Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2015

OR

 

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

Commission File Number: 000-23667

 

 

HOPFED BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		61-1322555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4155 Lafayette Road, Hopkinsville, Kentucky		42240
(Address of principal executive offices)		(Zip Code)

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

 

 

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

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

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

 

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

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

As of August 5, 2015, the Registrant had outstanding 6,975,308 shares of the Registrant’s Common stock.

 

 

 

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CONTENTS

HOPFED BANCORP, INC.

 

				PAGE
PART I.		FINANCIAL INFORMATION
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.		Financial Statements
		Consolidated Condensed Statements of Financial Condition as of June 30, 2015, (unaudited) and December  31, 2014			2
		Consolidated Condensed Statements of Income (Loss) for the Three and Six Month Periods Ended June  30, 2015, and June 30, 2014 (unaudited)			4
		Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended June 30, 2015, and June 30, 2014 (unaudited)			6
		Consolidated Condensed Statement of Stockholders’ Equity for the Six Month Periods Ended June  30, 2015, and June 30, 2014 (unaudited)			7
		Consolidated Condensed Statements of Cash Flows for the Six Month Periods Ended June 30, 2015, and June  30, 2014 (unaudited)			9
		Notes to Unaudited Consolidated Condensed Financial Statements			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			54
Item 4.		Controls and Procedures			54
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			55
Item 1A.		Risk Factors			55
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			56
Item 3.		Defaults Upon Senior Securities			56
Item 4.		Mine Safety Disclosures			56
Item 5.		Other Information			56
Item 6.		Exhibits			57
SIGNATURES					58

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

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

 

		June 30, 2015				December 31, 2014
		(Unaudited)
Assets
Cash and due from banks		$	16,538				34,389
Interest-earning deposits			3,145				6,050
Cash and cash equivalents			19,683				40,439
Federal Home Loan Bank stock, at cost			4,428				4,428
Securities available for sale			247,673				303,628
Loans held for sale			2,470				1,444
Loans receivable, net of allowance for loan losses of $5,534 at June 30, 2015, and $6,289 at December 31, 2014			554,806				539,264
Accrued interest receivable			3,873				4,576
Real estate and other assets owned			1,795				1,927
Bank owned life insurance			10,128				9,984
Premises and equipment, net			24,171				22,940
Deferred tax assets			1,668				2,261
Intangible asset			—				33
Other assets			6,918				4,861
Total assets		$	877,613				935,785
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts		$	112,396				115,051
Interest-bearing accounts
Interest-bearing checking accounts			185,642				186,616
Savings and money market accounts			99,020				97,726
Other time deposits			320,461				331,915
Total deposits			717,519				731,308
Advances from Federal Home Loan Bank			9,000				34,000
Repurchase agreements			48,224				57,358
Subordinated debentures			10,310				10,310
Advances from borrowers for taxes and insurance			792				513
Dividends payable			296				301
Accrued expenses and other liabilities			3,216				3,593
Total liabilities			789,357				837,383

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, Except Share and Per Share Amounts)

 

		June 30, 2015				December 31, 2014
		(Unaudited)
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at June 30, 2015, and December 31, 2014.		$	—				—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,950,436 issued and 6,977,245 outstanding at June 30, 2015, and 7,949,665 issued and 7,171,282 outstanding at December 31, 2014			79				79
Additional paid-in-capital			58,552				58,466
Retained earnings			46,455				45,729
Treasury stock - common (at cost, 973,191 shares at June 30, 2015, and 778,383 shares at December 31, 2014)			(12,159	)			(9,429	)
Unallocated ESOP shares (at cost, 570,830 shares at June 30, 2015, and no shares at December 31, 2014)			(7,525	)			—
Accumulated other comprehensive income, net of taxes			2,854				3,557
Total stockholders’ equity			88,256				98,402
Total liabilities and stockholders’ equity		$	877,613				935,785

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

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income (Loss)

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

 

		For the Three Month Periods Ended June 30,								For the Six Month Periods Ended June 30,
		2015				2014				2015				2014
Interest income:
Loans receivable		$	6,231				6,503				12,521				12,830
Securities available for sale - taxable			1,268				1,694				3,716				3,473
Securities available for sale - nontaxable			416				531				869				1,075
Interest-earning deposits			4				6				8				14
Total interest income			7,919				8,734				17,114				17,392
Interest expense:
Deposits			1,245				1,488				2,505				2,959
Advances from Federal Home Loan Bank			66				428				135				862
Repurchase agreements			118				245				238				494
Subordinated debentures			183				193				367				377
Total interest expense			1,612				2,354				3,245				4,692
Net interest income			6,307				6,380				13,869				12,700
Provision for loan losses			270				(261	)			485				119
Net interest income after provision for loan losses			6,037				6,641				13,384				12,581
Non-interest income:
Service charges			720				848				1,434				1,626
Merchant card income			286				276				556				535
Mortgage origination revenue			343				133				520				191
Gain on sale of securities			83				241				449				254
Income from bank owned life insurance			73				66				144				161
Financial services commission			194				168				353				374
Other operating income			169				213				325				402
Total non-interest income			1,868				1,945				3,781				3,543

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income (Loss), Continued

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

(Unaudited)

 

		For the Three Month Periods Ended June 30,								For the Six Month Periods Ended June 30,
		2015				2014				2015				2014
Non-interest expenses:
Salaries and benefits		$	4,004				3,692				8,188				7,487
Occupancy			752				808				1,490				1,717
Data processing			701				736				1,393				1,464
Bank franchise tax			251				398				499				644
Intangible amortization			16				33				32				65
Professional services			468				341				797				628
Deposit insurance and examination			151				183				268				380
Advertising			340				341				646				655
Postage and communications			134				140				266				283
Supplies			111				158				257				303
Loss on real estate owned			741				102				734				125
Real estate owned			67				92				204				222
Other operating			498				423				930				798
Total non-interest expense			8,234				7,447				15,704				14,771
Income (loss) before income tax			(329	)			1,139				1,461				1,353
Income tax expense (benefit)			(212	)			214				223				74
Net income (loss)		($	117	)			925				1,238				1,279
Net income (loss) per share:
Basic		($	0.02	)			0.13				0.19				0.17
Diluted		($	0.02	)			0.13				0.19				0.17
Dividend per share		$	0.04				0.04				0.08				0.08
Weighted average shares outstanding - basic			6,425,687				7,376,726				6,588,845				7,396,627
Weighted average shares outstanding - diluted			6,425,687				7,376,726				6,588,845				7,396,627

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

(Unaudited)

 

		For the Three Month								For the Six Month
		Periods Ended June 30,								Periods Ended June 30,
		2015				2014				2015				2014
Net income (loss)		($	117	)			925				1,238				1,279
Other comprehensive income, net of tax:
Unrealized gains on securities for which a portion of an other than temporary impairment has been recorded in earnings:
Unrealized holding gains arising during the period			—				—				306				—
Income tax expense			—				—				(104	)			—
Other comprehensive income on available for sale for sale securities with other than temporary impairment			—				—				202				—
Unrealized gain (loss) on investment securities available for sale, net of tax effect of $907 and ($1,340) for the three month periods ended June 30, 2015, and June 30, 2014, respectively; and $379 and ($2,260) for the six month periods ended June 30, 2015, and June 30, 2014, respectively;			(1,761	)			2,601				(736	)			4,387
Unrealized gain on derivatives, net of tax effect of ($32) and ($31) for the three month periods ended June 30, 2015, and June 30, 2014, respectively; and of ($65) and ($56) for the six month periods ending June 30, 2015, and June 30, 2014, respectively;			63				60				127				109
Reclassification adjustment for gains included in net income, net of tax effect of $28 and $82 for the three month periods ended June 30, 2015, and June 30, 2014, respectively; and $153 and $86 the six month periods ended June 30, 2015, and June 30, 2014, respectively;			(54	)			(159	)			(296	)			(168	)
Other comprehensive income (loss) on available for sale without other than temporary impairment			(1,752	)			2,502				(905	)			4,328
Total other comprehensive income (loss)			(1,752	)			2,502				(703	)			4,328
Comprehensive income (loss)		($	1,869	)			3,427				535				5,607

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Six Month Period Ended June 30, 2014

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

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

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Six Month Period Ended June 30, 2015

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

 

