchase plan was approved to repurchase up to 100,000 shares of the Company’s outstanding common stock. There is no expiration date for this plan.  

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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