HOPFED BANCORP INC Form 10-Q for Period Ending 9/30/2014
: 6.21.3
 
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Nov. 3, 2014
Document And Entity Information [Abstract]
  
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Entity Registrant Name
HOPFED BANCORP INC 
 
Entity Central Index Key
0001041550 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
7,210,243 
Consolidated Condensed Statements of Financial Condition (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Assets
  
Cash and due from banks
$ 18,673 
$ 37,229 
Interest-earning deposits
16,712 
18,619 
Cash and cash equivalents
35,385 
55,848 
Federal Home Loan Bank stock, at cost
4,428 
4,428 
Securities available for sale
311,685 
318,910 
Loans held for sale
483 
 
Loans receivable, net of allowance for loan losses of $8,133 at September 30, 2014 and $8,682 at December 31, 2013
530,759 
543,632 
Accrued interest receivable
4,659 
5,233 
Real estate owned
1,954 
1,674 
Bank owned life insurance
9,903 
9,677 
Premises and equipment, net
22,926 
23,108 
Deferred tax assets
2,189 
4,610 
Intangible asset
49 
130 
Other assets
5,266 
6,399 
Total assets
929,686 
973,649 
Deposits:
  
Non-interest-bearing
108,217 
105,252 
Interest-bearing checking
179,914 
183,643 
Savings and money market
96,426 
92,106 
Time deposits
343,669 
381,996 
Total deposits
728,226 
762,997 
Federal Home Loan Bank advances
40,269 
46,780 
Repurchase agreements
46,329 
52,759 
Subordinated debentures
10,310 
10,310 
Advances from borrowers for taxes and insurance
849 
521 
Dividends payable
301 
326 
Accrued expenses and other liabilities
4,313 
4,239 
Total liabilities
830,597 
877,932 
Stockholders' equity:
  
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at September 30, 2014, and December 31, 2013.
Common stock, par value $0.01 per share; authorized 15,000,000 shares; 7,949,665 issued and 7,211,055 outstanding at September 30, 2014, and 7,927,287 issued and 7,447,903 outstanding at December 31, 2013
79 
79 
Additional paid-in-capital
58,416 
58,302 
Retained earnings
47,049 
44,694 
Accumulated other comprehensive income (loss), net of taxes
2,501 
(1,429)
Total stockholders' equity
99,089 
95,717 
Total liabilities and stockholders' equity
929,686 
973,649 
Common Stock [Member]
  
Stockholders' equity:
  
Treasury stock- common (at cost, 738,610 shares at September 30, 2014, and 479,384 shares at December 31, 2013)
(8,956)
(5,929)
Total stockholders' equity
$ 79 
$ 79 
Consolidated Condensed Statements of Financial Condition (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Loans receivable, allowance for loan losses
$ 8,133 
$ 8,682 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
500,000 
500,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
15,000,000 
15,000,000 
Common stock, shares issued
7,949,665 
7,927,287 
Common stock, shares outstanding
7,211,055 
7,447,903 
Common Stock [Member]
  
Treasury stock, shares
738,610 
479,384 
Consolidated Condensed Statements of Income (USD $)
3 Months Ended9 Months Ended
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Interest income:
    
Loans receivable
$ 6,913 
$ 6,605 
$ 19,743 
$ 20,163 
Securities available for sale - taxable
1,562 
1,641 
5,035 
5,237 
Securities available for sale - nontaxable
514 
544 
1,589 
1,676 
Interest-earning deposits
19 
18 
Total interest income
8,994 
8,795 
26,386 
27,094 
Interest expense:
    
Deposits
1,354 
1,622 
4,313 
5,604 
Advances from Federal Home Loan Bank
430 
445 
1,292 
1,335 
Repurchase agreements
228 
245 
722 
717 
Subordinated debentures
174 
184 
551 
548 
Total interest expense
2,186 
2,496 
6,878 
8,204 
Net interest income
6,808 
6,299 
19,508 
18,890 
Provision for loan losses
(892)
426 
(773)
1,208 
Net interest income after provision for loan losses
7,700 
5,873 
20,281 
17,682 
Non-interest income:
    
Other-than-temporary impairment losses on debt securities
 
(511)
 
(511)
Portion of losses recognized in other comprehensive income
 
111 
 
111 
Net impairment losses recognized in in earnings
   
(400)
   
(400)
Net impairment losses recognized in earnings
   
(400)
   
(400)
Service charges
879 
949 
2,505 
2,739 
Merchant card income
265 
245 
800 
727 
Mortgage origination revenue
316 
147 
507 
559 
Gain on sale of securities
294 
201 
548 
1,617 
Income from bank owned life insurance
65 
88 
226 
250 
Financial services commission
363 
314 
737 
958 
Other operating income
211 
225 
613 
630 
Total non-interest income
2,393 
1,769 
5,936 
7,080 
Non-interest expenses:
    
Salaries and benefits
3,881 
3,735 
11,368 
11,297 
Occupancy
781 
878 
2,498 
2,605 
Data processing
730 
652 
2,194 
1,948 
State deposit tax
346 
143 
990 
432 
Intangible amortization
16 
33 
81 
130 
Professional services
397 
493 
1,025 
1,435 
Deposit insurance and examination
182 
137 
562 
548 
Advertising
368 
292 
1,023 
933 
Postage and communications
140 
149 
423 
427 
Supplies
156 
159 
459 
388 
Loss (gain) on real estate owned
35 
(54)
160 
(7)
Real estate owned expense (refund)
(29)
78 
193 
186 
Other operating
560 
289 
1,358 
1,060 
Total non-interest expense
7,563 
6,984 
22,334 
21,382 
Income before income tax
2,530 
658 
3,883 
3,380 
Income tax expense
577 
122 
651 
694 
Net income
$ 1,953 
$ 536 
$ 3,232 
$ 2,686 
Net income per share:
    
Basic
$ 0.27 
$ 0.07 
$ 0.44 
$ 0.36 
Diluted
$ 0.27 
$ 0.07 
$ 0.44 
$ 0.36 
Dividend per share
$ 0.04 
$ 0.04 
$ 0.12 
$ 0.08 
Weighted average shares outstanding - basic
7,265,597 
7,483,582 
7,348,708 
7,483,606 
Weighted average shares outstanding - diluted
7,265,597 
7,483,582 
7,348,708 
7,483,606 
Consolidated Condensed Statements of Comprehensive Income (Loss) (USD $)
3 Months Ended9 Months Ended
In Thousands, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Statement of Comprehensive Income [Abstract]
    
Net income
$ 1,953 
$ 536 
$ 3,232 
$ 2,686 
Other comprehensive income, net of tax:
    
Unrealized gain (loss) on investment securities available for sale, net of tax effect of $138 and $637 for the three month periods ended September 30, 2014, and September 30, 2013, respectively; and ($2,121) and $4,640 for the nine month periods ended September 30, 2014, and September 30, 2013, respectively;
(269)
(1,236)
4,118 
(9,007)
Unrealized gain on derivatives, net of tax effect of ($34) and ($22) for the three month periods ended September 30, 2014, and September 30, 2013, respectively, and of ($90) and ($94) for the nine month periods ending September 30, 2014, and September 30, 2013, respectively;
65 
43 
174 
183 
Reclassification adjustment for other than temporary impairment included in net income, net of tax effect of ($136) for the three and nine month periods ended September 30, 2013.
 
