HOPFED BANCORP INC (HFBC) Form 10-K for Period Ending 12/31/2017
: 6.23.6
 
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2017
Mar. 06, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
   
Document Type
10-K 
  
Amendment Flag
false 
  
Document Period End Date
Dec. 31, 2017 
  
Document Fiscal Year Focus
2017 
  
Document Fiscal Period Focus
FY 
  
Trading Symbol
HFBC 
  
Entity Registrant Name
HOPFED BANCORP INC 
  
Entity Central Index Key
0001041550 
  
Current Fiscal Year End Date
--12-31 
  
Entity Well-known Seasoned Issuer
No 
  
Entity Current Reporting Status
Yes 
  
Entity Voluntary Filers
No 
  
Entity Filer Category
Accelerated Filer 
  
Entity Common Stock, Shares Outstanding
 
6,635,945 
 
Entity Public Float
  
$ 92,177,023 
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Assets
  
Cash and due from banks
$ 37,965 
$ 21,779 
Interest-bearing deposits in banks
7,111 
3,970 
Cash and cash equivalents
45,076 
25,749 
Federal Home Loan Bank stock, at cost
4,428 
4,428 
Securities available for sale
184,791 
209,480 
Loans held for sale
1,539 
1,094 
Loans receivable, net of allowance for loan losses of $4,826 at December 31, 2017 and $6,112 at December 31, 2016
637,102 
604,286 
Accrued interest receivable
3,589 
3,799 
Foreclosed assets, net
3,369 
2,397 
Bank owned life insurance
10,368 
10,662 
Premises and equipment, net
22,700 
23,461 
Deferred tax assets
1,764 
3,052 
Other assets
2,784 
3,078 
Total assets
917,510 
891,486 
Deposits:
  
Non-interest-bearing accounts
136,197 
131,145 
Interest-bearing accounts:
  
Interest bearing checking accounts
208,496 
209,347 
Savings and money market accounts
104,347 
99,312 
Other time deposits
304,969 
293,078 
Total deposits
754,009 
732,882 
Advances from Federal Home Loan Bank
23,000 
11,000 
Repurchase agreements
38,353 
47,655 
Subordinated debentures
10,310 
10,310 
Advances from borrowers for taxes and insurance
808 
766 
Accrued expenses and other liabilities
3,618 
2,445 
Total liabilities
830,098 
805,058 
Stockholders' equity
  
Preferred stock, par value $0.01 per share; authorized 500,000 shares; no shares issued or outstanding at December 31, 2017 and December 31, 2016
  
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,976,131 issued and 6,637,771 outstanding at December 31, 2017 and 7,963,378 issued and 6,717,242 outstanding at December 31, 2016
80 
80 
Additional paid-in-capital
58,825 
58,660 
Retained earnings
51,162 
49,035 
Treasury stock, at cost (1,338,360 shares at December 31, 2017 and 1,246,136 shares at December 31, 2016)
(16,655)
(15,347)
Unearned ESOP shares (at cost 434,548 shares at December 31, 2017 and 498,346 at December 31, 2016)
(5,901)
(6,548)
Accumulated other comprehensive income (loss)
(99)
548 
Total stockholders' equity
87,412 
86,428 
Total liabilities and stockholders' equity
$ 917,510 
$ 891,486 
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
  
Loans receivable, allowance for loan losses
$ 4,826 
$ 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
7,976,131 
7,963,378 
Common stock, shares outstanding
6,637,771 
6,717,242 
Treasury stock, shares
1,338,360 
1,246,136 
Unearned ESOP shares
434,548 
498,346 
Consolidated Statements of Income - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Interest and dividend income
   
Loans
$ 28,167 
$ 25,778 
$ 25,300 
Taxable securities available for sale
4,478 
4,595 
6,149 
Nontaxable securities available for sale
1,014 
1,308 
1,651 
Interest bearing deposits in banks
96 
46 
22 
Total interest and dividend income
33,755 
31,727 
33,122 
Interest expense:
   
Deposits
4,810 
4,240 
5,031 
Advances from Federal Home Loan Bank
248 
163 
289 
Repurchase agreements
469 
508 
491 
Subordinated debentures
436 
388 
739 
Total interest expense
5,963 
5,299 
6,550 
Net interest income
27,792 
26,428 
26,572 
Provision for loan losses
477 
1,241 
1,051 
Net interest income after provision for loan losses
27,315 
25,187 
25,521 
Non-interest income:
   
Service charges
3,224 
2,788 
2,925 
Merchant card
1,222 
1,224 
1,130 
Mortgage origination
1,321 
1,585 
1,175 
Realized gains from sale of securities available for sale, net
169 
612 
691 
Income from bank owned life insurance
483 
343 
335 
Financial services commission
536 
614 
685 
Other operating
1,075 
769 
661 
Total non-interest income
8,030 
7,935 
7,602 
Non-interest expenses:
   
Salaries and employee benefits
16,049 
15,400 
15,810 
Occupancy
2,920 
3,173 
3,077 
Data processing
2,884 
2,942 
2,827 
State deposit tax
770 
990 
1,018 
Professional services
2,316 
1,404 
1,506 
Advertising
1,354 
1,401 
1,302 
Foreclosed assets, net
448 
1,227 
(Gain) loss on sale of premises and equipment
(72)
Other operating
3,592 
4,170 
3,677 
Total non-interest expense
29,896 
29,856 
30,445 
Income before income tax expense
5,449 
3,266 
2,678 
Income tax expense
2,148 
362 
274 
Net income
$ 3,301 
$ 2,904 
$ 2,404 
Earnings per share available to common stockholders:
   
Basic
$ 0.53 
$ 0.47 
$ 0.38 
Diluted
$ 0.53 
$ 0.47 
$ 0.38 
Weighted average shares outstanding-basic
6,221,632 
6,233,860 
6,372,277 
Weighted average shares outstanding-diluted
6,221,632 
6,233,860 
6,372,277 
Interim Consolidated Condensed Statements of Comprehensive Income - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
   
Net income
$ 3,301 
$ 2,904 
$ 2,404 
Other comprehensive income, net of tax:
   
Unrealized loss on non - other than temporary impaired ("OTTI") investment securities available for sale, net of taxes
(387)
(1,351)
(1,121)
Unrealized gain (loss) on OTTI securities, net of taxes
(148)
(170)
237 
Unrealized gain on derivatives, net of taxes
  
257 
Reclassification adjustment for gains and accretion included in net income, net of taxes
(112)
(405)
(456)
Total other comprehensive income (loss)
(647)
(1,926)
(1,083)
Comprehensive income
$ 2,654 
$ 978 
$ 1,321 
Consolidated Statements of Changes in 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 (Loss) [Member]
Beginning balance at Dec. 31, 2014
$ 98,402 
$ 79 
$ 58,466 
$ 45,729 
$ (9,429)
 
$ 3,557 
Beginning balance, Shares at Dec. 31, 2014
 
7,171,282 
     
Net income
2,404 
  
2,404 
   
Restricted stock awards, shares
 
2,034 
     
Net change in unrealized gain (losses) on securities available for sale, net of taxes
(1,340)
     
(1,340)
Net change in unrealized losses on derivatives, net of taxes
257 
     
257 
Cash dividend to common stockholders
(1,009)
  
(1,009)
   
Common stock repurchase
(11,926)
   
(11,926)
  
Common stock repurchase, shares
 
(907,505)
     
Common stock issued
    
7,884 
$ (7,884)
 
Common stock issued, shares
 
600,000 
     
ESOP shares earned
652 
 
(52)
    
ESOP Shares Earned, shares
     
704 
 
Compensation expense, restricted stock awards
190 
 
190 
    
Ending balance at Dec. 31, 2015
87,630 
$ 79 
58,604 
47,124 
(13,471)
$ (7,180)
2,474 
Ending balance, Shares at Dec. 31, 2015
 
6,865,811 
     
Net income
2,904 
  
2,904 
   
Restricted stock awards
$ 1 
     
Restricted stock awards, shares
 
11,679 
     
Net change in unrealized gain (losses) on securities available for sale, net of taxes
(1,926)
     
(1,926)
Cash dividend to common stockholders
(993)
  
(993)
   
Common stock repurchase
(1,876)
   
(1,876)
  
Common stock repurchase, shares
 
(160,248)
     
ESOP shares earned
$ 553 
 
(79)
    
ESOP Shares Earned, shares
600,000 
    
632 
 
Compensation expense, restricted stock awards
$ 135 
 
135 
    
Ending balance at Dec. 31, 2016
86,428 
$ 80 
58,660 
49,035 
(15,347)
$ (6,548)
548 
Ending balance, Shares at Dec. 31, 2016
 
