HOPFED BANCORP INC (HFBC) Form 10-Q for Period Ending 6/30/2017
: 6.23.6
 
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2017
Aug. 04, 2017
Document And Entity Information [Abstract]
  
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
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
 
6,717,663 
Interim Consolidated Condensed Statements of Financial Condition - USD ($)
$ in Thousands
Jun. 30, 2017
Dec. 31, 2016
Assets
  
Cash and due from banks
$ 20,208 
$ 21,779 
Interest-bearing deposits in banks
4,801 
3,970 
Cash and cash equivalents
25,009 
25,749 
Federal Home Loan Bank stock, at cost
4,428 
4,428 
Securities available for sale
205,363 
209,480 
Loans held for sale
2,386 
1,094 
Loans receivable, net of allowance for loan losses of $7,180 at June 30, 2017 and $6,112 at December 31, 2016
631,242 
604,286 
Accrued interest receivable
3,332 
3,799 
Foreclosed assets, net
1,408 
2,397 
Bank owned life insurance
10,192 
10,662 
Premises and equipment, net
23,097 
23,461 
Deferred tax assets
3,025 
3,052 
Other assets
2,645 
3,078 
Total assets
912,127 
891,486 
Deposits:
  
Non-interest-bearing accounts
132,305 
131,145 
Interest-bearing accounts
  
Checking accounts
216,256 
209,347 
Savings and money market accounts
98,270 
99,312 
Other time deposits
299,113 
293,078 
Total deposits
745,944 
732,882 
Advances from Federal Home Loan Bank
21,000 
11,000 
Repurchase agreements
41,820 
47,655 
Subordinated debentures
10,310 
10,310 
Advances from borrowers for taxes and insurance
984 
766 
Accrued expenses and other liabilities
3,278 
2,445 
Total liabilities
823,336 
805,058 
Stockholders' equity
  
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at June 30, 2017 and December 31, 2016
  
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,964,076 issued and 6,716,809 outstanding at June 30, 2017 and 7,963,378 issued and 6,717,242 outstanding at December 31, 2016
80 
80 
Additional paid-in-capital
58,750 
58,660 
Retained earnings
50,552 
49,035 
Treasury stock, at cost (1,247,267 shares at June 30, 2017 and 1,246,136 shares at December 31, 2016)
(15,361)
(15,347)
Unearned Employee Stock Ownership Plan ("ESOP") Shares, at cost (476,862 shares at June 30, 2017 and 498,346 shares at December 31, 2016)
(6,269)
(6,548)
Accumulated other comprehensive income
1,039 
548 
Total stockholders' equity
88,791 
86,428 
Total liabilities and stockholders' equity
$ 912,127 
$ 891,486 
Interim Consolidated Condensed Statements of Financial Condition (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
  
Loans receivable, allowance for loan losses
$ 7,180 
$ 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
7,964,076 
7,963,378 
Common stock, shares outstanding
6,716,809 
6,717,242 
Treasury stock, shares
1,247,267 
1,246,136 
Unearned ESOP Shares
476,862 
498,346 
Interim Consolidated Condensed Statements of Income - USD ($)
3 Months Ended6 Months Ended
$ in Thousands
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Interest and dividend income
    
Loans
$ 6,963 
$ 6,141 
$ 13,699 
$ 12,606 
Investment in securities, taxable
1,155 
1,198 
2,273 
2,445 
Nontaxable securities available for sale
280 
340 
563 
693 
Interest-bearing deposits
21 
12 
44 
28 
Total interest and dividend income
8,419 
7,691 
16,579 
15,772 
Interest expense:
    
Deposits
1,197 
1,007 
2,364 
2,102 
FHLB borrowings
30 
28 
62 
101 
Repurchase agreements
119 
139 
222 
282 
Subordinated debentures
108 
94 
212 
188 
Total interest expense
1,454 
1,268 
2,860 
2,673 
Net interest income
6,965 
6,423 
13,719 
13,099 
Provision for loan losses
59 
465 
350 
923 
Net interest income after provision for loan losses
6,906 
5,958 
13,369 
12,176 
Non-interest income:
    
Service charges
800 
698 
1,604 
1,375 
Merchant card
315 
314 
617 
605 
Mortgage origination revenue
278 
435 
612 
803 
Gain on sale of investments
14 
52 
16 
343 
Income from bank owned life insurance
72 
77 
307 
161 
Income from financial services
145 
191 
285 
324 
Other operating income
212 
203 
691 
379 
Total non-interest income
1,836 
1,970 
4,132 
3,990 
Non-interest expenses:
    
