Attached files
file | filename |
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EX-32.2 - EX-32.2 - HOPFED BANCORP INC | d326243dex322.htm |
EX-32.1 - EX-32.1 - HOPFED BANCORP INC | d326243dex321.htm |
EX-31.2 - EX-31.2 - HOPFED BANCORP INC | d326243dex312.htm |
EX-31.1 - EX-31.1 - HOPFED BANCORP INC | d326243dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-23667
HOPFED BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 61-1322555 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
4155 Lafayette Road, Hopkinsville, Kentucky |
42240 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (270) 885-1171
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required and posted pursuant to Rule 405 of Regulation S-T (subsection 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file or a non-accelerated filer. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule12b-2 of the Exchange Act: (Check one)
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company filer | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 4, 2017, the Registrant had outstanding 6,717,663 shares of the Registrants Common stock.
Table of Contents
HOPFED BANCORP, INC.
PART I. FINANCIAL INFORMATION | PAGE | |||||
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows: | ||||||
Item 1. | ||||||
2 | ||||||
4 | ||||||
6 | ||||||
7 | ||||||
9 | ||||||
Notes to Unaudited Interim Consolidated Condensed Financial Statements |
10 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
43 | ||||
Item 3. | 53 | |||||
Item 4. | 53 | |||||
PART II OTHER INFORMATION | ||||||
Item 1. | 54 | |||||
Item 1A. | 54 | |||||
Item 2. | 55 | |||||
Item 3. | 55 | |||||
Item 4. | 55 | |||||
Item 5. | 55 | |||||
Item 6. | 56 | |||||
SIGNATURES | 56 |
1
Table of Contents
Item 1. | Financial Statements |
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statements of Financial Condition
(Dollars in Thousands)
Assets |
June 30, 2017 |
December 31, 2016 |
||||||
(unaudited) | ||||||||
Cash and due from banks |
$ | 20,208 | 21,779 | |||||
Interest-bearing deposits in banks |
4,801 | 3,970 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
25,009 | 25,749 | ||||||
Federal Home Loan Bank stock, at cost |
4,428 | 4,428 | ||||||
Securities available for sale |
205,363 | 209,480 | ||||||
Loans held for sale |
2,386 | 1,094 | ||||||
Loans receivable, net of allowance for loan losses of $7,180 at June 30, 2017 and $6,112 at December 31, 2016 |
631,242 | 604,286 | ||||||
Accrued interest receivable |
3,332 | 3,799 | ||||||
Foreclosed assets, net |
1,408 | 2,397 | ||||||
Bank owned life insurance |
10,192 | 10,662 | ||||||
Premises and equipment, net |
23,097 | 23,461 | ||||||
Deferred tax assets |
3,025 | 3,052 | ||||||
Other assets |
2,645 | 3,078 | ||||||
|
|
|
|
|||||
Total assets |
$ | 912,127 | 891,486 | |||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Non-interest-bearing accounts |
$ | 132,305 | 131,145 | |||||
Interest-bearing accounts |
||||||||
Checking accounts |
216,256 | 209,347 | ||||||
Savings and money market accounts |
98,270 | 99,312 | ||||||
Other time deposits |
299,113 | 293,078 | ||||||
|
|
|
|
|||||
Total deposits |
745,944 | 732,882 | ||||||
Advances from Federal Home Loan Bank |
21,000 | 11,000 | ||||||
Repurchase agreements |
41,820 | 47,655 | ||||||
Subordinated debentures |
10,310 | 10,310 | ||||||
Advances from borrowers for taxes and insurance |
984 | 766 | ||||||
Accrued expenses and other liabilities |
3,278 | 2,445 | ||||||
|
|
|
|
|||||
Total liabilities |
823,336 | 805,058 | ||||||
|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
2
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statements of Financial Condition, Continued
(Dollars in Thousands)
June 30, 2017 |
December 31, 2016 |
|||||||
(unaudited) | ||||||||
Stockholders equity |
||||||||
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at June 30, 2017 and December 31, 2016 |
| | ||||||
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,964,076 issued and 6,716,809 outstanding at June 30, 2017 and 7,963,378 issued and 6,717,242 outstanding at December 31, 2016 |
80 | 80 | ||||||
Additional paid-in-capital |
58,750 | 58,660 | ||||||
Retained earnings |
50,552 | 49,035 | ||||||
Treasury stock, at cost (1,247,267 shares at June 30, 2017 and 1,246,136 shares at December 31, 2016) |
(15,361 | ) | (15,347 | ) | ||||
Unearned Employee Stock Ownership Plan (ESOP) Shares, at cost (476,862 shares at June 30, 2017 and 498,346 shares at December 31, 2016) |
(6,269 | ) | (6,548 | ) | ||||
Accumulated other comprehensive income |
1,039 | 548 | ||||||
|
|
|
|
|||||
Total stockholders equity |
88,791 | 86,428 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 912,127 | 891,486 | |||||
|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
3
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statements of Income
(Dollars in Thousands)
(Unaudited)
For the Three Month Periods Ended June 30, |
For the Six Month Periods Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest and dividend income: |
||||||||||||||||
Loans |
6,963 | 6,141 | 13,699 | 12,606 | ||||||||||||
Investment in securities, taxable |
1,155 | 1,198 | 2,273 | 2,445 | ||||||||||||
Nontaxable securities available for sale |
280 | 340 | 563 | 693 | ||||||||||||
Interest-bearing deposits |
21 | 12 | 44 | 28 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest and dividend income |
8,419 | 7,691 | 16,579 | 15,772 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest expense: |
||||||||||||||||
Deposits |
1,197 | 1,007 | 2,364 | 2,102 | ||||||||||||
FHLB borrowings |
30 | 28 | 62 | 101 | ||||||||||||
Repurchase agreements |
119 | 139 | 222 | 282 | ||||||||||||
Subordinated debentures |
108 | 94 | 212 | 188 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
1,454 | 1,268 | 2,860 | 2,673 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
6,965 | 6,423 | 13,719 | 13,099 | ||||||||||||
Provision for loan losses |
59 | 465 | 350 | 923 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
6,906 | 5,958 | 13,369 | 12,176 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Non-interest income: |
||||||||||||||||
Service charges |
800 | 698 | 1,604 | 1,375 | ||||||||||||
Merchant card |
315 | 314 | 617 | 605 | ||||||||||||
Mortgage origination revenue |
278 | 435 | 612 | 803 | ||||||||||||
Gain on sale of investments |
14 | 52 | 16 | 343 | ||||||||||||
Income from bank owned life insurance |
72 | 77 | 307 | 161 | ||||||||||||
Income from financial services |
145 | 191 | 285 | 324 | ||||||||||||
Other operating income |
212 | 203 | 691 | 379 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest income |
1,836 | 1,970 | 4,132 | 3,990 | ||||||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
4
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statements of Income, Continued
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
For the Three Month Periods Ended June 30, |
For the Six Month Periods Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Non-interest expenses: |
||||||||||||||||
Salaries and benefits |
3,977 | 3,901 | 8,213 | 7,889 | ||||||||||||
Occupancy |
729 | 801 | 1,504 | 1,588 | ||||||||||||
Data processing |
546 | 704 | 1,310 | 1,431 | ||||||||||||
State deposit tax |
200 | 247 | 431 | 495 | ||||||||||||
Professional services |
464 | 305 | 812 | 640 | ||||||||||||
Advertising |
368 | 371 | 749 | 691 | ||||||||||||
Foreclosure, net |
6 | 201 | 114 | 269 | ||||||||||||
Loss on sale of asset |
3 | | 3 | | ||||||||||||
Other |
940 | 1,079 | 1,786 | 2,289 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest expense |
7,233 | 7,609 | 14,922 | 15,292 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income tax expense |
1,509 | 319 | 2,579 | 874 | ||||||||||||
Income tax expense |
368 | 15 | 503 | 61 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
1,141 | 304 | 2,076 | 813 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.05 | $ | 0.33 | $ | 0.13 | ||||||||
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|
|
|
|
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|
|||||||||
Diluted |
$ | 0.18 | $ | 0.05 | $ | 0.33 | $ | 0.13 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Dividend per share |
$ | 0.05 | $ | 0.04 | $ | 0.09 | $ | 0.08 | ||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
5
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
For the Three Month Periods Ended June 30, |
For the Six Month Periods Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income |
$ | 1,141 | 304 | 2,076 | 813 | |||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Unrealized gain on non-other than temporary impaired investment securities available for sale, net of taxes of ($126) and ($368) for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and ($247) and ($1,267) for the six month periods ended June 30, 2017 and June 30, 2016, respectively. |
240 | 714 | 475 | 2,459 | ||||||||||||
Unrealized gain on OTTI securities, net of taxes of ($43) and none for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and ($14) and ($37) for the six month periods ended June 30, 2017 and June 30, 2016, respectively. |
83 | | 26 | 72 | ||||||||||||
Reclassification adjustment for gains included in net income, net of taxes of $5 and $18 for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and $6 and $117 for the six month periods ended June 30, 2017 and June 30, 2016, respectively. |
(9 | ) | (34 | ) | (10 | ) | (226 | ) | ||||||||
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|
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|
|||||||||
Total other comprehensive income |
314 | 680 | 491 | 2,305 | ||||||||||||
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|
|||||||||
Comprehensive income |
$ | 1,455 | 984 | 2,567 | 3,118 | |||||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
6
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statement of Stockholders Equity
For the Six Month Period Ended June 30, 2017
(Dollars in Thousands, Except Share Amounts)
(Unaudited)
Common Shares |
Common Stock |
Additional Paid in Capital |
Retained Earnings |
Common Treasury Shares |
Unearned ESOP Shares |
Accumulated Other Comprehensive Income |
Total Stockholders Equity |
|||||||||||||||||||||||||
Balance at December 31, 2016 |
6,717,242 | $ | 80 | 58,660 | 49,035 | (15,347 | ) | (6,548 | ) | 548 | 86,428 | |||||||||||||||||||||
Restricted stock awards |
698 | | | | | | | | ||||||||||||||||||||||||
Net Income |
| | | 2,076 | | | | 2,076 | ||||||||||||||||||||||||
Repurchase of treasury stock |
(1,131 | ) | | | | (14 | ) | | | (14 | ) | |||||||||||||||||||||
ESOP shares committed to be released |
| | | | | 279 | | 279 | ||||||||||||||||||||||||
Change in price of ESOP shares |
| | 29 | | | | | 29 | ||||||||||||||||||||||||
Compensation expense, restricted stock awards |
| | 61 | | | | | 61 | ||||||||||||||||||||||||
Net change in unrealized gain on securities available for sale, net of income taxes of ($255) |
| | | | | | 491 | 491 | ||||||||||||||||||||||||
Cash dividend declared to common stockholders |
| | | (559 | ) | | | | (559 | ) | ||||||||||||||||||||||
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|||||||||||||||||
Balance June 30, 2017 |
6,716,809 | $ | 80 | 58,750 | 50,552 | (15,361 | ) | (6,269 | ) | 1,039 | 88,791 | |||||||||||||||||||||
|
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|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
7
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statement of Stockholders Equity
For the Six Month Period Ended June 30, 2016
(Dollars in Thousands, Except Share Amounts)
(Unaudited)
Common Shares |
Common Stock |
Additional Paid in Capital |
Retained Earnings |
Common Treasury Shares |
Unearned ESOP Shares |
Accumulated Other Comprehensive Income |
Total Stockholders Equity |
|||||||||||||||||||||||||
Balance at December 31, 2015 |
6,865,811 | $ | 79 | 58,604 | 47,124 | (13,471 | ) | (7,180 | ) | 2,474 | 87,630 | |||||||||||||||||||||
Net Income |
| | | 813 | | | | 813 | ||||||||||||||||||||||||
Issuance of restricted stock |
11,486 | 1 | | | | | | 1 | ||||||||||||||||||||||||
Repurchase of treasury stock |
(138,218 | ) | | | | (1,624 | ) | | | (1,624 | ) | |||||||||||||||||||||
Forfeiture of restricted stock |
(663 | ) | | | | | | | | |||||||||||||||||||||||
Change in price of ESOP shares |
| | (34 | ) | | | | | (34 | ) | ||||||||||||||||||||||
ESOP shares committed to be released |
| | | | | 282 | | 282 | ||||||||||||||||||||||||
Compensation expense, restricted stock awards |
| | 78 | | | | | 78 | ||||||||||||||||||||||||
Net change in unrealized gain on securities available for sale, net of income taxes of ($1,187) |
| | | | | | 2,305 | 2,305 | ||||||||||||||||||||||||
Cash dividend declared to common stockholders |
| | | (499 | ) | | | | (499 | ) | ||||||||||||||||||||||
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|||||||||||||||||
Balance June 30, 2016 |
6,738,416 | $ | 80 | 58,648 | 47,438 | (15,095 | ) | (6,898 | ) | 4,779 | 88,952 | |||||||||||||||||||||
|
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See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
8
Table of Contents
HOPFED BANCORP, INC.
