HOPFED BANCORP INC (HFBC) Form 10-K for Period Ending 12/31/2014
: 6.22.4
 
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Mar. 3, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
   
Document Type
10-K 
  
Amendment Flag
false 
  
Document Period End Date
Dec. 31, 2014 
  
Document Fiscal Year Focus
2014 
  
Document Fiscal Period Focus
FY 
  
Trading Symbol
HFBC 
  
Entity Registrant Name
HOPFED BANCORP INC 
  
Entity Central Index Key
0001041550 
  
Current Fiscal Year End Date
--12-31 
  
Entity Well-known Seasoned Issuer
No 
  
Entity Current Reporting Status
Yes 
  
Entity Voluntary Filers
No 
  
Entity Filer Category
Accelerated Filer 
  
Entity Common Stock, Shares Outstanding
 
7,149,439 
 
Entity Public Float
  
$ 82,312,675 
Consolidated Balance Sheets (USD $)
Dec. 31, 2014
Dec. 31, 2013
Assets
  
Cash and due from banks
$ 34,389,000 
$ 37,229,000 
Interest-earning deposits
6,050,000 
18,619,000 
Cash and cash equivalents
40,439,000 
55,848,000 
Federal Home Loan Bank stock, at cost
4,428,000 
4,428,000 
Securities available for sale
303,628,000 
318,910,000 
Loans held for sale
1,444,000 
 
Loans receivable, net of allowance for loan losses of $6,289 at December 31, 2014, and $8,682 at December 31, 2013
539,264,000 
543,632,000 
Accrued interest receivable
4,576,000 
5,233,000 
Real estate and other assets owned
1,927,000 
1,674,000 
Bank owned life insurance
9,984,000 
9,677,000 
Premises and equipment, net
22,940,000 
23,108,000 
Deferred tax assets
2,261,000 
4,610,000 
Intangible asset
33,000 
130,000 
Other assets
4,861,000 
6,399,000 
Total assets
935,785,000 
973,649,000 
Deposits:
  
Non-interest-bearing accounts
115,051,000 
105,252,000 
Interest-bearing accounts:
  
Interest bearing checking accounts
186,616,000 
183,643,000 
Savings and money market accounts
97,726,000 
92,106,000 
Other time deposits
331,915,000 
381,996,000 
Total deposits
731,308,000 
762,997,000 
Advances from Federal Home Loan Bank
34,000,000 
46,780,000 
Repurchase agreements
57,358,000 
52,759,000 
Subordinated debentures
10,310,000 
10,310,000 
Advances from borrowers for taxes and insurance
513,000 
521,000 
Dividends payable
301,000 
326,000 
Accrued expenses and other liabilities
3,593,000 
4,239,000 
Total liabilities
837,383,000 
877,932,000 
Stockholders' equity
  
Preferred stock, par value $0.01 per share; authorized-500,000 shares; no shares issued or outstanding at December 31, 2014, and December 31, 2013.
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,949,665 issued and 7,171,282 outstanding at December 31, 2014, and 7,927,287 issued and 7,447,903 outstanding at December 31, 2013
79,000 
79,000 
Additional paid-in-capital
58,466,000 
58,302,000 
Retained earnings
45,729,000 
44,694,000 
Treasury stock
(9,429,000)
(5,929,000)
Accumulated other comprehensive income (loss), net of taxes
3,557,000 
(1,429,000)
Total stockholders' equity
98,402,000 
95,717,000 
Total liabilities and stockholders' equity
935,785,000 
973,649,000 
Commitments and contingencies
   
   
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
  
Loans receivable, allowance for loan losses
$ 6,289 
$ 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
7,171,282 
7,447,903 
Treasury stock, shares
778,383 
479,384 
Consolidated Statements of Income (USD $)
12 Months Ended
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Interest and dividend income
   
Loans receivable
$ 26,025 
$ 26,741 
$ 29,828 
Securities available for sale
6,548 
6,873 
8,722 
Nontaxable securities available for sale
2,081 
2,219 
2,266 
Interest-earning deposits
26 
24 
24 
Total interest and dividend income
34,680 
35,857 
40,840 
Interest expense:
   
Deposits
5,603 
7,114 
10,571 
Advances from Federal Home loan Bank
1,665 
1,780 
2,609 
Repurchase agreements
874 
954 
963 
Subordinated debentures
737 
733 
734 
Total interest expense
8,879 
10,581 
14,877 
Net interest income
25,801 
25,276 
25,963 
Provision for loan losses
(2,273)
1,604 
2,275 
Net interest income after provision for loan losses
28,074 
23,672 
23,688 
Non-interest income:
   
Other-than-temporary impairment losses on debt securities
 
(511)
 
Portion of losses recognized in other comprehensive income
 
111 
 
Net impairment losses recognized in earnings
 
(400)
 
Service charges
3,354 
3,670 
3,840 
Merchant card income
1,075 
983 
842 
Mortgage origination income
719 
634 
956 
Realized gain from sale of securities available for sale, net
578 
1,661 
1,671 
Income from bank owned life insurance
307 
354 
399 
Financial services commission
980 
1,250 
1,071 
Gain on sale of assets
 
412 
 
Other operating income
827 
808 
860 
Total non-interest income
7,840 
9,372 
9,639 
Non-interest expenses:
   
Salaries and benefits
15,222 
14,733 
13,979 
Occupancy expense
3,217 
3,475 
3,531 
Data processing expense
2,887 
2,695 
2,494 
Franchise and deposit tax
1,336 
581 
647 
Intangible amortization
97 
162 
227 
Professional services
1,331 
1,773 
1,605 
Advertising expense
1,341 
1,236 
1,357 
Postage and communications expense
577 
567 
562 
Supplies expense
627 
495 
355 
Deposit insurance and examination fees
724 
727 
1,539 
Loss on sale of assets
25 
12 
13 
Loss (gain) on sale of real estate owned
208 
140 
266 
Expenses related to real estate owned
266 
402 
123 
Loss on sale of loan note
1,781 
  
Loss on early debt extinguishment
2,510 
  
Other operating expenses
1,767 
1,640 
1,743 
Total non-interest expense
33,916 
28,638 
28,441 
Income (loss) before income tax expense
1,998 
4,406 
4,886 
Income tax expense
(201)
644 
817 
Net income
2,199 
3,762 
4,069 
Less: Dividend on preferred shares
  
1,007 
Accretion dividend on preferred shares
  
222 
Net income available for common shareholders
$ 2,199 
$ 3,762 
$ 2,840 
Earnings per share available to common stockholders
   
Basic
$ 0.30 
$ 0.50 
$ 0.38 
Fully diluted
$ 0.30 
$ 0.50 
$ 0.38 
Weighted average shares outstanding - basic
7,306,078 
7,483,606 
7,486,445 
Weighted average shares outstanding - diluted
7,306,078 
7,483,606 
7,486,445 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
   
Net income
$ 2,199 
$ 3,762 
$ 4,069 
Other comprehensive income (loss), net of tax:
   
Unrealized holding gain (loss) arising during the year, net of tax effect
5,130 
(10,568)
3,348 
Unrealized gain (loss) on derivatives
237 
248 
113 
Reclassification adjustment for gains and OTTI losses included in net income
(381)
(832)
(1,104)
Comprehensive income (loss)
$ 7,185 
$ (7,390)
$ 6,426 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Preferred Stock [Member]
Common Stock Warrants [Member]
Additional Paid In Capital [Member]
Retained Earnings [Member]
Treasury Stock Preferred [Member]
Treasury Stock Common [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Beginning balance at Dec. 31, 2011
$ 118,483 
$ 79 
 
$ 556 
$ 75,967 
$ 39,591 
 
$ (5,076)
$ 7,366 
Beginning balance, Shares at Dec. 31, 2011
 
7,492,420 
18,400 
      
Net income
4,069 
    
4,069 
   
Restricted stock awards
Restricted stock awards, shares
 
10,392 
       
Net change in unrealized gain (losses) on securities available for sale, net of taxes
2,244 
       
2,244 
Net change in unrealized gain (losses) on derivatives, net of taxes
113 
       
113 
Preferred stock dividend of 5%
(1,007)
    
(1,007)
   
Cash dividend to common stockholders'
(602)
    
(602)
   
Common stock repurchase
(18,400)
     
(18,400)
  
Compensation expense, restricted stock awards
99 
   
99 
    
Accretion of preferred stock discount
    
222 
(222)
   
Ending balance at Dec. 31, 2012
104,999 
79 
 
556 
76,288 
41,829 
(18,400)
(5,076)
9,723 
Ending balance, Shares at Dec. 31, 2012
 
7,502,812 
18,400 
      
Net income
3,762 
    
3,762 
   
Restricted stock awards
Restricted stock awards, shares
 
21,559 
       
Net change in unrealized gain (losses) on securities available for sale, net of taxes
(11,400)
       
