EX-13 3 dex13.txt EXHIBIT 13 EXHIBIT 13 SELECTED FINANCIAL INFORMATION AND OTHER DATA The following summary of selected financial information and other data does not purport to be complete and is qualified in its entirety by reference to the detailed information and Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report. FINANCIAL CONDITION AND OTHER DATA
At December 31, -------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Total amount of:.................. (Dollars in thousands) Assets......................... $ 427,502 $ 285,639 $ 229,958 $ 207,906 $ 220,032 Loans receivable, net.......... 292,095 170,016 129,154 113,532 108,807 Loans held for sale............ --- 928 --- --- --- Cash and due from banks........ 9,288 3,941 2,227 4,537 1,905 Time deposits and interest-bearing deposits in FHLB....................... 905 39 50 251 214 Federal funds sold............. 3,840 690 1,530 4,100 9,685 Securities available for sale.. 103,147 100,519 84,269 71,423 68,139 Securities held to maturity: FHLB securities.............. -- -- -- -- 13,998 Mortgage-backed securities... 2,932 4,462 7,796 9,958 13,356 Deposits....................... 353,655 200,316 165,604 160,905 154,816 FHLB advances.................. 23,623 38,747 17,040 -- -- Total Stockholder's equity..... 46,878 43,589 45,362 44,344 61,134 --------------------------------------------------------------------------------------------------- Number of: Real estate loans outstanding .................. 3,216 2,248 2,075 2,143 2,150 Deposit accounts .............. 36,868 18,178 18,778 18,667 19,251 Offices open .................. 8 6 5 5 5
Year Ended December 31, -------------------------------------------------------------- Operating Data 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (Dollars In thousands) Interest income................... $ 20,042 $ 17,562 $ 16,343 $ 14,205 $ 15,052 Interest expense.................. 9,420 9,752 9,112 7,078 8,004 ---------- ---------- ---------- ---------- ---------- Net interest income before provision for loan losses.. ..... 10,622 7,810 7,231 7,127 7,048 Provision for loan losses ........ 795 222 431 21 21 ---------- ---------- ---------- ---------- ---------- Net interest income............... 9,827 7,588 6,800 7,106 7,027 Non-interest income............... 2,312 717 509 7,028 547 Non-interest expense.............. 5,199 5,493 3,270 8,893 2,982 ---------- ---------- ---------- ---------- ---------- Income before income taxes........ 6,940 2,812 4,039 5,241 4,592 Provision for income taxes........ 2,346 973 1,373 2,766 1,641 ---------- ---------- ---------- ---------- ---------- Net income........................ $ 4,594 $ 1,839 $ 2,666 $ 2,475 $ 2,951 ========== ========== ========== ========== ==========
1 SELECTED QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- (Dollars In thousands) YEAR ENDED DECEMBER 31, 2002: Interest income............................... $ 4,587 $ 4,679 $ 4,950 $ 5,826 Net interest income after provision for losses on loans.............................. 2,448 2,588 2,368 2,423 Noninterest income............................ 436 402 677 797 Noninterest expense........................... 1,136 1,141 1,144 1,778 Net income.................................... 1,133 1,225 1,269 967 YEAR ENDED DECEMBER 31, 2001: Interest income............................... $ 4,302 $ 4,380 $ 4,445 $ 4,435 Net interest income after provision for losses on loans.............................. 1,882 1,865 1,948 1,893 Noninterest income............................ 98 180 279 160 Noninterest expense........................... 934 1,017 2,792 750 Net income (loss)............................. 669 661 (394) 903
2 KEY OPERATING RATIOS
At or for the Year Ended December 31, -------------------------------------- 2002 2001 2000 ---------- --------- --------- PERFORMANCE RATIOS Return on average assets (net income divided by average total assets) ..................................................... 1.37% 0.72% 1.18% Return on average equity (net income divided by average total equity) ............................................. 9.99% 4.26% 5.92% Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost) ........................................................ 2.81% 2.29% 2.28% Ratio of average interest-earning assets to average interest-bearing liabilities ...................................... 116.52% 121.63% 124.25% Ratio of non-interest expense to average total assets .............. 1.55% 2.15% 1.44% Ratio of net interest income after provision for loan losses to non-interest expense ........................... 189.02% 138.14% 207.95% Efficiency ratio (noninterest expense divided by sum of net interest income plus noninterest income) .......................... 40.20% 66.14% 44.74% ASSET QUALITY RATIOS Nonperforming assets to total assets at end of period .............. 0.19% 0.19% .19% Nonperforming loans to total loans at end of period ................ 0.29% 0.32% .34% Allowance for loan losses to total loans at end of period .......... 0.50% 0.54% .55% Allowance for loan losses to nonperforming loans at end of period ..................................................... 174.67% 167.21% 163.13% Provision for loan losses to total loans receivable, net ........... 0.27% .13% .33% Net charge-offs to average loans outstanding ....................... 0.12% .005% .001% CAPITAL RATIOS Total equity to total assets at end of period ...................... 10.97% 15.26% 19.73% Average total equity to average assets ............................. 13.68% 16.85% 19.86%
---------- REGULATORY CAPITAL RATIOS December 31, 2002 ---------------------- (Dollars in thousands) Tangible capital .................... $ 37,705 9.02% Less: Tangible capital requirement 6,265 1.50% ------- -------- Excess ............................ $ 31,440 7.52% ======= ======== Core capital ........................ $ 37,705 9.02% Less: Core capital requirement ..... 16,708 4.00% ------- -------- Excess ............................ 20,997 5.02% ======= ======== Total risk-based capital ............ $ 39,160 14.83% Less: Risk-based capital requirement 21,128 8.00% ------- -------- Excess ............................ 18,032 6.83% ======= ======== 3 MARKET AND DIVIDEND INFORMATION Since February 9, 1998, the Common Stock has been quoted on the Nasdaq Stock Market under the symbol "HFBC." As of March 20, 2003, there were approximately 3,200 stockholders of the Company's Common Stock. Following are the high and low stock prices of the Common Stock for the periods indicated. Dividends of $0.11 per share were declared in each of the four quarters of 2001 and 2002. Dividends, when and if paid, are subject to determination and declaration by the Board of Directors at its discretion, which will take into account the Company's consolidated financial condition and results of operations, the Bank's regulatory capital requirements, tax considerations, economic conditions, regulatory restrictions, and other factors; and there can be no assurance that dividends will be paid, or if paid, will continue to be paid in the future. The payment of future dividends by the Company will depend in large part upon the receipt of dividends from the Bank, which is subject to various tax and regulatory restrictions on the payment of dividends.
Price Range of Common Stock ------------------------------------------------------------------------------ Year Ended December 31, 2001 Year Ended December 31, 2002 ------------------------------------ ------------------------------- High Low High Low ----------- ------------ ---------- ------------ First Quarter $ 12.38 $ 10.60 $ 11.57 $ 9.78 Second Quarter $ 12.48 $ 11.39 $ 12.42 $ 10.46 Third Quarter $ 12.86 $ 10.65 $ 12.53 $ 12.02 Fourth Quarter $ 12.75 $ 11.25 $ 13.37 $ 11.82
4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This discussion relates to the financial condition and results of operations of the Company, which became the holding company for the Bank in February 1998. The principal business of the Bank consists of accepting deposits from the general public and investing these funds primarily in loans and in investment securities and mortgage-backed securities. The Bank's loan portfolio consists primarily of loans secured by residential real estate located in its market area. For the year ended December 31, 2002, the Company recorded net income of $4.6 million, a return on average assets of 1.37% and a return on average equity of 9.99%. For the year ended December 31, 2001, the Company recorded net income of $1.8 million, a return on average assets of 0.72% and a return on average equity of 4.26%. For the year ended December 31, 2000 the Company recorded net income of $2.7 million, a return on average assets of 1.18% and a return on average equity of 5.92%. The Company's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment securities and mortgage-backed securities portfolios and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the Company's net income also is affected by the level of non-interest expenses such as compensation and employee benefits and FDIC insurance premiums. The operations of the Company and the entire thrift industry are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company's market area. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative Aspects of Market Risk. The principal market risk affecting the Company is risk associated with interest rate volatility ("interest rate risk"). The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. The Company is not subject to foreign currency exchange rate risk or commodity price risk. Substantially all of the Company's interest rate risk is derived from the Bank's lending and deposit taking activities. This risk could result in reduced net income, loss in fair values of assets and/or increases in fair values of liabilities due to upward changes in interest rates. Qualitative Aspects of Market Risk. The Company's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between assets and liabilities maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Company's interest-earning assets by retaining for its portfolio loans with interest rates subject to periodic adjustment to market conditions. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of its interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Bank promotes demand accounts and certificates of deposit with primarily terms of up to five years. 5 ASSET / LIABILITY MANAGEMENT Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity of both the interest-earning asset and interest-bearing liability portfolios. The Company has employed various strategies intended to minimize the adverse affect of interest rate risk on future operations by providing a better match between the interest rate sensitivity between its assets and liabilities. In particular, the Company's strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination of adjustable-rate mortgage loans secured by one-to-four family residential real estate, and, to a lesser extent, multi-family real estate loans and the origination of other loans with interest rates that are more sensitive to adjustment based upon market conditions than long-term, fixed-rate residential mortgage loans. For the year ended December 31, 2002, approximately $143.9 million of the $171.4 million of one-to-four family residential loans originated by the Company (comprising 84.0% of such loans) had adjustable rates. The U.S. agency securities consist of notes issued by government agencies. These securities generally are purchased for a term of ten years or less, and are fixed-term, fixed rate securities, non-callable securities or securities with one time calls and thus improve the spread between the cost of funds and yield on investments. At December 31, 2002, no securities were due within one year, approximately $12.1 million were due in one to five years, approximately $11.3 were due in five to ten years and approximately $1.1 million were due after ten years. However, at December 31, 2002, $17.4 million of these securities had call provisions which authorize the issuing agency to prepay the securities at face value at certain pre-established dates. If, prior to their maturity dates, market interest rates decline below the rates paid on the securities, the issuing agency may elect to exercise its right to prepay the securities. At December 31, 2002, all of these securities are callable and/or due prior to January 31, 2005. The municipal bond portfolio largely consists of local school district bonds with the guarantee of the state of Kentucky or out of state bonds insured by private companies. At December 31, 2002, the Company has $11.8 million in municipal bonds. These bonds were purchased to provide long-term income stability and higher tax equivalent yields to a small portion of the investment portfolio. At December 31, 2002, approximately $7.8 million of the Company's municipal bond portfolio is callable with call dates ranging from January 2006 to December 2012. The call dates are staggered to eliminate the excessive cash flows within any one-year period. At December 31, 2002, $951,000 were due within one to five years, $4.1 million were due in five to ten years and approximately $6.8 million were due after ten years. At December 31, 2002, the Company held $5.9 million in corporate bonds. The Company conducts a financial analysis similar to that of a loan customer for each corporate bond purchased. All corporate bonds purchased by the Bank bonds are investment grade and mature by October 31, 2004 while providing yields that are attractive as compared to U.S. Government and Agency bonds of similar maturities. Mortgage-backed securities entitle the Company to receive a pro rata portion of the cash flow from an identified pool of mortgages. Although mortgage-backed securities generally offer lesser yields than the loans for which they are exchanged, mortgage-backed securities present lower credit risk by virtue of the guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company. Further, mortgage-backed securities provide a monthly stream of both interest and principal, thereby providing the Company with a cash flow to reinvest at current market rates and limit the Company's interest rate risk. For more information regarding investment securities, see Note 3 of Notes to Consolidated Financial Statements. 6 INTEREST RATE SENSITIVITY ANALYSIS The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent or on the same basis. As part of its effort to manage interest rate risk, the Bank monitors its net portfolio value ("NPV"), a methodology adopted by the OTS to assist the Bank in assessing interest rate risk. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. The following table presents the Bank's NPV at December 31, 2002, as calculated by the OTS, based on information provided to the OTS by the Bank.