		Shares Common Stock				Common Stock				Additional Capital Surplus				Retained Earnings				Treasury Stock Common				Unearned ESOP Shares				Accumulated Other Comprehensive Income				Total Stockholders Equity
Balance at December 31, 2014			7,171,282			$	79				58,466				45,729				(9,429	)			—				3,557				98,402
Consolidated net income			—				—				—				1,238				—				—				—				1,238
Treasury stock reissued			600,000				—				—				—				7,884				(7,884	)			—				—
Restricted stock issued			771				—				—				—				—				—				—				—
Repurchase of treasury stock			(794,808	)			—				—				—				(10,614	)			—				—				(10,614	)
ESOP shares committed to release			—				—				—				—				—				359				—				359
Change in price of ESOP shares			—				—				(12	)			—				—				—				—				(12	)
Compensation expense, restricted stock awards			—				—				98				—				—				—				—				98
Net change in unrealized gain on securities available for sale, net of income taxes of $428			—				—				—				—				—				—				(830	)			(830	)
Net change in unrealized loss on derivatives, net of income taxes of ($65)			—				—				—				—				—				—				127				127
Cash dividend to common stockholders			—				—				—				(512	)			—				—				—				(512	)
Balance June 30, 2015			6,977,245			$	79				58,552				46,455				(12,159	)			(7,525	)			2,854				88,256

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

		For the Six Month Periods June 30,
		2015				2014
Cash flows from operating activities:
Net cash provided by operating activities		$	2,306			$	4,477
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities available for sale			80,197				52,414
Purchase of securities available for sale			(25,989	)			(59,556	)
Net (increase) decrease in loans			(16,874	)			5,560
Proceeds from sale of foreclosed assets			240				249
Purchase of premises and equipment			(1,842	)			(508	)
Net cash provided by (used in) investing activities			35,732				(1,841	)
Cash flows from financing activities:
Net decrease in demand deposits			(2,655	)			(1,702	)
Net decrease in time and other deposits			(11,134	)			(18,026	)
Increase in advances from borrowers for taxes and insurance			279				202
Advances from Federal Home Loan Bank			15,000				15,000
Repayment of advances from Federal Home Loan Bank			(40,000	)			(21,004	)
Net decrease in repurchase agreements			(9,134	)			(1,634	)
Cash used to repurchase treasury stock			(10,614	)			(838	)
Dividends paid on common stock			(536	)			(591	)
Net cash used in financing activities			(58,794	)			(28,593	)
Decrease in cash and cash equivalents			(20,756	)			(25,957	)
Cash and cash equivalents, beginning of period			40,439				55,848
Cash and cash equivalents, end of period			19,683				29,891
Supplemental disclosures of cash flow information:
Interest paid		$	3,279				4,752
Income taxes paid		$	55				—
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off		$	1,357				588
Foreclosures and in substance foreclosures of loans during period		$	842				190
Net unrealized gains (losses) on investment securities classified as available for sale		$	(1,258	)			6,392
Increase (decrease) in deferred tax asset related to unrealized gains on investments		$	428				(2,173	)
Dividends declared and payable		$	296				308
Issue of treasury stock to ESOP		$	7,884				—

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

(1)	BASIS OF PRESENTATION

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

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

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

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the three month period ended June 30, 2015, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2015.

The accompanying unaudited financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2014, Consolidated Financial Statements.

 

 

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(2)	INCOME (LOSS) PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted income (loss) per share (“IPS”) computations for the three and six month periods ended June 30, 2015, and June 30, 2014. For the three and six month periods ended June 30, 2015, the Company’s financial statements reflect a liability adequate to release of 29,170 shares from the HopFed Bancorp, Inc. 2015 Employee Stock Ownership Plan (the “ESOP”). Therefore, the Company has included 29,170 shares held by the ESOP in the IPS calculation. The Company has excluded 570,830 unearned shares purchased and owned by the ESOP from our IPS computations. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrants outstanding.

 

		Three Month Period Ended June 30,
		2015				2014
Basic IPS:
Net income (loss)		($	117,000	)		$	925,000
Average common shares outstanding			6,425,687				7,376,726
Net income (loss) per share		($	0.02	)		$	0.13
Diluted IPS
Net income (loss)		($	117,000	)		$	925,000
Average common shares outstanding			6,425,687				7,376,726
Dilutive effect of stock options			—				—
Average diluted shares outstanding			6,425,687				7,376,726
Net income (loss) per share, diluted		($	0.02	)		$	0.13
		Six Month Period Ended June 30,
		2015				2014
Basic IPS:
Net income		$	1,238,000			$	1,279,000
Average common shares outstanding			6,588,845				7,396,627
Net income per share		$	0.19			$	0.17
Diluted IPS
Net income		$	1,238,000			$	1,279,000
Average common shares outstanding			6,588,845				7,396,627
Dilutive effect of stock options			—				—
Average diluted shares outstanding			6,588,845				7,396,627
Net income per share, diluted		$	0.19			$	0.17

 

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(3)	STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $49,000 and $98,000 for the three and six month periods ended June 30, 2015, and $35,000 and $65,000 for the three and six month periods ended June 30, 2014, respectively. The Company issued 771 shares during the three and six month periods ended June 30, 2015. The Company issued 20,238 shares of restricted stock during the three and six month periods ended June 30, 2014. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at June 30, 2015:

 

Year Ending December 31,		Future Expense
2015		$	89,875
2016			135,283
2017			48,459
2018			5,630
2019			725
Total		$	279,972

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

 

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(4)	SECURITIES

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

At June 30, 2015, the Company has 61 securities with unrealized losses. The carrying amount of securities and their estimated fair values at June 30, 2015, were as follows:

 

		June 30, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in Thousands)
Restricted:
FHLB stock		$	4,428				—				—				4,428
Available for sale
U.S. Treasury securities		$	2,001				10				—				2,011
Agency debt securities			92,585				1,971				(539	)			94,017
Taxable municipal bonds			8,428				150				(78	)			8,500
Tax free municipal bonds			49,143				2,511				(202	)			51,452
Trust preferred securities			1,608				195				—				1,803
Mortgage-backed securities:
GNMA			21,874				252				(124	)			22,002
FNMA			32,733				423				(112	)			33,044
FHLMC			5,657				30				(34	)			5,653
SLMA CMO			3,806				—				(23	)			3,783
AGENCY CMO			25,316				186				(94	)			25,408
		$	243,151				5,728				(1,206	)			247,673

 

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

 

		December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in Thousands)
Restricted:
FHLB stock		$	4,428				—				—				4,428
Available for sale
U.S. Treasury securities		$	3,977				3				—				3,980
Agency debt securities			101,654				2,125				(527	)			103,252
Tax free municipal bonds			57,399				3,814				(166	)			61,047
Taxable municipal bonds			11,871				235				(63	)			12,043
Trust preferred securities			1,600				—				(111	)			1,489
Commercial bonds			2,000				7				—				2,007
Mortgage-backed securities:
GNMA			27,535				670				(122	)			28,083
FNMA			50,617				694				(536	)			50,775
FHLMC			3,276				38				—				3,314
SLMA CMO			9,895				—				(252	)			9,643
AGENCY CMO			28,024				176				(205	)			27,995
		$	297,848				7,762				(1,982	)			303,628

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

 

June 30, 2015		Amortized Cost				Estimated Fair Value
Due within one year		$	4,830			$	4,927
Due in one to five years			16,675				16,972
Due in five to ten years			40,668				41,210
Due after ten years			26,089				27,452
			88,262				90,561
Amortizing agency bonds			65,503				67,222
Mortgage-backed securities			89,386				89,890
Total unrestricted securities available for sale		$	243,151			$	247,673

 

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

 

December 31, 2014		Amortized Cost				Estimated Fair Value
Due within one year		$	4,830			$	4,927
Due in one to five years			21,564				21,818
Due in five to ten years			41,683				42,613
Due after ten years			33,119				35,380
			101,196				104,738
Amortizing agency bonds			77,305				79,080
Mortgage-backed securities			119,347				119,810
Total unrestricted securities available for sale		$	297,848			$	303,628

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

 

