Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2017

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  ☒    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  ☒    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”, “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act: (Check one)

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company filer		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of May 5, 2017, the Registrant had outstanding 6,717,247 shares of the Registrant’s Common stock.

 

 

 

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CONTENTS

HOPFED BANCORP, INC.

 

				PAGE
PART I. FINANCIAL INFORMATION
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.		Financial Statements
		Consolidated Condensed Statements of Financial Condition as of March  31, 2017 (unaudited) and December 31, 2016			2
		Consolidated Condensed Statements of Income for the Three Month Periods Ended March 31, 2017 and March 31, 2016 (unaudited)			4
		Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three Month Periods Ended March 31, 2017 and March 31, 2016 (unaudited)			6
		Consolidated Condensed Statement of Stockholders’ Equity for the Three Month Periods Ended March 31, 2017 and March 31, 2016 (unaudited)			7
		Consolidated Condensed Statements of Cash Flows for the Three Month Periods Ended March 31, 2017 and March 31, 2016 (unaudited)			9
		Notes to Unaudited Consolidated Condensed Financial Statements			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			50
Item 4.		Controls and Procedures			51
PART II OTHER INFORMATION
Item 1.		Legal Proceedings			52
Item 1A.		Risk Factors			52
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3.		Defaults Upon Senior Securities			53
Item 4.		Mine Safety Disclosures			53
Item 5.		Other Information			53
Item 6.		Exhibits			53
SIGNATURES					54

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

 

		March 31, 2017				December 31, 2016
		(unaudited)
Assets
Cash and due from banks		$	30,663				21,779
Interest-bearing deposits in banks			19,408				3,970
Cash and cash equivalents			50,071				25,749
Federal Home Loan Bank stock, at cost			4,428				4,428
Securities available for sale			207,580				209,480
Loans held for sale			1,091				1,094
Loans receivable, net of allowance for loan losses of $6,164 at March 31, 2017, and $6,112 at December 31, 2016			615,480				604,286
Accrued interest receivable			3,121				3,799
Foreclosed assets, net			2,111				2,397
Bank owned life insurance			10,120				10,662
Premises and equipment, net			23,225				23,461
Deferred tax assets			2,918				3,052
Other assets			3,162				3,078
Total assets		$	923,307				891,486
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts		$	136,333				131,145
Interest-bearing accounts
Interest bearing checking accounts			217,562				209,347
Savings and money market accounts			100,009				99,312
Other time deposits			311,839				293,078
Total deposits			765,743				732,882
Advances from Federal Home Loan Bank			11,000				11,000
Repurchase agreements			45,492				47,655
Subordinated debentures			10,310				10,310
Advances from borrowers for taxes and insurance			867				766
Accrued expenses and other liabilities			2,434				2,445
Total liabilities			835,846				805,058

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

 

		March 31, 2017				December 31, 2016
		(unaudited)
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at March 31, 2017 and December 31, 2016			—				—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,963,378 issued and 6,716,549 outstanding at March 31, 2017 and 7,963,378 issued and 6,717,242 outstanding at December 31, 2016			80				80
Additional paid-in-capital			58,705				58,660
Retained earnings			49,721				49,035
Treasury stock, at cost (1,246,829 shares at March 31, 2017 and 1,246,136 shares at December 31, 2016)			(15,356	)			(15,347	)
Unearned Employee Stock Ownership Plan (“ESOP”) Shares, at cost (488,161 shares at March 31, 2017 and 498,346 shares at December 31, 2016)			(6,414	)			(6,548	)
Accumulated other comprehensive income			725				548
Total stockholders’ equity			87,461				86,428
Total liabilities and stockholders’ equity		$	923,307				891,486

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

 

		For the Three Month Periods Ended March 31,
		2017				2016
Interest and dividend income:
Loans		$	6,736				6,465
Investment in securities, taxable			1,118				1,247
Nontaxable securities available for sale			283				353
Interest-bearing deposits			23				16
Total interest and dividend income			8,160				8,081
Interest expense:
Deposits			1,167				1,095
FHLB borrowings			32				73
Repurchase agreements			103				143
Subordinated debentures			104				94
Total interest expense			1,406				1,405
Net interest income			6,754				6,676
Provision for loan losses			291				458
Net interest income after provision for loan losses			6,463				6,218
Non-interest income:
Service charges			804				677
Merchant card			302				291
Mortgage origination income			334				368
Gain on sale of investments			2				291
Income from bank owned life insurance			235				84
Income from financial services			140				133
Other operating income			479				176
Total non-interest income			2,296				2,020

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

 

		For the Three Month Periods Ended March 31,
		2017				2016
Non-interest expenses:
Salaries and benefits		$	4,236				3,988
Occupancy expense			775				787
Data processing			764				727
State deposit tax			231				248
Professional services			348				335
Advertising			381				320
Foreclosure, net			108				68
Other operating expenses			846				1,210
Total non-interest expense			7,689				7,683
Income before income tax expense			1,070				555
Income tax expense			135				46
Net income			935				509
Net income per share:
Basic		$	0.15			$	0.08
Diluted		$	0.15			$	0.08
Dividend per share		$	0.04			$	0.04
Weighted average shares outstanding - basic			6,218,706				6,297,755
Weighted average shares outstanding - diluted			6,218,706				6,297,755

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)

 

		For the Three Month Periods Ended March 31,
		2017				2016
Net income		$	935				509
Other comprehensive income, net of tax:
Unrealized gain on non-other than temporary impaired investment securities (OTTI) available for sale, net of taxes of ($121) and ($897), respectively			235				1,745
Unrealized gain (loss) on OTTI securities, net of taxes of $29 and ($39), respectively			(57	)			72
Reclassification adjustment for gains included in net income, net of taxes of $1 and $99, respectively			(1	)			(192	)
Total other comprehensive income			177				1,625
Comprehensive income		$	1,112				2,134

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Three Month Period Ended March 31, 2017

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

																										Accumulated
										Additional								Common				Unearned				Other				Total
		Common				Common				Paid in				Retained				Treasury				ESOP				Comprehensive				Stockholders’
		Shares				Stock				Capital				Earnings				Shares				Shares				Income				Equity
Balance at December 31, 2016			6,717,242			$	80				58,660				49,035				(15,347	)			(6,548	)			548				86,428
Consolidated net income			—				—				—				935				—				—				—				935
Repurchase of treasury stock			(693	)			—				—				—				(9	)			—				—				(9	)
ESOP shares committed to be released			—				—				—				—				—				134				—				134
Change in price of ESOP shares			—				—				14				—				—				—				—				14
Compensation expense, restricted stock awards			—				—				31				—				—				—				—				31
Net change in unrealized gain on securities available for sale, net of income taxes of ($91)			—				—				—				—				—				—				177				177
Cash dividend to common stockholders			—				—				—				(249	)			—				—				—				(249	)
Balance March 31, 2017			6,716,549			$	80				58,705				49,721				(15,356	)			(6,414	)			725				87,461

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Three Month Period Ended March 31, 2016

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

																										Accumulated
										Additional								Common				Unearned				Other				Total
		Common				Common				Paid in				Retained				Treasury				ESOP				Comprehensive				Stockholders’
		Shares				Stock				Capital				Earnings				Shares				Shares				Income				Equity
Balance at December 31, 2015			6,865,811			$	79				58,604				47,124				(13,471	)			(7,180	)			2,474				87,630
Consolidated net income			—				—				—				509				—				—				—				509
Issuance of restricted stock			10,609				1				—				—				—				—				—				1
Repurchase of treasury stock			(75,657	)			—				—				—				(901	)			—				—				(901	)
Change in price of ESOP shares			—				—				(16	)			—				—				—				—				(16	)
ESOP shares committed to be released			—				—				—				—				—				141				—				141
Compensation expense, restricted stock awards			—				—				30				—				—				—				—				30
Net change in unrealized gain on securities available for sale, net of income taxes of ($837)			—				—				—				—				—				—				1,625				1,625
Cash dividend to common stockholders			—				—				—				(251	)			—				—				—				(251	)
Balance March 31, 2016			6,800,763			$	80				58,618				47,382				(14,372	)			(7,039	)			4,099				88,768

