HOPFED BANCORP INC (HFBC) Form 10-K for Period Ending 12/31/2016
: 6.23.6
 
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2016
Mar. 06, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
   
Document Type
10-K 
  
Amendment Flag
false 
  
Document Period End Date
Dec. 31, 2016 
  
Document Fiscal Year Focus
2016 
  
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
 
6,716,679 
 
Entity Public Float
  
$ 74,901,029 
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Assets
  
Cash and due from banks
$ 21,779 
$ 46,926 
Interest-bearing deposits in banks
3,970 
7,772 
Cash and cash equivalents
25,749 
54,698 
Federal Home Loan Bank stock, at cost
4,428 
4,428 
Securities available for sale
209,480 
237,177 
Loans held for sale
1,094 
2,792 
Loans receivable, net of allowance for loan losses of $6,112 at December 31, 2016, and $5,700 at December 31, 2015
604,286 
556,349 
Accrued interest receivable
3,799 
4,139 
Foreclosed assets
2,397 
1,736 
Bank owned life insurance
10,662 
10,319 
Premises and equipment, net
23,461 
24,034 
Deferred tax assets
3,052 
2,642 
Other assets
3,078 
4,840 
Total assets
891,486 
903,154 
Deposits:
  
Non-interest-bearing accounts
131,145 
125,070 
Interest-bearing accounts:
  
Interest bearing checking accounts
209,347 
203,779 
Savings and money market accounts
99,312 
95,893 
Other time deposits
293,078 
314,664 
Total deposits
732,882 
739,406 
Advances from Federal Home Loan Bank
11,000 
15,000 
Repurchase agreements
47,655 
45,770 
Subordinated debentures
10,310 
10,310 
Advances from borrowers for taxes and insurance
766 
614 
Dividends payable
288 
287 
Accrued expenses and other liabilities
2,157 
4,137 
Total liabilities
805,058 
815,524 
Stockholders' equity
  
Preferred stock, par value $0.01 per share; authorized 500,000 shares; no shares issued or outstanding at December 31, 2016 and December 31, 2015
  
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,963,378 issued and 6,717,242 outstanding at December 31, 2016, and 7,951,699 issued and 6,865,811 outstanding at December 31, 2015
80 
79 
Additional paid-in-capital
58,660 
58,604 
Retained earnings
49,035 
47,124 
Treasury stock, at cost (1,246,136 shares at December 31, 2016 and 1,085,888 shares at December 31, 2015)
(15,347)
(13,471)
Unearned ESOP Shares (at cost 498,346 at December 31, 2016 and 546,413 at December 31, 2015)
(6,548)
(7,180)
Accumulated other comprehensive income
548 
2,474 
Total stockholders' equity
86,428 
87,630 
Total liabilities and stockholders' equity
$ 891,486 
$ 903,154 
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
  
Loans receivable, allowance for loan losses
$ 6,112 
$ 5,700 
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
7,963,378 
7,951,699 
Common stock, shares outstanding
6,717,242 
6,865,811 
Treasury stock, shares
1,246,136 
1,085,888 
Unearned ESOP Shares at cost
498,346 
546,413 
Consolidated Statements of Income - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Interest and dividend income
   
Loans
$ 25,778 
$ 25,300 
$ 26,025 
Taxable securities available for sale
4,595 
6,149 
6,548 
Nontaxable securities available for sale
1,308 
1,651 
2,081 
Interest-bearing deposits in banks
46 
22 
26 
Total interest and dividend income
31,727 
33,122 
34,680 
Interest expense:
   
Deposits
4,240 
5,031 
5,603 
Advances from Federal Home Loan Bank
163 
289 
1,665 
Repurchase agreements
508 
491 
874 
Subordinated debentures
388 
739 
737 
Total interest expense
5,299 
6,550 
8,879 
Net interest income
26,428 
26,572 
25,801 
Provision for loan losses
1,241 
1,051 
(2,273)
Net interest income after provision for loan losses
25,187 
25,521 
28,074 
Non-interest income:
   
Service charges
2,788 
2,925 
3,354 
Merchant card
1,224 
1,130 
1,075 
Mortgage origination
1,585 
1,175 
719 
Realized gains from sale of securities available for sale, net
612 
691 
578 
Income from bank owned life insurance
343 
335 
307 
Financial services commission
614 
685 
980 
Other operating
769 
661 
827 
Total non-interest income
7,935 
7,602 
7,840 
Non-interest expenses:
   
Salaries and employee benefits
15,400 
15,810 
15,222 
Occupancy
3,173 
3,077 
3,217 
Data processing
2,942 
2,827 
2,887 
State deposit tax
990 
1,018 
1,336 
Intangible amortization
 
33 
97 
Professional services
1,404 
1,506 
1,331 
Advertising
1,401 
1,302 
1,341 
Postage and communications
625 
577 
577 
Supplies
607 
527 
627 
Deposit insurance and examination fees
609 
586 
724 
(Gain) loss on sale of premises and equipment
(72)
25 
Foreclosed assets, net
448 
1,227 
474 
Loss on sale of loan note
  
1,781 
Loss on early debt extinguishment
  
2,510 
Other operating
2,329 
1,954 
1,767 
Total non-interest expense
29,856 
30,445 
33,916 
Income before income tax expense
3,266 
2,678 
1,998 
Income tax expense (benefit)
362 
274 
(201)
Net income
$ 2,904 
$ 2,404 
$ 2,199 
Earnings per share available to common stockholders:
   
Basic
$ 0.47 
$ 0.38 
$ 0.30 
Diluted
$ 0.47 
$ 0.38 
$ 0.30 
Weighted average shares outstanding - basic
6,233,860 
6,372,277 
7,306,078 
Weighted average shares outstanding - diluted
6,233,860 
6,372,277 
7,306,078 
Consolidated Statements of Comprehensive Income - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
   
Net income
$ 2,904 
$ 2,404 
$ 2,199 
Other comprehensive income, net of tax:
   
Unrealized gain (loss) on non - other than temporary impaired investment securities ("OTTI") available for sale, net of taxes
(1,351)
(1,121)
5,130 
Unrealized gain (loss) on OTTI securities, net of taxes
(170)
237 
 
Unrealized gain on derivatives, net of taxes
 
257 
237 
Reclassification adjustment for gains and accretion included in net income, net of taxes
(405)
(456)
(381)
Total other comprehensive income (loss)
(1,926)
(1,083)
4,986 
Comprehensive income
$ 978 
$ 1,321 
$ 7,185 
Consolidated Statements of Changes in Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Common Treasury Stock [Member]
Unearned ESOP Shares [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Beginning balance at Dec. 31, 2013
$ 95,717 
$ 79 
$ 58,302 
$ 44,694 
$ (5,929)
 
$ (1,429)
Beginning balance, Shares at Dec. 31, 2013
 
7,447,903 
     
Net income
2,199 
  
2,199 
   
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 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 
     
Net income
2,404 
  
2,404 
   
Restricted stock awards, shares
 
2,034 
     
Net change in unrealized gain (losses) on securities available for sale, net of taxes
(1,340)
     
