HOPFED BANCORP INC (HFBC) Form 10-Q for Period Ending 3/31/2017
: 6.23.6
 
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2017
May 05, 2017
Document And Entity Information [Abstract]
  
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
HFBC 
 
Entity Registrant Name
HOPFED BANCORP INC 
 
Entity Central Index Key
0001041550 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
6,717,247 
Consolidated Condensed Statements of Financial Condition - USD ($)
$ in Thousands
Mar. 31, 2017
Dec. 31, 2016
Assets
  
Cash and due from banks
$ 30,663 
$ 21,779 
Interest-bearing deposits in banks
19,408 
3,970 
Cash and cash equivalents
50,071 
25,749 
Federal Home Loan Bank stock, at cost
4,428 
4,428 
Securities available for sale
207,580 
209,480 
Loans held for sale
1,091 
1,094 
Loans receivable, net of allowance for loan losses of $6,164 at March 31, 2017, and $6,112 at December 31, 2016
615,480 
604,286 
Accrued interest receivable
3,121 
3,799 
Foreclosed assets, net
2,111 
2,397 
Bank owned life insurance
10,120 
10,662 
Premises and equipment, net
23,225 
23,461 
Deferred tax assets
2,918 
3,052 
Other assets
3,162 
3,078 
Total assets
923,307 
891,486 
Deposits:
  
Non-interest-bearing accounts
136,333 
131,145 
Interest-bearing accounts
  
Interest bearing checking accounts
217,562 
209,347 
Savings and money market accounts
100,009 
99,312 
Other time deposits
311,839 
293,078 
Total deposits
765,743 
732,882 
Advances from Federal Home Loan Bank
11,000 
11,000 
Repurchase agreements
45,492 
47,655 
Subordinated debentures
10,310 
10,310 
Advances from borrowers for taxes and insurance
867 
766 
Accrued expenses and other liabilities
2,434 
2,445 
Total liabilities
835,846 
805,058 
Stockholders' equity
  
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at March 31, 2017 and December 31, 2016
  
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,963,378 issued and 6,716,549 outstanding at March 31, 2017 and 7,963,378 issued and 6,717,242 outstanding at December 31, 2016
80 
80 
Additional paid-in-capital
58,705 
58,660 
Retained earnings
49,721 
49,035 
Treasury stock, at cost (1,246,829 shares at March 31, 2017 and 1,246,136 shares at December 31, 2016)
(15,356)
(15,347)
Unearned Employee Stock Ownership Plan ("ESOP") Shares, at cost (488,161 shares at March 31, 2017 and 498,346 shares at December 31, 2016)
(6,414)
(6,548)
Accumulated other comprehensive income
725 
548 
Total stockholders' equity
87,461 
86,428 
Total liabilities and stockholders' equity
$ 923,307 
$ 891,486 
Consolidated Condensed Statements of Financial Condition (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
  
Loans receivable, allowance for loan losses
$ 6,164 
$ 6,112 
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 
7,963,378 
Common stock, shares outstanding
6,716,549 
6,717,242 
Treasury stock, shares
1,246,829 
1,246,136 
Unearned ESOP Shares
488,161 
498,346 
Consolidated Condensed Statements of Income - USD ($)
3 Months Ended
$ in Thousands
Mar. 31, 2017
Mar. 31, 2016
Interest and dividend income
  
Loans
$ 6,736 
$ 6,465 
Investment in securities, taxable
1,118 
1,247 
Nontaxable securities available for sale
283 
353 
Interest-bearing deposits
23 
16 
Total interest and dividend income
8,160 
8,081 
Interest expense:
  
Deposits
1,167 
1,095 
FHLB borrowings
32 
73 
Repurchase agreements
103 
143 
Subordinated debentures
104 
94 
Total interest expense
1,406 
1,405 
Net interest income
6,754 
6,676 
Provision for loan losses
291 
458 
Net interest income after provision for loan losses
6,463 
6,218 
Non-interest income:
  
Service charges
804 
677 
Merchant card
302 
291 
Mortgage origination income
334 
368 
Gain on sale of investments
291 
Income from bank owned life insurance
235 
84 
Income from financial services
140 
133 
Other operating income
479 
176 
Total non-interest income
2,296 
2,020 
Non-interest expenses:
  
Salaries and benefits
4,236 
3,988 
Occupancy expense
775 
787 
Data processing
764 
727 
State deposit tax
231 
248 
Professional services
348 
335 
Advertising
381 
320 
Foreclosure, net
108 
68 
Other operating expenses
846 
1,210 
Total non-interest expense
7,689 
7,683 
Income before income tax expense
1,070 
555 
Income tax expense
135 
46 
Net income
$ 935 
$ 509 
Net income per share:
  
Basic
$ 0.15 
$ 0.08 
Diluted
0.15 
0.08 
Dividend per share
$ 0.04 
$ 0.04 
Weighted average shares outstanding - basic
6,218,706 
6,297,755 
Weighted average shares outstanding - diluted
6,218,706 
6,297,755 
Consolidated Statements of Comprehensive Income - USD ($)
3 Months Ended
$ in Thousands
Mar. 31, 2017
Mar. 31, 2016
Statement of Comprehensive Income [Abstract]
  
Net income
$ 935 
$ 509 
Other comprehensive income, net of tax:
  
Unrealized gain on non-other than temporary impaired investment securities (OTTI) available for sale, net of taxes of ($121) and ($897), respectively
235 
1,745 
Unrealized gain (loss) on OTTI securities, net of taxes of $29 and ($39), respectively
(57)
72 
Reclassification adjustment for gains included in net income, net of taxes of $1 and $99, respectively
(1)
(192)
Total other comprehensive income
177 
1,625 
Comprehensive income
$ 1,112 
$ 2,134 
Consolidated Statements of Comprehensive Income (Parenthetical) - USD ($)
3 Months Ended
$ in Thousands
Mar. 31, 2017
Mar. 31, 2016
Statement of Comprehensive Income [Abstract]
  
