HVBC 2016 Annual Report

43 Interest and fees on loans increased $77,000 to $4.5 million for the year ended June 30, 2017 from $4.4 million for 2016. This increase was primarily due to an increase in average loans outstanding of $10.1 million, which increased to $110.3 million for the year ended June 30, 2017, from $100.2 million for the year ended June 30, 2016 as a result of an increase in the average balance of one-to-four family residential loans. The benefit from the higher loan volume was partially offset by a reduction in average yield of 34 basis points, which decreased to 4.10% for the year ended June 30, 2017 from 4.44% for 2016. Interest on investment securities increased by $87,000 or 12.2% to $802,000 for the year ended June 30, 2017, from $715,000 for the year ended June 30, 2016. The increase was primarily the result of an increase in interest income on U.S. Government Agency securities, corporate bonds, municipal securities and restricted bank stock which increased $206,000 or 56.0%. This increase was partially offset by a decrease in interest income on mortgage backed securities and collateral mortgage obligation (CMO) securities of $101,000 or 26.9%, which decreased to $274,000 for the year ended June 30, 2017, from $375,000 for the year ended June 30, 2016. The average yield on total securities increased 9 basis points to 1.86% for the year ended June 30, 2017 from 1.77% for 2016, as market rates increased slightly. A portion of the conversion proceeds were used to purchase investment securities, which caused the average balance of investment securities to increase by $2.8 million to $43.2 million for the year ended June 30, 2017, from $40.4 million for the year ended June 30, 2016. Interest Expense Total interest expense increased $145,000, or 19.4%, to $891,000 for the year ended June 30, 2017 from $746,000 for the year ended June 30, 2016, due to a $92,000 increase in interest expense on deposits and a $53,000 increase in interest expense on advances from the Federal Home Loan Bank. Interest expense on deposits increased $92,000, or 14.2%, to $741,000 for the year ended June 30, 2017 from $649,000 for the year ended June 30, 2016 primarily as a result of an increase in average interest bearing deposits of $19.5 million to $153.4 million during the year ended June 30, 2017 as compared to $133.9 million for 2016, primarily as a result of a $24.3 million increase in the average balance of our core deposit accounts, which was partially offset by a $4.8 million decrease in the average balance of our certificates of deposit. The increase in the average balance of core deposits was primarily the result of the introduction of a new demand product attracting clients of local professional firms such as CPA firms, totaling $23.3 million at June 30, 2017. The average cost of deposits was unchanged at 48 basis points for the years ended June 30, 2017 and 2016. The rates paid on NOW accounts and money market deposits increased by 35 basis points and eight basis points, respectively. Rates on NOW accounts increased due to the Bank creating a higher tier NOW account product for the purposes of attracting deposits from professionals who maintain escrow or other fiduciary accounts on behalf of their clients. This product can pay up to 1.00% on interest per annum. The average cost of certificates of deposit decreased by ten basis points to 1.00% during the year ended June 30, 2017 as compared to 1.10% for the year ended June 30, 2016, reflecting runoff of higher priced certificates of deposit held by credit unions and banks. Interest expense on advances from the Federal Home Loan Bank increased $53,000 to $147,000 for the year ended June 30, 2017 from $94,000 for the year ended June 30, 2016 as a result of an increase in the average Federal Home Loan Bank advances, which increased $5.4 million to $14.3 million for the year ended June 30, 2017 from $8.9 million for 2016. The increase in interest expense on advances was partially offset by a decrease in the average rate on the Federal Home Loan Bank advances, which decreased from 1.06% for the year ended June 30, 2016 to 1.03% for the year ended June 30, 2017. The decrease in average cost was due to decreased rates on advances. Net Interest Income Net interest income increased $287,000 to $4.8 million for the year ended June 30, 2017 as compared to $4.6 million the year ended June 30, 2016 as a result of an increase in net interest-earning assets which increased to $22.3 million for the year ended June 30, 2017 from $12.6 million for the year ended June 30, 2016. This increase in net interest-earning assets was primarily the result of the stock offering proceeds related to the Company’s initial public offering and the conversion of the Bank from the mutual to the stock form of organization during the year ended June 30, 2017. Our interest rate spread decreased 39 basis points to 2.46% for the year ended June 30, 2017 from 2.85% for the year ended June 30, 2016. Our net interest margin decreased by 38 basis points to 2.52% for the year ended June 30, 2017 from 2.90% for the year ended June 30, 2016 as the increase in average interest earning assets occurred primarily in the lower yielding interest earning cash and cash equivalents.