6,717,242 
     
Net income
3,301 
  
3,301 
   
Restricted stock awards, shares
 
12,753 
     
Net change in unrealized gain (losses) on securities available for sale, net of taxes
(647)
     
(647)
Cash dividend to common stockholders
(1,174)
  
(1,174)
   
Common stock repurchase
$ (1,308)
   
(1,308)
  
Common stock repurchase, shares
(300,000)
(92,224)
     
ESOP shares earned
$ 706 
 
59 
    
ESOP Shares Earned, shares
600,234 
    
647 
 
Compensation expense, restricted stock awards
$ 106 
 
106 
    
Ending balance at Dec. 31, 2017
$ 87,412 
$ 80 
$ 58,825 
$ 51,162 
$ (16,655)
$ (5,901)
$ (99)
Ending balance, Shares at Dec. 31, 2017
 
6,637,771 
     
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 172 
$ 992 
$ 690 
Net change in unrealized losses on derivatives, income tax benefit
  
$ (132)
Cash dividend to common stockholders, per share
$ 0.19 
$ 0.16 
$ 0.16 
Common stock repurchase, shares
(300,000)
  
Common Stock [Member]
   
Common stock repurchase, shares
(92,224)
(160,248)
(907,505)
Retained Earnings [Member]
   
Cash dividend to common stockholders, per share
$ 0.19 
$ 0.16 
$ 0.16 
Accumulated Other Comprehensive Income (Loss) [Member]
   
Net change in unrealized gain (losses) on securities available for sale, taxes
$ 172 
$ 992 
$ 690 
Net change in unrealized losses on derivatives, income tax benefit
  
$ (132)
Consolidated Statements of Cash Flows - USD ($)
12 Months Ended
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
   
Net income
$ 3,301 
$ 2,904 
$ 2,404 
Adjustments to reconcile net income to net cash provided by operating activities:
   
Provision for loan losses
477 
1,241 
1,051 
Depreciation
1,225 
1,320 
1,266 
Amortization of intangible assets
  
33 
Amortization of investment premiums and discounts, net
1,073 
1,515 
1,650 
OTTI recovery on available for sale securities
(17)
(17)
(17)
Expense for deferred income taxes
1,585 
267 
177 
Stock compensation expense
106 
135 
138 
Income from bank owned life insurance
(483)
(343)
(335)
Gain on sale of securities available for sale
(169)
(612)
(691)
Gain on sale of mortgage loans
(1,321)
(1,585)
(1,175)
(Gain) loss on sale of premises and equipment
(72)
Proceeds from sale of mortgage loans
51,494 
56,309 
43,847 
(Gain) loss on sale of foreclosed assets
(158)
(21)
716 
Originations of mortgage loans sold
(50,618)
(53,026)
(44,020)
Decrease in:
   
Accrued interest receivable
210 
340 
437 
Other assets
389 
145 
21 
Increase (decrease) in accrued expenses and other liabilities
1,173 
(1,980)
933 
Net cash provided by operating activities
8,269 
6,520 
6,436 
Cash flows from investing activities:
   
Proceeds from sales, calls and maturities of securities available for sale
54,416 
67,671 
120,354 
Purchase of securities available for sale
(31,594)
(43,778)
(56,875)
Net increase in loans
(37,605)
(49,586)
(19,005)
Proceeds from sale of foreclosed assets
3,498 
1,623 
344 
Proceeds from death benefit of bank owned life insurance policy
777 
  
Proceeds from sale of premises and equipment
 
100 
 
Purchase of premises and equipment
(466)
(775)
(2,361)
Net cash provided by (used in) investing activities
(10,974)
(24,745)
42,457 
Cash flows from financing activities:
   
Net increase (decrease) in deposits
21,127 
(6,524)
8,098 
Increase in advance payments by borrowers for taxes and insurance
42 
152 
101 
Advances from Federal Home Loan Bank
80,000 
26,000 
41,000 
Repayment of advances from Federal Home Loan Bank
(68,000)
(30,000)
(60,000)
Increase (decrease) in repurchase agreements
(9,302)
1,885 
(11,588)
Acquisition of treasury stock
(1,308)
(1,876)
(11,926)
Proceeds from repayment of ESOP loan
647 
632 
704 
Dividends paid on common stock
(1,174)
(993)
(1,023)
Net cash provided by (used in) financing activities
22,032 
(10,724)
(34,634)
Increase (decrease) in cash and cash equivalents
19,327 
(28,949)
14,259 
Cash and cash equivalents, beginning of period
25,749 
54,698 
40,439 
Cash and cash equivalents, end of period
45,076 
25,749 
54,698 
Supplemental disclosures of cash flow information:
   
Interest paid
5,920 
5,354 
6,587 
Income taxes (refund) paid
1,044 
(564)
(900)
Supplemental disclosures of non-cash investing and financing activities:
   
Loans charged off
3,159 
1,468 
1,867 
Foreclosures and in substance foreclosures of loans during year
4,312 
2,263 
869 
Net unrealized losses on investment securities classified as available for sale
(978)
(2,918)
(2,030)
Increase in deferred tax asset related to unrealized gains on investments
331 
992 
691 
Dividends declared and payable
355 
288 
287 
Sale and financing of stock to ESOP
  
7,884 
Issue of unearned restricted stock
$ 178 
$ 145 
$ 25 
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]
 
Summary of Significant Accounting Policies
(1) Summary of Significant Accounting Policies:

Nature of Operations and Customer Concentration

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

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

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

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

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and its subsidiaries (collectively the “Company”) for all periods. Significant inter-company balances and transactions have been eliminated in consolidation.

Accounting

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and conform to general practices in the banking industry. U.S. GAAP is generally defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), as amended by Accounting Standards Updates (“ASUs”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative U.S. GAAP for SEC registrants.

 

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

Subsequent Events

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

Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand, amounts due on demand from commercial banks, interest-bearing deposits in other financial institutions and federal funds sold with maturities of three months or less. The Company is required to maintain reserve funds in either cash on hand or on deposit with the Federal Reserve Bank. At December 31, 2017, the Company’s reserve requirement was met with available cash on hand.

 

Securities

The Company reports debt, readily-marketable equity, mortgage-backed and mortgage related securities in one of the following categories: (i) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (ii) “available for sale” (all other debt, equity, mortgage-backed and mortgage related securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax as a separate component of stockholders’ equity. At the time of new security purchases, a determination is made as to the appropriate classification. Realized and unrealized gains and losses on trading securities are included in net income. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders’ equity, net of any tax effect. Cost of securities sold is recognized using the specific identification method. Interest income on securities is recognized as earned. The Company purchases many agency bonds at either a premium or discount to its par value. Premiums and discounts on agency bonds are amortized using the net interest method. For callable bonds purchased at a premium, the premium is amortized to the first call date. If the bond is not called on that date, the premium is fully amortized and the Company recognizes an increase in the net yield of the investment. For agency bonds purchased at a discount, the discount is accreted to the final maturity date. For callable bonds purchased at discount and called before maturity, the Company recognizes a gain on the sale of securities. The Company amortizes premiums and accretes discounts on mortgage back securities and collateralized mortgage obligations based on the securities three-month average prepayment speed. Gains and losses on sales are recorded on the trade date.

Other Than Temporary Impairment

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

Other Securities

Other securities which are not actively traded and may be restricted, such as Federal Home Loan Bank (FHLB) stock are recognized at cost. FHLB stock is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Receivable and Allowance for Loan Losses

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and deferred loan cost. ASC 310-20, Nonrefundable Fees and Other Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The Company charges off loans after, in management’s opinion, the collection of all or a large portion of the principal or interest is not probable. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received while the loan is classified as non-accrual, when the loan is ninety days past due. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.

The Company provides an allowance for loan losses and includes a provision for loan losses determined by management. Subsequent recoveries, if any, are credited to the allowance. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. The loss experience is determined by portfolio segment and is based on the actual losses experienced by the Company over the most recent three years.

Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments in accordance with the contractual terms of the loan agreement. Impaired loans and loans classified as Troubled Debt Restructurings (“TDRs”) may be classified as either substandard or doubtful and reserved for based on individual loans risk for loss. Loans not considered impaired may be classified as either special mention or watch and may have an allowance established for it. Typically, unimpaired classified loans exhibit some form of weakness in either industry trends, collateral, or cash flow that result in a default risk greater than that of the Company’s typical loan. All classified amounts include all unpaid interest and fees as well as the principal balance outstanding.