(1,340)
Net change in unrealized losses on derivatives, net of taxes
257 
     
257 
Cash dividend to common stockholders'
(1,009)
  
(1,009)
   
Common stock repurchase
(11,926)
   
(11,926)
  
Common stock repurchase, shares
 
(907,505)
     
Common stock issued
    
7,884 
$ (7,884)
 
Common stock issued, shares
 
600,000 
     
ESOP Shares Earned
652 
 
(52)
    
ESOP Shares Earned, shares
     
704 
 
Compensation expense, restricted stock awards
190 
 
190 
    
Ending balance at Dec. 31, 2015
87,630 
$ 79 
58,604 
47,124 
(13,471)
$ (7,180)
2,474 
Ending balance, Shares at Dec. 31, 2015
 
6,865,811 
     
Net income
2,904 
  
2,904 
   
Restricted stock awards
$ 1 
     
Restricted stock awards, shares
 
11,679 
     
Net change in unrealized gain (losses) on securities available for sale, net of taxes
(1,926)
     
(1,926)
Cash dividend to common stockholders'
(993)
  
(993)
   
Common stock repurchase
$ (1,876)
   
(1,876)
  
Common stock repurchase, shares
(92,550)
(160,248)
     
ESOP Shares Earned
$ 553 
 
(79)
    
ESOP Shares Earned, shares
600,000 
    
632 
 
Compensation expense, restricted stock awards
$ 135 
 
135 
    
Ending balance at Dec. 31, 2016
$ 86,428 
$ 80 
$ 58,660 
$ 49,035 
$ (15,347)
$ (6,548)
$ 548 
Ending balance, Shares at Dec. 31, 2016
 
6,717,242 
     
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 992 
$ 690 
$ (2,446)
Net change in unrealized losses on derivatives, income tax benefit
 
$ (132)
$ (122)
Cash dividend to common stockholders, per share
$ 0.16 
$ 0.16 
$ 0.16 
Retained Earnings [Member]
   
Cash dividend to common stockholders, per share
$ 0.16 
$ 0.16 
$ 0.16 
Accumulated Other Comprehensive Income (Loss) [Member]
   
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 992 
$ 690 
$ (2,446)
Net change in unrealized losses on derivatives, income tax benefit
 
$ (132)
$ (122)
Consolidated Statements of Cash Flows - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
   
Net income
$ 2,904 
$ 2,404 
$ 2,199 
Adjustments to reconcile net income to net cash provided by operating activities:
   
Provision for loan losses
1,241 
1,051 
(2,273)
Depreciation
1,320 
1,266 
1,336 
Amortization of intangible assets
 
33 
97 
Amortization of investment premiums and discounts, net
1,515 
1,650 
2,076 
Other than temporary impairment recovery on available for sale securities
(17)
(17)
 
Expense (benefit) for deferred income taxes
267 
177 
(231)
Stock compensation expense
135 
138 
164 
Income from bank owned life insurance
(343)
(335)
(307)
Gain on sale of securities available for sale
(612)
(691)
(578)
Gain on sale of mortgage loans
(1,585)
(1,175)
(719)
Loss on sale of loan note
  
1,781 
(Gain) loss on sale of premises and equipment
(72)
25 
Proceeds from sale of mortgage loans
56,309 
43,847 
37,300 
(Gain) loss on sale of foreclosed assets
(21)
716 
208 
Originations of mortgage loans sold
(53,026)
(44,020)
(32,835)
(Increase) decrease in:
   
Accrued interest receivable
340 
437 
657 
Other assets
145 
21 
1,513 
Increase (decrease) in accrued expenses and other liabilities
(1,980)
933 
(277)
Net cash provided by operating activities
6,520 
6,436 
10,136 
Cash flows from investing activities:
   
Proceeds from sales, calls and maturities of securities available for sale
67,671 
120,354 
112,235 
Purchase of securities available for sale
(43,778)
(56,875)
(91,257)
Net increase in loans
(49,586)
(19,005)
(1,908)
Proceeds from sale of foreclosed assets
1,623 
344 
1,118 
Proceeds from sale of premises and equipment
100 
  
Purchase of premises and equipment
(775)
(2,361)
(1,168)
Net cash provided by (used in) investing activities
(24,745)
42,457 
19,020 
Cash flows from financing activities:
   
Net increase (decrease) in deposits
(6,524)
8,098 
(31,689)
Increase (decrease) in advance payments by borrowers for taxes and insurance
152 
101 
(8)
Advances from Federal Home Loan Bank
26,000 
41,000 
57,000 
Repayment of advances from Federal Home Loan Bank
(30,000)
(60,000)
(69,780)
Increase (decrease) in repurchase agreements
1,885 
(11,588)
4,599 
Acquisition of treasury stock
(1,876)
(11,926)
(3,500)
Proceeds from repayment of ESOP loan
632 
704 
 
Dividends paid on common stock
(993)
(1,023)
(1,187)
Net cash (used in) financing activities
(10,724)
(34,634)
(44,565)
Increase (decrease) in cash and cash equivalents
(28,949)
14,259 
(15,409)
Cash and cash equivalents, beginning of period
54,698 
40,439 
55,848 
Cash and cash equivalents, end of period
25,749 
54,698 
40,439 
Supplemental disclosures of cash flow information:
   
Interest paid
5,354 
6,587 
8,977 
Income taxes refund
(564)
(900)
(718)
Supplemental disclosures of non-cash investing and financing activities:
   
Loans charged off
1,468 
1,867 
1,232 
Loan transferred to held for sale
  
6,987 
Foreclosures and in substance foreclosures of loans during year
2,263 
869 
1,579 
Net unrealized gains (losses) on investment securities classified as available for sale
(2,918)
(2,030)
7,195 
Increase (decrease) in deferred tax asset related to unrealized gains (losses) on investments
992 
691 
(2,446)
Dividends declared and payable
288 
287 
301 
Sale and financing of stock to ESOP
 
7,884 
 
Issue of unearned restricted stock
$ 145 
$ 25 
$ 260 
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2016
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 its 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).

The Bank is a Kentucky commercial chartered bank and is supervised by the Kentucky Department of Financial Institutions (“KDFI”) and the FDIC. Supervision of the Corporation is conducted by the Federal Reserve Bank of Saint Louis (“FED”).

The Bank owns JBMM, LLC, a wholly owned, limited liability company, which owns and manages the Bank’s foreclosed assets. The Bank owns Heritage Interim Corporation, a Tennessee corporation established to facilitate the acquisition of a bank in Tennessee. The proposed acquisition was terminated in August of 2013. The Bank owns Heritage USA Title, LLC, which sells title insurance to the Bank’s real estate loan customers.

The Bank owns Fort Webb LP, LLC, which owns a limited partnership interest in Fort Webb Elderly Housing LP, LLC, a low income senior citizen housing facility in Bowling Green, Kentucky. The facility offers apartments for rent for those senior citizens who qualify and is managed by the Bowling Green, Kentucky Housing Authority.

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 subsidiaries (collectively the “Company”) for all periods. 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 (“U.S. GAAP”) and conform to general practices in the banking industry. U.S. GAAP is generally defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), as amended by Accounting Standards Updates (“ASUs”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative U.S. GAAP for SEC registrants.

