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Section 1: 10-K (10-K)

hvbc-10k_20180630.htm

 

United States

SECURITIES AND EXCHANGE COMMISSION

100 F Street NE

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended June 30, 2018

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to           

Commission File No. 001-37981

HV Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

46-4351868

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

3501 Masons Mill Road Suite 401 Huntingdon Valley, Pennsylvania

 

19006

(Address of Principal Executive Offices)

 

(Zip Code)

 

(267) 280-4000

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Common Stock, $0.01 par value

 

The NASDAQ Stock Market, LLC

(Title of each class)

 

(Name of each exchange on which registered)

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐   NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐   NO ☒

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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

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 7(a)(2)(B) of the Securities Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐   NO 

As of December 31, 2017, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $28,164,646.

As of September 15, 2018, there were issued and outstanding 2,259,125 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the Registrant’s Annual Meeting of Stockholders (Part III).

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I

2

 

 

 

 

 

Item 1.

Business

2

 

Item 1A.

Risk Factors

32

 

Item 1B.

Unresolved Staff Comments

32

 

Item 2.

Properties

33

 

Item 3.

Legal Proceedings

33

 

Item 4.

Mine Safety Disclosures

33

 

 

 

 

PART II

34

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

34

 

Item 6.

Selected Financial Data

35

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

49

 

Item 8.

Financial Statements and Supplementary Data

50

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

105

 

Item 9A.

Controls and Procedures

105

 

Item 9B.

Other Information

106

 

 

 

 

PART III

107

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

107

 

Item 11.

Executive Compensation

107

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

107

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

107

 

Item 14.

Principal Accountant Fees and Services

107

 

 

 

 

PART IV

108

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

108

 

Item 16.

Form 10-K Summary

109

 

 

 

 

SIGNATURES

110

 

 

 

 

 

 

 


 

PART I

Item 1.

Business

Forward Looking Statements

This annual report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning plans, objectives, future events or performance and assumptions and other statements that are other than statements of historical fact.  Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as “anticipates,” “believes,” “expects,” “intends,” “may,” “plans,” “pursue,” “views” and similar terms or expressions.  Various statements contained in Item 7- “Management's Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, statements related to management's views on the banking environment and the economy, competition and market expansion opportunities, the interest rate environment, credit risk and the level of future non-performing assets and charge-offs, potential asset and deposit growth, future non-interest expenditures and non-interest income growth, and borrowing capacity are forward-looking statements.  HV Bancorp, Inc. (the "Company" or "HV Bancorp") wishes to caution readers that such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties that may adversely affect the Company's future results.  The following important factors, among others, could cause the Company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) changes in interest rates and changes in the duration of interest-earning assets and interest-bearing liabilities could negatively impact net interest income;  (ii) changes in the business cycle and downturns in the local, regional or national economies, including deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Company's allowance for loan losses and/or reduce valuations of foreclosed properties and real estate held for sale; (iii) changes in consumer spending could negatively impact the Company's credit quality and financial results; (iv) increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Company's competitive position within its market area and reduce demand for the Company's products and services; (v) deterioration of securities markets could adversely affect the value or credit quality of the Company's assets and the availability of funding sources necessary to meet the Company's liquidity needs; (vi) changes in technology could adversely impact the Company's operations and increase technology-related expenditures; (vii) increases in employee compensation and benefit expenses could adversely affect the Company's financial results; (viii) changes in laws and regulations that apply to the Company's business and operations, including without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Jumpstart Our Business Startups Act (the "JOBS Act") and the additional regulations that will be forthcoming as a result thereof, could adversely affect the Company's business environment, operations and financial results; (ix) changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies, the Financial Accounting Standards Board (the “FASB”) or the Public Company Accounting Oversight Board (“PCAOB”) could negatively impact the Company's financial results; (x) our ability to enter new markets successfully and capitalize on growth opportunities; and (xi) future regulatory compliance costs, including any increase caused by new regulations imposed by the Consumer Finance Protection Bureau.  Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements.

