Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-23667

 

 

HOPFED BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		61-1322555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

4155 Lafayette Road, Hopkinsville, Kentucky		42240
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (270) 885-1171

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required and posted pursuant to Rule 405 of Regulation S-T (subsection 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file or a non-accelerated filer. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act: (Check one)

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨		Smaller reporting company filer		¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

As of August 5, 2014, the Registrant had outstanding 7,319,136 shares of the Registrant’s Common stock.

 

 

 

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CONTENTS

HOPFED BANCORP, INC.

 

				PAGE
PART I.		FINANCIAL INFORMATION
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.		Financial Statements
		Consolidated Condensed Statements of Financial Condition as of June 30, 2014 (unaudited) and December 31, 2013			2
		Consolidated Condensed Statements of Income for the Three and Six-Month Periods Ended June 30, 2014, and June 30, 2013 (unaudited)			4
		Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Six-Month Periods Ended June 30, 2014 and June 30, 2013 (unaudited)			6
		Consolidated Condensed Statements of Stockholders’ Equity for the Six-Month Periods Ended June 30, 2014, and June 30, 2013 (unaudited)			7
		Consolidated Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2014, and June 30, 2013 (unaudited)			9
		Notes to Unaudited Consolidated Condensed Financial Statements			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			42
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			54
Item 4.		Controls and Procedures			55
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			55
Item 1A.		Risk Factors			56
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			56
Item 3.		Defaults Upon Senior Securities			56
Item 4.		Mine Safety Disclosures			56
Item 5.		Other Information			57
Item 6.		Exhibits			57
SIGNATURES					58

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

 

		June 30, 2014				December 31, 2013
		(unaudited)
Assets
Cash and due from banks		$	24,125				37,229
Interest-earning deposits			5,766				18,619
Cash and cash equivalents			29,891				55,848
Federal Home Loan Bank stock, at cost			4,428				4,428
Securities available for sale			331,639				318,910
Loans held for sale			464				—
Loans receivable, net of allowance for loan losses of $8,353 at June 30, 2014, and $8,682 at December 31, 2013			537,763				543,632
Accrued interest receivable			4,518				5,233
Real estate and other assets owned			1,490				1,674
Bank owned life insurance			9,837				9,677
Premises and equipment, net			22,896				23,108
Deferred tax assets			1,942				4,610
Intangible asset			65				130
Other assets			5,013				6,399
Total assets		$	949,946				973,649
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing		$	103,550				105,252
Interest-bearing checking			194,659				183,643
Savings and money market			93,939				92,106
Time deposits			351,121				381,996
Total deposits			743,269				762,997
Federal Home Loan Bank advances			40,776				46,780
Repurchase agreements			51,125				52,759
Subordinated debentures			10,310				10,310
Advances from borrowers for taxes and insurance			723				521
Dividends payable			308				326
Accrued expenses and other liabilities			3,475				4,239
Total liabilities			849,986				877,932

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

 

		June 30, 2014				December 31, 2013
		(unaudited)
Stockholders’ equity:
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at June 30, 2014, and December 31, 2013.			—				—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,947,525 issued and 7,395,285 outstanding at June 30, 2014, and 7,927,287 issued and 7,447,903 outstanding at December 31, 2013		$	79				79
Additional paid-in-capital			58,367				58,302
Retained earnings			45,382				44,694
Treasury stock- common (at cost, 552,240 shares at June 30, 2014, and 479,384 shares at December 31, 2013)			(6,767	)			(5,929	)
Accumulated other comprehensive income (loss), net of taxes			2,899				(1,429	)
Total stockholders’ equity			99,960				95,717
Total liabilities and stockholders’ equity		$	949,946				973,649

The consolidated condensed statement of financial condition at December 31, 2013, has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

 

		For the Three Month Periods Ended June 30,								For the Six Month Periods Ended June 30,
		2014				2013				2014				2013
Interest income:
Loans receivable		$	6,503				6,676				12,830				13,558
Securities available for sale—taxable			1,694				1,764				3,473				3,596
Securities available for sale—nontaxable			531				547				1,075				1,132
Interest-earning deposits			6				7				14				13
Total interest income			8,734				8,994				17,392				18,299
Interest expense:
Deposits			1,488				1,936				2,959				3,982
Advances from Federal Home Loan Bank			428				446				862				890
Repurchase agreements			245				230				494				472
Subordinated debentures			193				182				377				364
Total interest expense			2,354				2,794				4,692				5,708
Net interest income			6,380				6,200				12,700				12,591
Provision for loan losses			(261	)			406				119				782
Net interest income after provision for loan losses			6,641				5,794				12,581				11,809
Non-interest income:
Service charges			848				937				1,626				1,790
Merchant card income			276				259				535				482
Mortgage origination revenue			133				212				191				412
Gain on sale of securities			241				789				254				1,416
Income from bank owned life insurance			66				87				161				162
Financial services commission			168				347				374				644
Other operating income			213				197				402				405
Total non-interest income			1,945				2,828				3,543				5,311

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

 

		For the Three Month Periods Ended June 30,								For the Six Month Periods Ended June 30,
		2014				2013				2014				2013
Non-interest expenses:
Salaries and benefits		$	3,692				3,714				7,487				7,562
Occupancy			808				882				1,717				1,727
Data processing			736				646				1,464				1,296
Bank franchise tax			398				147				644				289
Intangible amortization			33				48				65				97
Professional services			341				549				628				942
Deposit insurance and examination			183				179				380				411
Advertising			341				308				655				641
Postage and communications			140				139				283				278
Supplies			158				93				303				229
Loss on real estate owned			102				12				125				47
Real estate owned			92				32				222				108
Other operating			423				375				798				771
Total non-interest expense			7,447				7,124				14,771				14,398
Income before income tax			1,139				1,498				1,353				2,722
Income tax expense			214				332				74				572
Net income		$	925				1,166				1,279				2,150
Net income per share:
Basic		$	0.13				0.16				0.17				0.29
Diluted		$	0.13				0.16				0.17				0.29
Dividend per share		$	0.04				0.02				0.08				0.04
Weighted average shares outstanding—basic			7,376,726				7,488,906				7,396,627				7,488,788
Weighted average shares outstanding—diluted			7,376,726				7,488,906				7,396,627				7,488,788

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

(Unaudited)

 

		For the Three Month Periods Ended June 30,								For the Six Month Periods Ended June 30,
		2014				2013				2014				2013
Net income		$	925				1,166				1,279				2,150
Other comprehensive income, net of tax:
Unrealized gain (loss) on investment securities available for sale, net of tax effect of ($1,340) and $3,405 for the three month periods ended June 30, 2014, and June 30, 2013, respectively; and ($2,260) and $4,003 for the six month periods ended June 30, 2014, and June 30, 2013, respectively;			2,601				(6,610	)			4,387				(7,771	)
Unrealized gain on derivatives, net of tax effect of ($31) and ($40) for the three month periods ended June 30, 2014, and June 30, 2013, respectively; and of ($56) and ($72) for the six month periods ending June 30, 2014, and June 30, 2013, respectively;			60				77				109				140
Reclassification adjustment for gains included in net income, net of tax effect of $82 and $268 for the three month periods ended June 30, 2014, and June 30, 2013, respectively; and $86 and $482 the six month periods ended June 30, 2014, and June 30, 2013, respectively;			(159	)			(521	)			(168	)			(935	)
Comprehensive income (loss)		$	3,427				(5,888	)			5,607				(6,416	)

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Six Month Period Ended June 30, 2014

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

		Shares Common Stock				Common Stock				Additional Capital Surplus				Retained Earnings				Treasury Stock Common				Accumulated Other Comprehensive Income (Loss)				Total Stockholders Equity
Balance at December 31, 2013			7,447,903			$	79				58,302				44,694				(5,929	)			(1,429	)			95,717
Restricted stock awards			20,238				—				—				—				—				—				—
Repurchase of treasury stock			(72,856	)			—				—				—				(838	)			—				(838	)
Consolidated net income			—				—				—				1,279				—				—				1,279
Compensation expense, restricted stock awards			—				—				65				—				—				—				65
Net change in unrealized gain on securities available for sale, net of income taxes of $2,173			—				—				—				—				—				4,219				4,219
Net change in unrealized loss on derivatives, net of income taxes of $56			—				—				—				—				—				109				109
Cash dividend to common stockholders			—				—				—				(591	)			—				—				(591	)
Balance June 30, 2014			7,395,285			$	79				58,367				45,382				(6,767	)			2,899				99,960

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Six Month Period Ended June 30, 2013

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

		Shares								Common Stock				Common Stock Warrants				Additional Capital Surplus				Retained Earnings				Treasury Stock Preferred				Treasury Stock Common				Accumulated Other Comprehensive Income				Total Stockholders Equity
		Common Stock				Preferred Stock
Balance at December 31, 2012			7,502,812				18,400			$	79				556				76,288				41,829				(18,400	)			(5,076	)			9,723				104,999
Restricted stock awards			227				—				—				—				—				—				—				—				—				—
Consolidated net income			—				—				—				—				—				2,150				—				—				—				2,150
Compensation expense, restricted stock awards			—				—				—				—				47				—				—				—				—				47
Net change in unrealized gain on securities available for sale, net of income tax benefit of $4,485			—				—				—				—				—				—				—				—				(8,706	)			(8,706	)
Net change in unrealized loss on derivatives, net of income taxes of $72			—				—				—				—				—				—				—				—				140				140
Repurchase of warrant			—				—				—				(556	)			299				—				—				—				—				(257	)
Cash dividend to common stockholders			—				—				—				—				—				(300	)			—				—				—				(300	)
Balance June 30, 2013			7,503,039				18,400			$	79				—				76,634				43,679				(18,400	)			(5,076	)			1,157				98,073

