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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, 2015

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, 2015, the Registrant had outstanding 6,913,013 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, 2015, (unaudited) and December 31, 2014

     2   
 

Consolidated Condensed Statements of Income for the Three and Nine Month Periods Ended September  30, 2015, and September 30, 2014 (unaudited)

     4   
 

Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2015, and September 30, 2014 (unaudited)

     6   
 

Consolidated Condensed Statement of Stockholders’ Equity for the Nine Month Periods Ended September  30, 2015 and September 30, 2014 (unaudited)

     7   
 

Consolidated Condensed Statements of Cash Flows for the Nine Month Periods Ended September  30, 2015, and September 30, 2014 (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

     51   

Item 4.

 

Controls and Procedures

     52   

PART II OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     53   

Item 1A.

 

Risk Factors

     53   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     53   

Item 3.

 

Defaults Upon Senior Securities

     54   

Item 4.

 

Mine Safety Disclosures

     54   

Item 5.

 

Other Information

     54   

Item 6.

 

Exhibits

     54   

SIGNATURES

     55   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands, Except Share and Per Share Amounts)

 

     September 30, 2015      December 31, 2014  
     (Unaudited)         
Assets      

Cash and due from banks

   $ 18,110         34,389   

Interest-earning deposits

     5,647         6,050   
  

 

 

    

 

 

 

Cash and cash equivalents

     23,757         40,439   

Federal Home Loan Bank stock, at cost

     4,428         4,428   

Securities available for sale

     239,922         303,628   

Loans held for sale

     5,298         1,444   

Loans receivable, net of allowance for loan losses of $5,487 at September 30, 2015, and $6,289 at December 31, 2014

     561,514         539,264   

Accrued interest receivable

     4,119         4,576   

Real estate and other assets owned

     1,736         1,927   

Bank owned life insurance

     10,236         9,984   

Premises and equipment, net

     24,371         22,940   

Deferred tax assets

     1,198         2,261   

Intangible asset

     —           33   

Income taxes receivable

     3,215         2,960   

Other assets

     2,942         1,901   
  

 

 

    

 

 

 

Total assets

   $ 882,736         935,785   
  

 

 

    

 

 

 
Liabilities and Stockholders’ Equity      

Liabilities:

     

Deposits:

     

Non-interest-bearing accounts

   $ 113,469         115,051   

Interest-bearing accounts

     

Interest-bearing checking accounts

     185,377         186,616   

Savings and money market accounts

     93,821         97,726   

Other time deposits

     313,531         331,915   
  

 

 

    

 

 

 

Total deposits

     706,198         731,308   

Advances from Federal Home Loan Bank

     25,000         34,000   

Repurchase agreements

     46,300         57,358   

Subordinated debentures

     10,310         10,310   

Advances from borrowers for taxes and insurance

     1,077         513   

Dividends payable

     289         301   

Accrued expenses and other liabilities

     4,739         3,593   
  

 

 

    

 

 

 

Total liabilities

     793,913         837,383   
  

 

 

    

 

 

 

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, Except Share and Per Share Amounts)

 

     September 30, 2015     December 31, 2014  
     (Unaudited)        

Stockholders’ equity

    

Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at September 30, 2015, and December 31, 2014.

   $ —          —     

Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,951,699 issued and 6,913,013 outstanding at September 30, 2015, and 7,949,665 issued and 7,171,282 outstanding at December 31, 2014

     79        79   

Additional paid-in-capital

     58,578        58,466   

Retained earnings

     46,719        45,729   

Treasury stock-common (at cost, 1,038,686 shares at September 30, 2015, and 778,383 shares at December 31, 2014)

     (12,915     (9,429

Unallocated ESOP shares (at cost, 562,937 shares at September 30, 2015, and no shares at December 31, 2014)

     (7,397     —     

Accumulated other comprehensive income, net of taxes

     3,759        3,557   
  

 

 

   

 

 

 

Total stockholders’ equity

     88,823        98,402   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 882,736        935,785   
  

 

 

   

 

 

 

Commitment and contingencies (note 14)

    

The consolidated condensed statement of financial condition at December 31, 2014, has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income

(Dollars in Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

     For the Three Month Periods
Ended September 30,
    For the Nine Month Periods
Ended September 30,
 
     2015      2014     2015      2014  

Interest income:

          

Loans receivable

   $ 6,374         6,913        18,895         19,743   

Securities available for sale - taxable

     1,237         1,562        4,953         5,035   

Securities available for sale - nontaxable

     398         514        1,267         1,589   

Interest-earning deposits

     3         5        11         19   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     8,012         8,994        25,126         26,386   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Deposits

     1,246         1,354        3,751         4,313   

Advances from Federal Home Loan Bank

     71         430        206         1,292   

Repurchase agreements

     130         228        368         722   

Subordinated debentures

     186         174        553         551   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     1,633         2,186        4,878         6,878   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     6,379         6,808        20,248         19,508   

Provision for loan losses

     275         (892     760         (773
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     6,104         7,700        19,488         20,281   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest income:

          

Service charges

     750         879        2,184         2,505   

Merchant card income

     286         265        842         800   

Mortgage origination revenue

     345         316        865         507   

Gain on sale of securities

     103         294        552         548   

Income from bank owned life insurance

     108         65        252         226   

Financial services commission

     186         363        539         737   

Other operating income

     158         211        483         613   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     1,936         2,393        5,717         5,936   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

     For the Three Month Periods     For the Nine Month Periods  
     Ended September 30,     Ended September 30,  
     2015     2014     2015      2014  

Non-interest expenses:

         

Salaries and benefits

   $ 3,960        3,881        12,148         11,368   

Occupancy

     788        781        2,278         2,498   

Data processing

     724        730        2,117         2,194   

Franchise and deposit tax

     260        346        759         990   

Intangible amortization

     —          16        32         81   

Professional services

     380        397        1,177         1,025   

Deposit insurance and examination

     135        182        403         562   

Advertising

     337        368        983         1,023   

Postage and communications

     162        140        428         423   

Supplies

     107        156        364         459   

Loss (gain) on real estate owned

     (18     35        716         160   

Real estate owned

     202        (29     406         193   

Other operating

     516        560        1,446         1,358   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-interest expense

     7,553        7,563        23,257         22,334   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income tax

     487        2,530        1,948         3,883   

Income tax expense (benefit)

     (23     577        200         651   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 510        1,953        1,748         3,232   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income per share:

         

Basic

   $ 0.08        0.27        0.27         0.44   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.08        0.27        0.27         0.44   
  

 

 

   

 

 

   

 

 

    

 

 

 

Dividend per share

   $ 0.04        0.04        0.12         0.12   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding - basic

     6,359,556        7,265,597        6,493,449         7,348,708   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     6,359,556        7,265,597        6,493,449         7,348,708   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)

 

     For the Three Month     For the Nine Month  
     Periods Ended September 30,     Periods Ended September 30,  
     2015     2014     2015     2014  

Net income

   $ 510        1,953        1,748        3,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Unrealized gains on securities for which a portion of an other than temporary impairment has been recorded in earnings:

        

Unrealized holding gains arising during the period

     (17     —          289        —     

Income tax expense (benefit)

     6        —          (98     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income on available for sale for sale securities with other than temporary impairment

     (11     —          191        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain (loss) on investment securities available for sale, net of tax effect of ($468) and $138 for the three months periods ended September 30, 2015, and September 30, 2014, respectively; and ($89) and ($2,121) for the nine month periods ended September 30, 2015, and September 30, 2014, respectively;

     920        (269     184        4,118   

Unrealized gain on derivatives, net of tax effect of ($33) and ($34) for the three month periods ended September 30, 2015, and September 30, 2014, respectively; and ($98) and ($90) for the nine month periods ending September 30, 2015, and September 30, 2014, respectively;

     64        65        191        174   

Reclassification adjustment for gains included in net income, net of tax effect of $35 and $100 for the three month periods ended September 30, 2015, and September 30, 2014, respectively; and $188 and $186 the nine month periods ended September 30, 2015, and September 30, 2014, respectively;

     (68     (194     (364     (362
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) on available for sale without other than temporary impairment

     916        (398     11        3,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     905        (398     202        3,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,415        1,555        1,950        7,162   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Nine Month Period Ended September 30, 2015

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

     Common
Shares
    Preferred
Shares
     Common
Stock
     Common
Stock
Warrant
     Additional
Paid-in
Capital
    Retained
Earnings
    Preferred
Treasury
Stock
     Common
Treasury
Stock
    Unearned
ESOP Shares
    Accumulated
Other
Comprehensive
Income
     Total Equity  