Unrealized gain on investment securities available for sale, tax effect
$ 121 
$ 897 
Unrealized gain (loss) on non other than temporary impaired securities, tax effect
29 
(39)
Reclassification adjustment for other than temporary impairment included in net income, tax effect
$ 1 
$ 99 
Consolidated Condensed Statement of Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Common Treasury Shares [Member]
Unearned ESOP Shares [Member]
Accumulated Other Comprehensive Income [Member]
Beginning balance at Dec. 31, 2015
$ 87,630 
$ 79 
$ 58,604 
$ 47,124 
$ (13,471)
$ (7,180)
$ 2,474 
Beginning balance, Shares at Dec. 31, 2015
 
6,865,811 
     
Consolidated net income
509 
  
509 
   
Issuance of restricted stock
$ 1 
     
Issuance of restricted stock, shares
 
10,609 
     
Repurchase of treasury stock
(901)
   
(901)
  
Repurchase of treasury stock, shares
 
(75,657)
     
Change in price of ESOP shares
(16)
 
(16)
    
ESOP shares committed to be released
141 
    
141 
 
Compensation expense, restricted stock awards
30 
 
30 
    
Net change in unrealized gain on securities available for sale, net of income taxes
1,625 
     
1,625 
Cash dividend to common stockholders
(251)
  
(251)
   
Ending balance at Mar. 31, 2016
88,768 
$ 80 
58,618 
47,382 
(14,372)
(7,039)
4,099 
Ending balance, Shares at Mar. 31, 2016
 
6,800,763 
     
Beginning balance at Dec. 31, 2016
86,428 
$ 80 
58,660 
49,035 
(15,347)
(6,548)
548 
Beginning balance, Shares at Dec. 31, 2016
 
6,717,242 
     
Consolidated net income
935 
  
935 
   
Repurchase of treasury stock
(9)
   
(9)
  
Repurchase of treasury stock, shares
 
(693)
     
Change in price of ESOP shares
14 
 
14 
    
ESOP shares committed to be released
134 
    
134 
 
Compensation expense, restricted stock awards
31 
 
31 
    
Net change in unrealized gain on securities available for sale, net of income taxes
177 
     
177 
Cash dividend to common stockholders
(249)
  
(249)
   
Ending balance at Mar. 31, 2017
$ 87,461 
$ 80 
$ 58,705 
$ 49,721 
$ (15,356)
$ (6,414)
$ 725 
Ending balance, Shares at Mar. 31, 2017
 
6,716,549 
     
Consolidated Condensed Statement of Stockholders' Equity (Parenthetical) - USD ($)
3 Months Ended
$ in Thousands
Mar. 31, 2017
Mar. 31, 2016
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 91 
$ 837 
Accumulated Other Comprehensive Income [Member]
  
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 91 
$ 837 
Consolidated Condensed Statements of Cash Flows - USD ($)
3 Months Ended
$ in Thousands
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities:
  
Net cash provided by operating activities
$ 3,180 
$ 817 
Cash flows from investing activities
  
Proceeds from sales, calls and maturities of securities available for sale
15,598 
16,764 
Purchase of securities available for sale
(13,728)
(15,021)
Net (increase) decrease in loans
(11,528)
3,259 
Proceeds from sale of foreclosed assets
329 
282 
Purchase of premises and equipment
(70)
(313)
Net cash provided by (used in) investing activities
(9,399)
4,971 
Cash flows from financing activities:
  
Net increase in demand deposits
14,100 
15,048 
Net increase (decrease) in time and other deposits
18,761 
(29,501)
Increase in advances from borrowers for taxes and insurance
101 
140 
Advances from Federal Home Loan Bank
22,000 
 
Repayment of advances from Federal Home Loan Bank
(22,000)
(4,000)
Net increase (decrease) in repurchase agreements
(2,163)
1,170 
Cash used to repurchase treasury stock
(9)
(901)
Dividends paid on common stock
(249)
(251)
Net cash provided by (used in) financing activities
30,541 
(18,295)
Increase (decrease) in cash and cash equivalents
24,322 
(12,507)
Cash and cash equivalents, beginning of period
25,749 
54,698 
Cash and cash equivalents, end of period
50,071 
42,191 
Supplemental disclosures of cash flow information:
  
Interest paid
1,396 
1,509 
Income taxes paid
Supplemental disclosures of non-cash investing and financing activities:
  
Loans charged off
292 
83 
Foreclosures and in substance foreclosures of loans during period
43 
 
Net unrealized gains on investment securities classified as available for sale
268 
2,460 
Decrease in deferred tax asset related to unrealized gains on investments
(91)
(838)
Dividends declared and payable
$ 288 
286 
Issuance of restricted common stock
 
$ 125 
Basis of Presentation
3 Months Ended
Mar. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
 
Basis of Presentation
(1) BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements include the accounts of HopFed Bancorp, Inc. (the “Corporation”) and its subsidiaries (collectively, the “Company”). The Corporation is a parent holding company of Heritage Bank USA, Inc. (the “Bank”). The Banks owns JBMM, LLC, a wholly owned, limited liability company, which owns and manages the Bank’s foreclosed assets. The Bank also 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 Corporation owns 100% of the common stock of HopFed Capital Trust I, a statutory trust formed under the laws of the state of Delaware with the purpose of issuing preferred capital securities to a third-party investor and purchasing junior subordinated debentures from the Company. HopFed Capital Trust I and Fort Webb LP, LLC are variable interest entities for which the Company is not the primary beneficiary. Accordingly, these subsidiaries are recorded under the equity method in the Company’s consolidated financial statements. All significant intercompany accounts have been eliminated.

The Bank is a Kentucky commercial bank regulated by the Kentucky Department of Financial Institutions (“KDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). HopFed Bancorp is regulated by the Federal Reserve Bank of Saint Louis (“FED”).