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

		For the Three Month Periods Ended March 31,
		2017				2016
Cash flows from operating activities:
Net cash provided by operating activities		$	3,180				817
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities available for sale			15,598				16,764
Purchase of securities available for sale			(13,728	)			(15,021	)
Net (increase) decrease in loans			(11,528	)			3,259
Proceeds from sale of foreclosed assets			329				282
Purchase of premises and equipment			(70	)			(313	)
Net cash provided by (used in) investing activities			(9,399	)			4,971
Cash flows from financing activities:
Net increase in demand deposits			14,100				15,048
Net increase (decrease) in time and other deposits			18,761				(29,501	)
Increase in advances from borrowers for taxes and insurance			101				140
Advances from Federal Home Loan Bank			22,000				—
Repayment of advances from Federal Home Loan Bank			(22,000	)			(4,000	)
Net increase (decrease) in repurchase agreements			(2,163	)			1,170
Cash used to repurchase treasury stock			(9	)			(901	)
Dividends paid on common stock			(249	)			(251	)
Net cash provided by (used in) financing activities			30,541				(18,295	)
Increase (decrease) in cash and cash equivalents			24,322				(12,507	)
Cash and cash equivalents, beginning of period			25,749				54,698
Cash and cash equivalents, end of period		$	50,071			$	42,191
Supplemental disclosures of cash flow information:
Interest paid		$	1,396				1,509
Income taxes paid			—				—
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off			292				83
Foreclosures and in substance foreclosures of loans during period			43				—
Net unrealized gains on investment securities classified as available for sale			268				2,460
Decrease in deferred tax asset related to unrealized gains on investments			(91	)			(838	)
Dividends declared and payable			288				286
Issuance of restricted common stock			—				125

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

(1)	BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements include the accounts of HopFed Bancorp, Inc. (the “Corporation”) and its subsidiaries (collectively, the “Company”). The Corporation is a parent holding company of Heritage Bank USA, Inc. (the “Bank”). The Banks owns JBMM, LLC, a wholly owned, limited liability company, which owns and manages the Bank’s foreclosed assets. The Bank also owns Heritage USA Title, LLC, which sells title insurance to the Bank’s real estate loan customers. The Bank owns Fort Webb LP, LLC, which owns a limited partnership interest in Fort Webb Elderly Housing LP, LLC, a low income senior citizen housing facility in Bowling Green, Kentucky. The Corporation owns 100% of the common stock of HopFed Capital Trust I, a statutory trust formed under the laws of the state of Delaware with the purpose of issuing preferred capital securities to a third-party investor and purchasing junior subordinated debentures from the Company. HopFed Capital Trust I and Fort Webb LP, LLC are variable interest entities for which the Company is not the primary beneficiary. Accordingly, these subsidiaries are recorded under the equity method in the Company’s consolidated financial statements. All significant intercompany accounts have been eliminated.

The Bank is a Kentucky commercial bank regulated by the Kentucky Department of Financial Institutions (“KDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). HopFed Bancorp is regulated by the Federal Reserve Bank of Saint Louis (“FED”).

The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the three month period ended March 31, 2017 are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2017.

The accompanying unaudited interim consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2016 Consolidated Financial Statements.

 

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(2)	NET INCOME PER SHARE

Basic net income per share (IPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three month periods ended March 31, 2017 and March 31, 2016, the Company has excluded all unearned shares held by the ESOP.

 

		March 31,
		2017				2016
Basic IPS:
Net income		$	935,000			$	509,000
Average common shares outstanding			6,218,706				6,297,755
Net income per share		$	0.15			$	0.08
Diluted IPS:
Net income		$	935,000			$	509,000
Average common shares outstanding			6,218,706				6,297,755
Dilutive effect of stock options			—				—
Average diluted shares outstanding			6,218,706				6,297,755
Net income per share, diluted		$	0.15			$	0.08

 

(3)	STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $31,000 for the three month period ended March 31, 2017 and $30,000 for the three month period ended March 31, 2016. The Company did not issue any restricted shares in the three month period ended March 31, 2017. The Company issued 10,609 shares of restricted stock in the three month period ended March 31, 2016. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting as of March 31, 2017 (Dollars in Thousands):

 

Year Ending December 31,		Future Expense
2017		$	57
2018			54
2019			9
2020			2
Total		$	122

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

 

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(4)	SECURITIES

The carrying amount of securities and their estimated fair values at March 31, 2017 were as follows:

 

		March 31, 2017
						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		$	2,000				—				—				2,000
U.S. Agency securities			90,294				929				(468	)			90,755
Taxable municipal bonds			2,164				16				(9	)			2,171
Tax free municipal bonds			33,052				1,128				(67	)			34,113
Trust preferred securities			1,638				94				—				1,732
Mortgage backed securities			77,334				374				(899	)			76,809
		$	206,482				2,541				(1,443	)			207,580

 

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

 

		December 31, 2016
						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			2,000				1				—				2,001
U.S. Agency securities			83,667				983				(638	)			84,012
Taxable municipal bonds			2,720				17				(10	)			2,727
Tax free municipal bonds			33,004				1,081				(174	)			33,911
Trust preferred securities			1,634				183				—				1,817
Mortgage-backed securities			85,626				437				(1,051	)			85,012
		$	208,651				2,702				(1,873	)			209,480

The scheduled maturities of debt securities available for sale at March 31, 2017 were as follows:

 

						Estimated
		Amortized				Fair
		Cost				Value
		(Dollars in Thousands)
Due within one year		$	6,622			$	6,624
Due in one to five years			20,553				20,748
Due in five to ten years			30,572				30,878
Due after ten years			11,024				11,515
			68,771				69,765
Amortizing agency bonds			60,377				61,006
Mortgage-backed securities			77,334				76,809
Total securities available for sale		$	206,482			$	207,580

 

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The estimated fair value and unrealized loss amounts of temporarily impaired investments as of March 31, 2017 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
		(Dollars in Thousands)
Available for sale
U.S. Agency securities		$	43,756				(419	)			3,380				(49	)			47,136				(468	)
Taxable municipals			794				(9	)			—				—				794				(9	)
Tax free municipals			5,408				(67	)			—				—				5,408				(67	)
Mortgage-backed securities			48,365				(654	)			8,369				(245	)			56,734				(899	)
Total available for sale		$	98,323				(1,149	)			11,749				(294	)			110,072				(1,443	)

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

 

		Less than 12 months								12 months or longer								Total
		Estimated				Unrealized				Estimated				Unrealized				Estimated				Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(Dollars in Thousands)
Available for sale
U.S. Agency securities		$	41,963				(597	)			3,459				(41	)			45,422				(638	)
Taxable municipals			1,347				(10	)			—				—				1,347				(10	)
Tax free municipals			7,369				(174	)			—				—				7,369				(174	)
Mortgage-backed securities			48,462				(796	)			7,439				(255	)			55,901				(1,051	)
Total available for sale		$	99,141				(1,577	)			10,898				(296	)			110,039				(1,873	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At March 31, 2017, the Company has 69 securities with unrealized losses. The losses for all securities are considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and are not related to the credit worthiness of the issuers. Furthermore, the Company has the intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of March 31, 2017.

At March 31, 2017 and December 31, 2016, securities with a book value of approximately $128.9 million and $125.6 million and a market value of approximately $131.9 million and $128.4 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law.

 

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(5)

LOANS

The Company uses the following loan segments as described below:

 

•

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

 

•

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

 

•

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

 

•

Multi-family loans are closed-end loans secured by residential housing with five or more units in a single building. Multi-family loans may carry a variable rate of interest or the interest rate on the loan is a fixed rate (usually five years). After the initial fixed rate period, the loan reverts to a variable rate or has a balloon maturity. Multi-family loans have amortization terms of up to twenty years and are under-written under the Company’s commercial loan underwriting guidelines.