Balance at December 31, 2014

     7,171,282        —         $ 79         —           58,466        45,729        —           (9,429     —          3,557         98,402   

Consolidated net income

     —          —           —           —           —          1,748        —           —          —          —           1,748   

Treasury stock reissued

     600,000        —           —           —           —          —          —           7,884        (7,884     —           —     

Restricted stock awards

     2,034        —           —           —           —          —          —           —          —          —           —     

Repurchase of treasury stock

     (860,303     —           —           —           —          —          —           (11,370     —          —           (11,370

ESOP shares committed to release

     —          —           —           —           —          —          —           —          487        —           487   

Change in price of ESOP shares

     —          —           —           —           (32     —          —           —          —          —           (32

Compensation expense, restricted stock awards

     —          —           —           —           144        —          —           —          —          —           144   

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

     —          —           —           —           —          —          —           —          —          11         11   

Net change in unrealized loss on derivatives, net of income taxes of ($98)

     —          —           —           —           —          —          —           —          —          191         191   

Cash dividend to common stockholders

     —          —           —           —           —          (758     —           —          —          —           (758
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance September 30, 2015

     6,913,013        —         $ 79         —           58,578        46,719        —           (12,915     (7,397     3,759         88,823   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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, 2014

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

     Common
Shares
    Preferred
Shares
     Common
Stock
     Common
Stock
Warrant
     Additional
Paid-in
Capital
     Retained
Earnings
    Preferred
Treasury
Stock
     Common
Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Equity  

Balance at December 31, 2013

     7,447,903        —         $ 79         —           58,302         44,694        —           (5,929     (1,429     95,717   

Consolidated net income

     —          —           —           —           —           3,232        —           —          —          3,232   

Repurchase of treasury stock

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

Restricted stock awards

     22,378        —           —           —           —           —          —           —          —          —     

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

 

8


Table of Contents

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

     For the Nine Month Periods  
     September 30,  
     2015     2014  

Cash flows from operating activities:

    

Net cash provided by operating activities

   $ 5,977        6,601   

Cash flows from investing activities

    

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

     91,119        81,801   

Purchase of securities available for sale

     (28,162     (69,927

Net (increase) decrease in loans

     (26,827     12,205   

Proceeds from sale of foreclosed assets

     318        1,001   

Purchase of premises and equipment

     (2,363     (856
  

 

 

   

 

 

 

Net cash provided by investing activities

     34,085        24,224   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in demand deposits

     (1,582     2,965   

Net decrease in time and other deposits

     (23,528     (37,736

Increase in advances from borrowers for taxes and insurance

     564        328   

Advances from Federal Home Loan Bank

     36,000        27,000   

Repayment of advances from Federal Home Loan Bank

     (45,000     (33,511

Net decrease in repurchase agreements

     (11,058     (6,430

Cash used to repurchase treasury stock

     (11,370     (3,027

Dividends paid on common stock

     (770     (877
  

 

 

   

 

 

 

Net cash used in financing activities

     (56,744     (51,288
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (16,682     (20,463

Cash and cash equivalents, beginning of period

     40,439        55,848   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 23,757        35,385   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 4,912        6,977   
  

 

 

   

 

 

 

Income taxes paid

   $ 100        —     
  

 

 

   

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

    

Loans charged off

   $ 1,744        820   
  

 

 

   

 

 

 

Foreclosures and in substance foreclosures of loans during period

   $ 843        1,441   
  

 

 

   

 

 

 

Net unrealized gains on investment securities classified as as available for sale

   $ 16        5,691   
  

 

 

   

 

 

 

Decrease in deferred tax asset related to unrealized gains on investments

   ($ 5     (1,935
  

 

 

   

 

 

 

Dividends declared and payable

   $ 289        301   
  

 

 

   

 

 

 

Issue of treasury stock to ESOP

   $ 7,884        —     
  

 

 

   

 

 

 

Issue of restricted stock

   $ 25        260   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

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

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

The Bank operates a mortgage division, Heritage Mortgage Services, in Clarksville, Tennessee with agents located in several of its markets. The Bank has a financial services division, Heritage Solutions, with offices in Murray, Kentucky, Kingston Springs, Tennessee, and Pleasant View, Tennessee. Heritage Wealth Management agents travel throughout western Kentucky and middle Tennessee offering fixed and variable annuities, mutual funds and brokerage services. In October of 2014, the Bank opened a loan production office in Nashville, Tennessee.

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 three month period ended September 30, 2015, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2015.

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, 2014. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2014, Consolidated Financial Statements.

 

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(2) INCOME PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted income per share (“IPS”) computations for the three and nine month periods ended September 30, 2015, and September 30, 2014. For the three and nine month periods ended September 30, 2015, the Company’s financial statements reflect a liability adequate to release of 37,063 shares from the HopFed Bancorp, Inc. 2015 Employee Stock Ownership Plan (the “ESOP”). Therefore, the Company has included 37,063 shares held by the ESOP in the IPS calculation. The Company has excluded 562,937 unearned shares purchased and owned by the ESOP from our IPS computations. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrants outstanding.

 

     Three Month Period Ended
September 30,
 
     2015      2014  

Basic IPS:

  

Net income

   $ 510,000       $ 1,953,000   

Average common shares outstanding

     6,359,556         7,265,597   
  

 

 

    

 

 

 

Net income per share

   $ 0.08       $ 0.27   
  

 

 

    

 

 

 

Diluted IPS:

  

Net income

   $ 510,000       $ 1,953,000   

Average common shares outstanding

     6,359,556         7,265,597   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,359,556         7,265,597   
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.08       $ 0.27   
  

 

 

    

 

 

 

 

     Nine Month Period Ended
September 30,
 
     2015      2014  

Basic IPS:

     

Net income

   $ 1,748,000       $ 3,232,000   

Average common shares outstanding

     6,493,449         7,348,708   
  

 

 

    

 

 

 

Net income per share

   $ 0.27       $ 0.44   
  

 

 

    

 

 

 

Diluted IPS:

     

Net income

   $ 1,748,000       $ 3,232,000   

Average common shares outstanding

     6,493,449         7,348,708   

Dilutive effect of stock options

     —           —     
  

 

 

    

 

 

 

Average diluted shares outstanding

     6,493,449         7,348,708   
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.27       $ 0.44   
  

 

 

    

 

 

 

 

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Table of Contents
(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $46,000 and $144,000 for the three and nine month periods ended September 30, 2015, and $49,000 and $114,000 for the three and nine month periods ended September 30, 2014, respectively. The Company issued 1,263 and 2,034 shares of restricted stock during the three and nine month periods ended September 30, 2015. The Company issued 2,140 and 22,378 shares of restricted stock during the three and nine month periods ended September 30, 2014. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at September 30, 2015:

 

Year Ending December 31,

   Future
Expense
 

2015

   $ 45,857   

2016

     139,040   

2017

     52,215   

2018

     9,387   

2019

     2,604   
  

 

 

 

Total

   $ 249,103   
  

 

 

 

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

 

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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, 2015, the Company has 42 securities with unrealized losses. The carrying amount of securities and their estimated fair values at September 30, 2015, were as follows:

 

     September 30, 2015  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  
     (Dollars in Thousands)  

Restricted:

           

FHLB stock

   $ 4,428         —           —           4,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale:

           

U.S. Treasury securities

   $ 2,001         9         —           2,010   

Agency debt securities

     91,190         2,352         (159      93,383   

Taxable municipal bonds

     7,173         217         (16      7,374   

Tax free municipal bonds

     47,209         2,525         (96      49,638   

Trust preferred securities

     1,613         177         —           1,790   

Mortgage-backed securities:

           

GNMA

     20,214         249         (89      20,374   

FNMA

     31,596         583         (20      32,159   

FHLMC

     5,353         46         (16      5,383   

SLMA CMO

     3,819         —           (183      3,636   

AGENCY CMO

     23,958         259         (42      24,175   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 234,126         6,417         (621      239,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The carrying amount of securities and their estimated fair values at December 31, 2014, was as follows:

 

     December 31, 2014  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  
     (Dollars in Thousands)  

Restricted:

           

FHLB stock

   $ 4,428         —           —           4,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale:

           

U.S. Treasury securities

   $ 3,977         3         —           3,980   

Agency debt securities

     101,654         2,125         (527      103,252   

Tax free municipal bonds

     57,399         3,814         (166      61,047   

Taxable municipal bonds

     11,871         235         (63      12,043   

Trust preferred securities

     1,600         —           (111      1,489   

Commercial bonds

     2,000         7         —           2,007   

Mortgage-backed securities:

           

GNMA

     27,535         670         (122      28,083   

FNMA

     50,617         694         (536      50,775   

FHLMC

     3,276         38         —           3,314   

SLMA CMO

     9,895         —           (252      9,643   

AGENCY CMO

     28,024         176         (205      27,995   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 297,848         7,762         (1,982      303,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

The scheduled maturities of debt securities available for sale at September 30, 2015, were as follows:

 

            Estimated  
     Amortized      Fair  

September 30, 2015

   Cost      Value  

Due within one year

   $ 4,830       $ 4,894   

Due in one to five years

     26,697         27,089   

Due in five to ten years

     29,401         30,316   

Due after ten years

     24,604         26,089   
  

 

 

    

 

 

 
     85,532         88,388   

Amortizing agency bonds

     63,654         65,807   

Mortgage-backed securities

     84,940         85,727   
  

 

 

    

 

 

 

Total unrestricted securities available for sale

   $ 234,126       $ 239,922   
  

 

 

    

 

 

 

 

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Table of Contents

The scheduled maturities of debt securities available for sale at December 31, 2014, were as follows:

 

            Estimated  
     Amortized      Fair  

December 31, 2014

   Cost      Value  

Due within one year

   $ 4,830       $ 4,927   

Due in one to five years

     21,564         21,818   

Due in five to ten years

     41,683         42,613   

Due after ten years

     33,119         35,380   
  

 

 

    

 

 

 
     101,196         104,738   

Amortizing agency bonds

     77,305         79,080   

Mortgage-backed securities

     119,347         119,810   
  

 

 

    

 

 

 

Total unrestricted securities available for sale

   $ 297,848       $ 303,628   
  

 

 

    

 

 

 

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of September 30, 2015, are as follows:

 

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

Available for sale

               

U.S. Agency debt securities

   $ 5,009         (13     9,997         (146     15,006         (159

Taxable municipals

     —           —          1,926         (16     1,926         (16

Tax free municipals

     —           —          6,308         (96     6,308         (96

Mortgage-backed securities:

               

GNMA

     4,180         (22     10,694         (67     14,874         (89

FNMA

     2,267         (12     3,101         (8     5,368         (20

FHLMC

     2,539         (16     —           —          2,539         (16

SLMA CMOs

     —           —          3,636         (183     3,636         (183

AGENCY CMOs

     2,422         (27     2,072         (15     4,494         (42
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 16,417         (90     37,734         (531     54,151         (621
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2014, were as follows:

 

     Less than 12 months     12 months or longer     Total  
     Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized  
     Fair Value      Losses     Fair Value      Losses     Fair Value      Losses  

Available for sale

               

U.S. Agency debt securities

   $ 14,021         (20     29,156         (507     43,177         (527

Taxable municipals

     —           —          4,785         (63     4,785         (63

Tax free municipals

     —           —          6,647         (166     6,647         (166

Trust preferred securities

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

Mortgage-backed securities:

               

GNMA

     12,568         (108     2,895         (14     15,463         (122

FNMA

     —           —          18,927         (536     18,927         (536

SLMA CMOs

     1,923         (14     7,720         (238     9,643         (252

AGENCY CMOs

     9,545         (91     7,685         (114     17,230         (205
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 38,057         (233     79,304         (1,749     117,361         (1,982
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At September 30, 2015, and December 31, 2014, the Company evaluated all securities with unrealized losses to determine if any such securities were other than temporarily impaired. At September 30, 2015, and December 31, 2014, the Company has determined that none of its securities are other than temporarily impaired.

At September 30, 2015, securities with a book value of approximately $124.8 million and a market value of approximately $129.6 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law.

At September 30, 2015, securities with a book value of $39.7 million and market value of $40.3 million were sold under agreements to repurchase from various customers. Furthermore, the Company has a wholesale repurchase agreement with third party secured by investments with a combined book value of $6.7 million and a market value of $6.9 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%.

 

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Table of Contents
(5) LOANS

The components of loans receivable in the consolidated balance sheets as of September 30, 2015, and December 31, 2014, were as follows:

 

     September 30, 2015      September 30, 2015     December 31, 2014      December 31, 2014  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands, except percentages)  

Real estate loans

  

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

   $ 146,370         25.8   $ 150,551         27.6

Second mortgages (closed end)

     1,798         0.3     2,102         0.4

Home equity lines of credit

     32,976         5.8     34,238         6.3

Multi-family

     23,366         4.1     25,991         4.8

Construction

     32,669         5.8     24,241         4.4

Land

     22,654         4.0     26,654         4.9

Farmland

     40,639         7.2     42,874         7.8

Non-residential real estate

     157,114         27.7     150,596         27.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage loans

     457,586         80.7     457,247         83.8

Consumer loans

     18,375         3.2     14,438         2.6

Commercial loans

     91,550         16.1     74,154         13.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other loans

     109,925         19.3     88,592         16.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans, gross

     567,511         100.0     545,839         100.0
     

 

 

      

 

 

 

Deferred loan cost, net of fees

     (510        (286   

Less allowance for loan losses

     (5,487        (6,289   
  

 

 

      

 

 

    

Total loans

   $ 561,514         $ 539,264      
  

 

 

      

 

 

    

The allowance for loan losses totaled $5.5 million at September 30, 2015, $6.3 million at December 31, 2014, and $8.1 million at September 30, 2014, respectively. The ratio of the allowance for loan losses to total loans was 0.97% at September 30, 2015, 1.15% at December 31, 2014, and 1.51% at September 30, 2014. At September 30, 2015, the Company has one land loan, totaling $1.5 million, that is past due 91 days but still accruing interest. The following table indicates the type and level of non-accrual loans at the periods indicated below:

 

     September 30, 2015      December 31, 2014      September 30, 2014  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 1,427         1,501         407   

Home equity line of credit

     48         —           31   

Multi-family

     1,968         95         —     

Land

     1,680         215         301   

Non-residential real estate

     672         1,159         101   

Farmland

     168         115         12   

Consumer loans

     —           —           2   

Commercial loans

     1,195         90         263   
  

 

 

    

 

 

    

 

 

 

Total non-accrual loans

   $ 7,158         3,175         1,117   
  

 

 

    

 

 

    

 

 

 

 

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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, 2015:

 

                         General     Specific     Ending  
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2014      2015     2015      2015     2015     9/30/2015  

One-to-four family mortgages

   $ 1,198         (143     30         90        (215     960   

Home equity line of credit

     181         (92     6         86        —          181   

Junior liens

     14         —          4         (4     (6     8   

Multi-family

     85         —          —           —          (11     74   

Construction

     146         —          —           —          51        197   

Land

     1,123         (911     —           514        958        1,684   

Non-residential real estate

     2,083         (222     2         (375     (287     1,201   

Farmland

     461         —          —           —          (124     337   

Consumer loans

     494         (224     94         120        (134     350   

Commercial loans

     504         (152     46         163        (66     495   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 6,289         (1,744     182         594        166        5,487   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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, 2014:

 

                         General     Specific     Ending  
     Balance      Charge off     Recovery      Provision     Provision     Balance  
     12/31/2013      2014     2014      2014     2014     12/31/2014  

One-to-four family mortgages

   $ 2,048         (233     24         (304     (337     1,198   

Home equity line of credit

     218         (83     3         (37     80        181   

Junior liens

     39         —          9         (25     (9     14   

Multi-family

     466         —          —           (381     —          85   

Construction

     88         (139     9         58        130        146   

Land

     1,305         —          —           (74     (108     1,123   

Non-residential real estate

     2,719         (66     864         (1,368     (66     2,083   

Farmland

     510         —          —           542        (591     461   

Consumer loans

     541         (415     109         (13     272        494   

Commercial loans

     748         (296     94         (244     202        504   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 8,682         (1,232     1,112         (1,846     (427     6,289   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The table below presents loan balances at September 30, 2015, by loan classification allocated between past due, performing and non-performing:

 

                                        Impaired Loan
Currently Performing
        
     Currently
Performing
     30 – 89 Days
Past Due
     90 Days +
past due and
Accruing
     Non-
Accrual
Loans
     Special
Mention
     Substandard      Doubtful      Total  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 142,796         325         —           1,427         330         1,492         —           146,370   

Home equity line of credit

     32,703         —           —           48         —           225         —           32,976   

Junior liens

     1,746         —           —           —           36         16         —           1,798   

Multi-family

     20,272         —           —           1,968         —           1,126         —           23,366   

Construction

     32,669         —           —           —           —           —           —           32,669   