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

		For the Six Month Periods Ended June 30,
		2014				2013
Cash flows from operating activities:
Net cash provided by operating activities		$	4,477				4,484
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities available for sale			52,414				73,375
Purchase of securities available for sale			(59,556	)			(69,182	)
Net (increase) decrease in loans			5,560				(4,672	)
Proceeds from sale of foreclosed assets			249				462
Purchase of premises and equipment			(508	)			(74	)
Net cash used in investing activities			(1,841	)			(91	)
Cash flows from financing activities:
Net increase (decrease) in demand deposits			(1,702	)			343
Net decrease in time and other deposits			(18,026	)			(17,544	)
Increase in advances from borrowers for taxes and insurance			202				301
Advances from Federal Home Loan Bank			15,000				8,000
Repayment of advances from Federal Home Loan Bank			(21,004	)			(5,973	)
Net increase (decrease) in repurchase agreements			(1,634	)			3,564
Cash used to repurchase warrant			—				(257	)
Cash used to repurchase treasury stock			(838	)			—
Dividends paid on common stock			(591	)			(300	)
Net cash used in financing activities			(28,593	)			(11,866	)
Decrease in cash and cash equivalents			(25,957	)			(7,473	)
Cash and cash equivalents, beginning of period			55,848				37,176
Cash and cash equivalents, end of period		$	29,891				29,703
Supplemental disclosures of Cash Flow Information:
Interest paid		$	4,752				5,852
Income taxes paid			—				495
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off		$	588				2,370
Foreclosures and in substance foreclosures of loans during period		$	190				593
Net unrealized gains (losses) on investment securities classified as available for sale		$	6,392				(13,191	)
Increase (decrease) in deferred tax asset related to unrealized gains on investments		($	2,173	)			4,485
Dividends declared and payable		$	308				150
Issue of unearned restricted stock		$	235				2

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

HopFed Bancorp, Inc. (the “Company”) was formed at the direction of Heritage Bank USA Inc, formerly Hopkinsville Federal Savings Bank (the “Bank”), to become the holding company of the Bank upon the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The conversion was consummated on February 6, 1998. The Company’s primary assets are the outstanding capital stock of the converted Bank, and its sole business is that of the converted Bank.

On June 5, 2013, the Bank’s legal name became Heritage Bank USA Inc. and the Bank was granted a commercial bank charter by the Kentucky Department of Financial Institutions (“KDFI”). On June 5, 2013, the Bank became subject to regulation by the KDFI and the Federal Deposit Insurance Corporation (“FDIC”). On the same day, HopFed Bancorp was granted a bank holding company charter by the Federal Reserve Bank of Saint Louis (“FED”) and as such regulated by the FED.

The Bank operates a mortgage division, Heritage Mortgage Services, in Clarksville, Tennessee with agents located in several of its markets. The Bank has a financial services division, Heritage Solutions, with offices in Murray, Kentucky, Kingston Springs, Tennessee, and Pleasant View, Tennessee. Heritage Solutions agents travel throughout western Kentucky and middle Tennessee offering fixed and variable annuities, mutual funds and brokerage services.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the six month period ended June 30, 2014, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2014.

The accompanying unaudited financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2013, Consolidated Financial Statements.

 

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(2) INCOME PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted income per share (“IPS”) computations for the three and six month periods ended June 30, 2014, and June 30, 2013. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrant outstanding.

 

		Three Month Periods Ended June 30,
		2014				2013
Basic IPS:
Net income available to common stockholders		$	925,000			$	1,166,000
Average common shares outstanding			7,376,726				7,488,906
Net income per share available to common shareholders, basic		$	0.13			$	0.16
Diluted IPS
Net income available to common stockholders		$	925,000			$	1,166,000
Average common shares outstanding			7,376,726				7,488,906
Dilutive effect of stock options			—				—
Average diluted shares outstanding			7,376,726				7,488,906
Net income per share available to common shareholders, diluted		$	0.13			$	0.16

 

		Six Month Periods Ended June 30,
		2014				2013
Basic IPS:
Net income available to common stockholders		$	1,279,000			$	2,150,000
Average common shares outstanding			7,396,627				7,488,788
Net income per share available to common shareholders, basic		$	0.17			$	0.29
Diluted IPS
Net income available to common stockholders		$	1,279,000			$	2,150,000
Average common shares outstanding			7,396,627				7,488,788
Dilutive effect of stock options			—				—
Average diluted shares outstanding			7,396,627				7,488,788
Net income per share available to common shareholders, diluted		$	0.17			$	0.29

 

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(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $35,000 and $65,000 for the three and six month periods ended June 30, 2014, and $25,000 and $47,000 for the three and six month periods ended June 30, 2013, respectively. The Company issued 20,238 shares of restricted stock during the three and six month periods ended June 30, 2014. The Company issued 227 shares of restricted stock during the three and six month periods ended June 30, 2013. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at June 30, 2014:

 

Year Ending December 31,		Future Expense
2014		$	95,260
2015			179,556
2016			126,526
2017			39,700
Total		$	441,042

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

 

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(4) SECURITIES

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2014, the Company has 63 securities with unrealized losses. The carrying amount of securities and their estimated fair values at June 30, 2014, were as follows:

 

		June 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in Thousands)
Restricted:
FHLB stock		$	4,428				—				—				4,428
Available for sale:
U.S. Treasury securities		$	3,973				5				—				3,978
U.S. Agency securities			118,130				2,126				(1,210	)			119,046
Corporate bonds			2,000				5				—				2,005
Taxable municipal bonds			14,119				333				(226	)			14,226
Tax free municipal bonds			61,918				3,643				(227	)			65,334
Trust preferred securities			1,600				—				(111	)			1,489
Mortgage-backed securities:
GNMA			27,450				695				(101	)			28,044
FNMA			65,479				866				(749	)			65,596
FHLMC			1,142				38				—				1,180
NON-AGENCY CMOs			10,811				4				(194	)			10,621
AGENCY CMOs			20,040				206				(126	)			20,120
		$	326,662				7,921				(2,944	)			331,639

 

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The carrying amount of securities and their estimated fair values at December 31, 2013, was as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in Thousands)
Restricted:
FHLB stock		$	4,428				—				—				4,428
Available for sale securities:
U.S. Agency securities		$	120,608				1,856				(2,441	)			120,023
Corporate bonds			2,000				—				(16	)			1,984
Taxable municipal bonds			18,337				458				(738	)			18,057
Tax free municipal bonds			64,291				2,066				(898	)			65,459
Trust preferred securities			1,600				—				(111	)			1,489
Mortgage-backed securities:
GNMA			17,327				590				(142	)			17,775
FNMA			70,104				526				(1,938	)			68,692
FHLMC			1,301				35				—				1,336
SLMA CMOs			8,459				—				(374	)			8,085
AGENCY CMOs			16,296				134				(420	)			16,010
		$	320,323				5,665				(7,078	)			318,910

 

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The scheduled maturities of debt securities available for sale at June 30, 2014, were as follows:

 

		Amortized Cost				Estimated Fair Value
Due within one year		$	195				197
Due in one to five years			20,422				20,711
Due in five to ten years			42,119				42,850
Due after ten years			41,010				42,905
			103,746				106,663
Amortizing agency bonds			97,994				99,415
Mortgage-backed securities			124,922				125,561
Total securities available for sale		$	326,662				331,639

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

 

		Amortized Cost				Estimated Fair Value
Due within one year		$	501				505
Due in one to five years			12,630				12,954
Due in five to ten years			38,192				37,364
Due in more than ten years			49,284				49,314
			100,607				100,137
Amortizing agency bonds			106,229				106,875
Mortgage-backed securities			113,487				111,898
Total securities available for sale		$	320,323				318,910

 

 

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The estimated fair value and unrealized loss amounts of temporarily impaired investments as of June 30, 2014, are as follows:

 

		Less than 12 months								12 months or longer								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
		(Dollars in Thousands)
Available for sale
U.S. government and agency securities:
Agency debt securities		$	9,500				(79	)			37,734				(1,131	)			47,234				(1,210	)
Taxable municipals			571				(4	)			7,595				(222	)			8,166				(226	)
Tax free municipals			—				—				7,242				(227	)			7,242				(227	)
Trust preferred securities			—				—				1,489				(111	)			1,489				(111	)
Mortgage-backed securities:
GNMA			11,316				(88	)			3,180				(13	)			14,496				(101	)
FNMA			2,922				(1	)			27,806				(748	)			30,728				(749	)
NON-AGENCY CMOs			2,499				(49	)			5,407				(145	)			7,906				(194	)
AGENCY CMOs			2,970				(10	)			6,203				(116	)			9,173				(126	)
Total Available for Sale		$	29,778				(231	)			96,656				(2,713	)			126,434				(2,944	)

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

 

		Less than 12 months								12 months or longer								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
		(Dollars in Thousands)
Available for sale
U.S. government and agency securities:
Agency debt securities		$	44,968				(2,107	)			6,793				(334	)			51,761				(2,441	)
Taxable municipal bonds			7,903				(660	)			797				(78	)			8,700				(738	)
Tax free municipal bonds			9,848				(692	)			3,720				(206	)			13,568				(898	)
Trust preferred securities			—				—				1,489				(111	)			1,489				(111	)
Commercial bonds			1,984				(16	)			—				—				1,984				(16	)
Mortgage-backed securities:
GNMA			5,320				(128	)			1,551				(14	)			6,871				(142	)
FNMA			42,464				(1,626	)			6,746				(312	)			49,210				(1,938	)
NON-AGENCY CMOs			5,224				(374	)			—				—				5,224				(374	)
AGENCY CMOs			7,031				(223	)			1,844				(197	)			8,875				(420	)
Total Available for Sale		$	124,742				(5,826	)			22,940				(1,252	)			147,682				(7,078	)

 

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The applicable dates for determining when securities are in an unrealized loss position are June 30, 2014 and December 31, 2013. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month periods ended June 30, 2014 and December 31, 2013, but is in the “Investments with an Unrealized Loss of less than 12 months” category above.