HV Bancorp, Inc.

HV Bancorp, Inc. is a Pennsylvania corporation and owns 100% of the common stock of Huntingdon Valley Bank (the "Bank"). On January 11, 2017, the Company completed its initial public offering of common stock in connection with the mutual-to-stock conversion of the Bank selling 2,182,125 shares of common stock at $10.00 per share and raising $21.8 million of gross proceeds. Since the completion of the initial public offering, the Company has not engaged in any significant business activity other than investment in securities and owning the common stock of the Bank and having deposits in the Bank. The Company’s shareholders approved the HV Bancorp, Inc. 2018 Equity Incentive Plan (the “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 Plan (see Note 11 of the Audited Consolidated Financial Statements for further discussion). At June 30, 2018, HV Bancorp, Inc. had total consolidated assets of $297.8 million, total consolidated deposits of $235.4 million, and total consolidated

 

 

2

 

 


 

shareholders’ equity of $30.7 million. Our executive offices are located at 3501 Masons Mill Road, Suite 401, Huntingdon Valley, Pennsylvania.  Our telephone number at this address is (267) 280-4000.

Huntingdon Valley Bank

Huntingdon Valley 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 (the "FDIC") and the Pennsylvania Department of Banking and Insurance (the "Pennsylvania Department of Banking"). We have offices in Montgomery, Bucks and Philadelphia Counties, Pennsylvania. We are a community-oriented bank offering a variety of financial products and services to meet the needs of our customers. We believe that our community orientation and personalized service distinguishes us from larger banks that operate in our market area.

Huntingdon Valley Bank was founded in 1871 as a building and loan association.  In 1951, the association converted to a federal thrift charter, changed its name to “Huntingdon Valley Federal Savings & Loan Association” and became federally insured. In January 2000, we changed our corporate name to “Huntingdon Valley Bank.” On July 1, 2003, Huntingdon Valley Bank converted from a federally chartered mutual savings bank to a Pennsylvania chartered mutual savings bank.

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, home equity loans and home equity lines of credit (“HELOCs”) and commercial real estate loans (including multi-family loans) and, to a lesser extent, commercial, construction and consumer 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 website address is www.myhvb.com.  Information on this website should not be considered a part of this annual report.

Market Area

We are headquartered in Huntingdon Valley, Pennsylvania, which is located in the northeast suburban area of metropolitan Philadelphia. We primarily serve communities located in Montgomery, Bucks and Philadelphia Counties in Pennsylvania from our executive office, four full service bank offices, one limited service office, a loan origination office and a loan production office.

Our markets are demographically attractive, close to the business and financial district of Center City Philadelphia, and within commuting distance of Northern New Jersey and New York City. Based on the United States Census for estimated population for 2017, Philadelphia, Montgomery and Bucks Counties have total populations of 1,581,000, 826,000 and 628,000, respectively, and the three counties comprise the 1st, 3rd and 4th largest counties in Pennsylvania, respectively. From 2010 to 2017 the estimated populations of Philadelphia, Montgomery and Bucks Counties are expected to grow by 3.6%, 3.3% and 0.5%, respectively. Additionally, between June 2016 and June 2018, our market area has shown significant improvement in unemployment levels, decreasing from 7.0% to 5.7% for Philadelphia County, decreasing from 4.3% to 3.5% for Montgomery County and decreasing from 4.7% to 3.7% for Bucks County.  The foreclosure rate in June 2018 for the Commonwealth of Pennsylvania was 0.06%, compared to foreclosure rates of 0.09%, 0.08%, and 0.09% for Philadelphia, Montgomery and Bucks Counties, respectively. In terms of median household income and median disposable income, Montgomery and Bucks Counties rank 2nd and 3rd in Pennsylvania in each category, based on the United States Census. Based on the United States Census, the median household income between 2012 and 2016 was $39,770, $81,902 and $79,559 for Philadelphia, Montgomery and Bucks Counties, respectively.  The median value of owner occupied homes in Bucks County is nearly double the statewide median value, and home values in Bucks and Montgomery Counties rank 2nd and 3rd, respectively, of all the counties in Pennsylvania, based on the United States Census.