Interim Consolidated Condensed Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Six Month Periods Ended June 30, |
||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: |
||||||||
Net cash provided by operating activities |
$ | 4,662 | 4,300 | |||||
Cash flows from investing activities |
||||||||
Proceeds from sales, calls and maturities of securities available for sale |
27,362 | 27,615 | ||||||
Purchase of securities available for sale |
(23,047 | ) | (19,952 | ) | ||||
Net increase in loans |
(27,474 | ) | (5,619 | ) | ||||
Proceeds from sale of foreclosed assets |
1,136 | 1,242 | ||||||
Purchase of premises and equipment |
(251 | ) | (376 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) investing activities |
(22,274 | ) | 2,910 | |||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Net increase (decrease) in demand deposits |
7,027 | (11,525 | ) | |||||
Net increase (decrease) in time and other deposits |
6,035 | (28,254 | ) | |||||
Increase in advances from borrowers for taxes and insurance |
218 | 553 | ||||||
Advances from Federal Home Loan Bank |
32,000 | | ||||||
Repayment of advances from Federal Home Loan Bank |
(22,000 | ) | (4,000 | ) | ||||
Net increase (decrease) in repurchase agreements |
(5,835 | ) | 1,812 | |||||
Cash used to repurchase treasury stock |
(14 | ) | (1,624 | ) | ||||
Dividends paid on common stock |
(559 | ) | (499 | ) | ||||
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|
|
|
|||||
Net cash provided by (used in) financing activities |
16,872 | (43,537 | ) | |||||
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|
|||||
Increase (decrease) in cash and cash equivalents |
(740 | ) | (36,327 | ) | ||||
Cash and cash equivalents, beginning of period |
25,749 | 54,698 | ||||||
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|
|||||
Cash and cash equivalents, end of period |
$ | 25,009 | $ | 18,371 | ||||
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Supplemental disclosures of cash flow information: |
||||||||
Interest paid |
2,840 | 2,772 | ||||||
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|
|
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Income taxes paid |
$ | 388 | $ | 447 | ||||
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|
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Supplemental disclosures of non-cash investing and financing activities: |
||||||||
Loans charged off |
401 | 449 | ||||||
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|
|
|
|||||
Foreclosures of loans during period |
168 | 286 | ||||||
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|
|||||
Net unrealized gains on investment securities classified as available for sale |
746 | 3,493 | ||||||
|
|
|
|
|||||
Decrease in deferred tax asset related to unrealized gains on investments |
(255 | ) | (1,187 | ) | ||||
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|
|
|||||
Dividends declared and payable |
356 | 286 | ||||||
|
|
|
|
|||||
Issuance of restricted common stock |
10 | 135 | ||||||
|
|
|
|
See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.
9
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) | BASIS OF PRESENTATION |
The accompanying unaudited interim consolidated condensed financial statements include the accounts of HopFed Bancorp, Inc. (the Corporation) and its subsidiaries (collectively, the Company). The Corporation is a parent holding company of Heritage Bank USA, Inc. (the Bank). The Banks owns JBMM, LLC, a wholly owned, limited liability company, which owns and manages the Banks foreclosed assets. The Bank also owns Heritage USA Title, LLC, which sells title insurance to the Banks real estate loan customers. The Bank owns Fort Webb LP, LLC, which owns a limited partnership interest in Fort Webb Elderly Housing LLLP, a low income senior citizen housing facility in Bowling Green, Kentucky. All significant intercompany accounts have been eliminated.
The Bank is a Kentucky commercial bank regulated by the Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC). HopFed Bancorp is regulated by the Federal Reserve Bank of Saint Louis (FED).
The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the six month period ended June 30, 2017 are not necessarily indicative of results that may be expected the entire fiscal year ending December 31, 2017.
The accompanying unaudited interim consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2016. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Companys December 31, 2016 Consolidated Financial Statements.
10
Table of Contents
(2) | NET INCOME PER SHARE |
Basic net income per share (IPS) is computed by dividing net income by the weighted average number of common stock shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common stock shares outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three and six month periods ended June 30, 2017 and June 30, 2016, the Company has excluded all unearned shares held by the ESOP.
For the three month Period Ended June 30, |
||||||||
2017 | 2016 | |||||||
Basic IPS: |
||||||||
Net income |
$ | 1,141,000 | $ | 304,000 | ||||
Average common shares outstanding |
6,228,894 | 6,232,457 | ||||||
|
|
|
|
|||||
Net income per share |
$ |
0.18 |
|
$ |
0.05 |
| ||
|
|
|
|
|||||
Diluted IPS |
||||||||
Net income |
$ | 1,141,000 | $ | 304,000 | ||||
Average common shares outstanding |
6,228,894 | 6,232,457 | ||||||
Dilutive effect of stock options |
| | ||||||
|
|
|
|
|||||
Average diluted shares outstanding |
6,228,894 | 6,232,457 | ||||||
|
|
|
|
|||||
Net income per share, diluted |
$ | 0.18 | $ | 0.05 | ||||
|
|
|
|
|||||
For the six month period Ended June 30, |
||||||||
2017 | 2016 | |||||||
Basic IPS: |
||||||||
Net income |
$ | 2,076,000 | $ | 813,000 | ||||
Average common shares outstanding |
6,223,802 | 6,265,106 | ||||||
|
|
|
|
|||||
Net income per share |
$ | 0.33 | $ | 0.13 | ||||
|
|
|
|
|||||
Diluted IPS |
||||||||
Net income |
$ | 2,076,000 | $ | 813,000 | ||||
Average common shares outstanding |
6,223,802 | 6,265,106 | ||||||
Dilutive effect of stock options |
| | ||||||
|
|
|
|
|||||
Average diluted shares outstanding |
6,223,802 | 6,265,106 | ||||||
|
|
|
|
|||||
Net income per share, diluted |
$ | 0.33 | $ | 0.13 | ||||
|
|
|
|
11
Table of Contents
(3) | STOCK COMPENSATION |
The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $30,000 and $61,000 for the three and six month period ended June 30, 2017 and $48,000 and $78,000 for the three and six month period ended June 30, 2016. The Company issued 698 shares of restricted shares in the three and six month period ended June 30, 2017. The Company issued 877 and 11,486 shares of restricted stock in the three and six month periods ended June 30, 2016. The table below provides a detail of the Companys future compensation expense related to future vesting of restricted stock as of June 30, 2017:
Year Ending December 31, |
Future Expense |
|||
(Dollars in Thousands) | ||||
2017 |
29 | |||
2018 |
57 | |||
2019 |
12 | |||
2020 |
4 | |||
2021 |
1 | |||
|
|
|||
103 | ||||
|
|
The compensation committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. In addition, award vesting may be accelerated due to certain events as outlined in the restricted stock award agreement. Any acceleration of vesting will change the timing of, but not the aggregate amount of, compensation expense incurred.
12
Table of Contents
(4) | SECURITIES |
The carrying amount of securities and their estimated fair values at June 30, 2017 were as follows:
June 30, 2017 | ||||||||||||||||
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. Agency securities |
$ | 94,075 | 908 | (399 | ) | 94,584 | ||||||||||
Taxable municipal bonds |
757 | 12 | | 769 | ||||||||||||
Tax free municipal bonds |
31,142 | 1,165 | (25 | ) | 32,282 | |||||||||||
Trust preferred securities |
1,642 | 223 | | 1,865 | ||||||||||||
Mortgage backed securities |
76,172 | 376 | (685 | ) | 75,863 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 203,788 | 2,684 | (1,109 | ) | 205,363 | |||||||||||
|
|
|
|
|
|
|
|
13
Table of Contents
The carrying amount of securities and their estimated fair values at December 31, 2016 were as follows:
December 31, 2016 | ||||||||||||||||
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 |
2,000 | 1 | | 2,001 | ||||||||||||
U.S. Agency securities |
83,667 | 983 | (638 | ) | 84,012 | |||||||||||
Taxable municipal bonds |
2,720 | 17 | (10 | ) | 2,727 | |||||||||||
Tax free municipal bonds |
33,004 | 1,081 | (174 | ) | 33,911 | |||||||||||
Trust preferred securities |
1,634 | 183 | | 1,817 | ||||||||||||
Mortgage-backed securities |
85,626 | 437 | (1,051 | ) | 85,012 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 208,651 | 2,702 | (1,873 | ) | 209,480 | |||||||||||
|
|
|
|
|
|
|
|
The scheduled maturities of debt securities available for sale at June 30, 2017 were as follows:
Amortized Cost |
Estimated Fair Value |
|||||||
(Dollars in Thousands) | ||||||||
Due within one year |
$ | 5,439 | $ | 5,469 | ||||
Due in one to five years |
20,620 | 20,833 | ||||||
Due in five to ten years |
28,461 | 28,896 | ||||||
Due after ten years |
9,870 | 10,504 | ||||||
|
|
|
|
|||||
64,390 | 65,702 | |||||||
Amortizing agency bonds |
63,226 | 63,798 | ||||||
Mortgage-backed securities |
76,172 | 75,863 | ||||||
|
|
|
|
|||||
Total securities available for sale |
$ | 203,788 | $ | 205,363 | ||||
|
|
|
|
14
Table of Contents
The estimated fair value and unrealized loss amounts of temporarily impaired investments as of June 30, 2017 were as follows:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
|||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Agency securities |
$ | 40,006 | (368 | ) | 3,350 | (31 | ) | 43,356 | (399 | ) | ||||||||||||||
Tax free municipals |
2,590 | (25 | ) | | | 2,590 | (25 | ) | ||||||||||||||||
Mortgage-backed securities |
40,085 | (403 | ) | 12,229 | (282 | ) | 52,314 | (685 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available for sale |
$ | 82,681 | (796 | ) | 15,579 | (313 | ) | 98,260 | (1,109 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2016 were as follows:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
|||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Agency securities |
$ | 41,963 | (597 | ) | 3,459 | (41 | ) | 45,422 | (638 | ) | ||||||||||||||
Taxable municipals |
1,347 | (10 | ) | | | 1,347 | (10 | ) | ||||||||||||||||
Tax free municipals |
7,369 | (174 | ) | | | 7,369 | (174 | ) | ||||||||||||||||
Mortgage-backed securities |
48,462 | (796 | ) | 7,439 | (255 | ) | 55,901 | (1,051 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available for sale |
$ | 99,141 | (1,577 | ) | 10,898 | (296 | ) | 110,039 | (1,873 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At June 30, 2017, the Company has 64 securities with unrealized losses. The losses for all securities are considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and are not related to the credit worthiness of the issuers. Furthermore, the Company has the intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of June 30, 2017.
At June 30, 2017 and December 31, 2016, securities with a book value of approximately $122.4 million and $125.6 million and a market value of approximately $125.2 million and $128.4 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law.