 

•

Constructions loans may consist of residential or commercial properties and carry a fixed or variable rate for the term of the construction period. Construction loans have a maturity of between twelve and twenty-four months depending on the type of property. After the construction period, loans are amortized over a twenty-year period and are under-written under the Company’s underwriting guidelines for the type of property.

 

•

Land loans consist of properties currently under development, land held for future development and land held for recreational purposes. Land loans used for recreational purposes are amortized for twenty years and typically carry a fixed rate of interest for one-to-five years with a balloon maturity or floating rate period to follow and are under-written under the Company’s commercial loan underwriting guidelines.

 

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•

Loans classified as farmland by the Company include properties that are used exclusively for the production of grain, livestock, poultry or swine. Loans secured by farmland have a maturity of up to twenty years and carry a fixed rate of interest for five to ten years. Loans secured by farmland are under-written under the Company’s commercial loan underwriting guidelines.

 

•

Non-residential real estate loans are secured by commercial real estate properties and may be either owner or non-owner occupied. The loans typically have a twenty year maturity and may be fixed for a period of five to ten years. After the initial fixed rate period, the note will either revert to a one year adjustable rate loan or have a balloon maturity. Loans secured by non-residential real estate are under-written under the Company’s commercial loan underwriting standards.

 

•

The Company originates secured and unsecured consumer loans. Collateral for consumer loans may include deposits, brokerage accounts, automobiles and other personal items. Consumer loans are typically fixed for a term of one to five years and are under-written using the Company’s consumer loan policy.

 

•

The Company originates unsecured and secured commercial loans. Secured commercial loans may have business inventory, accounts receivable and equipment as collateral. The typical customer may include all forms of manufacturing, retail and wholesale sales, professional services and various forms of agri-business interest. Commercial loans may be fixed or variable rate and typically have terms between one and five years.

 

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Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2017 and December 31, 2016. At March 31, 2017 and December 31, 2016, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

 

		March 31, 2017				December 31, 2016
		(Dollars in Thousands)
Real estate loans:
One-to-four family first mortgages		$	157,626				147,962
Home equity lines of credit			36,694				35,684
Junior liens			1,365				1,452
Multi-family			38,483				34,284
Construction			17,386				39,255
Land			20,142				23,840
Farmland			42,812				47,796
Non-residential real estate			213,933				182,940
Total mortgage loans			528,441				513,213
Consumer loans			8,674				8,717
Commercial loans			84,955				88,907
Total other loans			93,629				97,624
Total loans, gross			622,070				610,837
Deferred loan fees, net of costs			(426	)			(439	)
Less allowance for loan losses			(6,164	)			(6,112	)
Total loans, net		$	615,480			$	604,286

Although the Company has a diversified loan portfolio, 84.9% and 84.0% of the portfolio was concentrated in loans secured by real estate located primarily within a single geographic region of the United States as of March 31, 2017 and December 31, 2016, respectively.

 

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The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the three month period ended March 31, 2017 (Dollars in Thousands):

 

														General				Specific				Ending
		Balance				Charge off				Recovery				Provision				Provision				Balance
		12/31/2016				2017				2017				2017				2017				3/31/2017
One-to-four family mortgages		$	852				—				3				245				(3	)			1,097
Home equity line of credit			260				—				2				68				(2	)			328
Junior liens			8				—				1				1				(1	)			9
Multi-family			412				—				—				181				—				593
Construction			277				—				—				(136	)			—				141
Land			1,760				—				—				(396	)			(931	)			433
Farmland			778				—				—				(147	)			35				666
Non-residential real estate			964				—				6				324				47				1,341
Consumer loans			208				(68	)			33				18				49				240
Commercial loans			593				(224	)			8				551				388				1,316
Total		$	6,112				(292	)			53				709				(418	)			6,164

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2016 (Dollars in Thousands):

 

														General				Specific				Ending
		Balance				Charge off				Recovery				Provision				Provision				Balance
		12/31/2015				2016				2016				2016				2016				12/31/2016
One-to-four family mortgages		$	1,030				—				167				(118	)			(227	)			852
Home equity line of credit			201				(30	)			14				59				16				260
Junior liens			8				—				14				—				(14	)			8
Multi-family			227				(421	)			—				323				283				412
Construction			377				—				—				(100	)			—				277
Land			1,379				—				—				(586	)			967				1,760
Farmland			358				—				—				420				—				778
Non-residential real estate			1,139				—				10				(41	)			(144	)			964
Consumer loans			358				(422	)			293				(187	)			166				208
Commercial loans			623				(595	)			141				122				302				593
Total		$	5,700				(1,468	)			639				(108	)			1,349				6,112

 

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The table below presents past due and non-accrual balances at March 31, 2017 by loan classification allocated between performing and non-performing:

 

						30 - 89												Impaired Loans
		Currently				Days				Non-accrual				Special				Currently Performing
		Performing				Past Due				Loans				Mention				Substandard				Doubtful				Total
		(Dollars in Thousands)
One-to-four family mortgages		$	153,653				688				248				55				2,982				—			$	157,626
Home equity line of credit			36,132				—				402				—				160				—				36,694
Junior liens			1,320				4				—				29				12				—				1,365
Multi-family			37,668				—				—				—				815				—				38,483
Construction			17,386				—				—				—				—				—				17,386
Land			12,020				—				7,234				431				457				—				20,142
Farmland			40,588				—				338				693				1,193				—				42,812
Non-residential real estate			202,168				—				210				1,518				10,037				—				213,933
Consumer loans			8,239				22				119				—				294				—				8,674
Commercial loans			82,825				32				393				254				1,451				—				84,955
Total		$	591,999				746				8,944				2,980				17,401				—			$	622,070

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

 

						30 - 89				Non-								Impaired Loans
		Currently				Days				Accrual				Special				Currently Performing
		Performing				Past Due				Loans				Mention				Substandard				Doubtful				Total
		(Dollars in Thousands)
One-to-four family mortgages			145,069				896				270				744				983				—				147,962
Home equity line of credit			35,087				22				402				25				148				—				35,684
Junior liens			1,407				4				—				30				11				—				1,452
Multi-family			31,280				—				—				—				3,004				—				34,284
Construction			39,255				—				—				—				—				—				39,255
Land			15,581				—				7,675				35				549				—				23,840
Farmland			44,832				—				—				674				2,290				—				47,796
Non-residential real estate			172,395				—				208				3				10,334				—				182,940
Consumer loans			8,354				28				3				—				332				—				8,717
Commercial loans			84,913				261				516				603				2,614				—				88,907
Total			578,173				1,211				9,074				2,114				20,265				—				610,837

 

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At March 31, 2017 and December 31, 2016, there were no loans more than 90 days past due and accruing interest.

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

 

						Land
						Development /				Commercial				Residential
		Commercial				Construction				Real Estate				Real Estate				Consumer				Total
										(Dollars in Thousands)
March 31, 2017:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	201				105				88				—				98			$	492
Collectively evaluated for impairment			1,115				469				2,512				1,434				142				5,672
Total ending allowance balance		$	1,316				574				2,600				1,434				240			$	6,164
Loans:
Loans individually evaluated for impairment		$	1,844				7,691				12,593				3,804				413			$	26,345
Loans collectively evaluated for impairment			83,111				29,837				282,635				191,881				8,261				595,725
Total ending loans balance		$	84,955				37,528				295,228				195,685				8,674			$	622,070

 

						Land
						Development /				Commercial				Residential
		Commercial				Construction				Real Estate				Real Estate				Consumer				Total
										(Dollars in Thousands)
December 31, 2016:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	28				1,036				—				—				84			$	1,148
Collectively evaluated for impairment			565				1,001				2,154				1,120				124				4,964
Total ending allowance balance		$	593				2,037				2,154				1,120				208			$	6,112
Loans:
Loans individually evaluated for impairment		$	3,130				8,224				15,836				1,814				335			$	29,339
Loans collectively evaluated for impairment			85,777				54,871				249,184				183,284				8,382				581,498
Total ending loans balance		$	88,907				63,095				265,020				185,098				8,717			$	610,837

 

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

The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined risk metrics and categorized into one of the risk grades discussed below. The Company uses the following risk grade definitions for commercial loans:

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

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

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

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

 

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

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

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

Doubtful - A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status and have a defined work-out strategy.