		Less than 12 months								12 months or longer								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
		(Dollars in Thousands)
Available for sale
U.S. Agency debt securities		$	20,573				(172	)			14,473				(367	)			35,046				(539	)
Taxable municipals			2,043				(15	)			2,994				(63	)			5,037				(78	)
Tax free municipals			1,475				(3	)			6,209				(199	)			7,684				(202	)
Mortgage-backed securities:
GNMA			4,954				(38	)			11,177				(86	)			16,131				(124	)
FNMA			7,338				(62	)			3,068				(50	)			10,406				(112	)
FHLMC			2,663				(34	)			—				—				2,663				(34	)
SLMA CMOs			183				(2	)			3,600				(21	)			3,783				(23	)
AGENCY CMOs			8,245				(29	)			1,970				(65	)			10,215				(94	)
Total available for sale		$	47,474				(355	)			43,491				(851	)			90,965				(1,206	)

 

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

 

		Less than 12 months								12 months or longer								Total
December 31, 2014		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
Available for sale
U.S. Agency debt securities		$	14,021				(20	)			29,156				(507	)			43,177				(527	)
Taxable municipals			—				—				4,785				(63	)			4,785				(63	)
Tax free municipals			—				—				6,647				(166	)			6,647				(166	)
Trust preferred securities			—				—				1,489				(111	)			1,489				(111	)
Mortgage-backed securities:
GNMA			12,568				(108	)			2,895				(14	)			15,463				(122	)
FNMA			—				—				18,927				(536	)			18,927				(536	)
SLMA CMOs			1,923				(14	)			7,720				(238	)			9,643				(252	)
AGENCY CMOs			9,545				(91	)			7,685				(114	)			17,230				(205	)
Total available for sale		$	38,057				(233	)			79,304				(1,749	)			117,361				(1,982	)

At June 30, 2015, securities with a book value of approximately $162.8 million and a market value of approximately $168.2 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law.

At June 30, 2015, securities with a book and market value of $42.2 million were sold under agreements to repurchase from various customers. Furthermore, the Company has a wholesale repurchase agreement with third party secured by investments with a combined book value of $6.9 million and a market value of $7.1 million. The repurchase agreement is in the amount of $6.0 million and has a maturity of September 18, 2016, and is currently callable on a quarterly basis and has a fixed rate of interest of 4.36%.

 

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(5)

LOANS

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

 

		June 30, 2015				June 30, 2015				December 31, 2014				December 31, 2014
		Amount				Percent				Amount				Percent
		(Dollars in thousands, except percentages)
Real estate loans
One-to-four family (closed end) first mortgages		$	146,285				26.1	%		$	150,551				27.6	%
Second mortgages (closed end)			2,046				0.4	%			2,102				0.4	%
Home equity lines of credit			33,803				6.0	%			34,238				6.3	%
Multi-family			22,580				4.0	%			25,991				4.8	%
Construction			27,072				4.8	%			24,241				4.4	%
Land			24,521				4.4	%			26,654				4.9	%
Farmland			41,224				7.4	%			42,874				7.8	%
Non-residential real estate			160,039				28.5	%			150,596				27.6	%
Total mortgage loans			457,570				81.6	%			457,247				83.8	%
Consumer loans			16,011				2.9	%			14,438				2.6	%
Commercial loans			87,148				15.5	%			74,154				13.6	%
Total other loans			103,159				18.4	%			88,592				16.2	%
Total loans, gross			560,729				100.0	%			545,839				100.0	%
Deferred loan cost, net of income			(389	)							(286	)
Less allowance for loan losses			(5,534	)							(6,289	)
Total loans		$	554,806							$	539,264

The allowance for loan losses totaled $5.5 million at June 30, 2015, $6.3 million at December 31, 2014, and $8.4 million at June 30, 2014, respectively. The ratio of the allowance for loan losses to total loans was 0.99% at June 30, 2015, 1.15% at December 31, 2014, and 1.53% at June 30, 2014. The following table indicates the type and level of non-accrual loans at the periods indicated below:

 

		June 30, 2015				December 31, 2014				June 30, 2014
		(Dollars in Thousands)
One-to-four family mortgages		$	1,456				1,501				524
Home equity line of credit			48				—				29
Multi-family			1,827				95				—
Land			1,982				215				1,217
Non-residential real estate			520				1,159				6,520
Farmland			209				115				13
Consumer loans			—				—				1
Commercial loans			1,014				90				431
Total non-accrual loans		$	7,056				3,175				8,735

 

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The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the six month period ended June 30, 2015:

 

Six month period ended June 30, 2015		Balance 12/31/2014				Charge off 2015				Recovery 2015				General Provision 2015				Specific Provision 2015				Ending Balance 6/30/2015
One-to-four family mortgages		$	1,198				(88	)			21				61				(194	)			998
Home equity line of credit			181				(92	)			3				89				15				196
Junior liens			14				—				2				(2	)			(4	)			10
Multi-family			85				—				—				—				(12	)			73
Construction			146				—				—				—				20				166
Land			1,123				(631	)			—				84				597				1,173
Non-residential real estate			2,083				(222	)			2				(73	)			(150	)			1,640
Farmland			461				—				—				—				(94	)			367
Consumer loans			494				(177	)			73				91				(134	)			347
Commercial loans			504				(147	)			16				222				(31	)			564
		$	6,289				(1,357	)			117				472				13				5,534

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2014:

 

Year ended December 31, 2014		Balance 12/31/2013				Charge off 2014				Recovery 2014				General Provision 2014				Specific Provision 2014				Ending Balance 12/31/2014
One-to-four family mortgages		$	2,048				(233	)			24				(304	)			(337	)			1,198
Home equity line of credit			218				(83	)			3				(37	)			80				181
Junior liens			39				—				9				(25	)			(9	)			14
Multi-family			466				—				—				(381	)			—				85
Construction			88				(139	)			9				58				130				146
Land			1,305				—				—				(74	)			(108	)			1,123
Non-residential real estate			2,719				(66	)			864				(1,368	)			(66	)			2,083
Farmland			510				—				—				542				(591	)			461
Consumer loans			541				(415	)			109				(13	)			272				494
Commercial loans			748				(296	)			94				(244	)			202				504
		$	8,682				(1,232	)			1,112				(1,846	)			(427	)			6,289

 

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

 

						30 – 89												Impaired Loans
		Currently				Days				Non-accrual				Special				Currently Performing
June 30, 2015		Performing				Past Due				Loans				Mention				Substandard				Doubtful				Total
		(Dollars in Thousands)
One-to-four family mortgages		$	142,987				398				1,456				42				1,402				—				146,285
Home equity line of credit			33,113				69				48				—				573				—				33,803
Junior liens			1,992				—				—				38				16				—				2,046
Multi-family			17,818				140				1,827				1,655				1,140				—				22,580
Construction			26,972				100				—				—				—				—				27,072
Land			14,425				—				1,982				44				8,070				—				24,521
Non-residential real estate			149,565				162				520				640				9,152				—				160,039
Farmland			40,143				168				209				681				23				—				41,224
Consumer loans			15,790				13				—				14				194				—				16,011
Commercial loans			84,772				126				1,014				169				1,067				—				87,148
Total		$	527,577				1,176				7,056				3,283				21,637				—				560,729

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

 

						30 - 89												Impaired Loans
		Currently				Days				Non-accrual				Special				Currently Performing
		Performing				Past Due				Loans				Mention				Substandard				Doubtful				Total
One-to-four family mortgages		$	145,372				757				1,501				203				2,718				—				150,551
Home equity line of credit			33,338				143				—				—				757				—				34,238
Junior liens			2,025				—				—				40				37				—				2,102
Multi-family			20,066				—				95				2,904				2,926				—				25,991
Construction			24,241				—				—				—				—				—				24,241
Land			14,674				654				215				362				10,749				—				26,654
Non-residential real estate			131,854				—				1,159				5,492				12,091				—				150,596
Farmland			40,057				64				115				516				2,122				—				42,874
Consumer loans			14,104				14				—				21				299				—				14,438
Commercial loans			71,191				55				90				325				2,493				—				74,154
Total		$	496,922				1,687				3,175				9,863				34,192				—				545,839

 

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

 

