HVBC 2016 Annual Report

46 Non-Interest Income Non-interest income decreased $416,000, or 7.8% to $4.9 million for the year ended June 30, 2017 from $5.4 million for the year ended June 30, 2016. The decrease in non-interest income was primarily due to a decrease in the income from hedging instruments associated with the loans held for sale portfolio which decreased 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 due to the less favorable interest rate environments and decreased volume of locked loans associated with hedging. 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. These two decreases in non-interest income were partially offset by an increase in the gain on loans held for sale of $1.4 million, which increased to $5.5 million for the year ended June 30, 2017, from $4.1 million for the year ended June 30, 2016. The offset to the gains incurred from the hedging instruments is realized in the increased value of the loan when it is committed to the investor in the secondary market, and is therefore realized upon the sale of the loan. Non-Interest Expense Non-interest expense increased $466,000, or 5.6%, to $8.8 million for the year ended June 30, 2017 from $8.4 million for the year ended June 30, 2016. The increase for the year ended June 30, 2017 compared to the year ended June 30, 2016 primarily reflected increases in salaries and benefits of $352,000 and increases of $301,000 in professional fees and other expenses. These increases were partially offset by a decrease in real estate owned expenses of $255,000 during the same years. Salary expense increased by $352,000 to $5.0 million for the year ended June 30, 2017 from $4.7 million for year ended June 30, 2016. Salaries increased as full time equivalent (FTE) employees increased to seventy-four FTEs as of June 30, 2017, from sixty-one FTEs as of June 30, 2016, primarily as a result of the expansion in our mortgage loan department. Professional fees increased to $698,000 for the year ended June 30, 2017 from $561,000 for 2016, and other expenses increased to $1.3 million for the year ended June 30, 2017 from $1.2 million for 2016. The increase in both professional fees and other expenses during the year ended June 30, 2017 was primarily a result of additional professional fees of $95,000 as a result of ongoing compliance associated with being a public company as well as consulting fees of $77,000 for investing in rebranding of the Bank as part of our growth plan. Real estate owned expense decreased $255,000, or 93.1%, to $19,000 for the year ended June 30, 2017 from $274,000 for the year ended June 30, 2016 due to reductions in write-downs on real estate owned. Other real estate owned was $0 at June 30, 2017 and $115,000 at June 30, 2016. Income Tax Expense Income tax expense was $195,000 for the year ended June 30, 2017 compared to $525,000 for 2016. Federal income taxes included in total taxes for the year ended June 30, 2017 and 2016 were $147,000 and $417,000, respectively, with effective federal tax rates of 20.6% and 28.9%, respectively. Due to the increase in municipal tax free bonds during the year ended June 30, 2017,federal income tax expense was reduced which caused a lower effective federal tax rate for 2017 when compared to 2016. For the years ended June 30, 2017 and 2016, Pennsylvania state tax was $48,000 and $108,000, respectively, with effective rates of 6.2% and 6.9%. 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, and proceeds from sales, maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Pittsburgh. Huntingdon Valley Bank had Federal Home Loan Bank of Pittsburgh advances of $9.0 million outstanding with unused borrowing capacity of $58.4 million as of June 30, 2017. Additionally, at June 30, 2017, we had the ability to borrow $3.0 million from the Atlantic Community Bankers Bank and we maintained a line of credit equal to 95% of the fair value of collateral held by the Federal Reserve Bank, which was $2.4 million at June 30, 2017. We have not