15
Table of Contents
(5) | LOANS |
The Company uses the following loan segments as described below:
| One-to-four family first mortgages are closed-end loans secured by residential housing. Loans may be either owner or non-owner occupied properties. If the loan is owner-occupied, the loan is analyzed and under-written as a consumer loan. Loan terms may be up 30 years. |
| Home equity lines of credit may be first or second mortgages secured by one-to-four family properties. Home equity loans carry a variable rate and typically are open ended for a period not to exceed ten years with a fifteen year final maturity. Loans secured by home equity lines of credit are under-written under the Companys consumer loan guidelines. |
| Junior liens are closed-end loans secured by one-to-four family residences with a fixed or variable rate. Typically, the collateral for these loans are owner occupied units with a subordinate lien. Loans secured by junior liens are under-written under the Companys consumer loan guidelines. |
| Multi-family loans are closed-end loans secured by residential housing with five or more units in a single building. Multi-family loans may carry a variable rate of interest or the interest rate on the loan is a fixed rate (usually five years). After the initial fixed rate period, the loan reverts to a variable rate or have a balloon maturity. Multi-family loans have amortization terms of up to twenty years and are under-written under the Companys commercial loan underwriting guidelines. |
| Constructions loans may consist of residential or commercial properties and carry a fixed or variable rate for the term of the construction period. Construction loans have a maturity of between twelve and twenty-four months depending on the type of property. After the construction period, loans are amortized over a twenty-year period. All construction loans are under written under the Companys commercial loan underwriting guidelines for the type of property being constructed. |
| Land loans consist of properties currently under development, land held for future development and land held for recreational purposes. Land loans used for recreational purposes are amortized for twenty years and typically carry a fixed rate of interest for one-to-five years with a balloon maturity or floating rate period to follow and are under-written under the Companys commercial loan underwriting guidelines. |
| Loans classified as farmland by the Company include properties that are used exclusively for the production of grain, livestock, poultry or swine. Loans secured by farmland have a maturity of up to twenty years and carry a fixed rate of interest for five to ten years. Loans secured by farmland are under-written under the Companys commercial loan underwriting guidelines. |
16
Table of Contents
| Non-residential real estate loans are secured by commercial real estate properties and may be either owner or non-owner occupied. The loans typically have a twenty year maturity and may be fixed for a period of five to ten years. After the initial fixed rate period, the note will either revert to a one year adjustable rate loan or have a balloon maturity. Loans secured by non-residential real estate are under-written under the Companys commercial loan underwriting standards. |
| The Company originates secured and unsecured consumer loans. Collateral for consumer loans may include deposits, brokerage accounts, automobiles and other personal items. Consumer loans are typically fixed for a term of one to five years and are under-written using the Companys consumer loan policy. |
| The Company originates unsecured and secured commercial loans. Secured commercial loans may have business inventory, accounts receivable and equipment as collateral. The typical customer may include all forms of manufacturing, retail and wholesale sales, professional services and various forms of agri-business interest. Commercial loans may be fixed or variable rate and typically have terms between one and five years. |
Set forth below is selected data relating to the composition of the loan portfolio by type of loan at June 30, 2017 and December 31, 2016.
June 30, 2017 |
December 31, 2016 |
|||||||
(Dollars in Thousands) | ||||||||
Real estate loans: |
||||||||
One-to-four family first mortgages |
$ | 162,096 | 147,962 | |||||
Home equity lines of credit |
35,851 | 35,684 | ||||||
Junior liens |
1,472 | 1,452 | ||||||
Multi-family |
38,623 | 34,284 | ||||||
Construction |
25,033 | 39,255 | ||||||
Land |
20,049 | 23,840 | ||||||
Farmland |
39,575 | 47,796 | ||||||
Non-residential real estate |
217,049 | 182,940 | ||||||
|
|
|
|
|||||
Total mortgage loans |
539,748 | 513,213 | ||||||
Consumer loans |
8,250 | 8,717 | ||||||
Commercial loans |
90,857 | 88,907 | ||||||
|
|
|
|
|||||
Total other loans |
99,107 | 97,624 | ||||||
|
|
|
|
|||||
Total loans |
638,855 | 610,837 | ||||||
Deferred loan fees, net of cost |
(433 | ) | (439 | ) | ||||
Less allowance for loan losses |
(7,180 | ) | (6,112 | ) | ||||
|
|
|
|
|||||
Total loans, net |
$ | 631,242 | $ | 604,286 | ||||
|
|
|
|
Although the Company has a diversified loan portfolio, 84.5% and 84.0% of the portfolio was concentrated in loans secured by real estate at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, the majority of these loans are located within the Companys general operating area.
17
Table of Contents
The following table provides a detail of the Companys activity in the allowance for loan loss account by loan type for the six month period ended June 30, 2017:
Balance 12/31/2016 |
Charge offs 2017 |
Recoveries 2017 |
General Provision 2017 |
Specific Provision 2017 |
Ending Balance 6/30/2017 |
|||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
One-to-four family mortgages |
$ | 852 | (49 | ) | 6 | 449 | 43 | 1,301 | ||||||||||||||||
Home equity line of credit |
260 | | 8 | 85 | (8 | ) | 345 | |||||||||||||||||
Junior liens |
8 | | 2 | 3 | (2 | ) | 11 | |||||||||||||||||
Multi-family |
412 | | 417 | 192 | (417 | ) | 604 | |||||||||||||||||
Construction |
277 | | | (51 | ) | | 226 | |||||||||||||||||
Land |
1,760 | | 363 | (406 | ) | (838 | ) | 879 | ||||||||||||||||
Farmland |
778 | | 6 | (60 | ) | (7 | ) | 717 | ||||||||||||||||
Non-residential real estate |
964 | | 9 | 363 | 63 | 1,399 | ||||||||||||||||||
Consumer loans |
208 | (128 | ) | 45 | 12 | 36 | 173 | |||||||||||||||||
Commercial loans |
593 | (225 | ) | 264 | 650 | 243 | 1,525 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,112 | (402 | ) | 1,120 | 1,237 | (887 | ) | 7,180 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a detail of the Companys activity in the allowance for loan loss account by loan type for the year ended December 31, 2016:
Balance 12/31/2015 |
Charge offs 2016 |
Recoveries 2016 |
General Provision 2016 |
Specific Provision 2016 |
Ending Balance 12/31/2016 |
|||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
One-to-four family mortgages |
$ | 1,030 | | 167 | (118 | ) | (227 | ) | 852 | |||||||||||||||
Home equity line of credit |
201 | (30 | ) | 14 | 59 | 16 | 260 | |||||||||||||||||
Junior liens |
8 | | 14 | | (14 | ) | 8 | |||||||||||||||||
Multi-family |
227 | (421 | ) | | 323 | 283 | 412 | |||||||||||||||||
Construction |
377 | | | (100 | ) | | 277 | |||||||||||||||||
Land |
1,379 | | | (586 | ) | 967 | 1,760 | |||||||||||||||||
Farmland |
358 | | | 420 | | 778 | ||||||||||||||||||
Non-residential real estate |
1,139 | | 10 | (41 | ) | (144 | ) | 964 | ||||||||||||||||
Consumer loans |
358 | (422 | ) | 293 | (187 | ) | 166 | 208 | ||||||||||||||||
Commercial loans |
623 | (595 | ) | 141 | 122 | 302 | 593 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 5,700 | (1,468 | ) | 639 | (108 | ) | 1,349 | 6,112 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
The table below presents past due and non-accrual balances at June 30, 2017 by loan classification allocated between performing and non-performing:
Currently Performing |
30 - 89 Days Past Due |
Non-accrual Loans |
Special Mention |
Impaired Loans Currently Performing |
Total | |||||||||||||||||||||||
Substandard | Doubtful | |||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||
One-to-four family mortgages |
$ | 160,680 | 404 | 261 | 53 | 698 | | $ | 162,096 | |||||||||||||||||||
Home equity line of credit |
35,289 | | 402 | | 160 | | 35,851 | |||||||||||||||||||||
Junior liens |
1,434 | 3 | | 27 | 8 | | 1,472 | |||||||||||||||||||||
Multi-family |
36,765 | | | | 1,858 | | 38,623 | |||||||||||||||||||||
Construction |
25,033 | | | | | | 25,033 | |||||||||||||||||||||
Land |
12,398 | | 6,730 | 429 | 492 | | 20,049 | |||||||||||||||||||||
Farmland |
37,402 | | 455 | 478 | 1,240 | | 39,575 | |||||||||||||||||||||
Non-residential real estate |
202,950 | 2,485 | 207 | 1,505 | 9,902 | | 217,049 | |||||||||||||||||||||
Consumer loans |
8,072 | 18 | 3 | | 157 | | 8,250 | |||||||||||||||||||||
Commercial loans |
87,906 | | 521 | 716 | 1,714 | | 90,857 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 607,929 | 2,910 | 8,579 | 3,208 | 16,229 | | $ | 638,855 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents past due and non-accrual balances at December 31, 2016 by loan classification allocated between performing and non-performing:
Currently Performing |
30 - 89 Days Past Due |
Non-Accrual Loans |
Special Mention |
Impaired Loans Currently Performing |
Total | |||||||||||||||||||||||
Substandard | Doubtful | |||||||||||||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||||||||||
One-to-four family mortgages |
145,069 | 896 | 270 | 744 | 983 | | 147,962 | |||||||||||||||||||||
Home equity line of credit |
35,087 | 22 | 402 | 25 | 148 | | 35,684 | |||||||||||||||||||||
Junior liens |
1,407 | 4 | | 30 | 11 | | 1,452 | |||||||||||||||||||||
Multi-family |
31,280 | | | | 3,004 | | 34,284 | |||||||||||||||||||||
Construction |
39,255 | | | | | | 39,255 | |||||||||||||||||||||
Land |
15,581 | | 7,675 | 35 | 549 | | 23,840 | |||||||||||||||||||||
Farmland |
44,832 | | | 674 | 2,290 | | 47,796 | |||||||||||||||||||||
Non-residential real estate |
172,395 | | 208 | 3 | 10,334 | | 182,940 | |||||||||||||||||||||
Consumer loans |
8,354 | 28 | 3 | | 332 | | 8,717 | |||||||||||||||||||||
Commercial loans |
84,913 | 261 | 516 | 603 | 2,614 | | 88,907 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
578,173 | 1,211 | 9,074 | 2,114 | 20,265 | | 610,837 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017 and December 31, 2016, there were no loans more than 90 days past due and accruing interest.
19
Table of Contents
The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of June 30, 2017 and December 31, 2016, by portfolio segment and based on the impairment method.
June 30, 2017: | Commercial | Land Development / Construction |
Commercial Real Estate |
Residential Real Estate |
Consumer | Total | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 310 | 561 | 71 | | 37 | 979 | |||||||||||||||||
Collectively evaluated for impairment |
1,215 | 544 | 2,649 | 1,657 | 136 | 6,201 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending allowance balance |
$ | 1,525 | 1,105 | 2,720 | 1,657 | 173 | 7,180 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 2,235 | 7,222 | 13,662 | 1,529 | 160 | 24,808 | |||||||||||||||||
Loans collectively evaluated for impairment |
88,622 | 37,860 | 281,585 | 197,890 | 8,090 | 614,047 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending loans balance |
$ | 90,857 | 45,082 | 295,247 | 199,419 | 8,250 | 638,855 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2016: | Commercial | Land Development / Construction |
Commercial Real Estate |
Residential Real Estate |
Consumer | Total | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 28 | 1,036 | | | 84 | 1,148 | |||||||||||||||||
Collectively evaluated for impairment |
565 | 1,001 | 2,154 | 1,120 | 124 | 4,964 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending allowance balance |
$ | 593 | 2,037 | 2,154 | 1,120 | 208 | 6,112 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 3,130 | 8,224 | 15,836 | 1,814 | 335 | 29,339 | |||||||||||||||||
Loans collectively evaluated for impairment |
85,777 | 54,871 | 249,184 | 183,284 | 8,382 | 581,498 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending loans balance |
$ | 88,907 | 63,095 | 265,020 | 185,098 | 8,717 | 610,837 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The determination of the allowance for loan losses is based on managements analysis, performed on a quarterly basis. Various factors are considered, including the growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions and the market value of the underlying collateral. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred.
20
Table of Contents
The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined risk metrics and categorized into one of the risk grades discussed below. The Company uses the following risk grade definitions for commercial loans:
Excellent - Loans in this category are to persons or entities of unquestioned financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by Bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.
Very Good - These are loans to persons or entities with strong financial condition and above-average liquidity who have previously satisfactorily handled their obligations with the Bank. Collateral securing the Banks debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.
Satisfactory - Assets of this grade conform to substantially all the Banks underwriting criteria and evidence an average level of credit risk; however, such assets display more susceptibility to economic, technological or political changes since they lack the above average financial strength of credits rated Very Good. Borrowers repayment capacity is considered to be adequate. Credit is appropriately structured and serviced; payment history is satisfactory.
Acceptable - Assets of this grade conform to most of the Banks underwriting criteria and evidence an acceptable, though higher than average, level of credit risk; however, these loans have certain risk characteristics which could adversely affect the borrowers ability to repay given material adverse trends. Loans in this category require an above average level of servicing and show more reliance on collateral and guaranties to preclude a loss to the Bank should material adverse trends develop. If the borrower is a company, its earnings, liquidity and capitalization are slightly below average when compared to its peers.
Watch - These loans are characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrowers continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited.
