Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - HOPFED BANCORP INCFinancial_Report.xls
EX-32.1 - EX-32.1 - HOPFED BANCORP INCd792410dex321.htm
EX-31.1 - EX-31.1 - HOPFED BANCORP INCd792410dex311.htm
EX-32.2 - EX-32.2 - HOPFED BANCORP INCd792410dex322.htm
EX-31.2 - EX-31.2 - HOPFED BANCORP INCd792410dex312.htm
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 September 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 November 3, 2014, the Registrant had outstanding 7,210,243 shares of the Registrant’s Common stock.

 

 

 


Table of Contents

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 September 30, 2014 (unaudited) and December 31, 2013

     2   
 

Consolidated Condensed Statements of Income for the Three and Nine-Month Periods Ended September 30, 2014, and September, 2013 (unaudited)

     4   
 

Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Nine- Month Periods Ended September 30, 2014, and September 30, 2013 (unaudited)

     6   
 

Consolidated Condensed Statements of Stockholders’ Equity for the Nine-Month Periods Ended September  30, 2014, and September 30, 2013 (unaudited)

     7   
 

Consolidated Condensed Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2014, and September 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      55   
Item 4.   Controls and Procedures      56   
PART II   OTHER INFORMATION   
Item 1.   Legal Proceedings      57   
Item 1A.   Risk Factors      57   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      57   
Item 3.   Defaults Upon Senior Securities      57   
Item 4.   Mine Safety Disclosure      58   
Item 5.   Other Information      58   
Item 6.   Exhibits      58   

SIGNATURES

     59   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

 

     September 30, 2014      December 31, 2013  
     (unaudited)         
Assets      

Cash and due from banks

   $ 18,673         37,229   

Interest-earning deposits

     16,712         18,619   
  

 

 

    

 

 

 

Cash and cash equivalents

     35,385         55,848   

Federal Home Loan Bank stock, at cost

     4,428         4,428   

Securities available for sale

     311,685         318,910   

Loans held for sale

     483         —     

Loans receivable, net of allowance for loan losses of $8,133 at September 30, 2014 and $8,682 at December 31, 2013

     530,759         543,632   

Accrued interest receivable

     4,659         5,233   

Real estate owned

     1,954         1,674   

Bank owned life insurance

     9,903         9,677   

Premises and equipment, net

     22,926         23,108   

Deferred tax assets

     2,189         4,610   

Intangible asset

     49         130   

Other assets

     5,266         6,399   
  

 

 

    

 

 

 

Total assets

   $ 929,686         973,649   
  

 

 

    

 

 

 
Liabilities and Stockholders’ Equity      

Liabilities:

     

Deposits:

     

Non-interest-bearing

   $ 108,217         105,252   

Interest-bearing checking

     179,914         183,643   

Savings and money market

     96,426         92,106   

Time deposits

     343,669         381,996   
  

 

 

    

 

 

 

Total deposits

     728,226         762,997   

Federal Home Loan Bank advances

     40,269         46,780   

Repurchase agreements

     46,329         52,759   

Subordinated debentures

     10,310         10,310   

Advances from borrowers for taxes and insurance

     849         521   

Dividends payable

     301         326   

Accrued expenses and other liabilities

     4,313         4,239   
  

 

 

    

 

 

 

Total liabilities

     830,597         877,932   
  

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

2


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

 

     September 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 September 30, 2014, and December 31, 2013.

     —          —     

Common stock, par value $0.01 per share; authorized 15,000,000 shares; 7,949,665 issued and 7,211,055 outstanding at September 30, 2014, and 7,927,287 issued and 7,447,903 outstanding at December 31, 2013

     79        79   

Additional paid-in-capital

     58,416        58,302   

Retained earnings

     47,049        44,694   

Treasury stock- common (at cost, 738,610 shares at September 30, 2014, and 479,384 shares at December 31, 2013)

     (8,956     (5,929

Accumulated other comprehensive income (loss), net of taxes

     2,501        (1,429
  

 

 

   

 

 

 

Total stockholders’ equity

     99,089        95,717   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 929,686        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.

 

3


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

 

     For the Three Month Periods     For the Nine Month Periods  
     Ended September 30,     Ended September 30,  
     2014     2013     2014     2013  

Interest income:

        

Loans receivable

   $ 6,913        6,605        19,743        20,163   

Securities available for sale - taxable

     1,562        1,641        5,035        5,237   

Securities available for sale - nontaxable

     514        544        1,589        1,676   

Interest-earning deposits

     5        5        19        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,994        8,795        26,386        27,094   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,354        1,622        4,313        5,604   

Advances from Federal Home Loan Bank

     430        445        1,292        1,335   

Repurchase agreements

     228        245        722        717   

Subordinated debentures

     174        184        551        548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,186        2,496        6,878        8,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     6,808        6,299        19,508        18,890   

Provision for loan losses

     (892     426        (773     1,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     7,700        5,873        20,281        17,682   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Other-than-temporary impairment losses on debt securities

     —          (511     —          (511

Portion of losses recognized in other comprehensive income

     —          111        —          111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in in earnings

     —          (400     —          (400

Service charges

     879        949        2,505        2,739   

Merchant card income

     265        245        800        727   

Mortgage origination revenue

     316        147        507        559   

Gain on sale of securities

     294        201        548        1,617   

Income from bank owned life insurance

     65        88        226        250   

Financial services commission

     363        314        737        958   

Other operating income

     211        225        613        630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     2,393        1,769        5,936        7,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

4


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

 

     For the Three Month Periods     For the Nine Month Periods  
     Ended September 30,     Ended September 30,  
     2014     2013     2014      2013  

Non-interest expenses:

         

Salaries and benefits

   $ 3,881        3,735        11,368         11,297   

Occupancy

     781        878        2,498         2,605   

Data processing

     730        652        2,194         1,948   

State deposit tax

     346        143        990         432   

Intangible amortization

     16        33        81         130   

Professional services

     397        493        1,025         1,435   

Deposit insurance and examination

     182        137        562         548   

Advertising

     368        292        1,023         933   

Postage and communications

     140        149        423         427   

Supplies

     156        159        459         388   

Loss (gain) on real estate owned

     35        (54     160         (7

Real estate owned expense (refund)

     (29     78        193         186   

Other operating

     560        289        1,358         1,060   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-interest expense

     7,563        6,984        22,334         21,382   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income tax

     2,530        658        3,883         3,380   

Income tax expense

     577        122        651         694   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 1,953        536        3,232         2,686   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income per share:

         