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.

 

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The following credit risk standards are assigned to consumer loans:

Satisfactory - All consumer open-end and closed-end retail loans shall have an initial risk grade assigned of 3 - Satisfactory.

Substandard - All consumer open-end and closed-end retail loans past due 90 cumulative days from the contractual date will be classified as 7 - Substandard. If a consumer/retail loan customer files bankruptcy, the loan will be classified as 7 - Substandard regardless of payment history.

Loss - All closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off as loss assets. The charge off will be taken by the end of the month in which the 120-day or 180-day time period elapses. All losses in retail credit will be recognized when the affiliate becomes aware of the loss, but in no case should the charge off exceed the time frames stated within this policy.

A loan is considered to be impaired when management determines that it is 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.

 

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A summary of the Company’s impaired loans, including their respective regulatory classification and their respective specific reserve at March 31, 2017 and December 31, 2016 were as follows:

 

																						Specific				Allowance
																						Allowance				for Loans
						Special				Impaired Loans												for				not
March 31, 2017		Pass				Mention				Substandard				Doubtful				Total				Impairment				Impaired
						(Dollars in Thousands)
One-to-four family mortgages		$	154,341				55				3,230				—				157,626				—				1,097
Home equity line of credit			36,132				—				562				—				36,694				—				328
Junior liens			1,324				29				12				—				1,365				—				9
Multi-family			37,668				—				815				—				38,483				—				593
Construction			17,386				—				—				—				17,386				—				141
Land			12,020				431				7,691				—				20,142				105				328
Farmland			40,588				693				1,531				—				42,812				35				631
Non-residential real estate			202,168				1,518				10,247				—				213,933				53				1,288
Consumer loans			8,261				—				413				—				8,674				98				142
Commercial loans			82,857				254				1,844				—				84,955				201				1,115
Total		$	592,745				2,980				26,345				—				622,070				492				5,672

 

																						Specific				Allowance
																						Allowance				for Loans
						Special				Impaired Loans												for				not
December 31, 2016		Pass				Mention				Substandard				Doubtful				Total				Impairment				Impaired
						(Dollars in Thousands)
One-to-four family mortgages		$	145,965				744				1,253				—				147,962				—				852
Home equity line of credit			35,109				25				550				—				35,684				—				260
Junior liens			1,411				30				11				—				1,452				—				8
Multi-family			31,280				—				3,004				—				34,284				—				412
Construction			39,255				—				—				—				39,255				—				277
Land			15,581				35				8,224				—				23,840				1,036				724
Farmland			44,832				674				2,290				—				47,796				—				778
Non-residential real estate			172,395				3				10,542				—				182,940				—				964
Consumer loans			8,382				—				335				—				8,717				84				124
Commercial loans			85,174				603				3,130				—				88,907				28				565
Total		$	579,384				2,114				29,339				—				610,837				1,148				4,964

 

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

 

														For the three month period ended
						At March 31, 2017								March 31, 2017
						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
Impaired loans with no specific allowance		Investment				Balance				Allowance				Investment				Recognized
										(Dollars in Thousands)
One-to-four family mortgages		$	3,230				3,230				—				2,242				31
Home equity line of credit			562				562				—				556				10
Junior liens			12				12				—				12				—
Multi-family			815				815				—				1,910				10
Construction			—				—				—				—				—
Land			1,020				1,980				—				1,287				9
Farmland			1,005				1,005				—				1,648				13
Non-residential real estate			9,849				9,849				—				10,196				134
Consumer loans			18				18				—				9				—
Commercial loans			1,336				1,336				—				2,101				12
Total			17,847				18,807				—				19,961				219
Impaired loans with a specific allowance
One-to-four family mortgages			—				—				—				—				—
Home equity line of credit			—				—				—				—				—
Junior liens			—				—				—				—				—
Multi-family			—				—				—				—				—
Construction			—				—				—				—				—
Land			6,671				6,671				105				6,671				—
Farmland			526				526				35				263				—
Non-residential real estate			398				398				53				199				5
Consumer loans			395				395				98				365				—
Commercial loans			508				508				201				387				3
Total			8,498				8,498				492				7,885				8
Total impaired loans		$	26,345				27,305				492				27,846				227

 

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

 

														For the year ended
		At December 31, 2016												December 31, 2016
		(Dollars in Thousands)
						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
Impaired loans with no specific allowance		Investment				Balance				Allowance				Investment				Recognized
One-to-four family mortgages		$	1,253				1,253				—				1,470				67
Home equity line of credit			550				550				—				390				24
Junior liens			11				11				—				13				1
Multi-family			3,004				3,004				—				3,005				172
Construction			—				—				—				—				—
Land			1,553				2,513				—				7,868				38
Farmland			2,290				2,290				—				1,563				120
Non-residential real estate			10,542				10,542				—				9,363				485
Consumer loans			—				—				—				21				1
Commercial loans			2,865				2,865				—				3,168				112
Total			22,068				23,028				—				26,861				1,020
Impaired loans with a specific allowance
One-to-four family mortgages			—				—				—				452				—
Home equity line of credit			—				—				—				—				—
Junior liens			—				—				—				—				—
Multi-family			—				—				—				910				—
Construction			—				—				—				—				—
Land			6,671				6,671				1,036				1,811				485
Farmland			—				—				—				533				—
Non-residential real estate			—				—				—				—				—
Consumer loans			335				335				84				273				—
Commercial loans			265				265				28				754				24
Total			7,271				7,271				1,148				4,733				509
Total impaired loans		$	29,339				30,299				1,148				31,594				1,529

 

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

At December 31, 2016, the Company had eight loans, representing three lending relationships, classified as performing TDRs. During the three month period ended March 31, 2017, the Company removed one lending relationship from TDR status. That relationship, with two loans representing $2.2 million, has paid as agreed based on the original terms of their note for a period of at least six months. For the three month period ended March 31, 2017, no loans were added to TDR classification and all loans currently classified as TDR are current based on their revised terms.

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

 

										Post Modification
						Pre-Modification				Outstanding Record
		Number of				Outstanding				Investment, net of
		Loans				Record Investment				related allowance
March 31, 2017
Multi-family			3			$	815,273				815,273
Non-residential real estate			3				3,421,915				3,421,915
December 31, 2016
Multi-family			3			$	815,273				815,273
Non-residential real estate			5				5,646,223				5,646,223

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

 

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(6)	FORECLOSED ASSETS

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

At March 31, 2017 and December 31, 2016, the Company had balances in foreclosed assets consisting of the following:

 

		March 31, 2017				December 31, 2016
		(Dollars in Thousands)
One-to-four family mortgages		$	135				135
Home equity line of credit			28				28
Multi-family real estate			1,775				1,775
Non-residential real estate			173				459
Total other assets owned		$	2,111				2,397

For the three month period ended March 31, 2017, the Company’s activity in foreclosed property included the following:

 

						Activity During 2017
		Balance												Reduction				Gain (Loss)				Balance
		12/31/2016				Foreclosure				Sales				in Values				on Sale				3/31/2017
		(Dollars in Thousands)
One-to-four family mortgages		$	135				—				—				—				—			$	135
HELOC			28				—				—				—				—				28
Multi-family			1,775				—				—				—				—				1,775
Non-residential real estate			459				43				(329	)			—				—				173
Total		$	2,397				43				(329	)			—				—			$	2,111

 

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For the three month period ended March 31, 2016, the Company’s activity in foreclosed property included the following:

 

						Activity During 2016
		Balance												Reduction				Gain (Loss)				Balance
		12/31/2015				Foreclosure				Sales				in Values				on Sale				3/31/2016
		(Dollars in Thousands)
One-to-four family mortgages		$	55				—				—				—				—			$	55
HELOC			943				—				—				—				—				943
Non-residential real estate			738				—				(270	)			—				(9	)			459
Consumer			—				12				(12	)			—				—				—
Total		$	1,736				12				(282	)			—				(9	)		$	1,457

 

(7)

FAIR VALUE OF ASSETS AND LIABILITIES

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

 

•

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

 

•

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

 

•

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

 

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

Cash and due from banks

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

Interest-bearing deposits

The carrying amounts reported in the consolidated balance sheets for interest earning deposits approximate those assets’ fair values, because they are considered overnight deposits and may be withdrawn at any time without penalty and do not present credit risk concerns.