(11,400)
Net change in unrealized gain (losses) on derivatives, net of taxes
248 
       
248 
Preferred stock retired
    
(18,400)
 
18,400 
  
Preferred stock retired, shares
  
(18,400)
      
Cash dividend to common stockholders'
(897)
    
(897)
   
Common stock repurchase
(853)
      
(853)
 
Common stock repurchase, shares
 
(76,468)
       
Cash repurchase of warrant
(257)
  
(556)
299 
    
Compensation expense, restricted stock awards
115 
   
115 
    
Ending balance at Dec. 31, 2013
95,717 
79 
  
58,302 
44,694 
 
(5,929)
(1,429)
Ending balance, Shares at Dec. 31, 2013
 
7,447,903 
       
Net income
2,199 
    
2,199 
   
Restricted stock awards
Restricted stock awards, shares
 
22,378 
       
Net change in unrealized gain (losses) on securities available for sale, net of taxes
4,749 
       
4,749 
Net change in unrealized gain (losses) on derivatives, net of taxes
237 
       
237 
Cash dividend to common stockholders'
(1,164)
    
(1,164)
   
Common stock repurchase
(3,500)
      
(3,500)
 
Common stock repurchase, shares
 
(298,999)
       
Compensation expense, restricted stock awards
164 
   
164 
    
Ending balance at Dec. 31, 2014
$ 98,402 
$ 79 
  
$ 58,466 
$ 45,729 
 
$ (9,429)
$ 3,557 
Ending balance, Shares at Dec. 31, 2014
 
7,171,282 
       
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) (USD $)
12 Months Ended
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Net change in unrealized gain on securities available for sale, net of income taxes
$ 2,446 
$ 5,873 
$ (1,156)
Net change in unrealized loss on derivatives, net of income tax benefit
(122)
(128)
(58)
Preferred stock dividend
  
5.00% 
Cash dividend to common stockholders'
$ 0.16 
$ 0.12 
$ 0.08 
Retained Earnings [Member]
   
Preferred stock dividend
  
5.00% 
Cash dividend to common stockholders'
$ 0.16 
$ 0.12 
$ 0.08 
Accumulated Other Comprehensive Income (Loss) [Member]
   
Net change in unrealized gain on securities available for sale, net of income taxes
2,446 
5,873 
(1,156)
Net change in unrealized loss on derivatives, net of income tax benefit
$ (122)
$ (128)
$ (58)
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
   
Net income
$ 2,199 
$ 3,762 
$ 4,069 
Adjustments to reconcile net income to net cash provided by operating activities:
   
Provision for loan losses
(2,273)
1,604 
2,275 
Depreciation
1,336 
1,502 
1,587 
Amortization of intangible assets
97 
162 
227 
Amortization of investment premiums and discounts, net
2,076 
2,561 
3,327 
Other than temporary impairment charge on available for sale securities
 
400 
 
Expense (benefit) for deferred income taxes
(231)
566 
487 
Compensation expense, restricted stock grants and options
164 
115 
99 
Income from bank owned life insurance
(307)
(354)
(399)
Gain on sale of securities available for sale
(578)
(1,661)
(1,671)
Gain on sales of loans
(719)
(634)
(956)
Loss on sale of commercial real estate loan
1,781 
  
Loss on sale of premises and equipment
25 
12 
13 
Proceeds from sales of loans
37,300 
17,577 
48,705 
(Gain) loss on sale of foreclosed assets
208 
140 
266 
Originations of loans sold
(32,835)
(16,943)
(47,749)
(Increase) decrease in:
   
Accrued interest receivable
657 
165 
785 
Other assets (increase)
1,513 
171 
(815)
Increase (decrease) in accrued expenses and other liabilities
(277)
170 
(911)
Net cash (used in) provided by operating activities
10,136 
9,315 
9,339 
Cash flows from investing activities
   
Proceeds from sales, calls and maturities of securities available for sale
112,235 
124,471 
143,434 
Purchase of securities available for sale
(91,257)
(105,605)
(114,253)
Net (increase) decrease in loans
(1,908)
(21,630)
26,815 
Proceeds from sale of foreclosed assets
1,118 
908 
2,738 
Proceeds from bank owned life insurance
  
211 
Purchase of premises and equipment
(1,168)
(2,473)
(726)
Net cash provided by (used in) investing activities
19,020 
(4,329)
58,219 
Cash flows from financing activities:
   
Net increase (decrease) in deposits
(31,689)
3,132 
(40,230)
Increase (decrease) in advance payments by borrowers for taxes and insurance
(8)
125 
243 
Advances from Federal Home Loan Bank
57,000 
23,000 
3,000 
Repayment of advances from Federal Home Loan Bank
(69,780)
(19,961)
(22,578)
Increase in repurchase agreements
4,599 
9,251 
428 
Repurchase of preferred stock
  
(18,400)
Repurchase of common stock
(3,500)
(853)
 
Repurchase of common stock warrant
 
(257)
 
Dividends paid on preferred stock
  
(1,007)
Dividends paid on common stock
(1,187)
(751)
(598)
Net cash provided by (used in) financing activities
(44,565)
13,686 
(79,142)
Increase (decrease) in cash and cash equivalents
(15,409)
18,672 
(11,584)
Cash and cash equivalents, beginning of period
55,848 
37,176 
48,760 
Cash and cash equivalents, end of period
40,439 
55,848 
37,176 
Supplemental disclosures of cash flow information:
   
Interest paid
8,977 
10,840 
15,331 
Income taxes paid (refund)
(718)
(487)
1,990 
Supplemental disclosures of non-cash investing and financing activities:
   
Loans charged off
1,232 
4,444 
3,684 
Loan transferred to held for sale
6,987 
  
Foreclosures and in substance foreclosures of loans during year
1,579 
1,379 
2,285 
Net unrealized gains (losses) on investment securities classified as available for sale
7,195 
(17,273)
3,400 
Increase (decrease) in deferred tax asset related to unrealized gain (losses) on investments
(2,446)
5,873 
(1,156)
Dividends declared and payable
301 
325 
180 
Issue of unearned restricted stock
$ 260 
$ 232 
$ 74 
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]
 
Summary of Significant Accounting Policies
(1) Summary of Significant Accounting Policies:

Nature of Operations and Customer Concentration

HopFed Bancorp, Inc. (the Corporation) is a bank holding company incorporated in the state of Delaware and headquartered in Hopkinsville, Kentucky. The Corporation’s principal business activities are conducted through it’s wholly-owned subsidiary, Heritage Bank USA, Inc. (the Bank), a Kentucky state chartered commercial bank engaged in the business of accepting deposits and providing mortgage, consumer, construction and commercial loans to the general public through its retail banking offices. The Bank’s business activities are primarily limited to western Kentucky and middle and western Tennessee. The Bank is subject to competition from other financial institutions. Deposits at the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC).

As part of the enactment of the Dodd-Frank Financial Reform Act of 2010, the Corporation and Bank’s former regulator, the Office of Thrift Supervision, was eliminated on July 21, 2011. Prior to June 5, 2013, the Bank was subject to comprehensive regulation, examination and supervision by the Office of Comptroller of the Currency (OCC) and the FDIC. After June 5, 2013, the Bank’s legal name was changed to Heritage Bank USA, Inc. and the Bank was granted a Kentucky commercial bank charter and is now supervised by the Kentucky Department of Financial Institutions (“KDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). Supervision of the Corporation continues to be conducted by the Federal Reserve Bank of Saint Louis (“FED”).

A substantial portion of the Bank’s loans are secured by real estate in the western Kentucky and middle and west Tennessee markets. In addition, foreclosed real estate is located in this same market. Accordingly, the ultimate ability to collect on a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate is susceptible to changes in local market conditions.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and its wholly-owned subsidiary Fall & Fall Insurance (collectively the Company) for all periods. The Company sold all significant assets of Fall & Fall on December 31, 2013, to an unrelated third party. Significant inter-company balances and transactions have been eliminated in consolidation.

Accounting

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices in the banking industry.

 

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE) under accounting principles generally accepted in the United States. Voting interest entities in which the total equity investment is a risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decision about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIE’s are entities in which it has all, or at least a majority of, the voting interest. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The subsidiaries, HopFed Capital Trust I and Fort Webb LP, LLC are VIEs for which the Company is not the primary beneficiary. Accordingly, these accounts are not included in the Company’s consolidated financial statements.

The Company has evaluated subsequent events for potential impact and disclosure through the issue date of these consolidated financial statements.

Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and revenues and expenses for each year. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant collateral.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand, amounts due on demand from commercial banks, interest-earning deposits in other financial institutions and federal funds sold with maturities of three months or less.

Securities

The Company reports debt, readily-marketable equity, mortgage-backed and mortgage related securities in one of the following categories: (i) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (ii) “available for sale” (all other debt, equity, mortgage-backed and mortgage related securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax as a separate component of stockholders’ equity. At the time of new security purchases, a determination is made as to the appropriate classification. Realized and unrealized gains and losses on trading securities are included in net income. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders’ equity, net of any tax effect. Cost of securities sold is recognized using the specific identification method.