 

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 U.S. GAAP. 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.

Subsequent Events

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 in conformity with U.S. GAAP, 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-bearing deposits in other financial institutions and federal funds sold with maturities of three months or less. The Company is required to maintain reserve funds in either cash on hand or on deposit with the Federal Reserve Bank. At December 31, 2016, the Company’s reserve requirement was met with available cash on hand.

 

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. Gains and losses on sales are recorded on the trade date.

Other Than Temporary Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic conditions warrant such evaluation. 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. FHLB stock is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Receivable and Allowance for Loan Losses

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and deferred loan cost. 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. Subsequent recoveries, if any, are credited to the allowance. 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. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years.

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 estimate 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 U.S. GAAP and has taken into account the views of its regulators and the current economic environment.

If an asset or portion thereof is classified as a loss, we establish a specific reserve for such amount. If the Company determines that a loan relationship is collateral dependent, the Company will charge off the portion of that loan that is deemed to be impaired against the allowance for loan loss account. The Company defines collateral dependent as any loan in that the customer will be unable to reduce the principal balance of the loan without the complete or partial sale of the collateral. The Company will charge off a portion or all of a loan balance once it deems the collection of any remaining interest and principal due to be unlikely.

Loans held for sale

Mortgage loans originated and intended for sale are carried at the lower of cost or estimated fair value as determined on a loan-by-loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Realized gains and losses are recognized when legal title to the loans has been transferred to the purchaser and sales proceeds have been received and are reflected in the accompanying consolidated statement of operations in gains on mortgage loans sold, net of related costs such as compensation expenses. The Company does not securitize mortgage loans.

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, 2016, the Bank maintained a servicing portfolio of one to four family real estate loans of approximately $19.7 million and approximately $22.8 million at December 31, 2015. For the years ended December 31, 2016, December 31, 2015, and December 31, 2014, 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.

 

Foreclosed Assets

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.

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.

Treasury Stock

The Company may occasionally purchase its own common stock either in open market transactions or privately negotiated transactions. The value of the Company’s common stock held in treasury is listed at cost.

Unearned ESOP Shares

The Company offers an Employee Stock Ownership Plan (“ESOP”) to the employees of the Company. The unearned portion of common stock of the Company held in the ESOP Trust is recorded on the balance sheet at cost. Common stock is released from the ESOP Trust to the participants as the Bank makes payments on the loan to the Corporation on behalf of the ESOP Trust.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other than temporary impairment has been recognized in income, and unrealized appreciation (depreciation) on derivatives.

 

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets have been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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 was amortized using the sum of the year’s digits method over an estimated period of nine years. At December 31, 2015, the core deposit intangible was fully amortized.

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 the guidelines of 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. The Company’s derivative matured on October 8, 2015. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the years ended December 31, 2015 or 2014.

 

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-bearing deposits in banks

The carrying amounts reported in the consolidated balance sheets for interest bearing deposits in banks is 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 held for sale

Mortgage loans originated and intended to be sold are carried at the lower of cost or estimated fair value as determined on a loan by loan basis. Gains or losses are recognized at the time of ownership transfer. Net unrealized losses, if any, are recognized through a valuation allowance and charged to income.

 

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.

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%.

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 16. At December 31, 2016, there were no such restrictions. At December 31, 2016, the Corporation has approximately $1.1 million in cash on hand available to pay common dividends and repurchase treasury stock as outlined in Note 19. At December 31, 2016, the Bank may not pay an additional cash dividend to the Corporation 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. Anti-dilutive common stock equivalents are not included for the purposes of this calculation. At December 31, 2016, the Company has no warrants or stock options outstanding.

 

Stock Compensation

Compensation cost is recognized for restricted stock awards issued to employees based on the fair value of these awards at the date of grant. The cost is recognized over the required service period, generally defined as the vesting period.

Effect of New Accounting Pronouncements

In May 2014, the FASB issued new guidance related to “Revenue from Contracts with Customers.” This guidance supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the ASC. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016; however, the FASB has agreed to a one-year deferral of the effective date to December 15, 2017. The implementation of ASC Topic 605 will not have a material impact on the Company’s Consolidated Financial Statements.

 

ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 was effective for interim and annual reporting periods beginning after December 15, 2015. The implementation of the provisions of ASU No. 2015-02 did not have a material impact on the Company’s Consolidated Financial Statements.

ASU 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The implementation of ASU 2015-05, which was effective on January 1, 2016, did not have a significant impact on the Company’s Consolidated Financial Statements.

 

ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting.” ASU 2015-15 adds SEC paragraphs pursuant to an SEC Staff Announcement that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The implementation of ASU 2015-15 did not have a significant impact on the Company’s Consolidated Financial Statements.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” The guidance in this update eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance is intended to reduce complexity in financial reporting. The elimination of the restatement requirement should simplify financial reporting for many entities. However, recognizing the entire impact of a measurement period adjustment in a single reporting period may introduce earnings volatility and reduce comparability between periods when the adjustments are material. The accounting changes in this update are effective for public companies for annual periods, and the interim periods within those annual periods, after December 15, 2015. The implementation of ASU 2015-16 did not have a material impact on the Company’s Consolidated Financial Statements.

 

ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective on January 1, 2018, and is not expected to have a material effect on the Company’s Consolidated Financial Statements.

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019, and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the potential impact of ASU 2016-02 on the Company’s Consolidated Financial Statements.

ASU 2016-05Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 will be effective for us on January 1, 2017. The implementation of ASU 2016-05 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016-07 will be effective for us on January 1, 2017. The implementation of ASU 2016-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU 2016-09 is effective on January 1, 2017. The implementation of ASU 2016-09 is not expected to have a material effect on the Company’s Consolidated Financial Statements.

 

On June 16, 2016, the FASB released its finalized ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments to U.S. GAAP require businesses and other organization to measure the expected credit losses on financial assets, such as loans, securities, bond insurance, and many receivables, the FASB said. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified as available-for-sale. The accounting board added that the write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts to improve the loss estimates on financial assets that are losing value. The board also said the techniques that are employed today to write down loans and other instruments can still be used, although it expects the variables for calculating the losses to change. ASU 2016-13 will become effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Companies are permitted to adopt ASU 2016-13 in fiscal years beginning after December 15, 2018. The Company is currently evaluating the potential impact of ASU 2016-13.

ASU 2016-15 “Statement of Cash Flows (Topic 230)” (“ASU 2016-15”) is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. We are evaluating the impact that the adoption of ASU 2016-15 will have on the Company’s Consolidated Financial Statements.

Other accounting standards that have been issued or proposed by the FASB or other standards 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. Reclassifications had no effect on prior year’s net income or shareholders’ equity.