Available-for-sale securities

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

FHLB stock

The fair value of FHLB stock is recognized at cost.

Loans held for sale

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

Loans receivable

The fair values for of fixed-rate loans and variable rate loans that re-price on an infrequent basis is estimated using discounted cash flow analysis which considers future re-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans of similar type, terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The estimated fair value of variable-rate loans that re-price frequently and with have no significant change in credit risk is approximately the carrying value of the loan.

Accrued interest receivable

Fair value is estimated to approximate the carrying amount because such amounts are expected to be received within 90 days or less and any credit concerns have been previously considered in the carrying value.

Deposits

The fair values disclosed for deposits with no stated maturity such as demand deposits, interest-bearing checking accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and other fixed maturity time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such type accounts or similar accounts to a schedule of aggregated contractual maturities or similar maturities on such time deposits.

Advances from borrowers for taxes and insurance

The carrying amount of advances from borrowers for taxes and insurance approximates its fair value.

Advances from the Federal Home Loan Bank (FHLB)

The fair value of these advances is estimated by discounting the future cash flows of these advances using the current rates at which similar advances or similar financial instruments could be obtained.

Repurchase agreements

Overnight repurchase agreements have a fair value at book, given that they mature overnight. The fair values for of longer date repurchase agreements is estimated using discounted cash flow analysis which considers the current market pricing for repurchase agreements of similar final maturities and collateral requirements.

Subordinated debentures

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

Fair Value Measurements on a Recurring Basis

Where quoted prices are available for identical securities in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.

 

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The assets and liabilities measured at fair value on a recurring basis at March 31, 2017 are summarized below:

 

Description		Total carrying value in the consolidated balance sheet at 3/31/2017				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in Thousands)
Assets
Securities available for sale
U.S. Treasury securities			2,000				2,000				—				—
U.S. Agency securities			90,755				—				90,755				—
Taxable municipals			2,171				—				2,171				—
Tax-free municipals			34,113				—				34,113				—
Trust preferred securities			1,732				—				—				1,732
Mortgage backed securities			76,809				—				76,809				—
Total			207,580				2,000				203,848				1,732

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

 

Description		Total carrying value in the consolidated balance sheet at 12/31/2016				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in Thousands)
Assets
Securities available for sale
U.S. Treasury securities			2,001				2,001				—				—
U.S. Agency securities			84,012				—				84,012				—
Taxable municipals			2,727				—				2,727				—
Tax-free municipals			33,911				—				33,911				—
Trust preferred securities			1,817				—				—				1,817
Mortgage backed securities			85,012				—				85,012				—
Total			209,480				2,001				205,662				1,817

 

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The assets and liabilities measured at fair value on a non-recurring basis are summarized below for March 31, 2017:

 

Total carrying

Quoted Prices

Significant

value in the

In Active

Other

Significant

consolidated

Markets for

Observable

Unobservable

balance sheet at

Identical Assets

Inputs

Inputs

Description

March 31, 2017

(Level 1)

(Level 2)

(Level 3)

(Dollars in Thousands)

Assets

Foreclosed assets

$

2,111

—

—

$

2,111

Impaired loans, net of allowance

$

8,006

—

—

$

8,006

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

 

Total carrying

Quoted Prices

Significant

value in the

In Active

Other

Significant

consolidated

Markets for

Observable

Unobservable

balance sheet at

Identical Assets

Inputs

Inputs

Description

December 31, 2016

(Level 1)

(Level 2)

(Level 3)

(Dollars in Thousands)

Assets

Foreclosed assets

$

2,397

—

—

$

2,397

Impaired loans, net of allowance

$

6,123

—

—

$

6,123

 

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The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a recurring and non-recurring basis at March 31, 2017 and December 31, 2016:

 

Level 3 Significant Unobservable Input Assumptions

Quantitative Range

Fair

Valuation

Unobservable

of Unobservable

`

Value

Technique

Input

Inputs

(Dollars in Thousands)

March 31, 2017

Assets measured on a non-recurring basis

Foreclosed assets

$

2,111

Discount to appraised value of collateral

Appraisal comparability adjustments

30% to 55%

Impaired loans

8,006

Discount to appraised value of collateral

Appraisal comparability adjustments

10% to 25%

Asset measured on a recurring basis

Trust preferred securities

1,732

Discounted cash flow Spread to Libor swap curve

Compare to quotes for sale when available

One month libor 4% to 6%

December 31, 2016

Assets measured on a non-recurring basis

Foreclosed assets

$

2,397

Discount to appraised value of collateral

Appraisal comparability adjustments

30% to 55%

Impaired loans

6,123

Discount to appraised value of collateral

Appraisal comparability adjustments

10% to 15%

Asset measured on a recurring basis

Trust preferred securities

1,817

Discounted cash flow Spread to Libor swap curve

Compare to quotes for sale when available

One month libor 4% to 6%

 

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Foreclosed assets and impaired loans are valued at fair value, less cost to sell. Fair value of a foreclosed asset is determined by an appraised value of the underlying collateral to which a discount is applied. Management establishes the discount or adjustments based on recent sales and any unique features the collateral may possess. Management also considers the anticipated selling cost associated with the collateral when establishing the discounted percentage. Management may adjust the discounts based on the most recent sales of comparable collateral.

The Company bases the value of its trust preferred security on a quarterly review of SEC filings by the issuer to ascertain overall financial strength. Based on the analysis, the Company then reviews the Libor swap curve to analyze the overall yield of our investment as compared to long-term swap rates. On rare occasions, the Company may receive an offer from a broker to purchase similar type instruments and the Company will analyze these offerings as compared to our investment.

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the three month periods ended March 31, 2017 and March 31, 2016, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

		2017				2016
Three month period ended March 31,		Other Assets				Other Assets
		(Dollars in Thousands)
Fair value, January 1		$	1,817				1,865
Change in unrealized losses included in other comprehensive income for assets and liabilities still held at March 31			(89	)			105
Accretion of previously discounted amounts			4				4
Purchases, issuances and settlements, net			—				—
Transfers in and/or out of Level 3			—				—
Fair value, March 31		$	1,732				1,974

 

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

 

		Carrying Amount				Estimated Fair Value				Quoted Prices In Active Markets for Identical Assets Level 1				Using Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
										(Dollars in Thousands)
Financial Assets:
Cash and due from banks		$	30,663				30,663				30,663				—				—
Interest-bearing deposits			19,408				19,408				19,408				—				—
Securities available for sale			207,580				207,580				2,000				203,848				1,732
Federal Home Loan Bank stock			4,428				4,428				—				—				4,428
Loans held for sale			1,091				1,091				—				1,091				—
Loans receivable			615,480				600,288				—				—				600,288
Accrued interest receivable			3,121				3,121				—				—				3,121
Financial liabilities:
Deposits			765,743				766,415				—				766,415				—
Advances from borrowers for taxes and insurance			867				867				—				867				—
Advances from Federal Home Loan Bank			11,000				10,999				—				10,999				—
Repurchase agreements			45,492				45,492				—				45,492				—
Subordinated debentures			10,310				10,099				—				—				10,099

