HVBC 2016 Annual Report

40 Fair Value Measurements . Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A more detailed description of the fair values measured at each level of the fair value hierarchy and our methodology can be found in Note 13 of the audited consolidated financial statements of the Company included in this annual report. Derivative Instruments and Hedging Activities . We use derivative instruments as part of our overall strategy to manage our exposure to market risks primarily associated with fluctuations in interest rates. As a matter of policy, we do not use derivatives for speculative purposes. All of our derivative instruments that are measured at fair value on a recurring basis and are included in the consolidated statements of financial condition as mortgage banking derivatives and other liabilities. The fair value of our derivative instruments, other than Interest Rate Lock Commitments ( “ IRLC”) is determined by utilizing quoted prices from dealers in such securities or third-party models utilizing observable market inputs. The fair value of the Company’s IRLC instruments are based upon the underlying mortgage loan adjusted for the probability of such commitments being exercised and estimated costs to complete and originate the loan. The changes in the fair value of derivative instruments are included in non-interest income in the consolidated statements of income. To be announced securities (“TBAs”) are “forward delivery” securities considered derivative instruments under derivatives and hedging accounting guidance, (FASB ASC 815). We utilize TBAs to protect against the price risk inherent in derivative loan commitments. TBAs are valued based on forward dealer marks from our approved counterparties. We utilize a third-party market pricing service, which compiles current prices for instruments from market sources and those prices represent the current executable price. TBAs are recorded at fair value on the consolidated statements of financial condition in mortgage derivatives and other liabilities with changes in fair value recorded in non-interest income in the consolidated statements of income. Loan commitments that are derivatives are recognized at fair value on the consolidated statements of financial condition as mortgage banking derivatives and as other liabilities with changes in their fair values recorded as a gain in hedging instruments in non-interest income in the consolidated statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the da f te of issuance through the date o loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. We are subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. We have Se used mandatory commitments to substantially reduce these risks. e Note 9 Derivatives and Risk Management Activities in the audited consolidated financial statements of the Company in this annual report. Comparison of Financial Condition at June 30, 2017 and June 30, 2016 Total Assets Total assets increased $34.8 million, or 19.1%, to $216.8 million at June 30, 2017 from $182.0 million at June 30, 2016. The increase was primarily the result of increases of $18.3 million in loans receivable, which was primarily due to a $16.6 million increase in residential one-to four family loans which was primarily from our new correspondent lending channel which originated loans of $9.7 million during 2017. In addition, investment securities increased by $15.5 million and cash and cash equivalents increased by $13.2 million during 2017 which was partially offset by a decrease of $11.9 million in loans held for sale during the year ended June 30, 2017. Cash and cash equivalents Cash and cash equivalents increased $13.2 million, or 85.7%, to $28.6 million at June 30, 2017 from $15.4 million at June 30, 2016, primarily as a result of the proceeds received by the Company relating to the initial public offering of the Company, which has not yet fully been deployed into loans and securities. Additionally, an increase in deposits of $28.7 million, partially offset by a decrease in Federal Home Loan Bank (“FHLB”) Advances of $11.0 million also contributed to the increase in cash and cash equivalents in 2017.