Pennsylvania bank uses cryptocurrency to increase lending

by Arthur · August 23, 2022

A community bank in Doylestown, Pennsylvania, has broken what it says is new ground, agreeing to sell commercial loan stakes to a digital currency platform.

Under a deal announced late Friday, HV Bancorp, parent of Huntingdon Valley Bank, will syndicate a $571 million portion of new commercial loans to MakerDAO, the creator of the Dai digital currency. MakerDAO has committed to invest $100 million in HV loans.

Both MakerDAO and HV have called the pact the first commercial loan participation between a US bank and a decentralized digital currency. Like many other cryptocurrencies, Dai is not governed by a central agency similar to a central bank. Decisions are instead made by a decentralized network of participants.

MakerDAO’s currency is backed by assets pledged by participants, who convert the property’s collateral into Dai stablecoins — a type of cryptocurrency that tries to peg its value to a real-world value, in Dai’s case the US dollar. Since there is currently little effective regulation of the security underlying cryptocurrencies, injecting real value such as a bank’s real estate loan can provide a critical boost to a cryptocurrency’s credibility, according to Hugh Ragsdale, general partner at Lupine Capital in New York.

“It signals an intention to integrate, as opposed to evade, regulation,” while providing “an out-of-the-box real-world asset return solution that generates crypto-uncorrelated, relatively stable returns,” Ragsdale said in an email -mail.

HV Bancorp Chief Lending Officer Hugh Connelly (left) and CEO Travis Thompson predict that their syndication deal with MakerDAO could be the first of many such pacts between banks and crypto platforms.

For HV, whose loan portfolio totaled $388 million as of June 30, the $100 million promised by MakerDAO represents a significant pool of new liquidity, although executives promise it won’t lead to major changes in the way the bank does business. Prior to the deal with MakerDAO, HV syndicated loans in excess of the legal loan limit of $8 million to other banks. HV can now take advantage of a pre-funded relationship with a single partner, which significantly streamlines the lending process, according to Chief Lending Officer Hugh Connelly.

A longtime mutual institution that converted to stock ownership in January 2017, HV operates six branches in the Philadelphia area.

“We think it’s almost a watershed moment,” Connelly said of Friday’s deal. “We are the first, but we will not be the last bank to align with a cryptocurrency.

Connelly said he expects other banks to quickly follow in HV’s footsteps, seeking similar relationships with MakerDAO or other cryptocurrency platforms, as they offer lenders an opportunity to tap into a new stream of low-cost funding at a time when the Federal Reserve is shrinking its balance sheet and many lawmakers express concern over the size of the federal budget deficit.

On its own, MakerDAO wants to commit a total of $1 billion to acquire banking assets, leaving plenty of room for deals with other institutions, Connelly added.

Initially, HV’s partnership with MakerDAO will focus on commercial real estate loans, but may expand to include commercial-and-industrial and other types of commercial credit as MakerDAO’s comfort level increases, said Travis Thompson, HV’s chairman and CEO.

According to the terms of the agreement with MakerDAO, HV will submit the loans they seek to syndicate on a monthly basis. MakerDAO will make payments from a Delaware Trust account funded with dollars it converted from stablecoins.

Ted Peters, chairman and CEO of the Community Financial Institutions Fund and former chairman and CEO of Bryn Mawr Bancorp, expressed concern that adding such a large amount of additional funding could motivate HV’s lenders to make larger, riskier loans. For their part, Thompson and Connelly noted that HV has no time limit on deploying $100 million and will keep at least 50% of each loan on its books.

“We’re not a flashy bank,” Connelly said. “We’re small and we’re going to keep doing what we’re doing.”

On 30 June, HV’s non-performing assets amounted to 0.46% of the assets under management. Net write-downs amounted to 0.03% of outstanding loans.

HV has made it clear that it keeps its balance sheet free of crypto on both the asset and deposit side. The company “worked for months” with regulators to make sure they were comfortable with the idea of a community bank partnering with a cryptocurrency platform, Connelly said.

“We started really early,” Thompson said. “We wanted to be very transparent.”