Land

     11,604         —           1,486         1,680         43         7,841         —           22,654   

Non-residential real estate

     147,938         —           —           672         4,158         4,346         —           157,114   

Farmland

     40,309         —           —           168         —           162         —           40,639   

Consumer loans

     18,142         29         —           —           —           204         —           18,375   

Commercial loans

     88,384         701         —           1,195         357         913         —           91,550   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 536,563         1,055         1,486         7,158         4,924         16,325         —           567,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents loan balances December 31, 2014, by loan classification allocated past due, performing and non-performing:

 

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

One-to-four family mortgages

   $ 145,372         757         1,501         203         2,718         —           150,551   

Home equity line of credit

     33,338         143         —           —           757         —           34,238   

Junior liens

     2,025         —           —           40         37         —           2,102   

Multi-family

     20,066         —           95         2,904         2,926         —           25,991   

Construction

     24,241         —           —           —           —           —           24,241   

Land

     14,674         654         215         362         10,749         —           26,654   

Non-residential real estate

     131,854         —           1,159         5,492         12,091         —           150,596   

Farmland

     40,057         64         115         516         2,122         —           42,874   

Consumer loans

     14,104         14         —           21         299         —           14,438   

Commercial loans

     71,191         55         90         325         2,493         —           74,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 496,922         1,687         3,175         9,863         34,192         —           545,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of September 30, 2015, and December 31, 2014, by portfolio segment and based on the impairment method as of September 30, 2015, and December 31, 2014.

 

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

September 30, 2015:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 56         266         143         29         51       $ 545   

Collectively evaluated for impairment

     439         1,615         1,469         1,120         299         4,942   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 495         1,881         1,612         1,149         350       $ 5,487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,108         9,521         8,442         3,208         204       $ 23,483   

Loans collectively evaluated for impairment

     89,442         45,802         212,677         177,936         18,171         544,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 91,550         55,323         221,119         181,144         18,375       $ 567,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

December 31, 2014:

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —           663         738         51         62       $ 1,514   

Collectively evaluated for impairment

     504         606         1,891         1,342         432         4,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 504         1,269         2,629         1,393         494       $ 6,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 2,583         10,964         18,508         5,013         299       $ 37,367   

Loans collectively evaluated for impairment

     71,571         39,931         200,953         181,878         14,139         508,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 74,154         50,895         219,461         186,891         14,438       $ 545,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mentioned, 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, 2015, September 30, 2014, and the year ended December 31, 2014, was 0.37%, (0.05%) and 0.02%, respectively. The ratios of allowance for loan losses to non-accrual loans at September 30, 2015, September 30, 2014, and December 31, 2014, were 76.7%, 728.1%, and 198.08%, respectively.

The determination of the allowance for loan losses is based on management’s analysis, performed on a quarterly basis. Various factors are considered, including the 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 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.

 

21


Table of Contents

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; (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 23, Watch loans are included with satisfactory loans and classified as Pass.

Special Mention loans 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 possible that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral less cost to sell if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired. At September 30, 2015, December 31, 2014, and September 30, 2014, the Company’s impaired loans totaled $23.5 million, $37.4 million and $38.4 million, respectively.

 

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Table of Contents

At September 30, 2015, December 31, 2014 and September 30, 2014, the Company’s specific reserve for impaired loans totaled $545,000, $1.5 million and $2.9 million respectively. Loans by classification type and the related allowance amounts at September 30, 2015, are as follows:

 

                                        Specific      Allowance  
                                 Allowance      for  

September 30, 2015

          Special      Impaired Loans             for      Performing  
     Pass      Mention      Substandard      Doubful      Total      Impairment      Loans  
                   (Dollars in Thousands)                       

One-to-four family mortgages

   $ 143,121         330         2,919         —           146,370         29         931   

Home equity line of credit

     32,703         —           273         —           32,976         —           181   

Junior liens

     1,746         36         16         —           1,798         —           8   

Multi-family

     20,272         —           3,094         —           23,366         —           74   

Construction

     32,669         —           —           —           32,669         —           197   

Land

     11,604         1,529         9,521         —           22,654         266         1,417   

Non-residential real estate

     147,938         4,158         5,018         —           157,114         143         1,058   

Farmland

     40,309         —           330         —           40,639         —           337   

Consumer loans

     18,171         —           204         —           18,375         51         300   

Commercial loans

     89,085         357         2,108         —           91,550         56         439   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 537,618         6,410         23,483         —           567,511         545         4,942   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans by classification type and the related allowance amounts at December 31, 2014, are as follows:

 

            Special      Impaired Loans             Specific
Allowance
for
    

Allowance

For

Performing

 
     Pass      Mention      Substandard      Doubtful      Total      Impairment      Loans  
December 31, 2014                            

One-to-four family mortgages

   $ 146,129         203         4,219         —           150,551         51         1,147   

Home equity line of credit

     33,481         —           757         —           34,238         —           181   

Junior lien

     2,025         40         37         —           2,102         —           14   

Multi-family

     20,066         2,904         3,021         —           25,991         —           85   

Construction

     24,241         —           —           —           24,241         —           146   

Land

     15,328         362         10,964         —           26,654         663         460   

Non-residential real estate

     131,854         5,492         13,250         —           150,596         738         1,345   

Farmland

     40,121         516         2,237         —           42,874         —           461   

Consumer loans

     14,118         21         299         —           14,438         62         432   

Commercial loans

     71,246         325         2,583         —           74,154         —           504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 498,609         9,863         37,367         —           545,839         1,514         4,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Impaired loans by classification type and the related valuation allowance amounts at September 30, 2015, were as follows:

 

                          For the nine month period ended  
     At September 30, 2015      September 30, 2015  
            Unpaid             Average      Interest  
Impaired loans with no specific allowance    Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

One-to-four family mortgages

   $ 2,212         2,212         —           2,343         55   

Home equity line of credit

     273         273         —           553         9   

Junior liens

     16         16         —           17         1   

Multi-family

     3,094         3,094         —           3,019         126   

Construction

     —           —           —           —           —     

Land

     7,290         7,290         —           8,014         350   

Farmland

     330         330         —           268         35   

Non-residential real estate

     4,297         4,297         —           7,819         253   

Consumer loans

     —           —           —           3         —     

Commercial loans

     1,908         1,908         —           1,707         72   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     19,420         19,420         —           23,743         901   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance:

           

One-to-four family mortgages

     707         707         29         710         30   

Home equity line of credit

     —           —           —           —           —     

Junior liens

     —           —           —           —           —     

Multi-family

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Land

     2,231         3,248         266         2,083         72   

Farmland

     —           —           —           —           —     

Non-residential real estate

     721         721         143         875         20   

Consumer loans

     204         204         51         191         —     

Commercial loans

     200         200         56         419         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,063         5,080         545         4,278         129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 23,483         24,500         545         28,021         1,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2014, were as follows:

 

     At December 31, 2014      For the year ended
December 31, 2014
 
Impaired loans with no specific allowance    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

One-to-four family mortgages

   $ 3,501         3,501         —           2,972         176   

Home equity line of credit

     757         757         —           690         35   

Junior liens

     37         37         —           39         2   

Multi-family

     3,021         3,021         —           1,342         190   

Construction

     —           —           —           29         —     

Land

     7,740         7,740         —           8,978         339   

Non-residential real estate

     12,057         12,057         —           8,672         669   

Farmland

     2,237         2,237            3,968         125   

Consumer loans

     51         51         —           36         3   

Commercial loans

     2,583         2,583         —           2,246         154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31,984         31,984         —           28,972         1,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a specific allowance

              

One-to-four family mortgages

   $ 718         718         51         1,434         44   

Home equity line of credit

     —           —           —           —           —     

Junior liens

     —           —           —           —           —     

Multi-family

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Land

     3,224         4,737         663         3,418         160   

Non-residential real estate

     1,193         1,258         738         3,617         69   

Farmland

     —           —           —           619         —     

Consumer loans

     248         248         62         355         —     

Commercial loans

     —           —           —           100         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,383         6,961         1,514         9,543         273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 37,367         38,945         1,514         38,515         1,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


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.