 

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The estimated fair values of financial instruments were as follows at December 31, 2016:

 

		Carrying Amount				Estimated Fair Value				Quoted Prices In Active Markets for Identical Assets Level 1				Using Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
										(Dollars in Thousands)
Financial Assets:
Cash and due from banks		$	21,779				21,779				21,779				—				—
Interest-bearing deposits			3,970				3,970				3,970				—				—
Securities available for sale			209,480				209,480				2,001				205,662				1,817
Federal Home Loan Bank stock			4,428				4,428				—				—				4,428
Loans held for sale			1,094				1,094				—				1,094				—
Loans receivable			604,286				593,257				—				—				593,257
Accrued interest receivable			3,799				3,799				—				—				3,799
Financial liabilities:
Deposits			732,882				732,942				—				732,942				—
Advances from borrowers for taxes and insurance			766				766				—				766				—
Advances from Federal Home Loan Bank			11,000				10,979				—				10,979				—
Repurchase agreements			47,655				47,655				—				47,655				—
Subordinated debentures			10,310				10,099				—				—				10,099

 

(8)	EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

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

 

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ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective on January 1, 2018. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

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

ASU 2016-05 “Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 was effective beginning January 1, 2017. The implementation of ASU 2016-05 did not have a material impact on the Company’s consolidated financial statements.

ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016-07 was effective beginning January 1, 2017. The implementation of ASU 2016-07 did not have a material impact on the Company’s consolidated financial statements.

 

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

On June 16, 2016, the FASB released its finalized ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments to U.S. GAAP require businesses and other organization to measure the expected credit losses on financial assets, such as loans, securities, bond insurance, and many receivables. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified as available-for-sale. Write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts are expected to improve the loss estimates on financial assets that are losing value. The techniques that are employed today to write down loans and other instruments can still be used, although the variables for calculating the losses are expected to change. ASU 2016-13 will become effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Companies are permitted to adopt ASU 2016-13 in fiscal years beginning after December 15, 2018. Management is currently evaluating the potential impact of this ASU on the Company’s consolidated financial statements.

ASU 2016-15 “Statement of Cash Flows (Topic 230)” (“ASU 2016-15”) is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption was permitted with retrospective application. Management is evaluating the impact that the adoption of ASU 2016-15 will have on the Company’s consolidated financial statements.

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

 

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(9)	INCOME TAXES

The Company files consolidated federal income tax returns and Tennessee excise tax returns. The Company files consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has not accrued any interest or penalties for uncertain tax positions. The effective tax rate differs from the statutory federal rate of 35% and Tennessee excise rate of 6.5% due to investments in qualified municipal securities, bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses. The Company’s effective tax rate for the three month periods ended March 31, 2017 and March 31, 2016 was 12.6% and 8.3%, respectively. The Company’s effective federal income tax rate varies significantly from our federal statutory tax rate for a variety of factors, including:

The Company’s investment in Fort Webb LP, LLC generates tax credits and depreciation expense that the Company can use to offset taxable income. At March 31, 2017 and December 31, 2016, the Company’s balance sheet did not include any equity investment in Fort Webb. The Company has other investments that produce both tax credits and depreciation expense that may be used to offset net income.

At March 31, 2017, the Company has $10.1 million in bank owned life insurance policies. The income generated from these policies increase the cash flow of the policies on a tax free basis. Life insurance proceeds are paid upon the death of a covered party. These proceeds, netted against the current cash value of the policy, result in tax free income to the Company. For the three month period ended March 31, 2017, the Company received additional income of approximately $170,000 from the net proceeds of a life insurance policy.

At March 31, 2017, the Company’s investment portfolio includes $34.1 million of tax free municipal bonds. Interest income on this portfolio, after netting out a disallowance for interest expense attributable to this portfolio, is tax exempt.

 

(10)

ESOP

Substantially all of the Company’s employees who are at least 21 years old and have one year of employment with the Company participate in the 2015 HopFed Bancorp, Inc. Employee Stock Ownership Plan (“ESOP”). The ESOP purchased 600,000 shares of the Company’s common stock from the Company on March 2, 2015, at $13.14 per share. The ESOP borrowed $7.9 million from an open-end line of credit from the Company for the purchase of the stock, using the 600,000 shares of common stock as collateral. The Company makes discretionary contributions to the ESOP. The ESOP utilizes these contributions along with the dividends on the 600,000 held by the ESOP to repay the loan from the Company. When loan payments are made, ESOP shares are released based on reduction in the principal balance of the loan. The shares are allocated to participants based on relative compensation.

 

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

The Company made its second ESOP loan payment in December 2016. At March 31, 2017, the Company’s accrued liability for the loan payment is $195,000. At March 31, 2017 and December 31, 2016, shares held by the ESOP were as follows:

 

		March 31, 2017				December 31, 2016
Accrued for allocation to participants			10,185				—
Earned ESOP shares			101,654				101,654
Unearned ESOP shares			488,161				498,346
Total ESOP shares			600,000				600,000
Fair value of unearned shares		$	6,990,466			$	6,707,737

 

(11)	COMMITMENTS AND CONTINGENCIES

At March 31, 2017, the Bank had $32.1 million in outstanding commitments on revolving home equity lines of credit, $19.4 million in outstanding commitments on revolving personal lines of credit and $43.9 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $48.7 million. At March 31, 2017, the Company had $287,000 in standby letters of credit outstanding.

At March 31, 2017, the Company has $43.1 million in times deposits greater than $100,000 but less than $250,000 that are scheduled to mature in one year and $47.6 million in time deposits with balances greater than $250,000 that are scheduled to mature in one year or less.

 

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The Bank’s FHLB borrowings are secured by a blanket security agreement pledging the Bank’s 1-4 family first mortgage loans and non-residential real estate loans. At March 31, 2017 and December 31, 2016, the Bank has pledged all eligible 1-4 family first mortgages. At March 31, 2017 and December 31, 2016 the Bank has outstanding borrowings of $11.0 million from the FHLB. A schedule of FHLB borrowings at March 31, 2017 and December 31, 2016 is provided below:

 

Outstanding Balance				Rate				Maturity
(Dollars in Thousands)
$	5,000				0.88	%			10/06/2017
	6,000				1.18	%			07/06/2018
$	11,000				1.04	%

The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $45.5 million secured by the Bank’s loan portfolio to secure additional municipal deposits. At March 31, 2017, securities with a book value of approximately $45.2 million and a market value of $45.5 million were sold under agreements to repurchase from various customers.

The Company is a party to certain ordinary course litigation, and the Company intends to vigorously defend itself in all such matters. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

 

(12)	REGULATORY MATTERS

The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.