The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the three month period ended March 31, 2017 are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2017.

The accompanying unaudited interim consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2016 Consolidated Financial Statements.

Net Income Per Share
3 Months Ended
Mar. 31, 2017
Earnings Per Share [Abstract]
 
Net Income Per Share
(2) NET INCOME PER SHARE

Basic net income per share (IPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three month periods ended March 31, 2017 and March 31, 2016, the Company has excluded all unearned shares held by the ESOP.

 

     March 31,  
     2017      2016  

Basic IPS:

     

Net income

   $ 935,000      $ 509,000  

Average common shares outstanding

     6,218,706        6,297,755  
  

 

 

    

 

 

 

Net income per share

   $ 0.15      $ 0.08  
  

 

 

    

 

 

 

Diluted IPS:

     

Net income

   $ 935,000      $ 509,000  

Average common shares outstanding

     6,218,706        6,297,755  
  

 

 

    

 

 

 

Dilutive effect of stock options

     —          —    
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,218,706        6,297,755  
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.15      $ 0.08  
  

 

 

    

 

 

 
Stock Compensation
3 Months Ended
Mar. 31, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Stock Compensation
(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $31,000 for the three month period ended March 31, 2017 and $30,000 for the three month period ended March 31, 2016. The Company did not issue any restricted shares in the three month period ended March 31, 2017. The Company issued 10,609 shares of restricted stock in the three month period ended March 31, 2016. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting as of March 31, 2017 (Dollars in Thousands):

 

Year Ending December 31,

   Future
Expense
 

2017

   $ 57  

2018

     54  

2019

     9  

2020

     2  
  

 

 

 

Total

   $ 122  
  

 

 

 

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

Securities
3 Months Ended
Mar. 31, 2017
Cash and Cash Equivalents [Abstract]
 
Securities
(4) SECURITIES

The carrying amount of securities and their estimated fair values at March 31, 2017 were as follows:

 

     March 31, 2017  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  
     (Dollars in Thousands)  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale:

           

U.S. Treasury securities

   $ 2,000        —          —          2,000  

U.S. Agency securities

     90,294        929        (468      90,755  

Taxable municipal bonds

     2,164        16        (9      2,171  

Tax free municipal bonds

     33,052        1,128        (67      34,113  

Trust preferred securities

     1,638        94        —          1,732  

Mortgage backed securities

     77,334        374        (899      76,809  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 206,482        2,541        (1,443      207,580  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The carrying amount of securities and their estimated fair values at December 31, 2016 were as follows:

 

     December 31, 2016  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  
     (Dollars in Thousands)  

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  

Taxable municipal bonds

     2,720        17        (10      2,727  

Tax free municipal bonds

     33,004        1,081        (174      33,911  

Trust preferred securities

     1,634        183        —          1,817  

Mortgage-backed securities

     85,626        437        (1,051      85,012  
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

The scheduled maturities of debt securities available for sale at March 31, 2017 were as follows:

 

            Estimated  
     Amortized      Fair  
     Cost      Value  
     (Dollars in Thousands)  

Due within one year

   $ 6,622      $ 6,624  

Due in one to five years

     20,553        20,748  

Due in five to ten years

     30,572        30,878  

Due after ten years

     11,024        11,515  
  

 

 

    

 

 

 
     68,771        69,765  

Amortizing agency bonds

     60,377        61,006  

Mortgage-backed securities

     77,334        76,809  
  

 

 

    

 

 

 

Total securities available for sale

   $ 206,482      $ 207,580  
  

 

 

    

 

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of March 31, 2017 were 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  
     (Dollars in Thousands)  

Available for sale

               

U.S. Agency securities

   $ 43,756        (419     3,380        (49     47,136        (468

Taxable municipals

     794        (9     —          —         794        (9

Tax free municipals

     5,408        (67     —          —         5,408        (67

Mortgage-backed securities

     48,365        (654     8,369        (245     56,734        (899
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 98,323        (1,149     11,749        (294     110,072        (1,443
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2016 were 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  
     (Dollars in Thousands)  

Available for sale

               

U.S. Agency 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

     48,462        (796     7,439        (255     55,901        (1,051
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At March 31, 2017, the Company has 69 securities with unrealized losses. The losses for all securities are considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and are not related to the credit worthiness of the issuers. Furthermore, the Company has the intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of March 31, 2017.

At March 31, 2017 and December 31, 2016, securities with a book value of approximately $128.9 million and $125.6 million and a market value of approximately $131.9 million and $128.4 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law.

 

Loans
3 Months Ended
Mar. 31, 2017
Receivables [Abstract]
 
Loans
(5) LOANS

The Company uses the following loan segments as described below:

 

    One-to-four family first mortgages are closed end loans secured by residential housing. Loans may be either owner or non-owner occupied properties. If the loan is owner-occupied, the loan is analyzed and under-written as a consumer loan. Loan terms may be up to 30 years.

 

    Home equity lines of credit may be first or second mortgages secured by one-to-four family properties. Home equity loans carry a variable rate and typically are open-ended for a period not to exceed ten years with a fifteen year final maturity. Loans secured by home equity lines of credit are under-written under the Company’s consumer loan guidelines.

 

    Junior liens are closed-end loans secured by one-to-four family residences with a fixed or variable rate. Typically, the collateral for these loans are owner occupied units with a subordinate lien. Loans secured by junior liens are under-written under the Company’s consumer loan guidelines.

 

    Multi-family loans are closed-end loans secured by residential housing with five or more units in a single building. Multi-family loans may carry a variable rate of interest or the interest rate on the loan is a fixed rate (usually five years). After the initial fixed rate period, the loan reverts to a variable rate or has a balloon maturity. Multi-family loans have amortization terms of up to twenty years and are under-written under the Company’s commercial loan underwriting guidelines.