Net Portfolio Value NPV as % of PV of Assets Change -------------------------------------------- ------------------------ In Rates $ Amount $ Change % Change NPV Ratio Change -------- ---------- ---------- --------- ---------- ------- (Dollars in thousands) $ $ % % bp +300 bp 37,540 (7,328) (16)% 8.98% 127 bp +200 bp 41,264 (3,604) (8)% 9.69% -56 bp +100 bp 42,686 (2,182) (5)% 9.90% -35 bp 0 bp 44,868 -- -- 10.25% -- -100 bp 44,237 (631) (1)% 10.01% -24 bp
Due to the low level of interest rates at December 31, 2002, the OTS did not measure outputs associated with an interest rate decline of less than 100 basis points. Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets........... 10.25 % Exposure Measure: Post-Shock NPV Ratio.................. 9.69 % Sensitivity Measure: Change in NPV Ratio................ 56 bp The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. The computations do not contemplate any actions the Bank could undertake in response to changes in interest rates. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At December 31, 2002, the Company had a negative one-year or less interest rate sensitivity gap of 11.32% of total interest-earning assets. Generally, during a period of rising interest rates, a negative gap position would be expected to adversely affect net interest income while a positive gap position would be expected to result in an increase in net interest income. Conversely during a period of falling interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income. 7 The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2002, which are expected to mature or reprice in each of the time periods shown.
Over One Over Five Over Ten One Year Through Through Through Over Fifteen or Less Five Years Ten Years Fifteen Years Years Total --------- ---------- --------- ------------- ------------- --------- (Dollars in thousands) Interest-earning assets: Loans: One-to-four family .......... $ 89,615 $ 69,740 $ 4,116 $ 4,179 $ 3,554 $ 171,204 Multi-family residential .... 1,397 3,099 4,496 Construction ................ 955 769 1,724 Non-residential ............. 16,295 10,252 1,977 2,191 1,312 32,027 Secured by deposits ......... 2,545 458 3,003 Other loans ................. 33,030 42,536 1,382 1,674 1,019 79,641 Time deposits and interest- bearing deposits in FHLB ...... 905 905 Federal funds sold ............. 3,840 3,840 Securities ..................... 3,419 17,908 15,402 4,056 3,873 44,658 Mortgage-backed securities ..... 18,750 27,159 11,244 3,106 1,162 61,421 --------- ---------- --------- ------------- ------------- --------- Total ........................ $ 170,751 $ 171,921 $ 34,121 $ 15,206 $ 10,920 $ 402,919 --------- ---------- --------- ------------- ------------- --------- Interest-bearing liabilities: Deposits ....................... $ 216,045 $ 118,490 -- -- -- $ 334,535 Borrowed funds ................. 324 5,299 18,000 -- -- 23,623 --------- ---------- --------- ------------- ------------- --------- Total ........................ $ 216,369 123,789 18,000 -- -- 358,158 --------- ---------- --------- ------------- ------------- --------- Interest sensitivity gap .......... $ (45,618) $ 48,132 $ 16,121 $ 15,206 $ 10,920 $ 44,761 ========= ========== ========= ============= ============= ========= Cumulative interest sensitivity gap .............................. $ (45,618) $ 2,514 $ 18,635 $ 33,841 $ 44,761 $ 44,761 ========= ========== ========= ============= ============= ========= Ratio of interest-earning assets to Interest-bearing liabilities ..... 78.92% 138.88% 189.56% N/A N/A 112.50% ========= ========== ========= ============= ============= ========= Ratio of cumulative gap to total interest-earning assets .... (11.32)% 0.62% 4.62% 8.40% 11.11% 11.11% ========= ========== ========= ============= ============= =========
The preceding table was prepared based upon the assumption that loans will not be repaid before their respective contractual maturities, except for adjustable rate loans which are classified based upon their next re-pricing date. Further, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and other deposits are withdrawn or repriced within one year. Mortgage-backed securities are classified based on their lifetime prepayment speeds. Current prepayments speeds are much faster than lifetime averages and short the maturity and yields of mortgage-backed securities. Management of the Company does not believe that these assumptions will be materially different from the Company's actual experience. However, the actual interest rate sensitivity of the Company's assets and liabilities could vary significantly from the information set forth in the table due to market and other factors. The retention of adjustable-rate mortgage loans in the Company's portfolio helps reduce the Company's exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to borrowers as a result of repricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrowers. 8 AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to the Company's average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods and at the date indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances has caused any material difference in the information presented. The table also presents information for the periods and at the date indicated with respect to the difference between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net yield on interest-earning assets," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. At December 31, 2002 ------------------------------------ Weighted Balance Average Yield/Cost --------------- ------------------ (Dollars in thousands) Interest-earning assets: Loans receivable, net................ $ 292,095 6.43% Securities available for sale........ 103,147 4.24% Securities held to maturity.......... 2,932 6.25% Time deposits and other interest- bearing cash deposits............... 4,745 1.12% --------------- ------------------ Total interest-earning assets...... 402,919 5.76% Non-interest-earning assets............. 24,583 --------------- Total assets......................... $ 427,502 =============== Interest-bearing liabilities: Deposits............................. $ 334,535 3.12% FHLB borrowings...................... 23,623 4.55% --------------- ------------------ Total interest-bearing liabilities... 358,158 3.21% Non-interest-bearing liabilities........ 22,466 --------------- Total liabilities.................. 380,624 Common stock............................ 40 Additional paid-in capital.............. 25,714 Retained earnings....................... 25,106 Treasury stock.......................... (4,857) Accumulated other comprehensive Income................................. 875 --------------- Total liabilities and equity....... $ 427,502 =============== Interest rate spread.................... 2.55% ------------------ Ratio of interest-earning assets to interest-bearing liabilities......... 112.50% ================== (Continued on following page) 9
Year Ended December 31, -------------------------------------------------------------------------- 2002 2001 -------------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost --------- ---------- ---------- --------- --------- ---------- Interest-earning assets: Loans receivable, net ............. $ 223,733 $ 15,200 6.79% $ 149,804 $ 11,531 7.69% Securities available for sale ..... 87,141 4,424 5.08% 83,220 5,108 6.13% Securities held to maturity ....... 3,641 291 7.99% 5,986 456 7.61% Time deposits and other interest-bearing cash deposits ......................... 8,075 127 1.57% 9,998 467 4.67% --------- ---------- --------- --------- ---------- Total interest-earning assets ......................... 322,590 20,042 6.21% 249,008 17,562 7.05% ---------- ---------- --------- ---------- Non-interest-earning assets .......... 13,595 7,099 --------- --------- Total assets ...................... $ 336,185 $ 256,107 ========= ========= Interest-bearing liabilities: Deposits .......................... 244,866 8,090 3.30% 180,180 8,706 4.83% Borrowings ........................ 31,997 1,330 4.16% 24,541 1,046 4.26% --------- ---------- --------- --------- ---------- Total interest-bearing liabilities .................... 276,863 9,420 3.40% 204,721 9,752 4.76% ---------- ---------- --------- ---------- Non-interest-bearing liabilities ..... 13,326 8,223 --------- --------- Total liabilities ............... 290,188 212,944 Common stock 40 40 Additional paid-in capital ........... 25,714 24,586 Retained earnings .................... 24,552 21,273 Treasury stock ....................... (4,854) (3,266) Accumulated other comprehensive income (loss) ......... 545 530 --------- --------- Total liabilities and equity ......................... $ 336,185 $ 256,107 ========= ========= Net interest income .................. $ 10,622 $ 7,810 ========== ========= Interest rate spread ................ 2.81% 2.29% ========== ========== Net interest margin ................. 3.29% 3.13% ========== ========== Ratio of average interest-earning assets to average interest- bearing liabilities ................. 116.52% 121.63% ========== ==========
Year Ended December 31, -------------------------------------- 2000 2000 ---------- ----------------------- Average Average Balance Interest Yield/Cost ---------- ---------- ---------- Interest-earning assets: Loans receivable, net ............. $ 120,308 $ 9,299 7.73% Securities available for sale ..... 89,935 6,349 7.06% Securities held to maturity ....... 8,894 637 7.16% Time deposits and other interest-bearing cash deposits ......................... 58 5.76% 1,007 --------- ---------- Total interest-earning assets ......................... 220,144 16,343 7.42% --------- ---------- Non-interest-earning assets .......... 6,622 ---------- Total assets ...................... $ 226,766 ========== Interest-bearing liabilities: Deposits .......................... $ 159,268 7,931 4.98% Borrowings ........................ 17,905 1,181 6.60% ---------- --------- Total interest-bearing liabilities .................... 177,173 9,112 5.14% --------- ---------- 4,549 Non-interest-bearing liabilities ..... ----------- 181,722 Total liabilities ............... 40 Common stock 24,586 Additional paid-in capital ........... 21,738 Retained earnings .................... (210) Treasury stock ....................... Accumulated other (1,110) comprehensive income (loss) ......... ---------- Total liabilities and $ 226,766 equity ......................... ========== Net interest income .................. $ 7,231 ========== Interest rate spread ................. 2.28% ========== Net interest margin .................. 3.28% ========== Ratio of average interest-earning assets to average interest- bearing liabilities ................. 124.25% ========== 10 RATE VOLUME ANALYSIS The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume from year to year multiplied by the average rate for the prior year) and (ii) change in rate (changes in the average rate from year to year multiplied by the prior year's volume).