		Commercial				Land Development / Construction				Commercial Real Estate				Residential Real Estate				Consumer				Total
June 30, 2015:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	91				116				445				46				48			$	746
Collectively evaluated for impairment			473				1,223				1,635				1,158				299				4,788
Total ending allowance balance		$	564				1,339				2,080				1,204				347			$	5,534
Loans:
Loans individually evaluated for impairment		$	2,081				10,052				12,871				3,495				194			$	28,693
Loans collectively evaluated for impairment			85,067				41,541				210,972				178,639				15,817				532,036
Total ending loans balance		$	87,148				51,593				223,843				182,134				16,011			$	560,729
		Commercial				Land Development / Construction				Commercial Real Estate				Residential Real Estate				Consumer				Total
December 31, 2014:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	—				663				738				51				62			$	1,514
Collectively evaluated for impairment			504				606				1,891				1,342				432				4,775
Total ending allowance balance		$	504				1,269				2,629				1,393				494			$	6,289
Loans:
Loans individually evaluated for impairment		$	2,583				10,964				18,508				5,013				299			$	37,367
Loans collectively evaluated for impairment			71,571				39,931				200,953				181,878				14,139				508,472
Total ending loans balance		$	74,154				50,895				219,461				186,891				14,438			$	545,839

 

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

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

The Company’s annualized net charge off ratios for six month periods ended June 30, 2015, June 30, 2014, and the year ended December 31, 2014, was 0.45%, 0.16% and 0.02%, respectively. The ratios of allowance for loan losses to non-accrual loans at June 30, 2015, June 30, 2014, and December 31, 2014, were 78.4%, 95.6%, and 198.08%, respectively.

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

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

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

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

 

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Watch loans are acceptable credits: (1) that need continual monitoring, such as out-of territory or asset-based loans (since the Bank does not have an asset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends; (b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such as one-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency. If considered marginal, a loan would be a “watch” until financial data demonstrated improved performance or further deterioration to a “substandard” grade usually within a 12-month period. In the table on page 23, Watch loans are included with satisfactory loans and classified as Pass.

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

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

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

A loan is considered to be impaired when management determines that it is possible that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral less cost to sell if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired. At June 30, 2015, December 31, 2014, and June 30, 2014, the Company’s impaired loans totaled $28.7 million, $37.4 million and $37.7 million, respectively.

 

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At June 30, 2015, December 31, 2014 and June 30, 2014, the Company’s specific reserve for impaired loans totaled $746,000, $1.5 million and $1.5 million respectively. Loans by classification type and the related allowance amounts at June 30, 2015, are as follows:

 

																						Specific				Reserve
																						Reserve				for
						Special				Impaired Loans												for				Performing
June 30, 2015		Pass				Mention				Substandard				Doubful				Total				Impairment				Loans
		(Dollars in Thousands)
One-to-four family mortgages		$	143,385				42				2,858				—				146,285				46				952
Home equity line of credit			33,182				—				621				—				33,803				—				196
Junior liens			1,992				38				16				—				2,046				—				10
Multi-family			17,958				1,655				2,967				—				22,580				—				73
Construction			27,072				—				—				—				27,072				—				166
Land			14,425				44				10,052				—				24,521				116				1,057
Non-residential real estate			149,727				640				9,672				—				160,039				445				1,195
Farmland			40,311				681				232				—				41,224				—				367
Consumer loans			15,803				14				194				—				16,011				48				299
Commercial loans			84,898				169				2,081				—				87,148				91				473
Total		$	528,753				3,283				28,693				—				560,729				746				4,788
Loans by classification type and the related valuation allowance amounts at December 31, 2014, are as follows:
						Special				Impaired Loans												Specific Allowance for				Allowance For Loans
		Pass				Mention				Substandard				Doubtful				Total				Impairment				Not Impaired
December 31, 2014
One-to-four family mortgages		$	146,129				203				4,219				—				150,551				51				1,147
Home equity line of credit			33,481				—				757				—				34,238				—				181
Junior lien			2,025				40				37				—				2,102				—				14
Multi-family			20,066				2,904				3,021				—				25,991				—				85
Construction			24,241				—				—				—				24,241				—				146
Land			15,328				362				10,964				—				26,654				663				460
Non-residential real estate			131,854				5,492				13,250				—				150,596				738				1,345
Farmland			40,121				516				2,237				—				42,874				—				461
Consumer loans			14,118				21				299				—				14,438				62				432
Commercial loans			71,246				325				2,583				—				74,154				—				504
Total		$	498,609				9,863				37,367				—				545,839				1,514				4,775

 

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

 

														For the three month period ended
		At June 30, 2015												June 30, 2015
						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
Impaired loans with no recorded reserve
One-to-four family mortgages		$	2,148				2,175				—				2,408				11
Home equity line of credit			621				621				—				693				—
Junior liens			16				16				—				18				—
Multi-family			2,967				2,967				—				2,982				34
Construction			—				—				—				—				—
Land			9,456				10,087				—				8,376				20
Farmland			232				232				—				237				—
Non-residential real estate			8,949				8,949				—				9,580				18
Consumer loans			3				3				—				5				—
Commercial loans			1,727				1,727				—				1,607				21
Total			26,119				26,777				—				25,906				104
Impaired loans with a specific allowance:
One-to-four family mortgages			710				710				46				712				—
Home equity line of credit			—				—				—				—				—
Junior liens			—				—				—				—				—
Multi-family			—				—				—				—				—
Construction			—				—				—				—				—
Land			596				596				116				2,009				—
Farmland			—				—				—				—				—
Non-residential real estate			723				723				445				952				—
Consumer loans			191				191				48				185				—
Commercial loans			354				354				91				529				16
Total			2,574				2,574				746				4,387				16
Total impaired loans		$	28,693				29,351				746				30,293				120

 

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

 

														For the year ended
		At December 31, 2014												December 31, 2014
						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
Impaired loans with no specific allowance
One-to-four family mortgages		$	3,501				3,501				—				2,972				176
Home equity line of credit			757				757				—				690				35
Junior liens			37				37				—				39				2
Multi-family			3,021				3,021				—				1,342				190
Construction			—				—				—				29				—
Land			7,740				7,740				—				8,978				339
Non-residential real estate			12,057				12,057				—				8,672				669
Farmland			2,237				2,237								3,968				125
Consumer loans			51				51				—				36				3
Commercial loans			2,583				2,583				—				2,246				154
Total			31,984				31,984				—				28,972				1,693
Impaired loans with a specific allowance
One-to-four family mortgages		$	718				718				51				1,434				44
Home equity line of credit			—				—				—				—				—
Junior liens			—				—				—				—				—
Multi-family			—				—				—				—				—
Construction			—				—				—				—				—
Land			3,224				4,737				663				3,418				160
Non-residential real estate			1,193				1,258				738				3,617				69
Farmland			—				—				—				619				—
Consumer loans			248				248				62				355				—
Commercial loans			—				—				—				100				—
Total			5,383				6,961				1,514				9,543				273
Total impaired loans		$	37,367				38,945				1,514				38,515				1,966

 

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

 

•

The restructuring constitutes a concession

 

•

The debtor is experiencing financial difficulties

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

 

•

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

 

•

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

 

•

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

At December 31, 2014, and June 30, 2015, the Company had two loans classified as performing TDRs. At June 30, 2015, the terms of both loans are interest only and are paying as agreed. There was no activity in loans classified as TDRs for the six month ended June 30, 2015. A summary of the activity in loans classified as TDRs for the six month period ended June 30, 2015, is as follows:

 

		Balance at 12/31/14				New TDR				Loss or Foreclosure				Transferred to Held For Sale				Removed from (Taken to) Non-accrual				Balance at 6/30/15
		(Dollars in Thousands)
Non-residential real estate		$	3,284				—				—				—				—				3,284
Total performing TDR		$	3,284				—				—				—				—				3,284

 

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

 

		Balance at 12/31/13				New TDR				Loss or Foreclosure				Transferred to Held For Sale				Removed from (Taken to) Non-accrual				Balance at 12/31/14
		(Dollars in Thousands)
One-to-four family mortgages		$	—				—				—				—				—			$	—
Non-residential real estate			—				10,271				—				(6,987	)			—				3,284
Commercial loans			—				—				—				—				—				—
Total performing TDR		$	—				10,271				—				(6,987	)			—			$	3,284

 

(6)	REAL ESTATE AND OTHER ASSETS OWNED

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

At June 30, 2015, December 31, 2014, and June 30, 2014, the composition of the Company’s balances in both real estate and assets owned and non-accrual loans are as follows:

 