 

Interest income on securities is recognized as earned. The Company purchases many agency bonds at either a premium or discount to its par value. Premiums and discounts on agency bonds are amortized using the net interest method. For callable bonds purchased at a premium, the premium is amortized to the first call date. If the bond is not called on that date, the premium is fully amortized and the Company recognizes an increase in the net yield of the investment. The Company has determined that callable bonds purchased at a premium have a high likelihood of being called, and the decision to amortize premiums to their first call is a more conservative method of recognizing income and any variance from amortizing to contractual maturity is not material to the consolidated financial statements. For agency bonds purchased at a discount, the discount is accreted to the final maturity date. For callable bonds purchased at discount and called before maturity, the Company recognizes a gain on the sale of securities. The Company amortizes premiums and accretes discounts on mortgage back securities and collateralized mortgage obligations based on the securities three month average prepayment speed.

Other Than Temporary Impairment

A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount to fair value. To determine whether impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the security by reviewing the present value of the future cash flows associated with the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss. If a credit loss is identified, management then considers whether it is more-likely-than-not that the Company will be required to sell the security prior to recovery. If management concludes that it is not more-likely-than-not that it will be required to sell the security, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity. If the security is determined to be other-than-temporarily impaired, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established.

Other Securities

Other securities which are not actively traded and may be restricted, such as Federal Home Loan Bank (FHLB) stock are recognized at cost, as the value is not considered impaired.

Loans Receivable

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and deferred loan cost. The Statement of Financial Accounting Standards ASC 310-20, Nonrefundable Fees and Other Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan.

 

Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The Company charges off loans after, in management’s opinion, the collection of all or a large portion of the principal or interest is not collectable. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received while the loan is classified as non-accrual, when the loan is ninety days past due. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.

The Company provides an allowance for loan losses and includes in operating expenses a provision for loan losses determined by management. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management’s estimate of the adequacy of the allowance for loan loss can be classified as either a reserve for currently classified loans or estimates of future losses in the current loan portfolio.

Loans are considered to be impaired when, in management’s judgment, principal or interest is not collectible according to the contractual terms of the loan agreement. When conducting loan evaluations, management considers various factors such as historical loan performance, the financial condition of the borrower and adequacy of collateral to determine if a loan is impaired. Impaired loans and loans classified as Troubled Debt Restructurings (“TDR’s”) may be classified as either substandard or doubtful and reserved for based on individual loans risk for loss. Loans not considered impaired may be classified as either special mention or watch and may have an allowance established for it. Typically, unimpaired classified loans exhibit some form of weakness in either industry trends, collateral, or cash flow that result in a default risk greater than that of the Company’s typical loan. All classified amounts include all unpaid interest and fees as well as the principal balance outstanding.

The measurement of impaired loans generally may be based on the present value of future cash flows discounted at the historical effective interest rate. However, the majority of the Company’s problem loans become collateral dependent at the time they are judged to be impaired. Therefore, the measurement of impaired requires the Company to obtain a new appraisal to obtain the fair value of the collateral. The appraised value is then discounted to an estimated of the Company’s net realizable value, reducing the appraised value by the amount of holding and selling cost. When the measured amount of an impaired loan is less than the recorded investment in the loan, the impairment is recorded as a charge to income and a valuation allowance, which is included as a component of the allowance for loan losses. For loans not individually evaluated, management considers the Company’s recent charge off history, the Company’s current past due and non-accrual trends, banking industry trends and both local and national economic conditions when making an estimate as to the amount to reserve for losses. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment.

 

Fixed Rate Mortgage Originations

The Company operates a mortgage division that originates mortgage loans in the name of assorted investors, including Federal Home Loan Mortgage Corporation (Freddie Mac). Originations for Freddie Mac are sold through the Bank while originations to other investors are processed for a fee. On a limited basis, loans sold to Freddie Mac may result in the Bank retaining loan servicing rights. In recent years, customers have chosen lower origination rates over having their loan locally serviced; thereby limiting the amount of new loans sold with servicing retained. At December 31, 2014, the Bank maintained a servicing portfolio of one to four family real estate loans of approximately $25.0 million. For the years ended December 31, 2014, December 31, 2013, and December 31, 2012, the Bank has reviewed the value of the servicing asset as well as the operational cost associated with servicing the portfolio. The Bank has determined that the values of its servicing rights are not material to the Company’s consolidated financial statements.

Real Estate and Other Assets Owned

Assets acquired through, or in lieu of, loan foreclosure or repossession carried at the lower of cost or fair value less selling expenses. Costs of improving the assets are capitalized, whereas costs relating to holding the property are expensed. Management conducts periodic valuations (no less than annually) and any adjustments to value are recognized in the current period’s operations.

Brokered Deposits

The Company may choose to attract deposits from several sources, including using outside brokers to assist in obtaining time deposits using national distribution channels. Brokered deposits offer the Company an alternative to Federal Home Loan Bank advances and local retail time deposits.

Repurchase Agreements

The Company sells investments from its portfolio to business and municipal customers with a written agreement to repurchase those investments on the next business day. The repurchase product gives business customers the opportunity to earn income on liquid cash reserves. These funds are overnight borrowings of the Company secured by Company assets and are not FDIC insured.

Revenue Recognition

Mortgage loans held for sale are generally delivered to secondary market investors under best efforts sales commitments entered into prior to the closing of the individual loan. Loan sales and related gains or losses are recognized at settlement. Loan fees earned for the servicing of secondary market loans are recognized as earned.

Interest income on loans receivable is reported on the interest method. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired, placed in non-accrual status, or payments are past due more than 90 days. Interest earned as reported as income is reversed on any loans classified as non-accrual or past due more than 90 days. Interest may continue to accrue on loans over 90 days past due if they are well secured and in the process of collection.

 

Income Taxes

Income taxes are accounted for through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company files its federal and Kentucky income tax returns as well as its Kentucky and Tennessee franchise and excise tax returns on a consolidated basis with its subsidiaries. All taxes are accrued on a separate entity basis.

Operating Segments

The Company’s continuing operations include one primary segment, retail banking. The retail banking segment involves the origination of commercial, residential and consumer loans as well as the collections of deposits in eighteen branch offices.

Premises and Equipment

Land, land improvements, buildings, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and land improvements are depreciated generally by the straight-line method, and furniture and equipment are depreciated under various methods over the estimated useful lives of the assets. The Company capitalizes interest expense on construction in process at a rate equal to the Company’s cost of funds. The estimated useful lives used to compute depreciation are as follows:

 

Land improvements

  5-15 years   

Buildings

  40 years   

Furniture and equipment

  5-15 years   

Intangible Assets

The core deposit intangible asset related to the middle Tennessee acquisition of June 2006 is amortized using the sum of the year’s digits method over an estimated period of nine years. The Company periodically evaluates the recoverability of the intangible assets and takes into account events or circumstances that warrant a revised estimate of the useful lives or indicates that impairment exists.

Bank Owned Life Insurance

Bank owned life insurance policies (BOLI) are recorded at the cash surrender value or the amount to be realized upon current redemption. The realization of the redemption value is evaluated for each insuring entity that holds insurance contracts annually by management.

 

Advertising

The Company expenses the production cost of advertising as incurred.

Financial Instruments

The Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.

Derivative Instruments

Under guidelines ASC 815, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated balance sheet. 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 balance sheet with corresponding offsets recorded in the consolidated balance sheet. 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 years ended December 31, 2014, 2013 and 2012.

 

Fair Values of Financial Instruments

ASC 825, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. Accordingly, such estimates involve uncertainties and matters of judgment and therefore cannot be determined with precision. ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following are the more significant methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets’ fair values, because they mature within 90 days or less and do not present credit risk concerns.

Interest earning deposits

The carrying amounts reported in the consolidated balance sheets for interest earning deposits approximate those assets’ fair values, because they are considered overnight deposits and may be withdrawn at any time without penalty and do not present credit risk concerns.

Available-for-sale securities

Fair values for investment securities available-for-sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments provided by a third party pricing service. The Company reviews all securities in which the book value is greater than the market value for impairment that is other than temporary. For securities deemed to be other than temporarily impaired, the Company reduces the book value of the security to its market value by recognizing an impairment charge on its income statement.

Loans receivable

The fair values for of fixed-rate loans and variable rate loans that re-price on an infrequent basis is estimated using discounted cash flow analysis which considers future re-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans of similar type, terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The estimated fair value of variable-rate loans that re-price frequently and with have no significant change in credit risk is approximately the carrying value of the loan.

 

Letters of credit

The fair value of standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counter parties drawing on such financial instruments and the present creditworthiness of such counter parties. Such commitments have been made on terms which are competitive in the markets in which the Company operates, thus, the fair value of standby letters of credit equals the carrying value for the purposes of this disclosure.