Year Ended December 31, -------------------------------------------------------------------- 2002 vs. 2001 2001 vs. 2000 -------------------------------- -------------------------------- Increase Increase (Decrease) due to (Decrease) due to ----------------- ------------------ Total Total Increase Increase Rate Volume (Decrease) Rate Volume (Decrease) ------- ------- ---------- ------- ------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable ........ $(2,017) $ 5,685 $ 3,668 $ (47) $ 2,279 $ 2,232 Securities available for sale ............... (924) 240 (684) (767) (474) (1,241) Securities held to Maturity ................ 13 (178) (165) (65) (116) (181) Other interest- earning assets ......... (249) (90) (339) (11) 420 409 ------- ------- ---------- ------- ------- ---------- Total interest- earning assets....... $(3,177) $ 5,657 $ 2,480 $ (890) $ 2,109 $ 1,219 ------- ------- ---------- ------- ------- ---------- Interest-bearing liabilities: Deposits ................ (3,740) 3,124 $ (616) $ (235) $ 1,010 $ (775) Borrowings .............. (34) 318 284 (503) 368 (135) ------- ------- ---------- ------- ------- ---------- Total interest- bearing liabilities ... (3,774) $ 3,442 $ (332) $ (738) $ 1,378 $ 640 ------- ------- ---------- ------- ------- ---------- Increase (decrease) in net interest income ....... $ 597 $ 2,215 $ 2,812 $ (152) $ 731 $ 579 ======= ======= ========== ======= ======= ==========
CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on appropriate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involved the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors included the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrower's sensitivity to economic conditions throughout the Southeast and particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of the loan portfolio, its methodology accordingly may change. In addition, it may report materially different amount for the provision for loan losses in the statement of operations if management's assessment of the above factors change in future periods. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein. Although management believes the levels of the allowance for loan losses as of both December 31, 2002 and 2001 were adequate to absorb inherent losses in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonable predicted at this time. 11 The Company also considers it policy on non-accrual loans as a critical accounting policy. Loan are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 91 days or more. Any unpaid interest previously accrued on these loans is reserved for as part of management's evaluation of the allowance for loan loss account. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND DECEMBER 31, 2001 The Company's total assets increased by $141.9 million, from $285.6 million at December 31, 2001 to $427.5 million at December 31, 2002. Federal Funds sold increased from $690,000 at December 31, 2001 to $3.8 million at December 31, 2002. Securities held to maturity declined $1.5 million due to accelerated prepayments on mortgage-backed securities. Currently, all newly purchased investments are classified as available for sale. The available for sale portfolio increased $2.6 million. The Company's net loan portfolio increased by $122.1 million during the year ended December 31, 2002. Net loans totaled $292.1 and $170.9 at December 31, 2002 and December 31, 2001, respectively. The increase in the loan activity during the year ended December 31, 2002 was due to the Company's additions of new staff in key market areas, a more aggressive marketing effort, and the purchase of $41.6 million of loans as a result of the Fulton Division acquisition. For the year ended December 31, 2002, the Company's average yield on loans was 6.79%, compared with 7.69% for the year ended December 31, 2001. At December 31, 2002, the Company's investments classified as "held to maturity" were carried at an amortized cost of $2.9 million and had an estimated fair market value of $3.0 million, and its securities classified as "available for sale" had an estimated fair market value of $103.1 million. See Note 3 of Notes to Consolidated Financial Statements. The allowance for loan losses totaled $1.5 million at December 31, 2002, an increase of $532,000 from the allowance for loan losses of $923,000 at December 31, 2001. The ratio of the allowance for loan losses to loans was 0.50% and 0.54% at December 31, 2002 and 2001, respectively. Also at December 31, 2002, the Company's non-performing loans were $833,000, or 0.29% of total loans, compared to $551,000, or 0.32% of total loans, at December 31, 2001. The Company's ratio of allowance for loan losses to non-performing loans at December 31, 2002 and 2001 was 174.7% and 167.2%, respectively. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Net Income. The Company's net income for the year ended December 31, 2002 was $4.6 million compared to $1.8 million for the year ended December 31, 2001. Net Interest Income. Net interest income for the year ended December 31, 2002 was $10.6 million, compared to $7.8 million for the year ended December 31, 2001. The increase in net interest income for the year ended December 31, 2002 was the result of loan growth and a decline in the Company's cost of funds. For the year ended December 31, 2002, the Company's average yield on total interest-earning assets was 6.21%, compared to 7.05% for the year ended December 31, 2001, and its average cost of interest-bearing liabilities was 3.40%, compared to 4.76% for the year ended December 31, 2001. As a result, the Company's interest rate spread for the year ended December 31, 2002 was 2.81%, compared to 2.29% for the year ended December 31, 2001 and its net interest margin was 3.29% for the year ended December 31, 2002, compared to 3.13% for the year ended December 31, 2001. Interest Income. Interest income increased $2.4 million from $17.6 million to $20.0 million, or by 14.3% during the year ended December 31, 2002 compared to 2001. The increase was attributable to an increase in loan volume which offset a declining yield on interest-earning assets. The average balance on securities held to maturity declined $2.4 million, from $6.0 million at December 31, 2001 to $3.6 million at December 31, 2002. Average time deposits and other interest-bearing cash deposits declined $1.9 million, from $10.0 million at December 31, 2001 to $8.1 million at December 31, 2002. Overall, average total interest-earning assets increased $73.6 million from December 31, 2001 to December 31, 2002. Interest Expense. Interest expense decreased to $9.4 million for the year ended December 31, 2002 compared to $9.8 million for 2001. The decline in interest expense was attributable to a sharp decline in the interest rates paid on deposit accounts. The average cost of average interest-bearing liabilities declined from 4.76% for the year ended December 31, 2001 to 3.40% for the year ended December 31, 2002. Over the same period, the average 12 balance of deposits increased from $180.2 million for the year ended December 31, 2001 to $244.9 million at December 31, 2002. Provision for Loan Losses. The Company determined that an additional $795,000 in provision for loan losses was required for the year ended December 31, 2002. For the year ended December 31, 2001, the Company determined that a provision for loan losses of $222,000 was required. Non-Interest Expense. Total non-interest expense for the year ended December 31, 2002 was $5.2 million, compared to $5.5 million in 2001. The decline was the result of the Company incurring a $1.4 million curtailment expense in 2001 to terminate its defined benefit pension plan. Other increases in non-interest expense are the result of additional staffing and the acquisition of two branches in Fulton, Kentucky. See Notes 2 and 9 of Notes to Consolidated Financial Statements. Income Taxes. The effective tax rate for the year ended December 31, 2002 was 33.8%, compared to 34.6% for 2001. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 Net Income. The Company's net income for the year ended December 31, 2001 was $1.8 million compared to $2.7 million for the year ended December 31, 2000. Net Interest Income. Net interest income for the year ended December 31, 2001 was $7.8 million, compared to $7.2 million for the year ended December 31, 2000. The increase in net interest income for the year ended December 31, 2001 was primarily due to loan growth. For the year ended December 31, 2001, the Company's average yield on total interest-earning assets was 7.05%, compared to 7.42% for the year ended December 31, 2000, and its average cost of interest-bearing liabilities was 4.76%, compared to 5.14% for the year ended December 31, 2000. As a result, the Company's interest rate spread for the year ended December 31, 2001 was 2.29%, compared to 2.28% for the year ended December 31, 2000, and its net interest margin was 3.13% for the year ended December 31, 2001, compared to 3.28% for the year ended December 31, 2000. Interest Income. Interest income increased by $1.2 million from $16.3 million to $17.5 million, or by 7.4%, during the year ended December, 2001 compared to 2000. This increase was due to an increase in loans outstanding which offset declining investment yields that resulted from agency securities being called. The average balance of securities held to maturity declined $2.9 million, from $8.9 million at December 31, 2000, to $6.0 million at December 31, 2001. Average time deposits and other interest-bearing cash deposits increased $9.0 million, from $1.0 million at December 31, 2000 to $10.0 million at December 31, 2001. Overall, average total interest-earning assets increased $28.9 million from December 31, 2000 to December 31, 2001. Interest Expense. Interest expense increased to $9.8 million for the year ended December 31, 2001, compared to $9.1 million for 2000. The increase was attributable to an increase in deposits which offset lower interest rates paid on deposits. The average cost of average interest bearing liabilities declined from 5.14% for the year ended December 31, 2000 to 4.76% for the year ended December 31, 2001. Over the same period, the average balance of deposits increased from $159.3 million for the year ended December 31, 2000 to $180.2 million at December 31, 2001. Provision for Loan Losses. The Company determined that an additional $222,000 provision for loan loss was required for the year ended December 31, 2001. For the year ended December 31, 2000, the Company determined that a $431,000 provision for loan loss was warranted. Non-Interest Expense. Total non-interest expense in the year ended December 31, 2001 was $ 5.5 million, compared to $3.3 million in 2000. This increase was primarily attributable to a curtailment expense of approximately $1.4 million incurred in connection with termination of the Pension Plan. See " Current Business Strategy." See Note 9 of Notes to Consolidated Financial Statements. Income Taxes. The effective tax rate for the year ended December 31, 2001 was 34.6%, compared to 34.0% for 2000. 13 LIQUIDITY AND CAPITAL RESOURCES The Company has no business other than that of the Bank. Management believes dividends that may be paid from the Bank to the Company will provide sufficient funds for the Company's current and anticipated 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. Capital Resources. At December 31, 2002, the Bank exceeded all regulatory minimum capital requirements. For a detailed discussion of the OTS' regulatory capital requirements, and for a tabular presentation of the Bank's compliance with such requirements, see Note 15 of Notes to Consolidated Financial Statements. Liquidity. Liquidity management is both a daily and long-term function of business management. If the Bank requires funds beyond its ability to generate them internally, the Bank believes that it could borrow funds from the FHLB. At December 31, 2002, the Bank had outstanding advances of $23.6 million from the FHLB. See Note 8 of Notes to Consolidated Financial Statements. The Bank's primary sources of funds consist of deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Bank's liquidity needs for the immediate future. A portion of the Bank's liquidity consists of cash and cash equivalents. At December 31, 2002, cash and cash equivalents totaled $14.0 million. The level of these assets depends upon the Bank's operating, investing and financing activities during any given period. Cash flows from operating activities for the years ended December 31, 2000, 2001 and 2002 were $1.9 million, $4.3 million, and $4.4 million, respectively. Cash flows from investing activities were a net use of funds of $34.9 million, $55.0 million and $25.5 million in 2002, 2001 and 2000, respectively. A principal source of cash flows in this area has been proceeds from the maturities of held-to-maturity securities, the volume of which reflects the prior emphasis on investments in such securities over loans. These proceeds were a source of cash flows of $2.2 million for 2000, $3.3 million for 2001 and $1.6 million for 2002. At the same time, the investment of cash in loans was$80.1 million in 2002, $42.1 million in 2001 and $16.2 million in 2000. There were no purchases of held-to-maturity securities in 2000, 2001 and 2002. Maturities and sales of securities available for sale exceeded purchases of such securities by $43.1 million in 2002. Purchases of securities available for sale exceeded maturities and sales of securities available for such securities by $15.3 million and $11.4 million in 2001 and 2000 respectively. The Bank utilized excess deposit funds acquired in the Fulton Division acquisition of approximately $46 million to fund loan growth and to reduce the Company's debt with the FHLB of Cincinnati. At December 31, 2002, the Company had liquidated advances from the FHLB of Cincinnati totaling $15.1 million net. 14 At December 31, 2002, the Bank had $6.3 million in outstanding commitments to originate loans and unused lines of credit of $17.1 million. The Bank anticipates that it will have sufficient funds available to meet its current loan origination and lines of credit commitments. Certificates of deposit which are scheduled to mature in one year or less totaled $126.3 million at December 31, 2002. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, changes in interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. IMPACT OF DEPLOYMENT OF UNITED STATES MILITARY The Company's corporate headquarters, Hopkinsville, Kentucky, is approximately 15 miles north of Fort Campbell, Kentucky, home of the 101st Air Assault Division of the U.S. Army. Approximately 26,000 military personal are assigned to this facility. A large percentage of these troops have been or will soon be deployed overseas. Management anticipates that this deployment will result in a reduction of business activity in the community. While management believes that the direct impact on the Company is limited, the reduction in economic activity will adversely affect many of the Company's customers. The Company anticipates a possible increase in the amounts of classified assets during the military deployment. In particular, management is evaluating its exposure to the rental real estate market that services the military community. Management believes that the risk of loss is minimal and will fund the allowance for loan losses as necessary. FORWARD-LOOKING STATEMENTS Management's discussion and analysis includes certain forward-looking statements addressing, among other things, the Bank's prospects for earnings, asset growth and net interest margin. Forward-looking statements are accompanied by, and identified with, such terms as "anticipates," "believes," "expects," "intends," and similar phrases. Management's expectations for the Bank's future involve a number of assumptions and estimates. Factors that could cause actual results to differ from the expectations expressed herein include: substantial changes in interest rates, and changes in the general economy; changes in the Bank's strategies for credit-risk management, interest-rate risk management and investment activities. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. 15 Independent Auditors' Report The Board of Directors HopFed Bancorp, Inc. Hopkinsville, Kentucky We have audited the accompanying consolidated balance sheets of HopFed Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years ended December 31, 2002, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Rayburn, Betts & Bates, P.C. Nashville, Tennessee January 31, 2003 F-1 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (DOLLARS IN THOUSANDS)
Assets 2002 2001 ------------ ------------ Cash and due from banks (note 10) $ 9,288 3,941 Interest-earning deposits in Federal Home Loan Bank 905 39 Federal funds sold 3,840 690 ------------ ------------ Cash and cash equivalents 14,033 4,670 Securities available for sale (note 3) 103,147 100,519 Securities held to maturity, market value of $3,032 for 2002 and $4,664 for 2001, respectively (note 3) 2,932 4,462 Loans held for sale at estimated fair value (note 4) - 928 Loans receivable, net of allowance for loan losses of $1,455 for 2002 and $923 for 2001, respectively (note 4) 292,095 170,016 Accrued interest receivable 2,329 1,405 Premises and equipment, net (note 5) 4,959 3,315 Deferred tax assets (note 12) - 82 Intangible asset (notes 2 and 6) 2,511 - Goodwill (note 6) 3,689 - Bank owned life insurance (note 2) 1,547 - Other assets 260 242 ------------ ------------ Total assets $ 427,502 285,639 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposits: (note 7) Non-interest-bearing accounts $ 19,120 7,216 Interest-bearing accounts: NOW accounts 33,215 12,419 Money market accounts 47,360 32,173 Savings 9,107 9,222 Other time deposits 244,853 139,286 ------------ ------------ Total deposits 353,655 200,316 Advances from borrowers for taxes and insurance 211 201 Advances from Federal Home Loan Bank (note 8) 23,623 38,747 Dividends payable 399 399 Deferred tax liability (note 12) 47 - Accrued expenses and other liabilities (note 11) 2,689 2,387 ------------ ------------ Total liabilities 380,624 242,050 ============ ============
See notes to consolidated financial statements. F-2 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31, 2002 AND 2001 (DOLLARS IN THOUSANDS)
2002 2001 ------------ ------------ Stockholders' equity (notes 11, 15 and 16): Common stock, par value $.01 per share; authorized - 7,500,000 shares; 4,039,305 issued and 3,630,396 outstanding at December 31, 2002 and 4,039,305 issued and 3,631,538 outstanding at December 31, 2001 $ 40 40 Additional paid-in capital 25,714 25,714 Retained earnings-substantially restricted 25,106 22,110 Treasury stock (at cost, 408,909 shares at December 31, 2002 and 407,767 at December 31, 2001) (4,857) (4,845) Accumulated other comprehensive income, net of taxes 875 570 ------------ ------------ Total stockholders' equity 46,878 43,589 ------------ ------------ Total liabilities and stockholders' equity $ 427,502 285,639 ============ ============
Commitments and contingencies (notes 10, 11 and 14) See notes to consolidated financial statements. F-3 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000 ------------ ------------ ------------ Interest income: Loans receivable $ 15,200 11,531 9,299 Securities available for sale 4,424 5,108 6,349 Securities held to maturity 291 456 637 Interest-earning deposits in Federal Home Loan Bank 127 467 58 ------------ ------------ ------------ Total interest income 20,042 17,562 16,343 ------------ ------------ ------------ Interest expense: Deposits (note 7) 8,090 8,706 7,931 Advances from Federal Home Loan Bank 1,330 1,046 1,181 ------------ ------------ ------------ Total interest expense 9,420 9,752 9,112 ------------ ------------ ------------ Net interest income 10,622 7,810 7,231 Provision for loan losses (note 4) 795 222 431 ------------ ------------ ------------ Net interest income after provision for loan losses 9,827 7,588 6,800 ------------ ------------ ------------ Non-interest income: Loan fees 681 238 171 Service charges 711 280 268 Realized gain on sale of premises and equipment, net 112 - - Realized gain from sale of securities available for sale 568 88 - Other operating income 240 111 70 ------------ ------------ ------------ Total non-interest income 2,312 717 509 ------------ ------------ ------------ Non-interest expenses: Salaries and benefits (note 11) 2,806 3,344 2,089 Deposit insurance premium 36 32 35 Occupancy expense 436 421 205 Data processing 418 197 163 Other operating expenses 1,503 1,499 778 ------------ ------------ ------------ Total non-interest expense 5,199 5,493 3,270 ------------ ------------ ------------ Income before income tax expense 6,940 2,812 4,039 Income tax expense (note 12) 2,346 973 1,373 ------------ ------------ ------------ Net income $ 4,594 1,839 2,666 Earnings per share (note 17): Basic $ 1.26 0.49 0.67 ============ ============ ============ Fully diluted $ 1.26 0.49 0.67 ============ ============ ============ Weighted average shares outstanding - basic 3,630,668 3,758,053 3,979,664 ============ ============ ============ Weighted average shares outstanding - diluted 3,636,480 3,764,692 3,979,664 ============ ============ ============
See notes to consolidated financial statements. F-4 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ Net income $ 4,594 1,839 2,666 Other comprehensive income, net of tax (note 20): Unrealized gain on investment securities available for sale 680 565 962 Minimum pension liability adjustment - 222 (222) Reclassification adjustment for gains included in net income (375) (58) - ------------ ------------ ------------ Comprehensive income $ 4,899 2,568 3,406 ============ ============ ============
See notes to consolidated financial statements. F-5 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Additional Common Common Paid-in Retained Shares Stock Capital Earnings ----------- ----------- ----------- ----------- Balance, January 1, 2000 3,942,500 $ 39 24,214 20,990 Net income - - - 2,666 Minimum pension liability adjustment, net of income taxes of $114 - - - - Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $496 - - - - Issuance of common stock - MRP 61,849 1 974 - Recovery of proceeds on issuance of common stock - - 40 - Purchase of treasury stock (149,354) - - - Dividends ($0.41 per share) - - - (1,760) ----------- ----------- ----------- ----------- Balance, December 31, 2000 3,854,995 40 25,228 21,896 Net income - - - 1,839 Minimum pension liability adjustment, net of income tax of $114 - - - - Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $261 - - - - Issuance of common stock - MRP 34,956 - 486 - Purchase of treasury stock (258,413) - - - Dividends ($0.44 per share) - - - (1,625) ----------- ----------- ----------- ----------- Balance, December 31, 2001 3,631,538 40 25,714 22,110 Net income - - - 4,594 Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $157 - - - - Purchase of treasury stock (1,142) - - - Dividends ($0.44 per share) - - - (1,598) ----------- ----------- ----------- ----------- Balance, December 31, 2002 3,630,396 $ 40 25,714 25,106 =========== =========== =========== =========== Accumulated Other Treasury Comprehensive Total Stock Income (Loss) Equity ----------- ------------- ----------- Balance, January 1, 2000 - (899) 44,344 Net income - - 2,666 Minimum pension liability adjustment, net of income taxes of $114 - (222) (222) Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $496 - 962 962 Issuance of common stock - MRP - - 975 Recovery of proceeds on issuance of common stock - - 40 Purchase of treasury stock (1,643) - (1,643) Dividends ($0.41 per share) - - (1,760) ----------- ------------- ----------- Balance, December 31, 2000 (1,643) (159) 45,362 Net income - - 1,839 Minimum pension liability adjustment, net of income tax of $114 - 222 222 Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $261 - 507 507 Issuance of common stock - MRP - - 486 Purchase of treasury stock (3,202) - (3,202) Dividends ($0.44 per share) - - (1,625) ----------- ------------- ----------- Balance, December 31, 2001 (4,845) 570 43,589 Net income - - 4,594 Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $157 - 305 305 Purchase of treasury stock (12) - (12) Dividends ($0.44 per share) - - (1,598) ----------- ------------- ----------- Balance, December 31, 2002 (4,857) 875 46,878 =========== ============= ===========
See notes to consolidated financial statements. F-6 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 4,594 1,839 2,666 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 795 222 431 Depreciation 236 157 119 Amortization of intangible assets 126 - - Amortization (accretion) of investment premiums 399 (7) 144 and discounts, net Provision (benefit) for deferred income taxes 129 (463) 91 Stock dividends on Federal Home Loan Bank stock (107) (148) (150) Gain on sale of premises and equipment - - (9) Compensation expense recognized on MRP shares - - 549 Gain on sale of securities available for sale (568) (88) - Curtailment loss - 1,400 - (Increase) decrease in: Accrued interest receivable (924) 880 (1,190) Other assets 638 (81) (233) Increase (decrease) in: Accrued expenses and other liabilities (904) 593 (515) ------------ ------------ ------------ Net cash provided by operating activities 4,414 4,304 1,903 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from maturities of securities held to maturity 1,585 3,341 2,170 Proceeds from sales, calls and maturities of securities available for sale 78,533 82,751 12,507 Purchase of securities available for sale (35,477) (98,085) (23,898) Net increase in loans (80,109) (42,012) (16,195) Proceeds from sale of foreclosed asset 42 - - Purchases of premises and equipment (795) (1,030) (96) Proceeds from sale of premises and equipment - - 16 Purchase of branch location, net of funds received 1,304 - - ------------ ------------ ------------ Net cash used in investing activities (34,917) (55,035) (25,496) ------------ ------------ ------------