264 
 
264 
Reclassification adjustment for gains included in net income, net of tax effect of $100 and $68 for the three month periods ended September 30, 2014, and September 30, 2013, respectively; and $186 and $550 for the nine month periods ended September 30, 2014, and September 30, 2013, respectively;
(194)
(132)
(362)
(1,067)
Total other comprehensive income (loss), net of tax
(398)
(1,061)
3,930 
(9,627)
Comprehensive income (loss)
$ 1,555 
$ (525)
$ 7,162 
$ (6,941)
Consolidated Condensed Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
3 Months Ended9 Months Ended
In Thousands, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Statement of Comprehensive Income [Abstract]
    
Unrealized gain (loss) on investment securities available for sale, tax effect
$ 138 
$ 637 
$ (2,121)
$ 4,640 
Unrealized gain on derivatives, tax effect
(34)
(22)
(90)
(94)
Reclassification adjustment for other than temporary impairment included in net income, tax effect
 
(136)
 
(136)
Reclassification adjustment for gains included in net income, tax effect
$ 100 
$ 68 
$ 186 
$ 550 
Consolidated Condensed Statement of Stockholders' Equity (USD $)
In Thousands, except Share data
Total
USD ($)
Common Stock [Member]
USD ($)
Additional Paid In Capital [Member]
USD ($)
Retained Earnings [Member]
USD ($)
Treasury Stock Common [Member]
USD ($)
Accumulated Other Comprehensive Income (Loss) [Member]
USD ($)
Preferred Stock [Member]
Common Stock Warrants [Member]
USD ($)
Treasury Stock Preferred [Member]
USD ($)
Beginning balance at Dec. 31, 2012
$ 104,999 
$ 79 
$ 76,288 
$ 41,829 
$ (5,076)
$ 9,723 
 
$ 556 
$ (18,400)
Beginning balance, shares at Dec. 31, 2012
 
7,502,812 
    
18,400 
  
Restricted stock awards, shares
 
21,559 
       
Consolidated net income
2,686 
  
2,686 
     
Compensation expense, restricted stock awards
75 
 
75 
      
Net change in unrealized gain on securities available for sale, net of income tax expense (benefit)
(9,810)
    
(9,810)
   
Net change in unrealized loss on derivatives, net of income taxes
183 
    
183 
   
Repurchase of treasury stock
(559)
(50,104)
  
(559)
    
Repurchase of warrant
(257)
 
299 
    
(556)
 
Cash dividend to common stockholders
(599)
  
(599)
     
Ending balance at Sep. 30, 2013
96,718 
79 
76,662 
43,916 
(5,635)
96 
  
(18,400)
Ending balance, shares at Sep. 30, 2013
 
7,474,267 
    
18,400 
  
Beginning balance at Dec. 31, 2013
95,717 
79 
58,302 
44,694 
(5,929)
(1,429)
   
Beginning balance, shares at Dec. 31, 2013
 
7,447,903 
       
Restricted stock awards, shares
 
22,378 
       
Repurchase of treasury stock
(3,027)
   
(3,027)
    
Repurchase of treasury stock, shares
 
(259,226)
       
Consolidated net income
3,232 
  
3,232 
     
Compensation expense, restricted stock awards
114 
 
114 
      
Net change in unrealized gain on securities available for sale, net of income tax expense (benefit)
3,756 
    
3,756 
   
Net change in unrealized loss on derivatives, net of income taxes
174 
    
174 
   
Cash dividend to common stockholders
(877)
  
(877)
     
Ending balance at Sep. 30, 2014
$ 99,089 
$ 79 
$ 58,416 
$ 47,049 
$ (8,956)
$ 2,501 
   
Ending balance, shares at Sep. 30, 2014
 
7,211,055 
       
Consolidated Condensed Statement of Stockholders' Equity (Parenthetical) (USD $)
9 Months Ended
In Thousands, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Net change in unrealized gain on securities available for sale, income tax expense (benefit)
$ 1,935 
$ 5,054 
Net change in unrealized loss on derivatives, income taxes
90 
94 
Accumulated Other Comprehensive Income (Loss) [Member]
  
Net change in unrealized gain on securities available for sale, income tax expense (benefit)
1,935 
5,054 
Net change in unrealized loss on derivatives, income taxes
$ 90 
$ 94 
Consolidated Condensed Statements of Cash Flows (USD $)
9 Months Ended
In Thousands, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities:
  
Net cash provided by operating activities
$ 6,601 
$ 6,473 
Cash flows from investing activities
  
Proceeds from sales, calls and maturities of securities available for sale
81,801 
99,619 
Purchase of securities available for sale
(69,927)
(80,959)
Net (increase) decrease in loans
12,205 
(9,033)
Proceeds from sale of foreclosed assets
1,001 
913 
Purchase of premises and equipment
(856)
(288)
Net cash provided by in investing activities
24,224 
10,252 
Cash flows from financing activities:
  
Net increase in demand deposits
2,965 
4,354 
Net decrease in time and other deposits
(37,736)
(37,282)
Increase in advances from borrowers for taxes and insurance
328 
426 
Advances from Federal Home Loan Bank
27,000 
23,000 
Repayment of advances from Federal Home Loan Bank
(33,511)
(19,465)
Net increase (decrease) in repurchase agreements
(6,430)
4,674 
Cash used to repurchase warrant
 
(257)
Cash used to repurchase treasury stock
(3,027)
(559)
Dividends paid on common stock
(877)
(449)
Net cash used in financing activities
(51,288)
(25,558)
Decrease in cash and cash equivalents
(20,463)
(8,833)
Cash and cash equivalents, beginning of period
55,848 
37,176 
Cash and cash equivalents, end of period
35,385 
28,343 
Supplemental disclosures of Cash Flow Information:
  
Interest paid
6,977 
8,463 
Income taxes paid
 
495 
Supplemental disclosures of non-cash investing and financing activities:
  
Loans charged off
820 
2,858 
Foreclosures and in substance foreclosures of loans during period
1,441 
797 
Net unrealized gains (losses) on investment securities classified as available for sale
5,691 
(14,864)
Increase (decrease) in deferred tax asset related to unrealized gains on investments
(1,935)
5,054 
Dividends declared and payable
301 
299 
Issue of unearned restricted stock
$ 260 
$ 232 
Basis of Presentation
9 Months Ended
Sep. 30, 2014
Accounting Policies [Abstract]
 
Basis of Presentation
(1) BASIS OF PRESENTATION

HopFed Bancorp, Inc. (the “Company”) was formed at the direction of Heritage Bank USA Inc, formerly Hopkinsville Federal Savings Bank (the “Bank”), to become the holding company of the Bank upon the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The conversion was consummated on February 6, 1998. The Company’s primary assets are the outstanding capital stock of the converted Bank, and its sole business is that of the converted Bank.

On June 5, 2013, the Bank’s legal name became Heritage Bank USA Inc. and the Bank was granted a commercial bank charter by the Kentucky Department of Financial Institutions (“KDFI”). On June 5, 2013, the Bank became subject to regulation by the KDFI and the Federal Deposit Insurance Corporation (“FDIC”). On the same day, HopFed Bancorp was granted a bank holding company charter by the Federal Reserve Bank of Saint Louis (“FED”) and as such regulated by the FED.

The Bank operates a mortgage division, Heritage Mortgage Services, in Clarksville, Tennessee with agents located in several of its markets. The Bank has a financial services division, Heritage Solutions, with offices in Murray, Kentucky, Kingston Springs, Tennessee, and Pleasant View, Tennessee. Heritage Solutions agents travel throughout western Kentucky and middle Tennessee offering fixed and variable annuities, mutual funds and brokerage services.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the nine month period ended September 30, 2014, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2014.

The accompanying unaudited financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2013, Consolidated Financial Statements.

Income Per Share
9 Months Ended
Sep. 30, 2014
Earnings Per Share [Abstract]
 
Income Per Share
(2) INCOME PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted income per share (“IPS”) computations for the three and nine month periods ended September 30, 2014, and September 30, 2013. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrant outstanding.