Securities
12 Months Ended
Dec. 31, 2016
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, 2016  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

           

U.S. Treasury securities

   $ 2,000        1        —          2,001  

U.S. Agency securities

     83,667        983        (638      84,012  

Tax free municipal bonds

     33,004        1,081        (174      33,911  

Taxable municipal bonds

     2,720        17        (10      2,727  

Trust preferred securities

     1,634        183        —          1,817  

Mortgage-backed securities:

           

GNMA

     19,490        175        (109      19,556  

FNMA

     40,754        176        (577      40,353  

FHLMC

     6,831        12        (84      6,759  

Non-Agency CMOs

     3,786        —          (208      3,578  

AGENCY CMOs

     14,765        74        (73      14,766  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 208,651        2,702        (1,873      209,480  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

           

U.S. Treasury Securities

   $ 2,001        —          (1      2,000  

U.S. Agency Securities

     91,694        1,727        (488      92,933  

Tax free municipal bonds

     42,237        2,481        (59      44,659  

Taxable municipal bonds

     6,190        52        (65      6,177  

Trust preferred securities

     1,617        248        —          1,865  

Mortgage-backed securities:

           

GNMA

     29,990        239        (239      29,990  

FNMA

     28,189        266        (152      28,303  

FHLMC

     8,113        24        (51      8,086  

Non-Agency CMOs

     3,828        —          (174      3,654  

AGENCY CMOs

     19,570        71        (131      19,510  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 233,429        5,108        (1,360      237,177  
  

 

 

    

 

 

    

 

 

    

 

 

 

The scheduled maturities of debt securities available for sale at December 31, 2016, were as follows:

 

            Estimated  
     Amortized      Fair  
     Cost      Value  

Due within one year

   $ 6,605        6,615  

Due in one to five years

     13,913        14,067  

Due in five to ten years

     32,611        32,744  

Due after ten years

     13,022        13,603  
  

 

 

    

 

 

 
     66,151        67,029  

Amortizing agency bonds

     56,874        57,439  

Mortgage-backed securities

     85,626        85,012  
  

 

 

    

 

 

 

Total unrestricted securities available for sale

   $ 208,651        209,480  
  

 

 

    

 

 

 

The scheduled maturities of debt securities available for sale at December 31, 2015, were as follows:

 

            Estimated  
     Amortized      Fair  
     Cost      Value  

Due within one year

   $ —          —    

Due in one to five years

     17,939        18,304  

Due in five to ten years

     42,151        42,793  

Due after ten years

     22,702        24,088  
  

 

 

    

 

 

 
     82,792        85,185  

Amortizing agency bonds

     60,947        62,449  

Mortgage-backed securities

     89,690        89,543  
  

 

 

    

 

 

 

Total unrestricted securities available for sale

   $ 233,429        237,177  
  

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2016, are as follows:

 

     Less than 12 months     12 months or longer     Total  
     Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized  
     Fair Value      Losses     Fair Value      Losses     Fair Value      Losses  

Available for sale

               

U.S. Agency debt securities

   $ 41,963        (597     3,459        (41     45,422        (638

Taxable municipals

     1,347        (10     —          —         1,347        (10

Tax free municipals

     7,369        (174     —          —         7,369        (174

Mortgage-backed securities:

               

GNMA

     6,151        (62     3,861        (47     10,012        (109

FNMA

     28,950        (577     —          —         28,950        (577

FHLMC

     6,217        (84     —          —         6,217        (84

Non-Agency CMOs

     —          —         3,578        (208     3,578        (208

AGENCY CMOs

     7,144        (73     —          —         7,144        (73
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

   $ 99,141        (1,577     10,898        (296     110,039        (1,873
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2015, are as follows:

 

     Less than 12 months     12 months or longer     Total  
     Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized  
     Fair Value      Losses     Fair Value      Losses     Fair Value      Losses  

Available for sale

               

U.S. Treasury securities

   $ 2,000        (1     —          —         2,000        (1

U.S. Agency debt securities

     26,499        (203     16,224        (285     42,723        (488

Taxable municipals

     2,159        (32     1,887        (33     4,046        (65

Tax free municipals

     —          —         3,878        (59     3,878        (59

Mortgage-backed securities:

               

GNMA

     10,840        (105     11,508        (134     22,348        (239

FNMA

     11,484        (87     3,036        (65     14,520        (152

FHLMC

     7,336        (51     —          —         7,336        (51

NON-AGENCY CMOs

     —          —         3,654        (174     3,654        (174

AGENCY CMOs

     9,781        (90     1,991        (41     11,772        (131
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

   $ 70,099        (569     42,178        (791     112,277        (1,360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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. Management gives consideration 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, 2016, the Company has 73 securities with unrealized losses. 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 agreement.

At September 30, 2013, the Company recognized a $400,000 impairment charge related 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. In January 2015, Your Community Bankshares (“YCB”) purchased FFKY. In September of 2016, Wesbanco (“WSBC”) closed on its purchase of YCB. WSBC is a $9.8 billion institution headquartered in West Virginia. WSBC has assumed the debt originally issued by FFKY, and all interest is now current. The Company is currently accreting the $400,000 impairment charge back into income.

During 2016, the Company sold investment securities classified as available for sale for proceeds of $19.0 million resulting in gross gains of $690,000 and gross losses of $78,000. During 2015, the Company sold investment securities classified as available for sale for proceeds of $84.9 million resulting in gross gains of $1,274,000 and gross losses of $583,000. 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.

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, 2016, the Bank pledged investments with a book value of $125.6 million and a market value of approximately $128.4 million to various municipal entities as required by law. In addition, the Bank has provided $45.6 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, 2016
Receivables [Abstract]
 
Loans Receivable, Net
(3) Loans Receivable, Net:

 

The components of loans receivable in the consolidated balance sheets as of December 31, 2016, and December 31, 2015, were as follows:

 

     December 31, 2016     December 31, 2015  
     Amount      Percent     Amount      Percent  

Real estate loans:

          

One-to-four family first mortgages

   $ 147,962        24.2   $ 145,999        26.0

Home equity line of credit

     35,684        5.8     33,644        6.0

Second mortgages

     1,452        0.3     1,771        0.3

Multi-family

     34,284        5.6     24,725        4.4

Construction

     39,255        6.4     34,878        6.2

Land

     23,840        3.9     22,453        4.0

Farmland

     47,796        7.8     42,246        7.5

Non-residential real estate

     182,940        30.0     149,711        26.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage loans

     513,213        84.0     455,427        81.0

Consumer loans

     8,717        1.4     20,324        3.6

Commercial loans

     88,907        14.6     86,743        15.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other loans

     97,624        16.0     107,067        19.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     610,837        100.0     562,494        100.0
     

 

 

      

 

 

 

Deferred loan cost, net of fees

     (439        (445   

Less allowance for loan losses

     (6,112        (5,700   
  

 

 

      

 

 

    

Total loans, net

   $ 604,286        $ 556,349     
  

 

 

      

 

 

    

Loans serviced for the benefit of others totaled approximately $33.5 million and $36.9 million at December 31, 2016 and 2015, respectively. At December 31, 2016, approximately $19.7 million of the $33.5 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 are pledged to the Federal Home Loan Bank of Cincinnati as discussed in Note 6. At December 31, 2016, the carrying amount of loans eligible and pledged to the Federal Home Loan Bank of Cincinnati was $135.7 million.