 

 

3

 

 


 

As of 2016, the Philadelphia metropolitan area has the seventh largest total gross metropolitan product in the United States.  The economy of our market area is heavily based on education, life sciences and social services. The city of Philadelphia is home to many Fortune 500 companies, including pharmaceutical distributor, AmerisourceBergen; cable television and internet provider Comcast; insurance company Lincoln Financial Group; food services company Aramark; paper and packaging company Crown Holdings Incorporated; and hospital management company Universal Health Services. The city is also home to many universities and colleges.

Competition

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money centers and regional banks, community banks and credit unions. Banks owned by large bank holding companies such as PNC Financial Services Group, Inc., Wells Fargo & Company, TD Bank, Santander and Citizens Financial Group, Inc. also operate in our market area. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.

Lending Activities

General.  Our principal lending activity is the origination of one- to four-family residential real estate loans, commercial real estate loans, home equity loans and home equity lines of credit, and, to a lesser extent, commercial business loans, construction loans and consumer loans. Our primary business has been the origination and sale of one- to four-family residential real estate loans, 54.6% of which have been adjustable-rate loans and 45.4% of which have been fixed-rate loans. We currently sell in the secondary market most of the fixed-rate conforming one- to four-family residential real estate loans that we originate, generally on a servicing-released, limited or no recourse basis, while retaining adjustable-rate one- to four-family residential real estate loans, primarily jumbo loans, in order to manage the duration and time to repricing of our loan portfolio. We intend to continue commercial real estate lending, in an effort to diversify our overall loan portfolio and increase the overall yield earned on our loans.  

Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale.

 

 

 

At June 30,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

182,234

 

 

 

85.97

%

 

$

88,578

 

 

 

79.06

%

 

$

71,980

 

 

 

76.75

%

 

$

63,425

 

 

 

75.70

%

Home equity & HELOCs

 

 

4,921

 

 

 

2.32

 

 

 

5,466

 

 

 

4.88

 

 

 

6,448

 

 

 

6.87

 

 

 

6,662

 

 

 

7.95

 

Commercial real estate

 

 

10,804

 

 

 

5.10

 

 

 

12,191

 

 

 

10.88

 

 

 

11,620

 

 

 

12.39

 

 

 

12,662

 

 

 

15.11

 

Commercial business

 

 

4,088

 

 

 

1.93

 

 

 

3,801

 

 

 

3.39

 

 

 

558

 

 

 

0.59

 

 

 

634

 

 

 

0.76

 

Construction

 

 

2,907

 

 

 

1.37

 

 

 

2,004

 

 

 

1.79

 

 

 

3,179

 

 

 

3.39

 

 

 

365

 

 

 

0.44

 

Consumer and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

2

 

 

 

 

 

 

5

 

 

 

 

 

 

10

 

 

 

0.01

 

 

 

31

 

 

 

0.04

 

Medical education

 

 

7,047

 

 

 

3.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable

 

 

212,003

 

 

 

100.00

%

 

 

112,045

 

 

 

100.00

%

 

 

93,795

 

 

 

100.00

%

 

 

83,779

 

 

 

100.00

%

Deferred loan origination costs

 

 

1,564

 

 

 

 

 

 

 

359

 

 

 

 

 

 

 

142

 

 

 

 

 

 

 

54

 

 

 

 

 

Allowance for loan losses

 

 

(871

)

 

 

 

 

 

 

(593

)

 

 

 

 

 

 

(487

)

 

 

 

 

 

 

(514

)

 

 

 

 

Total loans receivable, net

 

$

212,696

 

 

 

 

 

 

$

111,811

 

 

 

 

 

 

$

93,450

 

 

 

 

 

 

$

83,319

 

 

 

 

 

 

 

 

4

 

 


 

Loan Portfolio Maturities and Yields.  The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2018.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending June 30, 2019.  Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.