Basic

   $ 0.27        0.07        0.44         0.36   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.27        0.07        0.44         0.36   
  

 

 

   

 

 

   

 

 

    

 

 

 

Dividend per share

   $ 0.04        0.04        0.12         0.08   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding - basic

     7,265,597        7,483,582        7,348,708         7,483,606   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     7,265,597        7,483,582        7,348,708         7,483,606   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

5


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

(Unaudited)

 

     For the Three Month     For the Nine Month  
     Periods Ended
September 30,
    Periods Ended
September 30,
 
     2014     2013     2014     2013  

Net income

   $ 1,953        536        3,232        2,686   

Other comprehensive income, net of tax:

        

Unrealized gain (loss) on investment securities available for sale, net of tax effect of $138 and $637 for the three month periods ended September 30, 2014, and September 30, 2013, respectively; and ($2,121) and $4,640 for the nine month periods ended September 30, 2014, and September 30, 2013, respectively;

     (269     (1,236     4,118        (9,007

Unrealized gain on derivatives, net of tax effect of ($34) and ($22) for the three month periods ended September 30, 2014, and September 30, 2013, respectively, and of ($90) and ($94) for the nine month periods ending September 30, 2014, and September 30, 2013, respectively;

     65        43        174        183   

Reclassification adjustment for other than temporary impairment included in net income, net of tax effect of ($136) for the three and nine month periods ended September 30, 2013.

     —          264        —          264   

Reclassification adjustment for gains included in net income, net of tax effect of $100 and $68 for the three month periods ended September 30, 2014, and September 30, 2013, respectively; and $186 and $550 for the nine month periods ended September 30, 2014, and September 30, 2013, respectively;

     (194     (132     (362     (1,067
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

   ($ 398     (1,061     3,930        (9,627
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 1,555        (525     7,162        (6,941
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

6


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Nine Month Period Ended September 30, 2014

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

     Shares
Common
Stock
    Common
Stock
     Additional
Paid In
Capital
     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

     22,378        —           —           —          —          —          —     

Repurchase of treasury stock

     (259,226     —           —           —          (3,027     —          (3,027

Consolidated net income

     —          —           —           3,232        —          —          3,232   

Compensation expense, restricted stock awards

     —          —           114         —          —          —          114   

Net change in unrealized gain on securities available for sale, net of income taxes of $1,935

     —          —           —           —          —          3,756        3,756   

Net change in unrealized loss on derivatives, net of income taxes of $90

     —          —           —           —          —          174        174   

Cash dividend to common stockholders

     —          —           —           (877     —          —          (877
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

     7,211,055      $ 79         58,416         47,049        (8,956     2,501        99,089   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

7


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Nine Month Period Ended September 30, 2013

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

   

 

Shares

    Common
Stock
    Common
Stock
Warrants
    Additional
Paid In
Capital
    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

    21,559        —          —          —          —          —          —          —          —          —     

Consolidated net income

    —          —          —          —          —          2,686        —          —          —          2,686   

Compensation expense, restricted stock awards

    —          —          —          —          75        —          —          —          —          75   

Net change in unrealized gain on securities available for sale, net of income tax benefit of $5,054

    —          —          —          —          —          —          —          —          (9,810     (9,810

Net change in unrealized loss on derivatives, net of income taxes of $94

    —          —          —          —          —          —          —          —          183        183   

Repurchase of treasury stock

    (50,104     —          —          —          —          —          —          (559     —          (559

Repurchase of warrant

    —          —          —          (556     299        —          —          —          —          (257

Cash dividend to common stockholders

    —          —          —          —          —          (599     —          —          —          (599
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

    7,474,267        18,400      $ 79        —          76,662        43,916        (18,400     (5,635     96        96,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

8


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

     For the Nine Month Periods  
     Ended September 30,  
     2014     2013  

Cash flows from operating activities:

    

Net cash provided by operating activities

   $ 6,601        6,473   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from sales, calls and maturities of securities available for sale

     81,801        99,619   

Purchase of securities available for sale

     (69,927     (80,959

Net (increase) decrease in loans

     12,205        (9,033

Proceeds from sale of foreclosed assets

     1,001        913   

Purchase of premises and equipment

     (856     (288
  

 

 

   

 

 

 

Net cash provided by in investing activities

     24,224        10,252   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in demand deposits

     2,965        4,354   

Net decrease in time and other deposits

     (37,736     (37,282

Increase in advances from borrowers for taxes and insurance

     328        426   

Advances from Federal Home Loan Bank

     27,000        23,000   

Repayment of advances from Federal Home Loan Bank

     (33,511     (19,465

Net increase (decrease) in repurchase agreements

     (6,430     4,674   

Cash used to repurchase warrant

     —          (257

Cash used to repurchase treasury stock

     (3,027     (559

Dividends paid on common stock

     (877     (449
  

 

 

   

 

 

 

Net cash used in financing activities

     (51,288     (25,558
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (20,463     (8,833

Cash and cash equivalents, beginning of period

     55,848        37,176   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 35,385        28,343   
  

 

 

   

 

 

 

Supplemental disclosures of Cash Flow Information:

    

Interest paid

   $ 6,977        8,463   
  

 

 

   

 

 

 

Income taxes paid

     —          495   
  

 

 

   

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

    

Loans charged off

   $ 820        2,858   
  

 

 

   

 

 

 

Foreclosures and in substance foreclosures of loans during period

   $ 1,441        797   
  

 

 

   

 

 

 

Net unrealized gains (losses) on investment securities classified as available for sale

   $ 5,691        (14,864
  

 

 

   

 

 

 

Increase (decrease) in deferred tax asset related to unrealized gains on investments

   ($ 1,935     5,054   
  

 

 

   

 

 

 

Dividends declared and payable

   $ 301        299   
  

 

 

   

 

 

 

Issue of unearned restricted stock

   $ 260        232   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

9


Table of Contents

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 nine month period ended September 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.

 

10


Table of Contents
(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 nine month periods ended September 30, 2014, and September 30, 2013. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrant outstanding.