The Company originates most fixed rate loans for immediate sale to outside investors, including Freddie Mac. Generally, the agreement to sell such loans occurs shortly after the loan application is tentatively approved through best effort commitments, not binding the Company to deliver a loan that does not close.

The Company uses the following risk definitions for commercial loan risk grades:

Excellent - Loans in this category are to persons or entities of unquestioned financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by Bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.

Very Good - These are loans to persons or entities with strong financial condition and above-average liquidity who have previously satisfactorily handled their obligations with the Bank. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.

Satisfactory - Assets of this grade conform to substantially all the Bank’s underwriting criteria and evidence an average level of credit risk; however, such assets display more susceptibility to economic, technological or political changes since they lack the above average financial strength of credits rated Very Good. Borrower’s repayment capacity is considered to be adequate. Credit is appropriately structured and serviced; payment history is satisfactory.

Acceptable - Assets of this grade conform to most of the Bank’s underwriting criteria and evidence an acceptable, though higher than average, level of credit risk; however, these loans have certain risk characteristics which could adversely affect the borrower’s ability to repay given material adverse trends. Loans in this category require an above average level of servicing and show more reliance on collateral and guaranties to preclude a loss to the Bank should material adverse trends develop. If the borrower is a company, its earnings, liquidity and capitalization are slightly below average when compared to its peers.

Watch - These loans are characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited.

Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the asset or in the institution’s credit position at some future date. Borrowers may be experiencing adverse operating trends or market conditions. Non-financial reasons for rating a credit exposure Special Mention include, but are not limited to: management problems, pending litigations, ineffective loan agreement and/or inadequate loan documentation, structural weaknesses and/or lack of control over collateral.

Substandard - A substandard asset is inadequately protected by the current sound worth or paying capacity of the debtor or the collateral pledged. There exists one or more well defined weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will experience some loss if the deficiencies are not corrected. Generally, the asset is considered collectible as to both principal and interest primarily because of collateral coverage or enterprise value. Generally, the asset is current and marginally secured.

Doubtful - A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status and have a defined work-out strategy.

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.

The following credit risk standards are assigned to consumer loans:

Satisfactory - All consumer open-end and closed-end retail loans shall have an initial risk grade assigned of 3 - Satisfactory.

Substandard - All consumer open-end and closed-end retail loans past due 90 cumulative days from the contractual date will be classified as 7 - Substandard. If a consumer/retail loan customer files bankruptcy, the loan will be classified as 7 - Substandard regardless of payment history.

Loss - All closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off as loss assets. The charge-off will be taken by the end of the month in which the 120-day or 180-day time period elapses. All losses in retail credit will be recognized when the affiliate becomes aware of the loss, but in no case should the charge off exceed the time frames stated within this policy.

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 loans. At December 31, 2016, approximately $78.7 million of the outstanding principal balance of the Company’s non-residential real estate loans were secured by owner-occupied properties, approximately $104.2 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.

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, farmland and agri-business commercial loans and one-to-four family residential real estate loans.

Loans by classification type and the related valuation allowance amounts at December 31, 2016 were as follows:

 

           

 

Special

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

One-to-four family mortgages

   $ 145,965        744        1,253        —          147,962        —          852  

Home equity line of credit

     35,109        25        550        —          35,684        —          260  

Junior liens

     1,411        30        11        —          1,452        —          8  

Multi-family

     31,280        —          3,004        —          34,284        —          412  

Construction

     39,255        —          —          —          39,255        —          277  

Land

     15,581        35        8,224        —          23,840        1,036        724  

Non-residential real estate

     172,395        3        10,542        —          182,940        —          964  

Farmland

     44,832        674        2,290        —          47,796        —          778  

Consumer loans

     8,382        —          335        —          8,717        84        124  

Commercial loans

     85,174        603        3,130        —          88,907        28        565  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 579,384        2,114        29,339        —          610,837        1,148        4,964  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans by classification type and the related valuation allowance amounts at December 31, 2015 were as follows:

 

           

 

Special

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

One-to-four family mortgages

   $ 142,729        41        3,229        —          145,999        60        970  

Home equity line of credit

     33,475        —          169        —          33,644        —          201  

Junior liens

     1,720        35        16        —          1,771        —          8  

Multi-family

     21,644        —          3,081        —          24,725        138        89  

Construction

     34,878        —          —          —          34,878        —          377  

Land

     11,794        41        10,618        —          22,453        69        1,310  

Non-residential real estate

     138,865        2,489        8,357        —          149,711        134        1,005  

Farmland

     41,917        —          329        —          42,246        —          358  

Consumer loans

     20,123        —          201        —          20,324        49        309  

Commercial loans

     84,317        352        2,074        —          86,743        180        443  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 531,462        2,958        28,074        —          562,494        630        5,070  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2016 were as follows:

 

     At December 31, 2016      For the year ended
December 31, 2016
 
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

Impaired loans with no specific allowance

              

One-to-four family mortgages

   $ 1,253        1,253        —          1,470        67  

Home equity line of credit

     550        550        —          390        24  

Junior liens

     11        11        —          13        1  

Multi-family

     3,004        3,004        —          3,005        172  

Construction

     —          —          —          —          —    

Land

     1,553        2,513        —          7,868        38  

Non-residential real estate

     10,542        10,542        —          9,363        485  

Farmland

     2,290        2,290        —          1,563        120  

Consumer loans

     —          —          —          21        1  

Commercial loans

     2,865        2,865        —          3,168        112  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     22,068        23,028        —          26,861        1,020  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance

              

One-to-four family mortgages

   $ —          —          —          452        —    

Home equity line of credit

     —          —          —          —          —    

Junior liens

     —          —          —          —          —    

Multi-family

     —          —          —          910        —    

Construction

     —          —          —          —          —    

Land

     6,671        6,671        1,036        1,811        485  

Non-residential real estate

     —          —          —          —          —    

Farmland

     —          —          —          533        —    

Consumer loans

     335        335        84        273        —    

Commercial loans

     265        265        28        754        24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,271        7,271        1,148        4,733        509  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 29,339        30,299        1,148        31,594        1,529  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2015 were as follows:

 

     At December 31, 2015      For the year ended
December 31, 2015
 
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

Impaired loans with no specific allowance

              

One-to-four family mortgages

   $ 2,526        2,526        —          2,389        80  

Home equity line of credit

     169        169        —          457        7  

Junior liens

     16        16        —          17        1  

Multi-family

     2,128        2,128        —          2,797        126  

Construction

     —          —          —          —          —    

Land

     10,038        10,998        —          8,520        671  

Non-residential real estate

     7,640        7,640        —          283        404  

Farmland

     329        329        —          7,774        19  

Consumer loans

     5        5        —          3        —    

Commercial loans

     1,274        1,274        —          1,599        73  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     24,125        25,085        —          23,839        1,381  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance

              

One-to-four family mortgages

   $ 703        703        60        709        40  

Home equity line of credit

     —          —          —          —          —    

Junior liens

     —          —          —          —          —    

Multi-family

     953        953        138        318        17  

Construction

     —          —          —          —          —    

Land

     580        580        69        1,707        46  

Non-residential real estate

     717        717        134        836        28  

Farmland

     —          —          —          —          —    

Consumer loans

     196        196        49        194        —    

Commercial loans

     800        800        180        514        15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,949        3,949        630        4,278        146  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 28,074        29,034        630        28,117        1,527  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of December 31, 2016, and December 31, 2015, by portfolio segment and based on the impairment method as of December 31, 2016, and December 31, 2015.