		June 30, 2015				December 31, 2014				June 30, 2014
		(Dollars in Thousands)
One-to-four family mortgages		$	115				159				356
Land			943				1,768				934
Non-residential real estate			737				—				200
Total other assets owned		$	1,795				1,927				1,490
Total non-accrual loans		$	7,056				3,175				8,735
Total non-performing assets		$	8,851				5,102				10,225
Non-performing assets / Total assets			1.01	%			0.55	%			1.08	%

 

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The following is a summary of the activity in the Company’s real estate and other assets owned for the six month period ending June 30, 2015:

 

		Balance				Activity During 2015								Reduction				Gain (Loss)				Balance
		12/31/2014				Foreclosures				Proceeds				in Values				on Sale				6/30/2015
		(Dollars in Thousands)
One-to-four family mortgages		$	159				105				(116	)			—				(33	)			115
Land			1,768				—				(124	)			—				(701	)			943
Non-residential real estate			—				737				—				—				—				737
Total		$	1,927				842				(240	)			—				(734	)			1,795

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

 

		Activity During 2014
		Balance 12/31/2013				Foreclosures				Sales				Reduction in Values				Gain (Loss) on Sale				Balance 12/31/2014
		(Dollars in Thousands)
One-to-four family mortgages		$	350				461				(667	)			(5	)			20				159
Land			1,124				943				(123	)			(157	)			(19	)			1,768
Non-residential real estate			200				175				(328	)			—				(47	)			—
Total		$	1,674				1,579				(1,118	)			(162	)			(46	)			1,927

 

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(7)	INVESTMENTS IN AFFILIATED COMPANIES

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

Summary Statements of Financial Condition

 

		At June 30, 2015				At December 31, 2014
Assets - investment in subordinated debentures issued by HopFed Bancorp, Inc.		$	10,310				10,310
Liabilities			—				—
Stockholder’s equity – trust preferred securities			10,000				10,000
Common stock (100% Owned by HopFed Bancorp, Inc.)			310				310
Total stockholders’ equity		$	10,310				10,310

Summary Statement of Income

 

		Three Month Periods Ended June 30,								Six Month Period Ended June 30,
		2015				2014				2015				2014
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.		$	89				87			$	174				173
Net income		$	89				87			$	174				173

Summary Statement of Stockholders’ Equity

(For the six month period ended June 30, 2015)

 

		Trust Preferred Securities				Common Stock				Retained Earnings				Total Stockholders’ Equity
Beginning balances, December 31, 2014		$	10,000				310				—				10,310
Net income			—				—				174				174
Dividends:
Trust preferred securities			—				—				(169	)			(169	)
Common paid to HopFed Bancorp, Inc.			—				—				(5	)			(5	)
Ending balances, June 30, 2015		$	10,000				310				—				10,310

 

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(8)	FAIR VALUE OF ASSETS AND LIABILITIES

In September 2006, the FASB issued ASC 820-10, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

 

•

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

 

•

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

 

•

Level 3 is for assets and liabilities in which significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company’s $1.8 million trust preferred is the only investment instrument classified as a Level 3 asset. The Company determines the value of the instrument by using the present value of scheduled future cash flows and discount accretion to determine an estimated market value for the security.

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

 

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Assets and Liabilities Measured on a Recurring Basis

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

 

June 30, 2015 Description		Total carrying value in the consolidated balance sheet at June 30, 2015				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Available for sale securities		$	247,673				2,010				243,860				1,803
Liabilities
Interest rate swap		$	198				—				198				—

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

 

December 31, 2014 Description		Total carrying value in the consolidated balance sheet at December 31, 2014				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Available for sale securities		$	303,628				—				302,139				1,489
Liabilities
Interest rate swap		$	390				—				390				—

 

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

 

June 30, 2015 Description		Total carrying value in the consolidated balance sheet at 6/ 30/ 2015				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in Thousands)
Assets
Other real estate and other assets owned		$	1,795				—				—			$	1,795
Impaired loans, net of reserve of $746		$	1,828				—				—			$	1,828

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

 

December 31, 2014 Description		Total carrying value in the consolidated balance sheet at 12/31/2014				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Other real estate and other assets owned		$	1,927				—				—			$	1,927
Impaired loans, net of reserve of $1,514		$	3,869				—				—			$	3,869

 

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The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the six month periods ended June 30, 2015, and June 30, 2014, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

		2015								2014
Six month period ended June 30,		Other Assets				Other Liabilities				Other Assets				Other Liabilities
		(Dollars in Thousands)
Fair value, January 1,		$	1,489				—				1,489				—
Change in unrealized losses included in other comprehensive income for assets and liabilities still held at June 30,			306				—				—				—
Accretion of previous discounted amounts			8
Purchases, issuances and settlements, net			—				—				—				—
Transfers in and/or out of Level 3			—				—				—				—
Fair value, June 30,		$	1,803				—				1,489				—

 

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

 

		Carrying Amount				Estimated Fair Value				Quoted Prices In Active Markets for Identical Assets Level 1				Using Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
Financial Assets:
Cash and due from banks		$	16,538				16,538				16,538				—				—
Interest-earning deposits			3,145				3,145				3,145				—				—
Securities available for sale			247,673				247,673				2,010				243,860				1,803
Federal Home Loan Bank stock			4,428				4,428				—				4,428				—
Loans held for sale			2,470				2,470				—				2,470				—
Loans receivable			554,806				554,193				—				—				554,193
Accrued interest receivable			3,873				3,873				—				3,873				—
Financial liabilities:
Deposits			717,519				700,283				—				700,283				—
Advances from borrowers for taxes and insurance			792				792				—				792				—
Advances from Federal Home Loan Bank			9,000				9,136				—				9,136				—
Repurchase agreements			48,224				48,485				—				48,485				—
Subordinated debentures			10,310				10,099				—				—				10,099
Off-balance-sheet liabilities:
Market value of interest rate swap			198				198				—				198				—

 

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

 

		Carrying Amount				Estimated Fair Value				Quoted Prices In Active Markets for Identical Assets Level 1				Using Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
Financial Assets:
Cash and due from banks		$	34,389				34,389				34,389				—				—
Interest-earning deposits			6,050				6,050				6,050				—				—
Securities available for sale			303,628				303,628				—				302,139				1,489
Federal Home Loan Bank stock			4,428				4,428				—				4,428				—
Loans held for sale			1,444				1,444				—				1,444				—
Loans receivable			539,264				537,493				—				—				537,493
Accrued interest receivable			4,576				4,576				—				4,576				—
Financial liabilities:
Deposits			731,308				714,750				—				714,750				—
Advances from borrowers for taxes and insurance			513				513				—				513				—
Advances from Federal Home Loan Bank			34,000				34,217				—				34,217				—
Repurchase agreements			57,358				57,688				—				57,688				—
Subordinated debentures			10,310				10,099				—				—				10,099
Off-balance-sheet liabilities:
Market value of interest rate swap			390				390				—				390				—

 

(9)	DERIVATIVE INSTRUMENTS

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

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

 

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

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. ASC 815 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the six month period ended June 30, 2015, or the year ended December 31, 2014.

In October of 2008, the Bank entered into an interest rate swap agreement for a term of seven years and an amount of $10.0 million. The Bank will pay a fixed rate of 7.27% for seven years and receive an amount equal to the three-month London Interbank Lending Rate (LIBOR) plus 3.10%. The interest rate swap is classified as a cash flow hedge by the Bank and will be tested quarterly for effectiveness. At June 30, 2015, and December 31, 2014, the cost of the Bank to terminate the cash flow hedge was approximately $198,000 and $390,000, respectively. The interest rate swap agreement expires October 8, 2015.

 

(10)	EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

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

 

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On June 12, 2014, the FASB issued ASU 2014-11, which makes limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements (“repos”). ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. ASU 2014-11 also amends ASC 860 to clarify that repos and securities lending transactions that do not meet all of the de-recognition criteria in ASC 860-10-40-5 should be accounted for as secured borrowings. In addition, the ASU provides examples of repurchase and securities lending arrangements that illustrate whether a transferor has maintained effective control over the transferred financial assets. For public business entities, the accounting changes are effective for the first interim or annual period beginning after December 15, 2014. The adoption of ASU 2014-11 did not have a material impact on the Company’s financial position or results of operations.