As shown in the tables above, at June 30, 2014, the Company had approximately $2.9 million in unrealized losses on $126.4 million of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and the unrealized loss is recorded as a component of equity. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

Because the Company currently does not intend to sell those securities that have an unrealized loss at June 30, 2014, and it is not more-likely-than-not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2014.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, the Company will consider selling the security, but will review each security on a case-by-case basis as these factors become known.

The carrying values of the Company’s investment securities could 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. There is also a risk that other-than-temporary impairment charges may occur in the future if management’s intention to hold these securities to maturity and or recovery changes.

At June 30, 2014, securities with a book value of approximately $185.7 million and a market value of approximately $192.5 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law. The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $13.5 million secured by the Bank’s loan portfolio to secure additional municipal deposits.

At June 30, 2014, securities with a book and market value of $35.1 million were sold under agreements to repurchase from various customers. Furthermore, the Company has two wholesale repurchase agreements with third parties secured by investments with a combined book value of $19.5 million and a market value of $19.4 million. One repurchase agreement is in the amount of $6.0 million and has a maturity of September 18, 2016, and is currently callable on a quarterly basis and has a fixed rate of interest of 4.36%. The second repurchase agreement, in the amount of $10.0 million, has a maturity of September 5, 2014, is currently callable quarterly and has a fixed rate of interest of 4.28%.

 

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(5) LOANS

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at June 30, 2014, and December 31, 2013. At June 30, 2014, and December 31, 2013, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

 

		June 30, 2014				June 30, 2014				December 31, 2013				December 31, 2013
		Amount				Percent				Amount				Percent
		(Dollars in thousands, except percentages)
Real estate loans:
One-to-four family (closed end) first mortgages		$	151,917				27.8	%		$	155,252				28.1	%
Second mortgages (closed end)			2,688				0.5	%			3,248				0.6	%
Home equity lines of credit			33,206				6.1	%			34,103				6.2	%
Multi-family			28,242				5.2	%			29,736				5.4	%
Construction			13,327				2.4	%			10,618				1.9	%
Land			29,579				5.4	%			34,681				6.3	%
Farmland			45,616				8.3	%			51,868				9.4	%
Non-residential real estate			157,795				28.9	%			157,692				28.5	%
Total mortgage loans			462,370				84.6	%			477,198				86.4	%
Consumer loans			15,564				2.9	%			11,167				2.0	%
Commercial loans			68,374				12.5	%			64,041				11.6	%
Total other loans			83,938				15.4	%			75,208				13.6	%
Total loans, gross			546,308				100.0	%			552,406				100.0	%
Deferred loan cost, net of fees			(192	)							(92	)
Less allowance for loan losses			(8,353	)							(8,682	)
Total loans		$	537,763							$	543,632

 

 

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The Company assigns an industry standard NAICS code to each loan in the Company’s portfolio. By assigning a standard code to each type of loan, management can more readily determine concentrations in risk by industry, location and loan type. This information is most useful when analyzing the Company’s non-residential real estate loan portfolio. At June 30, 2014, and December 31, 2013, the Company’s non-residential real estate loan portfolio was made up of the following loan types:

 

		June 30, 2014				December 31, 2013
		(Dollars in Thousands)
Land		$	29,579				34,681
Manufacturing			5,053				3,962
Professional, Technical			1,489				1,819
Retail Trade			11,491				10,916
Other Services			21,041				19,206
Finance & Insurance			2,615				1,862
Agricultural, Forestry, Fishing & Hunting			45,616				51,868
Real Estate and Rental and Leasing			55,408				55,692
Wholesale Trade			20,824				21,852
Arts, Entertainment & Recreation			3,698				3,015
Accommodations / Food Service			24,200				26,552
Healthcare and Social Assistance			6,473				6,862
Transportation & Warehousing			1,025				1,101
Information			2,205				2,390
Non-industry			2,042				2,101
Admin Support / Waste Mgmt			231				362
Total		$	232,990				244,241

The allowance for loan losses totaled $8.4 million at June 30, 2014, and $8.7 million at December 31, 2013, and $9.4 million at June 30, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.53% at June 30, 2014, 1.57% at December 31, 2013, and 1.75% at June 30, 2013.

The following table indicates the type and level of non-accrual loans at the dates indicated below:

 

		June 30, 2014				December 31, 2013				June 30, 2013
		(Dollars in Thousands)
One-to-four family mortgages		$	524				945				1,131
Home equity line of credit			29				1				22
Junior lien			—				2				37
Construction			—				175				—
Land			1,217				1,218				2,255
Non-residential real estate			6,520				6,546				7,055
Farmland			13				703				781
Consumer loans			1				13				11
Commercial loans			431				463				520
Total non-accrual loans		$	8,735				10,066				11,812

 

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The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the six month period ended June 30, 2014:

 

		Balance 12/31/2013				Charge off 2014				Recovery 2014				General Provision 2014				Specific Provision 2014				Ending Balance 6/30/2014
		(Dollars in Thousands)
One-to-four family mortgages		$	2,048				(181	)			12				105				(125	)			1,859
Home equity line of credit			218				(20	)			2				2				18				220
Junior liens			39				—				7				(16	)			(7	)			23
Multi-family			466				—				—				(159	)			—				307
Construction			88				(10	)			4				—				—				82
Land			1,305				—				—				(80	)			(280	)			945
Non-residential real estate			2,719				—				—				309				(171	)			2,857
Farmland			510				—				—				275				32				817
Consumer loans			541				(196	)			64				52				132				593
Commercial loans			748				(181	)			51				(85	)			117				650
Total		$	8,682				(588	)			140				403				(284	)			8,353

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2013:

 

		Balance 12/31/2012				Charge off 2013				Recovery 2013				General Provision 2013				Specific Provision 2013				Balance 12/31/2013
		(Dollars in Thousands)
One-to-four family mortgages		$	2,490				(852	)			329				(285	)			366				2,048
Home equity line of credit			374				(22	)			9				(88	)			(55	)			218
Junior liens			230				(119	)			71				5				(148	)			39
Multi-family			524				(38	)			164				(20	)			(164	)			466
Construction			256				—				—				(168	)			—				88
Land			2,184				(1,432	)			9				(718	)			1,262				1,305
Non-residential real estate			2,921				(1,041	)			14				757				68				2,719
Farmland			712				—				—				(202	)			—				510
Consumer loans			338				(649	)			246				228				378				541
Commercial loans			619				(291	)			32				437				(49	)			748
Total		$	10,648				(4,444	)			874				(54	)			1,658				8,682

 

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The table below presents currently performing, past due and non-accrual balances at June 30, 2014, by loan classification allocated between performing and non-performing:

 

June 30, 2014		Currently Performing				30 - 89 Days Past Due				Non-accrual Loans				Special Mention				Impaired Loans Currently Performing
																		Substandard				Doubtful				Total
		(Dollars in Thousands)
One-to-four family mortgages		$	145,897				669				524				204				4,623				—			$	151,917
Home equity line of credit			32,561				33				29				—				583				—				33,206
Junior liens			2,627				—				—				41				20				—				2,688
Multi-family			23,093				—				—				2,928				2,221				—				28,242
Construction			13,327				—				—				—				—				—				13,327
Land			13,898				2,975				1,217				370				11,119				—				29,579
Non-residential real estate			136,374				3,158				6,520				4,829				6,914				—				157,795
Farmland			43,636				—				13				343				1,624				—				45,616
Consumer loans			15,197				4				1				—				362				—				15,564
Commercial loans			64,632				1,170				431				657				1,484				—				68,374
Total		$	491,242				8,009				8,735				9,372				28,950				—			$	546,308

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

 

		Currently Performing				30 - 89 Days Past Due				Non-accrual Loans				Special Mention				Impaired Loans Currently Performing
December 31, 2013																		Substandard				Doubtful				Total
		(Dollars in Thousands)
One-to-four family mortgages		$	148,759				592				945				814				4,142				—				155,252
Home equity line of credit			33,369				93				1				—				640				—				34,103
Junior liens			3,126				—				2				43				77				—				3,248
Multi-family			29,736				—				—				—				—				—				29,736
Construction			10,443				—				175				—				—				—				10,618
Land			19,899				—				1,218				52				13,512				—				34,681
Non-residential real estate			142,701				343				6,546				515				7,587				—				157,692
Farmland			46,042				—				703				480				4,643				—				51,868
Consumer loans			10,493				234				13				—				427				—				11,167
Commercial loans			61,379				123				463				526				1,550				—				64,041
Total		$	505,947				1,385				10,066				2,430				32,578				—				552,406

 

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All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mention, substandard and doubtful are paying as agreed. However, the customer’s financial statements may indicate weaknesses in their current cash flow, the customer’s industry may be in decline due to current economic conditions, collateral values used to secure the loan may be declining, or the Company may be concerned about the customer’s future business prospects.