Salaries and benefits
3,977 
3,901 
8,213 
7,889 
Occupancy
729 
801 
1,504 
1,588 
Data processing
546 
704 
1,310 
1,431 
State deposit tax
200 
247 
431 
495 
Professional services
464 
305 
812 
640 
Advertising
368 
371 
749 
691 
Foreclosure, net
201 
114 
269 
Loss on sale of asset
 
 
Other
940 
1,079 
1,786 
2,289 
Total non-interest expense
7,233 
7,609 
14,922 
15,292 
Income before income tax expense
1,509 
319 
2,579 
874 
Income tax expense
368 
15 
503 
61 
Net income
$ 1,141 
$ 304 
$ 2,076 
$ 813 
Net income per share:
    
Basic
$ 0.18 
$ 0.05 
$ 0.33 
$ 0.13 
Diluted
0.18 
0.05 
0.33 
0.13 
Dividend per share
$ 0.05 
$ 0.04 
$ 0.09 
$ 0.08 
Interim Consolidated Statements of Comprehensive Income - USD ($)
3 Months Ended6 Months Ended
$ in Thousands
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Statement of Comprehensive Income [Abstract]
    
Net income
$ 1,141 
$ 304 
$ 2,076 
$ 813 
Other comprehensive income, net of tax:
    
Unrealized gain on non-other than temporary impaired investment securities available for sale, net of taxes of ($126) and ($368) for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and ($247) and ($1,267) for the six month periods ended June 30, 2017 and June 30, 2016, respectively.
240 
714 
475 
2,459 
Unrealized gain on OTTI securities, net of taxes of ($43) and none for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and ($14) and ($37) for the six month periods ended June 30, 2017 and June 30, 2016, respectively.
83 
 
26 
72 
Reclassification adjustment for gains included in net income, net of taxes of $5 and $18 for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and $6 and $117 for the six month periods ended June 30, 2017 and June 30, 2016, respectively.
(9)
(34)
(10)
(226)
Total other comprehensive income
314 
680 
491 
2,305 
Comprehensive income
$ 1,455 
$ 984 
$ 2,567 
$ 3,118 
Interim Consolidated Statements of Comprehensive Income (Parenthetical) - USD ($)
3 Months Ended6 Months Ended
$ in Thousands
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Statement of Comprehensive Income [Abstract]
    
Unrealized gain on investment securities available for sale, tax effect
$ (126)
$ (368)
$ (247)
$ (1,267)
Unrealized gain on OTTI securities, tax effect
(43)
 
(14)
(37)
Reclassification adjustment for other than temporary impairment included in net income, tax effect
$ 5 
$ 18 
$ 6 
$ 117 
Interim Consolidated Condensed Statement of Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Treasury Stock, Common [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 
     
Net income
813 
  
813 
   
Issuance of restricted stock
$ 1 
     
Issuance of restricted stock, shares
 
11,486 
     
Repurchase of treasury stock
(1,624)
   
(1,624)
  
Repurchase of treasury stock, shares
 
(138,218)
     
Forfeiture of restricted stock, shares
 
(663)
     
Change in price of ESOP shares
(34)
 
(34)
    
ESOP shares committed to be released
282 
    
282 
 
Compensation expense, restricted stock awards
78 
 
78 
    
Net change in unrealized gain on securities available for sale, net of income taxes
2,305 
     
2,305 
Cash dividend declared to common stockholders
(499)
  
(499)
   
Ending balance at Jun. 30, 2016
88,952 
$ 80 
58,648 
47,438 
(15,095)
(6,898)
4,779 
Ending balance, Shares at Jun. 30, 2016
 
6,738,416 
     
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 
     
Net income
2,076 
  
2,076 
   
Issuance of restricted stock, shares
 
698,000 
     
Repurchase of treasury stock
(14)
   
(14)
  
Repurchase of treasury stock, shares
 
(1,131)
     
Change in price of ESOP shares
29 
 
29 
    
ESOP shares committed to be released
279 
    
279 
 
Compensation expense, restricted stock awards
61 
 
61 
    
Net change in unrealized gain on securities available for sale, net of income taxes
491 
     
491 
Cash dividend declared to common stockholders
(559)
  
(559)
   
Ending balance at Jun. 30, 2017
$ 88,791 
$ 80 
$ 58,750 
$ 50,552 
$ (15,361)
$ (6,269)
$ 1,039 
Ending balance, Shares at Jun. 30, 2017
 