 

    Constructions loans may consist of residential or commercial properties and carry a fixed or variable rate for the term of the construction period. Construction loans have a maturity of between twelve and twenty-four months depending on the type of property. After the construction period, loans are amortized over a twenty-year period and are under-written under the Company’s underwriting guidelines for the type of property.

 

    Land loans consist of properties currently under development, land held for future development and land held for recreational purposes. Land loans used for recreational purposes are amortized for twenty years and typically carry a fixed rate of interest for one-to-five years with a balloon maturity or floating rate period to follow and are under-written under the Company’s commercial loan underwriting guidelines.

 

    Loans classified as farmland by the Company include properties that are used exclusively for the production of grain, livestock, poultry or swine. Loans secured by farmland have a maturity of up to twenty years and carry a fixed rate of interest for five to ten years. Loans secured by farmland are under-written under the Company’s commercial loan underwriting guidelines.

 

    Non-residential real estate loans are secured by commercial real estate properties and may be either owner or non-owner occupied. The loans typically have a twenty year maturity and may be fixed for a period of five to ten years. After the initial fixed rate period, the note will either revert to a one year adjustable rate loan or have a balloon maturity. Loans secured by non-residential real estate are under-written under the Company’s commercial loan underwriting standards.

 

    The Company originates secured and unsecured consumer loans. Collateral for consumer loans may include deposits, brokerage accounts, automobiles and other personal items. Consumer loans are typically fixed for a term of one to five years and are under-written using the Company’s consumer loan policy.

 

    The Company originates unsecured and secured commercial loans. Secured commercial loans may have business inventory, accounts receivable and equipment as collateral. The typical customer may include all forms of manufacturing, retail and wholesale sales, professional services and various forms of agri-business interest. Commercial loans may be fixed or variable rate and typically have terms between one and five years.

 

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2017 and December 31, 2016. At March 31, 2017 and December 31, 2016, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

 

     March 31, 2017      December 31, 2016  
     (Dollars in Thousands)  

Real estate loans:

     

One-to-four family first mortgages

   $ 157,626        147,962  

Home equity lines of credit

     36,694        35,684  

Junior liens

     1,365        1,452  

Multi-family

     38,483        34,284  

Construction

     17,386        39,255  

Land

     20,142        23,840  

Farmland

     42,812        47,796  

Non-residential real estate

     213,933        182,940  
  

 

 

    

 

 

 

Total mortgage loans

     528,441        513,213  

Consumer loans

     8,674        8,717  

Commercial loans

     84,955        88,907  
  

 

 

    

 

 

 

Total other loans

     93,629        97,624  
  

 

 

    

 

 

 

Total loans, gross

     622,070        610,837  

Deferred loan fees, net of costs

     (426      (439

Less allowance for loan losses

     (6,164      (6,112
  

 

 

    

 

 

 

Total loans, net

   $ 615,480      $ 604,286  
  

 

 

    

 

 

 

Although the Company has a diversified loan portfolio, 84.9% and 84.0% of the portfolio was concentrated in loans secured by real estate located primarily within a single geographic region of the United States as of March 31, 2017 and December 31, 2016, respectively.

 

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the three month period ended March 31, 2017 (Dollars in Thousands):

 

                         General     Specific     Ending  
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2016      2017     2017      2017     2017     3/31/2017  

One-to-four family mortgages

   $ 852        —         3        245       (3     1,097  

Home equity line of credit

     260        —         2        68       (2     328  

Junior liens

     8        —         1        1       (1     9  

Multi-family

     412        —         —          181       —         593  

Construction

     277        —         —          (136     —         141  

Land

     1,760        —         —          (396     (931     433  

Farmland

     778        —         —          (147     35       666  

Non-residential real estate

     964        —         6        324       47       1,341  

Consumer loans

     208        (68     33        18       49       240  

Commercial loans

     593        (224     8        551       388       1,316  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 6,112        (292     53        709       (418     6,164  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2016 (Dollars in Thousands):

 

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

Farmland

     358        —         —          420       —         778  

Non-residential real estate

     1,139        —         10        (41     (144     964  

Consumer loans

     358        (422     293        (187     166       208  

Commercial loans

     623        (595     141        122       302       593  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

The table below presents past due and non-accrual balances at March 31, 2017 by loan classification allocated between performing and non-performing:

 

            30 - 89                    Impaired Loans         
     Currently      Days      Non-accrual      Special      Currently Performing         
     Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 153,653        688        248        55        2,982        —        $ 157,626  

Home equity line of credit

     36,132        —          402        —          160        —          36,694  

Junior liens

     1,320        4        —          29        12        —          1,365  

Multi-family

     37,668        —          —          —          815        —          38,483  

Construction

     17,386        —          —          —          —          —          17,386  

Land

     12,020        —          7,234        431        457        —          20,142  

Farmland

     40,588        —          338        693        1,193        —          42,812  

Non-residential real estate

     202,168        —          210        1,518        10,037        —          213,933  

Consumer loans

     8,239        22        119        —          294        —          8,674  

Commercial loans

     82,825        32        393        254        1,451        —          84,955  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 591,999        746        8,944        2,980        17,401        —        $ 622,070  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents past due and non-accrual balances at December 31, 2016 by loan classification allocated between performing and non-performing:

 

            30 - 89      Non-             Impaired Loans         
     Currently      Days      Accrual      Special      Currently Performing         
     Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  
     (Dollars in Thousands)  

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  

Farmland

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

Non-residential real estate

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

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

At March 31, 2017 and December 31, 2016, there were no loans more than 90 days past due and accruing interest.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of March 31, 2017 and December 31, 2016, by portfolio segment and based on the impairment method as of March 31, 2017 and December 31, 2016.