The Company does not originate loans it considers sub-prime and is not aware of any exposure to the additional credit concerns associated with sub-prime lending in either the Company’s loan or investment portfolios. The Company does have a significant amount of construction and land development loans. Management reports to the Company’s Board of Directors on the status of the Company’s specific construction and development loans as well as the market trends in those markets in which the Company actively participates.

The Company’s annualized net charge off ratios for six month periods ended June 30, 2014, June 30, 2013, and the year ended December 31, 2013, was 0.16%, 0.77% and 0.66%, respectively. The ratios of allowance for loan losses to non-accrual loans at June 30, 2014, June 30, 2013, and December 31, 2013, were 95.6%, 86.3%, and 139.0% respectively.

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

The Company conducts annual reviews on all loan relationships above one million dollars to ascertain the borrowers continued ability to service their debt as agreed. In addition to the credit relationships mentioned above, management may classify any credit relationship once it becomes aware of adverse credit trends for that customer. Typically, the annual review consists of updated financial statements for borrowers and any guarantors, a review of the borrower’s credit history with the Company and other creditors, and current income tax information.

As a result of this review, management will classify loans based on their credit risk. Additionally, the Company provides a risk grade for all loans past due more than sixty days. The Company uses the following risk definitions for risk grades:

Satisfactory loans of average strength having some deficiency or vulnerability to changing economic or industry conditions. These customers should have reasonable amount of capital and operating ratios. Secured loans may lack in margin or liquidity. Loans to individuals, perhaps supported in dollars of net worth, but with supporting assets may be difficult to liquidate.

Watch loans are acceptable credits: (1) that need continual monitoring, such as out-of territory or asset-based loans (since the Bank does not have an asset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends;

 

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(b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such as one-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency. If considered marginal, a loan would be a “watch” until financial data demonstrated improved performance or further deterioration to a “substandard” grade usually within a 12-month period. In the table on page 25, Watch loans are included with satisfactory loans and classified as Pass.

Other Loans Especially Mentioned are currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan. These credit weaknesses, if not checked or corrected, will weaken the loan or inadequately protect the Bank’s credit position at some future date.

A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the credit. Examples of substandard loans include those to borrowers with insufficient or negative cash flow, negative net worth coupled with inadequate guarantor support, inadequate working capital, and/or significantly past-due loans and overdrafts.

A loan classified Doubtful has all the weaknesses inherent in a substandard credit except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factors charge-off is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. The doubtful classification is applied to that portion of the credit in which the full collection of principal and interest is questionable.

A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments using the fair value of the collateral if the loan is collateral dependent. Currently, it is management’s practice to test all loans for impairment that are classified as substandard or doubtful with an outbalance of more than $250,000. At June 30, 2014, December 31, 2013, and June 30, 2013, the Company’s impaired loans totaled $37.7 million, $42.6 million and $40.4 million, respectively. At June 30, 2014, December 31, 2013, and June 30, 2013, the Company’s specific reserve for impaired loans totaled $1.5 million, $1.9 million and $3.5 million, respectively.

 

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A summary of the Company’s loans, including their respective regulatory classification and their respective specific reserve at June 30, 2014, were as follows:

 

						Special				Impaired Loans												Specific Allowance for				Allowance for Performing
June 30, 2014		Pass				Mention				Substandard				Doubtful				Total				Impairment				Loans
		(Dollars in Thousands)
One-to-four family mortgages		$	146,566				204				5,147				—			$	151,917			$	303			$	1,555
Home equity line of credit			32,594				—				612				—				33,206				—				220
Junior liens			2,627				41				20				—				2,688				—				25
Multi-family			23,093				2,928				2,221				—				28,242				—				307
Construction			13,327				—				—				—				13,327				—				82
Land			16,873				370				12,336				—				29,579				491				452
Non-residential real estate			139,532				4,829				13,434				—				157,795				636				2,222
Farmland			43,636				343				1,637				—				45,616				33				783
Consumer loans			15,201				—				363				—				15,564				83				510
Commercial loans			65,802				657				1,915				—				68,374				—				651
Total		$	499,251				9,372				37,685				—			$	546,308			$	1,546			$	6,807
A summary of the Company’s loans and their respective reserve at December 31, 2013, were as follows:
						Special				Impaired Loans												Specific Allowance for				Allowance for Performing
		Pass				Mention				Substandard				Doubtful				Total				Impairment				Loans
		(Dollars in Thousands)
One-to-four family mortgages		$	149,351				814				5,087				—				155,252				597				1,451
Home equity line of credit			33,462				—				641				—				34,103				—				218
Junior liens			3,126				43				79				—				3,248				—				39
Multi-family			29,736				—				—				—				29,736				—				466
Construction			10,443				—				175				—				10,618				—				88
Land			19,899				52				14,730				—				34,681				771				534
Non-residential real estate			143,044				515				14,133				—				157,692				465				2,254
Farmland			46,042				480				5,346				—				51,868				—				510
Consumer loans			10,727				—				440				—				11,167				96				445
Commercial loans			61,502				526				2,013				—				64,041				—				748
Total		$	507,332				2,430				42,644				—				552,406				1,929				6,753

 

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Impaired loans by classification type and the related valuation allowance amounts at June 30, 2014, were as follows:

 

		At June 30, 2014												For the six month period ended June 30, 2014
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)
Impaired loans with no recorded reserve:
One-to-four family mortgages		$	3,261				3,261				—				2,319				83
Home equity line of credit			612				612				—				599				14
Junior liens			20				20				—				41				1
Multi-family			2,221				2,221				—				74				64
Construction			—				—				—				58				—
Land			9,014				9,014				—				10,334				191
Farmland			1,331				1,331				—				5,921				71
Non-residential real estate			9,449				9,449				—				7,927				218
Consumer loans			31				31				—				34				1
Commercial loans			1,915				1,915				—				2,268				45
Total		$	27,854				27,854				—				29,575				688
Impaired loans with recorded reserve:
One-to-four family mortgages		$	1,886				1,886				303				1,871				50
Home equity line of credit			—				—				—				—				—
Junior liens			—				—				—				—				—
Multi-family			—				—				—				—				—
Construction			—				—				—				—				—
Land			3,322				3,322				491				3,565				64
Farmland			306				306				33				1,221				17
Non-residential real estate			3,985				5,176				636				2,439				183
Consumer loans			332				332				83				439				—
Commercial loans			—				—				—				—				—
Total		$	9,831				11,022				1,546				9,535				314
Total impaired loans		$	37,685				38,876				1,546				39,110				1,002

 

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

 

		At December 31, 2013
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)
Impaired loans with no recorded reserve:
One-to-four family mortgages		$	3,216				3,216				—				2,361				8
Home equity line of credit			641				641				—				564				3
Junior liens			79				79				—				239				1
Multi-family			—				—				—				990				—
Construction			175				175				—				1,072				5
Land			10,882				12,315				—				10,668				186
Non-residential real estate			10,775				10,775				—				6,196				263
Farmland			5,346				5,346				—				6,955				149
Consumer loans			56				56				—				48				—
Commercial loans			2,013				2,013				—				2,391				95
Total		$	33,183				34,616				—				31,484				710
Impaired loans with recorded reserve:
One-to-four family mortgages		$	1,871				1,871				597				2,501				9
Home equity line of credit			—				—				—				279				—
Junior liens			—				—				—				113				—
Multi-family			—				—				—				—				—
Construction			—				—				—				1,385				—
Land			3,848				3,848				771				2,741				29
Non-residential real estate			3,358				4,222				465				2,243				111
Farmland			—				—				—				1,601				—
Consumer loans			384				384				96				401				—
Commercial loans			—				—				—				346				—
Total		$	9,461				10,325				1,929				11,610				149
Total impaired loans		$	42,644				44,941				1,929				43,094				859

 

 

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans of June 30, 2014 and December 31, 2013, by portfolio segment and based on impairment method as of June 30, 2014 and December 31, 2013 (in thousands):

 

		Commercial				Land Development/ Construction				Commercial Real Estate				Residential Real Estate				Consumer				Total
June 30, 2014:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	—			$	491			$	669			$	303			$	83			$	1,546
Collectively evaluated for impairment			650				535				3,312				1,800				510				6,807
Total ending allowance balance		$	650			$	1,026			$	3,981			$	2,103			$	593			$	8,353
Loans:
Loans individually evaluated for impairment		$	1,915			$	12,336			$	17,292			$	5,779			$	363			$	37,685
Loans collectively evaluated for impairment			66,459				30,570				214,361				182,032				15,201				508,623
Total ending loans balance		$	68,374			$	42,906			$	231,653			$	187,811			$	15,564			$	546,308
		Commercial				Land Development/ Construction				Commercial Real Estate				Residential Real Estate				Consumer				Total
December 31, 2013:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	—			$	771			$	465			$	597			$	96			$	1,929
Collectively evaluated for impairment			748				622				3,230				1,708				445				6,753
Total ending allowance balance		$	748			$	1,393			$	3,695			$	2,305			$	541			$	8,682
Loans:
Loans individually evaluated for impairment		$	2,013			$	14,905			$	19,479			$	5,807			$	440			$	42,644
Loans collectively evaluated for impairment			62,028				30,394				219,817				186,796				10,727				509,762
Total ending loans balance		$	64,041			$	45,299			$	239,296			$	192,603			$	11,167			$	552,406

 

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

 

•

The restructuring constitutes a concession

 

•

The debtor is experiencing financial difficulties

ASU 310 provides the following guidance for the Bank’s evaluation of whether it has granted a concession as follows:

 

•

If a debtor does not otherwise have access to funds at a market interest rate for debt with similar risk characteristics as the restructured debt, the restructured debt would be considered a below market rate, which may indicate that the Bank may have granted a concession. In that circumstance, the Bank 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 Bank must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

At June 30, 2014, and December 31, 2013, the Company has no loans classified as TDR’s that are reported as performing on June 30, 2014, and December 31, 2013, respectively. For the six month period ended June 30, 2014, no loans were classified as TDR and no loans were added or removed from TDR status during the six month period ended June 30, 2014.