 

     Three Month Periods Ended  
     September 30,  
                 2014                              2013              

Basic IPS:

     

Net income available to common stockholders

   $ 1,953,000       $ 536,000   

Average common shares outstanding

     7,265,597         7,483,582   
  

 

 

    

 

 

 

Net income per share available to common shareholders, basic

   $ 0.27       $ 0.07   
  

 

 

    

 

 

 

Diluted IPS

     

Net income available to common stockholders

   $ 1,953,000       $ 536,000   

Average common shares outstanding

     7,265,597         7,483,582   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     7,265,597         7,483,582   
  

 

 

    

 

 

 

Net income per share available to common shareholders, diluted

   $ 0.27       $ 0.07   
  

 

 

    

 

 

 

 

     Nine Month Periods Ended  
     September 30,  
                 2014                              2013              

Basic IPS:

     

Net income available to common stockholders

   $ 3,232,000       $ 2,686,000   

Average common shares outstanding

     7,348,708         7,483,606   
  

 

 

    

 

 

 

Net income per share available to common shareholders, basic

   $ 0.44       $ 0.36   
  

 

 

    

 

 

 

Diluted IPS

     

Net income available to common stockholders

   $ 3,232,000       $ 2,686,000   

Average common shares outstanding

     7,348,708         7,483,606   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     7,348,708         7,483,606   
  

 

 

    

 

 

 

Net income per share available to common shareholders, diluted

   $ 0.44       $ 0.36   
  

 

 

    

 

 

 
Stock Compensation
9 Months Ended
Sep. 30, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Stock Compensation
(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $49,000 and $114,000 for the three and nine month periods ended September 30, 2014, and $28,000 and $75,000 for the three and nine month periods ended September 30, 2013, respectively. The Company issued 22,378 shares of restricted stock during the nine-month period ended September 30, 2014. The Company issued 21,559 shares of restricted stock during the nine- month period ended September 30, 2013. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at September 30, 2014:

 

Year Ending December 31,

   Future
Expense
 

2014

   $ 49,193   

2015

     185,810   

2016

     132,780   

2017

     45,954   
  

 

 

 

Total

   $ 413,737   
  

 

 

 

The compensation committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. In addition, award vesting may be accelerated due to certain events as outlined in the restricted stock award agreement. Any acceleration of vesting will change the timing of, but not the aggregate amount of, compensation expense incurred.

Securities
9 Months Ended
Sep. 30, 2014
Cash and Cash Equivalents [Abstract]
 
Securities
(4) SECURITIES

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2014, the Company has 88 securities with unrealized losses. The carrying amount of securities and their estimated fair values at September 30, 2014, were as follows:

 

     September 30, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 
     (Dollars in Thousands)  

Restricted:

          

FHLB stock

   $ 4,428         —           —          4,428   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available for sale securities:

          

U.S. Treasury securities

   $ 3,975         —           (5     3,970   

U.S. Agency debt securities

     111,696         1,907         (1,050     112,553   

Corporate bonds

     2,000         19         —          2,019   

Taxable municipal bonds

     12,743         245         (158     12,830   

Tax free municipal bonds

     58,930         3,722         (191     62,461   

Trust preferred securities

     1,600         —           (111     1,489   

Mortgage-backed securities:

          

GNMA

     26,110         620         (146     26,584   

FNMA

     55,770         565         (881     55,454   

FHLMC

     3,277         39         (13     3,303   

SLMA CMOs

     10,025         —           (144     9,881   

AGENCY CMOs

     21,283         149         (291     21,141   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 307,409         7,266         (2,990     311,685   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

The carrying amount of securities and their estimated fair values at December 31, 2013, was as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 
     (Dollars in Thousands)  

Restricted:

          

FHLB stock

   $ 4,428         —           —          4,428   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available for sale securities:

          

U.S. Agency debt securities

   $ 120,608         1,856         (2,441     120,023   

Corporate bonds

     2,000         —           (16     1,984   

Taxable municipal bonds

     18,337         458         (738     18,057   

Tax free municipal bonds

     64,291         2,066         (898     65,459   

Trust preferred securities

     1,600         —           (111     1,489   

Mortgage-backed securities:

          

GNMA

     17,327         590         (142     17,775   

FNMA

     70,104         526         (1,938     68,692   

FHLMC

     1,301         35         —          1,336   

SLMA CMOs

     8,459         —           (374     8,085   

AGENCY CMOs

     16,296         134         (420     16,010   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 320,323         5,665         (7,078     318,910   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

The scheduled maturities of debt securities available for sale at September 30, 2014, were as follows:

 

            Estimated  
     Amortized      Fair  
     Cost      Value  

Due within one year

   $ 195         196   

Due in one to five years

     25,496         25,740   

Due in five to ten years

     39,049         39,794   

Due after ten years

     38,875         40,948   
  

 

 

    

 

 

 
     103,615         106,678   

Amortizing agency bonds

     87,329         88,644   

Mortgage-backed securities

     116,465         116,363   
  

 

 

    

 

 

 

Total securities available for sale

   $ 307,409         311,685   
  

 

 

    

 

 

 

The scheduled maturities of debt securities available for sale at December 31, 2013, were as follows:

 

            Estimated  
     Amortized      Fair  
     Cost      Value  

Due within one year

   $ 501         505   

Due in one to five years

     12,630         12,954   

Due in five to ten years

     38,192         37,364   

Due in more than ten years

     49,284         49,314   
  

 

 

    

 

 

 
     100,607         100,137   

Amortizing agency bonds

     106,229         106,875   

Mortgage-backed securities

     113,487         111,898   
  

 

 

    

 

 

 

Total securities available for sale

   $ 320,323         318,910   
  

 

 

    

 

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of September 30, 2014, are as follows:

 

     Less than 12 months     12 months or longer     Total  
     Estimated
Fair Value
     Unrealized
Losses
    Estimated
Fair Value
     Unrealized
Losses
    Estimated
Fair Value
     Unrealized
Losses
 
     (Dollars in Thousands)  

Available for sale

               

U.S. government and agency securities:

               

Treasury securities

   $ 3,970         (5     —           —          3,970         (5

Agency debt securities

     17,512         (50     30,890         (1,000     48,402         (1,050

Taxable municipals

     568         (4     7,630         (154     8,198         (158

Tax free municipals

     1,969         (22     5,088         (169     7,057         (191

Trust preferred securities

     —           —          1,489         (111     1,489         (111

Mortgage-backed securities:

               

GNMA

     10,567         (104     3,007         (42     13,574         (146

FNMA

     7,167         (12     31,140         (869     38,307         (881

FHLMC

     2,208         (13     —           —          2,208         (13

SLMA CMOs

     1,924         (12     5,511         (132     7,435         (144

AGENCY CMOs

     10,189         (144     4,113         (147     14,302         (291
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

   $ 56,074         (366     88,868         (2,624     144,942         (2,990
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2013, were as follows:

 

     Less than 12 months     12 months or longer     Total  
     Estimated
Fair Value
     Unrealized
Losses
    Estimated
Fair Value
     Unrealized
Losses
    Estimated
Fair Value
     Unrealized
Losses
 
     (Dollars in Thousands)  

Available for sale

               

U.S. government and agency securities:

               

Agency debt securities

   $ 44,968         (2,107     6,793         (334     51,761         (2,441

Taxable municipal bonds

     7,903         (660     797         (78     8,700         (738

Tax free municipal bonds

     9,848         (692     3,720         (206     13,568         (898

Trust preferred securities

     —           —          1,489         (111     1,489         (111

Commercial bonds

     1,984         (16     —           —          1,984         (16

Mortgage-backed securities:

               

GNMA

     5,320         (128     1,551         (14     6,871         (142

FNMA

     42,464         (1,626     6,746         (312     49,210         (1,938

NON-AGENCY CMOs

     5,224         (374     —           —          5,224         (374

AGENCY CMOs

     7,031         (223     1,844         (197     8,875         (420
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

   $ 124,742         (5,826     22,940         (1,252     147,682         (7,078
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

The applicable dates for determining when securities are in an unrealized loss position are September 30, 2014, and December 31, 2013. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month periods ended September 30, 2014, and December 31, 2013, but is in the “Investments with an Unrealized Loss of less than 12 months” category above.