 

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

December 31, 2016:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 28        1,036        —          —          84        1,148  

Collectively evaluated for impairment

     565        1,001        2,154        1,120        124        4,964  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 593        2,037        2,154        1,120        208        6,112  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 3,130        8,224        15,836        1,814        335        29,339  

Loans collectively evaluated for impairment

     85,777        54,871        249,184        183,284        8,382        581,498  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 88,907        63,095        265,020        185,098        8,717        610,837  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2015:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 180        69        272        60        49        630  

Collectively evaluated for impairment

     443        1,687        1,452        1,179        309        5,070  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 623        1,756        1,724        1,239        358        5,700  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,074        10,618        11,767        3,414        201        28,074  

Loans collectively evaluated for impairment

     84,669        46,713        204,915        178,000        20,123        534,420  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 86,743        57,331        216,682        181,414        20,324        562,494  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The average recorded investment in impaired loans for the years ended December 31, 2016 and 2015 was $31.6 million and $28.1 million, respectively. The Company recognized $1.5 million of interest income on impaired loans for the years ended December 31, 2016 and December 31, 2015, respectively, and $2.0 million for the year ended December 31, 2014. 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, 2016:

 

     Balance
12/31/2015
     Charge off
2016
    Recovery
2016
     General
Provision
2016
    Specific
Provision
2016
    Ending
Balance
12/31/2016
 

One-to-four family mortgages

   $ 1,030        —         167        (118     (227     852  

Home equity line of credit

     201        (30     14        59       16       260  

Junior liens

     8        —         14        —         (14     8  

Multi-family

     227        (421     —          323       283       412  

Construction

     377        —         —          (100     —         277  

Land

     1,379        —         —          (586     967       1,760  

Non-residential real estate

     1,139        —         10        (41     (144     964  

Farmland

     358        —         —          420       —         778  

Consumer loans

     358        (422     293        (187     166       208  

Commercial loans

     623        (595     141        122       302       593  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 5,700        (1,468     639        (108     1,349       6,112  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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, 2015:

 

     Balance
12/31/2014
     Charge off
2015
    Recovery
2015
     General
Provision
2015
    Specific
Provision
2015
    Ending
Balance
12/31/2015
 

One-to-four family mortgages

   $ 1,198        (143     39        (176     112       1,030  

Home equity line of credit

     181        (92     10        20       82       201  

Junior liens

     14        —         4        (6     (4     8  

Multi-family

     85        —         —          4       138       227  

Construction

     146        —         —          231       —         377  

Land

     1,123        (911     —          850       317       1,379  

Non-residential real estate

     2,083        (222     2        (944     220       1,139  

Farmland

     461        —         —          500       (603     358  

Consumer loans

     494        (298     118        (123     167       358  

Commercial loans

     504        (201     54        (61     327       623  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 6,289        (1,867     227        295       756       5,700  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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, 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  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Non-accrual loans totaled $9.1 million and $7.4 million at December 31, 2016, and December 31, 2015, respectively. All non-accrual loans noted below are classified as either substandard or doubtful. Interest income foregone on such loans totaled $108,000 at December 31, 2016, $337,000 at December 31, 2015, and $76,000 at December 31, 2014, 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, 2016, and December 31, 2015. For the years ended December 31, 2016, and December 31, 2015, the components of the Company’s balances of non-accrual loans are as follows:

 

     12/31/2016      12/31/2015  

One-to-four family first mortgages

   $ 270        2,234  

Home equity lines of credit

     402        48  

Multi-family

     —          1,968  

Land

     7,675        1,553  

Non-residential real estate

     208        247  

Farmland

     —          166  

Consumer loans

     3        8  

Commercial loans

     516        1,198  
  

 

 

    

 

 

 

Total non-accrual loans

   $ 9,074        7,422  
  

 

 

    

 

 

 

The table below presents gross loan balances excluding deferred loan fees of $439,000 at December 31, 2016, 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

   $ 145,069        896        270        744        983        —        $ 147,962  

Home equity line of credit

     35,087        22        402        25        148        —          35,684  

Junior liens

     1,407        4        —          30        11        —          1,452  

Multi-family

     31,280        —          —          —          3,004        —          34,284  

Construction

     39,255        —          —          —          —          —          39,255  

Land

     15,581        —          7,675        35        549        —          23,840  

Non-residential real estate

     172,395        —          208        3        10,334        —          182,940  

Farmland

     44,832        —          —          674        2,290        —          47,796  

Consumer loans

     8,354        28        3        —          332        —          8,717  

Commercial loans

     84,913        261        516        603        2,614        —          88,907  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 578,173        1,211        9,074        2,114        20,265        —          610,837  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents gross loan balances excluding deferred loan fees of $445,000 at December 31, 2015, 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

   $ 142,058        671        2,234        41        995        —        $ 145,999  

Home equity line of credit

     33,396        79        48        —          121        —          33,644  

Junior liens

     1,720        —          —          35        16        —          1,771  

Multi-family

     21,638        6        1,968        —          1,113        —          24,725  

Construction

     34,878        —          —          —          —          —          34,878  

Land

     11,047        747        1,553        41        9,065        —          22,453  

Non-residential real estate

     138,637        228        247        2,489        8,110        —          149,711  

Farmland

     41,853        64        166        —          163        —          42,246  

Consumer loans

     20,108        15        8        —          193        —          20,324  

Commercial loans

     84,272        45        1,198        352        876        —          86,743  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 529,607        1,855        7,422        2,958        20,652        —          562,494  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 TDR, ASC 310; A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, is determinative. 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

ASC 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, 2016, the Company had three loan relationships with a total of eight loans classified as performing TDR. The largest loan relationship classified as a TDR is collateralized by non-owner occupied commercial real estate and was placed on interest only payments in 2014. At July 31, 2015, both loans were removed from interest only and are now paying monthly principal and interest payments in accordance with the Company’s loan policy. At December 31, 2016, the loan relationship has a balance of approximately $3.2 million.

The second TDR relationship includes two loans secured by a non-owner occupied commercial real estate property. For a period of one year beginning in the third quarter of 2015, this loan relationship was modified to allow the customer to make interest only payments. The owner has significant equity in the collateral and is attempting to the sell the asset to use the equity for unanticipated financial obligations. The aggregate loan balance of this relationship is $2.2 million. At December 31, 2016, the owner is making principal and interest payments on this loan.

The third TDR relationship consist of three multi-family properties and one non-residential real estate property in which the loans payments were modified as interest only beginning in January 2016. The aggregate loan balance of this relationship is $1.1 million.