For the three month period ended September 30, 2015, the Company classified two additional loans as TDRs. At September 30, 2015, the two new TDR’s are interest only loans for six months. At September 30, 2015, the two notes that were previously classified as TDR have now begun to make monthly principal and interest payments but remain classified as TDR at this time. A summary of the activity in loans classified as TDRs for the nine month period ended September 30, 2015, is as follows:

 

     Balance at      New      Loss or      Loan    

Removed
from

(Taken to)

     Balance at  
     December 31, 2014      TDR      Foreclosure      Amortization     Non-accrual      September 30, 2015  
     (Dollars in Thousands)  

Non-residential real estate

   $ 3,284         2,149         —           (1     —           5,432   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total performing TDR

   $ 3,284         2,149         —           (1     —           5,432   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

26


Table of Contents

A summary of the activity in loans classified as TDRs for the twelve month period ended December 31, 2014, is as follows

 

     Balance at      New      Loss or      Transferred to    

Removed
from

(Taken to)

     Balance at  
     December 31, 2013      TDR      Foreclosure      Held For Sale     Non-accrual      December 31, 2014  
     (Dollars in Thousands)  

Non-residential real estate

   $ —           10,271         —           (6,987     —           3,284   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total performing TDR

   $ —           10,271         —           (6,987     —           3,284   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(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, 2015, December 31, 2014, and September 30, 2014, the composition of the Company’s balance of non-accrual loans, real estate owned and other assets owned are as follows:

 

     September 30, 2015     December 31, 2014     September 30, 2014  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 55        159        120   

Land

     943        1,768        1,834   

Non-residential real estate

     738        —          —     
  

 

 

   

 

 

   

 

 

 

Total other assets owned

   $ 1,736        1,927        1,954   
  

 

 

   

 

 

   

 

 

 

Total non-accrual loans

   $ 7,158        3,175        1,117   
  

 

 

   

 

 

   

 

 

 

Past due 90 days still accruing

     1,486        —          —     
  

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 10,380        5,102        3,071   
  

 

 

   

 

 

   

 

 

 

Non-performing assets / Total assets

     1.18     0.55     0.33
  

 

 

   

 

 

   

 

 

 

 

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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, 2015:

 

            Activity During 2015                     
     Balance        Reduction      Gain (Loss)     Balance  
     December 31, 2014      Foreclosures      Proceeds     in Values      on Sale     September 30, 2015  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 159         105         (194     —           (15     55   

Land

     1,768         —           (124     —           (701     943   

Non-residential real estate

     —           738         —          —           —          738   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,927         843         (318     —           (716     1,736   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following is a summary of the activity in the Company’s real estate and other assets owned for the year ended December 31, 2014:

 

     Activity During 2014  
     Balance                   Reduction     Gain (Loss)     Balance  
     December 31, 2013      Foreclosures      Sales     in Values     on Sale     December 31, 2014  
     (Dollars in Thousands)  

One-to-four family mortgages

   $ 350         461         (667     (5     20        159   

Land

     1,124         943         (123     (157     (19     1,768   

Non-residential real estate

     200         175         (328     —          (47     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,674         1,579         (1,118     (162     (46     1,927   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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(7) INVESTMENTS IN AFFILIATED COMPANIES

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

 

Summary Statements of Financial Condition    September 30, 2015      December 31, 2014  

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      Nine Month Period  
     Ended September 30,      Ended September 30,  
     2015      2014      2015      2014  

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

   $ 87         88       $ 264         261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 87         88       $ 264         261   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Summary Statement of Stockholders’ Equity

(For the nine month period ended September 30, 2015)

                           
     Trust
Preferred
Securities
     Common
Stock
     Retained
Earnings
     Total
Stockholders’
Equity
 

Beginning balances, December 31, 2014

   $ 10,000         310         —           10,310   

Net income

     —           —           264         264   

Dividends:

           

Trust preferred securities

     —           —           (256      (256

Common paid to HopFed Bancorp, Inc.

     —           —           (8      (8
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balances, September 30, 2015

   $ 10,000         310         —           10,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(8) FAIR VALUE OF ASSETS AND LIABILITIES

In September 2006, the FASB issued ASC 820-10, Fair Value Measurements. This Statement 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 Company’s $1.8 million book value trust preferred is the only investment security classified as a Level 3 asset. The Company determines the value of the security by computing the present value of all scheduled future cash flows and discount accretion to determine an estimated market value for the security.

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.

 

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Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at September 30, 2015, are summarized below:

 

     Total carrying      Quoted Prices      Significant         

September 30, 2015

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

Description

   September 30, 2015      (Level 1)      (Level 2)      (Level 3)  
Assets            

Available for sale securities

   $ 239,922         2,010         236,122         1,790   
Liabilities            

Interest rate swap

   $ 99         —           99         —     

The assets and liabilities measured at fair value on a recurring basis at December 31, 2014, are summarized below

 

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

December 31, 2014

   consolidated      Markets for      Observable      Unobservable  
     balance sheet at      Identical Assets      Inputs      Inputs  

Description

   December 31, 2014      (Level 1)      (Level 2)      (Level 3)  
Assets            

Available for sale securities

   $ 303,628         3,980         298,159         1,489   
Liabilities            

Interest rate swap

   $ 390         —           390         —     

 

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The assets and liabilities measured at fair value on a non-recurring basis are summarized below for September 30, 2015:

 

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

September 30, 2015

   consolidated      Markets for      Observable      Unobservable  
     balance sheet at      Identical Assets      Inputs      Inputs  

Description

   9/30/2015      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in Thousands)  
Assets            

Other real estate and other assets owned

   $ 1,736         —           —         $ 1,736   

Impaired loans, net of reserve of $545

   $ 3,518         —           —         $ 3,518   

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2014:

 

     Total carrying      Quoted Prices      Significant         

December 31, 2014

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

Description

   12/31/2014      (Level 1)      (Level 2)      (Level 3)  
Assets            

Other real estate and other assets owned

   $ 1,927         —           —         $ 1,927   

Impaired loans, net of reserve of $1,514

   $ 3,869         —           —         $ 3,869   

 

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The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the nine month periods ended September 30, 2015, and September 30, 2014, (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.

 

     2015      2014  

Nine month period ended September 30,

   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,

     289         —           —           —     

Accretion of previous discounted amounts

     12         —           —           —     

Purchases, issuances and settlements, net

     —           —           —           —     

Transfers in and/or out of Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value, September 30,

   $ 1,790         —           1,489         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The estimated fair values of financial instruments were as follows at September 30, 2015:

 

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

Financial Assets:

  

Cash and due from banks

   $ 18,110         18,110         18,110         —           —     

Interest-earning deposits

     5,647         5,647         5,647         —           —     

Securities available for sale

     239,922         239,922         2,010         236,122         1,790   

Federal Home Loan Bank stock

     4,428         4,428         —           4,428         —     

Loans held for sale

     5,298         5,298         —           5,298         —     

Loans receivable

     561,514         562,862         —           —           562,862   

Accrued interest receivable

     4,119         4,119         —           4,119         —     

Financial liabilities:

              

Deposits

     706,198         689,565         —           689,565         —     

Advances from borrowers for taxes and insurance

     1,077         1,077         —           1,077         —     

Advances from Federal Home Loan Bank

     25,000         24,979         —           24,979         —     

Repurchase agreements

     46,300         46,516         —           46,516         —     

Subordinated debentures

     10,310         10,099         —           —           10,099   

Off-balance-sheet liabilities:

              

Market value of interest rate swap

     99         99         —           99         —     

 

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The estimated fair values of financial instruments were as follows at December 31, 2014:

 

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

Financial Assets:

              

Cash and due from banks

   $ 34,389         34,389         34,389         —           —     

Interest-earning deposits

     6,050         6,050         6,050         —           —     

Securities available for sale

     303,628         303,628         3,980         298,159         1,489   

Federal Home Loan Bank stock

     4,428         4,428         —           4,428         —     

Loans held for sale

     1,444         1,444         —           1,444         —     

Loans receivable

     539,264         537,493         —           —           537,493   

Accrued interest receivable

     4,576         4,576         —           4,576         —     

Financial liabilities:

              

Deposits

     731,308         714,750         —           714,750         —     

Advances from borrowers for taxes and insurance

     513         513         —           513         —     

Advances from Federal Home Loan Bank

     34,000         34,217         —           34,217         —     

Repurchase agreements

     57,358         57,688         —           57,688         —     

Subordinated debentures

     10,310         10,099         —           —           10,099   

Off-balance-sheet liabilities:

              

Market value of interest rate swap

     390         390         —           390         —     

 

(9) 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.

 

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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, 2015, or the year ended December 31, 2014.

In October of 2008, the Company entered into an interest rate swap agreement for a term of seven years and an amount of $10.0 million. The Company pays 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 Company. At September 30, 2015, and December 31, 2014, the cost of the Company to terminate the cash flow hedge was approximately $99,000 and $390,000, respectively. The interest rate swap agreement expires October 8, 2015.