6,716,809 
     
Interim Consolidated Condensed Statement of Stockholders' Equity (Parenthetical) - USD ($)
6 Months Ended
$ in Thousands
Jun. 30, 2017
Jun. 30, 2016
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 255 
$ 1,187 
Accumulated Other Comprehensive Income [Member]
  
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 255 
$ 1,187 
Interim Consolidated Condensed Statements of Cash Flows - USD ($)
6 Months Ended
$ in Thousands
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities:
  
Net cash provided by operating activities
$ 4,662 
$ 4,300 
Cash flows from investing activities
  
Proceeds from sales, calls and maturities of securities available for sale
27,362 
27,615 
Purchase of securities available for sale
(23,047)
(19,952)
Net increase in loans
(27,474)
(5,619)
Proceeds from sale of foreclosed assets
1,136 
1,242 
Purchase of premises and equipment
(251)
(376)
Net cash provided by (used in) investing activities
(22,274)
2,910 
Cash flows from financing activities:
  
Net increase (decrease) in demand deposits
7,027 
(11,525)
Net increase (decrease) in time and other deposits
6,035 
(28,254)
Increase in advances from borrowers for taxes and insurance
218 
553 
Advances from Federal Home Loan Bank
32,000 
 
Repayment of advances from Federal Home Loan Bank
(22,000)
(4,000)
Net increase (decrease) in repurchase agreements
(5,835)
1,812 
Cash used to repurchase treasury stock
(14)
(1,624)
Dividends paid on common stock
(559)
(499)
Net cash provided by (used in) financing activities
16,872 
(43,537)
Increase (decrease) in cash and cash equivalents
(740)
(36,327)
Cash and cash equivalents, beginning of period
25,749 
54,698 
Cash and cash equivalents, end of period
25,009 
18,371 
Supplemental disclosures of cash flow information:
  
Interest paid
2,840 
2,772 
Income taxes paid
388 
447 
Supplemental disclosures of non-cash investing and financing activities:
  
Loans charged off
401 
449 
Foreclosures of loans during period
168 
286 
Net unrealized gains on investment securities classified as available for sale
746 
3,493 
Decrease in deferred tax asset related to unrealized gains on investments
(255)
(1,187)
Dividends declared and payable
356 
286 
Issuance of restricted common stock
$ 10 
$ 135 
Basis of Presentation
6 Months Ended
Jun. 30, 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 LLLP, a low income senior citizen housing facility in Bowling Green, Kentucky. 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 six month period ended June 30, 2017 are not necessarily indicative of results that may be expected 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
6 Months Ended
Jun. 30, 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 common stock shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common stock shares outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three and six month periods ended June 30, 2017 and June 30, 2016, the Company has excluded all unearned shares held by the ESOP.

 

     For the three month Period
Ended June 30,
 
     2017      2016  

Basic IPS:

     

Net income

   $ 1,141,000      $ 304,000  

Average common shares outstanding

     6,228,894        6,232,457  
  

 

 

    

 

 

 

Net income per share

   $
0.18
 
   $
0.05
 
  

 

 

    

 

 

 

Diluted IPS

     

Net income

   $ 1,141,000      $ 304,000  

Average common shares outstanding

     6,228,894        6,232,457  

Dilutive effect of stock options

     —          —    
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,228,894        6,232,457  
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.18      $ 0.05  
  

 

 

    

 

 

 
     For the six month period
Ended June 30,
 
     2017      2016  

Basic IPS:

     

Net income

   $ 2,076,000      $ 813,000  

Average common shares outstanding

     6,223,802        6,265,106  
  

 

 

    

 

 

 

Net income per share

   $ 0.33      $ 0.13  
  

 

 

    

 

 

 

Diluted IPS

     

Net income

   $ 2,076,000      $ 813,000  

Average common shares outstanding

     6,223,802        6,265,106  

Dilutive effect of stock options

     —          —    
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,223,802        6,265,106  
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.33      $ 0.13  
  

 

 

    

 

 

 
Stock Compensation
6 Months Ended
Jun. 30, 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 $30,000 and $61,000 for the three and six month period ended June 30, 2017 and $48,000 and $78,000 for the three and six month period ended June 30, 2016. The Company issued 698 shares of restricted shares in the three and six month period ended June 30, 2017. The Company issued 877 and 11,486 shares of restricted stock in the three and six month periods ended June 30, 2016. The table below provides a detail of the Company’s future compensation expense related to future vesting of restricted stock as of June 30, 2017:

 

Year Ending

December 31,

   Future
Expense
 
(Dollars in Thousands)  

2017

     29  

2018

     57  

2019

     12  

2020

     4  

2021

     1  
  

 

 

 
     103  
  

 

 