There were no loans as of December 31, 2016 that have been modified as TDRs during 2016 and then subsequently defaulted in 2016 on their modified terms. At December 31, 2016, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

A summary of the activity in loans classified as TDRs for the year ended December 31, 2016, is as follows:

 

     Balance at      New      Loss on      Transferred to      Loan     Balance at  
     12/31/15      TDR      Foreclosure      Non-accrual      Amortization     12/31/16  

Multi-family real estate

   $ —          816        —          —          (1     815  

Non-residential real estate

     5,536        228        —          —          (118     5,646  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total performing TDR

   $ 5,536        1,044        —          —          (119     6,461  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

A summary of the activity in loans classified as TDRs for the year ended December 31, 2015, is as follows:

 

     Balance at      New      Loss on      Transferred to      Loan     Balance at  
     12/31/14      TDR      Foreclosure      Held For Sale      Amortization     12/31/15  

Non-residential real estate

   $ 3,284        2,265        —          —          (13     5,536  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total performing TDR

   $ 3,284        2,265        —          —          (13     5,536  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The Company originates loans to officers and directors and their affiliates at terms substantially equivalent to those available to other borrowers. Loans to officers and directors at December 31, 2016, and December 31, 2015, were approximately $4.9 million and $3.8 million, respectively. At December 31, 2016 and December 31, 2015, funds committed that were undisbursed to officers and directors approximated $380,000 and $493,000, respectively.

The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2016, and December 31, 2015:

 

     2016      2015  

Balance at beginning of period

   $ 3,844        4,022  

New loans

     1,651        682  

Principal repayments

     (601      (860
  

 

 

    

 

 

 

Balance at end of period

   $ 4,894        3,844  
  

 

 

    

 

 

 
Premises and Equipment
12 Months Ended
Dec. 31, 2016
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, 2016 and December 31, 2015, consisted of the following:

 

     2016      2015  

Land

   $ 6,555        6,579  

Land improvements

     1,132        1,097  

Buildings

     22,397        22,405  

Furniture and equipment

     6,932        6,488  
  

 

 

    

 

 

 
     37,016        36,569  

Less accumulated depreciation

     13,555        12,535  
  

 

 

    

 

 

 

Premises and equipment, net

   $ 23,461        24,034  
  

 

 

    

 

 

 

Depreciation expense was approximately $1,320,000, $1,266,000 and $1,336,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

Deposits
12 Months Ended
Dec. 31, 2016
Text Block [Abstract]
 
Deposits
(5) Deposits:

At December 31, 2016, the scheduled maturities of other time deposits were as follows:

 

Years Ending December 31,

      

2017

   $ 137,907  

2018

     97,986  

2019

     29,945  

2020

     16,811  

2021

     10,429  
  

 

 

 
   $ 293,078  
  

 

 

 

The amount of other time deposits with a minimum denomination greater of $250,000 or more was approximately $79.7 million and $78.8 million at December 31, 2016, and December 31, 2015, respectively. At December 31, 2016 and December 31, 2015, directors, members of senior management and their affiliates had deposits in the Bank of approximately $2.1 million and $6.2 million, respectively.

Interest expense on deposits for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, is summarized as follows:

 

     2016      2015      2014  

Interest bearing checking accounts

   $ 1,183        1,105        1,253  

Money market accounts

     76        88        86  

Savings

     95        103        109  

Other time deposits

     2,886        3,735        4,155  
  

 

 

    

 

 

    

 

 

 
   $ 4,240        5,031        5,603  
  

 

 

    

 

 

    

 

 

 

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, 2016, average daily clearings were approximately $5.9 million.

At December 31, 2016, the Company had approximately $335,000 of deposit accounts in overdraft status and are reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2015, the Company had approximately $196,000 of deposit accounts in overdraft status and are reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2016, and December 31, 2015, the Company had deposits classified as brokered deposits totaling $33.4 million and $34.4 million, respectively.

Advances from Federal Home Loan Bank
12 Months Ended
Dec. 31, 2016
Banking and Thrift [Abstract]
 
Advances from Federal Home Loan Bank
(6) Advances from Federal Home Loan Bank:

 

Federal Home Loan Bank advances are summarized as follows:

 

     December 31,  
     2016     2015  
            Weighted            Weighted  

Types of Advances

  

Amount

    

Average Rate

   

Amount

    

Average Rate

 

Fixed-rate

   $ 11,000        1.04   $ 15,000        2.19

Scheduled maturities of FHLB advances as of December 31, 2016, are as follows:

 

Years Ending    Fixed      Average  

December 31,

   Rate      Cost  

2017

   $ 5,000        0.88

2018

     6,000        1.18
  

 

 

    

 

 

 

Total

   $ 11,000        1.04
  

 

 

    

 

 

 

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, 2016, the Bank could borrow an additional $51.3 million from the FHLB of Cincinnati without pledging additional collateral. At December 31, 2016, the Bank has an additional $6.8 million in additional collateral that could be pledged to the FHLB to secure additional advance requirements. The Bank has a $12 million unsecured line of credit with BBVA 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, 2016.

Repurchase Agreements
12 Months Ended
Dec. 31, 2016
Text Block [Abstract]
 
Repurchase Agreements
(7) Repurchase Agreements:

 

At December 31, 2016, the Company provided investment securities with a market value and book value of $47.7 million as collateral for repurchase agreements. The maximum repurchase balance outstanding during the year ended December 31, 2016, and December 31, 2015, was $54.8 million and $57.4 million, respectively.

At December 31, 2016, and December 31, 2015, the respective cost and maturities of the Company’s repurchase agreements are as follows:

 

2016                           

Third Party

  

Balance

    

Average Rate

   

Maturity

    

Various customers

   $ 47,655        0.91     Overnight     
  

 

 

    

 

 

      

Total

   $ 47,655        0.91     
  

 

 

    

 

 

      
2015                       

Third Party

  

Balance

    

Average Rate

   

Maturity

    

Comments

 

Merrill Lynch

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

Various customers

     39,770        0.61        Overnight  
  

 

 

    

 

 

      

Total

   $ 45,770        1.13     
  

 

 

    

 

 

      
Fair Value Measurement
12 Months Ended
Dec. 31, 2016
Fair Value Disclosures [Abstract]
 
Fair Value Measurement
(8) Fair Value Measurement:

ASC Topic 820, Fair Value Measurements and Disclosures, 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.