 

     Three Month Periods Ended  
     September 30,  
                 2014                              2013              

Basic IPS:

     

Net income available to common stockholders

   $ 1,953,000       $ 536,000   

Average common shares outstanding

     7,265,597         7,483,582   
  

 

 

    

 

 

 

Net income per share available to common shareholders, basic

   $ 0.27       $ 0.07   
  

 

 

    

 

 

 

Diluted IPS

     

Net income available to common stockholders

   $ 1,953,000       $ 536,000   

Average common shares outstanding

     7,265,597         7,483,582   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     7,265,597         7,483,582   
  

 

 

    

 

 

 

Net income per share available to common shareholders, diluted

   $ 0.27       $ 0.07   
  

 

 

    

 

 

 

 

     Nine Month Periods Ended  
     September 30,  
                 2014                              2013              

Basic IPS:

     

Net income available to common stockholders

   $ 3,232,000       $ 2,686,000   

Average common shares outstanding

     7,348,708         7,483,606   
  

 

 

    

 

 

 

Net income per share available to common shareholders, basic

   $ 0.44       $ 0.36   
  

 

 

    

 

 

 

Diluted IPS

     

Net income available to common stockholders

   $ 3,232,000       $ 2,686,000   

Average common shares outstanding

     7,348,708         7,483,606   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     7,348,708         7,483,606   
  

 

 

    

 

 

 

Net income per share available to common shareholders, diluted

   $ 0.44       $ 0.36   
  

 

 

    

 

 

 

 

11


Table of Contents
(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $49,000 and $114,000 for the three and nine month periods ended September 30, 2014, and $28,000 and $75,000 for the three and nine month periods ended September 30, 2013, respectively. The Company issued 22,378 shares of restricted stock during the nine-month period ended September 30, 2014. The Company issued 21,559 shares of restricted stock during the nine- month period ended September 30, 2013. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at September 30, 2014:

 

Year Ending December 31,

   Future
Expense
 

2014

   $ 49,193   

2015

     185,810   

2016

     132,780   

2017

     45,954   
  

 

 

 

Total

   $ 413,737   
  

 

 

 

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.

 

12


Table of Contents
(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 September 30, 2014, the Company has 88 securities with unrealized losses. The carrying amount of securities and their estimated fair values at September 30, 2014, were as follows:

 

     September 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 securities:

          

U.S. Treasury securities

   $ 3,975         —           (5     3,970   

U.S. Agency debt securities

     111,696         1,907         (1,050     112,553   

Corporate bonds

     2,000         19         —          2,019   

Taxable municipal bonds

     12,743         245         (158     12,830   

Tax free municipal bonds

     58,930         3,722         (191     62,461   

Trust preferred securities

     1,600         —           (111     1,489   

Mortgage-backed securities:

          

GNMA

     26,110         620         (146     26,584   

FNMA

     55,770         565         (881     55,454   

FHLMC

     3,277         39         (13     3,303   

SLMA CMOs

     10,025         —           (144     9,881   

AGENCY CMOs

     21,283         149         (291     21,141   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 307,409         7,266         (2,990     311,685   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

13


Table of Contents

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 debt 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   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

14


Table of Contents

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

 

            Estimated  
     Amortized      Fair  
     Cost      Value  

Due within one year

   $ 195         196   

Due in one to five years

     25,496         25,740   

Due in five to ten years

     39,049         39,794   

Due after ten years

     38,875         40,948   
  

 

 

    

 

 

 
     103,615         106,678   

Amortizing agency bonds

     87,329         88,644   

Mortgage-backed securities

     116,465         116,363   
  

 

 

    

 

 

 

Total securities available for sale

   $ 307,409         311,685   
  

 

 

    

 

 

 

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

 

            Estimated  
     Amortized      Fair  
     Cost      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   
  

 

 

    

 

 

 

 

15


Table of Contents

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of September 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:

               

Treasury securities

   $ 3,970         (5     —           —          3,970         (5

Agency debt securities

     17,512         (50     30,890         (1,000     48,402         (1,050

Taxable municipals

     568         (4     7,630         (154     8,198         (158

Tax free municipals

     1,969         (22     5,088         (169     7,057         (191

Trust preferred securities

     —           —          1,489         (111     1,489         (111

Mortgage-backed securities:

               

GNMA

     10,567         (104     3,007         (42     13,574         (146

FNMA

     7,167         (12     31,140         (869     38,307         (881

FHLMC

     2,208         (13     —           —          2,208         (13

SLMA CMOs

     1,924         (12     5,511         (132     7,435         (144

AGENCY CMOs

     10,189         (144     4,113         (147     14,302         (291
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Available for Sale

   $ 56,074         (366     88,868         (2,624     144,942         (2,990
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

The applicable dates for determining when securities are in an unrealized loss position are September 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 September 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 September 30, 2014, the Company had approximately $3.0 million in unrealized losses on $144.9 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 September 30, 2014, and it is not likely 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 September 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.

 

17


Table of Contents

At September 30, 2014, securities with a book value of approximately $188.5 million and a market value of approximately $184.1 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 September 30, 2014, securities with a book and market value of $40.3 million were sold under agreements to repurchase from various customers. Furthermore, the Company has one wholesale repurchase agreement with a third party secured by investments with a book value of $6.5 million and a market value of $6.6 million. The 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%.

 

18


Table of Contents
(5) LOANS

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

 

     September 30, 2014     September 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

   $ 147,650        27.4   $ 155,252        28.1

Second mortgages (closed end)

     2,200        0.4     3,248        0.6

Home equity lines of credit

     33,818        6.3     34,103        6.2

Multi-family

     24,567        4.6     29,736        5.4

Construction

     21,678        4.0     10,618        1.9

Land

     25,561        4.7     34,681        6.3

Farmland

     42,706        7.9     51,868        9.4

Non-residential real estate

     154,177        28.6     157,692        28.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

     452,357        83.9     477,198        86.4

Consumer loans

     14,896        2.8     11,167        2.0

Commercial loans

     71,849        13.3     64,041        11.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other loans

     86,745        16.1     75,208        13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, gross

     539,102        100.0     552,406        100.0
    

 

 

     

 

 

 

Deferred loan cost, net of fees

     (210       (92  

Less allowance for loan losses

     (8,133       (8,682  
  

 

 

     

 

 

   

Total loans

   $ 530,759        $ 543,632     
  

 

 

     

 

 

   

 

19


Table of Contents

The allowance for loan losses totaled $8.1 million at September 30, 2014, and $8.7 million at December 31, 2013, and $9.4 million at September 30, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.51% at September 30, 2014, 1.57% at December 31, 2013, and 1.74% at September 30, 2013.