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

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

Loans Held For Sale

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

Fixed Rate Mortgage Originations

The Company operates a mortgage division that originates mortgage loans in the name of assorted investors, including Federal Home Loan Mortgage Corporation (Freddie Mac). Originations for Freddie Mac are sold through the Bank while originations to other investors are processed for a fee. On a limited basis, loans sold to Freddie Mac may result in the Bank retaining loan servicing rights. In recent years, customers have chosen lower origination rates over having their loan locally serviced; thereby limiting the amount of new loans sold with servicing retained. At December 31, 2017, the Bank maintained a servicing portfolio of one to four family real estate loans of approximately $16.9 million.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure or repossession are initially recorded at fair value less selling cost when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated cost to sell. Costs of improving the assets are capitalized if the Company determines that it is likely to recover the cost. Other improvement cost and all cost relating to holding the property are expensed. Management conducts periodic valuations and any adjustments to value are recognized in the current period’s operations.

Repurchase Agreements

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

Treasury Stock

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

Unearned ESOP Shares

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

Comprehensive Income

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

Transfers of Financial Assets

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

Revenue Recognition

Mortgage loans held for sale are generally delivered to secondary market investors under best efforts sales commitments entered into prior to the closing of the individual loan. Loan sales and related gains or losses are recognized at settlement. Loan fees earned for the servicing of secondary market loans are recognized as earned. Interest income on loans receivable is reported on the interest method. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired, placed in non-accrual status, or payments are past due more than 90 days. Interest is reversed on any loans classified as non-accrual or past due more than 90 days. Interest may continue to accrue on loans over 90 days past due if they are well secured and in the process of collection.

Income Taxes

Income taxes are accounted for through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date. Accordingly, deferred tax assets that will be realized after December 31, 2017 were revalued using the tax rates enacted as a result of the 2017 Tax Cuts and Jobs Act resulting in a revaluation charge of $980,000. The Company files its federal and Kentucky income tax returns as well as its Kentucky and Tennessee franchise and excise tax returns on a consolidated basis with its subsidiaries. All taxes are accrued on a separate entity basis.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being recognized on examination. For tax positions not meeting the “more likely than not test”, no benefit is recorded.

Operating Segments

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

Premises and Equipment

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

 

Land improvements

     5-15 years  

Buildings

     40 years  

Furniture and equipment

     5-15 years  

 

Bank Owned Life Insurance

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

Advertising

The Company expenses the production cost of advertising as incurred.

Financial Instruments

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

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

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

Cash and due from banks

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

Interest-bearing deposits in banks

The carrying amounts reported in the consolidated balance sheets for interest bearing deposits in banks 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.

 

FHLB stock

The fair value of FHLB stock is recognized at cost.

Available-for-sale securities

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

Loans held for sale

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

Loans receivable

The fair values for of fixed-rate loans and variable rate loans that re-price on an infrequent basis is estimated using discounted cash flow analysis which considers future re-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans of similar type, terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The estimated fair value of variable-rate loans that re-price frequently and 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.

Repurchase agreements

Overnight repurchase agreements have a fair value at book, given that they mature overnight.

 

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.

Subordinated debentures

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

Dividend Restrictions

The Company is not permitted to pay a dividend to common shareholders if it fails to make a quarterly interest payment to the holders of the Company’s subordinated debentures. Furthermore, the Bank may be restricted in the payment of dividends to the Corporation by the KDFI or FDIC. Any restrictions imposed by either regulator would effectively limit the Company’s ability to pay a dividend to its common stockholders as discussed in Note 16. At December 31, 2017, there were no such restrictions. At December 31, 2017 and December 31, 2016, the Corporation had cash balances on hand to pay common dividends and repurchase treasury stock as outlined in Note 19 of approximately $860,000 and $1.1 million, respectively.

Earnings Per Share

Earnings per share (EPS) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus dilutive common stock equivalents (CSE). CSE consists of dilutive stock options granted through the Company’s stock option plan. Restricted stock awards represent future compensation expense and are dilutive. Anti-dilutive common stock equivalents are not included for the purposes of this calculation. At December 31, 2017 and December 31, 2016, the Company has no warrants or stock options outstanding.

Stock Compensation

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

 

Effect of New Accounting Pronouncements

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

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

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

 

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

On June 16, 2016, the FASB released its finalized ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments to U.S. GAAP require businesses and other organization to measure the expected credit losses on financial assets, such as loans, securities, bond insurance, and many receivables, the FASB said. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified as available-for-sale. Write-downs will be based on historical information, current business conditions, and forecasts, and FASB expects the forecasts to improve the loss estimates on financial assets that are losing value. FASB also said the techniques that are employed today to write down loans and other instruments can still be used, although FASB expects the variables for calculating the losses to change. ASU 2016-13 will become effective on January 1, 2020. Companies are permitted to adopt ASU 2016-13 in fiscal years beginning after December 15, 2018. The Company is currently evaluating the potential impact of ASU 2016-13.

ASU 2016-15 “Statement of Cash Flows” (Topic 230) is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public companies for annual periods beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted with retrospective application. The application of ASU 2016-15 did not have a material impact on the Company’s Consolidated Financial Statements.

 

ASU 2017-08, “Receivables – Nonrefundable Fees and Other Cost” (Topic 310) – amends the amortization period for certain purchased callable debt securities held at a premium. Prior to the issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual life of instrument. ASU 2017-08 premiums on purchased callable debt securities that have an explicit, non-contingent call features that are callable at fixed prices to be amortized to the earliest call date. There are no accounting changes for securities held at a discount. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU 2017-08 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

ASU 2017-09 “Compensation – Stock Compensation” (Topic 718) – clarifies when changes to the terms or conditions of a share-based payment must be accounted for as modifications. Under AUS 2017-09, an entity should account for changes to the terms or conditions of a share-based payment unless all of the following are met:

 

    The fair value of the modified award is the same as the fair value of the original award immediately before modification,

 

    The vesting conditions of the modified award is the same as the vesting conditions value of the original award immediately before modification, and

 

    The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before modification.

ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a material impact on our consolidated financial statements.

ASU 2017-12 “Derivatives and Hedging (Topic 815) amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information convey to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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

Reclassifications

Certain items in prior financial statements have been reclassified to conform to the current presentation. Reclassifications had no effect on prior year’s net income or shareholders’ equity.

Securities
12 Months Ended
Dec. 31, 2017
Cash and Cash Equivalents [Abstract]
 
Securities
(2) Securities:

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

 

     December 31, 2017  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

           

U.S. Agency securities

   $ 84,210        536        (653      84,093  

Tax free municipal bonds

     26,412        637        (83      26,966  

Taxable municipal bonds

     1,279        5        (1      1,283  

Trust preferred securities

     1,650        35        —          1,685  

Mortgage-backed securities

     71,389        201        (826      70,764  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 184,940        1,414        (1,563      184,791  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Restricted:

           

FHLB stock

   $ 4,428        —          —          4,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

           

U.S. Treasury securities

   $ 2,000        1        —          2,001  

U.S. Agency securities

     83,667        983        (638      84,012  

Tax free municipal bonds

     33,004        1,081        (174      33,911  

Taxable municipal bonds

     2,720        17        (10      2,727  

Trust preferred securities

     1,634        183        —          1,817  

Mortgage-backed securities

     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 December 31, 2017 and December 31, 2016 were as follows:

 

December 31, 2017

   Amortized
Cost
     Estimated
Fair
Value
 

Due within one year

   $ 2,078        2,095  

Due in one to five years

     28,692        28,624  

Due in five to ten years

     18,161        18,287  

Due after ten years

     7,218        7,443  
  

 

 

    

 

 

 
     56,149        56,449  

Amortizing agency bonds

     57,402        57,578  

Mortgage-backed securities

     71,389        70,764  
  

 

 

    

 

 

 

Total unrestricted securities available for sale

   $ 184,940        184,791  
  

 

 

    

 

 

 

 

December 31, 2016

   Amortized
Cost
     Estimated
Fair
Value
 

Due within one year

   $ 6,605        6,615  

Due in one to five years

     13,913        14,067  

Due in five to ten years

     32,611        32,744  

Due after ten years

     13,022        13,603  
  

 

 

    

 

 

 
     66,151        67,029  

Amortizing agency bonds

     56,874        57,439  

Mortgage-backed securities

     85,626        85,012  
  

 

 

    

 

 

 

Total unrestricted securities available for sale

   $ 208,651        209,480  
  

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2017 and December 31, 2016 are as follows:

 

     Less than 12 months     12 months or longer     Total  

December 31, 2017

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

Available for sale

               

U.S. Agency securities

   $ 41,501        (431     9,846        (222     51,347        (653

Taxable municipals

     521        (1     —          —         521        (1

Tax free municipals

     4,860        (51     913        (32     5,773        (83

Mortgage-backed securities

     40,441        (289     21,566        (537     62,007        (826
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

   $ 87,323        (772     32,325        (791     119,648        (1,563
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less than 12 months     12 months or longer     Total  

December 31, 2016

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

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. Management gives consideration to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

At December 31, 2017, the Company has 83 securities with unrealized losses. Management believes these unrealized losses relate to changes in interest rates and not credit quality. Management also believes the Company has the ability to hold these securities until maturity and, therefore, no declines are deemed to be other than temporary. The carrying value of the Company’s investment securities may decline in the future if the financial condition of issuers deteriorates and management determines it is probable that the Company will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future.