 

            Land                              
            Development /      Commercial      Residential                
     Commercial      Construction      Real Estate      Real Estate      Consumer      Total  
                   (Dollars in Thousands)         

March 31, 2017:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 201        105        88        —          98      $ 492  

Collectively evaluated for impairment

     1,115        469        2,512        1,434        142        5,672  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,316        574        2,600        1,434        240      $ 6,164  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 1,844        7,691        12,593        3,804        413      $ 26,345  

Loans collectively evaluated for impairment

     83,111        29,837        282,635        191,881        8,261        595,725  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 84,955        37,528        295,228        195,685        8,674      $ 622,070  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

            Land                              
            Development /      Commercial      Residential                
     Commercial      Construction      Real Estate      Real Estate      Consumer      Total  
                   (Dollars in Thousands)         

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined risk metrics and categorized into one of the risk grades discussed below. The Company uses the following risk grade definitions for commercial loans:

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.

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 possible 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 less cost to sell if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired.

 

A summary of the Company’s impaired loans, including their respective regulatory classification and their respective specific reserve at March 31, 2017 and December 31, 2016 were as follows:

 

                                        Specific      Allowance  
                                        Allowance      for Loans  
            Special      Impaired Loans             for      not  
March 31, 2017    Pass      Mention      Substandard      Doubtful      Total      Impairment      Impaired  
            (Dollars in Thousands)                

One-to-four family mortgages

   $ 154,341        55        3,230        —          157,626        —          1,097  

Home equity line of credit

     36,132        —          562        —          36,694        —          328  

Junior liens

     1,324        29        12        —          1,365        —          9  

Multi-family

     37,668        —          815        —          38,483        —          593  

Construction

     17,386        —          —          —          17,386        —          141  

Land

     12,020        431        7,691        —          20,142        105        328  

Farmland

     40,588        693        1,531        —          42,812        35        631  

Non-residential real estate

     202,168        1,518        10,247        —          213,933        53        1,288  

Consumer loans

     8,261        —          413        —          8,674        98        142  

Commercial loans

     82,857        254        1,844        —          84,955        201        1,115  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 592,745        2,980        26,345        —          622,070        492        5,672  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                        Specific      Allowance  
                                        Allowance      for Loans  
            Special      Impaired Loans             for      not  
December 31, 2016    Pass      Mention      Substandard      Doubtful      Total      Impairment      Impaired  
            (Dollars in Thousands)                

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  

Farmland

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

Non-residential real estate

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

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Impaired loans by classification type and the related valuation allowance amounts at March 31, 2017 were as follows:

 

                          For the three month period ended  
            At March 31, 2017      March 31, 2017  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
Impaired loans with no specific allowance    Investment      Balance      Allowance      Investment      Recognized  
                   (Dollars in Thousands)         

One-to-four family mortgages

   $ 3,230        3,230        —          2,242        31  

Home equity line of credit

     562        562        —          556        10  

Junior liens

     12        12        —          12        —    

Multi-family

     815        815        —          1,910        10  

Construction

     —          —          —          —          —    

Land

     1,020        1,980        —          1,287        9  

Farmland

     1,005        1,005        —          1,648        13  

Non-residential real estate

     9,849        9,849        —          10,196        134  

Consumer loans

     18        18        —          9        —    

Commercial loans

     1,336        1,336        —          2,101        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     17,847        18,807        —          19,961        219  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Impaired loans with a specific allowance                            

One-to-four family mortgages

     —          —          —          —          —    

Home equity line of credit

     —          —          —          —          —    

Junior liens

     —          —          —          —          —    

Multi-family

     —          —          —          —          —    

Construction

     —          —          —          —          —    

Land

     6,671        6,671        105        6,671        —    

Farmland

     526        526        35        263        —    

Non-residential real estate

     398        398        53        199        5  

Consumer loans

     395        395        98        365        —    

Commercial loans

     508        508        201        387        3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,498        8,498        492        7,885        8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 26,345        27,305        492        27,846        227  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

                          For the year ended  
     At December 31, 2016      December 31, 2016  
     (Dollars in Thousands)  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
Impaired loans with no specific allowance    Investment      Balance      Allowance      Investment      Recognized  

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  

Farmland

     2,290        2,290        —          1,563        120  

Non-residential real estate

     10,542        10,542        —          9,363        485  

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  

Farmland

     —          —          —          533        —    

Non-residential real estate

     —          —          —          —          —    

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

At December 31, 2016, the Company had eight loans, representing three lending relationships, classified as performing TDRs. During the three month period ended March 31, 2017, the Company removed one lending relationship from TDR status. That relationship, with two loans representing $2.2 million, has paid as agreed based on the original terms of their note for a period of at least six months. For the three month period ended March 31, 2017, no loans were added to TDR classification and all loans currently classified as TDR are current based on their revised terms.

The following table provides the number of loans remaining in each category as of March 31, 2017 and December 31, 2016 that the Company had previously modified in a TDR:

 

                   Post Modification  
            Pre-Modification      Outstanding Record  
     Number of      Outstanding      Investment, net of  
    

Loans

     Record Investment      related allowance  

March 31, 2017

        

Multi-family

     3      $ 815,273        815,273  

Non-residential real estate

     3        3,421,915        3,421,915  

December 31, 2016

        

Multi-family

     3      $ 815,273        815,273  

Non-residential real estate

     5        5,646,223        5,646,223  

There were no loans as of March 31, 2017 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At March 31, 2017, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

 

Foreclosed Assets
3 Months Ended
Mar. 31, 2017
Banking and Thrift [Abstract]
 
Foreclosed Assets
(6) FORECLOSED ASSETS

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

At March 31, 2017 and December 31, 2016, the Company had balances in foreclosed assets consisting of the following:

 

     March 31, 2017      December 31, 2016  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 135        135  

Home equity line of credit

     28        28  

Multi-family real estate

     1,775        1,775  

Non-residential real estate

     173        459  
  

 

 

    

 

 

 

Total other assets owned

   $ 2,111        2,397  
  

 

 

    

 

 

 

For the three month period ended March 31, 2017, the Company’s activity in foreclosed property included the following:

 