 

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
6 Months Ended
Jun. 30, 2017
Cash and Cash Equivalents [Abstract]
 
Securities
(4) SECURITIES

The carrying amount of securities and their estimated fair values at June 30, 2017 were as follows:

 

     June 30, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (Dollars in Thousands)  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale:

           

U.S. Agency securities

   $ 94,075        908        (399      94,584  

Taxable municipal bonds

     757        12        —          769  

Tax free municipal bonds

     31,142        1,165        (25      32,282  

Trust preferred securities

     1,642        223        —          1,865  

Mortgage backed securities

     76,172        376        (685      75,863  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 203,788        2,684        (1,109      205,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     December 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
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 June 30, 2017 were as follows:

 

     Amortized
Cost
     Estimated
Fair Value
 
     (Dollars in Thousands)  

Due within one year

   $ 5,439      $ 5,469  

Due in one to five years

     20,620        20,833  

Due in five to ten years

     28,461        28,896  

Due after ten years

     9,870        10,504  
  

 

 

    

 

 

 
     64,390        65,702  

Amortizing agency bonds

     63,226        63,798  

Mortgage-backed securities

     76,172        75,863  
  

 

 

    

 

 

 

Total securities available for sale

   $ 203,788      $ 205,363  
  

 

 

    

 

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of June 30, 2017 were as follows:

 

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

U.S. Agency securities

   $ 40,006        (368     3,350        (31     43,356        (399

Tax free municipals

     2,590        (25     —          —         2,590        (25

Mortgage-backed securities

     40,085        (403     12,229        (282     52,314        (685
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 82,681        (796     15,579        (313     98,260        (1,109
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
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 June 30, 2017, the Company has 64 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 June 30, 2017.

At June 30, 2017 and December 31, 2016, securities with a book value of approximately $122.4 million and $125.6 million and a market value of approximately $125.2 million and $128.4 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law.

Loans
6 Months Ended
Jun. 30, 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 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 have 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. All construction loans are under written under the Company’s commercial loan underwriting guidelines for the type of property being constructed.

 

    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 June 30, 2017 and December 31, 2016.

 

     June 30,
2017
     December 31,
2016
 
     (Dollars in Thousands)  

Real estate loans:

     

One-to-four family first mortgages

   $ 162,096        147,962  

Home equity lines of credit

     35,851        35,684  

Junior liens

     1,472        1,452  

Multi-family

     38,623        34,284  

Construction

     25,033        39,255  

Land

     20,049        23,840  

Farmland

     39,575        47,796  

Non-residential real estate

     217,049        182,940  
  

 

 

    

 

 

 

Total mortgage loans

     539,748        513,213  

Consumer loans

     8,250        8,717  

Commercial loans

     90,857        88,907  
  

 

 

    

 

 

 

Total other loans

     99,107        97,624  
  

 

 

    

 

 

 

Total loans

     638,855        610,837  

Deferred loan fees, net of cost

     (433      (439

Less allowance for loan losses

     (7,180      (6,112
  

 

 

    

 

 

 

Total loans, net

   $ 631,242      $ 604,286  
  

 

 

    

 

 

 

Although the Company has a diversified loan portfolio, 84.5% and 84.0% of the portfolio was concentrated in loans secured by real estate at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, the majority of these loans are located within the Company’s general operating area.

 

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the six month period ended June 30, 2017:

 

     Balance
12/31/2016
     Charge
offs
2017
    Recoveries
2017
     General
Provision
2017
    Specific
Provision
2017
    Ending
Balance
6/30/2017
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 852        (49     6        449       43       1,301  

Home equity line of credit

     260        —         8        85       (8     345  

Junior liens

     8        —         2        3       (2     11  

Multi-family

     412        —         417        192       (417     604  

Construction

     277        —         —          (51     —         226  

Land

     1,760        —         363        (406     (838     879  

Farmland

     778        —         6        (60     (7     717  

Non-residential real estate

     964        —         9        363       63       1,399  

Consumer loans

     208        (128     45        12       36       173  

Commercial loans

     593        (225     264        650       243       1,525  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 6,112        (402     1,120        1,237       (887     7,180  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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:

 

     Balance
12/31/2015
     Charge
offs
2016
    Recoveries
2016
     General
Provision
2016
    Specific
Provision
2016
    Ending
Balance
12/31/2016
 
     (Dollars in Thousands)  

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 June 30, 2017 by loan classification allocated between performing and non-performing:

 