ASU 2014-1, which amends FASB ASC Topic 323, Investments – Equity Method and Joint Ventures. The ASU impacts the Company’s accounting for investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in the update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received. The entity recognizes the net investment performance in the income statement as a component of income tax expense. The Company has chosen to continue to utilize the equity method for reporting under this topic. For public business entities, the accounting changes are effective for annual periods and interim reporting periods beginning after December 15, 2014. The adoption of ASU 2014-01 did not have a material impact on the Company’s financial position or results of operations.

ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. However, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.

 

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The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The Company adopted ASU No. 2014-12 effective January 1, 2015. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. As of March 31, 2015, the Company did not have any share-based payment awards that included performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 did not have a material impact on the Company’s Consolidated Financial Statements.

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

ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the provisions of ASU No. 2015-02 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements. In May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016; however, the FASB has proposed a one year deferral of the effective date. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

Effective January 1, 2015, the Company adopted new guidance related to Receivables. The new guidance requires that a government guaranteed mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. The adoption of this guidance was not material to the consolidated financial statements.

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

 

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(11)

INCOME TAXES

The Company and its subsidiaries file consolidated federal income tax returns and Tennessee excise tax returns. The Company and its non-bank subsidiaries filed consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has accrued any interest or penalties for uncertain tax positions. The effective tax rate differs from the statutory federal rate of 34% and Tennessee excise rate of 6.50% due to investments in qualified municipal securities; bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses.

 

(12)

OTHER ASSETS

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

 

		For the three months ended								For the six months ended
		June 30,								June 30,
		2015				2014				2015				2014
Investment loss included in pre-tax income		$	55				51			$	110				102
Tax credits recognized in provision for income taxes		$	24				20			$	48				40

 

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(13)

ESOP PLAN

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

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

At June 30, 2015, the ESOP has not made a loan payment to the Company. At June 30, 2015, the Company has an accrued ESOP contribution liability of approximately $437,000. At June 30, 2015, the Company has calculated that our current accrual would be sufficient to release 29,170 shares of ESOP shares to participants. At June 30, 2015, shares held by the ESOP were as follows:

 

Accrued to allocate to Participants			29,170
Unearned ESOP shares			570,830
Total ESOP shares			600,000
Fair value of unearned shares		$	6,450,375

 

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

Critical Accounting Policies

The consolidated condensed financial statements as of June 30, 2015, and December 31, 2014, and for the three and six month periods ended June 30, 2015, and June 30, 2014, included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company’s 2014 Annual Report to Stockholders on Form 10-K.

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

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

At June 30, 2015, total assets declined $58.2 million, to $877.6 million as compared to $935.8 million at December 31, 2014, largely due to lower levels of time deposits, Federal Home Loan Bank (“FHLB”) advances, customer repurchase account balances and the purchase of $10.6 million in treasury stock. Securities available for sale declined from $303.6 million at December 31, 2014, to $247.7 million at June 30, 2015. At June 30, 2015, and December 31, 2014, securities classified as “available for sale” had an amortized cost of $243.2 million and $297.8 million, respectively.

The Company’s holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost was $4.4 million at December 31, 2014, and June 30, 2015. Total Federal Home Loan Bank “FHLB” borrowings declined $25.0 million, from $34.0 million at December 31, 2014, to $9.0 million at June 30, 2015. Total repurchase balances decreased from $57.4 million at December 31, 2014, to $48.2 million at June 30, 2015. Net loans totaled $554.8 million and $539.3 million at June 30, 2015, and December 31, 2014, respectively.

 

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At June 30, 2015, deposits declined to $717.5 million from $731.3 million at December 31, 2014. At June 30, 2015, non-interest checking account balances are $112.4 million, or 15.66% of total deposits as compared to $115.1 million, or 15.73% of total deposits at December 31, 2014. At June 30, 2015, time deposits were $320.5 million, representing a decline of $11.4 million as compared to December 31, 2014. The average cost of all deposits during the three month periods ended June 30, 2015 and June 30, 2014, was 0.69% and 0.78%, respectively.

At June 30, 2015, the Company has a $98.0 million in time deposits that are scheduled to mature between December 1, 2015, and February 28, 2016. The weighted average cost of time deposits maturing during this time frame is 1.86%, representing an annual interest expense of approximately $1.8 million.

Comparison of Operating Results for the Six Month Periods Ended June 30, 2015 and 2014.

Net Income. The Company’s net income was $1.2 million for the six month period ended June 30, 2015, as compared to net income of $1.3 million for the six month period ended June 30, 2014. The decline in the Company’s results for the six month period ended June 30, 2015, was largely the result of an increase in non-interest expenses which offset an improved level of net interest income.

Net Interest Income. Net interest income for the six month period ended June 30, 2015, was $13.9 million, compared to $12.7 million for the six month period ended June 30, 2014. The increase in net interest income for the six months ended June 30, 2015, as compared to June 30, 2014, was due to a $1.4 million decline in the Company’s interest expense and the collection of $830,000 of past due investment income from our investment in a subordinated debenture originally issued by First Financial Services Corporation (“FFKY”). FFKY was sold in January 2015 and the purchaser paid all interest current.

For the six months ended June 30, 2015, the average yield on loans was 4.58%, as compared to 4.79% for the six month period ended June 30, 2014. For the six month periods ended June 30, 2015, and June 30, 2014, income on taxable securities was $3.7 million and $3.5 million, respectively. For the six month period ending June 30, 2015, the tax equivalent yield on taxable and tax free securities were 3.46% and 4.70%, respectively, as compared to 2.63% and 4.82% for the six -month period ended June 30, 2014, respectively. For the six month period ended June 30, 2015, the yield on taxable securities excluding the recovery income from the FFKY sale was 2.69%.

For the six month periods ended June 30, 2015, and June 30, 2014, the Company’s cost of interest bearing liabilities was 0.94% and 1.24%, respectively. The lower cost of interest bearing liabilities was largely the result of the prepayment of FHLB advances in December 2014. For the six month period ended June 30, 2015, and June 30, 2014, the Company’s net interest margin was 3.48% and 3.01%, respectively.

 

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Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the six -month periods ended June 30, 2015, and June 30, 2014. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate six -month periods. Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $429,000 for the six month period ended June 30, 2015, and $524,000 for the six month period ended June 30, 2014, for a tax equivalent rate using a cost of funds rate of 0.94% for June 30, 2015, and 1.24% for June 30, 2014. The table adjusts tax-free loan income by $7,000 for June 30, 2015, and $6,000 for June 30, 2014, respectively, for a tax equivalent rate using the same cost of funds rate:

 

		Average Balance 06/30/2015				Income & Expense 06/30/2015				Average Rates 06/30/2015				Average Balance 06/30/2014				Income & Expense 06/30/2014				Average Rates 06/30/2014
Loans		$	547,071			$	12,528				4.58	%		$	535,830			$	12,836				4.79	%
Investments AFS taxable			214,920				3,716				3.46	%			264,596				3,473				2.63	%
Investments AFS tax free			55,281				1,298				4.70	%			66,303				1,599				4.82	%
Interest earning deposits			6,046				8				0.26	%			11,225				14				0.25	%
Total interest earning assets			823,318				17,550				4.26	%			877,954				17,922				4.08	%
Other assets			73,916												81,908
Total assets		$	897,234											$	959,862
Retail time deposits		$	290,499				1,676				1.15	%		$	326,464				1,890				1.16	%
Brokered deposits			34,006				190				1.12	%			44,061				291				1.32	%
Interest bearing checking accounts			192,921				538				0.56	%			189,518				682				0.72	%
MMDA and savings accounts			100,242				101				0.20	%			93,630				96				0.21	%
FHLB borrowings			20,685				135				1.31	%			43,775				862				3.94	%
Repurchase agreements			41,999				238				1.13	%			47,670				494				2.07	%
Subordinated debentures			10,310				367				7.12	%			10,310				377				7.31	%
Total interest bearing liabilities			690,662				3,245				0.94	%			755,428				4,692				1.24	%
Non-interest bearing deposits			111,120												101,987
Other non-interest bearing liabilities			3,413												4,525
Stockholders’ equity			92,039												97,922
Total liabilities and stockholders’ equity		$	897,234											$	959,862
Interest rate spread							14,305				3.32	%							13,230				2.84	%
Net interest margin							3.48	%											3.01	%

 

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Interest Income. For the six month periods ended June 30, 2015, and June 30, 2014, the Company’s total interest income was $17.1 million and $17.4 million, respectively. For the six month period ended June 30, 2015, and June 30, 2014, interest income on loans was $12.5 million and $12.8 million, respectively. The average balance of loans receivable increased from $535.8 million for the six month period ended June 30, 2014, to $547.1 million for the six month period ended June 30, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 116.2% for the six months ended June 30, 2014, to 119.2% for the six months ended June 30, 2015.