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

At September 30, 2013, the Company recognized a $400,000 impairment charge related to management’s financial analysis of the issuing institution, and our opinion that it would be unable to make dividend payments after the five-year extension expired. In January 2015, Your Community Bancshares (“YCB”) purchased FFKY. In September of 2016, Wesbanco (“WSBC”) closed on its purchase of YCB. WSBC is a $9.9 billion institution headquartered in West Virginia. WSBC has assumed the debt originally issued by FFKY, and all interest is now current. The Company is currently accreting the $400,000 impairment charge back into income ratably.

During 2017, the Company sold investment securities classified as available for sale for proceeds of $18.0 million resulting in gross gains of $272,000 and gross losses of $103,000. During 2016, the Company sold investment securities classified as available for sale for proceeds of $19.0 million resulting in gross gains of $690,000 and gross losses of $78,000. During 2015, the Company sold investment securities classified as available for sale for proceeds of $84.9 million resulting in gross gains of $1,274,000 and gross losses of $583,000.

As part of its normal course of business, the Bank holds significant balances of municipal and other deposits that require the Bank to pledge investment instruments as collateral. At December 31, 2017, the Bank pledged investments with a book value of $118.0 million and a market value of approximately $119.8 million to various municipal entities as required by law. In addition, the Bank has provided $47.6 million of letters of credit issued by the Federal Home Loan Bank of Cincinnati to collateralize municipal deposits. At December 31, 2016, the Bank pledged investments with a book value of $125.6 million and a market value of approximately $128.4 million to various municipal entities as required by law. In addition, the Bank provided $45.6 million of letters of credit issued by the Federal Home Loan Bank of Cincinnati to collateralize municipal deposits. At December 31, 2017 and December 31, 2016, the collateral for the letters of credit issued are the Bank’s one to four family loan portfolio.

Loans Receivable, Net
12 Months Ended
Dec. 31, 2017
Receivables [Abstract]
 
Loans Receivable, Net
(3) Loans Receivable, Net:

The Company uses the following loan segments as described below:

 

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

 

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

 

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

 

    Multi-family loans are closed-end loans secured by residential housing with five or more units in a single building. Multi-family loans may carry a variable rate of interest or the interest rate on the loan is a fixed rate (usually five years). After the initial fixed rate period, the loan reverts to a variable rate or has 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 December 31, 2017 and December 31, 2016:

 

     December 31, 2017      December 31, 2016  

Real estate loans:

     

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

   $ 163,565        147,962  

Home equity lines of credit

     35,697        35,684  

Junior liens (closed end)

     1,184        1,452  

Multi-family

     37,445        34,284  

Construction

     30,246        39,255  

Land

     14,873        23,840  

Non-residential real estate

     224,952        182,940  

Farmland

     36,851        47,796  
  

 

 

    

 

 

 

Total mortgage loans

     544,813        513,213  

Consumer loans

     8,620        8,717  

Commercial loans

     88,938        88,907  
  

 

 

    

 

 

 

Total other loans

     97,558        97,624  
  

 

 

    

 

 

 

Total loans, gross

     642,371        610,837  

Deferred loan cost, net of fees

     (443      (439

Less allowance for loan losses

     (4,826      (6,112
  

 

 

    

 

 

 

Total loans

   $ 637,102      $ 604,286  
  

 

 

    

 

 

 

Although the Company has a diversified loan portfolio, 84.8% and 84.0% of the portfolio was concentrated in loans secured by real estate at December 31, 2017 and December 31, 2016, respectively. At December 31, 2017 and December 31, 2016, the majority of these loans are located within the Company’s general operating areas of Western Kentucky and Middle and Western Tennessee.

 

Risk Grade Classifications

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

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

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

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

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

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

 

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

Substandard—A substandard asset is inadequately protected by the current sound worth or paying capacity of the debtor or the collateral pledged. There exists one or more well defined weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will experience some loss if the deficiencies are not corrected.

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.

 

Loans by classification type and credit risk indicator at December 31, 2017 were as follows:

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

One-to-four family mortgages

   $ 162,993        —          572        —          163,565  

Home equity line of credit

     35,285        —          412        —          35,697  

Junior liens

     1,184        —          —          —          1,184  

Multi-family

     37,445        —          —          —          37,445  

Construction

     30,246        —          —          —          30,246  

Land

     14,318        —          555        —          14,873  

Non-residential real estate

     216,901        979        7,072        —          224,952  

Farmland

     35,253        1,147        451        —          36,851  

Consumer loans

     8,376        —          244        —          8,620  

Commercial loans

     83,892        3,572        1,474        —          88,938  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 625,893        5,698        10,780        —          642,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans by classification type and credit risk indicator at December 31, 2016 were as follows:

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

One-to-four family mortgages

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

Home equity line of credit

     35,109        25        550        —          35,684  

Junior liens

     1,411        30        11        —          1,452  

Multi-family

     31,280        —          3,004        —          34,284  

Construction

     39,255        —          —          —          39,255  

Land

     15,581        35        8,224        —          23,840  

Non-residential real estate

     172,395        3        10,542        —          182,940  

Farmland

     44,832        674        2,290        —          47,796  

Consumer loans

     8,382        —          335        —          8,717  

Commercial loans

     85,174        603        3,130        —          88,907  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 579,384        2,114        29,339        —          610,837  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     At December 31, 2017      For the year ended
December 31, 2017
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no specific allowance

              

One-to-four family mortgages

   $ 257        257        —          1,235        35  

Home equity line of credit

     —          —          —          447        26  

Junior liens

     —          —          —          6        —    

Multi-family

     —          —          —          1,135        —    

Construction

     —          —          —          —          —    

Land

     515        515        —          837        44  

Non-residential real estate

     7,086        7,086        —          8,979        395  

Farmland

     444        444        —          1,094        35  

Consumer loans

     —          —          —          8        2  

Commercial loans

     875        875        —          1,571        46  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,177        9,177        —          15,312        583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance

              

One-to-four family mortgages

   $ —          —          —          —          —    

Home equity line of credit

     —          —          —          —          —    

Junior liens

     —          —          —          —          —    

Multi-family

     —          —          —          —          —    

Construction

     —          —          —          —          —    

Land

     —          —          —          4,006        —    

Non-residential real estate

     2        2        2        88        2  

Farmland

     —          —          —          195        —    

Consumer loans

     217        217        54        248        —    

Commercial loans

     541        541        233        479        13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     760        760        289        5,016        15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,937        9,937        289        20,328        598  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no specific allowance

              

One-to-four family mortgages

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

Home equity line of credit

     550        550        —          390        24  

Junior liens

     11        11        —          13        1  

Multi-family

     3,004        3,004        —          3,005        172  

Construction

     —          —          —          —          —    

Land

     1,553        2,513        —          7,868        38  

Non-residential real estate

     10,542        10,542        —          9,363        485  

Farmland

     2,290        2,290        —          1,563        120  

Consumer loans

     —          —          —          21        1  

Commercial loans

     2,865        2,865        —          3,168        112  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance

              

One-to-four family mortgages

   $ —          —          —          452        —    

Home equity line of credit

     —          —          —          —          —    

Junior liens

     —          —          —          —          —    

Multi-family

     —          —          —          910        —    

Construction

     —          —          —          —          —    

Land

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

Non-residential real estate

     —          —          —          —          —    

Farmland

     —          —          —          533        —    

Consumer loans

     335        335        84        273        —    

Commercial loans

     265        265        28        754        24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Allowance for Loan Losses

A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral if the loan is collateral dependent.