Accrued interest receivable

Fair value is estimated to approximate the carrying amount because such amounts are expected to be received within 90 days or less and any credit concerns have been previously considered in the carrying value.

Repurchase agreements

Overnight repurchase agreements have a fair value at book, given that they mature overnight. The fair values for of longer date repurchase agreements is estimated using discounted cash flow analysis which considers the current market pricing for repurchase agreements of similar final maturities and collateral requirements.

Bank owned life insurance

The fair value of bank owned life insurance is the cash surrender value of the policy less redemption charges. By surrendering the policy, the Company is also subject to federal income taxes on all earnings previously recognized.

Deposits

The fair values disclosed for deposits with no stated maturity such as demand deposits, interest-bearing checking accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and other fixed maturity time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such type accounts or similar accounts to a schedule of aggregated contractual maturities or similar maturities on such time deposits.

Advances from the Federal Home Loan Bank (FHLB)

The fair value of these advances is estimated by discounting the future cash flows of these advances using the current rates at which similar advances or similar financial instruments could be obtained.

FHLB stock

The fair value of FHLB stock is recognized at cost.

 

Subordinated debentures

The book value of subordinated debentures is cost. The subordinated debentures re-price quarterly at a rate equal to three month libor plus 3.10%.

Off-Balance-Sheet Instruments

Off-balance-sheet lending commitments approximate their fair values due to the short period of time before the commitment expires.

Dividend Restrictions

The Company is not permitted to pay a dividend to common shareholders if it fails to make a quarterly interest payment to the holders of the Company’s subordinated debentures. Furthermore, the Bank may be restricted in the payment of dividends to the Corporation by the KDFI or FDIC. Any restrictions imposed by either regulator would effectively limit the Company’s ability to pay a dividend to its common stockholders as discussed in Note 17. At December 31, 2013, there were no such restrictions. At December 31, 2014, the Corporation has $2.9 million in cash on hand available to pay common dividends and repurchase common share as outlined in Note 20. At December 31, 2014, the Bank may not pay an additional cash dividend to the Company without regulatory approval.

 

Earnings Per Share

Earnings per share (EPS) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus dilutive common stock equivalents (CSE). CSE consists of dilutive stock options granted through the Company’s stock option plan. Restricted stock awards represent future compensation expense and are dilutive. Common stock equivalents which are considered anti-dilutive are not included for the purposes of this calculation. Common stock warrants issued in December 2008 and all stock options outstanding are currently anti-dilutive and are not included for the purposes of this calculation.

Both EPS and diluted EPS are reduced by the amount of dividend payments on preferred stock and the accretion of the discount on the preferred stock. The Company repurchased all preferred shares in December of 2012. The effect of the Company’s dividend payment on preferred stock and accretion of the preferred stock is as provided for the year ended December 31, 2012:

 

     2012  

Dividend on preferred shares

   $ 1,006,886   

Accretion dividend on preferred shares

     222,360   
  

 

 

 

Total cost of preferred stock

$ 1,229,246   
  

 

 

 

Reduction in earnings per share to common stockholders:

Basic

$ 0.16   
  

 

 

 

Fully diluted

$ 0.16   
  

 

 

 

Weighted average shares outstanding -basic

  7,486,445   
  

 

 

 

Weighted average shares outstanding -diluted

  7,486,445   
  

 

 

 

Stock Compensation

The Company utilized the Black-Sholes valuation model to determine the fair value of stock options on the date of grant. The model derives the fair value of stock options based on certain assumptions related to the expected stock prices volatility, expected option life, risk-free rate of return and the dividend yield of the stock. The expected life of options granted is estimated based on historical employee exercise behavior. The risk free rate of return coincides with the expected life of the options and is based on the ten year Treasury note rate at the time the options are issued. The historical volatility levels of the Company’s common stock are used to estimate the expected stock price volatility. The set dividend yield is used to estimate the expected dividend yield of the stock.

 

Effect of New Accounting Pronouncements

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.

 

ASU 2013-10, “Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU 2013-10 permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”). ASU 2013-10 became effective for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013, and did not have a significant impact on the Company’s consolidated financial position or results of operations.

ASU 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is effective for the Corporation beginning January 1, 2016, though early adoption is permitted. ASU 2015-01 is not expected to have a significant impact on the Company’s consolidated financial position or 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.

Reclassifications

Certain items in prior financial statements have been reclassified to conform to the current presentation.

Securities
12 Months Ended
Dec. 31, 2014
Cash and Cash Equivalents [Abstract]
 
Securities
(2) Securities:

Securities, which consist of debt and equity investments, have been classified in the consolidated balance sheets according to management’s intent. The carrying amount of securities and their estimated fair values follow:

 

     December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Restricted:

           

FHLB stock

   $ 4,428         —           —           4,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

U.S. Treasury securities

$ 3,977      3      —        3,980   

U.S. Agency securities:

  101,654      2,125      (527   103,252   

Tax free municipal bonds

  57,399      3,814      (166   61,047   

Taxable municipal bonds

  11,871      235      (63   12,043   

Trust preferred securities

  1,600      —        (111   1,489   

Commercial bonds

  2,000      7      —        2,007   

Mortgage-backed securities:

GNMA

  27,535      670      (122   28,083   

FNMA

  50,617      694      (536   50,775   

FHLMC

  3,276      38      —        3,314   

SLMA CMOs

  9,895      —        (252   9,643   

AGENCY CMOs

  28,024      176      (205   27,995   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 297,848      7,762      (1,982   303,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Restricted:

           

FHLB stock

   $ 4,428         —           —           4,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

U.S. government and agency securities:

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

Tax free municipal bonds

  64,291      2,066      (898   65,459   

Taxable municipal bonds

  18,337      458      (738   18,057   

Trust preferred securities

  1,600      —        (111   1,489   

Commercial bonds

  2,000      —        (16   1,984   

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 December 31, 2014, were as follows:

 

     Amortized
Cost
     Estimated
Fair
Value
 

2014

             

Due within one year

   $ 4,830         4,927   

Due in one to five years

     21,564         21,818   

Due in five to ten years

     41,683         42,613   

Due after ten years

     33,119         35,380   
  

 

 

    

 

 

 
  101,196      104,738   

Amortizing agency bonds

  77,305      79,080   

Mortgage-backed securities

  119,347      119,810   
  

 

 

    

 

 

 

Total unrestricted securities available for sale

$ 297,848      303,628   
  

 

 

    

 

 

 

 

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

 

2013

   Amortized
Cost
     Estimated
Fair
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 after 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 unrestricted securities available for sale

$ 320,323      318,910   
  

 

 

    

 

 

 

The FHLB stock is an equity interest in the Federal Home Loan Bank. FHLB stock does not have a readily determinable fair value because ownership is restricted and a market is lacking. FHLB stock is classified as a restricted investment security, carried at cost and evaluated for impairment.

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2014, are as follows:

 

     Less than 12 months     12 months or longer     Total  

December 31, 2014

   Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized  
     Fair Value      Losses     Fair Value      Losses     Fair Value      Losses  

Available for sale

               

U.S. government and agency securities:

               

Agency debt securities

   $ 14,021         (20     29,156         (507     43,177         (527

Taxable municipals

     —           —          4,785         (63     4,785         (63

Tax free municipals

     —           —          6,647         (166     6,647         (166

Trust preferred securities

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

Mortgage-backed securities:

               

GNMA

     12,568         (108     2,895         (14     15,463         (122

FNMA

     —           —          18,927         (536     18,927         (536

SLMA CMOs

     1,923         (14     7,720         (238     9,643         (252

AGENCY CMOs

     9,545         (91     7,685         (114     17,230         (205
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

$ 38,057      (233   79,304      (1,749   117,361      (1,982
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

     Less than 12 months     12 months or longer     Total  

December 31, 2013

   Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized  
     Fair Value      Losses     Fair Value      Losses     Fair Value      Losses  

Available for sale

               

U.S. government and agency securities:

               

Agency debt securities

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

Taxable municipals

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

Tax free municipals

     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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(2) Securities: (Continued)

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 December 31, 2014, the Company has 67 securities with unrealized losses. With the exception of a subordinated debenture discussed below, Management believes these unrealized losses relate to changes in interest rates and not credit quality. Management also believes the Company has the ability to hold these securities until maturity or for the foreseeable future and therefore no declines are deemed to be other than temporary.

The carrying value of the Company’s investment securities may 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.

In June of 2008, the Company purchased $2.0 million par value of a private placement subordinated debenture issued by First Financial Services Corporation (“FFKY”), the holding Company for First Federal Savings Bank (“First Fed”). The debenture is a thirty year security with a coupon rate of 8.00%. FFKY is a NASDAQ listed commercial bank holding company located in Elizabethtown, Kentucky. In October of 2010, FFKY informed the owners of its subordinated trust, including the Company, that it was deferring the dividend payments for up to five years as prescribed by the trust.