The Company 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 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, 2016

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

Significant

Unobservable

 

Description

   balance sheet at
December 31, 2016
     Identical Assets
(Level 1)
     Inputs
(Level 2)
     Inputs
(Level 3)
 

Assets

           

Available for sale securities

   $ 209,480        2,001        205,662        1,817  

 

December 31, 2015

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

Significant

Unobservable

 

Description

   balance sheet at
December 31, 2015
     Identical Assets
(Level 1)
     Inputs
(Level 2)
     Inputs
(Level 3)
 

Assets

           

Available for sale securities

   $ 237,177        2,000        233,312        1,865  

 

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

 

December 31, 2016

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

Description

   consolidated
balance sheet at
12/31/2016
     Markets for
Identical Assets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets

           

Foreclosed assets

   $ 2,397        —          —          2,397  

Impaired loans, net of allowance of $1,148

   $ 6,123        —          —          6,123  

 

December 31, 2015

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

Description

   consolidated
balance sheet at
12/31/2015
     Markets for
Identical Assets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets

           

Foreclosed assets

   $ 1,736        —          —          1,736  

Impaired loans, net of allowance of $630

   $ 3,319        —          —          3,319  

 

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a reoccuring and non-reoccuring basis at December 31, 2016 and 2015:

 

Level 3 Significant Unobservable Input Assumptions

 
     Fair
Value
    

Valuation

Technique

  

Unobservable

Input

   Quantitative Range
of Unobservable
Inputs
 

December 31, 2016

           

Assets measured on a non-recurring basis

     

Foreclosed assets

     2,397      Discount to appraised value of collateral    Appraisal comparability adjustments      30% to 55%  

Impaired loans

     7,271      Discount to appraised value of collateral    Appraisal comparability adjustments      10% to 25%  

Asset measured on a recurring basis

     

Trust preferred securities

     1,817     

Discounted cash flow

Spread to Libor swap curve

  

Compare to quotes for sale

when available

    

One month libor

4% to 6%

 

 

December 31, 2015

           

Assets measured on a non-recurring basis

     

Foreclosed assets

     1,736      Discount to appraised value of collateral    Appraisal comparability adjustments      10% to 15%  

Impaired loans

     3,949      Discount to appraised value of collateral    Appraisal comparability adjustments      10% to 15%  

Asset measured on a recurring basis

     

Trust preferred securities

     1,865     

Discounted cash flow

Spread to Libor swap curve

  

Compare to quotes for sale

when available

    

One month libor

4% to 6%

 

 

Foreclosed assets and impaired loans are valued at fair value, less cost to sell. Fair value of a foreclosed asset is determined by an appraised value of the underlying collateral to which a discount is applied. Management establishes the discount or adjustments based on recent sales and any unique features the collateral may possess. Management also considers the anticipated selling, holding and other administrative cost associated with the collateral when establishing the discounted percentage. Management may adjust the discounts based on the most recent sales of comparable collateral.

The Company bases the value of its trust preferred security on a quarterly review of SEC filings by the issuer to ascertain overall financial strength. Based on our analysis, the Company then reviews Libor swap curve to analyze the overall yield of our investment as compared to long-term swap rates. On rare occasions, the Company may receive an offer from a broker to purchase similar type instruments and the Company will analyze these offerings as compared to our investment.

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, 2016 and 2015, (including the change in fair value) for assets and liabilities classified by the Company 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,
 
     2016      2015  
     Other      Other  
     Assets      Assets  

Fair value, December 31,

   $ 1,865      $ 1,489  

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

     (65      359  

Other than temporary impairment charge

     —          —    

Recovery of prior impairment charge

     17        17  

Purchases, issuances and settlements, net

     —          —    

Transfers in and/or out of Level 3

     —          —    
  

 

 

    

 

 

 

Fair value, December 31,

   $ 1,817      $ 1,865  
  

 

 

    

 

 

 

 

The estimated fair values of financial instruments were as follows at December 31, 2016:

 

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

Financial Assets:

  

Cash and due from banks

   $ 21,779        21,779        21,779        —          —    

Interest-bearing deposits in banks

     3,970        3,970        3,970        —          —    

Securities available for sale

     209,480        209,480        2,001        205,662        1,817  

Federal Home Loan Bank stock

     4,428        4,428        —          4,428        —    

Loans held for sale

     1,094        1,094        —          1,094        —    

Loans receivable

     604,286        593,257        —          —          593,257  

Accrued interest receivable

     3,799        3,799        —          3,799        —    

Financial Liabilities:

              

Deposits

     732,882        732,942        —          732,942        —    

Advances from borrowers for taxes and insurance

     766        766        —          766        —    

Advances from Federal Home Loan Bank

     11,000        10,979        —          10,979        —    

Repurchase agreements

     47,655        47,655        —          47,655        —    

Subordinated debentures

     10,310        10,099        —          —          10,099  

The estimated fair values of financial instruments were as follows at December 31, 2015:

 

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

Financial Assets:

  

Cash and due from banks

   $ 46,926        46,926        46,926        —          —    

Interest-bearing deposits in banks

     7,772        7,772        7,772        —          —    

Securities available for sale

     237,177        237,177        2,000        233,312        1,865  

Federal Home Loan Bank stock

     4,428        4,428        —          4,428        —    

Loans held for sale

     2,792        2,792        —          2,792        —    

Loans receivable

     556,349        552,981        —          —          552,981  

Accounts receivable

     4,139        4,139        —          4,139        —    

Financial Liabilities:

              

Deposits

     739,406        724,877        —          724,877        —    

Advances from borrowers for taxes and insurance

     614        614        —          614        —    

Advances from Federal Home Loan Bank

     15,000        14,985        —          14,985        —    

Repurchase agreements

     45,770        45,931        —          45,931        —    

Subordinated debentures

     10,310        10,099        —          —          10,099  

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 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,  
     2016      2015      2014  

Beginning balance

   $ 1,736        1,927        1,674  

Foreclosed assets measured at initial recognition:

        

Carrying value of foreclosed assets prior to acquisition

     2,935        986        1,816  

Proceeds from sale of foreclosed assets

     (1,623      (344      (1,118

Charge-offs recognized in the allowance for loan loss

     (672      (117      (237

Gains (losses) included in non-interest expense

     21        (716      (208
  

 

 

    

 

 

    

 

 

 

Fair value

   $ 2,397        1,736        1,927  
  

 

 

    

 

 

    

 

 

 

Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. There were no transfers between levels for the years ended December 31, 2016, 2015 and 2014

Subordinated Debentures
12 Months Ended
Dec. 31, 2016
Brokers and Dealers [Abstract]
 
Subordinated Debentures
(9) 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 interest rate adjustment for the trust was effective January 12, 2017, which adjusted the total coupon rate to 4.12%. 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, 2016
Risks and Uncertainties [Abstract]
 
Concentrations of Credit Risk
(10) 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.

At December 31, 2016, all cash and cash equivalents are deposited with BBVA Compass 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, 2016, total FHLB deposits were approximately $826,000 and total deposits at the Federal Reserve were $4.7 million, none of which is insured by the FDIC. At December 31, 2016, total deposits at BBVA were $9.7 million, of which $250,000 were insured by the FDIC.

Employee Benefit Plans
12 Months Ended
Dec. 31, 2016
Compensation and Retirement Disclosure [Abstract]
 
Employee Benefit Plans
(11) Employee Benefit Plans:

HopFed Bancorp Long Term Incentive Plans

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 three or four year periods. 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.

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, 2016, the Compensation Committee granted 12,342 shares of restricted stock with a market value of $145,000. For the year ended December 31, 2015, the Compensation Committee granted 2,034 shares of restricted stock with a market value of $25,000. For the year ended December 31, 2014, the Compensation Committee granted 22,378 shares of restricted stock with a market value of $260,000. The Company recognized $135,000, $190,000, and $164,000 in compensation expense in 2016, 2015 and 2014, respectively. The remaining compensation expense to be recognized at December 31, 2016, is as follows:

 

Year Ending December 31,

   Approximate Future
Compensation Expense
 

2017

   $ 88  

2018

     54  

2019

     9