See notes to consolidated financial statements. F-7 HOPFED BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ Cash flows from financing activities: Net increase in demand deposits, savings, money market, NOW accounts and time deposits $ 56,590 34,712 4,699 Increase in advance payments by borrowers for taxes and insurance 10 43 2 Advances from Federal Home Loan Bank 21,000 21,707 17,040 Repayment of advances from Federal Home Loan Bank (36,124) - - Purchase of treasury stock (12) (3,202) (1,643) Dividends paid (1,598) (1,666) (1,626) Recovery of proceeds from issuance of common stock - - 40 ------------ ------------ ------------ Net cash provided by financing activities 39,866 51,594 18,512 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents 9,363 863 (5,081) Cash and cash equivalents, beginning of period 4,670 3,807 8,888 ------------ ------------ ------------ Cash and cash equivalents, end of period $ 14,033 4,670 3,807 ============ ============ ============ Supplemental disclosures of Cash Flow Information: Interest paid $ 9,023 8,690 9,112 ============ ============ ============ Income taxes paid $ 2,545 1,499 1,600 ============ ============ ============ Supplemental Disclosures of Non-cash Investing and Financing Activities: Foreclosures and in substance foreclosures of loans during year $ 42 - 142 ============ ============ ============ Net unrealized gains on investment securities classified as available for sale $ 1,325 768 1,458 ============ ============ ============ Increase in deferred tax liability related to unrealized gains on investments $ (157) (261) (496) ============ ============ ============ Dividends declared and payable $ 399 399 441 ============ ============ ============ Issue of common stock to MRP $ - 486 975 ============ ============ ============
See notes to consolidated financial statements. F-8 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) Summary of Significant Accounting Policies: The accounting and reporting policies of HopFed Bancorp, Inc. (the "Company") and subsidiaries conform with accounting principles generally accepted in the United States of America and to general practice within the banking industry. The following is a description of the more significant accounting policies which the Company follows in preparing and presenting its consolidated financial statements. Basis of Presentation The consolidated financial statements include the accounts of Hopfed Bancorp, Inc. its wholly-owned subsidiary Heritage Bank (the "Bank") and its wholly-owned subsidiary, Fall and Fall Insurance, for the year ended December 31, 2002. The accompanying consolidated financial statements as of December 31, 2001 and prior include the amounts of the Company and the Bank. All significant intercompany transactions and balances are eliminated in consolidation. The Company, a Delaware corporation, was organized by the Bank for the purpose of acquiring all of the capital stock of the Bank pursuant to the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Company is subject to the financial reporting requirements of the Securities and Exchange Act of 1934, as amended. Organization and Form of Ownership The Bank was originally founded as a mutual savings bank in 1879. Effective February 6, 1998, the Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank, as a wholly-owned subsidiary of a holding company chartered under Delaware law for the purpose of acquiring control of the Bank following consummation of the Bank's conversion. The Bank established, in accordance with the requirements of the Office of Thrift Supervision (OTS), a liquidation account for approximately $18,733,000, the amount of the Bank's net worth as of the date of the latest statement of financial condition, September 30, 1997, appearing in the IPO prospectus supplement. The liquidation account is for the benefit of eligible deposit account holders who maintain their deposit accounts in the Bank after conversion. In the event of a complete liquidation (and only in such an event) and prior to any payment to stockholders, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in an amount proportionate to the depositor's current adjusted balance for deposit accounts held before any liquidation. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account will not restrict the use or application of such net worth. F-9 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) Summary of Significant Accounting Policies: (Continued) Estimates In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the year. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains appraisals for significant properties. The fair value disclosure of financial instruments is an estimate that can be computed within a range. Cash and Cash Equivalents For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as cash on hand, amounts due on demand from banks, interest-earning deposits in the Federal Home Loan Bank and federal funds sold with maturities of three months or less. Securities The Company reports debt, readily-marketable equity, mortgage-backed and mortgage related securities in one of the following categories: (i) "held to maturity" (management has a positive intent and ability to hold to maturity) which are to be reported at cost, adjusted for premiums and discounts that are recognized in interest income; (ii) "trading" (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (iii) "available for sale" (all other debt, equity, mortgage-backed and mortgage related securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax as a separate component of stockholders' equity. At the time of new security purchases, a determination is made as to the appropriate classification. Realized and unrealized gains and losses on trading securities are included in net income. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders' equity, net of any tax effect. Cost of securities sold is recognized using the specific identification method. Loans Receivable Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and discounts. Discounts on home improvement and consumer loans are recognized over the lives of the loans using the interest method. Loan origination fee income is recognized as received and direct loan origination costs are expensed as incurred. SFAS 91 requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan. However, deferral of such fees and costs would not have a material effect on the consolidated financial statements. F-10 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) Summary of Significant Accounting Policies: (Continued) Loans Receivable (Continued) Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received while the loan is classified as nonaccrual. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal. The Bank provides an allowance for loan losses and includes in operating expenses a provision for loan losses determined by management. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment. Loans are considered to be impaired when, in management's judgement, principal or interest is not collectible according to the contractual terms of the loan agreement. When conducting loan evaluations, management considers various factors such as historical loan performance, the financial condition of the borrower and adequacy of collateral to determine if a loan is impaired. The measurement of impaired loans generally is based on the present value of future cash flows discounted at the historical effective interest rate, except that collateral-dependent loans generally are measured for impairment based on the fair value of the collateral. When the measured amount of an impaired loan is less than the recorded investment in the loan, the impairment is recorded as a charge to income and a valuation allowance which is included as a component of the allowance for loan losses. Foreclosed Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less selling expenses. Costs of developing such real estate are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management, and any adjustments to value are made through an allowance for losses. F-11 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) Summary of Significant Accounting Policies: (Continued) Income Taxes Income taxes are accounted for through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company files its federal income tax return on a consolidated basis with its subsidiaries. Premises and Equipment Land is carried at cost. Land improvements, buildings, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and land improvements are depreciated generally by the straight-line method, and furniture and equipment are depreciated under accelerated methods over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation are as follows: Land improvements 5-15 years Buildings 40 years Furniture and equipment 5-15 years Goodwill Beginning January 1, 2002 with the adoption of SFAS 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized, but instead tested for impairment at least annually. Intangible Assets The intangible assets for insurance contracts and core deposits are amortized using the straight-line method over the estimated period of benefit of seven years. The Company periodically evaluates the recoverability of the intangible assets and takes into account events or circumstances that warrant a revised estimate of the useful lives or indicates that an impairment exists. Advertising The Company expenses the production cost of advertising as incurred. Financial Instruments In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. F-12 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) Summary of Significant Accounting Policies: (Continued) Fair Values of Financial Instruments The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein: Cash and cash equivalents The carrying amounts of cash and cash equivalents approximates their fair value. Available for sale and held to maturity securities Fair values for securities 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. Loans receivable For variable rate loans that reprice annually and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate mortgage loans and fixed rate commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Deposits The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected annual maturities on time deposits. Advances from borrowers for taxes and insurance The carrying amounts of advances from borrowers for taxes and insurance approximate their fair value. Advances from the Federal Home Loan Bank The carrying amounts of other borrowed funds approximate their fair values since such borrowings mature within 90 days. Accrued interest The carrying amounts of accrued interest approximate their fair values. Off-balance-sheet instruments Off-balance-sheet lending commitments approximate their fair values due to the short period of time before the commitment expires. F-13 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS) (1) Summary of Significant Accounting Policies: (Continued) Earnings Per Share Earnings per share (EPS) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (CSE). CSE consists of dilutive stock options granted through the Company's stock option plan. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. During 2002, 2001 and 2000, there were no antidilutive CSEs. Stock Options The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS 123, Accounting for Stock-Based Compensation. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS 123 requires entities which continue to apply the provisions of APB Opinion No. 25 to provide pro-forma earnings per share disclosure for stock option grants made in 1995 and subsequent years as if the fair value based method defined in SFAS 123 had been applied. SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB No. 123, provides that an entity that has transitioned to the accounting treatment prescribed by SFAS 123 may use the intrinsic value method in lieu of the fair value based method for determining the fair value of stock options at the date of grant. SFAS 148 requires disclosure in addition to SFAS 123 if APB opinion No. 25 is currently being applied (see Effect of New Accounting Pronouncements). The Company applies Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for the plan. No compensation cost has been recognized for the plan because the stock option price is equal to or greater than the fair value at the grant date. Following is a reconciliation of reported and pro forma net income and earnings per share had compensation cost for the plan been determined based on the fair value of SFAS 123, Accounting for Stock-Based Compensation, as amended:
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Net income: As reported $ 4,594 1,839 2,666 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards granted, net of related tax effects (62) (46) (14) ------------ ------------ ------------ Pro forma net income $ 4,532 1,793 2,652 ============ ============ ============