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

One-to-four family mortgages

   $ 160,680        404        261        53        698        —        $ 162,096  

Home equity line of credit

     35,289        —          402        —          160        —          35,851  

Junior liens

     1,434        3        —          27        8        —          1,472  

Multi-family

     36,765        —          —          —          1,858        —          38,623  

Construction

     25,033        —          —          —          —          —          25,033  

Land

     12,398        —          6,730        429        492        —          20,049  

Farmland

     37,402        —          455        478        1,240        —          39,575  

Non-residential real estate

     202,950        2,485        207        1,505        9,902        —          217,049  

Consumer loans

     8,072        18        3        —          157        —          8,250  

Commercial loans

     87,906        —          521        716        1,714        —          90,857  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 607,929        2,910        8,579        3,208        16,229        —        $ 638,855  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

(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 June 30, 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 June 30, 2017 and December 31, 2016, by portfolio segment and based on the impairment method.

 

June 30, 2017:    Commercial      Land
Development /
Construction
     Commercial
Real Estate
     Residential
Real
Estate
     Consumer      Total  
   (Dollars in Thousands)  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 310        561        71        —          37        979  

Collectively evaluated for impairment

     1,215        544        2,649        1,657        136        6,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,525        1,105        2,720        1,657        173        7,180  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,235        7,222        13,662        1,529        160        24,808  

Loans collectively evaluated for impairment

     88,622        37,860        281,585        197,890        8,090        614,047  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 90,857        45,082        295,247        199,419        8,250        638,855  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2016:    Commercial      Land
Development /
Construction
     Commercial
Real Estate
     Residential
Real
Estate
     Consumer      Total  
   (Dollars in Thousands)  

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 and 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 probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral 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 June 30, 2017 and December 31, 2016 were as follows:

 

June 30, 2017

   Pass      Special
Mention
    

 

Impaired Loans

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

(Dollars in Thousands)

 

One-to-four family mortgages

     161,084        53        959        —          162,096        —          1,301  

Home equity line of credit

     35,289        —          562        —          35,851        —          345  

Junior liens

     1,437        27        8        —          1,472        —          11  

Multi-family

     36,765        —          1,858        —          38,623        —          604  

Construction

     25,033        —          —          —          25,033        —          226  

Land

     12,398        429        7,222        —          20,049        561        318  

Farmland

     37,402        478        1,695        —          39,575        69        648  

Non-residential real estate

     205,435        1,505        10,109        —          217,049        2        1,397  

Consumer loans

     8,090        —          160        —          8,250        37        136  

Commercial loans

     87,906        716        2,235        —          90,857        310        1,215  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     610,839        3,208        24,808        —          638,855        979        6,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2016    Pass      Special
Mention
    

 

Impaired Loans

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

(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 June 30, 2017 were as follows:

 

     At June 30, 2017      For the six month period
ended June 30, 2017
 
Impaired loans with no specific allowance    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
                   (Dollars in
Thousands)
               

One-to-four family mortgages

   $ 959        959        —          2,095        62  

Home equity line of credit

     562        562        —          562        17  

Junior liens

     8        8        —          10        —    

Multi-family

     1,858        1,858        —          1,337        —    

Construction

     —          —          —          —          —    

Land

     533        533        —          777        22  

Farmland

     1,569        1,569        —          1,287        12  

Non-residential real estate

     10,087        10,087        —          9,968        266  

Consumer loans

     13        13        —          16        —    

Commercial loans

     1,652        1,652        —          1,494        62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     17,241        17,241        —          17,546        441  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Impaired loans with a specific allowance                                   

One-to-four family mortgages

     —          —          —          —          —    

Home equity line of credit

     —          —          —          —          —    

Junior liens

     —          —          —          —          —    

Multi-family

     —          —          —          —          —    

Construction

     —          —          —          —          —    

Land

     6,689        6,689        561        6,680        —    

Farmland

     126        126        69        326        —    

Non-residential real estate

     22        22        2        210        1  

Consumer loans

     147        147        37        271        —    

Commercial loans

     583        583        310        546        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,567        7,567        979        8,033        8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,808        24,808        979        25,579        449  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

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

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

On a periodic basis, the Bank may modify the terms of certain loans. At December 31, 2016, the Company had eight loans, representing three lending relationships, classified as performing TDRs. During the six month period ended June 30, 2017, the Company removed one lending relationship from TDR status and one lending relationship had three loans to pay off. One non-residential real estate loan 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 six month period ended June 30, 2017, no loans were added to TDR classification and all loans currently classified as TDRs are current based on their revised terms.