At September 30, 2013, the Company recognized a $400,000 impairment charge due against this security. The impairment charge was recognized due to management’s financial analysis of the issuing institution and our opinion that it would be unable to make dividend payments after the five year extension expired. The current par value of the security is $1.6 million, which reflects the impairment charge taken. At December 31, 2014, the Company has determined that our Company’s investment in FFKY remained impaired.

 

(2) Securities: (Continued)

During 2014, the Company sold investment securities classified as available for sale for proceeds of $75.3 million resulting in gross gains of $788,000 and gross losses of $210,000. During 2013, the Company sold investment securities classified as available for sale for proceeds of $68.5 million resulting in gross gains of $1.7 million and gross losses of $33,000. During 2012, the Company sold investment securities classified as available for sale for proceeds of $69.0 million resulting in gross gains of $1.8 million and gross losses of $115,000.

As part of its normal course of business, the Bank holds significant balances of municipal and other deposits that require the Bank to pledge investment instruments as collateral. At December 31, 2014, the Bank pledged investments with a book value of $181.8 million and a market value of approximately $192.8 million to various municipal entities as required by law. In addition, the Bank has provided $11.0 million of letters of credit issued by the Federal Home Loan Bank of Cincinnati to collateralize municipal deposits. The collateral for these letters of credit are the Bank’s one to four family loan portfolio.

Loans Receivable, Net
12 Months Ended
Dec. 31, 2014
Receivables [Abstract]
 
Loans Receivable, Net
(3) Loans Receivable, Net:

The components of loans receivable in the consolidated balance sheets as of December 31, 2014, and December 31, 2013, were as follows:

 

     December 31, 2014     December 31, 2013  
     Amount      Percent     Amount      Percent  

Real estate loans:

          

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

   $ 150,551         27.6     155,252         28.1

Second mortgages (closed end)

     2,102         0.4     3,248         0.6

Home equity lines of credit

     34,238         6.3     34,103         6.2

Multi-family

     25,991         4.8     29,736         5.4

Construction

     24,241         4.4     10,618         1.9

Land

     26,654         4.9     34,681         6.3

Farmland

     42,874         7.8     51,868         9.4

Non-residential real estate

     150,596         27.6     157,692         28.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage loans

  457,247      83.8   477,198      86.4

Consumer loans

  14,438      2.6   11,167      2.0

Commercial loans

  74,154      13.6   64,041      11.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other loans

  88,592      16.2   75,208      13.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans, gross

  545,839      100.0   552,406      100.0
     

 

 

      

 

 

 

Deferred loan cost, net of fees

  (286   (92

Less allowance for loan losses

  (6,289   (8,682
  

 

 

      

 

 

    

Total loans

$ 539,264      543,632   
  

 

 

      

 

 

    

The Company continues to reduce its land development loan portfolio exposure. The land development portfolio continues to be plagued by higher levels of loan losses, adverse risk classifications and regulatory scrutiny. At December 31, 2014, the Company has approximately $26.7 million land development loans, with $10.8 million, or 40.6% of the land development portfolio, being classified as substandard. At December 31, 2014, the Company has $37.4 million of total loans classified as substandard.

 

Loans serviced for the benefit of others totaled approximately $30.4 million, $32.6 million and $40.3 million at December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, approximately $25.0 million of the $30.4 million in loans serviced by the Company are serviced for the benefit of Freddie Mac. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow amounts, disbursing payments to investors and foreclosure processing. The servicing rights associated with these loans are not material to the Company’s consolidated financial statements. Qualified one-to-four family first mortgage loans, non-residential real estate loans, multi-family loans and commercial real estate loans are pledged to the Federal Home Loan Bank of Cincinnati as discussed in Note 7.

The Company originates most fixed rate loans for immediate sale to FHLMC or other investors. Generally, the sale of such loans is arranged shortly after the loan application is tentatively approved through commitments.

The Company conducts annual reviews on all loan relationships above $1.0 million 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 sixty 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 Company 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 a 12-month period. In the table on page 38, 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 Company 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 or using the fair value of the collateral if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired.

 

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loansAt December 31, 2014, approximately $82.0 million of the outstanding principal balance of the Company’s non-residential real estate loans were secured by owner-occupied properties, approximately $68.6 million was secured by non-owner occupied properties.

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Company maintains an independent loan review function that is typically outsourced to firms that specialize in conducting loan reviews. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company policies and procedures.

Most of the Company’s lending activity occurs in Western Kentucky and middle and western Tennessee. The majority of the Company’s loan portfolio consists of non-residential real estate loans and one-to-four family residential real estate loans.

Loans by classification type and the related valuation allowance amounts at December 31, 2014, were as follows:

 

            Special      Impaired Loans             Specific
Allowance for
     Allowance for
Loans not
 
     Pass      Mention      Substandard      Doubtful      Total      Impairment      Impaired  

December 31, 2014

              

One-to-four family mortgages

   $ 146,129         203         4,219         —           150,551         51         1,147   

Home equity line of credit

     33,481         —           757         —           34,238         —           181   

Junior lien

     2,025         40         37         —           2,102         —           14   

Multi-family

     20,066         2,904         3,021         —           25,991         —           85   

Construction

     24,241         —           —           —           24,241         —           146   

Land

     15,328         362         10,964         —           26,654         663         460   

Non-residential real estate

     131,854         5,492         13,250         —           150,596         738         1,345   

Farmland

     40,121         516         2,237         —           42,874         —           461   

Consumer loans

     14,118         21         299         —           14,438         62         432   

Commercial loans

     71,246         325         2,583         —           74,154         —           504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 498,609      9,863      37,367      —        545,839      1,514      4,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

            Special      Impaired Loans             Specific
Allowance for
     Allowance for
Loans not
 
     Pass      Mention      Substandard      Doubtful      Total      Impairment      Impaired  

December 31, 2013

              

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 lien

     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 December 31, 2014, were as follows:

 

                          For the year ended  
     At December 31, 2014      December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no specific allowance

              

One-to-four family mortgages

   $ 3,501         3,501         —           2,972         176   

Home equity line of credit

     757         757         —           690         35   

Junior liens

     37         37         —           39         2   

Multi-family

     3,021         3,021         —           1,342         190   

Construction

     —           —           —           29         —     

Land

     7,740         7,740         —           8,978         339   

Non-residential real estate

     12,057         12,057         —           8,672         669   

Farmland

     2,237         2,237            3,968         125   

Consumer loans

     51         51         —           36         3   

Commercial loans

     2,583         2,583         —           2,246         154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  31,984      31,984      —        28,972      1,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance

One-to-four family mortgages

$ 718      718      51      1,434      44   

Home equity line of credit

  —        —        —        —        —     

Junior liens

  —        —        —        —        —     

Multi-family

  —        —        —        —        —     

Construction

  —        —        —        —        —     

Land

  3,224      4,737      663      3,418      160   

Non-residential real estate

  1,193      1,258      738      3,617      69   

Farmland

  —        —        —        619      —     

Consumer loans

  248      248      62      355      —     

Commercial loans

  —        —        —        100      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  5,383      6,961      1,514      9,543      273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

$ 37,367      38,945      1,514      38,515      1,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

                          For the year ended  
     At December 31, 2013      December 31, 2013  
     Recorded      Unpaid
Principal
     Related      Average
Recorded
     Interest
Income
 
     Investment      Balance      Allowance      Investment      Recognized  

Impaired loans with no specific allowance

              

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 a specific allowance

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 as of December 31, 2014, and December 31, 2013, by portfolio segment and based on the impairment method as of December 31, 2014, and December 31, 2013.