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

 

Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2017, approximately $95.6 million of the outstanding principal balance of the Company’s non-residential real estate loans were secured by owner-occupied properties, approximately $129.4 million was secured by non-owner occupied properties. At December 31, 2016, approximately $78.7 million of the outstanding principal balance of the Company’s non-residential real estate loans were secured by owner-occupied properties, approximately $104.2 million was secured by non-owner occupied properties.

 

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

 

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

December 31, 2017:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 233        —          2        —          54        289  

Collectively evaluated for impairment

     614        1,384        1,468        941        130        4,537  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 847        1,384        1,470        941        184        4,826  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 1,416        515        7,532        257        217        9,937  

Loans collectively evaluated for impairment

     87,522        44,604        291,716        200,189        8,403        632,434  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 88,938        45,119        299,248        200,446        8,620        642,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2016:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 28        1,036        —          —          84        1,148  

Collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The average recorded investment in impaired loans for the years ended December 31, 2017 and 2016 was $20.3 million and $31.6 million, respectively. For the year ended December 31, 2017, the Company recognized $598,000 of interest income on impaired loans as compared to $1.5 million of interest income on impaired loans for the years ended December 31, 2016. The following table provides a detail of the Company’s activity in the allowance for loan loss account allocated by loan type for the years ended December 31, 2017, December 31, 2016 and December 31, 2015:

 

December 31, 2017

   Balance
12/31/2016
     Charge
off
    Recovery      Provision
for Loan
Loss
    Ending
Balance
12/31/2017
 

One-to-four family mortgages

   $ 852        (66     13        (52     747  

Home equity line of credit

     260        —         12        (83     189  

Junior liens

     8        —         4        (7     5  

Multi-family

     412        —         417        (515     314  

Construction

     277        —         —          (116     161  

Land

     1,760        (2,608     559        1,512       1,223  

Non-residential real estate

     964        —         16        (191     789  

Farmland

     778        —         10        (421     367  

Consumer loans

     208        (261     87        150       184  

Commercial loans

     593        (224     278        200       847  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 6,112        (3,159     1,396        477       4,826  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2016

   Balance
12/31/2015
     Charge
off
    Recovery      Provision
for Loan
Loss
    Ending
Balance
12/31/2016
 

One-to-four family mortgages

   $ 1,030        —         167        (345     852  

Home equity line of credit

     201        (30     14        75       260  

Junior liens

     8        —         14        (14     8  

Multi-family

     227        (421     —          606       412  

Construction

     377        —         —          (100     277  

Land

     1,379        —         —          381       1,760  

Non-residential real estate

     1,139        —         10        (185     964  

Farmland

     358        —         —          420       778  

Consumer loans

     358        (422     293        (21     208  

Commercial loans

     623        (595     141        424       593  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 5,700        (1,468     639        1,241       6,112  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

December 31, 2015

   Balance
12/31/2014
     Charge off     Recovery      Provision
for Loan
Loss
    Ending
Balance
12/31/2015
 

One-to-four family mortgages

   $ 1,198        (143     39        (64     1,030  

Home equity line of credit

     181        (92     10        102       201  

Junior liens

     14        —         4        (10     8  

Multi-family

     85        —         —          142       227  

Construction

     146        —         —          231       377  

Land

     1,123        (911     —          1,167       1,379  

Non-residential real estate

     2,083        (222     2        (724     1,139  

Farmland

     461        —         —          (103     358  

Consumer loans

     494        (298     118        44       358  

Commercial loans

     504        (201     54        266       623  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 6,289        (1,867     227        1,051       5,700  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-accrual loans totaled $1.3 million and $9.1 million at December 31, 2017 and December 31, 2016, respectively. All non-accrual loans noted below are classified as substandard. Interest income foregone on such loans totaled $100,000 at December 31, 2017, $108,000 at December 31, 2016, and $337,000 at December 31, 2015, respectively. The Company is not committed to lend additional funds to borrowers whose loans have been placed on a non-accrual basis. At December 31, 2017, there was one loan with a balance $88,000 that was past due more than ninety days and still accruing interest. There were no loans past due more than three months and still accruing interest as of December 31, 2016 and December 31, 2015, respectively. At December 31, 2017 and December 31, 2016, the Company’s balances of non-accrual loans by loan type are as follows:

 

     12/31/2017      12/31/2016  

One-to-four family first mortgages

   $ 266      $ 270  

Home equity lines of credit

     402        402  

Junior lien

     4        —    

Land

     40        7,675  

Non-residential real estate

     —          208  

Farmland

     111        —    

Consumer loans

     3        3  

Commercial loans

     459        516  
  

 

 

    

 

 

 

Total non-accrual loans

   $ 1,285      $ 9,074  
  

 

 

    

 

 

 

 

The table below presents gross loan balances excluding deferred loan fees of $443,000 at December 31, 2017 by loan classification allocated between past due, performing and non-accrual:

 

     Currently
Performing
     30 – 89
Days
Past Due
     More than
90 days past
Due and still
Accruing
     Non-accrual
Loans
     Total  

One-to-four family mortgages

   $ 163,030        181        88        266      $ 163,565  

Home equity line of credit

     35,295        —          —          402        35,697  

Junior liens

     1,180        —          —          4        1,184  

Multi-family

     37,445        —          —          —          37,445  

Construction

     30,246        —          —          —          30,246  

Land

     14,833        —          —          40        14,873  

Non-residential real estate

     224,743        209        —          —          224,952  

Farmland

     36,740        —          —          111        36,851  

Consumer loans

     8,614        3        —          3        8,620  

Commercial loans

     88,479        —          —          459        88,938  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 640,605        393        88        1,285        642,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents gross loan balances excluding deferred loan fees of $439,000 at December 31, 2016 by loan classification allocated between past due, performing and non-accrual:

 

     Currently
Performing
     30 – 89
Days
Past Due
     Non-accrual
Loans
     Total  

One-to-four family mortgages

   $ 146,796        896        270      $ 147,962  

Home equity line of credit

     35,260        22        402        35,684  

Junior liens

     1,448        4        —          1,452  

Multi-family

     34,284        —          —          34,284  

Construction

     39,255        —          —          39,255  

Land

     16,165        —          7,675        23,840  

Non-residential real estate

     182,732        —          208        182,940  

Farmland

     47,796        —          —          47,796  

Consumer loans

     8,686        28        3        8,717  

Commercial loans

     88,130        261        516        88,907  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 600,552        1,211        9,074        610,837  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Troubled Debt Restructuring

On a periodic basis, the Company may modify the terms of certain loans. In evaluating whether a restructuring constitutes a TDR, ASC 310; A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, is determinative. In evaluating whether a restructuring constitutes a TDR, the Company must separately conclude that both of the following exist:

 

  a.) The restructuring constitutes a concession

 

  b.) The debtor is experiencing financial difficulties

ASC 310 provides the following guidance for the Company’s evaluation of whether it has granted a concession.

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

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

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

There were no loans as of December 31, 2017, December 31, 2016 and December 31, 2015 that were been modified as TDRs and within twelve months of the modification subsequently defaulted on their modified terms. At December 31, 2017 and December 31, 2016, there were no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

 

A summary of the activity in loans classified as TDRs for the year ended December 31, 2017 is as follows:

 

     Balance at
12/31/16
     New
TDR
     Loss on
Foreclosure
     Transferred to
Non-accrual
     Loan
Amortization
    Balance at
12/31/17
 

Multi-family real estate

   $ 815        —          —          —          (815     —    

Non-residential real estate

     5,646        —          —          —          (2,483     3,163  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total performing TDR

   $ 6,461        —          —          —          (3,298     3,163  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

During the year ended December 31, 2017, there were no new loans modified as TDR.

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

 

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

Multi-family real estate

   $ —          816        —          —          (1     815  

Non-residential real estate

     5,536        228        —          —          (118     5,646  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total performing TDR

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

During the year ended December 31, 2016, the Company made financial concessions to one borrower having four loans totaling $1.04 million that resulted in in a TDR classification. The loans were secured by three multi-family real estate properties and one parcel of non-residential real estate. The borrower had financial problems and made a request of the Bank to make interest only payments for a period not to exceed one year. During the interest only period, the borrower committed to attempt to sell the collateral. During 2017, the borrower successfully sold the collateral and the Company received all funds due.