As shown in the tables above, at September 30, 2014, the Company had approximately $3.0 million in unrealized losses on $144.9 million of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and the unrealized loss is recorded as a component of equity. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

Because the Company currently does not intend to sell those securities that have an unrealized loss at September 30, 2014, and it is not likely the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2014.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, the Company will consider selling the security, but will review each security on a case-by-case basis as these factors become known.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that the Company will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. There is also a risk that other-than-temporary impairment charges may occur in the future if management’s intention to hold these securities to maturity and or recovery changes.

 

At September 30, 2014, securities with a book value of approximately $188.5 million and a market value of approximately $184.1 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law. The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $13.5 million secured by the Bank’s loan portfolio to secure additional municipal deposits.

At September 30, 2014, securities with a book and market value of $40.3 million were sold under agreements to repurchase from various customers. Furthermore, the Company has one wholesale repurchase agreement with a third party secured by investments with a book value of $6.5 million and a market value of $6.6 million. The repurchase agreement is in the amount of $6.0 million and has a maturity of September 18, 2016, and is currently callable on a quarterly basis and has a fixed rate of interest of 4.36%.

Loans
9 Months Ended
Sep. 30, 2014
Receivables [Abstract]
 
Loans
(5) LOANS

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at September 30, 2014, and December 31, 2013. At September 30, 2014, and December 31, 2013, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

 

     September 30, 2014     September 30, 2014     December 31, 2013     December 31, 2013  
     Amount     Percent     Amount     Percent  
     (Dollars in thousands, except percentages)  

Real estate loans:

        

One-to-four family (closed end) first mortgages

   $ 147,650        27.4   $ 155,252        28.1

Second mortgages (closed end)

     2,200        0.4     3,248        0.6

Home equity lines of credit

     33,818        6.3     34,103        6.2

Multi-family

     24,567        4.6     29,736        5.4

Construction

     21,678        4.0     10,618        1.9

Land

     25,561        4.7     34,681        6.3

Farmland

     42,706        7.9     51,868        9.4

Non-residential real estate

     154,177        28.6     157,692        28.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

     452,357        83.9     477,198        86.4

Consumer loans

     14,896        2.8     11,167        2.0

Commercial loans

     71,849        13.3     64,041        11.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other loans

     86,745        16.1     75,208        13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, gross

     539,102        100.0     552,406        100.0
    

 

 

     

 

 

 

Deferred loan cost, net of fees

     (210       (92  

Less allowance for loan losses

     (8,133       (8,682  
  

 

 

     

 

 

   

Total loans

   $ 530,759        $ 543,632     
  

 

 

     

 

 

   

 

The allowance for loan losses totaled $8.1 million at September 30, 2014, and $8.7 million at December 31, 2013, and $9.4 million at September 30, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.51% at September 30, 2014, 1.57% at December 31, 2013, and 1.74% at September 30, 2013.

The following table indicates the type and level of non-accrual loans at the dates indicated below:

 

     September 30, 2014      December 31, 2013      September 30, 2013  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 407         945         865   

Home equity line of credit

     31         1         275   

Junior lien

     —           2         2   

Construction

     —           175         —     

Land

     301         1,218         2,257   

Non-residential real estate

     101         6,546         7,187   

Farmland

     12         703         744   

Consumer loans

     2         13         316   

Commercial loans

     263         463         482   
  

 

 

    

 

 

    

 

 

 

Total non-accrual loans

   $ 1,117         10,066         12,128   
  

 

 

    

 

 

    

 

 

 

 

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the nine month period ended September 30, 2014:

 

                         General     Specific     Ending  
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2013      2014     2014      2014     2014     9/30/2014  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 2,048         (191     19         (219     (294     1,363   

Home equity line of credit

     218         (73     3         44        —          192   

Junior liens

     39         —          8         (31     —          16   

Multi-family

     466         —          —           (362     —          104   

Construction

     88         (10     7         15        60        160   

Land

     1,305         —          —           (220     —          1,085   

Non-residential real estate

     2,719         (1     864         (716     660        3,526   

Farmland

     510         —          —           33        2        545   

Consumer loans

     541         (308     86         33        250        602   

Commercial loans

     748         (237     58         (215     186        540   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 8,682         (820     1,045         (1,638     864        8,133   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2013:

 

                         General     Specific        
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2012      2013     2013      2013     2013     12/31/2013  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 2,490         (852     329         (285     366        2,048   

Home equity line of credit

     374         (22     9         (88     (55     218   

Junior liens

     230         (119     71         5        (148     39   

Multi-family

     524         (38     164         (20     (164     466   

Construction

     256         —          —           (168     —          88   

Land

     2,184         (1,432     9         (718     1,262        1,305   

Non-residential real estate

     2,921         (1,041     14         757        68        2,719   

Farmland

     712         —          —           (202     —          510   

Consumer loans

     338         (649     246         228        378        541   

Commercial loans

     619         (291     32         437        (49     748   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 10,648         (4,444     874         (54     1,658        8,682   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

The table below presents currently performing, past due and non-accrual balances at September 30, 2014, by loan classification allocated between performing and non-performing:

 

            30 - 89                    Impaired Loans         
     Currently      Days      Non-accrual      Special      Currently Performing         

September 30, 2014

   Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 140,971         1,454         407         203         4,615         —           147,650   

Home equity line of credit

     32,921         91         31         —           775         —           33,818   

Junior liens

     2,123         —           —           40         37         —           2,200   

Multi-family

     17,587         1,879         —           2,904         2,197         —           24,567   

Construction

     21,678         —           —           —           —           —           21,678   

Land

     14,380         —           301         362         10,518         —           25,561   

Farmland

     40,180         184         12         516         1,814         —           42,706   

Non-residential real estate

     132,515         996         101         5,492         15,073         —           154,177   

Consumer loans

     14,550         4         2         21         319         —           14,896   

Commercial loans

     68,318         1,002         263         325         1,941         —           71,849   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 485,223         5,610         1,117         9,863         37,289         —         $ 539,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents currently performing, past due and non-accrual balances at December 31, 2013, by loan classification allocated between performing and non-performing:

 

            30 - 89                    Impaired Loans         
     Currently      Days      Non-accrual      Special      Currently Performing         

December 31, 2013

   Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 148,759         592         945         814         4,142         —           155,252   

Home equity line of credit

     33,369         93         1         —           640         —           34,103   

Junior liens

     3,126         —           2         43         77         —           3,248   

Multi-family

     29,736         —           —           —           —           —           29,736   

Construction

     10,443         —           175         —           —           —           10,618   

Land

     19,899         —           1,218         52         13,512         —           34,681   

Non-residential real estate

     142,701         343         6,546         515         7,587         —           157,692   

Farmland

     46,042         —           703         480         4,643         —           51,868   

Consumer loans

     10,493         234         13         —           427         —           11,167   

Commercial loans

     61,379         123         463         526         1,550         —           64,041   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 505,947         1,385         10,066         2,430         32,578         —           552,406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mention, substandard and doubtful are paying as agreed. However, the customer’s financial statements may indicate weaknesses in their current cash flow, the customer’s industry may be in decline due to current economic conditions, collateral values used to secure the loan may be declining, or the Company may be concerned about the customer’s future business prospects.

The Company does not originate loans it considers sub-prime and is not aware of any exposure to the additional credit concerns associated with sub-prime lending in either the Company’s loan or investment portfolios. The Company does have a significant amount of construction and land development loans. Management reports to the Company’s Board of Directors on the status of the Company’s specific construction and development loans as well as the market trends in those markets in which the Company actively participates.

The Company’s annualized net charge off (net recovery) ratios for nine month periods ended September 30, 2014, September 30, 2013, and the year ended December 31, 2013, was (0.05%), 0.61% and 0.66%, respectively. The ratios of allowance for loan losses to non-accrual loans at September 30, 2014, September 30, 2013, and December 31, 2013, were 728.1%, 77.6%, and 86.2% respectively.