The following table provides the number of loans remaining in each category as of June 30, 2017 and December 31, 2016 that the Company had previously modified in a TDR:

 

     Number
of
Loans
     Pre-Modification
Outstanding
Record
Investment
     Post
Modification
Outstanding
Record
Investment,
net of
related
allowance
 

June 30, 2017

                    

Non-residential real estate

     3      $ 3,388,370        3,388,370  

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 June 30, 2017 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At June 30, 2017, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

Foreclosed Assets
6 Months Ended
Jun. 30, 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 June 30, 2017 and December 31, 2016, the Company had balances in foreclosed assets consisting of the following:

 

     June 30,
2017
     December 31,
2016
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 190        135  

Home equity line of credit

     18        28  

Multi-family real estate

     1,200        1,775  

Non-residential real estate

     —          459  
  

 

 

    

 

 

 

Total other assets owned

   $ 1,408        2,397  
  

 

 

    

 

 

 

For the six month period ended June 30, 2017, the Company’s activity in foreclosed property included the following:

 

            Activity During 2017                    
     Balance
12/31/2016
     Foreclosure      Sales     Reduction
in Values
    Gain (Loss)
on Sale
    Balance
6/30/2017
 
            (Dollars in Thousands)                    

One-to-four family mortgages

   $ 135        125        (84     —         14     $ 190  

HELOC

     28        —          —         (10     —         18  

Multi-family

     1,775        —          (552     —         (23     1,200  

Non-residential real estate

     459        43        (500     —         (2     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,397        168        (1,136     (10     (11   $ 1,408  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

The Company’s activity in foreclosed assets for the six month period ended June 30, 2016 is as follows:

 

            Activity During 2016                     
     Balance
12/31/2015
     Foreclosure      Sales     Reduction
in Values
     Gain (Loss)
on Sale
    Balance
6/30/2016
 
            (Dollars in Thousands)                     

One-to-four family mortgages

   $ 55        —          (40     —          (15     —    

Multi-family

     —          141        —         —          —         141  

Land

     943        130        (913     —          12       172  

Non-residential real estate

     738        —          (270     —          (9     459  

Consumer

     —          15        (19     —          4       —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,736        286        (1,242     —          (8   $ 772  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Fair Value of Assets and Liabilities
6 Months Ended
Jun. 30, 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.

 

Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at June 30, 2017 are summarized below:

 

Description

   Total
carrying
value in the
consolidated
balance
sheet at
6/30/2017
     Quoted
Prices In
Active
Markets
for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

   (Dollars in Thousands)  

Securities available for sale

           

U.S. Agency securities

     94,584        —          94,584        —    

Taxable municipals

     769        —          769        —    

Tax-free municipals

     32,282        —          32,282        —    

Trust preferred securities

     1,865        —          —          1,865  

Mortgage backed securities

     75,863        —          75,863        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     205,363        —          203,498        1,865  
  

 

 

    

 

 

    

 

 

    

 

 

 

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)
 

Assets

  

(Dollars in Thousands)

 

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 June 30, 2017:

 

Description

   Total
carrying
value in the
consolidated
balance
sheet at
June 30,
2017
     Quoted
Prices In
Active
Markets
for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

   (Dollars in Thousands)  

Foreclosed assets

   $ 1,408        —          —        $ 1,408  

Impaired loans, net of allowance

   $ 6,588        —          —        $ 6,588  

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

 

Description

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

Assets

   (Dollars in Thousands)  

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 June 30, 2017 and December 31, 2016:

 

Level 3 Significant Unobservable Input Assumptions

`   

Fair
Value

    

Valuation Technique

    

Unobservable Input

    

Quantitative
Range of
Unobservable
Inputs

June 30, 2017

          (Dollars in Thousand)              
Assets measured on a non-recurring basis                  
Foreclosed assets    $1,408      Discount to appraised value of collateral      Appraisal comparability adjustments      30% to 55%
Impaired loans    6,588      Discount to appraised value of collateral      Appraisal comparability adjustments      10% to 25%
Asset measured on a recurring basis                  
Trust preferred securities    1,865      Discounted cash flow Spread to Libor swap curve      Compare to quotes for sale when available     

One month libor

4% to 6%

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 six month periods ended June 30, 2017 and June 30, 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  

Six month period ended June 30,

   Other
Assets
     Other
Assets
 
     (Dollars in
Thousands)
        

Fair value, January 1

   $ 1,817        1,865  

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

     40        97  

Accretion of previously discounted amounts

     8        16  

Purchases, issuances and settlements, net

     —          —    

Transfers in and/or out of Level 3

     —          —    
  

 

 

    

 

 

 

Fair value, June 30

   $ 1,865        1,978  
  

 