            Activity During 2017                      
     Balance                   Reduction      Gain (Loss)      Balance  
     12/31/2016      Foreclosure      Sales     in Values      on Sale      3/31/2017  
     (Dollars in Thousands)                

One-to-four family mortgages

   $ 135        —          —         —          —        $ 135  

HELOC

     28        —          —         —          —          28  

Multi-family

     1,775        —          —         —          —          1,775  

Non-residential real estate

     459        43        (329     —          —          173  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 2,397        43        (329     —          —        $ 2,111  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

For the three month period ended March 31, 2016, the Company’s activity in foreclosed property included the following:

 

            Activity During 2016                     
     Balance                   Reduction      Gain (Loss)     Balance  
     12/31/2015      Foreclosure      Sales     in Values      on Sale     3/31/2016  
     (Dollars in Thousands)               

One-to-four family mortgages

   $ 55        —          —         —          —       $ 55  

HELOC

     943        —          —         —          —         943  

Non-residential real estate

     738        —          (270     —          (9     459  

Consumer

     —          12        (12     —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,736        12        (282     —          (9   $ 1,457  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Fair Value of Assets and Liabilities
3 Months Ended
Mar. 31, 2017
Fair Value Disclosures [Abstract]
 
Fair Value of Assets and Liabilities

(7)
FAIR VALUE OF ASSETS AND LIABILITIES

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

 

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

 

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

 

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

 

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

Cash and due from banks

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

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

Available-for-sale securities

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

FHLB stock

The fair value of FHLB stock is recognized at cost.

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.

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.

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 borrowers for taxes and insurance

The carrying amount of advances from borrowers for taxes and insurance approximates its fair value.

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.

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.

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%.

Fair Value Measurements on a Recurring Basis

Where quoted prices are available for identical securities in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.

 

The assets and liabilities measured at fair value on a recurring basis at March 31, 2017 are summarized below:

 

Description

   Total carrying
value in the
consolidated
balance sheet at
3/31/2017
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (Dollars in Thousands)  
Assets            

Securities available for sale

           

U.S. Treasury securities

     2,000        2,000        —          —    

U.S. Agency securities

     90,755        —          90,755        —    

Taxable municipals

     2,171        —          2,171        —    

Tax-free municipals

     34,113        —          34,113        —    

Trust preferred securities

     1,732        —          —          1,732  

Mortgage backed securities

     76,809        —          76,809        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     207,580        2,000        203,848        1,732  
  

 

 

    

 

 

    

 

 

    

 

 

 

The assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are summarized below:

 

Description

   Total carrying
value in the
consolidated
balance sheet at
12/31/2016
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (Dollars in Thousands)  
Assets            

Securities available for sale

           

U.S. Treasury securities

     2,001        2,001        —          —    

U.S. Agency securities

     84,012        —          84,012        —    

Taxable municipals

     2,727        —          2,727        —    

Tax-free municipals

     33,911        —          33,911        —    

Trust preferred securities

     1,817        —          —          1,817  

Mortgage backed securities

     85,012        —          85,012        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for March 31, 2017:

 

     Total carrying      Quoted Prices      Significant         
     value in the      In Active      Other      Significant  
     consolidated      Markets for      Observable      Unobservable  
     balance sheet at      Identical Assets      Inputs      Inputs  

Description

   March 31, 2017      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in Thousands)  

Assets

  

Foreclosed assets

   $ 2,111        —          —        $ 2,111  

Impaired loans, net of allowance

   $ 8,006        —          —        $ 8,006  

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2016:

 

     Total carrying      Quoted Prices      Significant         
     value in the      In Active      Other      Significant  
     consolidated      Markets for      Observable      Unobservable  
     balance sheet at      Identical Assets      Inputs      Inputs  

Description

   December 31, 2016      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in Thousands)  

Assets

  

Foreclosed assets

   $ 2,397        —          —        $ 2,397  

Impaired loans, net of allowance

   $ 6,123        —          —        $ 6,123  

 

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a recurring and non-recurring basis at March 31, 2017 and December 31, 2016:

 

Level 3 Significant Unobservable Input

Assumptions

 
                          Quantitative Range  
     Fair      Valuation      Unobservable      of Unobservable  
`    Value      Technique      Input      Inputs  
            (Dollars in Thousands)  

March 31, 2017

           

Assets measured on a non-recurring basis

 

        

Foreclosed assets

   $ 2,111       
Discount to appraised
value of collateral
 
 
    
Appraisal comparability
adjustments
 
 
     30% to 55%  

Impaired loans

     8,006       
Discount to appraised
value of collateral
 
 
    
Appraisal comparability
adjustments
 
 
     10% to 25%  

Asset measured on a recurring basis

 

        

Trust preferred securities

     1,732       
Discounted cash flow
Spread to Libor swap curve
 
 
    
Compare to quotes for
sale when available
 
 
    
One month libor
4% to 6%
 
 

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

     6,123       
Discount to appraised
value of collateral
 
 
    
Appraisal comparability
adjustments
 
 
     10% to 15%  

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%
 
 

 

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 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 the analysis, the Company then reviews the 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.