The determination of the allowance for loan losses is based on management’s analysis, completed on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred.

The Company conducts annual reviews on all loan relationships above one million dollars to ascertain the borrowers continued ability to service their debt as agreed. In addition to the credit relationships mentioned above, management may classify any credit relationship once it becomes aware of adverse credit trends for that customer. Typically, the annual review consists of updated financial statements for borrowers and any guarantors, a review of the borrower’s credit history with the Company and other creditors, and current income tax information.

As a result of this review, management will classify loans based on their credit risk. Additionally, the Company provides a risk grade for all loans past due more than ninety days. The Company uses the following risk definitions for risk grades:

Satisfactory loans of average strength having some deficiency or vulnerability to changing economic or industry conditions. These customers should have reasonable amount of capital and operating ratios. Secured loans may lack in margin or liquidity. Loans to individuals, perhaps supported in dollars of net worth, but with supporting assets may be difficult to liquidate.

Watch loans are acceptable credits: (1) that need continual monitoring, such as out-of territory or asset-based loans (since the Bank does not have an asset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends;

 

(b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such as one-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency. If considered marginal, a loan would be a “watch” until financial data demonstrated improved performance or further deterioration to a “substandard” grade usually within a12-month period. In the table on page 25, Watch loans are included with satisfactory loans and classified as Pass.

Other Loans Especially Mentioned are currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan. These credit weaknesses, if not checked or corrected, will weaken the loan or inadequately protect the Bank’s credit position at some future date.

A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the credit. Examples of substandard loans include those to borrowers with insufficient or negative cash flow, negative net worth coupled with inadequate guarantor support, inadequate working capital, and/or significantly past-due loans and overdrafts.

A loan classified Doubtful has all the weaknesses inherent in a substandard credit except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factors charge-off is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. The doubtful classification is applied to that portion of the credit in which the full collection of principal and interest is questionable.

A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments using the fair value of the collateral if the loan is collateral dependent. Currently, it is management’s practice to test all loans for impairment that are classified as substandard or doubtful loans that have an outstanding balance of more than $250,000. At September 30, 2014, December 31, 2013, and September 30, 2013, the Company’s impaired loans totaled $38.4 million, $42.6 million and $45.3 million, respectively. At September 30, 2014, December 31, 2013, and September 30, 2013, the Company’s specific reserve for impaired loans totaled $2.9 million, $1.9 million and $3.4 million, respectively.

 

A summary of the Company’s loans, including their respective regulatory classification and their respective specific reserve at September 30, 2014, were as follows:

 

September 30, 2014

   Pass      Special      Impaired Loans      Total      Specific
Allowance
for
     Allowance
for
Performing
 
      Mention      Substandard      Doubtful         Impairment      Loans  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 142,425         203         5,022         —           147,650         131       $ 1,232   

Home equity line of credit

     33,012         —           806         —           33,818         —           192   

Junior liens

     2,123         40         37         —           2,200         —           16   

Multi-family

     19,466         2,904         2,197         —           24,567         —           104   

Construction

     21,678         —           —           —           21,678         —           160   

Land

     14,380         362         10,819         —           25,561         703         382   

Non-residential real estate

     133,511         5,492         15,174         —           154,177         1,988         1,538   

Farmland

     40,364         516         1,826         —           42,706         2         543   

Consumer loans

     14,554         21         321         —           14,896         74         528   

Commercial loans

     69,320         325         2,204         —           71,849         8         532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 490,833         9,863         38,406         —         $ 539,102         2,906       $ 5,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A summary of the Company’s loans and their respective reserve at December 31, 2013, were as follows:

 

     Pass      Special      Impaired Loans      Total      Specific
Allowance
for
     Allowance
for
Performing
Loans
 
      Mention      Substandard      Doubtful         Impairment     
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 149,351         814         5,087         —           155,252         597         1,451   

Home equity line of credit

     33,462         —           641         —           34,103         —           218   

Junior liens

     3,126         43         79         —           3,248         —           39   

Multi-family

     29,736         —           —           —           29,736         —           466   

Construction

     10,443         —           175         —           10,618         —           88   

Land

     19,899         52         14,730         —           34,681         771         534   

Non-residential real estate

     143,044         515         14,133         —           157,692         465         2,254   

Farmland

     46,042         480         5,346         —           51,868         —           510   

Consumer loans

     10,727         —           440         —           11,167         96         445   

Commercial loans

     61,502         526         2,013         —           64,041         —           748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 507,332         2,430         42,644         —           552,406         1,929         6,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Impaired loans by classification type and the related valuation allowance amounts at September 30, 2014, were as follows:

 

     At September 30, 2014      For the nine month period
ended
September 30, 2014
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

Impaired loans with no recorded reserve:

              

One-to-four family mortgages

   $ 3,746         3,746         —           2,795         141   

Home equity line of credit

     806         806         —           668         28   

Junior liens

     37         37         —           40         2   

Multi-family

     2,197         2,197         —           782         93   

Construction

     —           —           —           39         —     

Land

     7,504         7,504         —           9,391         292   

Farmland

     1,794         1,794         —           4,545         114   

Non-residential real estate

     6,778         6,778         —           7,544         318   

Consumer loans

     26         26         —           31         1   

Commercial loans

     1,804         1,804         —           2,133         101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,692         24,692         —           27,968         1,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with recorded reserve:

  

One-to-four family mortgages

   $ 1,276         1,276         131         1,673         56   

Home equity line of credit

     —           —           —           —           —     

Junior liens

     —           —           —           —           —     

Multi-family

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Land

     3,315         3,315         703         3,482         134   

Farmland

     32         32         2         825         2   

Non-residential real estate

     8,396         8,396         1,988         4,425         74   

Consumer loans

     295         295         74         391         —     

Commercial loans

     400         400         8         133         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,714         13,714         2,906         10,929         283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 38,406         38,406         2,906         38,897         1,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2013, were as follows:

 

     At December 31, 2013      For the Year Ended
December 31, 2013
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
            (Dollars in
thousands)
                      

Impaired loans with no recorded reserve:

              

One-to-four family mortgages

   $ 3,216         3,216         —           2,361         8   

Home equity line of credit

     641         641         —           564         3   

Junior liens

     79         79         —           239         1   

Multi-family

     —           —           —           990         —     

Construction

     175         175         —           1,072         5   

Land

     10,882         12,315         —           10,668         186   

Non-residential real estate

     10,775         10,775         —           6,196         263   

Farmland

     5,346         5,346         —           6,955         149   

Consumer loans

     56         56         —           48         —     

Commercial loans

     2,013         2,013         —           2,391         95   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,183         34,616         —           31,484         710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with recorded reserve:

              

One-to-four family mortgages

   $ 1,871         1,871         597         2,501         9   

Home equity line of credit

     —           —           —           279         —     

Junior liens

     —           —           —           113         —     

Multi-family

     —           —           —           —           —     

Construction

     —           —           —           1,385         —     

Land

     3,848         3,848         771         2,741         29   

Non-residential real estate

     3,358         4,222         465         2,243         111   

Farmland

     —           —           —           1,601         —     

Consumer loans

     384         384         96         401         —     

Commercial loans

     —           —           —           346         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,461         10,325         1,929         11,610         149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 42,644         44,941         1,929         43,094         859   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans of September 30, 2014 and December 31, 2013, by portfolio segment and based on impairment method as of September 30, 2014 and December 31, 2013 (in thousands):

 

     Commercial      Land
Development/
Construction
     Commercial
Real Estate
     Residential
Real Estate
     Consumer      Total  

September 30, 2014:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 8       $ 703       $ 1,991       $ 131       $ 73       $ 2,906   

Collectively evaluated for impairment

     532         542         2,184         1,440         529         5,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 540       $ 1,245       $ 4,175       $ 1,571       $ 602       $ 8,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,204       $ 10,819       $ 19,197       $ 5,865       $ 321       $ 38,406   