 

    

 

 

 

 

The estimated fair values of financial instruments were as follows at June 30, 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

   $ 20,208        20,208        20,208        —          —    

Interest-bearing deposits

     4,801        4,801        4,801        —          —    

Securities available for sale

     205,363        205,363        —          203,498        1,865  

Federal Home Loan Bank stock

     4,428        4,428        —          —          4,428  

Loans held for sale

     2,386        2,386        —          2,386        —    

Loans receivable

     631,242        611,910        —          —          611,910  

Accrued interest receivable

     3,332        3,332        —          —          3,332  

Financial liabilities:

              

Deposits

     745,944        746,635        —          746,635        —    

Advances from borrowers for taxes and insurance

     984        984        —          984        —    

Advances from Federal Home Loan Bank

     21,000        21,007        —          21,007        —    

Repurchase agreements

     41,820        41,820        —          41,820        —    

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
6 Months Ended
Jun. 30, 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.

 

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, 2019, 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
6 Months Ended
Jun. 30, 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 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 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 June 30, 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 June 30, 2017, the Company has $10.2 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 six month period ended June 30, 2017, the Company received additional income of approximately $160,000 from the net proceeds of a life insurance policy, further reducing our effective tax rate.

At June 30, 2017, the Company’s investment portfolio includes $32.3 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
6 Months Ended
Jun. 30, 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 reductions 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 June 30, 2017 and December 31, 2016, shares held by the ESOP were as follows:

 

     June 30, 2017      December 31,
2016
 

Accrued for allocation to participants

     21,484        —    

Earned ESOP shares

     101,654        101,654  

Unearned ESOP shares

     476,862        498,346  
  

 

 

    

 

 

 

Total ESOP shares

     600,000        600,000  
  

 

 

    

 

 

 

Fair value of unearned shares

   $ 6,833,432      $ 6,707,737  
  

 

 

    

 

 

 
Commitments and Contingencies
6 Months Ended
Jun. 30, 2017
Commitments and Contingencies Disclosure [Abstract]
 
Commitments and Contingencies
(11) COMMITMENTS AND CONTINGENCIES

At June 30, 2017, the Bank had $32.8 million in outstanding commitments on revolving home equity lines of credit, $18.3 million in outstanding commitments on revolving personal lines of credit and $47.1 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $52.3 million. At June 30, 2017, the Company had $268,000 in standby letters of credit outstanding.

At June 30, 2017, the Company has $38.1 million in times deposits greater than $100,000 but less than $250,000 that are schedule to mature in one year and $54.7 million in time deposits with balances greater than $250,000 that are scheduled to mature in one year or less. Management believes that a significant percentage of such deposits will remain with the Bank.

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 June 30, 2017 and December 31, 2016, the Bank has pledged all eligible 1-4 family first mortgages. At June 30, 2017, the Bank has outstanding borrowings of $21.0 million from the FHLB. A schedule of FHLB borrowings at June 30, 2017 is provided below:

 

Outstanding
Balance

    

Rate

   

Maturity

 

(Dollars in thousands)

 
$
10,000
 
    
1.27

   
Overnight
 
  5,000        0.88     10/06/2017  
  6,000        1.18     07/06/2018  

 

 

    

 

 

   

 

 

 
$ 21,000        1.15  

 

 

    

 

 

   

 

A schedule of FHLB borrowings at 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 $47.6 million secured by the Bank’s loan portfolio to secure additional municipal deposits. At June 30, 2017, securities with a fair market value of $41.8 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
6 Months Ended
Jun. 30, 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 consists 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 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, 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.

 

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 June 30, 2017 and December 31, 2016 based on the phase-in provisions of Basel III Capital Rules. Management believes, as of June 30, 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 June 30, 2017 and December 31, 2016 are presented below (Dollars in Thousands):

 

As of June 30, 2017

   Actual     Minimum Capital
Required – Basel III
Phase-In Schedule
    To be Well
Capitalized for
Prompt Corrective
Action Provisions
 
   Amount      Ratio     Amount      Ratio     Amount      Ratio  

Tier 1 leverage capital to adjusted total assets

               

Company

   $ 94,993        10.4   $ 36,273        4.0   $ 45,341        5.0

Bank

   $ 91,851        10.4   $ 35,472        4.0   $ 44,240        5.0

Total capital to risk weighted assets

               

Company

   $ 102,173        16.1   $ 58,361        9.25   $ 63,093        10.0

Bank

   $ 99,032        15.7   $ 58,232        9.25   $ 62,954        10.0

Tier 1 capital to risk weighted assets

               

Company

   $ 94,993        15.0   $ 45,743        7.25   $ 50,475        8.0

Bank

   $ 91,851        14.6   $ 45,642        7.25   $ 50,363        8.0

Common equity tier 1 capital to risk weighted assets

               

Company

   $ 94,993        15.0   $ 36,279        5.75     n/a        n/a  

Bank

   $ 91,851        14.6   $ 36,199        5.75   $ 40,920        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)
6 Months Ended
Jun. 30, 2017
Accounting Changes and Error Corrections [Abstract]
 
Fair Value Measurement
Revenue from Contracts with Customers
Financial Instruments
Leases

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.