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

 

     September 30, 2014      December 31, 2013      September 30, 2013  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 407         945         865   

Home equity line of credit

     31         1         275   

Junior lien

     —           2         2   

Construction

     —           175         —     

Land

     301         1,218         2,257   

Non-residential real estate

     101         6,546         7,187   

Farmland

     12         703         744   

Consumer loans

     2         13         316   

Commercial loans

     263         463         482   
  

 

 

    

 

 

    

 

 

 

Total non-accrual loans

   $ 1,117         10,066         12,128   
  

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

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

 

                         General     Specific     Ending  
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2013      2014     2014      2014     2014     9/30/2014  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 2,048         (191     19         (219     (294     1,363   

Home equity line of credit

     218         (73     3         44        —          192   

Junior liens

     39         —          8         (31     —          16   

Multi-family

     466         —          —           (362     —          104   

Construction

     88         (10     7         15        60        160   

Land

     1,305         —          —           (220     —          1,085   

Non-residential real estate

     2,719         (1     864         (716     660        3,526   

Farmland

     510         —          —           33        2        545   

Consumer loans

     541         (308     86         33        250        602   

Commercial loans

     748         (237     58         (215     186        540   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 8,682         (820     1,045         (1,638     864        8,133   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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:

 

                         General     Specific        
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2012      2013     2013      2013     2013     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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

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

 

            30 - 89                    Impaired Loans         
     Currently      Days      Non-accrual      Special      Currently Performing         

September 30, 2014

   Performing      Past Due      Loans      Mention      Substandard      Doubtful      Total  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 140,971         1,454         407         203         4,615         —           147,650   

Home equity line of credit

     32,921         91         31         —           775         —           33,818   

Junior liens

     2,123         —           —           40         37         —           2,200   

Multi-family

     17,587         1,879         —           2,904         2,197         —           24,567   

Construction

     21,678         —           —           —           —           —           21,678   

Land

     14,380         —           301         362         10,518         —           25,561   

Farmland

     40,180         184         12         516         1,814         —           42,706   

Non-residential real estate

     132,515         996         101         5,492         15,073         —           154,177   

Consumer loans

     14,550         4         2         21         319         —           14,896   

Commercial loans

     68,318         1,002         263         325         1,941         —           71,849   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 485,223         5,610         1,117         9,863         37,289         —         $ 539,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

            30 - 89                    Impaired Loans         
     Currently      Days      Non-accrual      Special      Currently Performing         

December 31, 2013

   Performing      Past Due      Loans      Mention      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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

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 (net recovery) ratios for nine month periods ended September 30, 2014, September 30, 2013, and the year ended December 31, 2013, was (0.05%), 0.61% and 0.66%, respectively. The ratios of allowance for loan losses to non-accrual loans at September 30, 2014, September 30, 2013, and December 31, 2013, were 728.1%, 77.6%, and 86.2% 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 ninety 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;

 

23


Table of Contents

(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 loans that have an outstanding balance of more than $250,000. At September 30, 2014, December 31, 2013, and September 30, 2013, the Company’s impaired loans totaled $38.4 million, $42.6 million and $45.3 million, respectively. At September 30, 2014, December 31, 2013, and September 30, 2013, the Company’s specific reserve for impaired loans totaled $2.9 million, $1.9 million and $3.4 million, respectively.

 

24


Table of Contents

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

 

September 30, 2014

   Pass      Special      Impaired Loans      Total      Specific
Allowance
for
     Allowance
for
Performing
 
      Mention      Substandard      Doubtful         Impairment      Loans  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 142,425         203         5,022         —           147,650         131       $ 1,232   

Home equity line of credit

     33,012         —           806         —           33,818         —           192   

Junior liens

     2,123         40         37         —           2,200         —           16   

Multi-family

     19,466         2,904         2,197         —           24,567         —           104   

Construction

     21,678         —           —           —           21,678         —           160   

Land

     14,380         362         10,819         —           25,561         703         382   

Non-residential real estate

     133,511         5,492         15,174         —           154,177         1,988         1,538   

Farmland

     40,364         516         1,826         —           42,706         2         543   

Consumer loans

     14,554         21         321         —           14,896         74         528   

Commercial loans

     69,320         325         2,204         —           71,849         8         532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 490,833         9,863         38,406         —         $ 539,102         2,906       $ 5,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A summary of the Company’s loans and their respective reserve at December 31, 2013, were as follows:

 

     Pass      Special      Impaired Loans      Total      Specific
Allowance
for
     Allowance
for
Performing
Loans
 
      Mention      Substandard      Doubtful         Impairment     
     (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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

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

 

     At September 30, 2014      For the nine month period
ended
September 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

   $ 3,746         3,746         —           2,795         141   

Home equity line of credit

     806         806         —           668         28   

Junior liens

     37         37         —           40         2   

Multi-family

     2,197         2,197         —           782         93   

Construction

     —           —           —           39         —     

Land

     7,504         7,504         —           9,391         292   

Farmland

     1,794         1,794         —           4,545         114   

Non-residential real estate

     6,778         6,778         —           7,544         318   

Consumer loans

     26         26         —           31         1   

Commercial loans

     1,804         1,804         —           2,133         101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,692         24,692         —           27,968         1,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with recorded reserve:

  

One-to-four family mortgages

   $ 1,276         1,276         131         1,673         56   

Home equity line of credit

     —           —           —           —           —     

Junior liens

     —           —           —           —           —     

Multi-family

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Land

     3,315         3,315         703         3,482         134   

Farmland

     32         32         2         825         2   

Non-residential real estate

     8,396         8,396         1,988         4,425         74   

Consumer loans

     295         295         74         391         —     

Commercial loans

     400         400         8         133         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,714         13,714         2,906         10,929         283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 38,406         38,406         2,906         38,897         1,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

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

 

     At December 31, 2013      For the Year Ended
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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

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

 

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

September 30, 2014:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 8       $ 703       $ 1,991       $ 131       $ 73       $ 2,906   

Collectively evaluated for impairment

     532         542         2,184         1,440         529         5,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 540       $ 1,245       $ 4,175       $ 1,571       $ 602       $ 8,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,204       $ 10,819       $ 19,197       $ 5,865       $ 321       $ 38,406   

Loans collectively evaluated for impairment

     69,645         36,420         202,253         177,803         14,575         500,696   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 71,849       $ 47,239       $ 221,450       $ 183,668       $ 14,896       $ 539,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

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.

 

29


Table of Contents

At December 31, 2013, the Company has no loans classified as TDR’s that are reported as performing on December 31, 2013, respectively. For the nine month period ended September 30, 2014, the Company’s TDR activity is listed below.