Loans collectively evaluated for impairment

     69,645         36,420         202,253         177,803         14,575         500,696   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 71,849       $ 47,239       $ 221,450       $ 183,668       $ 14,896       $ 539,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial      Land
Development/
Construction
     Commercial
Real Estate
     Residential
Real Estate
     Consumer      Total  

December 31, 2013:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —         $ 771       $ 465       $ 597       $ 96       $ 1,929   

Collectively evaluated for impairment

     748         622         3,230         1,708         445         6,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 748       $ 1,393       $ 3,695       $ 2,305       $ 541       $ 8,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,013       $ 14,905       $ 19,479       $ 5,807       $ 440       $ 42,644   

Loans collectively evaluated for impairment

     62,028         30,394         219,817         186,796         10,727         509,762   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 64,041       $ 45,299       $ 239,296       $ 192,603       $ 11,167       $ 552,406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

On a periodic basis, the Bank may modify the terms of certain loans. In evaluating whether a restructuring constitutes a troubled debt restructuring (TDR), Financial Accounting Standards Board has issued Accounting Standards Update 310 (ASU 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In evaluating whether a restructuring constitutes a TDR, the Bank must separately conclude that both of the following exist:

 

    The restructuring constitutes a concession

 

    The debtor is experiencing financial difficulties

ASU 310 provides the following guidance for the Bank’s evaluation of whether it has granted a concession as follows:

 

    If a debtor does not otherwise have access to funds at a market interest rate for debt with similar risk characteristics as the restructured debt, the restructured debt would be considered a below market rate, which may indicate that the Bank may have granted a concession. In that circumstance, the Bank should consider all aspects of the restructuring in determining whether it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a TDR.

 

    A temporary or permanent increase in the interest rate on a loan as a result of a restructuring does not eliminate the possibility of the restructuring from being considered a concession if the new interest rate on the loan is below the market interest rate for loans of similar risk characteristics.

 

    A restructuring that results in a delay in payment that is insignificant is not a concession. However, the Bank must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

 

At December 31, 2013, the Company has no loans classified as TDR’s that are reported as performing on December 31, 2013, respectively. For the nine month period ended September 30, 2014, the Company’s TDR activity is listed below.

 

     Balance at
12/31/13
     New
TDR
     Loss or
Foreclosure
     Removed
Due to
Performance
     Removed
from
(Taken to)
Non-accrual
     Balance at
9/30/14
 

Non-residential real estate

   $  —           10,271         —           —           —           10,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing TDR

   $ —           10,271         —           —           —           10,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real Estate and Other Assets Owned
9 Months Ended
Sep. 30, 2014
Banking and Thrift [Abstract]
 
Real Estate and Other Assets Owned
(6) REAL ESTATE AND OTHER ASSETS OWNED

The Company’s real estate and other assets owned represent properties and personal collateral acquired through customer loan defaults. The property is recorded at the lower of cost or fair value less estimated cost to sell and carrying cost at the date acquired. Any difference between the book value and estimated market value is recognized as a charge off through the allowance for loan loss account. Additional real estate owned and other asset losses may be determined on individual properties at specific intervals or at the time of disposal. In general, the Company will obtain a new appraisal on all real estate owned with a book balance in excess of $250,000 on an annual basis. Additional losses are recognized as a non-interest expense.

At September 30, 2014, December 31, 2013, and September 30, 2013, the Company had balances in other real estate and other assets owned and non-accrual loans consisting of the following:

 

     September 30, 2014     December 31, 2013     September 30, 2013  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 120        350        252   

Land

     1,834        1,124        1,112   

Non-residential real estate

     —          200        73   

Consumer assets

     —          —          2   
  

 

 

   

 

 

   

 

 

 

Total other real estate owned

   $ 1,954        1,674        1,439   
  

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     1,117        10,066        12,128   
  

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 3,071        11,740        13,567   
  

 

 

   

 

 

   

 

 

 

Non-performing assets / Total assets

     0.33     1.21     1.45
  

 

 

   

 

 

   

 

 

 

 

The following is a summary of the activity in the Company’s real estate and other assets owned for the nine month period ending September 30, 2014:

 

     Activity During 2014  
     Balance
12/31/2013
     Foreclosures      Proceeds     Reduction
in Values
    Gain (Loss)
on Sale
    Balance
9/30/2014
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 350         365         (601     (5     11      $ 120   

Land

     1,124         901         (72     (100     (19     1,834   

Non-residential real estate

     200         175         (328     —          (47     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,674         1,441         (1,001     (105     (55   $ 1,954   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of the activity in the Company’s real estate and other assets owned for the year ended December 31, 2013:

 

     Activity During 2013  
     Balance
12/31/2012
     Foreclosures      Proceeds     Reduction
in Values
    Gain (Loss)
on Sale
    Balance
12/31/2013
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 258         1,052         (938     (26     4        350   

Construction

     130         —           (110     (110     90        —     

Land

     1,112         80         —          (68     —          1,124   

Non-residential real estate

     44         240         (60     (11     (13     200   

Consumer assets

     4         7         (5     (4     (2     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,548         1,379         (1,113     (219     79        1,674   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Investments in Affiliated Companies
9 Months Ended
Sep. 30, 2014
Equity Method Investments and Joint Ventures [Abstract]
 
Investments in Affiliated Companies
(7) INVESTMENTS IN AFFILIATED COMPANIES

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust 1 (“Trust”), a wholly-owned statutory business trust. The Trust was formed on September 25, 2003. Summary financial information for the Trust follows (dollars in thousands):

Summary Statements of Financial Condition

 

     At September 30, 2014      At December 31, 2013  

Assets - investment in subordinated debentures issued by HopFed Bancorp, Inc.

   $ 10,310         10,310   
  

 

 

    

 

 

 

Liabilities

     —           —     

Stockholder’s equity – trust preferred securities

     10,000         10,000   

Common stock (100% Owned by HopFed Bancorp, Inc.)

     310         310   
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 10,310       $ 10,310   
  

 

 

    

 

 

 

Summary Statement of Income

 

     Three Month Periods
Ended September 30,
     Nine Month Period
Ended September 30,
 
     2014      2013      2014      2013  

Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.

   $ 88         88       $ 261         264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 88         88       $ 261         264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Summary Statement of Stockholders’ Equity

 

     Trust Preferred
Securities
     Common Stock      Retained
Earnings
    Total
Stockholders’
Equity
 

Beginning balances, December 31, 2013

   $ 10,000         310         —          10,310   

Net income

     —           —           261        261   

Dividends:

          

Trust preferred securities

     —           —           (253     (253

Common paid to HopFed Bancorp, Inc.

     —           —           (8     (8
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balances, September 30, 2014

   $ 10,000         310         —          10,310   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fair Value of Assets and Liabilities
9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]
 
Fair Value of Assets and Liabilities
(8) FAIR VALUE OF ASSETS AND LIABILITIES

ASC 820-10, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

 

    Level 1 is for assets and liabilities that management has obtained quoted prices (unadjusted for transaction cost) or identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

 

    Level 2 is for assets and liabilities in which significant unobservable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

    Level 3 is for assets and liabilities in which significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by a matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without exclusively using quoted prices for the individual securities in the Company’s portfolio but rather by relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments using the fair value of any assigned collateral. The liability associated with the Company’s derivative is obtained from a quoted value supplied by our correspondent banker. The value of real estate owned is obtained from appraisals completed on properties at the time of acquisition and annually thereafter.