 

 

 

One- to

Four-

Family

Real Estate

Loans

 

 

Home

Equity &

HELOCs

 

 

Commercial

Real Estate

Loans

 

 

Commercial

Business

Loans

 

 

Construction

Loans

 

 

Medical education

Loans

 

 

Consumer

Loans

 

 

Total

 

 

 

(In thousands)

 

Due During the Years

   Ending June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

$

37

 

 

$

16

 

 

$

426

 

 

$

3,163

 

 

$

 

 

$

285

 

 

$

2

 

 

$

3,929

 

2020

 

 

13

 

 

 

42

 

 

 

79

 

 

 

254

 

 

 

 

 

 

68

 

 

 

 

 

 

456

 

2021

 

 

 

 

 

539

 

 

 

947

 

 

 

 

 

 

574

 

 

 

 

 

 

 

 

 

2,060

 

2022 to 2023

 

 

347

 

 

 

55

 

 

 

4,367

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

4,782

 

2024 to 2028

 

 

5,816

 

 

 

522

 

 

 

2,116

 

 

 

133

 

 

 

 

 

 

871

 

 

 

 

 

 

9,458

 

2029 to 2033

 

 

3,807

 

 

 

354

 

 

 

1,313

 

 

 

 

 

 

 

 

 

5,167

 

 

 

 

 

 

10,641

 

2034 and beyond

 

 

172,214

 

 

 

3,393

 

 

 

1,556

 

 

 

525

 

 

 

2,333

 

 

 

656

 

 

 

 

 

 

180,677

 

Total

 

$

182,234

 

 

$

4,921

 

 

$

10,804

 

 

$

4,088

 

 

$

2,907

 

 

$

7,047

 

 

$

2

 

 

$

212,003

 

 

The following table sets forth our fixed and adjustable-rate loans at June 30, 2018 that are contractually due after June 30, 2019.

 

 

 

Due After June 30, 2019

 

 

 

Fixed

 

 

Adjustable

 

 

Total

 

 

 

(In thousands)

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

82,726

 

 

$

99,471

 

 

$

182,197

 

Home equity & HELOCs

 

 

1,370

 

 

 

3,535

 

 

 

4,905

 

Commercial real estate

 

 

7,854

 

 

 

2,524

 

 

 

10,378

 

Commercial business

 

 

792

 

 

 

133

 

 

 

925

 

Construction

 

 

515

 

 

 

2,392

 

 

 

2,907

 

Consumer and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Medical education

 

 

 

 

 

6,762

 

 

 

6,762

 

Total

 

$

93,257

 

 

$

114,817

 

 

$

208,074

 

 

One- to Four-Family Residential Real Estate Lending.  At June 30, 2018, we had $182.2 million of loans secured by one- to four-family residential real estate, representing 86.0% of our total loan portfolio.  In addition, at June 30, 2018, we had $13.6 million of residential mortgages held for sale.  We originate fixed-rate one- to four-family residential real estate loans as well as adjustable-rate loans depending on market conditions and borrower preferences.  At June 30, 2018, 45.4% of our one- to four-family residential real estate loans were fixed-rate loans, and 54.6% of such loans were adjustable-rate loans.  

Our fixed-rate one- to four-family residential real estate loans typically have terms of 10 to 30 years and are generally underwritten according to Fannie Mae or Freddie Mac guidelines when the loan balance meets such guidelines, and we refer to loans that conform to such guidelines as “conforming loans.”  We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits, which as of June 30, 2018 was generally $453,100 for single-family homes in our market area. We typically sell most of our fixed-rate conforming loans on a servicing-released basis. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans,” that we retain in our portfolio. Jumbo loans that we originate typically have 15 to 30 year terms and maximum loan-to-value ratios of 80%.  At June 30, 2018, we had $130.4 million in jumbo loans, which represented 71.6% of our one- to four-family residential real estate loans. Of the $130.4 million in jumbo loans, 63.7% or $83.1 million were variable jumbo loans and 36.3% or $47.3 million were fixed jumbo loans. Our average loan size for jumbo loans was $631,000 at June 30, 2018.  We also offer FHA,

 

 

5

 

 


 

USDA and VA loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, USDA and VA guidelines. Most of our one- to four-family residential real estate loans are secured by properties located in our market area.  