 

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

December 31, 2014:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —         $ 663       $ 738       $ 51       $ 62       $ 1,514   

Collectively evaluated for impairment

     504         606         1,891         1,342         432         4,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

$ 504    $ 1,269    $ 2,629    $ 1,393    $ 494    $ 6,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

Loans individually evaluated for impairment

$ 2,583    $ 10,964    $ 18,508    $ 5,013    $ 299    $ 37,367   

Loans collectively evaluated for impairment

  71,571      39,931      200,953      181,878      14,139      508,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

$ 74,154    $ 50,895    $ 219,461    $ 186,891    $ 14,438    $ 545,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The average recorded investment in impaired loans for the years ended December 31, 2014, 2013 and 2012 was $38.5 million, $43.1 million and $79.3 million, respectively. Interest income recognized on impaired loans for the years ended December 31, 2014 and December 31, 2013 and December 31, 2012, was $2.0 million, $859,000 and $2.8 million, respectively. The following table provides a detail of the Company’s activity in the allowance for loan loss account allocated by loan type for the year ended December 31, 2014:

 

Year ended December 31, 2014

   Balance
12/31/2013
     Charge
off
2014
    Recovery
2014
     General
Provision
2014
    Specific
Provision
2014
    Ending
Balance
12/31/2014
 

One-to-four family mortgages

     2,048         (233     24         (304     (337     1,198   

Home equity line of credit

     218         (83     3         (37     80        181   

Junior liens

     39         —          9         (25     (9     14   

Multi-family

     466         —          —           (381     —          85   

Construction

     88         (139     9         58        130        146   

Land

     1,305         —          —           (74     (108     1,123   

Non-residential real estate

     2,719         (66     864         (1,368     (66     2,083   

Farmland

     510         —          —           542        (591     461   

Consumer loans

     541         (415     109         (13     272        494   

Commercial loans

     748         (296     94         (244     202        504   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
  8,682      (1,232   1,112      (1,846   (427   6,289   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The following table provides a detail of the Company’s activity in the allowance for loan loss account allocated by loan type for the year ended December 30, 2013:

 

Year ended December 31, 2013

   Balance
12/31/2012
     Charge
off
2013
    Recovery
2013
     General
Provision
2013
    Specific
Provision
2013
    Ending
Balance
12/31/2013
 

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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Non-accrual loans totaled $3.2 million and $10.1 million at December 31, 2014, and December 31, 2013, respectively. All non-accrual loans noted below are classified as either substandard or doubtful. Interest income foregone on such loans totaled $76,000 at December 31, 2014, $432,000 at December 31, 2013, and $271,000 at December 31, 2012, respectively. The Company is not committed to lend additional funds to borrowers whose loans have been placed on a non-accrual basis. There were no loans past due more than three months and still accruing interest as of December 31, 2014, and December 31, 2013. For the years ended December 31, 2014, and December 31, 2013, the components of the Company’s balances of non-accrual loans are as follows:

 

     12/31/2014      12/31/2013  

One-to-four family first mortgages

   $ 1,501         945   

Home equity lines of credit

     —           1   

Junior liens

     —           2   

Multi-family

     95         —     

Construction

     —           175   

Land

     215         1,218   

Non-residential real estate

     1,159         6,546   

Farmland

     115         703   

Consumer loans

     —           13   

Commercial loans

     90         463   
  

 

 

    

 

 

 

Total non-accrual loans

$ 3,175      10,066   
  

 

 

    

 

 

 

 

The table below presents loan balances at December 31, 2014, by loan classification allocated between past due, classified, performing and non-performing:

 

     Currently      30 - 89
Days
     Non-accrual      Special      Impaired Loans
Currently Performing
        
     Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  

One-to-four family mortgages

   $ 145,372         757         1,501         203         2,718         —           150,551   

Home equity line of credit

     33,338         143         —           —           757         —           34,238   

Junior liens

     2,025         —           —           40         37         —           2,102   

Multi-family

     20,066         —           95         2,904         2,926         —           25,991   

Construction

     24,241         —           —           —           —           —           24,241   

Land

     14,674         654         215         362         10,749         —           26,654   

Non-residential real estate

     131,854         —           1,159         5,492         12,091         —           150,596   

Farmland

     40,057         64         115         516         2,122         —           42,874   

Consumer loans

     14,104         14         —           21         299         —           14,438   

Commercial loans

     71,191         55         90         325         2,493         —           74,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 496,922      1,687      3,175      9,863      34,192      —        545,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Currently      30—89
Days
     Non-accrual      Special      Impaired Loans
Currently Performing
        
     Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  

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.

Troubled Debt Restructuring

On a periodic basis, the Company 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 Company must separately conclude that both of the following exist:

 

  a.) The restructuring constitutes a concession

 

  b.) The debtor is experiencing financial difficulties

ASU 310 provides the following guidance for the Company’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 Company may have granted a concession. In that circumstance, the Company 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 Company must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

At December 31, 2014, the Company had no loans classified as performing TDRs as compared to no loans at December 31, 2013. A summary of the activity in loans classified as TDRs for the twelve month period ended December 31, 2014, is as follows:

 

     Balance at
12/31/13
     New
TDR
     Loss or
Foreclosure
     Transfer to Held
for Sale
    Removed
from
(Taken to)
Non-accrual
     Balance
at
12/31/14
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ —           —           —           —          —         $ —     

Home equity line of credit

     —           —           —           —          —           —     

Junior Lien

     —           —           —           —          —           —     

Multi-family

     —           —           —           —          —           —     

Construction

     —           —           —           —          —           —     

Land

     —           —           —           —          —           —     

Non-residential real estate

     —           10,271         —           (6,987     —           3,284   

Farmland

     —           —           —           —          —           —     

Consumer loans

     —           —           —           —          —           —     

Commercial loans

     —           —           —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total performing TDR

$ —        10,271      —        (6,987   —      $ 3,284   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

A summary of the activity in loans classified as TDRs for the year ended December 31, 2013, is as follows:

 

     Balance at
12/31/12
     New
TDR
     Loss or
Foreclosure
    Removed due to
Payment or
Performance
    Removed
from
(Taken to)
Non-accrual
    Balance
at
12/31/13
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 1,888         242         —          (1,863     (267     —     

Home equity line of credit

     —           —           —          —          —          —     

Junior Lien

     96         —           —          (10     (86     —     

Multi-family

     234         —           —          (234     —          —     

Construction

     4,112         —           —          —          (4,112     —     

Land

     656         2,649         (393     (656     (2,256     —     

Non-residential real estate

     3,173         266         (864     —          (2,575     —     

Farmland

     865         —           —          (865     —          —     

Consumer loans

     5         —           —          (5     —          —     
              

 

 

 

Commercial loans

  9      222      —        (231   —        —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total performing TDR

$ 11,038      3,379      (1,257   (3,864   (9,296   —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The Company originates loans to officers and directors and their affiliates at terms substantially identical to those available to other borrowers. Loans to officers and directors at December 31, 2014 and December 31, 2013, were approximately $4.0 million and $4.8 million, respectively. At December 31, 2014, funds committed that were undisbursed to officers and directors approximated $447,000.

The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2014, and December 31, 2013:

 

     2014      2013  
     

Balance at beginning of period

   $ 4,800         8,846   

New loans

     669         410   

Principal repayments

     (1,447      (4,456
  

 

 

    

 

 

 

Balance at end of period

$ 4,022      4,800   
  

 

 

    

 

 

 

 

Premises and Equipment
12 Months Ended
Dec. 31, 2014
Property, Plant and Equipment [Abstract]
 
Premises and Equipment
(4) Premises and Equipment:

Components of premises and equipment included in the consolidated balance sheets as of December 31, 2014 and December 31, 2013, consisted of the following:

 

     2014      2013  

Land

   $ 6,576         6,526   

Land improvements

     611         575   

Buildings

     20,914         20,257   

Construction in process

     486         582   

Furniture and equipment

     6,213         6,696   
  

 

 

    

 

 

 
  34,800      34,636   

Less accumulated depreciation

  11,860      11,528   
  

 

 

    

 

 

 

Premises and equipment, net

$ 22,940      23,108   
  

 

 

    

 

 

 

Depreciation expense was approximately $1,336,000, $1,502,000 and $1,587,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Intangible Assets
12 Months Ended
Dec. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract]
 
Intangible Assets
(5) Intangible Assets:

The amount of other intangible assets and the changes in the carrying amounts of other intangible assets for the years ended December 31, 2014, 2013 and 2012:

 

     Core Deposits
Intangible
 

Balance, December 31, 2011

   $ 519   

Amortization

     (227
  

 

 

 

Balance December 31, 2012

  292   

Amortization

  (162
  

 

 

 

Balance December 31, 2013

  130   

Amortization

  (97
  

 

 

 

Balance, December 31, 2014

$ 33   
  

 

 

 
Deposits
12 Months Ended
Dec. 31, 2014
Text Block [Abstract]
 
Deposits
(6) Deposits:

At December 31, 2014, the scheduled maturities of other time deposits were as follows:

Years Ending December 31,

 

2015

$ 139,708   

2016

  137,147   

2017

  32,175   

2018

  15,299   

2019

  7,576   

2020 and thereafter

  10   
  

 

 

 
$ 331,915   
  

 

 

 

The amount of other time deposits with a minimum denomination of $100,000 was approximately $169.3 million and $200.2 million at December 31, 2014, and December 31, 2013, respectively. At December 31, 2014, directors, members of senior management and their affiliates had deposits in the Bank of approximately $4.4 million.

Interest expense on deposits for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 is summarized as follows:

 

     2014      2013      2012  

Interest bearing checking accounts

   $ 1,253       $ 1,243         1,180   

Money market accounts

     86         73         58   

Savings

     109         79         71   

Other time deposits

     4,155         5,719         9,262   
  

 

 

    

 

 

    

 

 

 
$ 5,603    $ 7,114      10,571   
  

 

 

    

 

 

    

 

 

 

The Bank maintains clearing arrangements for its demand, interest bearing checking accounts and money market accounts with BBVA Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 2014, average daily clearings were approximately $6.1 million.