 

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

 

     Balance at
12/31/14
     New
TDR
     Loss on
Foreclosure
     Transferred to
Non-accrual
     Loan
Amortization
    Balance at
12/31/15
 

Non-residential real estate

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total performing TDR

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

During the year ended December 31, 2015 there were six new loans to one borrower modified as TDR. The loans included one commercial vehicle, two parcels of non-residential real estate and three loans for commercial equipment used in conjunction with the non-residential real estate. The customer had financial difficulties related to personal legal issues. The customer received a concession from the Bank of one year of interest only payments due to his inability to materially participate in the business. The customer listed the properties for sale. The properties remained in TDR status until they were sold to a third party in 2017.

The Company originates loans to officers and directors and their affiliates at terms substantially equivalent to those available to other borrowers. Loans to officers and directors at December 31, 2017 and December 31, 2016, were approximately $5.9 million and $4.9 million, respectively. At December 31, 2017 and December 31, 2016, funds committed that were undisbursed to officers and directors approximated $1.5 million and $380,000, respectively.

The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2017 and December 31, 2016:

 

     2017      2016  

Balance at beginning of period

   $ 4,894        3,844  

New loans

     3,043        1,651  

Principal repayments

     (2,004      (601
  

 

 

    

 

 

 

Balance at end of period

   $ 5,933        4,894  
  

 

 

    

 

 

 
Premises and Equipment
12 Months Ended
Dec. 31, 2017
Property, Plant and Equipment [Abstract]
 
Premises and Equipment
(4) Premises and Equipment:

Components of premises and equipment included in the consolidated balance sheets as of December 31, 2017 and December 31, 2016 consisted of the following:

 

     2017      2016  

Land

   $ 6,555        6,555  

Land improvements

     1,153        1,132  

Buildings

     22,467        22,397  

Furniture and equipment

     6,957        6,932  
  

 

 

    

 

 

 
     37,132        37,016  

Less accumulated depreciation

     14,432        13,555  
  

 

 

    

 

 

 

Premises and equipment, net

   $ 22,700        23,461  
  

 

 

    

 

 

 

Depreciation expense was approximately $1,225,000, $1,320,000 and $1,266,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

Deposits
12 Months Ended
Dec. 31, 2017
Text Block [Abstract]
 
Deposits
(5) Deposits:

At December 31, 2017, the scheduled maturities of other time deposits were as follows:

 

Years Ending December 31,

      

2018

   $ 190,955  

2019

     68,714  

2020

     30,079  

2021

     10,649  

2022

     4,572  
  

 

 

 
   $ 304,969  
  

 

 

 

The amount of other time deposits with a minimum denomination of $250,000 or more was approximately $97.8 million and $79.7 million at December 31, 2017, and December 31, 2016, respectively. At December 31, 2017 and December 31, 2016, directors, members of senior management and their affiliates had deposits in the Bank of approximately $2.1 million. At December 31, 2017 and December 31, 2016, the Company had deposits classified as brokered deposits totaling $60.1 million and $33.4 million, respectively.

Interest expense on deposits for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, is summarized as follows:

 

     2017      2016      2015  

Interest bearing checking accounts

   $ 1,262        1,183        1,105  

Money market accounts

     71        76        88  

Savings

     94        95        103  

Other time deposits

     3,383        2,886        3,735  
  

 

 

    

 

 

    

 

 

 
   $ 4,810        4,240        5,031  
  

 

 

    

 

 

    

 

 

 

The Bank maintains clearing arrangements for its demand, interest bearing checking accounts and money market accounts with BBVA Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. For the month ended December 31, 2017, average daily clearings were approximately $5.3 million.

At December 31, 2017 and December 31, 2016, the Company had deposit accounts in overdraft status that were reclassified to loans on the accompanying consolidated balance sheet of approximately $0.2 million and $0.3 million,

Advances from Federal Home Loan Bank
12 Months Ended
Dec. 31, 2017
Banking and Thrift [Abstract]
 
Advances from Federal Home Loan Bank
(6) Advances from Federal Home Loan Bank:

Federal Home Loan Bank advances are summarized as follows:

 

     December 31,  
     2017     2016  

Types of Advances

   Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 

Fixed-rate

   $ 23,000        1.57   $ 11,000        1.04

Scheduled maturities of FHLB advances as of December 31, 2017, are as follows:

 

Years Ending

December 31,

   Fixed
Rate
     Average
Cost
 

2018

   $ 6,000        1.18

2019

2020

    

7,000

10,000

 

 

    

1.55

1.83


  

 

 

    

 

 

 

Total

   $ 23,000        1.57
  

 

 

    

 

 

 

The Bank has an approved line of credit of $30 million at the FHLB of Cincinnati, which is secured by a blanket agreement to maintain residential first mortgage loans and non-residential real estate loans with a principal value of 125% of the outstanding advances and has a variable interest rate. At December 31, 2017, the Bank could borrow an additional $49.1 million from the FHLB of Cincinnati without pledging additional collateral. At December 31, 2017, the Bank has an additional $9.9 million in additional collateral that could be pledged to the FHLB to secure additional advance requirements. The Bank has a $12.0 million unsecured line of credit with BBVA Compass Bank of Birmingham, Alabama. The Company’s overnight lines of credit with both the Federal Home Loan Bank of Cincinnati and Compass Bank had no balance at December 31, 2017.

Repurchase Agreements
12 Months Ended
Dec. 31, 2017
Text Block [Abstract]
 
Repurchase Agreements
(7) Repurchase Agreements:

At December 31, 2017, the Company provided investment securities with a market value of $38.4 million as collateral for repurchase agreements. The maximum repurchase balance outstanding during the year ended December 31, 2017 and December 31, 2016 was $46.8 million and $54.8 million, respectively.

At December 31, 2017 and December 31, 2016, the respective cost and maturities of the Company’s repurchase agreements are as follows:

 

2017

   Balance      Average Rate     Maturity  

Various customers

   $ 38,353        1.24     Overnight  
  

 

 

    

 

 

   

Total

   $ 38,353        1.24  
  

 

 

    

 

 

   

 

2016

   Balance      Average Rate     Maturity  

Various customers

   $ 47,655        0.91     Overnight  
  

 

 

    

 

 

   

Total

   $ 47,655        0.91  
  

 

 

    

 

 

   
Fair Value Measurement
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]
 
Fair Value Measurement
(8) Fair Value Measurement:

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. Although ASC 820 provides for fair value accounting, the Company did not elect the fair value option for any financial instrument not presently required to be accounted for at fair value.

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

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

 

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

 

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

 

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

The fair value of securities available for sale are determined by a matrix pricing, which is a mathematical technique what is widely used in the industry to value debt securities without relying exclusively on quoted prices for the individual securities in the Company’s portfolio but relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments and considering the fair value of any assigned collateral. The fair value of these liabilities is based on information obtained from a third party bank and is reflected within level 2 of the valuation hierarchy.

 

Assets and Liabilities Measured on a Recurring Basis

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

 

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

Description

   12/31/2017      (Level 1)      (Level 2)      (Level 3)  
    

(Dollars in Thousands)

 

Securities available for sale

           

U.S. Agency securities

   $ 84,093        —          84,093        —    

Taxable municipals

     1,283        —          1,283        —    

Tax-free municipals

     26,966        —          26,966        —    

Trust preferred securities

     1,685        —          —          1,685  

Mortgage backed securities

     70,764        —          70,764        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 184,791        —          183,106        1,685  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Description

   12/31/2016      (Level 1)      (Level 2)      (Level 3)  
    

(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:

 

December 31, 2017

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

Description

   consolidated
balance sheet At
12/31/2017
     Markets for
Identical
Assets (Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets

           

Foreclosed assets

   $ 3,369        —          —          3,369  

Impaired loans, net of allowance of $289

   $ 473        —          —          473  

 

December 31, 2016

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

Description

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

Assets

           

Foreclosed assets

   $ 2,397        —          —          2,397  

Impaired loans, net of allowance of $1,148

   $ 6,123        —          —          6,123  

 

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 December 31, 2017 and December 31, 2016:

 

Level 3 Significant Unobservable Input Assumptions

      Fair Value    Valuation Technique    Unobservable Input    Quantitative Range
of Unobservable
Inputs

December 31, 2017

           

Assets measured on a non-recurring basis

        

Foreclosed assets

   3,369    Discount to either actual sales price or appraised value of collateral    Appraisal and sales comparability adjustments    30% to 55%

Impaired loans

   760    Discount to appraised value of collateral    Appraisal comparability adjustments    10% to 25%

Asset measured on a recurring basis

        

Trust preferred securities

   1,685    Discounted cash flow Spread to Libor swap curve    Compare to quotes for sale when available    One month libor plus 4% to 6%

December 31, 2016

           

Assets measured on a non-recurring basis

        

Foreclosed assets

   2,397    Discount to either actual sales price or appraised value of collateral    Appraisal comparability adjustments    30% to 55%

Impaired loans

   7,271    Discount to appraised value of collateral    Appraisal comparability adjustments    10% to 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 plus 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 our analysis, the Company then reviews Libor swap curve to analyze the overall yield of our investment as compared to long-term swap rates. On rare occasions, the Company may receive an offer from a broker to purchase similar type instruments and the Company will analyze these offerings as compared to our investment.