 

(10) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is effective for the Corporation beginning January 1, 2016, though early adoption is permitted. ASU 2015-01 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3)

 

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Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the provisions of ASU No. 2015-02 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016; however, the FASB has agreed to a one year deferral of the effective date to December 15, 2017. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The guidance in this update eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance is intended to reduce complexity in financial reporting. The elimination of the restatement requirement should simplify financial reporting for many entities. However, recognizing the entire impact of a measurement period adjustment in a single reporting period may introduce earnings volatility and reduce comparability between periods when the adjustments are material. The accounting changes in this update are effective for public companies for annual periods, and the interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted for financial statements that have not been issued. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

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

 

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(11) 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 34% 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.

 

(12) OTHER ASSETS

The Company has invested in two flow-through limited liability entities that manage and invest in affordable housing projects that qualify for historic, low-income and elderly housing tax credits. At September 30, 2015, the Company’s total investment in each entity was $422,000 and $1.0 million, respectively. The Company has no future capital commitments to either entity. The amounts recognized in net income for these investments for the three and nine month periods below include:

 

     For the three months      For the nine months  
     ended September 30,      ended September 30,  
     2015      2014      2015      2014  

Investment loss included in pre-tax income

   $ 55         51       $ 165         153   

Tax credits recognized in provision for income taxes

   $ 24         20       $ 72         60   

 

(13) ESOP PLAN

All Company employees participate in the 2015 HopFed Bancorp, Inc. Employee Stock Ownership Plan (ESOP). The ESOP purchased 600,000 shares of the Company’s common stock from the Company on March 2, 2015, at $13.14 per share. The ESOP borrowed $7.9 million from the Company for the purchase of the stock, using the 600,000 shares of common stock as collateral. The Company makes discretionary contributions to the ESOP. The ESOP utilizes these contributions along with the dividends on the 600,000 held by the ESOP to repay the loan from the Company. When loan payments are made, ESOP shares are released based on reduction in the principal balance of the loan.

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

 

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At September 30, 2015, the ESOP has not made a loan payment to the Company. At September 30, 2015, the Company has an accrued ESOP contribution liability of approximately $630,000. At September 30, 2015, the Company has calculated that our current accrual would be sufficient to release 37,063 shares of ESOP shares to participants. At September 30, 2015, shares held by the ESOP were as follows:

 

Accrued to allocate to Participants

     37,063   

Unearned ESOP shares

     562,937   
  

 

 

 

Total ESOP shares

     600,000   
  

 

 

 

Fair value of unearned shares

   $ 6,727,097   
  

 

 

 

 

(14) COMMITMENTS AND CONTINGENCIES

At September 30, 2015, the Company had $19.7 million in outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $109.3 million. Management believes that the Company’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, 2015, totaled $200.1 million. Management believes that a significant percentage of such deposits will remain with the Company. At September 30, 2015, the Company has deposit balances totaling $30.2 million that exceed FDIC insurance limits without additional collateral pledged.

The Company’s FHLB borrowings are secured by a blanket security agreement pledging the Company’s 1-4 family first mortgage loans and non-residential real estate loans. At September 30, 2015, the Company has pledged all eligible 1-4 family first mortgages.

At September 30, 2015, the Company has outstanding borrowings of $25.0 million from the FHLB. At September 30, 2015, the Company’s has a $4.0 million borrowing that matures on March 17, 2016, with an interest rate of 5.34% and $6.0 million that matures on July 6, 2018, with an interest rate of 1.18%. The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $13.0 million secured by the Company’s loan portfolio to secure select municipal deposits with balances in excess of FDIC insurance limits.

At September 30, 2015, the Company had $45.6 million in additional borrowing capacity with the FHLB. The Company’s borrowing capacity with the FHLB includes an overnight line of credit of $30.0 million. At September 30, 2015, the Company’s had $15.0 million outstanding against the overnight line of credit. The Company has an $8.0 million unsecured overnight borrowing capacity from a correspondent bank.

 

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The Company’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 Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

At September 30, 2015, the Company had the following off-balance sheet commitments (in thousands):

 

Standby letters of credit

   $ 47   

Unused home equity lines of credit

   $ 30,034   

Unused commercial lines of credit

   $ 51,767   

Unused unsecured personal lines of credit

   $ 27,458   

Unfunded commitments on commercial loans

   $ 19,726   

 

(15) REGULATORY MATTERS

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory capital rules applicable to Heritage Bank USA, Inc. and HopFed Bancorp, Inc. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (Basel III) and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8%; (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

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

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

The Federal Reserve has adopted regulations applicable to bank holding companies with assets over $10 billion that require such holding companies and banks to conduct annual stress tests and report the results to the applicable regulators and publicly disclose a summary of certain capital information and results including pro forma changes in regulatory capital ratios. The Board of Directors and senior management are required to consider the results of the stress test in the normal course of business, including but not limited to capital planning and an assessment of capital adequacy in accordance with management’s policies. The FDIC has adopted all guidelines applicable to state nonmember banks in each case.

At September 30, 2015, the Company and 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, 2015:

 

     Company     Bank  
     Amount      Percent     Amount      Percent  
     (Dollars in Thousands)  

Common equity tier 1 ratio

   $ 95,063         16.34   $ 92,557         15.90

Tier 1 leverage ratio

   $ 95,063         10.92   $ 92,557         10.67

Tier 1 risk-based capital ratio

   $ 95,063         16.34   $ 92,557         15.90

Total risk based capital ratio

   $ 100,550         17.20   $ 98,044         16.84

 

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

Critical Accounting Policies

The consolidated condensed financial statements as of September 30, 2015, and December 31, 2014, and for the three and nine month periods ended September 30, 2015, and September 30, 2014, 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 2014 Annual Report to Stockholders on Form 10-K.

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

Comparison of Financial Condition at September 30, 2015, and December 31, 2014

At September 30, 2015, total assets declined $53.1 million, to $882.7 million as compared to $935.8 million at December 31, 2014 Securities available for sale declined from $303.6 million at December 31, 2014, to $239.9 million at September 30, 2015. At September 30, 2015, and December 31, 2014, securities classified as “available for sale” had an amortized cost of $234.1 million and $297.8 million, respectively. The Company utilized the cash flow from its investment portfolio to reduce its level of time deposits, Federal Home Loan Bank (“FHLB”) advances, customer repurchase account balances and the purchase of $11.4 million in treasury stock.

The Company’s holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost was $4.4 million at December 31, 2014, and September 30, 2015. Total Federal Home Loan Bank “FHLB” borrowings declined $9.0 million, from $34.0 million at December 31, 2014, to $25.0 million at September 30, 2015. Total repurchase balances decreased from $57.4 million at December 31, 2014, to $46.3 million at September 30, 2015. Net loans totaled $561.5 million and $539.3 million at September 30, 2015, and December 31, 2014, respectively.

 

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At September 30, 2015, deposits declined to $706.2 million from $731.3 million at December 31, 2014. At September 30, 2015, time deposits were $313.5 million, representing a decline of $18.4 million as compared to December 31, 2014. The average cost of all deposits during the three and nine month periods ended September 30, 2015, and September 30, 2014, was 0.69% and 0.78%, respectively.

At September 30, 2015, the Company has $65.2 million in time deposits that have a weighted average cost of 2.52% that mature between December 1, 2015, and February 28, 2016. The Company’s eight year interest rate swap, used to fix the cost of the Company’s subordinated debentures at 7.27%, matured on October 8, 2015. Beginning January 1, 2016, the cost of the Company’s subordinated debt will becoming a floating rate equal to three month Libor plus 3.10%. The Company has a $4.0 million FHLB advance with a current coupon of 5.34% that will mature in March 2016.

Comparison of Operating Results for the Nine Month Periods Ended September 30, 2015 and 2014.

Net Income. The Company’s net income was $1.7 million for the nine month period ended September 30, 2015, as compared to net income of $3.2 million for the nine month period ended September 30, 2014. The decline in the Company’s results for the nine month period ended September 30, 2015, was largely the result of a negative provision for loan loss expense of $773,000 in the nine month period ended September 30, 2014, as compared to a $760,000 provision for loan loss expense for the nine month period ended September 30, 2015. For the nine month period ended September 30, 2015, the Company’s combined losses and expenses related to other real estate owned increased by $769,000 as compared to the nine month period ended September 30, 2014.

Net Interest Income. Net interest income for the nine month period ended September 30, 2015, was $20.2 million, compared to $19.5 million for the nine month period ended September 30, 2014. The increase in net interest income for the nine months ended September 30, 2015, as compared to September 30, 2014, was largely the result of a $2.0 million decline in the Company’s interest expense.