Special Mention - Loans in this category have potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the asset or in the institutions credit position at some future date. Borrowers may be experiencing adverse operating trends or market conditions. Non-financial reasons for rating a credit exposure Special Mention include, but are not limited to: management problems, pending litigations, ineffective loan agreement and/or inadequate loan documentation, structural weaknesses and/or lack of control over collateral.
21
Table of Contents
Substandard - A substandard asset is inadequately protected by the current sound worth or paying capacity of the debtor or the collateral pledged. There exists one or more well defined weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will experience some loss if the deficiencies are not corrected.
Doubtful - A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Banks loan. These loans are in a work-out status and have a defined work-out strategy.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as Bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.
The following credit risk standards are assigned to consumer loans:
Satisfactory - All consumer open-end and closed-end retail loans shall have an initial risk grade assigned of 3 - Satisfactory.
Substandard - All consumer open-end and closed-end retail loans past due 90 cumulative days from the contractual date will be classified as 7 - Substandard. If a consumer/retail loan customer files bankruptcy, the loan will be classified as 7 - Substandard regardless of payment history.
Loss - All closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off as loss assets. The charge off will be taken by the end of the month in which the 120-day or 180-day time period elapses. All losses in retail credit will be recognized when the affiliate becomes aware of the loss, but in no case should the charge off exceed the time frames stated within this policy.
A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral less cost to sell if the loan is collateral dependent. Currently, it is managements practice to classify all substandard or doubtful loans as impaired.
22
Table of Contents
A summary of the Companys impaired loans, including their respective regulatory classification and their respective specific reserve at June 30, 2017 and December 31, 2016 were as follows:
June 30, 2017 |
Pass | Special Mention |
Impaired Loans |
Total | Specific Allowance for Impairment |
Allowance for Loans not Impaired |
||||||||||||||||||||||
Substandard | Doubtful | |||||||||||||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||||||||||
One-to-four family mortgages |
161,084 | 53 | 959 | | 162,096 | | 1,301 | |||||||||||||||||||||
Home equity line of credit |
35,289 | | 562 | | 35,851 | | 345 | |||||||||||||||||||||
Junior liens |
1,437 | 27 | 8 | | 1,472 | | 11 | |||||||||||||||||||||
Multi-family |
36,765 | | 1,858 | | 38,623 | | 604 | |||||||||||||||||||||
Construction |
25,033 | | | | 25,033 | | 226 | |||||||||||||||||||||
Land |
12,398 | 429 | 7,222 | | 20,049 | 561 | 318 | |||||||||||||||||||||
Farmland |
37,402 | 478 | 1,695 | | 39,575 | 69 | 648 | |||||||||||||||||||||
Non-residential real estate |
205,435 | 1,505 | 10,109 | | 217,049 | 2 | 1,397 | |||||||||||||||||||||
Consumer loans |
8,090 | | 160 | | 8,250 | 37 | 136 | |||||||||||||||||||||
Commercial loans |
87,906 | 716 | 2,235 | | 90,857 | 310 | 1,215 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
610,839 | 3,208 | 24,808 | | 638,855 | 979 | 6,201 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
December 31, 2016 | Pass | Special Mention |
Impaired Loans |
Total | Specific Allowance for Impairment |
Allowance for Loans not Impaired |
||||||||||||||||||||||
Substandard | Doubtful | |||||||||||||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||||||||||
One-to-four family mortgages |
$ | 145,965 | 744 | 1,253 | | 147,962 | | 852 | ||||||||||||||||||||
Home equity line of credit |
35,109 | 25 | 550 | | 35,684 | | 260 | |||||||||||||||||||||
Junior liens |
1,411 | 30 | 11 | | 1,452 | | 8 | |||||||||||||||||||||
Multi-family |
31,280 | | 3,004 | | 34,284 | | 412 | |||||||||||||||||||||
Construction |
39,255 | | | | 39,255 | | 277 | |||||||||||||||||||||
Land |
15,581 | 35 | 8,224 | | 23,840 | 1,036 | 724 | |||||||||||||||||||||
Farmland |
44,832 | 674 | 2,290 | | 47,796 | | 778 | |||||||||||||||||||||
Non-residential real estate |
172,395 | 3 | 10,542 | | 182,940 | | 964 | |||||||||||||||||||||
Consumer loans |
8,382 | | 335 | | 8,717 | 84 | 124 | |||||||||||||||||||||
Commercial loans |
85,174 | 603 | 3,130 | | 88,907 | 28 | 565 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 579,384 | 2,114 | 29,339 | | 610,837 | 1,148 | 4,964 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
Impaired loans by classification type and the related valuation allowance amounts at June 30, 2017 were as follows:
At June 30, 2017 | For the six month period ended June 30, 2017 |
|||||||||||||||||||
Impaired loans with no specific allowance | Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||
One-to-four family mortgages |
$ | 959 | 959 | | 2,095 | 62 | ||||||||||||||
Home equity line of credit |
562 | 562 | | 562 | 17 | |||||||||||||||
Junior liens |
8 | 8 | | 10 | | |||||||||||||||
Multi-family |
1,858 | 1,858 | | 1,337 | | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Land |
533 | 533 | | 777 | 22 | |||||||||||||||
Farmland |
1,569 | 1,569 | | 1,287 | 12 | |||||||||||||||
Non-residential real estate |
10,087 | 10,087 | | 9,968 | 266 | |||||||||||||||
Consumer loans |
13 | 13 | | 16 | | |||||||||||||||
Commercial loans |
1,652 | 1,652 | | 1,494 | 62 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
17,241 | 17,241 | | 17,546 | 441 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Impaired loans with a specific allowance | ||||||||||||||||||||
One-to-four family mortgages |
| | | | | |||||||||||||||
Home equity line of credit |
| | | | | |||||||||||||||
Junior liens |
| | | | | |||||||||||||||
Multi-family |
| | | | | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Land |
6,689 | 6,689 | 561 | 6,680 | | |||||||||||||||
Farmland |
126 | 126 | 69 | 326 | | |||||||||||||||
Non-residential real estate |
22 | 22 | 2 | 210 | 1 | |||||||||||||||
Consumer loans |
147 | 147 | 37 | 271 | | |||||||||||||||
Commercial loans |
583 | 583 | 310 | 546 | 7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
7,567 | 7,567 | 979 | 8,033 | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 24,808 | 24,808 | 979 | 25,579 | 449 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
24
Table of Contents
Impaired loans by classification type and the related valuation allowance amounts at December 31, 2016 were as follows:
At December 31, 2016 | For the year ended December 31, 2016 |
|||||||||||||||||||
Impaired loans with no specific allowance | Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||
One-to-four family mortgages |
$ | 1,253 | 1,253 | | 1,470 | 67 | ||||||||||||||
Home equity line of credit |
550 | 550 | | 390 | 24 | |||||||||||||||
Junior liens |
11 | 11 | | 13 | 1 | |||||||||||||||
Multi-family |
3,004 | 3,004 | | 3,005 | 172 | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Land |
1,553 | 2,513 | | 7,868 | 38 | |||||||||||||||
Farmland |
2,290 | 2,290 | | 1,563 | 120 | |||||||||||||||
Non-residential real estate |
10,542 | 10,542 | | 9,363 | 485 | |||||||||||||||
Consumer loans |
| | | 21 | 1 | |||||||||||||||
Commercial loans |
2,865 | 2,865 | | 3,168 | 112 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
22,068 | 23,028 | | 26,861 | 1,020 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Impaired loans with a specific allowance | ||||||||||||||||||||
One-to-four family mortgages |
| | | 452 | | |||||||||||||||
Home equity line of credit |
| | | | | |||||||||||||||
Junior liens |
| | | | | |||||||||||||||
Multi-family |
| | | 910 | | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Land |
6,671 | 6,671 | 1,036 | 1,811 | 485 | |||||||||||||||
Farmland |
| | | 533 | | |||||||||||||||
Non-residential real estate |
| | | | | |||||||||||||||
Consumer loans |
335 | 335 | 84 | 273 | | |||||||||||||||
Commercial loans |
265 | 265 | 28 | 754 | 24 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
7,271 | 7,271 | 1,148 | 4,733 | 509 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 29,339 | 30,299 | 1,148 | 31,594 | 1,529 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
25
Table of Contents
On a periodic basis, the Bank may modify the terms of certain loans. At December 31, 2016, the Company had eight loans, representing three lending relationships, classified as performing TDRs. During the six month period ended June 30, 2017, the Company removed one lending relationship from TDR status and one lending relationship had three loans to pay off. One non-residential real estate loan relationship, with two loans representing $2.2 million, has paid as agreed based on the original terms of their note for a period of at least six months. For the six month period ended June 30, 2017, no loans were added to TDR classification and all loans currently classified as TDRs are current based on their revised terms.
The following table provides the number of loans remaining in each category as of June 30, 2017 and December 31, 2016 that the Company had previously modified in a TDR:
Number of Loans |
Pre-Modification Outstanding Record Investment |
Post Modification Outstanding Record Investment, net of related allowance |
||||||||||
June 30, 2017 |
||||||||||||
Non-residential real estate |
3 | $ | 3,388,370 | 3,388,370 | ||||||||
December 31, 2016 |
||||||||||||
Multi-family |
3 | $ | 815,273 | 815,273 | ||||||||
Non-residential real estate |
5 | 5,646,223 | 5,646,223 |
There were no loans as of June 30, 2017 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At June 30, 2017, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.
26
Table of Contents
(6) | FORECLOSED ASSETS |
The Companys foreclosed assets have been acquired through customer loan defaults. The property is recorded at the lower of cost or fair value less estimated cost to sell and carrying cost at the date acquired. Any difference between the book value and estimated market value is recognized as a charge off through the allowance for loan loss account. Additional losses on foreclosed assets may be determined on individual properties at specific intervals or at the time of disposal. In general, the Company will obtain a new appraisal on all foreclosed assets with a book balance in excess of $250,000 on an annual basis. Additional losses are recognized as a non-interest expense.
At June 30, 2017 and December 31, 2016, the Company had balances in foreclosed assets consisting of the following:
June 30, 2017 |
December 31, 2016 |
|||||||
(Dollars in Thousands) | ||||||||
One-to-four family mortgages |
$ | 190 | 135 | |||||
Home equity line of credit |
18 | 28 | ||||||
Multi-family real estate |
1,200 | 1,775 | ||||||
Non-residential real estate |
| 459 | ||||||
|
|
|
|
|||||
Total other assets owned |
$ | 1,408 | 2,397 | |||||
|
|
|
|
For the six month period ended June 30, 2017, the Companys activity in foreclosed property included the following:
Activity During 2017 | ||||||||||||||||||||||||
Balance 12/31/2016 |
Foreclosure | Sales | Reduction in Values |
Gain (Loss) on Sale |
Balance 6/30/2017 |
|||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
One-to-four family mortgages |
$ | 135 | 125 | (84 | ) | | 14 | $ | 190 | |||||||||||||||
HELOC |
28 | | | (10 | ) | | 18 | |||||||||||||||||
Multi-family |
1,775 | | (552 | ) | | (23 | ) | 1,200 | ||||||||||||||||
Non-residential real estate |
459 | 43 | (500 | ) | | (2 | ) | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,397 | 168 | (1,136 | ) | (10 | ) | (11 | ) | $ | 1,408 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
The Companys activity in foreclosed assets for the six month period ended June 30, 2016 is as follows:
Activity During 2016 | ||||||||||||||||||||||||
Balance 12/31/2015 |
Foreclosure | Sales | Reduction in Values |
Gain (Loss) on Sale |
Balance 6/30/2016 |
|||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
One-to-four family mortgages |
$ | 55 | | (40 | ) | | (15 | ) | | |||||||||||||||
Multi-family |
| 141 | | | | 141 | ||||||||||||||||||
Land |
943 | 130 | (913 | ) | | 12 | 172 | |||||||||||||||||
Non-residential real estate |
738 | | (270 | ) | | (9 | ) | 459 | ||||||||||||||||
Consumer |
| 15 | (19 | ) | | 4 | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,736 | 286 | (1,242 | ) | | (8 | ) | $ | 772 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(7) | FAIR VALUE OF ASSETS AND LIABILITIES |
Accounting Standards Codification Topic (ASC) 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
○ | Level 1 is for assets and liabilities that management has obtained quoted prices (unadjusted for transaction cost) or identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. |
○ | Level 2 is for assets and liabilities in which significant unobservable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
○ | Level 3 is for assets and liabilities in which significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
28
Table of Contents
The following are the significant methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments:
Cash and due from banks
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets fair values, because they mature within 90 days or less and do not present credit risk concerns.