Change in Level 3 fair value measurements:

The table below includes a roll-forward of the balance sheet items for the years ended December 31, 2017 and 2016, (including the change in fair value) for assets and liabilities classified by the Company within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

     Year ended December 31,  
     2017      2016  
      Other
Assets
     Other
Assets
 

Fair value, December 31,

   $ 1,817      $ 1,865  

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

     (149      (65

Recovery of prior impairment charge

     17        17  
  

 

 

    

 

 

 

Fair value, December 31,

   $ 1,685      $ 1,817  
  

 

 

    

 

 

 

 

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

 

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

Financial Assets:

  

Cash and due from banks

   $ 37,965        37,965        37,965        —          —    

Interest-bearing deposits in banks

     7,111        7,111        7,111        —          —    

Securities available for sale

     184,791        184,791        —          183,106        1,685  

Federal Home Loan Bank stock

     4,428        4,428        —          —          4,428  

Loans held for sale

     1,539        1,539        —          1,539        —    

Loans receivable

     637,102        615,265        —          —          615,265  

Accrued interest receivable

     3,589        3,589        —          —          3,589  

Financial Liabilities:

              

Deposits

     754,009        754,510        —          754,510        —    

Advances from borrowers for taxes and insurance

     808        808        —          808        —    

Advances from Federal Home Loan Bank

     23,000        22,849        —          22,849        —    

Repurchase agreements

     38,353        38,353        —          38,353        —    

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
 

Financial Assets:

  

Cash and due from banks

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

Interest-bearing deposits in banks

     3,970        3,970        3,970        —          —    

Securities available for sale

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

Federal Home Loan Bank stock

     4,428        4,428        —          —          4,428  

Loans held for sale

     1,094        1,094        —          1,094        —    

Loans receivable

     604,286        593,257        —          —          593,257  

Accrued interest receivable

     3,799        3,799        —          —          3,799  

Financial Liabilities:

              

Deposits

     732,882        732,942        —          732,942        —    

Advances from borrowers for taxes and insurance

     766        766        —          766        —    

Advances from Federal Home Loan Bank

     11,000        10,979        —          10,979        —    

Repurchase agreements

     47,655        47,655        —          47,655        —    

Subordinated debentures

     10,310        10,099        —          —          10,099  

Non-Financial Assets and Non-Financial Liabilities:

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

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

 

     Years Ended December 31,  
     2017      2016      2015  

Beginning balance

   $ 2,397        1,736        1,927  

Foreclosed assets measured at initial recognition:

        

Carrying value of foreclosed assets acquired

     4,312        2,263        869  

Proceeds from sale of foreclosed assets

     (3,498      (1,623      (344

Gains (losses) included in non-interest expense

     158        21        (716
  

 

 

    

 

 

    

 

 

 

Fair value

   $ 3,369      $ 2,397        1,736  
  

 

 

    

 

 

    

 

 

 

Changes in economic conditions of model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. There were no transfers between levels for the years ended December 31, 2017, 2016 and 2015.

Subordinated Debentures
12 Months Ended
Dec. 31, 2017
Brokers and Dealers [Abstract]
 
Subordinated Debentures
(9) Subordinated Debentures:

On September 25, 2003, the Company formed HopFed Capital Trust I (the “Trust”). The Trust is a statutory trust formed under the laws of the state of Delaware. In September 2003, the Trust issued variable rate capital securities with an aggregate liquidation amount of $10,000,000 ($1,000 per preferred security) to a third-party investor. The Company then issued floating rate junior subordinated debentures aggregating $10,310,000 to the Trust. The junior subordinated debentures are the sole assets of the Trust. The junior subordinated debentures and the capital securities pay interest and dividends, respectively, on a quarterly basis. The variable interest rate is the three-month LIBOR plus 3.10% adjusted quarterly. The most recent interest rate adjustment for the trust was effective January 12, 2018, which adjusted the total coupon rate to 4.82%. These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities became redeemable contemporaneously, in whole or in part, beginning October 8, 2008 at a redemption price of $1,000 per capital security.

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

Concentrations of Credit Risk
12 Months Ended
Dec. 31, 2017
Risks and Uncertainties [Abstract]
 
Concentrations of Credit Risk
(10) Concentrations of Credit Risk:

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

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit-related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.

At December 31, 2017 and December 31, 2016, all cash and cash equivalents are deposited with BBVA Compass Bank, the Federal Reserve Bank or the Federal Home Loan Bank of Cincinnati (FHLB). Deposits at Compass BBVA Bank are insured to $250,000. All deposits at the FHLB are liabilities of the individual bank and were not federally insured. The FHLB is a government sponsored enterprise (GSE) and has the second highest rating available by all rating agencies. At December 31, 2017, total FHLB deposits were approximately $5.6 million and total deposits at the Federal Reserve were $7.1 million, none of which is insured by the FDIC. At December 31, 2017, total deposits at BBVA were $26.3 million, of which $250,000 were insured by the FDIC. At December 31, 2016, total FHLB deposits were approximately $0.8 million and total deposits at the Federal Reserve were $4.7 million, none of which is insured by the FDIC. At December 31, 2016, total deposits at BBVA were $9.7 million, of which $250,000 were insured by the FDIC.

Employee Benefit Plans
12 Months Ended
Dec. 31, 2017
Retirement Benefits [Abstract]
 
Employee Benefit Plans
(11) Employee Benefit Plans:

HopFed Bancorp Long Term Incentive Plans

On March 20, 2013, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2013 Long Term Incentive Plan (the “Plan”), which was subsequently approved at the 2013 Annual Meeting of Stockholders. Under the Plan, the Compensation Committee has discretionary authority to grant up to 300,000 shares in the form of restricted stock grants and options to such employees, directors and advisory directors as the committee shall designate. The grants vest in equal installments over three or four year periods. Grants may vest immediately upon specific events, including a change of control of the Company, death or disability of award recipient, and termination of employment of the recipient by the Company without cause.

Awards are recognized as an expense to the Company in accordance with the vesting schedule. Awards in which the vesting is accelerated must be recognized as an expense immediately. Awards are valued at the closing stock price on the day the award is granted. For the year ended December 31, 2017, the Compensation Committee granted 12,753 shares of restricted stock with a market value of $178,000. For the year ended December 31, 2016, the Compensation Committee granted 12,342 shares of restricted stock with a market value of $145,000. For the year ended December 31, 2015, the Compensation Committee granted 2,034 shares of restricted stock with a market value of $25,000. The Company recognized $106,000, $135,000 and $190,000 in compensation expense in 2017, 2016 and 2015, respectively. The remaining compensation expense to be recognized at December 31, 2017, is as follows:

 

Year Ending December 31,

   Approximate Future
Compensation Expense
 

2018

   $ 111  

2019

     67  

2020

     45  

2021

     3  
  

 

 

 

Total

   $ 226  
  

 

 

 

The Compensation Committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. The early vesting of restricted stock awards due to factors outlined in the award agreement may accelerate future compensation expenses related to the plan. However, the total amount of future compensation expense would not change as a result of an accelerated vesting of shares. At December 31, 2017, the Company has 229,824 restricted shares available from the Plan that may be awarded.

 

401(K) Plan

The Company has a 401(K) retirement program that is available to all employees who meet minimum eligibility requirements. In 2015, the Company discontinued all employer 401(K) contributions on behalf of employees while allowing employees to continue contributions to the 401(K) plan.

HopFed Bancorp, Inc. 2015 Employee Stock Ownership Plan

On March 2, 2015, the Company implemented the HopFed Bancorp, Inc. 2015 Employee Stock Ownership Plan which covers substantially all employees who are at least 21 years old with at least one year of employment with the Company and Heritage Bank USA, Inc., the Company’s commercial bank subsidiary. The ESOP has three individuals who have been selected by the Company to serve as trustees. A directed corporate trustee has also been appointed. The ESOP will be administered by a committee (the “Committee”) currently composed of eleven employees selected by the Company or its designee.