At December 31, 2014, the Company had approximately $248,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2013, the Company had approximately $384,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2014, and December 31, 2013, the Company had deposits classified as brokered deposits totaling $37.1 million and $46.3 million, respectively.

Advances from Federal Home Loan Bank
12 Months Ended
Dec. 31, 2014
Banking and Thrift [Abstract]
 
Advances from Federal Home Loan Bank
(7) Advances from Federal Home Loan Bank:

Federal Home Loan Bank advances are summarized as follows:

 

     December 31,  
     2014     2013  
            Weighted            Weighted  

Types of Advances

   Amount      Average Rate     Amount      Average Rate  

Fixed-rate

   $ 34,000         0.88   $ 46,780         3.72

Scheduled maturities of FHLB advances as of December 31, 2014 are as follows:

 

Years Ending

December 31,

   Fixed
Rate
     Average
Cost
 

2015

   $ 30,000         0.29

2016

     4,000         5.34
  

 

 

    

 

 

 

Total

$ 34,000      0.88
  

 

 

    

 

 

 

On December 30, 2014, the Company prepaid $35.9 million in FHLB advances, incurring a $2.5 million prepayment penalty. To fund this transaction, the Company borrowed $15.0 million from the FHLB with a maturity of one month and $15.0 million with a maturity of six months.

The Bank has an approved line of credit of $30 million at the FHLB of Cincinnati, which is secured by a blanket agreement to maintain residential first mortgage loans and non-residential real estate loans with a principal value of 125% of the outstanding advances and has a variable interest rate. At December 31, 2014, the Bank could borrow an additional $52.6 million from the FHLB of Cincinnati without pledging additional collateral. At December 31, 2014, the Bank has an additional $40.1 million in additional collateral that could be pledged to the FHLB to secure additional advance requirements. The Bank has an $8 million unsecured line of credit with BVA Compass Bank of Birmingham, Alabama. The Company’s overnight lines of credit with both the Federal Home Loan Bank of Cincinnati and Compass Bank had no balance at December 31, 2014.

Repurchase Agreements
12 Months Ended
Dec. 31, 2014
Text Block [Abstract]
 
Repurchase Agreements
(8) Repurchase Agreements:

In 2006, the Company enhanced its cash management product line to include an automated sweep of excess funds from checking accounts to repurchase accounts, allowing interest to be paid on excess funds remaining in checking accounts of business and municipal customers. Repurchase balances are overnight borrowings from customers and are not FDIC insured. In addition, the Company has entered into two long term repurchase agreements with third parties.

At December 31, 2014, the Company provided investment securities with a market value and book value of $57.9 million as collateral for repurchase agreements. The maximum repurchase balances outstanding during the twelve month periods ending December 31, 2014, and December 31, 2013, was $57.9 million and $58.1 million, respectively.

At December 31, 2014, and December 31, 2013, the respective cost and maturities of the Company’s repurchase agreements are as follows:

 

2014

Third Party

   Balance      Average Rate     Maturity      Comments

Merrill Lynch

   $ 6,000         4.36     9/18/2016       Quarterly callable

Various customers

     51,358         0.60      Overnight
  

 

 

    

 

 

      

Total

$ 57,358      1.42
  

 

 

    

 

 

      

2013

Third Party

   Balance      Average Rate     Maturity      Comments

Deutsch Bank

   $ 10,000         4.28     9/05/2014       Quarterly callable

Merrill Lynch

     6,000         4.36     9/18/2016       Quarterly callable

Various customers

     36,759         0.99      Overnight
  

 

 

    

 

 

      

Total

$ 52,759      2.29
  

 

 

    

 

 

   
Fair Value Measurement
12 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]
 
Fair Value Measurement
(9) Fair Value Measurement:

In September 2006, FASB issued ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820 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. Although ASC 820 provides for fair value accounting, the Company did not elect the fair value option for any financial instrument not presently required to be accounted for at fair value.

HopFed Bancorp has developed a process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models or processes that use primarily market based or based on third party market data, including interest rate yield curves, option volatilities and other third party information. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financials instruments could result in a different estimate of fair value at the reporting date.

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

    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 value of securities available for sale are determined by a matrix pricing, which is a mathematical technique what is widely used in the industry to value debt securities without relying exclusively on quoted prices for the individual securities in the Company’s portfolio but relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments and considering the fair value of any assigned collateral.

The Company has certain liabilities carried at fair value including interest rate swap agreements. The fair value of these liabilities is based on information obtained from a third party bank and is reflected within level 2 of the valuation hierarchy.

Assets and Liabilities Measured on a Recurring Basis

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

 

December 31, 2014

   Total carrying
value in the
consolidated
     Quoted Prices
In Active
Markets for
     Significant
Other
Observable
     Significant
Unobservable
 

Description

   balance sheet at
December 31, 2014
     Identical Assets
(Level 1)
     Inputs
(Level 2)
     Inputs
(Level 3)
 

Assets

           

Available for sale securities

   $ 303,628         —           302,139         1,489   

Liabilities

           

Interest rate swap

   $ 390         —           390         —     

December 31, 2013

   Total carrying
value in the
consolidated
     Quoted Prices
In Active
Markets for
     Significant
Other
Observable
     Significant
Unobservable
 

Description

   balance sheet at
December 31, 2013
     Identical Assets
(Level 1)
     Inputs
(Level 2)
     Inputs
(Level 3)
 

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:

 

December 31, 2014

   Total carrying
value in the
     Quoted Prices
In Active
     Significant
Other
     Significant  

Description

   consolidated
balance sheet at
12/31/2014
     Markets for
Identical Assets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets

           

Other real estate owned

   $ 1,927         —           —           1,927   

Impaired loans, net of allowance of $1,514

   $ 35,853         —           —           35,853   

December 31, 2013

   Total carrying
value in the
     Quoted Prices
In Active
     Significant
Other
     Significant  

Description

   consolidated
balance sheet at
12/31/2013
     Markets for
Identical Assets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets

           

Other real estate owned

   $ 1,674         —           —           1,674   

Impaired loans, net of allowance of $1,929

   $ 40,715         —           —           40,715   

 

Change in level 3 fair value measurements:

The table below includes a roll-forward of the balance sheet items for the years ended December 31, 2014 and 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 a financial instrument 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 financial instruments 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.

 

     Year ended December 31,  
     2014      2013  
     Other      Other      Other      Other  
     Assets      Liabilities      Assets      Liabilities  

Fair value, December 31,

   $ 1,489         —         $ 1,489         —     

Change in unrealized gains (losses) included in other comprehensive income for assets and liabilities still held at December 31,

     —           —           —           —     

Other than temporary impairment charge

     —           —           —           —     

Purchases, issuances and settlements, net

     —           —           —           —     

Transfers in and/or out of Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value, December 31,

$ 1,489      —      $ 1,489      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Financial Assets:

              

Cash and due from banks

   $ 34,389         34,389       $ 34,389         —           —     

Interest-earning deposits

     6,050         6,050         6,050         —           —     

Securities available for sale

     303,628         303,628         —           302,139         1,489   

Federal Home Loan Bank stock

     4,428         4,428         —           4,428         —     

Loans held for sale

     1,444         1,444         —           1,444         —     

Loans receivable

     539,264         537,493         —           —           537,493   

Accrued interest receivable

     4,576         4,576         —           4,576         —     

Financial liabilities:

              

Deposits

     731,308         714,750         —           714,750         —     

Advances from borrowers for taxes and insurance

     513         513         —           513         —     

Advances from Federal Home Loan Bank

     34,000         34,217         —           34,217         —     

Repurchase agreements

     57,358         57,688         —           57,688         —     

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

     390         390         —           390         —     

 

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
 

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         —     

 

Non-Financial Assets and Non-Financial Liabilities:

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were re-measured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

The following table presents foreclosed assets that were re-measured and reported at fair value:

 

 

     Years Ended December 31,  
     2014      2013      2012  

Beginning balance

   $ 1,674         1,548         2,267   

Foreclosed assets measured at initial recognition:

        

Carrying value of foreclosed assets prior to acquisition

     1,816         1,535         2,634   

Proceeds from sale of foreclosed assets

     (1,118      (908      (2,738

Charge-offs recognized in the allowance for loan loss

     (237      (361      (349

Gains (losses) on REO included in non-interest expense

     (208      (140      (266
  

 

 

    

 

 

    

 

 

 

Fair value

$ 1,927      1,674      1,548   
  

 

 

    

 

 

    

 

 

 

Subordinated Debentures
12 Months Ended
Dec. 31, 2014
Brokers and Dealers [Abstract]
 
Subordinated Debentures
(10) Subordinated Debentures:

On September 25, 2003, the Company formed HopFed Capital Trust I (the Trust). The Trust is a statutory trust formed under the laws of the state of Delaware. In September 2003, the Trust issued variable rate capital securities with an aggregate liquidation amount of $10,000,000 ($1,000 per preferred security) to a third-party investor. The Company then issued floating rate junior subordinated debentures aggregating $10,310,000 to the Trust. The junior subordinated debentures are the sole assets of the Trust. The junior subordinated debentures and the capital securities pay interest and dividends, respectively, on a quarterly basis. The variable interest rate is the three-month LIBOR plus 3.10% adjusted quarterly, The most recent adjustment was effective January 8, 2015, which adjusted the total coupon rate to 3.35%. These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities became redeemable contemporaneously, in whole or in part, beginning October 8, 2008 at a redemption price of $1,000 per capital security.