F-14 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNT IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) Summary of Significant Accounting Policies: (Continued) Stock Options (Continued)
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Earnings per share: Basic - as reported $ 1.26 0.49 0.67 ============ ============ ============ Basic - pro forma 1.25 0.49 0.67 ============ ============ ============ Diluted - as reported $ 1.26 0.49 0.67 ============ ============ ============ Diluted - pro forma 1.25 0.48 0.67 ============ ============ ============
Effect of New Accounting Pronouncements In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143, establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company does not anticipate any material impact on the Company's financial position, results of operations and cash flow subsequent to the effective date of this statement. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The Company did not experience any material impact on its financial position, results of operations and cash flow subsequent to the effective date of this statement. In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds SFAS 4 and 64, relative to debt extinguishments and provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB Opinion No 30. Applying the provisions of APB Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The Statement amends SFAS 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Finally, the Statement rescinds SFAS 44, Accounting for Intangible Assets of Motor Carriers, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of the Statement relative to accounting for leases were effective for transactions occurring after May 15, 2002. F-15 HopFed Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued December 31, 2002, 2001 and 2000 (1) Summary of Significant Accounting Policies: (Continued) Effect of New Accounting Pronouncements (Continued) Implementation of these provisions of the Statement had no impact on the Company's financial position, results of operations and cash flow subsequent to the effective date of this statement. In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not anticipate any material impact on the Company's financial position, results of operations and cash flow subsequent to the effective date of the statement. In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, providing interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of SFAS 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of intangible and identifiable intangible assets acquired as an identifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS 144 requires for other long-lived assets that are held and used. Provisions that relate to the application of the purchase method of accounting, are effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions that relate to accounting for the impairment or disposal of certain long-term customer relationship intangible assets are effective on October 1, 2002. The Company does not anticipate any material impact on the Company's financial position, results of operations and cash flow subsequent to the effective date of this statement. F-16 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (1) Summary of Significant Accounting Policies: (Continued) Effect of New Accounting Pronouncements (Continued) In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of the Statement are effective for financial statements of fiscal years ending after December 15, 2002. Interim disclosures are required for reports containing condensed financial statements for periods beginning after December 15, 2002. The Company does not anticipate any material impact on the Company's financial position, results of operations and cash flow subsequent to the effective date of this statement. Reclassification Certain 2001 and 2000 amounts have been reclassified to conform to the December 31, 2002 presentation. (2) Acquisition: The Company's wholly-owned subsidiary, Heritage Bank (the Bank), completed the purchase of the operating assets and assumed the deposits and certain liabilities of the Fulton, Kentucky division of Old National Bank (Fulton Division) and Fall and Fall Insurance (Fall and Fall), a full service insurance agency on September 5 and 6, 2002. The Company believes that this acquisition enhances its position in the markets of Northwestern Tennessee and Southwestern Kentucky. The consolidated statement of income of the Company for the year ended December 31, 2002, includes the results of operations for the Fulton Division and Fall and Fall from the September 5, 2002 acquisition date. The acquisition resulted in approximately $3.7 million of goodwill, $2.5 million of core deposit intangible assets and $128,000 of other intangible assets, all of which are deductible for tax purposes. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over the estimated useful life of seven years using the straight-line method. The amount allocated to other intangibles represents the identified intangible asset for insurance contracts from Fall and Fall. This intangible asset is being amortized over the estimated useful life of seven years using the straight-line method. F-17 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (2) Acquisition: (Continued) The following condensed balance sheet discloses amounts assigned to each major asset and liability caption at the date of acquisition: Assets: Cash and due from banks $ 1,304 Securities available for sale 45,002 Loans 41,879 Premises and equipment 1,085 Goodwill 3,689 Intangible assets 2,637 Bank owned life insurance 1,547 Other assets 657 ----------- Total assets $ 97,800 =========== Liabilities: Deposits $ 96,750 Accrued expenses and other liabilities 1,050 ----------- Total liabilities $ 97,800 =========== The following represents supplemental pro forma disclosure required by SFAS 141 for the years ended December 31, 2002 and 2001, of interest income, non-interest income, net income and earnings per share as though the business combination had been completed as of January 1, 2002 and 2001. For the Year Ended December 31, --------------------------- 2002 2001 ------------- ------------ Interest income $ 22,877 22,930 Non-interest income 2,868 1,684 Net income 4,615 2,289 Earnings per share: Basic 1.27 .61 Diluted 1.27 .61 F-18 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS) (3) Securities: Securities, which consist of debt and equity investments, have been classified in the consolidated balance sheets according to management's intent. The carrying amount of securities and their estimated fair values follow:
December 31, 2002 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Available for sale securities Restricted: FHLB stock $ 2,391 - - 2,391 Intrieve stock 15 - - 15 ------------ ------------ ------------ ------------ 2,406 - - 2,406 ------------ ------------ ------------ ------------ Unrestricted: U.S. government and agency securities: FHLB debt securities 24,294 245 - 24,539 Corporate bonds 5,913 17 (20) 5,910 Municipal bonds 11,827 95 (119) 11,803 Mortgage-backed securities: GNMA 10,886 210 - 11,096 FNMA 14,764 309 - 15,073 FHLMC 16,592 391 - 16,983 CMO 15,140 197 - 15,337 ------------ ------------ ------------ ------------ 99,416 1,464 (139) 100,741 ------------ ------------ ------------ ------------ $ 101,822 1,464 (139) 103,147 ============ ============ ============ ============
F-19 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands) (3) Securities: (Continued)
December 31, 2001 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Available for sale securities Restricted: FHLB stock $ 2,284 - - 2,284 Intrieve stock 15 - - 15 ------------ ------------ ------------ ------------ 2,299 - - 2,299 ------------ ------------ ------------ ------------ Unrestricted: U.S. government and agency securities: FHLB debt securities $ 20,218 393 (24) 20,587 FFCB 515 9 - 524 Municipal bonds 4,372 - (210) 4,162 Mortgage-backed securities: GNMA 17,347 76 - 17,423 FNMA 19,353 90 - 19,443 FHLMC 21,523 44 - 21,567 CMO 14,029 485 - 14,514 ------------ ------------ ------------ ------------ 97,357 1,097 (234) 98,220 ------------ ------------ ------------ ------------ $ 99,656 1,097 (234) 100,519 ============ ============ ============ ============
The scheduled maturities of debt securities available for sale at December 31, 2002 and 2001 were as follows: Estimated Amortized Fair 2002 Cost Value ------ ------------ ------------ Due within one year $ 1,004 1,013 Due in one to five years 17,850 17,908 Due in five to ten years 15,287 15,402 Due after ten years 7,893 7,929 ------------ ------------ 42,034 42,252 Mortgage-backed securities 57,382 58,489 ------------ ------------ Total unrestricted securities available for sale $ 99,416 100,741 ============ ============ F-20 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands) (3) Securities: (Continued) Estimated Amortized Fair 2001 Cost Value ---- ------------ ------------ Due within one year $ - - Due in one to five years 14,685 14,952 Due in five to ten years 5,235 5,240 Due after ten years 5,185 5,081 ------------ ------------ 25,105 25,273 Mortgage-backed securities 72,252 72,947 ------------ ------------ Total unrestricted securities available for sale $ 97,357 98,220 ============ ============ FHLB stock is an equity interest in the Federal Home Loan Bank. Intrieve stock is an equity interest in Intrieve, Incorporated, the Bank's data processing service center. These stocks do not have readily determinable fair values because ownership is restricted and a market is lacking. FHLB stock and Intrieve stock are classified as restricted investment securities, carried at cost and evaluated for impairment. During 2002, the Company sold investment securities classified as available-for-sale for proceeds of $56.8 million resulting in gross gains of $584,000 and losses of $16,000.
December 31, 2002 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Held to maturity securities Mortgage-backed securities: GNMA $ 2,675 94 - 2,769 FNMA 257 6 - 263 ------------ ------------ ------------ ------------ $ 2,932 100 - 3,032 ============ ============ ============ ============
F-21 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS) (3) Securities: (Continued)
December 31, 2001 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Held to maturity securities Mortgage-backed securities: GNMA $ 4,197 195 - 4,392 FNMA 265 7 - 272 ------------ ------------ ------------ ------------ $ 4,462 202 - 4,664 ============ ============ ============ ============
(4) Loans Held for Sale, Net and Loans Receivable, Net: Loans held for sale, net are summarized as follows: 2002 2001 ------------ ------------ One-to-four family loans $ - 928 ============ ============ The Company originates most fixed rate loans for immediate sale to the Federal Home Loan Mortgage Corporation (FHLMC) or other investors. Generally, the sale of such loans is arranged at the time the loan application is received through commitments. The components of loans receivable in the consolidated balance sheets as of December 31, 2002 and 2001 were as follows: 2002 2001 ------------ ------------ Real estate loans: One-to-four family $ 171,453 111,768 Multi-family 4,547 2,448 Construction 1,757 5,617 Non-residential 32,368 18,445 ------------ ------------ Total mortgage loans 210,125 138,278 Loans secured by deposits 3,003 2,191 Other consumer loans 44,238 16,455 Commercial loans 36,184 14,943 ------------ ------------ 293,550 171,867 Less: Loans held for sale - 928 Less allowance for loan losses 1,455 923 ------------ ------------ $ 292,095 170,016 ============ ============ F-22 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS) (4) Loans Held for Sale, Net and Loans Receivable, Net: (Continued) Impaired loans and related valuation allowance amounts at December 31, 2002 and 2001 were as follows: 2002 2001 ------------ ------------ Recorded investment $ 833 766 ============ ============ Valuation allowance $ 177 163 ============ ============ The average recorded investment in impaired loans for the years ended December 31, 2002, 2001 and 2000 was $869,000, $810,000 and $253,000, respectively. Interest income recognized on impaired loans was not significant during the years ended December 31, 2002, 2001 and 2000. An analysis of the change in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 follows: 2002 2001 2000 ---------- ---------- ---------- Balance at beginning of year $ 923 708 278 Loans charged off (272) (7) (1) Recoveries 9 - - Provision for loan losses 795 222 431 ---------- ---------- ---------- Balance at end of year $ 1,455 923 708 ========== ========== ========== Nonaccrual loans totaled $833,000 and $149,000 at December 31, 2002 and 2001, respectively. Loans three months or more past due still accruing interest totaled approximately $402,000 as of December 31, 2001. There were no loans three months or more past due still