Interest-bearing deposits
The carrying amounts reported in the consolidated balance sheets for interest earning deposits approximate those assets fair values, because they are considered overnight deposits and may be withdrawn at any time without penalty and do not present credit risk concerns.
Available-for-sale securities
Fair values for investment securities available-for-sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments provided by a third-party pricing service. The Company reviews all securities in which the book value is greater than the market value for impairment that is other than temporary. For securities deemed to be other than temporarily impaired, the Company reduces the book value of the security to its market value by recognizing an impairment charge on its income statement.
FHLB stock
The fair value of FHLB stock is recognized at cost.
Loans held for sale
Mortgage loans originated and intended to be sold are carried at the lower of cost or estimated fair value as determined on a loan by loan basis. Gains or losses are recognized at the time of ownership transfer. Net unrealized losses, if any, are recognized through a valuation allowance and charged to income.
Loans receivable
The fair values for of fixed-rate loans and variable rate loans that re-price on an infrequent basis is estimated using discounted cash flow analysis which considers future re-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans of similar type, terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The estimated fair value of variable-rate loans that re-price frequently and with have no significant change in credit risk is approximately the carrying value of the loan.
Accrued interest receivable
Fair value is estimated to approximate the carrying amount because such amounts are expected to be received within 90 days or less and any credit concerns have been previously considered in the carrying value.
29
Table of Contents
Deposits
The fair values disclosed for deposits with no stated maturity such as demand deposits, interest-bearing checking accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and other fixed maturity time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such type accounts or similar accounts to a schedule of aggregated contractual maturities or similar maturities on such time deposits.
Advances from borrowers for taxes and insurance
The carrying amount of advances from borrowers for taxes and insurance approximates its fair value.
Advances from the Federal Home Loan Bank (FHLB)
The fair value of these advances is estimated by discounting the future cash flows of these advances using the current rates at which similar advances or similar financial instruments could be obtained.
Repurchase agreements
Overnight repurchase agreements have a fair value at book, given that they mature overnight. The fair values for of longer date repurchase agreements is estimated using discounted cash flow analysis which considers the current market pricing for repurchase agreements of similar final maturities and collateral requirements.
Subordinated debentures
The book value of subordinated debentures is cost. The subordinated debentures re-price quarterly at a rate equal to three month libor plus 3.10%.
Fair Value Measurements on a Recurring Basis
Where quoted prices are available for identical securities in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.
30
Table of Contents
Assets and Liabilities Measured on a Recurring Basis
The assets and liabilities measured at fair value on a recurring basis at June 30, 2017 are summarized below:
Description |
Total carrying value in the consolidated balance sheet at 6/30/2017 |
Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
(Dollars in Thousands) | |||||||||||||||
Securities available for sale |
||||||||||||||||
U.S. Agency securities |
94,584 | | 94,584 | | ||||||||||||
Taxable municipals |
769 | | 769 | | ||||||||||||
Tax-free municipals |
32,282 | | 32,282 | | ||||||||||||
Trust preferred securities |
1,865 | | | 1,865 | ||||||||||||
Mortgage backed securities |
75,863 | | 75,863 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
205,363 | | 203,498 | 1,865 | ||||||||||||
|
|
|
|
|
|
|
|
The assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are summarized below:
Description |
Total carrying value in the consolidated balance sheet at 12/31/2016 |
Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
(Dollars in Thousands) |
|||||||||||||||
Securities available for sale |
||||||||||||||||
U.S. Treasury securities |
2,001 | 2,001 | | | ||||||||||||
U.S. Agency securities |
84,012 | | 84,012 | | ||||||||||||
Taxable municipals |
2,727 | | 2,727 | | ||||||||||||
Tax-free municipals |
33,911 | | 33,911 | | ||||||||||||
Trust preferred securities |
1,817 | | | 1,817 | ||||||||||||
Mortgage backed securities |
85,012 | | 85,012 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
209,480 | 2,001 | 205,662 | 1,817 | ||||||||||||
|
|
|
|
|
|
|
|
31
Table of Contents
The assets and liabilities measured at fair value on a non-recurring basis are summarized below for June 30, 2017:
Description |
Total carrying value in the consolidated balance sheet at June 30, 2017 |
Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
(Dollars in Thousands) | |||||||||||||||
Foreclosed assets |
$ | 1,408 | | | $ | 1,408 | ||||||||||
Impaired loans, net of allowance |
$ | 6,588 | | | $ | 6,588 |
The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2016:
Description |
Total carrying value in the consolidated balance sheet at December 31, 2016 |
Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
(Dollars in Thousands) | |||||||||||||||
Foreclosed assets |
$ | 2,397 | | | $ | 2,397 | ||||||||||
Impaired loans, net of allowance |
$ | 6,123 | | | $ | 6,123 |
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The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a recurring and non-recurring basis at June 30, 2017 and December 31, 2016:
Level 3 Significant Unobservable Input Assumptions | ||||||||
` | Fair |
Valuation Technique |
Unobservable Input |
Quantitative | ||||
June 30, 2017 |
(Dollars in Thousand) | |||||||
Assets measured on a non-recurring basis | ||||||||
Foreclosed assets | $1,408 | Discount to appraised value of collateral | Appraisal comparability adjustments | 30% to 55% | ||||
Impaired loans | 6,588 | Discount to appraised value of collateral | Appraisal comparability adjustments | 10% to 25% | ||||
Asset measured on a recurring basis | ||||||||
Trust preferred securities | 1,865 | Discounted cash flow Spread to Libor swap curve | Compare to quotes for sale when available | One month libor 4% to 6% | ||||
December 31, 2016 |
||||||||
Assets measured on a non-recurring basis | ||||||||
Foreclosed assets | $2,397 | Discount to appraised value of collateral | Appraisal comparability adjustments | 30% to 55% | ||||
Impaired loans | 6,123 | Discount to appraised value of collateral | Appraisal comparability adjustments | 10% to 15% | ||||
Asset measured on a recurring basis | ||||||||
Trust preferred securities | 1,817 | Discounted cash flow Spread to Libor swap curve | Compare to quotes for sale when available | One month libor 4% to 6% |
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Table of Contents
Foreclosed assets and impaired loans are valued at fair value, less cost to sell. Fair value of a foreclosed asset is determined by an appraised value of the underlying collateral to which a discount is applied. Management establishes the discount or adjustments based on recent sales and any unique features the collateral may possess. Management also considers the anticipated selling cost associated with the collateral when establishing the discounted percentage. Management may adjust the discounts based on the most recent sales of comparable collateral.
The Company bases the value of its trust preferred security on a quarterly review of SEC filings by the issuer to ascertain overall financial strength. Based on the analysis, the Company then reviews the Libor swap curve to analyze the overall yield of our investment as compared to long-term swap rates. On rare occasions, the Company may receive an offer from a broker to purchase similar type instruments and the Company will analyze these offerings as compared to our investment.
The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the six month periods ended June 30, 2017 and June 30, 2016, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.
2017 | 2016 | |||||||
Six month period ended June 30, |
Other Assets |
Other Assets |
||||||
(Dollars in Thousands) |
||||||||
Fair value, January 1 |
$ | 1,817 | 1,865 | |||||
Change in unrealized gain included in other comprehensive income for assets and liabilities still held at June 30, |
40 | 97 | ||||||
Accretion of previously discounted amounts |
8 | 16 | ||||||
Purchases, issuances and settlements, net |
| | ||||||
Transfers in and/or out of Level 3 |
| | ||||||
|
|
|
|
|||||
Fair value, June 30 |
$ | 1,865 | 1,978 | |||||
|
|
|
|
34
Table of Contents
The estimated fair values of financial instruments were as follows at June 30, 2017:
Carrying Amount |
Estimated Fair Value |
Quoted Prices In Active Markets for Identical Assets Level 1 |
Using Significant Other Observable Inputs Level 2 |
Significant Unobservable Inputs Level 3 |
||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 20,208 | 20,208 | 20,208 | | | ||||||||||||||
Interest-bearing deposits |
4,801 | 4,801 | 4,801 | | | |||||||||||||||
Securities available for sale |
205,363 | 205,363 | | 203,498 | 1,865 | |||||||||||||||
Federal Home Loan Bank stock |
4,428 | 4,428 | | | 4,428 | |||||||||||||||
Loans held for sale |
2,386 | 2,386 | | 2,386 | | |||||||||||||||
Loans receivable |
631,242 | 611,910 | | | 611,910 | |||||||||||||||
Accrued interest receivable |
3,332 | 3,332 | | | 3,332 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Deposits |
745,944 | 746,635 | | 746,635 | | |||||||||||||||
Advances from borrowers for taxes and insurance |
984 | 984 | | 984 | | |||||||||||||||
Advances from Federal Home Loan Bank |
21,000 | 21,007 | | 21,007 | | |||||||||||||||
Repurchase agreements |
41,820 | 41,820 | | 41,820 | | |||||||||||||||
Subordinated debentures |
10,310 | 10,099 | | | 10,099 |
35
Table of Contents
The estimated fair values of financial instruments were as follows at December 31, 2016:
Carrying Amount |
Estimated Fair Value |
Quoted Prices In Active Markets for Identical Assets Level 1 |
Using Significant Other Observable Inputs Level 2 |
Significant Unobservable Inputs Level 3 |
||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 21,779 | 21,779 | 21,779 | | | ||||||||||||||
Interest-bearing deposits |
3,970 | 3,970 | 3,970 | | | |||||||||||||||
Securities available for sale |
209,480 | 209,480 | 2,001 | 205,662 | 1,817 | |||||||||||||||
Federal Home Loan Bank stock |
4,428 | 4,428 | | | 4,428 | |||||||||||||||
Loans held for sale |
1,094 | 1,094 | | 1,094 | | |||||||||||||||
Loans receivable |
604,286 | 593,257 | | | 593,257 | |||||||||||||||
Accrued interest receivable |
3,799 | 3,799 | | | 3,799 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Deposits |
732,882 | 732,942 | | 732,942 | | |||||||||||||||
Advances from borrowers for taxes and insurance |
766 | 766 | | 766 | | |||||||||||||||
Advances from Federal Home Loan Bank |
11,000 | 10,979 | | 10,979 | | |||||||||||||||
Repurchase agreements |
47,655 | 47,655 | | 47,655 | | |||||||||||||||
Subordinated debentures |
10,310 | 10,099 | | | 10,099 |
(8) | EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS |
In May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the ASC. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016; however, the FASB has agreed to a one-year deferral of the effective date to December 15, 2017. Management is currently evaluating the impact that this ASU will have on the Companys consolidated financial statements.
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ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective on January 1, 2018. Management is currently evaluating the impact that this ASU will have on the Companys consolidated financial statements.
ASU 2016-02, Leases (Topic 842). ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, Revenue from Contracts with Customers. ASU 2016-02 will be effective for us on January 1, 2019, and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently evaluating the potential impact of ASU 2016-02 on the Companys consolidated financial statements.
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Table of Contents
On June 16, 2016, the FASB released its finalized ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments to U.S. GAAP require businesses and other organization to measure the expected credit losses on financial assets, such as loans, securities, bond insurance, and many receivables. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified as available-for-sale. Write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts are expected to improve the loss estimates on financial assets that are losing value. The techniques that are employed today to write down loans and other instruments can still be used, although the variables for calculating the losses are expected to change. ASU 2016-13 will become effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2021. Companies are permitted to adopt ASU 2016-13 in fiscal years beginning after December 15, 2018. Management is currently evaluating the potential impact of this ASU on the Companys consolidated financial statements.
ASU 2016-15 Statement of Cash Flows (Topic 230) (ASU 2016-15) is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption was permitted with retrospective application. Management is evaluating the impact that the adoption of ASU 2016-15 will have on the Companys 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 Companys financial position, results of operations or cash flows.