 

Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at September 30, 2014, are summarized below:

 

Description

   Total carrying
value in the
consolidated
balance sheet at
September 30, 2014
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

(Dollars in

Thousands)

 

Assets

           

Available for sale securities

   $ 311,685         —           310,196         1,489   

Liabilities

           

Interest rate swap

   $ 485         —           485         —     

The assets and liabilities measured at fair value on a recurring basis at December 31, 2013, are summarized below:

 

Description

   Total carrying
value in the
consolidated
balance sheet at
December 31, 2013
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

(Dollars in

Thousands)

 

Assets

           

Available for sale securities

   $ 318,910         —           317,421         1,489   

Liabilities

           

Interest rate swap

   $ 750         —           750         —     

 

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for September 30, 2014:

 

Description

   Total carrying
value in the
consolidated
balance sheet at
September 30, 2014
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in Thousands)  

Assets

     

Other real estate owned

   $ 1,954         —           —         $ 1,954   

Impaired loans, net of reserve of $2,906

   $ 35,500         —           —         $ 35,500   

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2013:

 

Description

   Total carrying
value in the
consolidated
balance sheet at
December 31, 2013
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in Thousands)  

Assets

           

Other real estate owned

   $ 1,674         —           —         $ 1,674   

Impaired loans, net of reserve of $1,929

   $ 40,715         —           —         $ 40,715   

 

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the nine month periods ended September 30, 2014, and September 30, 2013, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

Nine month period ended September 30,

   2014      2013  
     Other Assets      Other Liabilities      Other Assets      Other Liabilities  
     (Dollars in Thousands)  

Fair value, January 1,

   $ 1,489         —           1,489         —     

Change in unrealized losses included in other comprehensive income for assets and liabilities still held at September 30,

     —           —           —           —     

Purchases, issuances and settlements, net

     —           —           —           —     

Transfers in and/or out of Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value, September 30,

   $ 1,489         —           1,489         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The estimated fair values of financial instruments were as follows at September 30, 2014:

 

     Carrying
Amount
     Estimated
Fair
Value
     Quoted Prices
In Active Markets
for Identical
Assets
Level 1
     Using
Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 
     (Dollars in Thousands)  

Financial assets:

              

Cash and due from banks

   $ 18,673         18,673       $ 18,673         —           —     

Interest-earning deposits

     16,712         16,712         16,712         —           —     

Securities available for sale

     311,685         311,685         —           310,196         1,489   

Federal Home Loan Bank Stock

     4,428         4,428         —           4,428         —     

Loans held for sale

     483         483         —           —           483   

Loans receivable

     530,759         529,363         —           —           529,363   

Accrued interest receivable

     4,659         4,659         —           4,659         —     

Financial liabilities:

              

Deposits

     728,226         712,658         —           712,658         —     

Advances from borrowers for taxes and insurance

     849         849         —           849         —     

Advances from Federal Home Loan Bank

     40,269         42,582         —           42,582         —     

Repurchase agreements

     46,329         46,684         —           46,684         —     

Subordinated debentures

     10,310         10,091         —           —           10,091   

Off-balance-sheet liabilities:

              

Commitments to extend credit

     —           —              

Commercial letters of credit

     —           —              

Market value of interest rate swap

     485         485         —           485         —     

 

The estimated fair values of financial instruments were as follows at December 31, 2013:

 

     Carrying
Amount
     Estimated
Fair
Value
     Quoted Prices
In Active Markets
for Identical
Assets
Level 1
     Using
Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 
     (Dollars in Thousands)  

Financial assets:

  

Cash and due from banks

   $ 37,229         37,229       $ 37,229         —           —     

Interest-earning deposits

     18,619         18,619         18,619         —           —     

Securities available for sale

     318,910         318,910         —           317,421         1,489   

Federal Home Loan Bank stock

     4,428         4,428         —           4,428         —     

Loans receivable

     543,632         546,319         —           —           546,319   

Accrued interest receivable

     5,233         5,233         —           5,233         —     

Financial liabilities:

              

Deposits

     762,997         763,605         —           763,605         —     

Advances from borrowers for taxes and insurance

     521         521         —           521         —     

Advances from Federal Home Loan Bank

     46,780         51,010         —           51,010         —     

Repurchase agreements

     52,759         53,712         —           53,712         —     

Subordinated debentures

     10,310         10,099         —           —           10,099   

Off-balance-sheet liabilities:

                 —     

Commitments to extend credit

     —           —           —           —           —     

Commercial letters of credit

     —           —           —           —           —     

Market value of interest rate swap

     750         750         —           750         —     

Stock Options
9 Months Ended
Sep. 30, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Stock Options
(9) STOCK OPTIONS

At September 30, 2014, all stock options outstanding were issued under the HopFed Bancorp, Inc. 1999 Stock Option Plan and have expired.

Derivative Instruments
9 Months Ended
Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]
 
Derivative Instruments
(10) DERIVATIVE INSTRUMENTS

Under guidelines of Financial Accounting Standards Board (“FASB”) ASC 815, Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated statement of financial position. ASC 815 provides special hedge accounting provisions, which permit the change in fair value of the hedge item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

A derivative instrument designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under ASC 815. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the consolidated statement of financial position with corresponding offsets recorded in the consolidated statement of financial position.

The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. ASC 815 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the nine month period ended September 30, 2014, or the year ended December 31, 2013.

 

In October of 2008, the Bank entered into an interest rate swap agreement for a term of seven years and an amount of $10.0 million. The Bank will pay a fixed rate of 7.27% for seven years and receive an amount equal to the three-month London Interbank Lending Rate (LIBOR) plus 3.10%. The interest rate swap is classified as a cash flow hedge by the Bank and will be tested quarterly for effectiveness. At September 30, 2014, and December 31, 2013, the cost of the Bank to terminate the cash flow hedge was approximately $485,000 and $750,000, respectively.

Regulatory Changes
9 Months Ended
Sep. 30, 2014
Banking and Thrift [Abstract]
 
Regulatory Changes
(11) REGULATORY CHANGES

On June 5, 2013, the Company announced that its wholly owned subsidiary, Heritage Bank, has completed its conversion from a federally chartered savings and loan to a state chartered commercial bank regulated by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation. In connection with the Bank’s charter conversion, the Company has received approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to convert our holding company from a savings and loan holding company to a bank holding company also with an effective date of June 5, 2013.

On July 2, 2013, the Board of Governors of the Federal Reserve Bank approved the final rule for BASEL III capital requirements for all commercial banks charted in the United States of America. The rule was subsequently approved by the FDIC on July 9, 2013. The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. The transition period for implementation of Basel III is January 1, 2015, through December 31, 2018. The Company is currently evaluating the impact of Basel III on our financial statements.

Effect of New Accounting Pronouncements
9 Months Ended
Sep. 30, 2014
Accounting Changes and Error Corrections [Abstract]
 
Effect of New Accounting Pronouncements
(12) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on January 1, 2013, and did not have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. These amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of residential foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures about such activities are required by these amendments. The amendments in this ASU become effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2014, and early adoption is permitted. The Company is assessing the impact that these amendments will have on its financial position and results of operations, but does not currently anticipate that it will have a material impact.

On June 12, 2014, the FASB issued ASU 2014-11, which makes limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements (“repos”). ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings.

ASU 2014-11 also amends ASC 860 to clarify that repos and securities lending transactions that do not meet all of the de-recognition criteria in ASC 860-10-40-5 should be accounted for as secured borrowings. In addition, the ASU provides examples of repurchase and securities lending arrangements that illustrate whether a transferor has maintained effective control over the transferred financial assets. For public business entities, the accounting changes are effective for the first interim or annual period beginning after December 15, 2014. The Company is assessing the impact that these amendments will have on its financial position and results of operations.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Income Taxes
9 Months Ended
Sep. 30, 2014
Income Tax Disclosure [Abstract]
 
Income Taxes
(13) Income Taxes

The Company and its subsidiaries file consolidated federal income tax returns and Tennessee excise tax returns. The Company and its non-bank subsidiaries filed consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has accrued any interest or penalties for uncertain tax positions.

The effective tax rate differs from the statutory federal rate of 35% and Tennessee excise rate of 6.50% due to investments in qualified municipal securities, bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses.