The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2017, the capital conservation buffer is 1.25%. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

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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.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2017 and December 31, 2016 based on the phase-in provisions of Basel III Capital Rules. Management believes, as of March 31, 2017 and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

 

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The Company’s consolidated capital ratios and the Bank’s actual capital amounts and ratios as of March 31, 2017 and December 31, 2016 are presented below:

 

																		To be Well
										Minimum Capital								Capitalized for
										Required – Basel III								Prompt Corrective
		Actual								Phase-In Schedule								Action Provisions
As of March 31, 2017		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
Tier 1 leverage capital to adjusted total assets
Company		$	94,592				10.6	%		$	35,876				4.0	%		$	44,845				5.0	%
Bank		$	93,585				10.5	%		$	35,752				4.0	%		$	44,690				5.0	%
Total capital to risk weighted assets
Company		$	100,756				16.1	%		$	57,792				9.25	%		$	62,478				10.0	%
Bank		$	99,749				16.0	%		$	57,664				9.25	%		$	62,339				10.0	%
Tier 1 capital to risk weighted assets
Company		$	94,592				15.1	%		$	45,297				7.25	%		$	49,983				8.0	%
Bank		$	93,585				15.0	%		$	45,196				7.25	%		$	49,871				8.0	%
Common equity tier 1 capital to risk weighted assets
Company		$	94,592				15.1	%		$	35,925				5.75	%			n/a				n/a
Bank		$	93,585				15.0	%		$	35,845				5.75	%		$	40,520				6.5	%
As of December 31, 2016
Tier 1 leverage capital to adjusted total assets
Company		$	92,803				10.8	%		$	34,392				4.0	%		$	42,990				5.0	%
Bank		$	91,617				10.7	%		$	34,315				4.0	%		$	42,894				5.0	%
Total capital to risk weighted assets
Company		$	98,915				16.2	%		$	52,682				8.625	%		$	61,080				10.0	%
Bank		$	97,729				16.0	%		$	52,561				8.625	%		$	60,941				10.0	%
Tier 1 capital to risk weighted assets
Company		$	92,803				15.2	%		$	40,466				6.625	%		$	48,864				8.0	%
Bank		$	91,617				15.0	%		$	40,373				6.625	%		$	48,753				8.0	%
Common equity tier 1 capital to risk weighted assets
Company		$	92,803				15.2	%		$	31,304				5.125	%			n/a				n/a
Bank		$	91,617				15.0	%		$	31,232				5.125	%		$	39,611				6.5	%

 

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

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with U.S. GAAP and general banking practices. These estimates include accounting for the allowance for loan losses, foreclosed assets, valuation of deferred tax assets and fair value measurements. A description of these estimates, which significantly affect the Company’s determination of our consolidated financial position, results of operations and cash flows, is set forth in Note 1, “Summary of Significant Accounting Policies” of the Notes to the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016.

The emphasis of this discussion is a comparison of assets, liabilities and stockholders’ equity as of March 31, 2017 to December 31, 2016, while comparing income and expense for the three month periods ended March 31, 2017 and March 31, 2016.

All information should be read in conjunction with the Company’s unaudited consolidated condensed financial statements and related notes appearing elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016.

Comparison of Financial Condition at March 31, 2016, and December 31, 2016

At March 31, 2017, total assets increased $31.8 million, to $923.3 million as compared to $891.5 million at December 31, 2016, largely due to higher levels of time deposits, cash on hand and loan growth. Securities available for sale declined from $209.5 million at December 31, 2016 to $207.6 million at March 31, 2017. At March 31, 2017 and December 31, 2016, securities classified as “available for sale” had an amortized cost of $206.5 million and $208.7 million. Net loans totaled $615.5 million and $604.3 million at March 31, 2017, and December 31, 2016, respectively.

The Company’s holdings of Federal Home Loan Bank of Cincinnati (“FHLB”) stock, at cost were $4.4 million at December 31, 2016 and March 31, 2017. Total FHLB borrowings were $11.0 million at March 31, 2017 and December 31, 2016. Total repurchase balances declined from $47.7 million at December 31, 2016 to $45.5 million at March 31, 2017.

 

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At March 31, 2017, deposits increased $32.8 million from $732.9 million at December 31, 2016 to $765.7 million at March 31, 2017. At March 31, 2017, non-interest checking account balances are $136.3 million, or 17.8% of total deposits as compared to $131.1 million, or 17.9% of total deposits at December 31, 2016. For the period ended March 31, 2017, interest bearing checking accounts increased by $8.2 million as compared to December 31, 2016. At March 31, 2017, time deposits were $311.8 million, representing an increase of $18.8 million as compared to December 31, 2016. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area.

Comparison of Operating Results for the Three Month Periods Ended March 31, 2017 and March 31, 2016.

Net Income. The Company’s net income was $935,000 for the three month period ended March 31, 2017, as compared to net income of $509,000 for the three month period ended March 31, 2016.

Net Interest Income. Net interest income for the three month period ended March 31, 2017, was $6.8 million, compared to $6.7 million for the three month period ended March 31, 2016. The increase in net interest income for the three month period ended March 31, 2017 as compared to March 31, 2016 was largely due to the $54.8 million increase in the average balance of loans outstanding. For the three month period ended March 31, 2017, the growth in the average balance of loans outstanding as compared to three month period ended March 31, 2016 helped to offset a decline in the average yield of the loan portfolio.

For the three month period ended March 31, 2017, the average yield on loans was 4.38%, as compared to 4.62% for the three month period ended March 31, 2016. For the three month period ended March 31, 2017, income on taxable securities and tax free securities was $1.1 million and $283,000, respectively. Income on taxable and tax free securities was $1.2 million and $353,000 for the three month period ended March 31, 2016, respectively. For the three month period ending March 31, 2017, the tax equivalent yield on taxable and tax free securities were 2.53% and 5.00%, respectively, as compared to 2.52% and 5.01% for the three month period ended March 31, 2016, respectively.

For the three month periods ended March 31, 2017 and March 31, 2016, the Company’s cost of interest bearing liabilities was 0.81% and 0.83%, respectively. For the three month periods ended March 31, 2017 and March 31, 2016, the Company’s net interest margin was 3.31% and 3.39%, 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 March 31, 2017 and March 31, 2016. 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 $141,000 for the three month period ended March 31, 2017 and $174,000 for the three month period ended March 31, 2016, for a tax equivalent rate using a cost of funds rate of 0.81% for the three month period ended March 31, 2017 and 0.83% for the three month period ended March 31, 2016. The table adjusts tax-free loan income by $9,000 for the three month period ended March 31, 2017 and $5,000 for the three month period ended March 31, 2016, for a tax equivalent rate using the same cost of funds rate (Table amounts in thousands, except percentages):

 

		Average				Income &				Average				Average				Income &				Average
		Balance				Expense				Rates				Balance				Expense				Rates
		03/31/2017				03/31/2017				03/31/2017				03/31/2016				03/31/2016				03/31/2016
Loans		$	615,382			$	6,745				4.38	%		$	560,544			$	6,470				4.62	%
Taxable AFS securities			176,824				1,118				2.53	%			197,761				1,247				2.52	%
Non-taxable AFS securities			33,868				424				5.00	%			42,098				527				5.01	%
Other interest bearing deposits			9,260				23				0.99	%			9,491				16				0.67	%
Total interest earning assets			835,334				8,310				3.98	%			809,894				8,260				4.08	%
Other assets			73,527												85,874
Total assets		$	908,861											$	895,874
Retail time deposits		$	259,086				664				1.03	%		$	264,308				640				0.97	%
Brokered deposits			46,040				135				1.17	%			35,986				99				1.10	%
Interest bearing checking accounts			219,696				326				0.59	%			213,336				311				0.58	%
MMDA and savings accounts			100,282				42				0.17	%			97,391				45				0.18	%
FHLB borrowings			13,433				32				0.95	%			13,593				73				2.15	%
Repurchase agreements			41,840				103				0.98	%			43,744				143				1.31	%
Subordinated debentures			10,310				104				4.03	%			10,310				94				3.65	%
Total interest bearing liabilities			690,687				1,406				0.81	%			678,668				1,405				0.83	%
Non-interest bearing deposits			126,809												112,926
Other non-interest bearing liabilities			3,993												4,706
Stockholders’ equity			87,372												89,468
Total liabilities and stockholders’ equity		$	908,861											$	895,768
Net interest income						$	6,904											$	6,855
Interest rate spread											3.17	%											3.25	%
Net interest margin							3.31	%											3.39	%

 

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Interest Income. For the three month period ended March 31, 2017, the Company’s total interest income was $8.2 million, representing an increase of $79,000 as compared to the three month period ended March 31, 2016. For the three month periods ended March 31, 2017 and March 31, 2016, interest income on loans was $6.7 million and $6.5 million, respectively. The average balance of loans receivable increased from $560.5 million for the three month period ended March 31, 2016 to $615.4 million for the three month period ended March 31, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 119.34% for the three month period ended March 31, 2016 to 120.94% for the three month period ended March 31, 2017.