 

     Balance at
12/31/13
     New
TDR
     Loss or
Foreclosure
     Removed
Due to
Performance
     Removed
from
(Taken to)
Non-accrual
     Balance at
9/30/14
 

Non-residential real estate

   $  —           10,271         —           —           —           10,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing TDR

   $ —           10,271         —           —           —           10,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

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

 

     September 30, 2014     December 31, 2013     September 30, 2013  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 120        350        252   

Land

     1,834        1,124        1,112   

Non-residential real estate

     —          200        73   

Consumer assets

     —          —          2   
  

 

 

   

 

 

   

 

 

 

Total other real estate owned

   $ 1,954        1,674        1,439   
  

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     1,117        10,066        12,128   
  

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 3,071        11,740        13,567   
  

 

 

   

 

 

   

 

 

 

Non-performing assets / Total assets

     0.33     1.21     1.45
  

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

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

 

     Activity During 2014  
     Balance
12/31/2013
     Foreclosures      Proceeds     Reduction
in Values
    Gain (Loss)
on Sale
    Balance
9/30/2014
 
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 350         365         (601     (5     11      $ 120   

Land

     1,124         901         (72     (100     (19     1,834   

Non-residential real estate

     200         175         (328     —          (47     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,674         1,441         (1,001     (105     (55   $ 1,954   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents
(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 September 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 September 30,
     Nine Month Period
Ended September 30,
 
     2014      2013      2014      2013  

Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.

   $ 88         88       $ 261         264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 88         88       $ 261         264   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     —           —           261        261   

Dividends:

          

Trust preferred securities

     —           —           (253     (253

Common paid to HopFed Bancorp, Inc.

     —           —           (8     (8
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balances, September 30, 2014

   $ 10,000         310         —          10,310   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

32


Table of Contents
(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 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.

 

33


Table of Contents

Assets and Liabilities Measured on a Recurring Basis

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

 

Description

   Total carrying
value in the
consolidated
balance sheet at
September 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

   $ 311,685         —           310,196         1,489   

Liabilities

           

Interest rate swap

   $ 485         —           485         —     

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   

Liabilities

           

Interest rate swap

   $ 750         —           750         —     

 

34


Table of Contents

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

 

Description

   Total carrying
value in the
consolidated
balance sheet at
September 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 owned

   $ 1,954         —           —         $ 1,954   

Impaired loans, net of reserve of $2,906

   $ 35,500         —           —         $ 35,500   

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 owned

   $ 1,674         —           —         $ 1,674   

Impaired loans, net of reserve of $1,929

   $ 40,715         —           —         $ 40,715   

 

35


Table of Contents

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the nine month periods ended September 30, 2014, and September 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.

 

Nine month period ended September 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 September 30,

     —           —           —           —     

Purchases, issuances and settlements, net

     —           —           —           —     

Transfers in and/or out of Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value, September 30,

   $ 1,489         —           1,489         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

36


Table of Contents

The estimated fair values of financial instruments were as follows at September 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

   $ 18,673         18,673       $ 18,673         —           —     

Interest-earning deposits

     16,712         16,712         16,712         —           —     

Securities available for sale

     311,685         311,685         —           310,196         1,489   

Federal Home Loan Bank Stock

     4,428         4,428         —           4,428         —     

Loans held for sale

     483         483         —           —           483   

Loans receivable

     530,759         529,363         —           —           529,363   

Accrued interest receivable

     4,659         4,659         —           4,659         —     

Financial liabilities:

              

Deposits

     728,226         712,658         —           712,658         —     

Advances from borrowers for taxes and insurance

     849         849         —           849         —     

Advances from Federal Home Loan Bank

     40,269         42,582         —           42,582         —     

Repurchase agreements

     46,329         46,684         —           46,684         —     

Subordinated debentures

     10,310         10,091         —           —           10,091   

Off-balance-sheet liabilities:

              

Commitments to extend credit

     —           —              

Commercial letters of credit

     —           —              

Market value of interest rate swap

     485         485         —           485         —     

 

37


Table of Contents

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         —     

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         —     

 

38


Table of Contents
(9) STOCK OPTIONS

At September 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 nine month period ended September 30, 2014, or the year ended December 31, 2013.

 

39


Table of Contents

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 September 30, 2014, and December 31, 2013, the cost of the Bank to terminate the cash flow hedge was approximately $485,000 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.

 

40


Table of Contents
(12) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

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 this ASU 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.

 

41


Table of Contents

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.

 

(14) Subsequent Event

The Company issued a press release on October 31, 2014 announcing that its Board of Directors approved the commencement of a new stock repurchase program of up to 300,000 shares of the Company’s common stock. Furthermore, the Company may purchase up to 1 million shares of common stock that may be used a later date for general corporate purposes and employee benefit plans.

In September 2013, the Company’s Board authorized a 375,000 share repurchase program. At October 29, 2014, the Company had 38,494 shares remaining under this plan. The Company intends to complete the current repurchase program before repurchasing shares under the new program.

The Company will conduct repurchases through various means, including, without limitation, open market transactions or in privately negotiated transactions that may be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. The share repurchase program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The consolidated condensed financial statements as of September 30, 2014, and December 31, 2013, and for the three and nine month periods ended September 30, 2014, and September 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.

 

42


Table of Contents

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

At September 30, 2014, total assets declined $43.9 million, to $929.7 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 decreased from $318.9 million at December 31, 2013, to $311.7 million at September 30, 2014. At September 30, 2014, and December 31, 2013, securities classified as “available for sale” had an amortized cost of $307.4 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 September 30, 2014. Total Federal Home Loan Bank “FHLB” borrowings declined $6.5 million, from $46.8 million at December 31, 2013, to $40.3 million at September 30, 2014. Total repurchase balances decreased from $52.8 million at December 31, 2013, to $46.3 million at September 30, 2014, largely due to the maturity of a $10.0 million wholesale repurchase agreement. Net loans totaled $530.8 million and $543.6 million at September 30, 2014, and December 31, 2013, respectively.

At September 30, 2014, deposits declined to $728.2 million from $763.0 million at December 31, 2013. At September 30, 2014, non-interest checking account balances are $108.2 million, or 14.86% of total deposits as compared to $105.3 million, or 13.80% of total deposits at December 31, 2013. At September 30, 2014, time deposits were $343.7 million, representing a $38.3 million decline as compared to December 31, 2013. The average cost of all deposits during the nine month periods ended September 30, 2014, and September 30, 2013, was 0.78% and 0.99%, 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.

 

43


Table of Contents

Comparison of Operating Results for the Nine Month Periods Ended September 30, 2014 and 2013.

Net Income. The Company’s net income was $3.2 million for the nine month period ended September 30, 2014, as compared to net income of $2.7 million for the nine month period ended September 30, 2013. The increase in the Company’s results for the nine month period ended September 30, 2014, was largely the result of a $2.0 million reduction in provision for loan loss expense.