Subsequent Event
9 Months Ended
Sep. 30, 2014
Subsequent Events [Abstract]
 
Subsequent Event
(14) Subsequent Event

The Company issued a press release on October 31, 2014 announcing that its Board of Directors approved the commencement of a new stock repurchase program of up to 300,000 shares of the Company’s common stock. Furthermore, the Company may purchase up to 1 million shares of common stock that may be used a later date for general corporate purposes and employee benefit plans.

In September 2013, the Company’s Board authorized a 375,000 share repurchase program. At October 29, 2014, the Company had 38,494 shares remaining under this plan. The Company intends to complete the current repurchase program before repurchasing shares under the new program.

The Company will conduct repurchases through various means, including, without limitation, open market transactions or in privately negotiated transactions that may be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. The share repurchase program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

Loans (Policies)
9 Months Ended
Sep. 30, 2014
Accounting Changes and Error Corrections [Abstract]
 
Troubled Debt Restructuring
Fair Value Measurement and Disclosures
Derivative Instruments and Hedging Activities
Comprehensive Income
Receivables-Troubled Debt Restructurings by Creditors
Repurchase Agreements

On a periodic basis, the Bank may modify the terms of certain loans. In evaluating whether a restructuring constitutes a troubled debt restructuring (TDR), Financial Accounting Standards Board has issued Accounting Standards Update 310 (ASU 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In evaluating whether a restructuring constitutes a TDR, the Bank must separately conclude that both of the following exist:

 

    The restructuring constitutes a concession

 

    The debtor is experiencing financial difficulties

ASU 310 provides the following guidance for the Bank’s evaluation of whether it has granted a concession as follows:

 

    If a debtor does not otherwise have access to funds at a market interest rate for debt with similar risk characteristics as the restructured debt, the restructured debt would be considered a below market rate, which may indicate that the Bank may have granted a concession. In that circumstance, the Bank should consider all aspects of the restructuring in determining whether it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a TDR.

 

    A temporary or permanent increase in the interest rate on a loan as a result of a restructuring does not eliminate the possibility of the restructuring from being considered a concession if the new interest rate on the loan is below the market interest rate for loans of similar risk characteristics.

 

    A restructuring that results in a delay in payment that is insignificant is not a concession. However, the Bank must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

ASC 820-10, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

 

    Level 1 is for assets and liabilities that management has obtained quoted prices (unadjusted for transaction cost) or identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

 

    Level 2 is for assets and liabilities in which significant unobservable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

    Level 3 is for assets and liabilities in which significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by a matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without exclusively using quoted prices for the individual securities in the Company’s portfolio but rather by relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments using the fair value of any assigned collateral. The liability associated with the Company’s derivative is obtained from a quoted value supplied by our correspondent banker. The value of real estate owned is obtained from appraisals completed on properties at the time of acquisition and annually thereafter.

Under guidelines of Financial Accounting Standards Board (“FASB”) ASC 815, Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated statement of financial position. ASC 815 provides special hedge accounting provisions, which permit the change in fair value of the hedge item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

A derivative instrument designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under ASC 815. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the consolidated statement of financial position with corresponding offsets recorded in the consolidated statement of financial position.

The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. ASC 815 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the nine month period ended September 30, 2014, or the year ended December 31, 2013.

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on January 1, 2013, and did not have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. These amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of residential foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures about such activities are required by these amendments. The amendments in this ASU become effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2014, and early adoption is permitted. The Company is assessing the impact that these amendments will have on its financial position and results of operations, but does not currently anticipate that it will have a material impact.

On June 12, 2014, the FASB issued ASU 2014-11, which makes limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements (“repos”). ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings.

ASU 2014-11 also amends ASC 860 to clarify that repos and securities lending transactions that do not meet all of the de-recognition criteria in ASC 860-10-40-5 should be accounted for as secured borrowings. In addition, the ASU provides examples of repurchase and securities lending arrangements that illustrate whether a transferor has maintained effective control over the transferred financial assets. For public business entities, the accounting changes are effective for the first interim or annual period beginning after December 15, 2014. The Company is assessing the impact that these amendments will have on its financial position and results of operations.

Income Per Share (Tables)
9 Months Ended
Sep. 30, 2014
Earnings Per Share [Abstract]
 
Reconciliation of Basic and Diluted Income Per Share
Reconciliation of Basic and Diluted Income Per Share

The following schedule reconciles the numerators and denominators of the basic and diluted income per share (“IPS”) computations for the three and nine month periods ended September 30, 2014, and September 30, 2013. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrant outstanding.

 

     Three Month Periods Ended  
     September 30,  
                 2014                              2013              

Basic IPS:

     

Net income available to common stockholders

   $ 1,953,000       $ 536,000   

Average common shares outstanding

     7,265,597         7,483,582   
  

 

 

    

 

 

 

Net income per share available to common shareholders, basic

   $ 0.27       $ 0.07   
  

 

 

    

 

 

 

Diluted IPS

     

Net income available to common stockholders

   $ 1,953,000       $ 536,000   

Average common shares outstanding

     7,265,597         7,483,582   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     7,265,597         7,483,582   
  

 

 

    

 

 

 

Net income per share available to common shareholders, diluted

   $ 0.27       $ 0.07   
  

 

 

    

 

 

 

 

     Nine Month Periods Ended  
     September 30,  
                 2014                              2013              

Basic IPS:

     

Net income available to common stockholders

   $ 3,232,000       $ 2,686,000   

Average common shares outstanding

     7,348,708         7,483,606   
  

 

 

    

 

 

 

Net income per share available to common shareholders, basic

   $ 0.44       $ 0.36   
  

 

 

    

 

 

 

Diluted IPS

     

Net income available to common stockholders

   $ 3,232,000       $ 2,686,000   

Average common shares outstanding

     7,348,708         7,483,606   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     7,348,708         7,483,606   
  

 

 

    

 

 

 

Net income per share available to common shareholders, diluted

   $ 0.44       $ 0.36   
  

 

 

    

 

 

 
Stock Compensation (Tables)
9 Months Ended
Sep. 30, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Company's Future Compensation Expense Related to Restricted Stock Vesting
Company's Future Compensation Expense Related to Restricted Stock Vesting

The Company issued 21,559 shares of restricted stock during the nine- month period ended September 30, 2013. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at September 30, 2014:

 

Year Ending December 31,

   Future
Expense
 

2014

   $ 49,193   

2015

     185,810   

2016

     132,780   

2017

     45,954   
  

 

 

 

Total

   $ 413,737   
  

 

 

 

Securities (Tables)
9 Months Ended
Sep. 30, 2014
Cash and Cash Equivalents [Abstract]
 
Amortized Cost of Securities and their Estimated Fair Values
Maturities of Debt Securities Available for Sale
Estimated Fair Value and Unrealized Loss Amounts of Impaired Investments

At September 30, 2014, the Company has 88 securities with unrealized losses. The carrying amount of securities and their estimated fair values at September 30, 2014, were as follows:

 

     September 30, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 
     (Dollars in Thousands)  

Restricted:

          

FHLB stock

   $ 4,428         —           —          4,428   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available for sale securities:

          

U.S. Treasury securities

   $ 3,975         —           (5     3,970   

U.S. Agency debt securities

     111,696         1,907         (1,050     112,553   

Corporate bonds

     2,000         19         —          2,019   

Taxable municipal bonds

     12,743         245         (158     12,830   

Tax free municipal bonds

     58,930         3,722         (191     62,461   

Trust preferred securities

     1,600         —           (111     1,489   

Mortgage-backed securities:

          

GNMA

     26,110         620         (146     26,584   

FNMA

     55,770         565         (881     55,454   

FHLMC

     3,277         39         (13     3,303   

SLMA CMOs

     10,025         —           (144     9,881   

AGENCY CMOs

     21,283         149         (291     21,141   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 307,409         7,266         (2,990     311,685