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Table of Contents
(9) | INCOME TAXES |
The Company files consolidated federal income tax returns and Tennessee excise tax returns. The Company files consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has accrued any interest or penalties for uncertain tax positions. The effective tax rate differs from the statutory federal rate of 35% and Tennessee excise rate of 6.5% due to investments in qualified municipal securities, Bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses. The Companys effective federal income tax rate varies significantly from our federal statutory tax rate for a variety of factors, including:
The Companys investment in Fort Webb LP, LLC generates tax credits and depreciation expense that the Company can use to offset taxable income. At June 30, 2017 and December 31, 2016, the Companys balance sheet did not include any equity investment in Fort Webb. The Company has other investments that produce both tax credits and depreciation expense that may be used to offset net income.
At June 30, 2017, the Company has $10.2 million in Bank owned life insurance policies. The income generated from these policies increase the cash flow of the policies on a tax free basis. Life insurance proceeds are paid upon the death of a covered party. These proceeds, netted against the current cash value of the policy, result in tax free income to the Company. For the six month period ended June 30, 2017, the Company received additional income of approximately $160,000 from the net proceeds of a life insurance policy, further reducing our effective tax rate.
At June 30, 2017, the Companys investment portfolio includes $32.3 million of tax free municipal bonds. Interest income on this portfolio, after netting out a disallowance for interest expense attributable to this portfolio, is tax exempt.
(10) | ESOP |
Substantially all of the Companys employees who are at least 21 years old and have one year of employment with the Company participate in the 2015 HopFed Bancorp, Inc. Employee Stock Ownership Plan (ESOP). The ESOP purchased 600,000 shares of the Companys common stock from the Company on March 2, 2015, at $13.14 per share. The ESOP borrowed $7.9 million from an open-end line of credit from the Company for the purchase of the stock, using the 600,000 shares of common stock as collateral. The Company makes discretionary contributions to the ESOP. The ESOP utilizes these contributions along with the dividends on the 600,000 held by the ESOP to repay the loan from the Company. When loan payments are made, ESOP shares are released based on reductions in the principal balance of the loan. The shares are allocated to participants based on relative compensation.
Employees who are not employed on December 31st of each year are not eligible for participation in the ESOP. The Company anticipates that loan payments will be made at the end of each year. Participants receive shares at the end of employment. The Company has the option to repurchase the shares or provide the shares directly to the employee.
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Table of Contents
The Company made its second ESOP loan payment in December 2016. At June 30, 2017 and December 31, 2016, shares held by the ESOP were as follows:
June 30, 2017 | December 31, 2016 |
|||||||
Accrued for allocation to participants |
21,484 | | ||||||
Earned ESOP shares |
101,654 | 101,654 | ||||||
Unearned ESOP shares |
476,862 | 498,346 | ||||||
|
|
|
|
|||||
Total ESOP shares |
600,000 | 600,000 | ||||||
|
|
|
|
|||||
Fair value of unearned shares |
$ | 6,833,432 | $ | 6,707,737 | ||||
|
|
|
|
(11) | COMMITMENTS AND CONTINGENCIES |
At June 30, 2017, the Bank had $32.8 million in outstanding commitments on revolving home equity lines of credit, $18.3 million in outstanding commitments on revolving personal lines of credit and $47.1 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $52.3 million. At June 30, 2017, the Company had $268,000 in standby letters of credit outstanding.
At June 30, 2017, the Company has $38.1 million in times deposits greater than $100,000 but less than $250,000 that are schedule to mature in one year and $54.7 million in time deposits with balances greater than $250,000 that are scheduled to mature in one year or less. Management believes that a significant percentage of such deposits will remain with the Bank.
The Banks FHLB borrowings are secured by a blanket security agreement pledging the Banks 1-4 family first mortgage loans and non-residential real estate loans. At June 30, 2017 and December 31, 2016, the Bank has pledged all eligible 1-4 family first mortgages. At June 30, 2017, the Bank has outstanding borrowings of $21.0 million from the FHLB. A schedule of FHLB borrowings at June 30, 2017 is provided below:
Outstanding |
Rate |
Maturity |
||||||||
(Dollars in thousands) |
||||||||||
$ |
10,000 |
|
|
1.27 |
% |
|
Overnight |
| ||
5,000 | 0.88 | % | 10/06/2017 | |||||||
6,000 | 1.18 | % | 07/06/2018 | |||||||
|
|
|
|
|
|
|||||
$ | 21,000 | 1.15 | % | |||||||
|
|
|
|
40
Table of Contents
A schedule of FHLB borrowings at December 31, 2016 is provided below:
Outstanding |
Rate |
Maturity |
||||||||
(Dollars in thousands) | ||||||||||
$ | 5,000 | 0.88 | % | 10/06/2017 | ||||||
6,000 | 1.18 | % | 07/06/2018 | |||||||
|
|
|
|
|
|
|||||
$ | 11,000 | 1.04 | % | |||||||
|
|
|
|
The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Banks name totaling $47.6 million secured by the Banks loan portfolio to secure additional municipal deposits. At June 30, 2017, securities with a fair market value of $41.8 million were sold under agreements to repurchase from various customers.
The Company is a party to certain ordinary course litigation, and the Company intends to vigorously defend itself in all such matters. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Companys consolidated financial statements or results of operations.
(12) | REGULATORY MATTERS |
The new minimum capital level requirements applicable to Bank holding companies and Banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a capital conservation buffer of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2017, the capital conservation buffer is 1.25%. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Under these new rules, Tier 1 capital generally consists 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 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, 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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Table of Contents
The final rules allow Banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company has made the decision to opt-out of this requirement.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2017 and December 31, 2016 based on the phase-in provisions of Basel III Capital Rules. Management believes, as of June 30, 2017 and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject. The Companys consolidated capital ratios and the Banks actual capital amounts and ratios as of June 30, 2017 and December 31, 2016 are presented below (Dollars in Thousands):
As of June 30, 2017 |
Actual | Minimum Capital Required Basel III Phase-In Schedule |
To be Well Capitalized for Prompt Corrective Action Provisions |
|||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier 1 leverage capital to adjusted total assets |
||||||||||||||||||||||||
Company |
$ | 94,993 | 10.4 | % | $ | 36,273 | 4.0 | % | $ | 45,341 | 5.0 | % | ||||||||||||
Bank |
$ | 91,851 | 10.4 | % | $ | 35,472 | 4.0 | % | $ | 44,240 | 5.0 | % | ||||||||||||
Total capital to risk weighted assets |
||||||||||||||||||||||||
Company |
$ | 102,173 | 16.1 | % | $ | 58,361 | 9.25 | % | $ | 63,093 | 10.0 | % | ||||||||||||
Bank |
$ | 99,032 | 15.7 | % | $ | 58,232 | 9.25 | % | $ | 62,954 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets |
||||||||||||||||||||||||
Company |
$ | 94,993 | 15.0 | % | $ | 45,743 | 7.25 | % | $ | 50,475 | 8.0 | % | ||||||||||||
Bank |
$ | 91,851 | 14.6 | % | $ | 45,642 | 7.25 | % | $ | 50,363 | 8.0 | % | ||||||||||||
Common equity tier 1 capital to risk weighted assets |
||||||||||||||||||||||||
Company |
$ | 94,993 | 15.0 | % | $ | 36,279 | 5.75 | % | n/a | n/a | ||||||||||||||
Bank |
$ | 91,851 | 14.6 | % | $ | 36,199 | 5.75 | % | $ | 40,920 | 6.5 | % | ||||||||||||
As of December 31, 2016 |
||||||||||||||||||||||||
Tier 1 leverage capital to adjusted total assets |
||||||||||||||||||||||||
Company |
$ | 92,803 | 10.8 | % | $ | 34,392 | 4.0 | % | $ | 42,990 | 5.0 | % | ||||||||||||
Bank |
$ | 91,617 | 10.7 | % | $ | 34,315 | 4.0 | % | $ | 42,894 | 5.0 | % | ||||||||||||
Total capital to risk weighted assets |
||||||||||||||||||||||||
Company |
$ | 98,915 | 16.2 | % | $ | 52,682 | 8.625 | % | $ | 61,080 | 10.0 | % | ||||||||||||
Bank |
$ | 97,729 | 16.0 | % | $ | 52,561 | 8.625 | % | $ | 60,941 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets |
||||||||||||||||||||||||
Company |
$ | 92,803 | 15.2 | % | $ | 40,466 | 6.625 | % | $ | 48,864 | 8.0 | % | ||||||||||||
Bank |
$ | 91,617 | 15.0 | % | $ | 40,373 | 6.625 | % | $ | 48,753 | 8.0 | % | ||||||||||||
Common equity tier 1 capital to risk weighted assets |
||||||||||||||||||||||||
Company |
$ | 92,803 | 15.2 | % | $ | 31,304 | 5.125 | % | n/a | n/a | ||||||||||||||
Bank |
$ | 91,617 | 15.0 | % | $ | 31,232 | 5.125 | % | $ | 39,611 | 6.5 | % |
42
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Critical Accounting Policies
The preparation of the Companys consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with U.S. GAAP and general banking practices. These estimates include accounting for the allowance for loan losses, foreclosed assets, valuation of deferred tax assets and fair value measurements. A description of these estimates, which significantly affect the Companys determination of our consolidated financial position, results of operations and cash flows, is set forth in Note 1, Summary of Significant Accounting Policies of the Notes to the Companys consolidated financial statements in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2016.
The emphasis of this discussion is a comparison of assets, liabilities and stockholders equity as of June 30, 2017 to December 31, 2016, while comparing income and expenses for the three and six month periods ended June 30, 2017 and June 30, 2016.
All information should be read in conjunction with the Companys unaudited interim consolidated condensed financial statements and related notes appearing elsewhere in this report and Managements Discussion and Analysis of Financial Condition and Results of Operations appearing in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2016.
Comparison of Financial Condition at June 30, 2016, and December 31, 2016
At June 30, 2017, total assets increased $20.6 million, to $912.1 million as compared to $891.5 million at December 31, 2016, largely due to higher levels of time deposits, cash on hand and loan growth. Securities available for sale declined from $209.5 million at December 31, 2016 to $205.4 million at June 30, 2017. At June 30, 2017 and December 31, 2016, securities classified as available for sale had an amortized cost of $203.8 million and $208.7 million, respectively. Net loans totaled $631.2 million and $604.3 million at June 30, 2017 and December 31, 2016, respectively.
The Companys holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost were $4.4 million at December 31, 2016 and June 30, 2017. Total FHLB borrowings were $21.0 million at June 30, 2017 and $11.0 million at December 31, 2016, respectively. Total repurchase balances declined from $47.7 million at December 31, 2016 to $41.8 million at June 30, 2017.
At June 30, 2017, deposits increased $13.0 million from $732.9 million at December 31, 2016 to $745.9 million at June 30, 2017. At June 30, 2017, non-interest checking account balances are $132.3 million, or 17.7% of total deposits as compared to $131.1 million, or 17.9% of total deposits at December 31, 2016. For the period ended June 30, 2017, interest bearing checking accounts increased by $6.9 million as compared to December 31, 2016. At June 30, 2017, time deposits were $299.1 million, representing an increase of $6.0 million as compared to December 31, 2016. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area.
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Table of Contents
Comparison of Operating Results for the Six Month Periods Ended June 30, 2017 and June 30, 2016.
Net Income. The Companys net income was $2.1 million for the six month period ended June 30, 2017, as compared to net income of $813,000 for the six month period ended June 30, 2016. The improved level of income is largely the result of growth in the average balance of loans and a reduction in the Companys provision for loan loss expense. For the six month period ended June 30, 2017, the reduction in provision expense was accomplished as a result of $718,000 in net recoveries as well as continued improvements in credit quality.
Net Interest Income. Net interest income for the six month period ended June 30, 2017 was $13.7 million, compared to $13.1 million for the six month period ended June 30, 2016. The increase in net interest income for the six month period ended June 30, 2017 as compared to June 30, 2016 was largely due to the $61.9 million increase in the average balance of loans outstanding. The growth in loan balances offset a decline in the average yield of the loan portfolio as well as the average balance of available for sale investment securities.
For the six month period ended June 30, 2017, the average tax equivalent yield on loans was 4.44%, as compared to 4.53% for the six month period ended June 30, 2016. For the six month period ended June 30, 2017, income on taxable securities and tax free securities was $2.3 million and $563,000, respectively. Income on taxable and tax free securities was $2.4 million and $693,000 for the six month period ended June 30, 2016, respectively. For the six month period ending June 30, 2017, the tax equivalent yield on taxable and tax free securities were 2.57% and 5.04%, respectively, as compared to 2.46% and 5.03% for the six month period ended June 30, 2016, respectively. For the six month periods ended June 30, 2017 and June 30, 2016, the Companys cost of interest bearing liabilities was 0.83% and 0.80%, respectively. For the six month periods ended June 30, 2017 and June 30, 2016, the Companys net interest margin was 3.35% and 3.34%, respectively.
Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the six month periods ended June 30, 2017 and June 30, 2016. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate six month periods.
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Table of Contents
Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $279,000 for the six month period ended June 30, 2017 and $344,000 for the six month period ended June 30, 2016, for a tax equivalent rate using a cost of funds rate of 0.83% for the six month period ended June 30, 2017 and 0.80% for the six month period ended June 30, 2016. The table adjusts tax-free loan income by $21,000 for the six month period ended June 30, 2017 and $13,000 for the six month period ended June 30, 2016, for a tax equivalent rate using the same cost of funds rate (Dollars in thousands):
Average Balance 06/30/2017 |
Income & Expense 06/30/2017 |
Average Rates 06/30/2017 |
Average Balance 06/30/2016 |
Income & Expense 06/30/2016 |
Average Rates 06/30/2016 |
|||||||||||||||||||
Loans |
$ | 618,430 | $ | 13,720 | 4.44 | % | $ | 556,562 | $ | 12,619 | 4.53 | % | ||||||||||||
Taxable AFS securities |
177,044 | 2,273 | 2.57 | % | 199,129 | 2,445 | 2.46 | % | ||||||||||||||||
Non-taxable AFS securities |
33,391 | 842 | 5.04 | % | 41,202 | 1,037 | 5.03 | % | ||||||||||||||||
Other interest bearing deposits |
7,565 | 44 | 1.16 | % | 9,508 | 28 | 0.59 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest earning assets |
836,430 | 16,879 | 4.04 | % | 806,401 | 16,129 | 4.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Other assets |
73,072 | 77,219 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 909,502 | $ | 883,620 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Retail time deposits |
$ | 258,518 | 1,342 | 1.04 | % | $ | 258,776 | 1,218 | 0.94 | % | ||||||||||||||
Brokered deposits |
47,461 | 280 | 1.18 | % | 34,478 | 187 | 1.08 | % | ||||||||||||||||
Interest bearing checking accounts |
221,580 | 660 | 0.60 | % | 209,810 | 610 | 0.58 | % | ||||||||||||||||
MMDA and savings accounts |
99,294 | 82 | 0.17 | % | 98,223 | 87 | 0.18 | % | ||||||||||||||||
FHLB borrowings |
12,298 | 62 | 1.01 | % | 12,297 | 101 | 1.64 | % | ||||||||||||||||
Repurchase agreements |
40,482 | 222 | 1.10 | % | 43,127 | 282 | 1.31 | % | ||||||||||||||||
Subordinated debentures |
10,310 | 212 | 4.11 | % | 10,310 | 188 | 3.65 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest bearing liabilities |
689,943 | 2,860 | 0.83 | % | 667,021 | 2,673 | 0.80 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Non-interest bearing deposits |
127,447 | 124,379 | ||||||||||||||||||||||
Other non-interest bearing liabilities |
3,987 | 3,270 | ||||||||||||||||||||||
Stockholders equity |
88,125 | 88,950 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 909,502 | $ | 883,620 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 14,019 | $ | 13,456 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.21 | % | 3.20 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin |
3.35 | % | 3.34 | % | ||||||||||||||||||||
|
|
|
|
45
Table of Contents
Interest Income. For the six month period ended June 30, 2017, the Companys total interest income was $16.6 million, representing an increase of $807,000 as compared to the six month period ended June 30, 2016. For the six month periods ended June 30, 2017 and June 30, 2016, interest income on loans was $13.7 million and $12.6 million, respectively. The average balance of loans receivable increased from $556.6 million for the six month period ended June 30, 2016 to $618.4 million for the six month period ended June 30, 2017. For the six month period ended June 30, 2017, the increase in interest income on loans as compared to the six month period ended June 30, 2016 was partially offset by a $302,000 decline in investment income during the period resulting from a decline in the average balance of both taxable and tax free investment securities. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 120.9% for the six month period ended June 30, 2016 to 121.2% for the six month period ended June 30, 2017.
Interest Expense. Interest expense increased $187,000 for the six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016. For the six month period ending June 30, 2017, the Companys interest expense on FHLB advances was $62,000, as compared to $101,000 for the six month period ended June 30, 2016. The average cost of FHLB borrowings were 1.01% for the six month period ended June 30, 2017 and 1.64% for the six month period ended June 30, 2016.
For the six month period ended June 30, 2017, the average balance of interest bearing retail time deposits declined $258,000 to $258.5 million, as compared to $258.8 million for the six month period ended June 30, 2016. The average cost of retail time deposits for the six month periods ended June 30, 2017 and June 30, 2016 was 1.04% and 0.94%, respectively.
The average cost of brokered deposits increased from 1.08% for the six month period ended June 30, 2016 as compared to 1.18% for the six month period ended June 30, 2017. Over the same period, the average balance of brokered deposits increased $13.0 million. For the six month period ended June 30, 2017, the Companys total cost of deposits was 0.63% as compared to 0.58% for the six month period ended June 30, 2016. The increase in deposit cost is the result of three increases in overnight federal funds rates, increasing the cost of all deposits.
The average balance of repurchase agreements declined from $43.1 million for the six months ended June 30, 2016, to $40.5 million for the six month period ended June 30, 2017. The average cost of repurchase agreements was 1.31% for the six months ended June 30, 2016 and 1.10% for the six month period ended June 30, 2017. For the six month period ended June 30, 2017, the Companys subordinated debt interest expense was $212,000 as compared to $188,000 for the six month period ended June 30, 2016. The increase in the subordinated debt interest expense is the result of an increase in the three month libor rate.
Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on managements 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 $350,000 in provision for loan loss was required for the six month period ended June 30, 2017 compared to a $923,000 provision for loan loss expense for the six month period ended June 30, 2016. The lower level of required provision expense for the six month period ended June 30, 2017 as compared to June 30, 2016 is the result of improving credit quality and $718,000 in net loan loss recoveries in during the six month period ended June 30, 2017.
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Table of Contents
Non-Interest Income. There was a $142,000 increase in non-interest income in the six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016. For the six month period ended June 30, 2017, other operating income was $691,000 as compared to $379,000 for the six month period ended June 30, 2016. The improved level of other operating income is largely the result of $225,000 in one time licensing fees earned by the Bank from a vendor. For the six month period ended June 30, 2017, the Company earned $612,000 in mortgage origination income as compared to $803,000 during the six month period ended June 30, 2016. The decline in mortgage origination income was largely the result of an increase in mortgage loan rates which reduced the demand for fixed rate mortgage loan products.
The Companys income for services charges was $1.6 million for the six month period ended June 30, 2017, as compared to $1.4 million for the same period in 2016. The increase in service charge income is the result of the Companys revised consumer transaction account product offerings, providing additional income on these accounts. The Companys financial services commission was $285,000 for the six month period ended June 30, 2017 as compared to $324,000 for the six month period ended June 30, 2016. For the six month period ended June 30, 2017, gains on the sale of securities were $16,000, as compared to $343,000 for the six month period ended June 30, 2016. The decline in gains on the sale of securities is largely the result of higher short term interest rates.
The Companys income from bank owned life insurance was $307,000 for the six month period ended June 30, 2017 compared to $161,000 for the six month period ended June 30, 2016. The increase in bank owned life insurance income is largely the result of the receipt of a death benefit payment of approximately $160,000 in March 2017.
Non-Interest Expenses. There was a $370,000 decline in total non-interest expenses for the six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016. The most significant change in non-interest expenses was a $324,000 increase in salaries and benefits expense. The increase in salaries and benefits expense is largely the result of an $180,000 increase in the cost of health insurance benefits and a $104,000 increase in overall compensation.
During the six month period ended June 30, 2017, the Companys professional expenses were $812,000 as compared to $640,000 for the six month period ended June 30, 2016. The increase in professional services expense is largely the result of increased legal expenses related to a shareholder demand letter and shareholder lawsuit filed by an activist shareholder. For the six month period ended June 30, 2017, other operating expenses were $1.8 million as compared to $2.3 million for the six month period ended June 30, 2016. The reduction in other expenses is attributable to several factors, including a $250,000 one-time refund of other operating expenses. For the six month period ended June 30, 2017, foreclosure expenses were $114,000 as compared to $269,000 for the six month period ended June 30, 2016. The decrease in foreclosure expenses is the result of lower balances in foreclosed assets and a reduction in foreclosure activity as compared to the six month period ended June 30, 2016.
Income Taxes. The effective tax rate for the six month periods ending June 30, 2017 was 19.5% as compared to 7.0% for the six month period ended June 30, 2016. The increase in the Companys tax rate is due to an increase in taxable net interest income. The Companys tax rate remains well below the statutory tax rate of 34% due to the relatively high level of tax free income from a $32.3 million in tax free municipal bonds and an increase in income from Bank owned life insurance resulting from the receipt of approximately $160,000 in proceeds from the death benefit of a life insurance policy.
47
Table of Contents
Comparison of Operating Results for the Three Month Periods Ended June 30, 2017 and June 30, 2016.
Net Income. The Companys net income was $1,141,000 for the three month period ended June 30, 2017, as compared to net income of $304,000 for the three month period ended June 30, 2016. The improved level of net income for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016 was largely the result of growth in the average balance of loans, a $376,000 reduction in non-interest expenses and $406,000 decline in provision for loan loss expense.
Net Interest Income. Net interest income for the three month period ended June 30, 2017 was $7.0 million, compared to $6.4 million for the three month period ended June 30, 2016. The increase in net interest income for the three month period ended June 30, 2017 as compared to June 30, 2016 was largely due to the $67.5 million increase in the average balance of loans outstanding. For the three month period ended June 30, 2017, the growth in the average balance of loans outstanding as compared to three month period ended June 30, 2016 helped to offset a decline in the average yield and the average balance of taxable and tax free securities.
For the three month period ended June 30, 2017, the average yield on loans was 4.48%, as compared to 4.43% for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, income on taxable securities and tax free securities was $1.2 million and $280,000, respectively. Income on taxable securities and tax free securities was $1.2 million and $340,000 for the three month period ended June 30, 2016, respectively. For the three month period ending June 30, 2017, the tax equivalent yield on taxable and tax free securities were 2.61% and 5.09%, respectively, as compared to 2.39% and 5.05% for the three month period ended June 30, 2016, respectively.
For the three month periods ended June 30, 2017 and June 30, 2016, the Companys cost of interest bearing liabilities was 0.84% and 0.77%, respectively. For the three month periods ended June 30, 2017 and June 30, 2016, the Companys net interest margin was 3.39% and 3.28%, 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, 2017 and June 30, 2016. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three month periods.