The Company has provided a full-irrevocable and unconditional guarantee on a subordinated basis of the obligations of the Trust under the capital securities in the event of the occurrence of an event of default, as defined in such guarantee.

Concentrations of Credit Risk
12 Months Ended
Dec. 31, 2014
Risks and Uncertainties [Abstract]
 
Concentrations of Credit Risk
(11) Concentrations of Credit Risk:

Most of the Bank’s business activity is with customers located within the western part of the Commonwealth of Kentucky and middle and western Tennessee. One-to-four family residential and non residential real estate collateralize the majority of the loans. The Bank requires collateral for the majority of loans.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit-related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. In October of 2008, the FDIC increased its deposit coverage on all accounts to $250,000. In addition, financial institutions could choose to pay a higher premium to have all non-interest demand deposit balances insured. Compass Bank of Birmingham, Alabama, the Heritage Bank correspondent banker, elected to accept this additional coverage. Therefore, uninsured deposits are limited to those balances transferred to an overnight federal funds account. During 2013 and 2012, Heritage Bank chose not to transfer balances to an overnight federal funds account. Unlimited FDIC insurance on non-interest bearing deposits ended December 31, 2012.

At December 31, 2014, all cash and cash equivalents are deposited with Compass BBVA Bank, the Federal Reserve Bank or the Federal Home Loan Bank of Cincinnati (FHLB). Deposits at Compass BBVA Bank are insured to $250,000. All deposits at the FHLB are liabilities of the individual bank and were not federally insured. The FHLB is a government sponsored enterprise (GSE) and has the second highest rating available by all rating agencies. At December 31, 2014, total FHLB deposits were approximately $1.0 million and total deposits at the Federal Reserve were $5.8 million, none of which is insured by the FDIC.

Employee Benefit Plans
12 Months Ended
Dec. 31, 2014
Compensation and Retirement Disclosure [Abstract]
 
Employee Benefit Plans
(12) Employee Benefit Plans:

Stock Option Plan

The total amount of options outstanding and the exercise price of options were adjusted to reflect a 2% stock dividend paid to stockholders’ of record on September 30, 2010, and October 3, 2011.

On February 24, 1999, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 1999 Stock Option Plan (Option Plan), which was subsequently approved at the 1999 Annual Meeting of Stockholders. Under the Option Plan, the Option Committee has discretionary authority to grant stock options and stock appreciation rights to such employees, directors and advisory directors, as the committee shall designate. The Option Plan reserved 403,360 shares of common stock for issuance upon the exercise of options or stock appreciation rights. At December 31, 2012, the Company can no longer issue options under this plan. The remaining 20,808 options are fully vested and outstanding until their maturity date.

On May 31, 2000, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2000 Stock Option Plan (the “2000 Option Plan”). Under the 2000 Option Plan, the option committee has discretionary authority to grant stock options to such employees as the committee shall designate. The 2000 Option Plan reserves 40,000 shares of common stock for issuance upon the exercise of options. The Company will receive the exercise price for shares of common stock issued to 2000 Option Plan participants upon the exercise of their option. The Board of Directors has granted options to purchase 40,000 shares of common stock under the 2000 Option Plan at an exercise price of $10.00 per share, which was the fair market value on the date of the grant. At December 31, 2014, all options having been granted under the 2000 Option Plan have been exercised and expired.

 

 

     Number of
Shares
     Weighted
Average Exercise
Price
 

Options outstanding, December 2011

     31,212         15.06   

Granted

     —           —     

Exercised

     —           —     

Forfeited

     (10,404      11.85   
  

 

 

    

 

 

 

Options outstanding, December 2012

  20,808      16.67   

Granted

  —        —     

Exercised

  —        —     

Forfeited

  —        —     
  

 

 

    

 

 

 

Options outstanding, December 2013

  20,808      16.67   

Granted

  —        —     

Exercised

  —        —     

Forfeited

  (20,808   16.67   
  

 

 

    

 

 

 

Options outstanding, December 2014

  —        —     
  

 

 

    

 

 

 

At December 31, 2014, there are no stock options outstanding.

 

HopFed Bancorp Long Term Incentive Plans

On February 18, 2004, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan (the Plan), which was subsequently approved at the 2004 Annual Meeting of Stockholders. Under the Plan, the Compensation Committee has discretionary authority to grant up to 200,000 shares in the form of restricted stock grants, options, and stock appreciation rights to such employees, directors and advisory directors as the committee shall designate. The grants vest in equal installments over a four-year period. Grants may vest immediately upon specific events, including a change of control of the Company, death or disability of award recipient, and termination of employment of the recipient by the Company without cause.

On March 20, 2013, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2013 Long Term Incentive Plan (the Plan), which was subsequently approved at the 2013 Annual Meeting of Stockholders. Under the Plan, the Compensation Committee has discretionary authority to grant up to 300,000 shares in the form of restricted stock grants and options to such employees, directors and advisory directors as the committee shall designate. The grants vest in equal installments over a three or four year period. Grants may vest immediately upon specific events, including a change of control of the Company, death or disability of award recipient, and termination of employment of the recipient by the Company without cause. The 2004 Plan has now expired and no other shares may be issued under the 2004 Plan.

Awards are recognized as an expense to the Company in accordance with the vesting schedule. Awards in which the vesting is accelerated must be recognized as an expense immediately. Awards are valued at the closing stock price on the day the award is granted. For the year ended December 31, 2014, the Compensation Committee granted 22,378 shares of restricted stock with a market value of $260,000. For the year ended December 31, 2013, the Compensation Committee granted 21,559 shares of restricted stock with a market value of $232,000. For the year ended December 31, 2012, the Compensation Committee granted 10,392 shares of restricted stock with a market value of $73,800. The Company recognized $164,000, $115,000, and $99,000 in compensation expense in 2014, 2013 and 2012, respectively.

The remaining compensation expense to be recognized at December 31, 2014 is as follows:

 

Year Ending December 31,

   Approximate Future
Compensation Expense
 

2015

   $  186   

2016

     133   

2017

     46   

2018

     3   
  

 

 

 
Total $ 368   
  

 

 

 

 

 

HopFed Bancorp Long Term Incentive Plans

The Compensation Committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. The early vesting of restricted stock awards due to factors outlined in the award agreement may accelerate future compensation expenses related to the plan. However, the total amount of future compensation expense would not change as a result of an accelerated vesting of shares. At December 31, 2014, the Company has 256,290 restricted shares available from the HopFed Bancorp, Inc. 2013 Long Term Incentive Plan that may be awarded.

401(K) Plan

The Company has a 401(k) retirement program that is available to all employees who meet minimum eligibility requirements. Participants may generally contribute up to 15% of earnings, and in addition, management will match employee contributions up to 4%. In addition, the Company has chosen to provide all eligible employees an additional 4% of compensation without regards to the amount of the employee contribution. Expense related to Company contributions amounted to $769,000, $737,000, and $627,000 in 2014, 2013 and 2012, respectively. The reduction in expense related to the 401K program in 2014, 2013 and 2012 was the offset of approximately $43,000, $22,000 and $59,000, respectively, in Company contributions forfeited by employees who are no longer employed by the Company and have not met the full vesting requirements of the plan. See footnote 24 on subsequent events.

Deferred Compensation Plan

During the third quarter of 2002, the Company purchased assets and assumed the liabilities relating to a nonqualified deferred compensation plan for certain employees of the Fulton division. The Company owns single premium life insurance policies on the life of each participant and is the beneficiary of the policy value. When a participant retires, the benefits accrued for each participant will be distributed to the participant in equal installments for 15 years. The plan is now fully funded and no additional expenses will be recognized. The Deferred Compensation Plan also provides the participant with life insurance coverage, which is a percentage of the net death proceeds for the policy, if any, applicable to the participant. The original face value of all deferred compensation contracts was approximately $668,000. At December 31, 2014, the accrued value of all deferred compensation contacts is approximately $292,000. The Company is currently making cash remittances of approximately $12,000 per year on deferred compensation contracts.

Income Taxes
12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]
 
Income Taxes
(13) Income Taxes:

The provision for income tax expense (benefit) for the years ended December 31, 2014, December 31, 2013, and December 31, 2012, consisted of the following:

 

     2014      2013      2012  

Current

        

Federal

   $ —           (32      210   

State

     30         110         120   
  

 

 

    

 

 

    

 

 

 
  30      78      330   
  

 

 

    

 

 

    

 

 

 

Deferred