We generally limit the loan-to-value ratios of our mortgage loans without private mortgage insurance to 80% of the sales price or appraised value, whichever is lower.  Loans where the borrower obtains private mortgage insurance may be made with loan-to-value ratios up to 95%.  

Our adjustable-rate one- to four-family residential real estate loans carry terms to maturity ranging from 10 to 30 years and generally have fixed rates for initial terms of five or seven years, and adjust annually thereafter at a margin, which in recent years has been tied to a margin above the LIBOR and Treasury rate. The maximum amount by which the interest rate may be increased or decreased is generally 5% for the first adjustment period and 2% per adjustment period thereafter, with a lifetime interest rate cap of generally 5% over the initial interest rate of the loan. We typically hold in portfolio our adjustable-rate one- to four-family residential real estate loans.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower.  At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates.  Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments.  Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in market interest rates generally may be limited.

We offer on a limited basis one- to four-family residential real estate loans secured by non-owner occupied properties. Generally, we require personal guarantees from the borrowers on these properties, and we will not make loans in excess of 85% loan-to-value on non-owner-occupied properties.  

We have not offered but may offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan).  We also have not offered and will not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We have not had a “subprime lending” program for one- to four-family residential real estate loans (i.e., loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).

We generally require title insurance on all of our one- to four-family residential real estate mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. Substantially all of our residential real estate mortgage loans have a mortgage escrow account from which disbursements are made for real estate taxes and flood insurance. We do not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan. If we identify an environmental problem on land that will secure a loan, the environmental hazard must be remediated before the closing of the loan.  

When underwriting residential real estate loans, we review and verify each loan applicant’s employment, income and credit history and, if applicable, our experience with the borrower. Our policy is to obtain credit reports and financial statements on all borrowers and guarantors, and to verify references. Properties securing real estate loans are appraised by board-approved independent appraisers. Appraisals are subsequently reviewed by our loan underwriting department.

Home Equity Loans and Lines of Credit. We also offer home equity loans and home equity lines of credit, both of which are secured by either first mortgages or second mortgages on owner occupied one- to four-family

 

 

6

 

 


 

residences.  At June 30, 2018, outstanding home equity loans and equity lines of credit totaled $4.9 million, or 2.3% of total loans outstanding.  At June 30, 2018, the unadvanced portion of home equity lines of credit totaled $7.7 million.  At June 30, 2018, $2.8 million of our home equity loans and lines of credit were in a junior lien position.

The underwriting standards utilized for home equity loans and home equity lines of credit include a title review, the recordation of a lien, a determination of the applicant’s ability to satisfy existing debt obligations and payments on the proposed loan, and the value of the collateral securing the loan.  The loan-to-value ratio for our home equity loans and our lines of credit is generally limited to 80% when combined with the first security lien, if applicable.  Home equity loans are offered with fixed rates of interest and with terms up to 20 years.  Our home equity lines of credit generally have 30-year terms and adjustable-rates of interest, subject to a contractual floor, which are indexed to the prime rate.  

Commercial Real Estate Lending.  We also offer commercial real estate loans, including a limited amount of multi-family loans.  At June 30, 2018, we had $10.8 million in commercial real estate loans, representing 5.1% of our total loan portfolio.  Our commercial real estate loans generally have initial terms of five years and amortization terms of 20 to 25 years, with a balloon payment due at the end of the initial term. The maximum loan-to-value ratio of our commercial real estate loans is generally 75%.  Our commercial real estate loans are typically secured by medical, retail, industrial, warehouse, service, or other commercial properties. We originate a limited number of multi-family loans generally secured by apartment buildings. At June 30, 2018, the average loan balance of our outstanding commercial real estate loans was $303,000, and the largest of such loans was a $3.0 million loan secured by first perfected security interest in all of the borrower’s business assets. This loan was performing in accordance with its terms at June 30, 2018.