(6) REAL ESTATE AND OTHER ASSETS OWNED

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

 

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At June 30, 2014, December 31, 2013, and June 30, 2013, the Company had balances in other real estate owned and non-accrual loans consisting of the following:

 

		June 30, 2014				December 31, 2013				June 30, 2013
		(Dollars in Thousands)
One-to-four family mortgages		$	356				350			$	447
Land			934				1,124				1,112
Non-residential real estate			200				200				73
Total other real estate owned			1,490				1,674				1,632
Total non-accrual loans			8,735				10,066				11,812
Total non-performing assets		$	10,225				11,740			$	13,444
Non-performing assets / Total assets			1.08	%			1.21	%			1.42	%

 

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The following is a summary of the activity in the Company’s real estate and other assets owned for the six month period ending June 30, 2014:

 

		Activity During 2014
		Balance 12/31/2013				Foreclosures				Proceeds				Reduction in Values				Gain (Loss) on Sale				Balance 6/30/2014
		(Dollars in Thousands)
One-to-four family mortgages		$	350				190				(178	)			(5	)			(1	)			356
Land			1,124				—				(71	)			(100	)			(19	)			934
Non-residential real estate			200				—				—				—				—				200
Total		$	1,674				190				(249	)			(105	)			(20	)			1,490
The following is a summary of the activity in the Company’s real estate and other assets owned for the year ended December 31, 2013:
		Activity During 2013
		Balance 12/31/2012				Foreclosures				Proceeds				Reduction in Values				Gain (Loss) on Sale				Balance 12/31/2013
		(Dollars in Thousands)
One-to-four family mortgages		$	258				1,052				(938	)			(26	)			4				350
Construction			130				—				(110	)			(110	)			90				—
Land			1,112				80				—				(68	)			—				1,124
Non-residential real estate			44				240				(60	)			(11	)			(13	)			200
Consumer assets			4				7				(5	)			(4	)			(2	)			—
Total		$	1,548				1,379				(1,113	)			(219	)			79				1,674

 

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(7) INVESTMENTS IN AFFILIATED COMPANIES

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust 1 (“Trust”), a wholly-owned statutory business trust. The Trust was formed on September 25, 2003. Summary financial information for the Trust follows (dollars in thousands):

 

Summary Statements of Financial Condition		At June 30, 2014				At December 31, 2013
Assets—investment in subordinated debentures issued by HopFed Bancorp, Inc.		$	10,310				10,310
Liabilities			—				—
Stockholder’s equity—trust preferred securities			10,000				10,000
Common stock (100% Owned by HopFed Bancorp, Inc.)			310				310
Total stockholders’ equity		$	10,310			$	10,310

Summary Statement of Income

 

		Three Month Periods Ended June 30,								Six Month Period Ended June 30,
		2014				2013				2014				2013
Income—interest income from subordinated debentures issued by HopFed Bancorp, Inc.		$	87				88			$	173				176
Net income		$	87				88			$	173				176

Summary Statement of Stockholders’ Equity

 

		Trust Preferred Securities				Common Stock				Retained Earnings				Total Stockholders’ Equity
Beginning balances, December 31, 2013		$	10,000				310				—				10,310
Net income			—				—				173				173
Dividends:
Trust preferred securities			—				—				(168	)			(168	)
Common paid to HopFed Bancorp, Inc.			—				—				(5	)			(5	)
Ending balances, June 30, 2014		$	10,000				310				—				10,310

 

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(8) FAIR VALUE OF ASSETS AND LIABILITIES

ASC 820-10, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

 

•

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

 

•

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

 

•

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

The fair values of securities available for sale are determined by a matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without exclusively using quoted prices for the individual securities in the Company’s portfolio but rather by relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments using the fair value of any assigned collateral. The values for bank owned life insurance are obtained from stated values from the respective insurance companies. The liability associated with the Company’s derivative is obtained from a quoted value supplied by our correspondent banker. The value of real estate owned is obtained from appraisals completed on properties at the time of acquisition and annually thereafter.

 

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Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at June 30, 2014, are summarized below:

 

Description		Total carrying value in the consolidated balance sheet at June 30, 2014				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(Dollars in Thousands)
Assets
Available for sale securities		$	331,639				—				330,150				1,489
Bank owned life insurance		$	9,837				—				9,837				—
Liabilities
Interest rate swap		$	585				—				585				—

The assets and liabilities measured at fair value on a recurring basis at December 31, 2013, are summarized below:

 

Description		Total carrying value in the consolidated balance sheet at December 31, 2013				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(Dollars in Thousands)
Assets
Available for sale securities		$	318,910				—				317,421				1,489
Bank owned life insurance		$	9,677				—				9,677				—
Liabilities
Interest rate swap		$	750				—				750				—

 

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The assets and liabilities measured at fair value on a non-recurring basis are summarized below for June 30, 2014:

 

Description		Total carrying value in the consolidated balance sheet at June 30, 2014				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(Dollars in Thousands)
Assets
Other real estate and repossessed asset		$	1,490				—				—			$	1,490
Impaired loans, net of reserve of $1,546		$	36,139				—				—			$	36,139

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2013:

 

Description		Total carrying value in the consolidated balance sheet at December 31, 2013		Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
				(Dollars in Thousands)
Assets
Other real estate and repossessed assets		$1,674			—				—			$	1,674
Impaired loans, net of reserve of $1,929		$40,715			—				—			$	40,715

 

 

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The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the six month periods ended June 30, 2014, and June 30, 2013, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

Six month period ended June 30,		2014								2013
		Other Assets				Other Liabilities				Other Assets				Other Liabilities
		(Dollars in Thousands)
Fair value, January 1,		$	1,489				—				1,489				—
Change in unrealized losses included in other comprehensive income for assets and liabilities still held at June 30,			—				—				—				—
Purchases, issuances and settlements, net			—				—				—				—
Transfers in and/or out of Level 3			—				—				—				—
Fair value, June 30,		$	1,489				—				1,489				—

 

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The estimated fair values of financial instruments were as follows at June 30, 2014:

 

		Carrying Amount				Estimated Fair Value				Quoted Prices In Active Markets for Identical Assets Level 1				Using Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
		(Dollars in Thousands)
Financial Assets:
Cash and due from banks		$	24,125				24,125			$	24,125				—				—
Interest-earning deposits			5,766				5,766				5,766				—				—
Securities available for sale			331,639				331,639				—				330,150				1,489
Federal Home Loan Bank stock			4,428				4,428				—				4,428				—
Loans held for sale			464				464				—				—				464
Loans receivable			537,763				541,610				—				—				541,610
Accrued interest receivable			4,518				4,518				—				4,518				—
Bank owned life insurance			9,837				9,837				—				9,837				—
Financial liabilities:
Deposits			743,269				744,334				—				744,334				—
Advances from borrowers for taxes and insurance			723				723				—				723				—
Advances from Federal Home Loan Bank			40,776				44,189				—				44,189				—
Repurchase agreements			51,125				51,690				—				51,690				—
Subordinated debentures			10,310				10,099				—				—				10,099
Off-balance-sheet liabilities:
Commitments to extend credit			—				—
Commercial letters of credit			—				—
Market value of interest rate swap			585				585				—				585				—

 

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The estimated fair values of financial instruments were as follows at December 31, 2013:

 

		Carrying Amount				Estimated Fair Value				Quoted Prices In Active Markets for Identical Assets Level 1				Using Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
		(Dollars in Thousands)
Financial Assets:
Cash and due from banks		$	37,229				37,229			$	37,229				—				—
Interest-earning deposits			18,619				18,619				18,619				—				—
Securities available for sale			318,910				318,910				—				317,421				1,489
Federal Home Loan Bank stock			4,428				4,428				—				4,428				—
Loans receivable			543,632				546,319				—				—				546,319
Accrued interest receivable			5,233				5,233				—				5,233				—
Bank owned life insurance			9,677				9,677				—				9,677				—
Financial liabilities:
Deposits			762,997				763,605				—				763,605				—
Advances from borrowers for taxes and insurance			521				521				—				521				—
Advances from Federal Home Loan Bank			46,780				51,010				—				51,010				—
Repurchase agreements			52,759				53,712				—				53,712				—
Subordinated debentures			10,310				10,099				—				—				10,099
Off-balance-sheet liabilities:																			—
Commitments to extend credit			—				—				—				—				—
Commercial letters of credit			—				—				—				—				—
Market value of interest rate swap			750				750				—				750				—

 

 

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(9) STOCK OPTIONS

At June 30, 2014, all stock options outstanding were issued under the HopFed Bancorp, Inc. 1999 Stock Option Plan and have expired.

(10) DERIVATIVE INSTRUMENTS

Under guidelines of Financial Accounting Standards Board (“FASB”) ASC 815, Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated statement of financial position. ASC 815 provides special hedge accounting provisions, which permit the change in fair value of the hedge item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

A derivative instrument designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under ASC 815. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the consolidated statement of financial position with corresponding offsets recorded in the consolidated statement of financial position.

The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. ASC 815 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the six month period ended June 30, 2014, or the year ended December 31, 2013.