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the three month periods ended March 31, 2017 and March 31, 2016, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

     2017     2016  

Three month period ended March 31,

   Other Assets     Other Assets  
     (Dollars in Thousands)        

Fair value, January 1

   $ 1,817       1,865  

Change in unrealized losses included in other comprehensive income for assets and liabilities still held at March 31

     (89     105  

Accretion of previously discounted amounts

     4       4  

Purchases, issuances and settlements, net

     —         —    

Transfers in and/or out of Level 3

     —         —    
  

 

 

   

 

 

 

Fair value, March 31

   $ 1,732       1,974  
  

 

 

   

 

 

 

 

The estimated fair values of financial instruments were as follows at March 31, 2017:

 

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

Financial Assets:

              

Cash and due from banks

   $ 30,663        30,663        30,663        —          —    

Interest-bearing deposits

     19,408        19,408        19,408        —          —    

Securities available for sale

     207,580        207,580        2,000        203,848        1,732  

Federal Home Loan Bank stock

     4,428        4,428        —          —          4,428  

Loans held for sale

     1,091        1,091        —          1,091        —    

Loans receivable

     615,480        600,288        —          —          600,288  

Accrued interest receivable

     3,121        3,121        —          —          3,121  

Financial liabilities:

              

Deposits

     765,743        766,415        —          766,415        —    

Advances from borrowers for taxes and insurance

     867        867        —          867        —    

Advances from Federal Home Loan Bank

     11,000        10,999        —          10,999        —    

Repurchase agreements

     45,492        45,492        —          45,492        —    

Subordinated debentures

     10,310        10,099        —          —          10,099  

 

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

 

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

Financial Assets:

              

Cash and due from banks

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

Interest-bearing deposits

     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  

 

Effect of New Accounting Pronouncements
3 Months Ended
Mar. 31, 2017
Accounting Changes and Error Corrections [Abstract]
 
Effect of New Accounting Pronouncements
(8) 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. Management is currently evaluating the impact that this ASU will have 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. Management is currently evaluating the impact that this ASU will have 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. Management is 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 was effective beginning January 1, 2017. The implementation of ASU 2016-05 did not 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 was effective beginning January 1, 2017. The implementation of ASU 2016-07 did not 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 was effective beginning January 1, 2017. The implementation of ASU 2016-09 did not 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 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. Write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts are expected to improve the loss estimates on financial assets that are losing value. The techniques that are employed today to write down loans and other instruments can still be used, although the variables for calculating the losses are expected 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. Management is currently evaluating the potential impact of this ASU on the Company’s consolidated financial statements.

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 was permitted with retrospective application. Management is 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-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Income Taxes
3 Months Ended
Mar. 31, 2017
Income Tax Disclosure [Abstract]
 
Income Taxes
(9) INCOME TAXES

The Company files consolidated federal income tax returns and Tennessee excise tax returns. The Company files consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has not accrued any interest or penalties for uncertain tax positions. The effective tax rate differs from the statutory federal rate of 35% and Tennessee excise rate of 6.5% due to investments in qualified municipal securities, bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses. The Company’s effective tax rate for the three month periods ended March 31, 2017 and March 31, 2016 was 12.6% and 8.3%, respectively. The Company’s effective federal income tax rate varies significantly from our federal statutory tax rate for a variety of factors, including:

The Company’s investment in Fort Webb LP, LLC generates tax credits and depreciation expense that the Company can use to offset taxable income. At March 31, 2017 and December 31, 2016, the Company’s balance sheet did not include any equity investment in Fort Webb. The Company has other investments that produce both tax credits and depreciation expense that may be used to offset net income.

At March 31, 2017, the Company has $10.1 million in bank owned life insurance policies. The income generated from these policies increase the cash flow of the policies on a tax free basis. Life insurance proceeds are paid upon the death of a covered party. These proceeds, netted against the current cash value of the policy, result in tax free income to the Company. For the three month period ended March 31, 2017, the Company received additional income of approximately $170,000 from the net proceeds of a life insurance policy.

At March 31, 2017, the Company’s investment portfolio includes $34.1 million of tax free municipal bonds. Interest income on this portfolio, after netting out a disallowance for interest expense attributable to this portfolio, is tax exempt.

Esop
3 Months Ended
Mar. 31, 2017
Text Block [Abstract]
 
Esop
(10) ESOP

Substantially all of the Company’s employees who are at least 21 years old and have one year of employment with the Company participate in the 2015 HopFed Bancorp, Inc. Employee Stock Ownership Plan (“ESOP”). The ESOP purchased 600,000 shares of the Company’s common stock from the Company on March 2, 2015, at $13.14 per share. The ESOP borrowed $7.9 million from an open-end line of credit from the Company for the purchase of the stock, using the 600,000 shares of common stock as collateral. The Company makes discretionary contributions to the ESOP. The ESOP utilizes these contributions along with the dividends on the 600,000 held by the ESOP to repay the loan from the Company. When loan payments are made, ESOP shares are released based on reduction in the principal balance of the loan. The shares are allocated to participants based on relative compensation.

 

Employees who are not employed on December 31st of each year are not eligible for participation in the ESOP. The Company anticipates that loan payments will be made at the end of each year. Participants receive shares at the end of employment. The Company has the option to repurchase the shares or provide the shares directly to the employee.

The Company made its second ESOP loan payment in December 2016. At March 31, 2017, the Company’s accrued liability for the loan payment is $195,000. At March 31, 2017 and December 31, 2016, shares held by the ESOP were as follows:

 

     March 31, 2017      December 31, 2016  

Accrued for allocation to participants

     10,185        —    

Earned ESOP shares

     101,654        101,654  

Unearned ESOP shares

     488,161        498,346  
  

 

 

    

 

 

 

Total ESOP shares

     600,000        600,000  
  

 

 

    

 

 

 

Fair value of unearned shares

   $ 6,990,466      $ 6,707,737  
  

 

 

    

 

 

 
Commitments and Contingencies
3 Months Ended
Mar. 31, 2017
Commitments and Contingencies Disclosure [Abstract]
 
Commitments and Contingencies
(11) COMMITMENTS AND CONTINGENCIES

At March 31, 2017, the Bank had $32.1 million in outstanding commitments on revolving home equity lines of credit, $19.4 million in outstanding commitments on revolving personal lines of credit and $43.9 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $48.7 million. At March 31, 2017, the Company had $287,000 in standby letters of credit outstanding.

At March 31, 2017, the Company has $43.1 million in times deposits greater than $100,000 but less than $250,000 that are scheduled to mature in one year and $47.6 million in time deposits with balances greater than $250,000 that are scheduled to mature in one year or less.