48
Table of Contents
Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $139,000 for the three month period ended June 30, 2017 and $169,000 for the three month period ended June 30, 2016, for a tax equivalent rate using a cost of funds rate of 0.84% for the three month period ended June 30, 2017 and 0.77% for the three month period ended June 30, 2016. The table adjusts tax-free loan income by $12,000 for the three month period ended June 30, 2017 and $6,000 for the three month period ended June 30, 2016, for a tax equivalent rate using the same cost of funds rate (Dollars in thousands):
Average Balance 06/30/2017 |
Income & Expense 06/30/2017 |
Average Rates 06/30/2017 |
Average Balance 06/30/2016 |
Income & Expense 06/30/2016 |
Average Rates 06/30/2016 |
|||||||||||||||||||
Loans |
$ | 622,606 | $ | 6,975 | 4.48 | % | $ | 555,147 | $ | 6,147 | 4.43 | % | ||||||||||||
Taxable AFS securities |
177,260 | 1,155 | 2.61 | % | 200,496 | 1,198 | 2.39 | % | ||||||||||||||||
Non-taxable AFS securities |
32,919 | 419 | 5.09 | % | 40,306 | 509 | 5.05 | % | ||||||||||||||||
Other interest bearing deposits |
5,888 | 21 | 1.43 | % | 9,525 | 12 | 0.50 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest earning assets |
838,673 | 8,570 | 4.09 | % | 805,474 | 7,866 | 3.91 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Other assets |
70,359 | 67,697 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 909,032 | $ | 873,171 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Retail time deposits |
$ | 257,956 | 678 | 1.05 | % | $ | 253,244 | 578 | 0.91 | % | ||||||||||||||
Brokered deposits |
48,866 | 145 | 1.19 | % | 32,971 | 88 | 1.07 | % | ||||||||||||||||
Interest bearing checking accounts |
223,444 | 334 | 0.60 | % | 206,284 | 299 | 0.58 | % | ||||||||||||||||
MMDA and savings accounts |
98,317 | 40 | 0.16 | % | 99,054 | 42 | 0.17 | % | ||||||||||||||||
FHLB borrowings |
11,176 | 30 | 1.07 | % | 11,000 | 28 | 1.02 | % | ||||||||||||||||
Repurchase agreements |
39,138 | 119 | 1.22 | % | 42,510 | 139 | 1.31 | % | ||||||||||||||||
Subordinated debentures |
10,310 | 108 | 4.19 | % | 10,310 | 94 | 3.65 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest bearing liabilities |
689,207 | 1,454 | 0.84 | % | 655,373 | 1,268 | 0.77 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Non-interest bearing deposits |
128,078 | 125,833 | ||||||||||||||||||||||
Other non-interest bearing liabilities |
3,915 | 3,302 | ||||||||||||||||||||||
Stockholders equity |
87,832 | 88,663 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 909,032 | $ | 873,171 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 7,116 | $ | 6,598 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.25 | % | 3.14 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin |
3.39 | % | 3.28 | % | ||||||||||||||||||||
|
|
|
|
49
Table of Contents
Interest Income. For the three month period ended June 30, 2017, the Companys total interest income was $8.4 million, representing an increase of $728,000 as compared to the three month period ended June 30, 2016. For the three month periods ended June 30, 2017 and June 30, 2016, interest income on loans was $6.9 million and $6.1 million, respectively. The average balance of loans receivable increased from $555.1 million for the three month period ended June 30, 2016 to $622.6 million for the three month period ended June 30, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities declined from 122.9% for the three month period ended June 30, 2016 to 121.7% for the three month period ended June 30, 2017.
Interest Expense. Interest expense increased $186,000 for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016. For the three month period ending June 30, 2017, the Companys interest expense on FHLB advances was $30,000, as compared to $28,000 for the three month period ended June 30, 2016. The average cost of FHLB borrowings were 1.07% for the three month period ended June 30, 2017 and 1.02% for the three month period ended June 30, 2016.
For the three month period ended June 30, 2017, the average balance of interest bearing retail time deposits increased $4.8 million to $258.0 million, as compared to $253.2 million for the three month period ended June 30, 2016. The average cost of retail time deposits for the three month periods ended June 30, 2017 and June 30, 2016 was 1.05% and 0.91%, respectively.
The average cost of brokered deposits increased from 1.07% for the three month period ended June 30, 2016 to 1.19% for the three month period ended June 30, 2017. Over the same period, the average balance of brokered deposits increased $15.9 million. For the three month period ended June 30, 2017, the Companys total cost of deposits was 0.63% as compared to 0.55% for the three month period ended June 30, 2016.
The average balance of repurchase agreements declined from $42.5 million for the three months ended June 30, 2016 to $39.1 million for the three month period ended June 30, 2017. The average cost of repurchase agreements was 1.31% for the three months ended June 30, 2016 and 1.22% for the three month period ended June 30, 2017. For the three month period ended June 30, 2017, the Companys subordinated debt interest expense was $108,000 as compared to $94,000 for the three month period ended June 30, 2016. The increase in the subordinated debt interest expense is the result of an increase in the three month libor rate.
Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on managements 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 $59,000 in provision for loan loss was required for the three month period ended June 30, 2017 compared to a $465,000 provision for loan loss expense for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, the lower level of provision expense was the result of improving credit quality and $956,000 in loan loss recoveries during the period.
50
Table of Contents
Non-Interest Income. There was a $134,000 decline in non-interest income in the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016. For the three month period ended June 30, 2017, other operating income was $212,000 as compared to $203,000 for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, the Company earned $278,000 in mortgage origination income as compared to $435,000 during the three month period ended June 30, 2016. The decline in mortgage origination income was largely the result of an increase in mortgage loan rates which reduced the demand for fixed rate mortgage loan products.
The Companys income for services charges was $800,000 for the three month period ended June 30, 2017, as compared to $698,000 for the same period in 2016. The increase in service charge income is the result of the Companys revised consumer transaction account product offerings. The Companys financial services commission was $145,000 for the three month period ended June 30, 2017 as compared to $191,000 for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, gains on the sale of securities were $14,000, as compared to $52,000 for the three month period ended June 30, 2016.
Non-Interest Expenses. There was a $376,000 decline in total non-interest expenses for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016. For the three month period ended June 30, 2017, salaries and benefits increased by $76,000 as compared to the three month period ended June 30, 2016. The increase in salaries and benefits expense is largely the result of an $112,000 increase in health insurance benefits due to an increase in medical insurance. For the three month period ended June 30, 2017, the Companys professional services expense was $464,000, an increase of $159,000 as compared to the three month period ended June 30, 2016, largely the result of shareholder lawsuits and demand letters filed in the three month period ended Jun 30, 2017. For the three month period ended June 30, 2017, other operating expenses were $940,000 as compared to $1.1 million for the three month period ended June 30, 2016.
Income Taxes. The effective tax rate for the three month periods ending June 30, 2017 was 24.4% due to an increase in the Companys taxable net interest income. For the three month period ended June 30, 2016, the Companys effective tax rate was 4.7% due to very low levels of net income and a relatively higher level of tax free income.
Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company.
The Bank uses brokered deposits to supplement its asset liability need for longer term deposits at reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement.
51
Table of Contents
At June 30, 2017, the Banks brokered deposits consisted of the following:
Issue Date |
Interest Rate |
Balance | Maturity Date | |||||||||
10/16/2015 | 0.85% | 4,042,000 | 7/16/2017 | |||||||||
7/27/2015 | 1.00% | 1,500,000 | 7/27/2017 | |||||||||
8/16/2016 | 0.75% | 2,153,000 | 10/16/2017 | |||||||||
7/22/2016 | 0.75% | 2,070,000 | 11/22/2017 | |||||||||
10/24/2016 | 0.80% | 964,000 | 12/24/2017 | |||||||||
1/3/2013 | 1.00% | 3,030,000 | 1/3/2018 | |||||||||
1/9/2015 | 1.20% | 2,004,000 | 1/9/2018 | |||||||||
7/29/2016 | 0.85% | 1,887,000 | 3/29/2018 | |||||||||
1/12/2017 | 1.10% | 5,433,000 | 4/12/2018 | |||||||||
2/15/2017 | 1.10% | 4,986,000 | 5/15/2018 | |||||||||
10/24/2016 | 1.00% | 2,149,000 | 6/24/2018 | |||||||||
1/12/2017 | 1.25% | 5,074,000 | 9/12/2018 | |||||||||
2/15/2017 | 1.30% | 4,278,000 | 12/15/2018 | |||||||||
8/16/2016 | 1.00% | 1,008,000 | 2/16/2019 | |||||||||
7/22/2016 | 1.00% | 2,138,000 | 5/22/2019 | |||||||||
7/29/2016 | 1.05% | 2,964,000 | 7/29/2019 | |||||||||
8/16/2016 | 1.10% | 1,978,000 | 8/16/2019 | |||||||||
|
|
|||||||||||
Total | $ | 47,658,000 | ||||||||||
|
|
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.
52
Table of Contents
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The actual results of the Companys asset liability management analysis are highly dependent on the prepayment speed of mortgage backed securities and collateralized mortgage obligations. The United States Treasurys 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, Managements Discussion and Analysis of Financial Condition and Results of Operations. Actual results for the year ending December 31, 2017 will differ from simulations due to timing, magnitude, and the frequency or interest rate changes, market conditions, management strategies, and the timing of the Companys cash receipts and disbursements.
The Companys analysis at June 30, 2017 indicates that changes in interest rates are less likely to result in significant changes in the Companys annual net interest income. A summary of the Companys analysis at June 30, 2017 for the twelve month period ending June 30, 2018 is as follows:
Down 1.00% | No change | Up 1.00% | Up 2.00% | Up 3.00% | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Net interest income |
$ | 29,058 | $ | 30,406 | $ | 31,352 | $ | 32,096 | $ | 32,640 |
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 Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys 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, 2017.
Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the six months ended June 30, 2017 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.
Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud will be detected.
The Company is subject to Section 404 of The Sarbanes-Oxley Act of 2002. Section 404 requires management to assess and report on the effectiveness of the Companys internal controls over financial reporting.
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Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the Companys fiscal quarter ended June 30, 2017 that have materially affected, or are reasonable likely to materially affect, the Companys internal control over financial reporting.
Item 1. | Legal Proceedings |
From time to time, the Company is a party to certain ordinary course litigation. The Company will vigorously defend itself in all such matters when the Company determines that it has meritorious defenses. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Companys consolidated financial statements or results of operations. The Company and its subsidiaries have adopted policies and procedures intended to minimize the impact of adverse litigation and regulatory actions, and has endeavored to secure reasonable insurance coverage.
On May 4, 2017, the Company and its directors, John Peck, Michael Woolfolk, Harry Dempsey, Ted Kinsey, Steve Hunt, Clay Smith, Thomas Miller and Richard Perkins, and a former director, Gilbert Lee, were named as defendants in a lawsuit filed in the Court of Chancery in the State of Delaware by Company stockholders, Stilwell Associates, L.P., Stilwell Activist Fund, L.P. and Stilwell Activist Investments, L.P. (collectively, the Plaintiffs), concerning the adoption of Article III, Section 13 of the Companys Amended and Restated Bylaws. The Bylaw concerns qualifications for individuals to serve on the Companys Board of Directors and qualifications for individuals that wish to nominate a candidate for the Board of Directors. The Plaintiffs seek a declaration that the Bylaw is invalid or, in the alternative, a declaration that the Bylaw does not prevent Plaintiffs from nominating candidates for director. The Plaintiffs also seek an injunction enjoining the application of the Bylaw prohibiting Plaintiffs from nominating director candidates and an order declaring that the Defendants, other than Mr. Miller, breached their fiduciary duties in adopting the Bylaw. The Plaintiffs do not seek damages. A motion to dismiss the lawsuit is pending. At this time the Company cannot predict with any certainty the outcome of the lawsuit.
Item 1A. | Risk Factors |
There have been no material changes to our risk factors as previously disclosed in Part 1, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2016.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | Unregistered Sales of Equity Securities. |
None
(b) | Use of Proceeds. Not applicable |
(c) | Repurchase of Equity Securities |
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total number of shares Purchased as part of Publically Announced Programs |
Maximum Number of Shares that Yet may be Purchased Under the Program at the end of the period |
||||||||||||
April 1, 2017 to April 30, 2017 |
| | 1,846,829 | 91,857 | ||||||||||||
May 1, 2017 to May 31, 2017 |
260 | $ | 12.70 | 1,847,089 | 91,597 | |||||||||||
June 1, 2017 to June 30, 2017 |
178 | $ | 12.75 | 1,847,267 | 91,419 | |||||||||||
|
|
|
|
|
|
|
|
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Total |
438 | $ | 12.72 | 1,847,267 | 91,419 | |||||||||||
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|
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|
|
|
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Mine Safety Disclosures |
Not Applicable
Item 5. | Other Information |
None
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31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer. | |
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer. | |
32.1 | Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer. | |
32.2 | Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer. | |
101 | The following materials from the Companys quarterly report on Form 10-Q for the three and six month periods ended June 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Financial Condition as of June 30, 2017 (unaudited) and December 31, 2016, (ii) Consolidated Condensed Statements of Income for the three and six month periods ended June 30, 2017 and June 30, 2016 (unaudited), (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) for the six month periods ended June 30, 2017 and June 30, 2016 (unaudited), (iv) Consolidated Condensed Statements of Stockholders Equity, for the six month periods ended June 30, 2016 and June 30, 2017 (unaudited); and (v) Consolidated Condensed Statements of Cash Flows, for the six month periods ended June 30, 2017 and June 30, 2016 (unaudited), and (iv) Notes to Consolidated Condensed Financial Statements (unaudited), tagged as blocks of text. |
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 9, 2017 | /s/ John E. Peck | |||||
John E. Peck | ||||||
President and Chief Executive Officer | ||||||
Date: August 9, 2017 | /s/ Billy C. Duvall | |||||
Billy C. Duvall | ||||||
Senior Vice President, Chief Financial | ||||||
Officer and Treasurer |
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