 

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In October of 2008, the Bank entered into an interest rate swap agreement for a term of seven years and an amount of $10.0 million. The Bank will pay a fixed rate of 7.27% for seven years and receive an amount equal to the three-month London Interbank Lending Rate (LIBOR) plus 3.10%. The interest rate swap is classified as a cash flow hedge by the Bank and will be tested quarterly for effectiveness. At June 30, 2014, and December 31, 2013, the cost of the Bank to terminate the cash flow hedge was approximately $585,000 and $750,000, respectively.

(11) REGULATORY CHANGES

On June 5, 2013, the Company announced that its wholly owned subsidiary, Heritage Bank, has completed its conversion from a federally chartered savings and loan to a state chartered commercial bank regulated by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation. In connection with the Bank’s charter conversion, the Company has received approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to convert our holding company from a savings and loan holding company to a bank holding company also with an effective date of June 5, 2013.

On July 2, 2013, the Board of Governors of the Federal Reserve Bank approved the final rule for BASEL III capital requirements for all commercial banks charted in the United States of America. The rule was subsequently approved by the FDIC on July 9, 2013. The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. The transition period for implementation of Basel III is January 1, 2015, through December 31, 2018. The Company is currently evaluating the impact of Basel III on our financial statements.

 

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(12) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

ASU 2011-11, “Balance Sheet (Topic 210)—“Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU No. 2013-01, “Balance Sheet (Topic 210)—Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” clarifies that ordinary trade receivables are not within the scope of ASU 2011-11. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and did not have a material impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05. This update to Comprehensive Income (Topic 220) defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. The deferral supersedes only the paragraphs pertaining to how and where reclassification adjustments are presented. The amendments in this update were effective for public entities for reporting periods beginning after December 15, 2011. The implementation of ASU 2011-12 did not have a material impact on the Company’s consolidated statement of comprehensive income.

ASU 2012-02, “Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess.

Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 is effective for the Company’s beginning January 1, 2013 (early adoption permitted) and is not expected to have a significant impact on the Company’s financial statements.

ASU 2012-06, “Business Combinations (Topic 805)—Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force).” ASU 2012-06 clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution.

 

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Under ASU 2012-06, when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 became effective for the Company on January 1, 2013 and did not have a significant impact on the Corporation’s financial statements.

ASU 2013-02, “Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on January 1, 2013, and did not have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. These amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of residential foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures about such activities are required by these amendments. The amendments in ASU 2014-04 become effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2014, and early adoption is permitted. The Company is assessing the impact that these amendments will have on its financial position and results of operations, but does not currently anticipate that it will have a material impact.

On June 12, 2014, the FASB issued ASU 2014-11, which makes limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements (“repos”). ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings.

ASU 2014-11 also amends ASC 860 to clarify that repos and securities lending transactions that do not meet all of the de-recognition criteria in ASC 860-10-40-5 should be accounted for as secured borrowings. In addition, the ASU provides examples of repurchase and securities lending arrangements that illustrate whether a transferor has maintained effective control over the transferred financial assets. For public business entities, the accounting changes are effective for the first interim or annual period beginning after December 15, 2014. The Company is assessing the impact that these amendments will have on its financial position and results of operations.

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

(13) Income Taxes

The Company and its subsidiaries file consolidated federal income tax returns and Tennessee excise tax returns. The Company and its non-bank subsidiaries filed consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has accrued any interest or penalties for uncertain tax positions.

The effective tax rate differs from the statutory federal rate of 35% and Tennessee excise rate of 6.50% due to investments in qualified municipal securities, bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The consolidated condensed financial statements as of June 30, 2014, and December 31, 2013, and for the three and six month periods ended June 30, 2014, and June 30, 2013, included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company’s 2013 Annual Report to Stockholders on Form 10-K.

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances, which could affect these material judgments, include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, and assessing other than temporary impairments of securities.

Comparison of Financial Condition at June 30, 2014, and December 31, 2013

At June 30, 2014, total assets declined $23.7 million, to $949.9 million as compared to $973.6 million at December 31, 2013, due to lower levels of cash, time deposit and Federal Home Loan Bank (“FHLB”) advances. Securities available for sale increased from $318.9 million at December 31, 2013, to $331.6 million at June 30, 2014. At June 30, 2014, and December 31, 2013, securities classified as “available for sale” had an amortized cost of $326.7 million and $320.3 million, respectively.

The Company’s holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost was $4.4 million at December 31, 2013, and June 30, 2014. Total Federal Home Loan Bank “FHLB” borrowings declined $6.0 million, from $46.8 million at December 31, 2013, to $40.8 million at June 30, 2014. Total repurchase balances decreased from $52.8 million at December 31, 2013, to $51.1 million at June 30, 2014. Net loans totaled $537.8 million and $543.6 million at June 30, 2014, and December 31, 2013, respectively.

At June 30, 2014, deposits declined to $743.3 million from $763.0 million at December 31, 2013. At June 30, 2014, non-interest checking account balances are $103.6 million, or 13.93% of total deposits as compared to $105.3 million, or 13.79% of total deposits at December 31, 2013.

 

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For the six month period ended June 30, 2014, interest bearing checking accounts and money market accounts increased by $11.0 million and $1.8 million, respectively, as compared to December 31, 2013. At June 30, 2014, time deposits were $351.1 million, representing a $30.9 million decline as compared to December 31, 2013. The average cost of all deposits during the six month periods ended June 30, 2014, and June 30, 2013, was 0.78% and 1.04%, respectively. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area.

Comparison of Operating Results for the Six Month Periods Ended June 30, 2014 and 2013.

Net Income. The Company’s net income was $1.3 million for the six month period ended June 30, 2014, as compared to net income of $2.2 million for the six month period ended June 30, 2013. The decline in the Company’s results for the six month period ended June, 2014, was partially the result of a $1.2 million reduction in gains on the sale of available for sale securities.

Net Interest Income. Net interest income for the six month period ended June 30, 2014, was $12.7 million, compared to $12.6 million for the six month period ended June 30, 2013. The small increase in net interest income for the six months ended June 30, 2014, as compared to June 30, 2013, was due to a $1.0 million decline in the total interest expenses. The decline in interest expense offset a $900,000 decline in total interest income.

For the six months ended June 30, 2014, the average yield on loans was 4.79%, as compared to 5.16% for the six month period ended June 30 2013. For the six month periods ended June 30, 2014, and June 30, 2013, income on taxable securities was $3.5 million and $3.6 million, respectively. For the six month period ending June 30, 2014, the tax equivalent yield on taxable and tax free securities were 2.63% and 4.82%, respectively, as compared to 2.53% and 4.56% for the six-month period ended June 30, 2013, respectively.

For the six month periods ended June 30, 2014, and June 30, 2013, the Company’s cost of interest bearing liabilities was 1.24% and 1.49%, respectively. The lower cost of interest bearing liabilities was the result of a $51.9 million decline in average retail time deposits and the re-pricing of a significant percentage of the Company’s time deposits in 2013. For the six month periods ended June 30, 2014, and June 30, 2013, the Company’s net interest margin was 3.01% and 2.94%, respectively.

Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the six-month periods ended June 30, 2014, and June 30, 2013. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate six-month periods.

Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $524,000 for June 30, 2014, and $545,000 for June 30, 2013, for a tax equivalent rate using a cost of funds rate of 1.25% for June 30, 2014, and 1.50% for June 30, 2013. The table adjusts tax-free loan income by $6,000 for the

 

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six month period ended June 30, 2014, and $4,000 for the six month period ended June 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

 

		Average				Income and				Average				Average				Income and				Average
		Balance				Expense				Rates				Balance				Expense				Rates
		6/30/2014				6/30/2014				6/30/2014				6/30/2013				6/30/2013				6/30/2013
		(Table Amounts in Thousands, Except Percentages)
Loans		$	535,830				12,836				4.79	%		$	525,448				13,562				5.16	%
Investments AFS taxable			264,596				3,473				2.63	%			283,867				3,596				2.53	%
Investment AFS tax free			66,303				1,599				4.82	%			73,499				1,677				4.56	%
Interest bearing deposits			11,225				14				0.25	%			9,672				13				0.27	%
Total interest earning assets			877,954				17,922				4.08	%			892,486				18,848				4.22	%
Other assets			81,908												79,201
Total assets		$	959,862											$	971,687
Interest bearing checking			189,518				682				0.72	%			165,564				673				0.81	%
Savings & MMDA			93,630				96				0.21	%			83,367				70				0.17	%
Retail time deposits			326,464				1,890				1.16	%			378,326				2,877				1.52	%
Brokered deposits			44,061				291				1.32	%			46,390				362				1.56	%
FHLB borrowings			43,775				862				3.94	%			43,586				890				4.08	%
Repurchase agreements			47,670				494				2.07	%			40,595				472				2.33	%
Subordinated debentures			10,310				377				7.31	%			10,310				364				7.06	%
Total interest bearing liabilities			755,428				4,692				1.24	%			768,138				5,708				1.49	%
Non-interest bearing deposits			101,987												93,857
Other liabilities			4,525												4,944
Stockholders’ equity			97,922												104,748
Total liabilities and stockholders’ equity		$	959,862											$	971,687
Interest rate spread							13,230				2.84	%							13,140				2.73	%
Net interest margin							3.01	%											2.94	%

Interest Income. For the six month periods ended June 30, 2014, and June 30, 2013, the Company’s total interest income was $17.4 million and $18.3 million, respectively. As the Company’s loan demand remains soft, we continue to experience a decline in interest income on loans. For the six month period ended June 30, 2014, interest income on loans was $12.8 million, a

 

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$728,000 decline as compared to the six month period ended June 30, 2013. The average balance of loans receivable increased from $525.4 million for the six month period ended June 30, 2013, to $535.8 million for the six month period ended June 30, 2014. The average yields on loans for the six month period ended June 30, 2014, was 4.79%, a 37 basis point decline in the average yield on loans as compared to the six month period ended June 30, 2013.