 

The Bank’s FHLB borrowings are secured by a blanket security agreement pledging the Bank’s 1-4 family first mortgage loans and non-residential real estate loans. At March 31, 2017 and December 31, 2016, the Bank has pledged all eligible 1-4 family first mortgages. At March 31, 2017 and December 31, 2016 the Bank has outstanding borrowings of $11.0 million from the FHLB. A schedule of FHLB borrowings at March 31, 2017 and December 31, 2016 is provided below:

 

Outstanding
Balance
     Rate     Maturity  
(Dollars in Thousands)  
$ 5,000        0.88     10/06/2017  
  6,000        1.18     07/06/2018  

 

 

    

 

 

   
$ 11,000        1.04  

 

 

    

 

 

   

The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $45.5 million secured by the Bank’s loan portfolio to secure additional municipal deposits. At March 31, 2017, securities with a book value of approximately $45.2 million and a market value of $45.5 million were sold under agreements to repurchase from various customers.

The Company is a party to certain ordinary course litigation, and the Company intends to vigorously defend itself in all such matters. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

Regulatory Matters
3 Months Ended
Mar. 31, 2017
Banking and Thrift [Abstract]
 
Regulatory Matters
(12) REGULATORY MATTERS

The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.

The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2017, the capital conservation buffer is 1.25%. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

Under these new rules, Tier 1 capital generally consist of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets, trust preferred securities issued prior to that date, will continue to count as Tier 1 capital subject to certain limitations. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria.

Common equity Tier 1 capital generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company has made the decision to opt-out of this requirement.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2017 and December 31, 2016 based on the phase-in provisions of Basel III Capital Rules. Management believes, as of March 31, 2017 and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

 

The Company’s consolidated capital ratios and the Bank’s actual capital amounts and ratios as of March 31, 2017 and December 31, 2016 are presented below:

 

                               To be Well  
                  Minimum Capital     Capitalized for  
                  Required – Basel III     Prompt Corrective  
     Actual     Phase-In Schedule     Action Provisions  
As of March 31, 2017    Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in Thousands)  

Tier 1 leverage capital to adjusted total assets

               

Company

   $ 94,592        10.6   $ 35,876        4.0   $ 44,845        5.0

Bank

   $ 93,585        10.5   $ 35,752        4.0   $ 44,690        5.0

Total capital to risk weighted assets

               

Company

   $ 100,756        16.1   $ 57,792        9.25   $ 62,478        10.0

Bank

   $ 99,749        16.0   $ 57,664        9.25   $ 62,339        10.0

Tier 1 capital to risk weighted assets

               

Company

   $ 94,592        15.1   $ 45,297        7.25   $ 49,983        8.0

Bank

   $ 93,585        15.0   $ 45,196        7.25   $ 49,871        8.0

Common equity tier 1 capital to risk weighted assets

               

Company

   $ 94,592        15.1   $ 35,925        5.75     n/a        n/a  

Bank

   $ 93,585        15.0   $ 35,845        5.75   $ 40,520        6.5
As of December 31, 2016                                        

Tier 1 leverage capital to adjusted total assets

               

Company

   $ 92,803        10.8   $ 34,392        4.0   $ 42,990        5.0

Bank

   $ 91,617        10.7   $ 34,315        4.0   $ 42,894        5.0

Total capital to risk weighted assets

               

Company

   $ 98,915        16.2   $ 52,682        8.625   $ 61,080        10.0

Bank

   $ 97,729        16.0   $ 52,561        8.625   $ 60,941        10.0

Tier 1 capital to risk weighted assets

               

Company

   $ 92,803        15.2   $ 40,466        6.625   $ 48,864        8.0

Bank

   $ 91,617        15.0   $ 40,373        6.625   $ 48,753        8.0

Common equity tier 1 capital to risk weighted assets

               

Company

   $ 92,803        15.2   $ 31,304        5.125     n/a        n/a  

Bank

   $ 91,617        15.0   $ 31,232        5.125   $ 39,611        6.5
Fair Value of Assets and Liabilities (Policies)
3 Months Ended
Mar. 31, 2017
Accounting Changes and Error Corrections [Abstract]
 
Fair Value Measurement
Revenue from Contracts with Customers
Financial Instruments
Leases
Derivatives and Hedging
Investments-Equity Method and Joint Ventures
Compensation - Stock Compensation

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

 

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

 

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

 

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

 

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

Cash and due from banks

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

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

Available-for-sale securities

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

FHLB stock

The fair value of FHLB stock is recognized at cost.

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.

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.

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 borrowers for taxes and insurance

The carrying amount of advances from borrowers for taxes and insurance approximates its fair value.

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.

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.

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%.

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. Management is currently evaluating the impact that this ASU will have 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. Management is currently evaluating the impact that this ASU will have 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. Management is 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 was effective beginning January 1, 2017. The implementation of ASU 2016-05 did not 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 was effective beginning January 1, 2017. The implementation of ASU 2016-07 did not 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 was effective beginning January 1, 2017. The implementation of ASU 2016-09 did not 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 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. Write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts are expected to improve the loss estimates on financial assets that are losing value. The techniques that are employed today to write down loans and other instruments can still be used, although the variables for calculating the losses are expected 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. Management is currently evaluating the potential impact of this ASU on the Company’s consolidated financial statements.

Net Income Per Share (Tables)
3 Months Ended
Mar. 31, 2017
Earnings Per Share [Abstract]
 
Reconciliation of Basic and Diluted Income (Loss) Per Share
Reconciliation of Basic and Diluted Income (Loss) Per Share
     March 31,  
     2017      2016  

Basic IPS:

     

Net income

   $ 935,000      $ 509,000  

Average common shares outstanding

     6,218,706        6,297,755  
  

 

 

    

 

 

 

Net income per share

   $ 0.15      $ 0.08  
  

 

 

    

 

 

 

Diluted IPS:

     

Net income

   $ 935,000      $ 509,000  

Average common shares outstanding

     6,218,706        6,297,755