For the nine months ended September 30, 2015, the average yield on loans was 4.58%, as compared to 4.92% for the nine month period ended September 30, 2014. For the each of the nine month period’s ended September 30, 2015, and September 30, 2014, income on taxable securities was $5.0 million. For the nine month period ending September 30, 2015, the tax equivalent yield on taxable and tax free securities were 3.16% and 4.68%, respectively, as compared to 2.59% and 4.98% for the nine month period ended September 30, 2014, respectively.

For the nine month periods ended September 30, 2015, and September 30, 2014, the Company’s cost of interest bearing liabilities was 0.95% and 1.25%, respectively. The lower cost of interest bearing liabilities was largely the result of the prepayment of FHLB advances in December 2014. For the nine month period ended September 30, 2015, and September 30, 2014, the Company’s net interest margin was 3.40% and 3.12%, respectively.

 

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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, 2015, and September 30, 2014. 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. 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 $625,000 for the nine month period ended September 30, 2015, and $774,000 for the nine month period ended September 30, 2014, for a tax equivalent rate using a cost of funds rate of 0.95% for September 30, 2015, and 1.25% for September 30, 2014. The table adjusts tax-free loan income by $5,000 for September 30, 2015, and $9,000 for September 30, 2014, respectively, for a tax equivalent rate using the same cost of funds rate:

 

     Average      Income &     Average     Average      Income &     Average  
     Balance      Expense     Rates     Balance      Expense     Rates  
     09/30/2015      09/30/2015     09/30/2015     09/30/2014      09/30/2014     09/30/2014  

Loans

   $ 550,047       $ 18,900        4.58   $ 535,659       $ 19,752        4.92

Investments AFS taxable

     208,721         4,953        3.16     259,615         5,035        2.59

Investments AFS tax free

     53,859         1,892        4.68     63,321         2,363        4.98

Interest earning deposits

     5,096         11        0.29     9,819         19        0.26
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest earning assets

     817,723         25,756        4.20     868,414         27,169        4.17
     

 

 

   

 

 

      

 

 

   

 

 

 

Other assets

     74,136             73,550        
  

 

 

        

 

 

      

Total assets

   $ 891,859           $ 941,964        
  

 

 

        

 

 

      

Retail time deposits

   $ 289,157         2,516        1.16   $ 307,307         2,786        1.21

Brokered deposits

     32,706         279        1.14     39,741         401        1.35

Interest bearing checking accounts

     195,929         810        0.55     191,925         981        0.68

MMDA and savings accounts

     95,016         146        0.20     96,278         145        0.20

FHLB borrowings

     17,315         206        1.59     44,985         1,292        3.83

Repurchase agreements

     43,726         368        1.12     41,386         722        2.33

Subordinated debentures

     10,310         553        7.15     10,310         551        7.13
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     684,159         4,878        0.95     731,932         6,878        1.25
     

 

 

   

 

 

      

 

 

   

 

 

 

Non-interest bearing deposits

     112,198             105,325        

Other non-interest bearing liabilities

     4,363             5,026        

Stockholders’ equity

     91,139             99,681        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 891,859           $ 941,964        
  

 

 

        

 

 

      

Interest rate spread

        20,878        3.25        20,291        2.92
     

 

 

   

 

 

      

 

 

   

 

 

 

Net interest margin

        3.40          3.12  
     

 

 

        

 

 

   

 

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Interest Income. For the nine month periods ended September 30, 2015, and September 30, 2014, the Company’s total interest income was $25.1 million and $26.4 million, respectively. For the nine month period ended September 30, 2015, and September 30, 2014, interest income on loans was $18.9 million and $19.7 million, respectively. The average balance of loans receivable increased from $535.7 million for the nine month period ended September 30, 2014, to $550.0 million for the nine month period ended September 30, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 118.7% for the nine months ended September 30, 2014, to 119.5% for the nine months ended September 30, 2015.

Interest Expense. Interest expense declined $2.0 million for the nine month period ended September 30, 2015, as compared to the nine month period ended September 30, 2014. For the nine month period ending September 30, 2015, the Company’s interest expense on FHLB advances was $206,000, compared to $1.3 million for the nine month period ended September 30, 2014. The Company’s decision to prepay $35.9 million in FHLB advances was the most significant contributing factor in the reduction of the Company’s borrowing expense. The average balance of funds borrowed from the FHLB declined to $17.3 million, from $45.0 million for the nine months ended September 30, 2014. The average cost of FHLB borrowing were 3.83% for the nine months ended September 30, 2014, and 1.59% for the nine months ended September 30, 2015. For the nine month period ended September 30, 2015, the average balance of interest bearing retail time deposits declined $18.1 million to $289.2 million, as compared to $307.3 million for the nine month period ended September 30, 2014.

The average cost of brokered deposits declined from 1.35% for the nine months ended September 30, 2014, to 1.14% for the nine months ended September 30, 2015. Over the same period, the average balance of brokered deposits declined $7.0 million to $32.7 million for the nine month period ended September 30, 2015, as compared to the nine month period ended September 30, 2014. For the nine month period ended September 30, 2015, the Company’s total cost of deposits was 0.69% as compared to 0.78% for the nine month period ended September 30, 2014.

The average balance of repurchase agreements increased from $41.4 million for the nine months ended September 30, 2014, to $43.7 million for the nine month period ended September 30, 2015. The average cost of repurchase agreements was 2.33% for the nine months ended September 30, 2014, and 1.12% for the nine month period ended September 30, 2015. The reduction in the cost of repurchase agreements was primarily from the maturity of a $10.0 million long term wholesale repurchase agreement that matured in September 2014 at a cost of 4.28%.

 

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Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $760,000 in provision for loan loss was required for the nine month period ended September 30, 2015.

For the nine month period ended September 30, 2014, the Company determined that it could record a $773,000 reduction in the allowance for loan loss account. The reduction in the allowance account for the nine month period ended September 30, 2014, was the result of the Company’s improved credit quality, a reduction in the level of adversely classified assets and improving local and national economy.

Non-Interest Income. There was a $219,000 decline in non-interest income in the nine month period ended September 30, 2015, as compared to the same period in 2014. The decline in non-interest income was largely the result of a decline in service charge income and financial services income. For the nine month period ended September 30, 2015, the Company earned $539,000 in financial services income as compared to $737,000 during the nine month period ended September 30, 2014. For the nine month ended September 30, 2015, the Company’s service charge income was $2.2 million as compared to $2.5 million for the nine month period ended September 30, 2014. The Company’s mortgage origination income continues to improve, as we earned $865,000 in the nine month period ended September 30, 2015, as compared to $507,000 in the nine month period ended September 30, 2014.

Non-Interest Expenses. There was a $923,000 increase in total non-interest expenses in the nine-month period ended September 30, 2015, as compared to the same period in 2014. The most significant change in non-interest expenses was a $556,000 increase in losses on the sale of other real estate owned, a $213,000 increase in expenses related to other real estate owned and a $780,000 increase in salaries and benefit expense for the nine month period ended September 30, 2015, as compared to the nine month period ended September 30, 2014. For the nine month period ended September 30, 2015, the increase in salaries and benefits expense was largely the result of payroll expenses related to the opening of the Nashville, Tennessee, loan production office in the fourth quarter of 2014 as well as a company-wide increase in healthcare cost.

Income Taxes. The effective tax rate for the nine-month periods ending September 30, 2015, was 10.2% due to the lower levels of taxable income. For the nine month period ended September 30, 2014, the Company’s tax rate was 16.8% due to the higher levels of overall gross income.

 

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Comparison of Operating Results for the Three Month Periods Ended September 30, 2015 and 2014.

Net Income. For the three month period ended September 30, 2015, the Company experienced net income of $510,000, as compared to net income of $2.0 million for the three month period ended September 30, 2014. The decline in net income as compared to the three month period ended September 30, 2014, was significantly influenced by an $892,000 recapture in provision for loan losses as compared to the three month period ended September 30, 2015.

Net Interest Income. Net interest income for the three month period ended September 30, 2015, was $6.4 million, compared to $6.8 million for the three month period ended September 30, 2014. The decline in net interest income for the three months ended September 30, 2015, as compared to September 30, 2014, was due to a $539,000 decline in the Company’s interest income on loans, a $116,000 decline in tax free securities income and a $325,000 decline in the Company’s income on taxable securities available for sale. The decline of interest income was partially offset by a $553,000 decline in the Company’s interest expense.