Interest Expense. Interest expense increased $1,000 for the three month period ended March 31, 2017 as compared to the three month period ended March 31, 2016. For the three month period ending March 31, 2017, the Company’s interest expense on FHLB advances was $32,000, as compared to $73,000 for the three month period ended March 31, 2016. The average cost of FHLB borrowings were 0.95% for the three month period ended March 31, 2017 and 2.15% for the three month period ended March 31, 2016.

For the three month period ended March 31, 2017, the average balance of interest bearing retail time deposits declined $5.2 million to $259.1 million, as compared to $264.3 million for the three month period ended March 31, 2016. The average cost of retail time deposits for the three month periods ended March 31, 2017 and March 31, 2016 was 1.03% and 0.97%, respectively.

The average cost of brokered deposits increased from 1.10% for the three month period ended March 31, 2016 to 1.17% for the three month period ended March 31, 2017. Over the same period, the average balance of brokered deposits increased $10.0 million to $46.0 million. For the three month period ended March 31, 2017, the Company’s total cost of deposits was 0.61% as compared to 0.60% for the three month period ended March 31, 2016.

The average balance of repurchase agreements declined from $43.7 million for the three months ended March 31, 2016, to $41.8 million for the three month period ended March 31, 2017. The average cost of repurchase agreements was 1.31% for the three months ended March 31, 2016, and 0.98% for the three month period ended March 31, 2017.

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 $291,000 in provision for loan loss was required for the three month period ended March 31, 2017 compared to a $458,000 provision for loan loss expense for the three month period ended March 31, 2016.

 

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Non-Interest Income. There was a $276,000 increase in non-interest income in the three month period ended March 31, 2017 as compared to the three month period ended March 31, 2016. For the three month period ended March 31, 2017, other operating income was $479,000 as compared to $176,000 for the three month period ended March 31, 2016. The improved level of other operating income is the result of one time licensing fees earned by the Bank from a vendor. For the three month period ended March 31, 2017, the Company earned $334,000 in mortgage origination income as compared to $368,000 during the three month period ended March 31, 2016. The decline in mortgage origination income was largely the result of an increase in mortgage loan rates which reduced the demand for fixed rate mortgage loan products.

The Company’s income for services charges was $804,000 for the three month period ended March 31, 2017, as compared to $677,000 for the same period in 2016. The increase in service charge income is the result of the Company’s revised consumer transaction account product offerings, providing additional income on these accounts. The Company’s financial services commission was $133,000 for the three month period ended March 31, 2016 as compared to $140,000 for the three month period ended March 31, 2017. For the three month period ended March 31, 2017, gains on the sale of securities were $2,000, as compared to $291,000 for the three month period ended March 31, 2016. For the three month period ended March 31, 2017, the Company’s liquidity position grew due to an increase in deposits, eliminating the need for the Company to sell securities for liquidity purposes.

Non-Interest Expenses. There was a $6,000 increase in total non-interest expenses for the three month period ended March 31, 2017 as compared to the three month period ended March 31, 2016. The most significant change in non-interest expenses was a $248,000 increase in salaries and benefits expense. The increase in salaries and benefits expense is largely the result of a $67,000 increase in health insurance benefits due to an increase in medical insurance and a $146,000 increase in overall compensation.

For the three month period ended March 31, 2017, other operating expenses were $846,000 as compared to $1.2 million for the three month period ended March 31, 2016. The reduction in other expenses is attributable to several factors, including reduced legal cost as the Company sought to obtain legal title to properties owned by past due borrowers. These properties, now held in foreclosed assets, resulted in an expense of foreclosed assets of $108,000 for the three month period ended March 31, 2017 as compared to $68,000 for the three month period ended March 31, 2016.

Income Taxes. The effective tax rate for the three month periods ending March 31, 2017 was 12.6% due to the modest level of taxable net interest income and a higher level of tax free income and an increase in income from bank owned life insurance resulting from the receipt of approximately $170,000 in from the proceeds of a life insurance policy. For the three month period ended March 31, 2016, the Company’s taxable net income effective rate was 8.3% due to very low levels of net income and a relatively higher level of tax free income.

 

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

At March 31, 2017, the Bank’s brokered deposits consisted of the following:

 

Issue Date		Interest Rate				Balance				Maturity Date
1/9/2015			1.00	%		$	2,077,000				4/9/2017
1/15/2016			1.00	%			2,028,000				5/15/2017
10/16/2015			0.85	%			4,042,000				7/16/2017
7/27/2015			1.00	%			1,500,000				7/27/2017
8/16/2016			0.75	%			2,153,000				10/16/2017
7/22/2016			0.75	%			2,070,000				11/22/2017
10/24/2016			0.80	%			964,000				12/24/2017
1/3/2013			1.00	%			3,030,000				1/3/2018
1/9/2015			1.20	%			2,004,000				1/9/2018
7/29/2016			0.85	%			1,887,000				3/29/2018
1/12/2017			1.10	%			5,433,000				4/12/2018
2/15/2017			1.10	%			4,986,000				5/15/2018
10/24/2016			1.00	%			2,149,000				6/24/2018
1/12/2017			1.25	%			5,074,000				9/12/2018
2/15/2017			1.30	%			4,278,000				12/15/2018
8/16/2016			1.00	%			1,008,000				2/16/2019
7/22/2016			1.00	%			2,138,000				5/22/2019
7/29/2016			1.05	%			2,964,000				7/29/2019
8/16/2016			1.10	%			1,978,000				8/16/2019
Total						$	51,763,000

 

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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, 2017 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 March 31, 2017 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 March 31, 2017 for the twelve month period ending March 31, 2018 is as follows:

 

		Down 1.00%				No change				Up 1.00%				Up 2.00%				Up 3.00%
		(Dollars in Thousands)
Net interest income		$	27,877			$	29,162			$	30,120			$	30,838			$	31,399

 

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended March 31, 2017.

Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the three months ended March 31, 2017 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

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

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

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended March 31, 2017 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

On May 4, 2017, the Company, its President, Chief Executive Officer and a director, its Executive Vice President and a director, its other current directors and a former director were named in a lawsuit filed in the Court of Chancery of the State of Delaware by Stilwell Associates, L.P., Stilwell Activist Fund, L.P., and Stilwell Activist Investments, L.P. (collectively the “Stilwell Funds”). The complaint alleges that the defendants adopted Article III, Section 13 (“Director Qualifications”) of the Company’s Bylaws for the improper purpose of blocking the Stilwell Funds from nominating a director to join the Company’s Board of Directors.

 

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 10-K for the fiscal year ended December 31, 2016.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Unregistered Sales of Equity Securities.

N/A

 

(b)

Use of Proceeds. Not applicable

 

(c)

Repurchase of Equity Securities

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total number of shares Purchased as part of Publically Announced Programs				Maximum Number of Shares that Yet may be Purchased Under the Program at the end of the period
January 1, 2017 to January 31, 2017			—				—				1,846,136				92,550
February 1, 2017 to February 28, 2017			563			$	12.60				1,846,699				91,987
March 1, 2017 to March 31, 2017			130			$	12.50				1,846,829				91,857
Total			693			$	12.58				1,846,829				91,857

 

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Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Mine Safety Disclosures

Not Applicable

 

Item 5.

Other Information

None

 

Item 6.

Exhibits

 

 

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SIGNATURES

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

 

						HOPFED BANCORP, INC.
Date: May 9, 2017						/s/ John E. Peck
						John E. Peck
						President and Chief Executive Officer
Date: May 9, 2017						/s/ Billy C. Duvall
						Billy C. Duvall
						Senior Vice President, Chief Financial
						Officer and Treasurer

 

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