Net Interest Income. Net interest income for the nine month period ended September 30, 2014, was $19.5 million, compared to $18.9 million for the nine month period ended September 30, 2013. The small increase in net interest income for the nine months ended September 30, 2014, as compared to September 30, 2013, was due to a $1.3 million decline in the total interest expenses. The decline in interest expense offset a $708,000 decline in total interest income.

For the nine months ended September 30, 2014, the average yield on loans was 4.92%, as compared to 5.10% for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s loan yields and net interest margin increased by 0.07% and 0.05%, respectively, due to the collection of $280,000 in non-accrual interest during September 2014. For the nine month periods ending September 30, 2014, and September 30, 2013, income on taxable securities was $5.0 million and $5.2 million, respectively. For the nine month period ending September 30, 2014, the tax equivalent yield on taxable and tax free securities were 2.59% and 4.98%, respectively, as compared to 2.53% and 4.66% for the nine-month period ended September 30, 2013, respectively.

For the nine month periods ended September 30, 2014, and September 30, 2013, the Company’s cost of interest bearing liabilities was 1.25% and 1.44%, respectively. The lower cost of interest bearing liabilities was the result of a $63.6 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 nine month periods ended September 30, 2014, and September 30, 2013, the Company’s net interest margin was 3.12% and 2.98%, 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 nine-month periods ended September 30, 2014, and September 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 nine-month periods.

 

44


Table of Contents

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 $774,000 for September 30, 2014, and $812,000 for September 30, 2013, for a tax equivalent rate using a cost of funds rate of 1.25% for September 30, 2014, and 1.40% for September 30, 2013. The table adjusts tax-free loan income by $9,000 for the nine month period ended September 30, 2014, and $6,000 for the nine month period ended September 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

 

     Average
Balance
9/30/2014
     Income and
Expense
9/30/2014
    Average
Rates
9/30/2014
    Average
Balance
9/30/2013
     Income and
Expense
9/30/2013
    Average
Rates
9/30/2013
 
     (Table Amounts in Thousands, Except Percentages)  

Loans

   $ 535,659         19,752        4.92   $ 527,054         20,169        5.10

Investments AFS taxable

     259,615         5,035        2.59     275,934         5,237        2.53

Investment AFS tax free

     63,321         2,363        4.98     71,269         2,488        4.66

Interest bearing deposits

     9,819         19        0.26     8,851         18        0.27
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest earning assets

     868,414         27,169        4.17     883,108         27,912        4.21
     

 

 

   

 

 

      

 

 

   

 

 

 

Other assets

     73,550             79,779        
  

 

 

        

 

 

      

Total assets

   $ 941,964           $ 962,887        
  

 

 

        

 

 

      

Retail time deposits

     307,307         2,786        1.21     370,917         4,018        1.44

Brokered deposits

     39,741         401        1.35     44,002         525        1.59

Savings and MMDA

     96,278         145        0.20     84,823         109        0.17

Interest bearing checking

     191,925         981        0.68     163,493         952        0.78

FHLB borrowings

     44,985         1,292        3.83     43,602         1,335        4.08

Repurchase agreements

     41,386         722        2.33     41,556         717        2.30

Subordinated debentures

     10,310         551        7.13     10,310         548        7.09
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     731,932         6,878        1.25     758,703         8,204        1.44
     

 

 

   

 

 

      

 

 

   

 

 

 

Non-interest bearing deposits

     105,325             94,695        

Other liabilities

     5,026             4,361        

Stockholders’ equity

     99,681             105,128        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 941,964           $ 962,887        
  

 

 

        

 

 

      

Net interest spread

        20,291        2.92        19,708        2.77
     

 

 

   

 

 

      

 

 

   

 

 

 

Net interest margin

        3.12          2.98  
     

 

 

        

 

 

   

 

45


Table of Contents

Interest Income. For the nine month periods ended September 30, 2014, and September 30, 2013, the Company’s total interest income was $26.4 million and $27.1 million, respectively. The Company’s loan demand remains weak and we continue to experience a decline in interest income on loans. For the nine month period ended September 30, 2014, interest income on loans was $19.7 million, a $420,000 decline as compared to the nine month period ended September 30, 2013. The average balance of loans receivable increased from $527.1 million for the nine month period ended September 30, 2013, to $535.7 million for the nine month period ended September 30, 2014. The average yields on loans for the nine month period ended September 30, 2014, was 4.92%, a 0.18% basis point decline in the average yield on loans as compared to the nine month period ended September 30, 2013.

Interest Expense. Interest expense declined $1.3 million for the nine months ended September 30, 2014, as compared to the nine month period ended September 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 1.44% for the nine month period ended September 30, 2013, to 1.21% for the nine months ended September 30, 2014. The average balance of interest bearing retail time deposits declined $63.6 million, from $370.9 million for the nine months ended September 30, 2013, to $307.3 million for the nine months ended September 30, 2014.

The average cost of brokered deposits declined from 1.59% for the nine months ended September 30, 2013, to 1.35% for the nine months ended September 30, 2014. Over the same period, the average balance of brokered deposits declined $4.3 million to $39.7 million for the nine month period ended September 30, 2014, as compared to the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s total cost of deposits was 0.78% as compared to 0.99% for the nine month period ended September 30, 2013.

The average balance of funds borrowed from the FHLB increased $1.4 million, from $43.6 million for the nine months ended September 30, 2013, to $45.0 million for the nine month period ended September 30, 2014. The average cost of borrowed funds from the FHLB were 4.08% for the nine months ended September 30, 2013, and 3.83% for the nine months ended September 30, 2014, respectively. For the nine month periods ending September 30, 2014, and September 30, 2013, the average balance of repurchase agreements was $41.4 million and $41.6 million, respectively. The average cost of repurchase agreements was 2.30% for the nine months ended September 30, 2013, and 2.33% for the nine month period ended September 30, 2014.

 

46


Table of Contents

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 reduce its allowance funding by $773,000 for the nine month period ended September 30, 2014, compared to a provision for loan loss expense of $1.2 million for the nine month period ended September 30, 2013.

Non-Interest Income. There was a $1.1 million decline in non-interest income in the nine month period ended September 30, 2014, as compared to the same period in 2013. The decline in non-interest income was largely the result of a $1.1 million decline in gains realized on the sale of investments. For the nine month period ended September 30, 2014, the Company earned $507,000 in mortgage origination income as compared to $559,000 during the nine month period ended September 30, 2013. The Company’s income for services charges was $2.5 million for the nine month period ended September 30, 2014, compared to $2.7 million for the same period in 2013. Likewise, the Company’s financial services commission declined from $958,000 for the nine month period ended September 30, 2013, to $737,000 for the nine month period ended September 30, 2014, due to the Company’s sale of insurance assets on December 31, 2013. For the nine month period ended September 20, 2013, the Company’s insurance assets provided $344,000 of revenue.

