HVBC 2016 Annual Report

42 $2.4 million, established as part of the creation of the Huntingdon Valley Bank Employee Stock Ownership Plan and other comprehensive losses of $104,000 due to the fair value adjustments, net of deferred tax, on the investment securities available-for-sale portfolio. Comparison of Operating Results for the Years Ended June 30, 2017 and June 30, 2016 General Net income decreased $457,000 to $569,000 for the year ended June 30, 2017 from $1.0 million for the year ended June 30, 2016. The decrease in net income was primarily due to a decrease in revenue associated with our mortgage banking activities. Our mortgage banking activities include (i) gains on loans held for sale, (ii) gains or losses from hedging instruments and (iii) changes in fair value of loans held for sale. Gains on loans held for sale increased by $1.4 million to $5.5 million for the year ended June 30, 2017, from $4.1 million for the year ended June 30, 2016. Losses from hedging instruments associated with the loans held for sale increased by $841,000, to a loss of $337,000 for the year ended June 30, 2017, from a gain of $504,000 for the year ended June 30, 2016. Changes in the fair value of loans held for sale decreased by $962,000, to a loss of $578,000 for the year ended June 30, 2017 from a gain of $384,000 for the year ended June 30, 2016. The net impact of these three components of our mortgage banking activities contributed to a decrease in non-interest income of $404,000 as total mortgage banking revenue decreased to $4.6 million for the year ended June 30, 2017 from $5.0 million for the year ended June 30, 2016. The losses from hedging instruments included net gains and losses from derivative instruments on loan commitments for loans that will be held for sale. These gross gains or losses are recorded as (i) gains or losses on interest rate lock commitments (“IRLCs”), which reflects the value of the loan commitment at the time the loan is originated; (ii) subsequent gains or losses related to the change in value of the commitment, usually due to interest rate risk or price risk; and (iii) changes in the values of the to be announced (“TBA”) securities that the Bank uses to protect against the price risk of the loan commitments. The recognition of gains/(losses) related to the hedging instruments for the year ended June 30, 2017 was recorded as a result of the IRLCs, the subsequent valuation adjustments of the loan commitments and changes in TBA valuations, which were $368,000, ($699,000) and ($6,000), respectively, and comprises the total loss from hedging instruments of ($337,000) for the year ended June 30, 2017. See note 9 Derivatives and Risk Management Activities in the consolidated financial statements. Gains recorded from IRLCs decreased from $1.1 million for the year ended June 30, 2016 to $368,000 for the year ended June 30, 2017 primarily as the result of lower committed loans that were not closed during the 90 days prior to the year ended June 30, 2017 of $59.8 million compared to $74.2 million for 2016. Additionally, the change in fair value of loans held for sale decreased by $962,000 to ($578,000) for the year ended June 30, 2017, from $384,000 for the year ended June 30, 2016. Salary expense increased by $352,000 to $5.0 million for the year ended June 30, 2017, from $4.7 million for the year ended June 30, 2016 primarily due to an increase of full time equivalent employees from 65 at June 30, 2016 to 74 at June 30, 2017 primarily as a result of the expansion in our mortgage loan department. The provision for loan losses increased $287,000 to $201,000 for the year ended June 30, 2017, from $9,000 for the year ended June 30, 2016 as a result of increased charge-offs of $129,000 and an increase in the general reserves as a result of increased loan volume. For the year ended June 30, 2017, the increases in salary expense and provision for loan losses were partially offset by an increase in net interest income of $287,000 and lower other real estate owned expenses of $255,000. Interest Income Total interest income increased $432,000 or 8.1% to $5.7 million for the year ended June 30, 2017 as compared to $5.3 million for the year ended June 30, 2016. The increase was the result of an increase in interest income on cash and cash equivalents, interest and fees on loans and investment securities. Interest income on cash and cash equivalents increased by $250,000 to $363,000 for the year ended June 30, 2017, from $113,000 for the year ended June 30, 2016. The increase was due to an increase in the average balances of cash and cash-equivalents of $21.6 million, which increased to $37.7 million for the year ended June 30, 2017 from $16.1 million for the year ended June 30, 2016. Interest earning cash and cash equivalents increased primarily as a result of the stock offering proceeds of $21.4 million related to the Company’s initial public offering and the conversion of the Bank from the mutual to the stock form of organization. Additionally, the average yield on cash and cash equivalents increased 26 basis points, to 96 basis points for the year ended June 30, 2017 from 70 basis points for the year ended June 30, 2016. The increase was primarily due to recent rate increases in the Federal funds rate by the Federal Reserve Bank during 2017.