Interest Expense. Interest expense declined $1.0 million for the six months ended June 30, 2014, as compared to the six month period ended June 30, 2013. The decline was attributable to the re-pricing of higher costing deposits, and a reduction in the average balance of time deposits and an increase in lower costing interest bearing checking accounts. The average cost of interest-bearing retail time deposits declined from 1.52% for the six month period ended June 30, 2013, to 1.16% for the six months ended June 30, 2014. Over the same period, the average balance of interest bearing retail time deposits declined $51.8 million, from $378.3 million for the six months ended June 30, 2013, to $326.5 million for the six months ended June 30, 2014.

The average cost of brokered deposits declined from 1.56% for the six months ended June 30, 2013, to 1.32% for the six months ended June 30, 2014. Over the same period, the average balance of brokered deposits declined $2.3 million to $44.1 million for the six month period ended June 30, 2014, as compared to the six month period ended June 30, 2013. For the six month period ended June 30, 2014, the Company’s total cost of deposits was 0.78% as compared to 1.04% for the six month period ended June 30, 2013.

The average balance of funds borrowed from the FHLB increased $200,000, from $43.6 million for the six months ended June 30, 2013, to $43.8 million for the six month period ended June 30, 2014. The average cost of borrowed funds from the FHLB were 4.08% for the six months ended June 30, 2013, and 3.94% for the six months ended June 30, 2014, respectively. The average balance of repurchase agreements increased from $40.6 million for the six months ended June 30, 2013, to $47.7 million for the six month period ended June 30, 2014. The average cost of repurchase agreements was 2.33% for the six months ended June 30, 2013, and 2.07% for the six month period ended June 30, 2014.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $119,000 in provision for loan loss was required for the six month period ended June 30, 2014, compared to a $782,000 provision for loan loss expense for the six month period ended June 30, 2013.

Non-Interest Income. There was a $1.8 million decline in non-interest income in the six month period ended June 30, 2014, as compared to the same period in 2013. The decline in non-interest income was largely the result of a $1.2 million decline in gains realized on the sale of investments. For the six month period ended June 30, 2014, the Company earned $191,000 in mortgage origination income as compared to $412,000 during the six month period ended June 30, 2013.

 

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The Company’s income for services charges was $1.6 million for the six month period ended June 30, 2014, compared to $1.8 million for the same period in 2013. Likewise, the Company’s financial services commission declined from $644,000 for the six month period ended June 30, 2013, to $374,000 for the six month period ended June 30, 2014, due to the Company’s sale of insurance assets in 2013.

Non-Interest Expenses. There was a $400,000 increase in total non-interest expenses in the three-month period ended June 30, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $355,000 increase in bank franchise tax expense for the six month period ended June 30, 2014, as compared to the six month period ended June 30, 2013. The increase in bank franchise taxes was the result of the Company’s recent charter conversion and changes in which type of investment securities may be used to reduce the Company’s tax burden. For the six month period ended June 30, 2014, losses incurred on the sale of other assets owned and expenses incurred in the management of problem assets owned were $125,000 and $222,000, respectively, as compared to $47,000 and $108,000, respectively, for the six month period ended June 30, 2013. The increase in real estate owned expenses is the result of legal expenses involving customer bankruptcy filings.

Income Taxes. The effective tax rate for the six-month period ending June 30, 2014, and was 5.5% due to the level of tax free income and tax credits available to the Company. The effective tax rate for the six month period ended June 30, 2013, was 21.0%.

Comparison of Operating Results for the Three Month Periods Ended June 30, 2014 and 2013.

Net Income. The Company’s net income was $925,000 for the three month period ended June 30, 2014, as compared to net income of $1.2 million for the three month period ended June 30, 2013. The decline in the Company’s results for the three month period ended June 30, 2014, was partially the result of a $883,000 reduction in non-interest income.

Net Interest Income. Net interest income for the three month period ended June 30, 2014, was $6.4 million, compared to $6.2 million for the three month period ended June 30, 2013. The increase in net interest income for the three months ended June 30, 2014, as compared to June 30, 2013, was due to a $440,000 decline in the Company’s total interest expense.

 

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For the three months ended June 30, 2014, the average yield on loans was 4.83%, as compared to 5.06% for the three month period ended June 30, 2013. For the three month periods ended June 30, 2014, and June 30, 2013, income on taxable investments were $1.7 million and $1.8 million, respectively. For the three month period ending June 30, 2014, the tax equivalent yield on taxable and tax free securities were 2.54% and 4.84%, respectively, as compared to 2.49% and 4.54% for the three-month period ended June 30, 2013, respectively.

For the three month periods ended June 30, 2014, and June 30, 2013, the Company’s cost of interest bearing liabilities was 1.26% and 1.47%, respectively. The lower cost of interest bearing liabilities was the result of a $51.0 million decline in retail time deposits and the re-pricing of a significant percentage of the Company’s time deposits in 2013. For the three month period ended June 30, 2014, and June 30, 2013, the Company’s net interest margin was 3.02% and 2.90%, respectively.

Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the three-month periods ended June 30, 2014, and June 30, 2013. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three-month periods.

 

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Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $259,000 for June 30, 2014, and $263,000 for June 30, 2013, for a tax equivalent rate using a cost of funds rate of 1.20% for June 30, 2014, and 1.50% for June 30, 2013. The table adjusts tax-free loan income by $3,000 for the three month period ended June 30, 2014, and $2,000 for the three month period ended and June 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

 

		Average				Income and				Average				Average				Income and				Average
		Balance				Expense				Rates				Balance				Expense				Rates
		6/30/2014				6/30/2014				6/30/2014				6/30/2013				6/30/2013				6/30/2013
		(Table Amounts in Thousands, Except Percentages)
Loans		$	538,895				6,506				4.83	%		$	528,160				6,678				5.06	%
Investments AFS taxable			266,815				1,694				2.54	%			283,262				1,764				2.49	%
Investment AFS tax free			65,323				790				4.84	%			71,333				810				4.54	%
Interest bearing deposits			9,899				6				0.24	%			9,465				7				0.30	%
Total interest earning assets			880,932				8,996				4.08	%			892,220				9,259				4.15	%
Other assets			76,307												73,757
Total assets		$	957,239											$	965,977
Retail time deposits			320,957				927				1.16	%			371,908				1,378				1.48	%
Brokered deposits			42,024				146				1.39	%			45,688				178				1.56	%
Savings & MMDA			93,932				54				0.23	%			86,018				37				0.17	%
Now accounts			194,863				361				0.74	%			167,038				343				0.82	%
FHLB borrowings			41,764				428				4.10	%			43,612				446				4.09	%
Repurchase agreements			45,997				245				2.13	%			38,185				230				2.41	%
Subordinated debentures			10,310				193				7.49	%			10,310				182				7.06	%
Total interest bearing liabilities			749,847				2,354				1.26	%			762,759				2,794				1.47	%
Non-interest bearing deposits			103,717												93,616
Other liabilities			4,522												4,891
Stockholders’ equity			99,153												104,711
Total liabilities and stockholders’ equity		$	957,239											$	965,977
Net interest income							6,642												6,465
Interest rate spread											2.82	%											2.68	%
Net interest margin							3.02	%											2.90	%

 

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Interest Income. For the three month periods ended June 30, 2014, and June 30, 2013, the Company’s total interest income was $8.7 million and $9.0 million, respectively. For the three month period ended June 30, 2014, interest income on loans was $6.5 million, a $173,000 decline as compared to the three month period ended June 30, 2013. The average balance of loans receivable increased from $528.2 million for the three month period ended June 30, 2013, to $538.9 million for the three month period ended June 30, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 117.0% for the three months ended June 30, 2013, to 117.5% for the three months ended June 30, 2014.

Interest Expense. Interest expense declined $440,000 for the three months ended June 30, 2014, as compared to the three month period ended June 30, 2013. The decline was attributable to the re-pricing of higher costing deposits, and a reduction in the average balance of time deposits and an increase in lower costing interest bearing checking accounts. The average cost of interest-bearing retail time deposits declined from 1.48% for the three month period ended June 30, 2013, to 1.16% for the three months ended June 30, 2014. Over the same period, the average balance of interest bearing retail time deposits declined $50.9 million, from $371.9 million for the three months ended June 30, 2013, to $321.0 million for the three months ended June 30, 2014.

The average balance cost of brokered deposits declined from 1.56% for the three months ended June 30, 2013, to 1.39% for the three months ended June 30, 2014. Over the same period, the average balance of brokered deposits declined $3.7 million, to $42.0 million, for the three month period ended June 30, 2014 as compared to the three month period ended June 30, 2013. For the three month period ended June 30, 2014, the Company’s total cost of deposits was 0.79% as compared to 1.01% for the three month period ended June 30, 2013.

The average balance of funds borrowed from the FHLB declined by $1.8 million, from $43.6 million for the three months ended June 30, 2013, to $41.8 million for the three month period ended June 30, 2014. The average cost of borrowed funds from the FHLB was 4.09% for the three months ended June 30, 2013, and 4.10% for the three months ended June 30, 2014, respectively. The average balance of repurchase agreements increased from $38.2 million for the three months ended June 30, 2013, to $46.0 million for the three month period ended June 30, 2014. The average cost of repurchase agreements was 2.41% for the three months ended June 30, 2013, and 2.13% for the three month period ended June 30, 2014.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that it could record a $261,000 reduction in the allowance for loan loss account during three month period ended June 30, 2014, compared to a $406,000 provision for loan loss expense for the three month period ended June 30, 2013. The reduction in the allowance for loan loss account was the result of improved credit quality, enhanced economic trends, and lower levels of assets with specific reserves.