We consider a number of factors in originating commercial real estate loans.  We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan.  When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions.  In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service).  We generally require a debt service ratio of at least 1.20x.  All commercial real estate loans are appraised by outside independent appraisers approved by the board of directors.  

Personal guarantees are generally obtained from the principals of commercial real estate loan borrowers, although this requirement may be waived in limited circumstances depending upon the loan-to-value ratio and the debt service ratio associated with the loan. We require property, casualty and title insurance and flood insurance if the property is in a flood zone area.  

Commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.  In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service.  Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property.  Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties.

Commercial Business Lending.  At June 30, 2018, we had $4.1 million of commercial business loans, representing 1.9% of our total loan portfolio.  We offer regular lines of credit and revolving lines of credit with terms of up to 12 months to small businesses in our market area to finance short-term working capital needs such as accounts receivable and inventory. Our commercial lines of credit are typically adjustable-rate generally based on the prime rate, as published in The Wall Street Journal, plus a margin. We generally obtain personal guarantees with respect to all commercial business lines of credit.

 

 

7

 

 


 

We typically originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. Commercial business loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment.  As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area.  Therefore, commercial business loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans.  In addition, commercial business loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts.

Construction Lending.  We originate construction loans for the purchase of developed lots and for the construction of single-family residences.  Construction loans to individuals are made on the same general terms as our one- to four-family mortgage loans, but provide for the payment of interest only during the construction phase, which is usually six months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent appraiser. We also review and inspect each project prior to disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection of the project based on percentage of completion. At June 30, 2018, we had $2.9 million of construction loans, representing 1.4% of our total loan portfolio.  At June 30, 2018, our largest construction loan was a $1.1 million loan secured by residential real estate. This loan was performing in accordance with its original terms at June 30, 2018.

The maximum loan-to-value of these loans is 80% of the lesser of the appraised value or the purchase price of the property, and all these loans include personal guarantees.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose us to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties. In addition, some of these borrowers have more than one outstanding loan, so an adverse development with respect to one loan or credit relationship can expose us to significantly greater risk of non-payment and loss.

 

Medical Education. 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 June 30, 2018, the balance of the private education loans was $7.0 million. The private student loans are made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. The purchased private student loans had recourse which included a fully paid insurance wrap for the life of the loan provided by an insurance company who is required to repurchase loans delinquent over 180 days. However, in June 2018, the Company was informed that the insurance company was declared insolvent and adopted a plan of liquidation. The default claims will continue to be filed with the insurance company’s liquidator if accounts reach the 180th day of delinquency. At June 30, 2018, there were no delinquent loans which required filing a claim. Any future claims that may be submitted would be subject to the available liquidated assets at that time. As such, there is no assurance that the future claims will be paid in part or in full.

Consumer Lending.  We offer on a limited basis consumer loans to individuals secured by deposit accounts. At June 30, 2018, our consumer loan portfolio totaled $2,000 consisting primarily of consumer overdraft accounts.

 

 

8

 

 


 

Loan Originations, Participations, Purchases and Sales

Most of our loan originations are generated by our loan personnel and from referrals from existing customers and real estate brokers. All loans we originate are underwritten pursuant to our policies and procedures.  While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and pricing levels established by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our loan originations can vary from period to period.  

Consistent with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold on a servicing-released basis most of the fixed-rate conforming one- to four-family residential mortgage loans that we have originated. We consider our Statement of Financial Condition as well as market conditions on an ongoing basis in making decisions as to whether to hold loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. For the year ended June 30, 2018, we sold $144.7 million of residential one- to four-family real estate loans.

From time to time, we may purchase loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. At June 30, 2018, we had six participation loans for $5.1 million in which we were not the lead lender, all of which were performing in accordance with the loans original terms at June 30, 2018. We also have participated out portions of loans from time to time that exceeded our loans-to-one borrower legal lending limit and for risk diversification.  