Interest Expense. Interest expense declined $1.4 million for the six month period ended June 30, 2015, as compared to the six month period ended June 30, 2014. For the six month period ending June 30, 2015, the Company’s interest expense on FHLB advances was $135,000, compared to $862,000 for the six month period ended June 30, 2014. The Company’s decision to prepay $35.9 million in FHLB advances was the most significant contributing factor in the reduction of the Company’s borrowing expense. The average balance of funds borrowed from the FHLB declined to $20.7 million, from $43.8 million for the six months ended June 30, 2014. The average cost of FHLB borrowing were 3.94% for the six months ended June 30, 2014, and 1.31% for the six months ended June 30, 2015.

The average cost of brokered deposits declined from 1.32% for the six months ended June 30, 2014, to 1.12% for the six months ended June 30, 2015. Over the same period, the average balance of brokered deposits declined $10.1 million to $34.0 million for the six month period ended June 30, 2015, as compared to the six month period ended June 30, 2014. For the six month period ended June 30, 2015, the Company’s total cost of deposits was 0.69% as compared to 0.78% for the six month period ended June 30, 2014.

The average balance of repurchase agreements decreased from $47.7 million for the six months ended June 30, 2014, to $42.0 million for the six month period ended June 30, 2015. The average cost of repurchase agreements was 2.07% for the six months ended June 30, 2014, and 1.13% for the six month period ended June 30, 2015. The reduction in the cost of repurchase agreements was primarily from the maturity of a $10.0 million long term wholesale repurchase agreement that matured in September 2014 at a cost of 4.28%.

 

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Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $485,000 in provision for loan loss was required for the six month period ended June 30, 2015, compared to a provision for loan loss expense of $119,000 for the six month period ended June 30, 2014.

Non-Interest Income. There was a $238,000 increase in non-interest income in the six month period ended June 30, 2015, as compared to the same period in 2014. The increase in non-interest income was largely the result of an increase in gains realized on the sale of investments and mortgage origination income. For the six month period ended June 30, 2015, the Company earned $520,000 in mortgage origination income as compared to $191,000 during the six month period ended June 30, 2014. For the six month ended June 30, 2015, the Company’s gain on the sale of securities was $449,000 as compared to $254,000 for the six month period ended June 30, 2014. The Company’s income for services charges was $1.4 million for the six month period ended June 30, 2015, compared to $1.6 million for the same period in 2014. Likewise, the Company’s financial services commission declined from $374,000 for the six month period ended June 30, 2014, to $353,000 for the six month period ended June 30, 2015.

Non-Interest Expenses. There was a $933,000 increase in total non-interest expenses in the six-month period ended June 30, 2015, as compared to the same period in 2014. The most significant change in non-interest expenses was a $609,000 increase in losses on the sale of other real estate owned and a $701,000 increase in salaries and benefit expense for the six month period ended June 30, 2015, as compared to the six month period ended June 30, 2014. The increase in salaries and benefits expense was the result of higher cost of healthcare benefits and payroll expenses as well as the opening of a new loan production office in Nashville, Tennessee.

Income Taxes. The effective tax rate for the six-month periods ending June 30, 2015, was 15.3% due to the lower levels of tax free income. For the six month period ended June 30, 2014, the Company’s tax rate was 5.5% due to the low level of our net income and relatively high level of tax free income and tax credits.

 

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

Net Income. For the three month period ended June 30, 2015, the Company experienced a net loss of $117,000, as compared to net income of $925,000 for the three month period ended June 30, 2014. The decline in net income is largely the result of a $787,000 increase in non-interest expenses as compared to the three month period ended June 30, 2014.

Net Interest Income. Net interest income for the three month period ended June 30, 2015, was $6.3 million, compared to $6.4 million for the three month period ended June 30, 2014. The small decline in net interest income for the three months ended June 30, 2015, as compared to June 30, 2014, was due to a $272,000 decline in the Company’s interest income on loans and $426,000 decline in the Company’s income on taxable securities available for sale. The decline of interest income was largely offset by a $742,000 decline in the Company’s interest expense.

For the three months ended June 30, 2015, the average yield on loans was 4.51%, as compared to 4.83% for the three month period ended June 30, 2014. For the three month periods ended June 30, 2015, and June 30, 2014, income on taxable investments were $1.3 million and $1.7 million, respectively. For the three month period ending June 30, 2015, the tax equivalent yield on taxable and tax free securities were 2.42% and 4.69%, respectively, as compared to 2.54% and 4.84% for the three-month period ended June 30, 2014, respectively.

For the three month periods ended June 30, 2015, and June 30, 2014, the Company’s cost of interest bearing liabilities was 0.94% and 1.26%, respectively. For the three month period ended June 30, 2015, and June 30, 2014, the Company’s net interest margin was 3.17% and 3.02%, respectively.

Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the three-month periods ended June 30, 2015, and June 30, 2014. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three-month periods.

 

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Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $205,000 for June 30, 2015, and $259,000 for June 30, 2014, for a tax equivalent rate using a cost of funds rate of 0.94% for June 30, 2015, and 1.26% for June 30, 2014. The table adjusts tax-free loan income by $5,000 for the three month period ended June 30, 2015, and $3,000 for the three month period ended and June 30, 2014, respectively, for a tax equivalent rate using the same cost of funds rate:

 

		Average Balance 6/30/2015				Income and Expense 6/30/2015				Average Rates 6/30/2015				Average Balance 6/30/2014				Income and Expense 6/30/2014				Average Rates 6/30/2014
		(Table Amounts in Thousands, Except Percentages)
Loans		$	552,992				6,236				4.51	%		$	538,895				6,506				4.83	%
Investments AFS taxable			209,907				1,268				2.42	%			266,815				1,694				2.54	%
Investment AFS tax free			52,960				621				4.69	%			65,323				790				4.84	%
Interest bearing deposits			6,107				4				0.26	%			9,899				6				0.24	%
Total interest earning assets			821,966				8,129				3.96	%			880,932				8,996				4.08	%
Other assets			68,467												76,307
Total assets		$	890,433											$	957,239
Retail time deposits			288,618				831				1.15	%			320,957				927				1.16	%
Brokered deposits			32,669				94				1.15	%			42,024				146				1.39	%
MMDA and Savings			100,776				51				0.20	%			93,932				54				0.23	%
Interest bearing checking			194,224				269				0.55	%			194,863				361				0.74	%
FHLB borrowings			18,231				66				1.45	%			41,764				428				4.10	%
Repurchase agreements			41,478				118				1.14	%			45,997				245				2.13	%
Subordinated debentures			10,310				183				7.10	%			10,310				193				7.49	%
Total interest bearing liabilities			686,306				1,612				0.94	%			749,847				2,354				1.26	%
Non-interest bearing deposits			110,379												103,717
Other liabilities			3,353												4,522
Stockholders’ equity			90,395												99,153
Total liabilities and stockholders’ equity		$	890,433											$	957,239
Net interest income							6,517												6,642
Interest rate spread											3.02	%											2.82	%
Net interest margin							3.17	%											3.02	%

 

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Interest Income. For the three month periods ended June 30, 2015, and June 30, 2014, the Company’s total interest income was $7.9 million and $8.7 million, respectively. For the three month period ended June 30, 2015, interest income on loans was $6.2 million, a $272,000 decline as compared to the three month period ended June 30, 2014. The average balance of loans receivable increased from $538.9 million for the three month period ended June 30, 2014, to $553.0 million for the three month period ended June 30, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 117.48% for the three months ended June 30, 2014, to 119.77% for the three months ended June 30, 2015.