For the three months ended September 30, 2015, the average yield on loans was 4.59%, as compared to 5.16% for the three month period ended September 30, 2014. For the three month periods ended September 30, 2015, and September 30, 2014, income on taxable investments were $1.2 million and $1.6 million, respectively. For the three month period ending September 30, 2015, the tax equivalent yield on taxable and tax free securities were 2.52% and 4.66%, respectively, as compared to 2.35% and 4.69% for the three month period ended September 30, 2014, respectively.

For the three month periods ended September 30, 2015, and September 30, 2014, the Company’s cost of interest bearing liabilities was 0.97% and 1.17%, respectively. For the three month period ended September 30, 2015, and September 30, 2014, the Company’s net interest margin was 3.25% and 3.22%, 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, 2015, and September 30, 2014. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three month periods.

 

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Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $197,000 for September 30, 2015, and $251,000 for September 30, 2014, for a tax equivalent rate using a cost of funds rate of 0.97% for September 30, 2015, and 1.20% for September 30, 2014. The table adjusts tax-free loan income by $3,000 for the three month periods ended September 30, 2015 and September 30, 2014, respectively, for a tax equivalent rate using the same cost of funds rate:

 

     Average      Income and     Average     Average      Income and     Average  
     Balance      Expense     Rates     Balance      Expense     Rates  
     9/30/2015      9/30/2015     9/30/2015     9/30/2014      9/30/2014     9/30/2014  
     (Table Amounts in Thousands, Except Percentages)  

Loans

   $ 555,792         6,377        4.59   $ 535,774         6,916        5.16

Investments AFS taxable

     196,524         1,237        2.52     265,853         1,562        2.35

Investment AFS tax free

     51,063         595        4.66     65,298         765        4.69

Interest bearing deposits

     6,305         3        0.19     10,917         5        0.18
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest earning assets

     809,684         8,212        4.06     877,842         9,248        4.21
     

 

 

   

 

 

      

 

 

   

 

 

 

Other assets

     67,860             75,617        
  

 

 

        

 

 

      

Total assets

   $ 877,544           $ 953,459        
  

 

 

        

 

 

      

Retail time deposits

     286,516         840        1.17     320,008         896        1.12

Brokered deposits

     30,149         89        1.18     42,605         110        1.03

MMDA and Savings

     94,679         45        0.19     94,522         49        0.21

Interest bearing checking

     191,903         272        0.57     190,329         299        0.63

FHLB borrowings

     10,685         71        2.66     42,970         430        4.00

Repurchase agreements

     47,124         130        1.10     46,765         228        1.95

Subordinated debentures

     10,310         186        7.22     10,310         174        6.75
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     671,366         1,633        0.97     747,509         2,186        1.17
     

 

 

   

 

 

      

 

 

   

 

 

 

Non-interest bearing deposits

     114,319             103,112        

Other liabilities

     4,574             4,660        

Stockholders’ equity

     87,285             98,178        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 877,544           $ 953,459        
  

 

 

        

 

 

      

Net interest income

        6,579             7,062     
     

 

 

        

 

 

   

Interest rate spread

          3.09          3.04
       

 

 

        

 

 

 

Net interest margin

        3.25          3.22  
     

 

 

        

 

 

   

 

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Interest Income. For the three month periods ended September 30, 2015, and September 30, 2014, the Company’s total interest income was $8.0 million and $9.0 million, respectively. For the three month period ended September 30, 2015, interest income on loans was $6.4 million, a $539,000 decline as compared to the three month period ended September 30, 2014. The average balance of loans receivable increased from $535.8 million for the three month period ended September 30, 2014, to $555.8 million for the three month period ended September 30, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 117.4% for the three month period ended September 30, 2014, to 120.6% for the three month period ended September 30, 2015.

Interest Expense. Interest expense declined $553,000 for the three months ended September 30, 2015, as compared to the three month period ended September 30, 2014. The decline was attributable to the prepayment of FHLB advances and an increase in lower cost interest bearing checking accounts. The average balance of funds borrowed from the FHLB declined by $32.3 million, from $43.0 million for the three months ended September 30, 2014, to $10.7 million for the three month period ended September 30, 2015. The average cost of borrowed funds from the FHLB was 4.00% for the three months ended September 30, 2014, and 2.66% for the three months ended September 30, 2015, respectively. The average balance of repurchase agreements increased from $46.8 million for the three months ended September 30, 2014, to $47.1 million for the three month period ended September 30, 2015. The average cost of repurchase agreements was 1.95% for the three months ended September 30, 2014, and 1.10% for the three month period ended September 30, 2015.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that it could record a $892,000 reduction in the allowance for loan loss account during three month period ended September 30, 2014, compared to a $275,000 provision for loan loss expense for the three month period ended September 30, 2015. The reduction in the allowance for loan loss account was the result of improved credit quality, enhanced economic trends, and lower levels of assets with specific reserves.

Non-Interest Income. The Company’s non-interest income declined by $457,000 in the three month period ended September 30, 2015, as compared to the three month period ended September 30, 2014. The decline in non-interest income was partly the result of a $191,000 decline in gains realized on the sale of investments. The Company’s income for services charges was $750,000 for the three month period ended September 30, 2015, compared to $879,000 for the same period in 2014. The Company’s financial services commission declined from $363,000 for the three month period ended September 30, 2014, to $186,000 for the three month period ended September 30, 2015. For the three month period ended September 30, 2015, the Company earned $345,000 in mortgage origination income as compared to $316,000 during the three month period ended September 30, 2014.

 

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Table of Contents

Non-Interest Expenses. There was a $10,000 decrease in total non-interest expenses in the three month period ended September 30, 2015, as compared to the three month period ended September 30, 2014. The most significant change in non-interest expenses was a $231,000 increase in expenses related to real estate owned and a $79,000 increase in salary and benefit expense for the three month period ended September 30, 2015, as compared to the three month period ended September 30, 2014. The increase in salaries and benefits expense is largely the result of payroll related to the Company’s new loan production office in Nashville and higher health insurance cost.

Income Taxes. For the three month period ended September 30, 2015, the Company’s effective tax rate was negative due to a high level of tax free income, tax credits available to the Company and relatively low level of net income. The effective tax rate for the three month period ended September 30, 2014, was 22.8%.

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.

The Company uses brokered deposits to supplement its asset liability need for longer term deposits at reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement and on its table on pages 44 and 48 that provides the yields and cost of assets and liabilities.

At September 30, 2015, the Company’s brokered deposits consisted of the following:

 

Issue Date

   Interest Rate     Balance      Maturity Date  

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         10/06/2016   

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) 

1/9/2015

     1.00     2,077,000         4/9/2017   

7/27/2012

     1.00     1,500,000         7/27/2017   

1/3/2013

     1.00     3,030,000         1/3/2018   

1/9/2015

     1.20     2,004,000         1/9/2018   
    

 

 

    

Total

     $ 29,083,000      
    

 

 

    

 

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

 

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Forward-Looking Statements

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

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

The effects of rising interest rates are discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actual results for the year ending December 31, 2015, 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, 2015, indicates that changes in interest rates are less likely to result in significant changes in the Company’s annual net interest income. A summary of the Company’s analysis at September 30, 2015, for the twelve month period ending September 30, 2016, is as follows:

 

     Down 1.00%      No change      Up 1.00%      Up 2.00%      Up 3.00%  
     (Dollars In Thousands)  

Net interest income

   $ 26,045       $ 27,324       $ 27,967       $ 28,577       $ 29,104   

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Senior Vice President, Chief Financial Officer and Treasurer, 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, 2015.

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 nine months ended September 30, 2015, 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 includes (as such term’s defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Act during the Company’s fiscal quarter ended September 30, 2015, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Various legal proceedings to which the Company or its subsidiaries is a party arise from time to time in the normal course of business. There are no material pending legal proceedings to which the Company or its subsidiaries is a party or of which any of their property is the subject.

 

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, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

N/A

 

  (a) Use of Proceeds. Not applicable

 

  (b) Repurchase of Equity Securities

 

                   Total number      Maximum  
                   of shares      Number of  
                   Purchased      Shares that  
     Total             as part of      Yet may be  
     Number of      Average      Publically      Purchased Under  
     Shares      Price Paid      Announced      the Program at  

Period

   Purchased      Per Share      Programs      the end of the period  

July 1, 2015, to July 31, 2015

     —           —           1,573,191         504,725   

August 1, 2015, to August 31, 2015

     17,495       $ 11.64         1,590,686         487,230   

September 1, 2015, to September 30, 2015

     48,000       $ 11.52         1,638,686         439,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     65,495       $