We currently have arrangements with full-service mortgage lenders to purchase primarily jumbo adjustable-rate one- to four-family residential real estate loans. As of June 30, 2018, we have purchased $75.4 million of such loans pursuant to these relationships. We also have an arrangement with a mortgage origination company affiliated with a national home builder to purchase residential one- to four-family real estate loans, all of which are jumbo adjustable-rate loans. As of June 30, 2018, we have purchased $4.9 million of loans pursuant to this relationship. The homes are located in Pennsylvania, New Jersey and Delaware. These loans are originated pursuant to our underwriting guidelines and subject to our underwriting process prior to when we purchase the loan.  We intend to maintain these current relationships and in the future we will look for additional opportunities to expand our purchase of one- to four-family real estate loans.

In November 2017, we purchased a $7.8 million portfolio of private education loans made to American citizens attending AMA approved medical schools in Caribbean nations. The private student loans are made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At June 30, 2018, the balance of the private education loans was $7.0 million.

 

 

9

 

 


 

The following table shows our loan originations, sales and repayment activities for the years indicated, including loans held for sale.

 

 

 

For the Year Ended

June 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Total loans at beginning of year (1)

 

$

124,829

 

 

$

118,471

 

 

$

100,040

 

 

$

98,189

 

Loan originations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family (1)

 

 

170,479

 

 

 

202,503

 

 

 

182,962

 

 

 

171,114

 

Home equity & HELOCs

 

 

103

 

 

 

430

 

 

 

2,989

 

 

 

298

 

Commercial real estate

 

 

673

 

 

 

1,796

 

 

 

1,198

 

 

 

2,399

 

Commercial business

 

 

2,767

 

 

 

3,386

 

 

 

 

 

 

 

Construction

 

 

5,384

 

 

 

 

 

 

2,970

 

 

 

460

 

Consumer loans

 

 

31

 

 

 

5

 

 

 

4

 

 

 

4

 

Total loans originated

 

 

179,437

 

 

 

208,120

 

 

 

190,123

 

 

 

174,275

 

Loans Purchased

 

 

88,180

 

 

 

 

 

 

 

 

 

 

Sales and loan principal repayments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal repayments

 

 

22,208

 

 

 

22,494

 

 

 

13,914

 

 

 

12,973

 

Loan sales

 

 

144,677

 

 

 

179,268

 

 

 

157,778

 

 

 

159,451

 

Net loan activity

 

 

100,732

 

 

 

6,358

 

 

 

18,431

 

 

 

1,851

 

Total loans at end of year (1)

 

$

225,561

 

 

$

124,829

 

 

$

118,471

 

 

$

100,040

 

 

(1)

Includes loans held for sale.

Loans to One Borrower. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Huntingdon Valley Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral”). This 15% of unimpaired capital and surplus was approximately $3.8 million as of June 30, 2018.  At June 30, 2018, our largest credit relationship was a $3.0 million loan secured by first perfected security interest in all of the borrower’s business assets.  At June 30, 2018, this loan was performing in accordance with its current terms.

Loan Approval Procedures and Authority.  Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the board of directors. In the approval process for residential loans, we assess the borrower's ability to repay the loan and the value of the property securing the loan. To assess the borrower's ability to repay, we review the borrower's income and expenses and employment and credit history. In the case of commercial real estate loans, we also review projected income, expenses and the viability of the project being financed. We generally require appraisals of all real property securing loans. Appraisals are performed by independent licensed appraisers who are approved by our board of directors. All real estate secured loans generally require fire, title and casualty insurance and, if warranted, flood insurance in amounts at least equal to the principal amount of the loan or the maximum amount available. Our loan approval policies and limits are also established by our board of directors. All loans originated by Huntingdon Valley Bank are subject to our underwriting guidelines.