Interest Expense. Interest expense declined $742,000 for the three months ended June 30, 2015, as compared to the three month period ended June 30, 2014. The decline was attributable to the prepayment of FHLB advances and an increase in lower costing interest bearing checking accounts. The average balance of funds borrowed from the FHLB declined by $23.6 million, from $41.8 million for the three months ended June 30, 2014, to $18.2 million for the three month period ended June 30, 2015. The average cost of borrowed funds from the FHLB was 4.10% for the three months ended June 30, 2014, and 1.45% for the three months ended June 30, 2015, respectively. The average balance of repurchase agreements decreased from $46.0 million for the three months ended June 30, 2014, to $41.5 million for the three month period ended June 30, 2015. The average cost of repurchase agreements was 2.13% for the three months ended June 30, 2014, and 1.14% for the three month period ended June 30, 2015.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that it could record a $261,000 reduction in the allowance for loan loss account during three month period ended June 30, 2014, compared to a $270,000 provision for loan loss expense for the three month period ended June 30, 2015. The reduction in the allowance for loan loss account was the result of improved credit quality, enhanced economic trends, and lower levels of assets with specific reserves.

Non-Interest Income. The Company’s non-interest income declined by $77,000 in the three month period ended June 30, 2015, as compared to the three month period ended June 30, 2014. The decline in non-interest income was partly the result of a $158,000 decline in gains realized on the sale of investments. For the three month period ended June 30, 2015, the Company earned $343,000 in mortgage origination income as compared to $133,000 during the three month period ended June 30, 2014. The Company’s income for services charges was $720,000 for the three month period ended June 30, 2015, compared to $848,000 for the same period in 2014. The Company’s financial services commission increased to $194,000 for the three month period ended June 30, 2015, from $168,000 for the three month period ended June 30, 2014. The Company attributes the improved level of fee income from mortgage originations and financial services income is the result of improved customer demand for both residential mortgage loans and wealth management products offered by the Company.

 

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Non-Interest Expenses. There was a $787,000 increase in total non-interest expenses in the three month period ended June 30, 2015, as compared to the three month period ended June 30, 2014. The most significant change in non-interest expenses was a $639,000 increase in losses on the sale of other real estate owned and a $312,000 increase in salary and benefit expense for the three month period ended June 30, 2015, as compared to the three month period ended June 30, 2014. For the three month period ended June 30, 2015, professional services expenses were $468,000 as compared to $341,000 for the three month period ended June 30, 2014.

The increase in losses on other real estate owned are the result of an absolute auction of two properties that were held for sale by the Company. The increases in professional services expense was the result of higher legal fees to assist in the resolution of sale of problem assets. The increase in salaries and benefits expense is largely the result of the Company opening a loan production office in Nashville and higher health insurance cost. The increase in professional services is largely the result of higher legal fees.

Income Taxes. For the three month period ended June 30, 2015, the Company’s effective tax rate was negative due to the net loss for the period. The effective tax rate for the three month period ended June 30, 2014, was 18.8%.

Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company.

 

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The Bank uses brokered deposits to supplement its asset liability need for longer term deposits at reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement and on its table on pages 43 and 47 that provides the yields and cost of assets and liabilities.

At June 30, 2015, the Bank’s brokered deposits consisted of the following:

 

Issue Date		Interest Rate				Balance				Maturity Date
7/27/2012			0.70	%		$	3,590,000				7/27/2015
7/22/2013			0.65	%			1,940,000				11/22/2015
12/21/2010			1.70	%			805,000				12/21/2015
9/21/2012			0.60	%			2,500,000				1/21/2016
7/9/2012			0.75	%			2,309,000				3/9/2016
3/17/2011			2.25	%			1,500,000				3/17/2016
7/22/2013			0.80	%			2,000,000				7/22/2016
8/6/2014			0.75	%			2,842,000				10/06/2016
10/13/2011			1.35	%			2,086,000				10/13/2016	(1)
3/9/2012			1.00	%			3,044,000				12/9/2016	(1)
7/9/2012			1.05	%			1,446,000				1/9/2017	(1)
1/9/2015			1.00	%			2,077,000				4/9/2017
7/27/2012			1.00	%			1,496,000				7/27/2017	(1)
1/3/2013			1.00	%			3,030,000				1/3/2018
1/9/2015			1.20	%			2,004,000				1/9/2018
Total						$	32,669,000

 

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

 

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

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

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.

 

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

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

At June 30, 2015, the Bank exceeded all regulatory capital requirements. The table below presents certain information relating to the Company’s and Bank’s capital compliance at June 30, 2015:

 

		Company								Bank
		Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Common equity tier 1 ratio		$	95,402				16.32	%		$	94,386				16.23	%
Tier 1 leverage ratio		$	95,402				10.65	%		$	94,386				10.56	%
Tier 1 risk-based capital ratio		$	95,402				16.32	%		$	94,386				16.23	%
Total risk based capital ratio		$	100,936				17.26	%		$	99,920				17.18	%

At June 30, 2015, the Bank had $12.0 million in outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $103.4 million. Management believes that the Bank’s sources of funds are sufficient to fund all of its outstanding commitments. Certificates of deposits scheduled to mature in one year or less from June 30, 2015, totaled $203.4 million. Management believes that a significant percentage of such deposits will remain with the Bank. At June 30, 2015, the Company has deposit balances totaling $27.7 million that exceed FDIC insurance limits without additional collateral pledged.

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

 

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At June 30, 2015, the Bank has outstanding borrowings of $9.0 million from the FHLB. At June 30, 2015, the Company’s has a $4.0 million borrowing that matures of March 17, 2016, with an interest rate of 5.34%. The FHLB has issued letters of credit in the Bank’s name totalling $32.5 million secured by the Bank’s 1-4 Family loan portfolio to secure municipal deposits above FDIC deposit limits.

At June 30, 2015, the Bank had $60.7 million in additional borrowing capacity with the FHLB. The Company’s borrowing capacity with the FHLB includes an overnight line of credit of $30.0 million. At June 30, 2015, the Company’s had $5.0 million of borrowings outstanding against the overnight line of credit. The Bank has an $8.0 million unsecured overnight borrowing capacity from a correspondent bank.

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

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

 

Standby letters of credit		$	352
Unused home equity lines of credit		$	29,583
Unused commercial lines of credit		$	43,003
Unused unsecured personal lines of credit		$	30,838
Unfunded commitments on commercial loans		$	11,965

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.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

The effects of rising interest rates are discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actual results for the year ending December 31, 2015, will differ from simulations due to timing, magnitude, and the frequency or interest rate changes, market conditions, management strategies, and the timing of the Company’s cash receipts and disbursements.

The Company’s analysis at June 30, 2015, indicates that changes in interest rates are less likely to result in significant changes in the Company’s annual net interest income. A summary of the Company’s analysis at June 30, 2015, for the twelve month period ending June 30, 2016, is as follows:

 

		Down 1.00%				No change				Up 1.00%				Up 2.00%				Up 3.00%
						(Dollars In Thousands)
Net interest income		$	25,972			$	27,085			$	27,698			$	28,341			$	28,910

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and the Senior Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended June 30, 2015.

Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President, Chief Financial Officer and Treasurer concluded that the disclosure controls and procedures were effective as of the end of the six months ended June 30, 2015, to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

 

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

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

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting includes (as such term’s defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Act during the Company’s fiscal quarter ended June 30, 2015, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

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

N/A

 

Item 1A.

Risk Factors

There have been no material changes to our risk factors as previously disclosed in Part 1, Item 1A of our annual report on Form 10K for the fiscal year ended December 31, 2014.

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

N/A

 

(a)

Use of Proceeds. Not applicable

 

(b)

Repurchase of Equity Securities

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total number of shares Purchased as part of Publically Announced Programs				Maximum Number of Shares that Yet may be Purchased Under the Program at the end of the period
April 1, 2015, to April 30, 2015			468			$	12.68				1,504,192				573,724
May 1, 2015, to May 31, 2015			104			$	12.75				1,504,296				573,620
June 30, 2015, to June 30, 2015			68,895			$	12.83				1,573,191				504,725
Total			69,467			$	12.83				1,573,191				504,725

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Mine Safety Disclosures

Not Applicable

 

Item 5.

Other Information

None

 

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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: August 10, 2015				/s/ John E. Peck
				John E. Peck
				President and Chief Executive Officer
Date: August 10, 2015				/s/ Billy C. Duvall
				Billy C. Duvall
				Senior Vice President, Chief Financial
				Officer and Treasurer

 

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