 

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Non-Interest Income. There was a $880,000 decline in non-interest income in the three month period ended June 30, 2014, as compared to the same period in 2013. The decline in non-interest income was largely the result of a $548,000 decline in gains realized on the sale of investments. For the three month period ended June 30, 2014, the Company earned $133,000 in mortgage origination income as compared to $212,000 during the three month period ended June 30, 2013. The Company’s income for services charges was $848,000 for the three month period ended June 30, 2014, compared to $937,000 for the same period in 2013. Likewise, the Company’s financial services commission declined from $347,000 for the three month period ended June 30, 2013, to $168,000 for the three month period ended June 30, 2014, due to the Company’s sale of insurance assets in 2013.

Non-Interest Expenses. There was a $323,000 increase in total non-interest expenses in the three-month period ended June 30, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $251,000 increase in bank franchise tax expense for the three month period ended June 30, 2014, as compared to the three month period ended June 30, 2013. The increase in bank franchise taxes was the result of the Company’s recent charter conversion and changes in which type of investment securities may be used to reduce the Company’s tax burden. For the three month period ended June 30, 2014, losses incurred on the sale of other assets owned and expenses incurred in the management of problem assets owned were $102,000 and $92,000, respectively, as compared to $12,000 and $32,000, respectively, for the three month period ended June 30, 2013. The increase in losses on real estate owned is the result of a reduction in the carrying value of properties currently listed for sale by the Company.

Income Taxes. The effective tax rate for the three-month periods ending June 30, 2014, was 18.8%, resulting from a high level of tax free income and tax credits available to the Company. The effective tax rate for the three month period ended June 30, 2013, was 22.5%.

Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company. Currently, we are not required to seek approval for each cash common dividend payment to the Federal Reserve Bank or the Kentucky Department of Financial Institutions.

The Bank uses brokered deposits to supplement its asset liability need for longer term deposits at reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement and on its tables that provides the yields and cost of assets and liabilities for the three and six month periods ended June 30, 2014.

 

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At June 30, 2014, the Bank’s brokered deposits consisted of the following:

 

Issue Date		Interest Rate				Balance				Maturity Date
8/11/2009			3.00	%			5,095,000				8/11/2014
10/18/2013 7/9/2012			0.30 0.60	%  %			2,500,000 3,159,000				10/18/2014 1/9/2015
10/18/2013 7/27/2012			0.35 0.70	%  %			2,539,000 3,590,000				1/18/2015 7/27/2015
7/22/2013 12/21/2010			0.65 1.70	%  %			1,940,000 805,000				11/22/2015 12/21/2015
9/21/2012			0.60	%			2,500,000				1/21/2016
7/9/2012			0.75	%			2,309,000				3/9/2016
3/17/2011			2.25	%			1,500,000				3/17/2016
7/22/2013			0.80	%			2,000,000				7/22/2016
10/13/2011			1.35	%			2,086,000				10/13/2016	(1)
3/9/2012			1.00	%			3,044,000				12/9/2016	(1)
7/9/2012			1.05	%			1,446,000				1/9/2017	(1)
7/27/2012			0.75	%			1,496,000				7/27/2017	(1)
1/3/2013			1.00	%			3,030,000				1/3/2018
Total						$	39,039,000

 

(1)	Denotes brokered deposit with rising rate feature in which the Bank has a call option.

 

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Presently, the Bank must satisfy three capital standards: a tier 1 capital to adjusted total assets ratio of 4.0%, a tier one capital to risk weighted asset ratio of 4.0%, and total capital to risk weighted assets ratio of 8.0%. At June 30, 2014, the Bank exceeded all regulatory capital requirements.

The table below presents certain information relating to the Company’s and Bank’s capital compliance at June 30, 2014:

 

		Actual								Minimum Capital Requirement								Minimum To Be Well Capitalized Under Applicable Regulatory Provisions
June 30, 2014		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier 1 Leverage Ratio:
Consolidated		$	107,195				11.34	%		$	37,920				4.0	%		$	47,400				5.0	%
Heritage Bank			103,481				10.95	%			37,806				4.0	%			47,258				5.0	%
Tier 1 Risk Based Capital Ratio:
Consolidated			107,195				17.95	%			24,005				4.0	%			36,008				6.0	%
Heritage Bank			103,481				17.34	%			23,866				4.0	%			35,799				6.0	%
Total Risk Based Capital Ratio:
Consolidated			114,664				19.20	%			48,010				8.0	%			60,013				10.0	%
Heritage Bank			110,950				18.60	%			47,732				8.0	%			59,666				10.0	%

Under Kentucky and federal banking regulations, the dividends the Bank can pay during any calendar year are generally limited to its profits for that year, plus its retained net profits for the two preceding years, less any required transfers to surplus or to fund the retirement of preferred stock or debt, absent approval of the respective state or federal banking regulators. FDIC regulations also require all insured depository institutions to remain in a safe and sound condition, as defined in regulations, as a condition of having federal deposit insurance.

At June 30, 2014, the Bank had no outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $23.0 million. Management believes that the Bank’s sources of funds are sufficient to fund all of its outstanding commitments. Certificates of deposits scheduled to mature in one year or less from June 30, 2014, totaled $151.0 million. Management believes that a significant percentage of such deposits will remain with the Bank.

The Bank’s FHLB borrowings are secured by a blanket security agreement pledging the Bank’s 1-4 family first mortgage loans and non-residential real estate loans. At June 30, 2014, the Bank has pledged all eligible 1-4 family first mortgages.

 

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At June 30, 2014, the Bank has outstanding borrowings of $40.8 million from the FHLB with maturities ranging from approximately 18 months to 4.5 years. A schedule of FHLB borrowings at June 30, 2014, is provided below:

 

Outstanding Balance				Rate				Maturity		Note
(Dollars in thousands)
	4,000				5.34	%		03/17/16
	7,000				4.25	%		05/01/17		Quarterly callable
	10,000				4.56	%		06/27/17		Quarterly callable
	10,000				4.26	%		08/17/17		Quarterly callable
	9,776				3.13	%		01/01/19		Monthly Principal Payments
	$40,776				4.17	%		3.25 years		Weighted average maturity

At June 30, 2014, the Bank had $63.9 million in additional borrowing capacity with the FHLB which includes an overnight line of credit of $30.0 million. The Bank has an $8.0 million unsecured overnight borrowing capacity from a correspondent bank.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

At June 30, 2014, the Company had the following off-balance sheet commitments (in thousands):

 

Standby letters of credit		$	1,136
Unused home equity lines of credit		$	29,338
Unused commercial lines of credit		$	48,746
Unused unsecured personal lines of credit		$	22,111

 

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words “believe,” “expect,” “seek,” and “intend” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The actual results of the Company’s asset liability management analysis are highly dependent on the prepayment speed of mortgage backed securities and collateralized mortgage obligations. The United States Treasury’s policy of purchasing longer dated Treasury bonds has the result of lowering mortgage loan rates, allowing more consumers to refinance their mortgages and pay-off their current mortgage, resulting in higher prepayment speeds on mortgage investment products.

The effects of rising interest rates are discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actual results for the year ending December 31, 2014, will differ from simulations due to timing, magnitude, and the frequency or interest rate changes, market conditions, management strategies, and the timing of the Company’s cash receipts and disbursements.

The Company’s analysis at June 30, 2014, indicates that changes in interest rates are less likely to result in changes in the Company’s annual net interest income. A summary of the Company’s analysis at June 30, 2014, for the twelve month period ending June 30, 2015, is as follows:

 

		Down 1.00%				No change				Up 1.00%				Up 2.00%				Up 3.00%
		(Dollars In Thousands)
Net interest income		$	27,013			$	27,011			$	26,741			$	26,531			$	26,431

 

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended June 30, 2014.

Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the three months ended June 30, 2014, to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud will be detected.

The Company is subject to Section 404 of The Sarbanes-Oxley Act of 2002. Section 404 requires management to assess and report on the effectiveness of the Company’s internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended June 30, 2014, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

The Company currently has no material pending legal proceedings.

 

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Item 1A.

Risk Factors

There have been no material changes to our risk factors as previously disclosed in Part 1, Item 1A of our annual report on Form 10K for the fiscal year ended December 31, 2013.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Unregistered Sales of Equity Securities. Not applicable

(b)

Use of Proceeds. Not applicable

(c)

Repurchase of Equity Securities

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total number of shares Purchased as part of Publically Announced Programs				Maximum Number of Shares that Yet may be Purchased Under the Program at the end of the period
April 1, 2014, to April 30, 2014			12,181			$	11.46				99,035				275,965
May 1, 2014, to May 31, 2014			16,902			$	11.44				115,937				259,063
June 1, 2014, to June 30, 2014			33,387			$	11.54				149,324				225,676
Total			62,470			$	11.49				149,324				225,676

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Mine Safety Disclosures

Not Applicable

 

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Item 5.

Other Information

None

 

Item 6.

Exhibits

 

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer.
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer.
32.1		Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer.
32.2		Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer.
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				HOPFED BANCORP, INC.
Date: August 11, 2014						/s/ John E. Peck
						John E. Peck
						President and Chief Executive Officer

 

Date: August 11, 2014						/s/ Billy C. Duvall
						Billy C. Duvall
						Senior Vice President, Chief Financial
						Officer and Treasurer

 

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