The following limitations apply to originations of loans.  An underwriter may approve loans up to $417,000, and an executive vice president, assistant vice president or senior underwriter officer may approve loans up to $500,000.  The Officer Loan Committee must approve “jumbo” loans (currently, loans between $500,000 to $650,000), construction loans and any conventional loans not receiving automated underwriting system recommendation.  The Executive Management Committee must approve loans in excess of $650,000.  The board of directors must approve loans in excess of $900,000 that are exceptions to the Bank’s lending policy.

 

 

10

 

 


 

Delinquencies, Non-Performing Assets and Classified Assets

Delinquency Procedures. When a loan is 15 days past due, we send the borrower a late notice. We generally also contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, we mail the borrower a letter reminding the borrower of the delinquency, and attempt to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, we will send the borrower a final demand for payment and may recommend foreclosure. Loans are charged off when we believe that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the board of directors each month.

Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

 

 

 

Loans Delinquent For

 

 

 

 

 

 

 

 

 

 

 

60-89 Days

 

 

90 Days and Over

 

 

Total

 

 

 

Number

 

 

Amount

 

 

Number

 

 

Amount

 

 

Number

 

 

Amount

 

 

 

(Dollars in thousands)

 

At June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

5

 

 

$

412

 

 

 

5

 

 

$

800

 

 

 

10

 

 

$

1,212

 

Home equity & HELOCs

 

 

 

 

 

 

 

 

1

 

 

 

105

 

 

 

1

 

 

 

105

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical education

 

 

2

 

 

 

62

 

 

 

1

 

 

 

24

 

 

 

3

 

 

 

86

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

7

 

 

$

474

 

 

 

7

 

 

$

929

 

 

 

14

 

 

$

1,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

4

 

 

$

381

 

 

 

10

 

 

$

950

 

 

 

14

 

 

$

1,331

 

Home equity & HELOCs

 

 

 

 

 

 

 

 

2

 

 

 

110

 

 

 

2

 

 

 

110

 

Commercial real estate

 

 

 

 

 

 

 

 

1

 

 

 

100

 

 

 

1

 

 

 

100

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

381

 

 

 

13

 

 

$

1,160

 

 

 

17

 

 

$

1,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

3

 

 

$

317

 

 

 

5

 

 

$

659

 

 

 

8

 

 

$

976

 

Home equity & HELOCs

 

 

1

 

 

 

79

 

 

 

2

 

 

 

227

 

 

 

3

 

 

 

306

 

Commercial real estate

 

 

 

 

 

 

 

 

1

 

 

 

100

 

 

 

1

 

 

 

100

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

396

 

 

 

8

 

 

$

986

 

 

 

12

 

 

$

1,382

 

 

Non-Performing Loans.  Loans are generally placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. Loans are classified as troubled debt restructurings when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial

 

 

11

 

 


 

difficulty experienced by those borrowers. At June 30, 2018, we had no non-accruing troubled debt restructurings. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent. Interest income that would have been recorded for the year ended June 30, 2018 had non-accruing loans been current according to their original terms amounted to $97,000.  We recognized $53,000 of interest income for these loans for the year ended June 30, 2018

 

Other Real Estate Owned. Other real estate owned includes assets acquired through, or in lieu of, loan foreclosure and are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance are included in operations. We had no other real estate owned at June 30, 2018 and 2017.

Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. We had one loan accruing past due 90 days at June 30, 2018 and no accruing loans past due 90 days or more at June 30, 2017, 2016 or 2015. Additionally, we had no non-accruing troubled debt restructurings at June 30, 2018, 2017, 2016 or 2015.

 

 

 

At June 30,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

1,429

 

 

$

1,198

 

 

$

818

 

 

$

1,277

 

Home equity & HELOCs

 

 

105

 

 

 

110

 

 

 

227

 

 

 

147

 

Commercial real estate

 

 

 

 

 

100

 

 

 

100

 

 

 

226

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Total non-accrual loans

 

 

1,534

 

 

 

1,408

 

 

 

1,145

 

 

 

1,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans accruing past 90 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical education

 

 

24