Non-Interest Expenses. There was a $1.0 million increase in total non-interest expenses in the nine-month period ended September 30, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $558,000 increase in state deposit tax expense for the nine month period ended September 30, 2014, as compared to the nine month period ended September 30, 2013. The increase in state deposit 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 nine month period ended September 30, 2014, losses incurred on the sale of other assets owned and expenses incurred in the management of problem assets owned were $160,000 and $193,000, respectively, as compared to ($7,000) and $186,000, respectively, for the nine month period ended September 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 nine-month period ending September 30, 2014, was 16.8% due to the high level of tax free income and tax credits available to the Company. The effective tax rate for the nine month period ended September 30, 2013, was 20.5%.

 

47


Table of Contents

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

Net Income. The Company’s net income was $2.0 million for the three month period ended September 30, 2014, as compared to net income of $536,000 for the three month period ended September 30, 2013. The increase in the Company’s results for the three month period ended September 30, 2014, was partially the result of a $624,000 increase in non-interest income and a $1.3 million decline in our provision for loan loss expense.

Net Interest Income. Net interest income for the three month period ended September 30, 2014, was $6.8 million, compared to $6.3 million for the three month period ended September 30, 2013. The increase in net interest income for the three months ended September 30, 2014, as compared to September 30, 2013, was due to a $310,000 decline in the Company’s total interest expense and the $280,000 collection of non-accrual interest.

For the three months ended September 30, 2014, the average yield on loans was 5.16%, as compared to 4.99% for the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the average yield on loans and net interest margin were affected by 0.21% and 0.13%, respectively by the collection of $280,000 of previously non-accrued interest income on loans. For the three month periods ended September 30, 2014, and September 30, 2013, income on taxable investments was $1.6 million. For the three month period ending September 30, 2014, the tax equivalent yield on taxable and tax free securities were 2.35% and 4.69%, respectively, as compared to 2.52% and 4.83% for the three-month period ended September 30, 2013, respectively.

For the three month periods ended September 30, 2014, and September 30, 2013, the Company’s cost of interest bearing liabilities was 1.17% and 1.35%, respectively. The lower cost of interest bearing liabilities was the result of a $32.3 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 three month period ended September 30, 2014, and September 30, 2013, the Company’s net interest margin was 3.22% and 3.04%, 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 September 30, 2014, and September 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.

 

48


Table of Contents

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 $251,000 for September 30, 2014, and $264,000 for September 30, 2013, for a tax equivalent rate using a cost of funds rate of 1.20% for September 30, 2014, and 1.35% for September 30, 2013. The table adjusts tax-free loan income by $3,000 for the three month period ended September 30, 2014, and $2,000 for the three month period ended and September 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

 

     Average
Balance
9/30/2014
     Income and
Expense
9/30/2014
    Average
Rates
9/30/2014
    Average
Balance
9/30/2013
     Income and
Expense
9/30/2013
    Average
Rates
9/30/2013
 
     (Table Amounts in Thousands, Except Percentages)  

Loans

   $ 535,774         6,916        5.16   $ 530,086         6,607        4.99

Investments AFS taxable

     265,853         1,562        2.35     260,326         1,641        2.52

Investment AFS tax free

     65,298         765        4.69     66,882         808        4.83

Interest bearing deposits

     10,917         5        0.18     7,237         5        0.28
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest earning assets

     877,842         9,248        4.21     864,531         9,061        4.19
     

 

 

   

 

 

      

 

 

   

 

 

 

Other assets

     75,617             75,930        
  

 

 

        

 

 

      

Total assets

   $ 953,459           $ 940,461        
  

 

 

        

 

 

      

Retail time deposits

     320,008         896        1.12     352,291         1,141        1.30

Brokered deposits

     42,605         110        1.03     43,353         163        1.50

Savings & MMDA

     94,522         49        0.21     87,687         39        0.18

Interest bearing checking

     190,329         299        0.63     159,419         279        0.70

FHLB borrowings

     42,970         430        4.00     43,634         445        4.08

Repurchase agreements

     46,765         228        1.95     43,448         245        2.26

Subordinated debentures

     10,310         174        6.75     10,310         184        7.14
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     747,509         2,186        1.17     740,142         2,496        1.35
     

 

 

   

 

 

      

 

 

   

 

 

 

Non-interest bearing deposits

     103,112             96,343        

Other liabilities

     4,660             5,013        

Stockholders’ equity

     98,178             98,963        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 953,459           $ 940,461        
  

 

 

        

 

 

      

Net interest income

        7,062             6,565     
     

 

 

        

 

 

   

Net interest spread

          3.04          2.84
       

 

 

        

 

 

 

Net interest margin

        3.22          3.04  
     

 

 

        

 

 

   

 

49


Table of Contents

Interest Income. For the three month periods ended September 30, 2014, and September 30, 2013, the Company’s total interest income was $9.0 million and $8.8 million, respectively. For the three month period ended September 30, 2014, interest income on loans was $6.9 million, a $308,000 increase as compared to the three month period ended September 30, 2013. The average balance of loans receivable increased from $530.1 million for the three month period ended September 30, 2013, to $535.8 million for the three month period ended September 30, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 116.81% for the three months ended September 30, 2013, to 117.44% for the three months ended September 30, 2014.

Interest Expense. Interest expense declined $310,000 for the three months ended September 30, 2014, as compared to the three month period ended September 30, 2013. The decline was attributable to the re-pricing of higher costing deposits, 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 1.30% for the three month period ended September 30, 2013, to 1.12% for the three months ended September 30, 2014. Over the same period, the average balance of interest bearing retail time deposits declined $32.3 million, from $352.3 million for the three months ended September 30, 2013, to $320.0 million for the three months ended September 30, 2014.

The average cost of brokered deposits declined from 1.50% for the three months ended September 30, 2013, to 1.03% for the three months ended September 30, 2014. Over the same period, the average balance of brokered deposits declined $748,000, to $42.6 million, for the three month period ended September 30, 2014 as compared to the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the Company’s total average cost of deposits was 0.72% as compared to 0.88% for the three month period ended September 30, 2013.