 

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, 2019, 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)
6 Months Ended
Jun. 30, 2017
Earnings Per Share [Abstract]
 
Reconciliation of Basic and Diluted Income (Loss) Per Share
Reconciliation of Basic and Diluted Income (Loss) Per Share
     For the three month Period
Ended June 30,
 
     2017      2016  

Basic IPS:

     

Net income

   $ 1,141,000      $ 304,000  

Average common shares outstanding

     6,228,894        6,232,457  
  

 

 

    

 

 

 

Net income per share

   $
0.18
 
   $
0.05
 
  

 

 

    

 

 

 

Diluted IPS

     

Net income

   $ 1,141,000      $ 304,000  

Average common shares outstanding

     6,228,894        6,232,457  

Dilutive effect of stock options

     —          —    
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,228,894        6,232,457  
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.18      $ 0.05  
  

 

 

    

 

 

 
     For the six month period
Ended June 30,
 
     2017      2016  

Basic IPS:

     

Net income

   $ 2,076,000      $ 813,000  

Average common shares outstanding

     6,223,802        6,265,106  
  

 

 

    

 

 

 

Net income per share

   $ 0.33      $ 0.13  
  

 

 

    

 

 

 

Diluted IPS

     

Net income

   $ 2,076,000      $ 813,000  

Average common shares outstanding

     6,223,802        6,265,106  

Dilutive effect of stock options

     —          —    
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,223,802        6,265,106  
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.33      $ 0.13  
  

 

 

    

 

 

 
Stock Compensation (Tables)
6 Months Ended
Jun. 30, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Company's Future Compensation Expense Related to Future Vesting Restricted Stock
Company's Future Compensation Expense Related to Future Vesting Restricted Stock

The Company issued 877 and 11,486 shares of restricted stock in the three and six month periods ended June 30, 2016. The table below provides a detail of the Company’s future compensation expense related to future vesting of restricted stock as of June 30, 2017:

 

Year Ending

December 31,

   Future
Expense
 
(Dollars in Thousands)  

2017

     29  

2018

     57  

2019

     12  

2020

     4  

2021

     1  
  

 

 

 
     103  
  

 

 

 
Securities (Tables)
6 Months Ended
Jun. 30, 2017
Cash and Cash Equivalents [Abstract]
 
Amortized Cost of Securities and their Estimated Fair Values
Maturities of Debt Securities Available for Sale
Estimated Fair Value and Unrealized Loss Amounts of Impaired Investments

The carrying amount of securities and their estimated fair values at June 30, 2017 were as follows:

 

     June 30, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (Dollars in Thousands)  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale:

           

U.S. Agency securities

   $ 94,075        908        (399      94,584  

Taxable municipal bonds

     757        12        —          769  

Tax free municipal bonds

     31,142        1,165        (25      32,282  

Trust preferred securities

     1,642        223        —          1,865  

Mortgage backed securities

     76,172        376        (685      75,863  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 203,788        2,684        (1,109      205,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     December 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
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 June 30, 2017 were as follows:

 

     Amortized
Cost
     Estimated
Fair Value
 
     (Dollars in Thousands)  

Due within one year

   $ 5,439      $ 5,469  

Due in one to five years

     20,620        20,833  

Due in five to ten years

     28,461        28,896  

Due after ten years

     9,870        10,504  
  

 

 

    

 

 

 
     64,390        65,702  

Amortizing agency bonds

     63,226        63,798  

Mortgage-backed securities

     76,172        75,863  
  

 

 

    

 

 

 

Total securities available for sale

   $ 203,788      $ 205,363  
  

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of June 30, 2017 were as follows:

 

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

U.S. Agency securities

   $ 40,006        (368     3,350        (31     43,356        (399

Tax free municipals

     2,590        (25     —          —         2,590        (25

Mortgage-backed securities

     40,085        (403     12,229        (282     52,314        (685
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 82,681        (796     15,579        (313     98,260        (1,109
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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