On March 2, 2015, the ESOP purchased 600,000 shares from the Corporation at a cost of $7,884,000 using the proceeds of a loan granted to the ESOP from the Company. In accordance with the ESOP Loan documents, the common stock purchased by the ESOP serves as collateral for the ESOP Loan. The ESOP Loan will be repaid principally from discretionary contributions by the Bank to the ESOP. The ESOP Loan requires annual payments and has a final maturity of December 9, 2026. The interest rate on the ESOP Loan is 3.0%. Shares purchased by the ESOP are be held in a trust account for allocation among participants as the ESOP Loan is repaid. The ESOP shares receive dividends. Dividends on unearned shares will be used to repay the ESOP Loan.

 

For the year ended December 31, 2017, the Company recognized an expense of $706,000 related to the ESOP loan payment and the Company released 64,032 shares from the ESOP trust to individual participants of the ESOP as a result of the 2017 loan payment. For the year ended December 31, 2016, the Company recognized an expense of $553,000 related to the ESOP loan payment and released 48,067 shares from the ESOP trust to individual participants as a result of the 2016 loan payment. For the year ended December 31, 2015, the Company recognized an expense of $652,000 related to the ESOP loan payment and released 53,587 shares from the ESOP trust to individual participants of the plan as a result of a 2015 loan payment. At December 31, 2017, shares held by the ESOP were as follows:

 

     December 31, 2017      December 31, 2016  

Earned ESOP shares

     165,686        101,654  

Unearned ESOP shares

     434,548        498,346  
  

 

 

    

 

 

 

Total ESOP shares

     600,234        600,000  
  

 

 

    

 

 

 

Share price at December 31,

   $ 14.10      $ 13.46  
  

 

 

    

 

 

 

Fair value of ESOP shares

   $ 6,127,127      $ 6,707,737  
  

 

 

    

 

 

 
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]
 
Income Taxes

(12) Income Taxes:

The provision for income tax expense for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, consisted of the following:

 

     2017      2016      2015  

Current

        

Federal

   $ 468        —          —    

State

     95        95        97  
  

 

 

    

 

 

    

 

 

 
     563        95        97  

Deferred

        

Federal

     1,585        267        177  

State

     —          —          —    
  

 

 

    

 

 

    

 

 

 
     1,585        267        177  
  

 

 

    

 

 

    

 

 

 
   $ 2,148      $ 362        274  
  

 

 

    

 

 

    

 

 

 

Total income tax expense for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, differed from the amounts computed by applying the federal income tax rate of 34 percent to income before income taxes as follows:

 

     2017     2016     2015  

Expected federal income tax expense at statutory tax rate

   $ 1,853       1,110       911  

Effect of nontaxable interest income

     (345     (452     (458

Effect of nontaxable bank owned life insurance income

     (164     (117     (114

Effect of Qualified Zone Academy Bond (QZAB)

     —         (114     (109

State taxes on income, net of federal benefit

     59       59       59  

Other tax credits

     (243     (128     (80

Deferred tax asset revaluation

     980       —         —    

Non-deductible expenses

     8       4       65  
  

 

 

   

 

 

   

 

 

 

Total income tax expense

   $ 2,148       362       274  
  

 

 

   

 

 

   

 

 

 

Income tax rate

     39.4     11.1     10.2
  

 

 

   

 

 

   

 

 

 

The components of deferred taxes as of December 31, 2017 and December 31, 2016 are summarized as follows:

 

     2017      2016  

Deferred tax assets:

     

Allowance for loan loss

   $ 1,014        2,078  

Accrued expenses

     77        294  

Net operating loss carry forward

     192        454  

Tax credit carry forward

     651        568  

Unrealized loss on securities available for sale

     57        —    

Intangible amortization

     192        548  

Other

     77        242  
  

 

 

    

 

 

 
     2,260        4,184  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

FHLB stock dividends

     (486      (787

Unrealized gain on securities available for sale

     —          (240

Depreciation and amortization

     (10      (105
  

 

 

    

 

 

 
     (496      (1,132
  

 

 

    

 

 

 

Net deferred tax asset

   $ 1,764        3,052  
  

 

 

    

 

 

 

At December 31, 2017, the Company has operating loss carry forwards of approximately $3.1 million, which begin to expire in 2034.

No valuation allowance for deferred tax assets was recorded at December 31, 2017 and December 31, 2016, as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years and expected future taxable income. There were no unrecognized tax benefits during any of the reported periods. The Corporation files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2013. The Company recognizes interest and penalties on income taxes, if any, as a component of income tax expense.

Foreclosed Asset
12 Months Ended
Dec. 31, 2017
Banking and Thrift [Abstract]
 
Foreclosed Asset
(13) Foreclosed Asset:

The Company’s foreclosed asset balances at December 31, 2017 and December 31, 2016 represent properties and personal collateral acquired by the Bank through customer loan defaults. The property is recorded at fair value less selling cost at the date acquired with any loss recognized as a charge off through the allowance for loan loss account. Additional real estate and other asset losses may be determined on individual properties at specific intervals or at the time of disposal. Additional losses are recognized as a non-interest expense. As of December 31, 2017 and December 31, 2016, the composition of the Company’s balance in foreclosed assets are as follows:

 

     December 31,  
     2017      2016  

One-to-four family mortgages

   $ 169        135  

Home equity line of credit

     —          28  

Multi-family

     —          1,775  

Land

     3,200        —    

Non-residential real estate

     —          459  
  

 

 

    

 

 

 

Total foreclosed assets

   $ 3,369        2,397  
  

 

 

    

 

 

 
Commitments and Contingencies
12 Months Ended
Dec. 31, 2017
Commitments and Contingencies Disclosure [Abstract]
 
Commitments and Contingencies
(14) Commitments and Contingencies:

In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. The table below outlines the Company’s open loan commitments at December 31, 2017 and December 31, 2016:

 

     December 31,  
     2017      2016  

Commitments to extend credit

   $ 54,458      $ 43,365  

Standby letters of credit

     143        228  

Unused commercial lines of credit

     62,910        59,790  

Unused home equity lines of credit

     32,701        31,818  

Unused personal lines of credit

     17,048        18,559  

The Company and the Bank have agreed to enter into employment agreements with certain officers, which provide certain benefits in the event of their termination following a change in control of the Company or the Bank. The employment agreements provide for an initial term of three years. On each anniversary of the commencement date of the employment agreements, the term of each agreement may be extended for an additional year at the discretion of the Board. In the event of a change in control of the Company or the Bank, as defined in the agreement, the officers shall be paid an amount equal to 2.9 times the officer’s base salary as defined in the employment agreement.

The Company and the Bank have entered into commitments to rent facilities, purchase services and lease operating equipment that are non-cancelable. At December 31, 2017, future minimal purchase, lease and rental commitments were as follows:

 

Years Ending

December 31,

      

2018

   $ 2,286  

2019

     1,953  

2002

     202  

2021

     169  

2022

     110  
  

 

 

 

Total

   $ 4,720  
  

 

 

 

The Company incurred rental expenses of approximately $130,000, $127,000 and $61,000 for the years ended December 31, 2017 December 31, 2016 and December 31, 2015, respectively. In the normal course of business, the Bank and Corporation have entered into operating contracts necessary to conduct the Company’s daily business. The most significant operating contract is for the Bank’s data processing services, ACH item processing and ATM / Debit card processing which is variable based on the number of accounts and usage but has an expected annual cost of approximately $2.8 million annually.

 

The Company is partially self-insured for medical benefits provided to employees. Heritage Bank is named as the plan administrator for this plan and has retained Anthem Blue Cross Blue Shield (“Anthem”) to process claims and handle other duties of the plan. Anthem does not assume any liabilities as a third-party administrator. The Bank purchased two stop-loss insurance policies to limit total medical claims from Anthem. The first specific stop-loss policy limits the Company’s annual cost per covered individual in 2015, 2016 and 2017 to $90,000, $90,000 and $100,000, respectively. The Company has purchased a second stop-loss policy that limits the aggregate claims for the Company in 2017, 2016 and 2015 at $1.7 million, $1.8 million and $1.7 million, respectively, based upon the Company’s enrollment during those years. The Company has established a liability for outstanding claims as well as incurred but unreported claims. While management uses what it believes are pertinent factors in estimating the plan liability, the actual liability is subject to change based upon unexpected claims experience and fluctuations in enrollment during the plan year. At December 31, 2017 and December 31, 2016, the Company recognized a liability for self-insured medical expenses of approximately $172,000 and $256,000, respectively.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of invo