The average balance of funds borrowed from the FHLB declined by $664,000, from $43.6 million for the three months ended September 30, 2013, to $43.0 million for the three month period ended September 30, 2014. The average cost of borrowed funds from the FHLB was 4.08% for the three months ended September 30, 2013, and 4.00% for the three months ended September 30, 2014, respectively. The average balance of repurchase agreements increased from $43.4 million for the three months ended September 30, 2013, to $46.8 million for the three month period ended September 30, 2014. The average cost of repurchase agreements was 2.26% for the three months ended September 30, 2013, and 1.95% for the three month period ended September 30, 2014.

 

50


Table of Contents

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 reduce the funding in the allowance for loan loss account by $892,000 during three month period ended September 30, 2014, as compared to a $426,000 provision for loan loss expense for the three month period ended September 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 non-performing assets and charge offs.

Non-Interest Income. There was a $624,000 increase in non-interest income in the three month period ended September 30, 2014, as compared to the same period in 2013. The increase in non-interest income was largely the result of a $400,000 impairment of investment securities incurred in the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the Company earned $316,000 in mortgage origination income as compared to $147,000 during the three month period ended September 30, 2013, due to lower levels of interest rates and an increase in single family home sales in our market. The Company’s income for services charges was $879,000 for the three month period ended September 30, 2014, compared to $949,000 for the same period in 2013. The Company’s financial services commission increased to $363,000 for the three month period ended September 30, 2014, as compared to $314,000 for the three month period ended September 30, 2013. This increase was achieved despite the sale of the Company’s insurance assets in December 2013. For the three and nine month periods ended September 30, 2013, the Company’s insurance assets contributed $111,000 and $344,000, respectively, to our non-interest income.

Non-Interest Expenses. There was a $579,000 increase in total non-interest expenses in the three-month period ended September 30, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $203,000 increase in bank franchise tax expense for the three month period ended September 30, 2014, as compared to the three month period ended September 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 September 30, 2014, salaries and benefits expense increased by $146,000, to $3.9 million, as compared to the same period in 2013 due to higher commissions for commission based employees. Other operating expenses increased by $271,000 for the three month period ended September 30, 2014, as compared to the three month period ended September 30, 2013.

Income Taxes. The effective tax rate for the three-month periods ending September 30, 2014, was 22.8%, resulting from a high level of taxable income. The effective tax rate for the three month period ended September 30, 2013, was 18.5%.

 

51


Table of Contents

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 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 nine month periods ended September 30, 2014.

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

 

Issue Date

   Interest Rate     Balance      Maturity Date  

10/18/2013

     0.30   $ 2,500,000         10/18/2014   

7/9/2012

     0.60     3,159,000         1/9/2015   

10/18/2013

     0.35     2,539,000         1/18/2015   

8/06/2014

     0.25     2,861,000         3/06/2015   

7/27/2012

     0.70     3,590,000         7/27/2015   

7/22/2013

     0.65     1,940,000         11/22/2015   

12/21/2010

     1.70     805,000         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   

8/6/2014

     0.75     2,842,000         10/6/2016   

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

     $ 39,647,000      
    

 

 

    

 

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

 

52


Table of Contents

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 September 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 September 30, 2014:

 

     Actual     Minimum Capital
Requirement
    Minimum To Be Well
Capitalized Under
Applicable
Regulatory Provisions
 

September 30, 2014

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

Tier 1 leverage ratio:

               

Consolidated

     $106,539         11.18     $37,101         4.0     $46,377         5.0

Heritage Bank

     105,659         11.25     36,984         4.0     46,230         5.0

Tier 1 Risk Based Capital Ratio:

               

Consolidated

     106,539         17.73     24,121         4.0     36,182         6.0

Heritage Bank

     105,659         17.61     24,004         4.0     36,006         6.0

Total Risk Based Capital Ratio:

               

Consolidated

     114,047         18.98     48,242         8.0     60,303         10.0

Heritage Bank

     113,167         18.86     48,008         8.0     60,010         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 September 30, 2014, the Bank had no outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $29.9 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 September 30, 2014, totaled $146.5 million. Management believes that a significant percentage of such deposits will remain with the Bank.

 

53


Table of Contents

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 September 30, 2014, the Bank has pledged all eligible 1-4 family first mortgages.

At September 30, 2014, the Bank has outstanding borrowings of $40.3 million from the FHLB with maturities ranging from approximately 18 months to 4.5 years. A schedule of FHLB borrowings at September 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

  9,269         3.13   01/01/19   

Monthly Principal Payments

 

 

    

 

 

   

 

  
$ 40,269         4.18   2.97 years   

Weighted average maturity

 

 

    

 

 

      

At September 30, 2014, the Bank had $61.2 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 September 30, 2014, the Company had the following off-balance sheet commitments (in thousands):

 

Standby letters of credit

   $ 1,141   

Unused home equity lines of credit

   $ 29,436   

Unused commercial lines of credit

   $ 48,369   

Unused unsecured personal lines of credit

   $ 33,550   

 

54


Table of Contents

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 September 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 September 30, 2014, for the twelve month period ending September 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

   $ 24,294       $ 25,619       $ 26,410       $ 27,262       $ 28,111   

 

55


Table of Contents
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 September 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 September 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 September 30, 2014, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

56


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company currently has no material pending legal proceedings.

 

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
 

July 1, 2014, to July 31, 2014

     76,149       $ 11.84         225,473         149,527   

August 1, 2014, to August 31, 2014

     48,016       $ 11.82         273,489         101,511   

September 1, 2014, to September 30, 2014

     62,205       $ 11.57         335,694         39,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     186,370       $ 11.74         335,694         39,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company issued a press release on October 31, 2014 announcing that its Board of Directors approved the commencement of a new stock repurchase program of up to 300,000 shares of the Company’s common stock. Furthermore, the Company may purchase up to 1 million shares of common stock that may be used a later date for general corporate purposes and employee benefit plans.

In September 2013, the Company’s Board authorized a 375,000 share repurchase program. At October 29, 2014, the Company had 38,494 shares remaining under this plan. The Company intends to complete the current repurchase program before repurchasing shares under the new program.

The Company will conduct repurchases through various means, including, without limitation, open market transactions or in privately negotiated transactions that may be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. The share repurchase program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

 

Item 3. Defaults Upon Senior Securities

None

 

57


Table of Contents
Item 4. Mine Safety Disclosures

Not Applicable

 

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

 

58


Table of Contents

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: November 10, 2014               

/s/ John E. Peck

      John E. Peck
      President and Chief Executive Officer
Date: November 10, 2014      

/s/ Billy C. Duvall

      Billy C. Duvall
      Senior Vice President, Chief Financial Officer and Treasurer

 

59