accruing interest as of December 31, 2002. (5) Premises and Equipment: Components of premises and equipment included in the consolidated balance sheets as of December 31, 2002 and 2001 consisted of the following: 2002 2001 ------------ ------------ Land $ 904 838 Land improvements 84 87 Buildings 3,852 2,478 Furniture and equipment 1,284 882 ------------ ------------ 6,124 4,285 Less accumulated depreciation 1,165 970 ------------ ------------ $ 4,959 3,315 ============ ============ Depreciation expense was approximately $236,000, $157,000 and $119,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F-23 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS (6) Intangible Assets: Under the provisions of SFAS No. 142, goodwill is tested for impairment on an annual basis and as events or circumstances change that would more likely than not reduce fair value below its carrying amount. The Company completed its review and determined there was no impairment of goodwill as of December 31, 2002. The changes in the carrying amounts of other intangible assets for the year ended December 31, 2002 is as follows: Insurance Core Deposit Contracts Intangible Intangible Total ---------- ---------- ---------- Balance, January 1, 2002 $ - - - Fulton Division acquisition 2,509 - 2,509 Fall and Fall acquisition - 128 128 Amortization (120) (6) (126) ---------- ---------- ---------- Balance, December 31 2002 $ 2,389 122 2,511 ========== ========== ========== The estimated amortization expense for intangible assets for the subsequent five years is as follows: Insurance Core Deposit Contracts Intangible Intangible Total ---------- ---------- ---------- 2003 $ 358 18 376 2004 358 18 376 2005 358 18 376 2006 358 18 376 2007 358 18 376 Thereafter 599 32 631 ---------- ---------- ---------- $ 2,389 122 2,511 ========== ========== ========== (7) Deposits: At December 31, 2002, the scheduled maturities of other time deposits were as follows: 2003 $ 126,417 2004 44,645 2005 18,965 2006 39,274 2007 15,552 ----------- $ 244,853 ----------- The amount of other time deposits with a minimum denomination of $100,000 was approximately $61,740,000 and $25,350,000 at December 31, 2002 and 2001, respectively. F-24 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (TABLE AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES) (7) Deposits: (Continued) Interest expense on deposits for the years ended December 31, 2002, 2001 and 2000 are summarized as follows: 2002 2001 2000 ---------- ---------- ---------- Demand and NOW accounts $ 385 213 222 Money market accounts 187 829 1,051 Savings 920 141 194 Other time deposits 6,598 7,523 6,464 ---------- ---------- ---------- $ 8,090 8,706 7,931 ========== ========== ========== The Bank maintains clearing arrangements for its demand, NOW and money market accounts with Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 2002, average daily clearings were approximately $2,739,000. (8) Advances from Federal Home Loan Bank: FHLB advances are summarized as follows:
December 31, ----------------------------------------------------------- 2002 2001 --------------------------- ---------------------------- Weighted Weighted Type of Advances Amount Average Rate Amount Average Rate ----------------------------- ------------ ------------ ------------ ------------ Fixed-rate $ 23,623 4.57% $ 38,747 4.24% ============ ============ ============ ============
Scheduled maturities of FHLB advances as of December 31, 2002 are as follows: Amount at Years Ended Stated December 31, Maturity --------------------- ----------- 2003 $ 324 2004-2008 5,299 2009-2011 18,000 ----------- $ 23,623 =========== The Bank has an approved line of credit of $20,000,000 at December 31, 2002 which is secured by a blanket agreement to maintain residential first mortgage loans with a principal value of 125% of the outstanding advances and has a variable interest rate. The Company can increase its borrowings from the FHLB to $88,871,000 at December 31, 2002. F-25 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (9) Financial Instruments: The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and commercial letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet-instruments. Unless noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that most loan commitments are drawn upon by customers. The Bank has offered standby letters of credit on a limited basis. As of December 31, 2002, the Bank has not been requested to advance funds on any of the standby letters of credit. F-26 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (9) Financial Instruments: (Continued) The estimated fair values of financial instruments were as follows at December 31, 2002:
Estimated Carrying Fair Amount Value ------------ ------------ Financial assets: Cash and due from banks $ 9,288 9,288 Interest-earning deposits in Federal Home Loan Bank 905 905 Federal funds sold 3,840 3,840 Securities available for sale 103,147 103,147 Securities held to maturity 2,932 3,032 Loans receivable 292,095 294,724 Accrued interest receivable 2,329 2,329 Bank owned life insurance 1,547 1,547 Financial liabilities: Deposits 353,655 365,710 Advances from borrowers for taxes and insurance 211 211 Advances from Federal Home Loan Bank 23,623 24,890 Off-balance-sheet liabilities: Commitments to extend credit - - Commercial letters of credit - -
The estimated fair values of financial instruments were as follows at December 31, 2001:
Estimated Carrying Fair Amount Value ------------ ------------ Financial assets: Cash and due from banks $ 3,941 3,941 Interest-earning deposits in Federal Home Loan Bank 39 39 Federal funds sold 690 690 Securities available for sale 100,519 100,519 Securities held to maturity 4,462 4,664 Loans held for sale 928 928 Loans receivable 170,016 172,730 Accrued interest receivable 1,405 1,405 Financial liabilities: Deposits 200,316 203,169 Advances from borrowers for taxes and insurance 201 201 Advances from Federal Home Loan Bank 38,747 40,177 Off-balance-sheet liabilities: Commitments to extend credit - - Commercial letters of credit - -
F-27 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (10) Concentrations of Credit Risk: Most of the Bank's business activity is with customers located within the western part of the Commonwealth of Kentucky. The majority of the loans are collateralized by a one-to-four family residence. The Bank requires collateral for all loans. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit-related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. Cash and cash equivalents with financial institutions exceeded the insurance coverage as of December 31, 2002 and 2001. The excess balance of such items as of December 31, 2002 and 2001 was $3.9 million and $567,000, respectively. (11) Employee Benefit Plans: Pension Plan The Bank had maintained a defined benefit pension plan covering substantially all of its employees who satisfy certain age and service requirements. The benefits were based on years of service and the employee's average earnings which were computed using the five consecutive years prior to retirement that yield the highest average. The Bank's funding policy was to contribute annually, actuarially determined amounts to finance the plan benefits. During September 2001, the Bank Board of Directors authorized management to terminate the plan effective December 31, 2001. This action resulted in the Company recognizing a pretax curtailment loss of approximately $1.4 million. The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets at December 31: 2002 2001 ------------ ------------ Change in benefit obligation: Benefit obligation at beginning of year $ 2,633 3,630 Service cost - 92 Interest costs 195 266 Actuarial loss 10 204 Benefits paid (195) (60) Settlements - (830) Curtailment - (669) ------------ ------------ Benefit obligation at end of year 2,643 2,633 ------------ ------------ F-28 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Percent ages) (11) Employee Benefit Plans: (Continued) Pension Plan (Continued)
2002 2001 ------------ ------------ Change in plan assets Fair value of plan assets at beginning of year 1,244 2,011 Actual return on plan assets 55 106 Employers contributions 311 109 Benefits paid (195) (60) Settlements - (922) ------------ ------- Fair value of plan assets at end of year 1,415 1,244 ------------ ------- Funded status (1,228) (1,389) Unrecognized net asset (16) (21) ------------ -------- Accrued pension cost $ (1,244) (1,410) ============ =======
Weighted average assumptions used to develop the net periodic pension cost were:
2002 2001 2000 --------- --------- --------- Discount rate 6.75% 7.70% 7.75% Expected long-term rate of return on assets 7.00% 7.00% 7.00% Rate of increase in compensation levels N/A 4.50% 4.50%
The components of net periodic pension cost for the years ended December 31, were as follows:
2002 2001 2000 --------- --------- --------- Service cost $ - 92 101 Interest cost on projected benefit obligation 195 266 184 Expected return on plan assets (85) (132) (147) Amortization of transitional asset (6) (7) (7) Amortization of prior service cost - 15 18 Amortization of net loss 42 85 3 --------- --------- --------- Net periodic pension cost $ 146 319 152 ========= ========= =========
F-29 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (11) Employee Benefit Plans: (Continued) Management Recognition Plan On February 24, 1999, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. Management Recognition Plan (MRP) which was subsequently approved at the 1999 Annual Meeting of Stockholders. The Board of Directors awarded 161,342 shares of common stock which were subject to automatic plan share awards as provided in the MRP document. Under applicable standards, the Company recognizes compensation expense over the expected vesting period for the awards. The MRP provided for the following vesting schedule: 33 1/3% at date of awards; 33 1/3% on January 1, 2000 and 33 1/3% on January 1, 2001 (subject to immediate vesting upon certain events, including death or normal retirement of recipient). The compensation expense of the MRP was $549,000 in 2000. There was no compensation expense related to the MRP for the years ended December 31, 2002 and 2001. Stock Option Plan On February 24, 1999, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 1999 Stock Option Plan (Option Plan) which was subsequently approved at the 1999 Annual Meeting of Stockholders. Under the Option Plan, the Option Committee has discretionary authority to grant stock options and stock appreciation rights to such employees, directors and advisory directors as the committee shall designate. The Option Plan reserved 403,362 shares of common stock for issuance upon the exercise of options or stock appreciation rights. The Company will receive the exercise price for shares of common stock issued to Option Plan participants upon the exercise of their option, and will receive no monetary consideration upon the exercise of stock appreciation rights. The Board of Directors granted options to purchase 403,360 shares of common stock under the Option Plan at an exercise price of $20.75 per share, which was the fair market value on the date of the grant. As a result of the special dividend of $4.00 per share paid in December, 1999, and in accordance with plan provisions, the number of options and the exercise price have been adjusted to 480,475 and $17.42 respectively. The options granted to participants became vested and exercisable as follows: 50% on date of grant and 50% on January 1, 2000 (subject to immediate vesting upon certain events, including death or normal retirement of participant). On May 31, 2000, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2000 Stock Option Plan (the "2000 Option Plan"). Under the 2000 Option Plan, the option committee has discretionary authority to grant stock options to such employees as the committee shall designate. The 2000 Option Plan reserves 40,000 shares of common stock for issuance upon the exercise of options. The Company will receive the exercise price for shares of common stock issued to 2000 Option Plan participants upon the exercise of their option. The Board of Directors has granted options to purchase 40,000 shares of common stock under the 2000 Option Plan at an exercise price of $10.00 per share, which was the fair market value on the date of the grant. F-30 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (11) Employee Benefit Plans: (Continued) Stock Option Plan (Continued) The options granted become vested and exercisable as follows: 25% on May 31, 2001, 25% on May 31, 2002, 25% on May 31, 2003 and 25% on May 31, 2004 (subject to immediate vesting upon certain events, including death or normal retirement of participant). The following summary represents the activity under the stock option plans:
Weighted Number of Average Exercise Shares Price ----------- ---------------- Options outstanding, January 1, 2001 520,475 $ 16.85 Granted 50,000 12.33 Exercised - Forfeited (168,166) 17.42 ----------- Options outstanding, December 31, 2001 402,309 16.05 Granted Exercised - Forfeited - ------------ Options outstanding, December 31, 2002 402,309 16.05 ============
The following is a summary of stock options outstanding at December 31, 2002: Weighted Average Remaining Exercise Contractual Options Options Price Life (Years) Outstanding Exercisable ------------- ------------- ------------- ------------- $ 17.42 5.2 312,309 312,309 12.33 8.4 50,000 12,500 10.00 7.4 40,000 20,000 ------------- ------------- ------------- ------------- 16.05 5.8 402,309 344,809 ============= ============= The weighted average fair value of options granted during December 31, 2001 and 2000 was $7.68 and $8.13 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: risk free interest rate of 3.44% and 6.28%, volatility of 32.00% and 35.00%, expected dividend yield of 3.67% and 3.96% and expected life of six years for options granted during the years ended December 31, 2001 and 2000, respectively. F-31 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Percentages) (11) Employee Benefit Plans: (Continued) 401(k) Plan During 2002, the Bank initiated a 401(k) retirement program. The plan is available to all employees who meet minimum eligibility requirements. Participants may generally contribute up to 15% of earnings, and in addition, management will match employee contributions up to 4%. Expense related to Company contributions amounted to $135,000 in 2002. Deferred Compensation Plan During the third quarter of 2002, the Company purchased assets and assumed the liabilities relating to a nonqualified deferred compensation plan for certain employees of the Fulton division. The Company owns single premium life insurance policies on the life of each participant and is the beneficiary of the policy value. When a participant retires, the benefits accrued for each participant will be distributed to the participant in equal installments for 15 years. The Deferred Compensation Plan also provides the participant with life insurance coverage, which is a percentage of the net death proceeds for the policy, if any, applicable to the participant. (12) Income Taxes: The provision for income taxes for the years ended December 31, 2002, 2001 and 2000 consisted of the following: 2002 2001 2000 ---------- ---------- ---------- Current Federal $ 2,217 1,436 1,282 State - - - ---------- ---------- ---------- 2,217 1,436 1,282 Deferred 129 (463) 91 ---------- ---------- ---------- $ 2,346 973 1,373 ========== ========== ========== Total income tax expense for the years ended December 31, 2002, 2001 and 2000 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to income before income taxes as follows:
2002 2001 2000 ---------- ---------- ---------- Expected federal income tax expense at statutory tax rate $ 2,360 953 1,373 Other (14) 20 - ---------- ---------- ---------- Total federal income tax expense $ 2,346 973 1,373 ========== ========== ========== Effective rate 33.8% 34.6% 34.0% ========== ========== ==========
The components of deferred taxes as of December 31, 2002 and 2001 are summarized as follows: F-32 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Percentages) (12) Income Taxes: (Continued) 2002 2001 ------------ ------------ Deferred tax liabilities: FHLB stock dividends $ (541) (504) Post 1987 bad debt reserves (50) (100) Unrealized appreciation on securities available for sale (451) (294) ------------ ------------ (1,042) (898) ------------ ------------ Deferred tax assets: Bad debt reserves 495 314 Pension cost 473 462 Accrued interest expense 5 13 Accrued expenses 22 191 ------------ ------------ 995 980 ------------ ------------ Net deferred tax asset (liability) $ (47) 82 ============ ============ Thrift institutions, in determining taxable income, were previously allowed special bad debt deductions based on specified experience formula or on a percentage of taxable income before such deductions. The Small Business Protection Act of 1996, among other things, repealed the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. As a result, thrifts must recapture into taxable income the amount of their post-1987 tax bad debt reserves over a six-year period beginning after 1995. This recapture could be deferred for up to two years if the thrift satisfied a residential loan portfolio test, and the Bank qualified for that deferral. For each of the years ended December 31, 2002 and 2001, the Bank recaptured approximately $146,000 of tax bad debt reserves into taxable income. A similar amount will be recaptured in 2003. Thrifts such as the Bank may now only use the same tax bad debt reserve method that is allowed for commercial banks. Accordingly, a thrift with assets of $500 million or less may only add to its tax bad debt reserves based upon its moving six-year average experience of actual loan losses (i.e., the experience method). A thrift with assets greater than $500 million can no longer use the reserve method and may only deduct loan losses as they actually arise (i.e., the specific charge-off method). F-33 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Percentages) (12) Income Taxes: (Continued) The portion of a thrift's tax bad debt reserve that is not recaptured (generally pre-1988 bad debt reserves) under the 1996 law is only subject to recapture at a later date under certain circumstances. These include stock repurchase redemptions by the thrift or if the thrift converts to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Bank does not anticipate engaging in any transactions at this time that would require the recapture of its remaining tax bad debt reserves. Therefore, retained earnings at December 31, 2002 and 2001 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided. (13) Related Parties: The Bank has entered into transactions with its directors and their affiliates (related parties). The aggregate amount of loans to such related parties at December 31, 2002 and 2001, was $5,049,000 and $3,482,000, respectively. During 2002, new loans to such related parties amounted to $1,907,000, and repayments amounted to $340,000. During 2001, new loans to such related parties amounted to $3,318,000 and repayments amounted to $2,687,000. (14) Commitments and Contingencies: In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. The Bank had open loan commitments at December 31, 2002 and 2001 of approximately $6,346,000 and $10,638,000, respectively. Of these amounts, approximately $930,000 and $123,000 as of December 31, 2002 and 2001, respectively, were for fixed rate loans. The interest rates for the fixed rate loan commitments ranged from 5.13% to 6.25% and 5.50% to 6.25% for December 31, 2002 and 2001, respectively. Unused lines of credit were approximately $17,075,000 and $6,986,000 as of December 31, 2002 and 2001, respectively. The Company and the Bank have agreed to enter into Employment Agreements with certain officers, which provide certain benefits in the event of their termination following a change in control of the Company or the Bank. The employment agreements provide for an initial term of three years. On each anniversary of the commencement date of the Employment Agreements, the term of each agreement may be extended for an additional year at the discretion of the Board. In the event of a change in control of the Company or the Bank, as defined in the agreement, the officers shall be paid an amount equal to two times the officers base salary as defined in the employment agreement. In addition, the Bank is a defendant in legal proceedings arising in connection with its business. It is the best judgment of management that neither the financial position nor results of operations of the Bank will be materially affected by the final outcome of these legal proceedings. F-34 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Percentages) (15) Regulatory Matters: The Company is a unitary thrift holding company and, as such, is subject to regulation, examination and supervision by the OTS. The Bank is also subject to various regulatory requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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). Management believes, as of December 31, 2002 and 2001, that the Bank meets all capital adequacy requirements to which it is subject. The most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total, tangible and core capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's and the Bank's actual capital amounts and ratios as of December 31, 2002 and 2001 are presented below (dollars in thousands): F-35 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Percentages) (15) Regulatory Matters: (Continued)
Required to be Categorized as Well Capitalized Under Company Bank Required for Capital Prompt Corrective Action Actual Actual Adequacy Purposes Provisions ------------------- ------------------- -------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio -------- -------- -------- -------- -------- --------- -------- ------------ AS OF DECEMBER 31, 2002 Tangible capital to adjusted total assets 39,803 9.5% 37,705 9.0% 6,265 1.50% N/A N/A Core capital to adjusted total assets 39,803 9.5% 37,705 9.0% 16,708 4.00 $ 20,884 5.00% Total capital to risk weighted assets 41,258 15.5% 39,160 14.8% 21,129 8.00 26,411 10.00 Tier I capital to risk weighted assets 39,803 14.9% 37,705 14.3% N/A N/A 15,847 6.00 AS OF DECEMBER 31, 2001 Tangible capital to adjusted total assets 43,019 15.1% 39,191 13.8% 4,271 1.50% N/A N/A Core capital to adjusted total assets 43,019 15.1% 39,191 13.8% 11,389 4.00 $ 14,237 5.00% Total capital to risk weighted assets 43,942 29.6% 40,114 27.0% 11,890 8.00 14,863 10.00 Tier I capital to risk weighted assets 43,019 28.9% 39,191 26.4% N/A N/A 8,918 6.00
F-36 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (16) Stockholders' Equity: The Company's sources of income and funds for dividends to its stockholders are earnings on its investments and dividends from the Bank. The Bank's primary regulator, the Office of Thrift Supervision (OTS), has regulations that impose certain restrictions on payment of dividends to the Company. Current regulations of the OTS allow the Bank (based upon its current capital level and supervisory status assigned by the OTS) to pay a dividend of up to 100% of net income to date during the calendar year plus the retained income for the preceding two years. Supervisory approval is not required, but 30 days prior notice to the OTS is required. Any capital distribution in excess of this amount would require supervisory approval. Capital distributions are further restricted should the Bank's capital level fall below the fully phased-in capital requirements of the OTS. In no case will the Bank be allowed to make capital distributions reducing equity below the required balance of the liquidation account. The Bank paid dividends to the Company totaling $8,000,000 and $3,880,000 during the years ended December 31, 2001 and 2000, respectively. OTS regulations also place restrictions after the conversion on the Company with respect to repurchases of its common stock. With prior notice to the OTS, the Company is allowed to repurchase its outstanding shares. During 2001 and 2000, the Company requested and received regulatory approval to acquire a total of 500,000 shares of its outstanding common stock. As of December 31, 2002, 408,909 shares had been repurchased at an average price of $11.88 per share. (17) Earnings Per Share: Earnings per share of common stock are based on the weighted average number of basic shares and dilutive shares outstanding during the year. The following is a reconciliation of weighted average common shares for the basic and dilutive earnings per share computations:
Years Ended December 31, -------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Basic Earnings per Share: Weighted average common shares 3,630,668 3,758,053 3,979,664 ========== ========== ========== Diluted Earnings per Share: Weighted average common shares 3,630,668 3,758,053 3,979,664 Diluted effect of stock options 5,812 6,639 - ---------- ---------- ---------- Weighted average common and incremental shares 3,636,480 3,764,692 3,979,664 ========== ========== ==========
F-37 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands) (18) Condensed Parent Company Only Financial Statements: The following condensed balance sheets as of December 31, 2002 and 2001 and condensed statements of income and cash flows for the years ended December 31, 2002, 2001 and 2000 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto. Consolidated Balance Sheets: 2002 2001 ------------ ------------ Assets: Cash and due from banks $ 25 12 Receivable from subsidiary 69 4,026 Federal funds sold 2,440 190 Investment in subsidiary 23,860 18,876 ------------ ------------ Total assets $ 26,394 23,104 ============ ============ Liabilities and equity Liabilities: Dividends payable 399 399 ------------ ------------ Total liabilities 399 399 ------------ ------------ Equity: Common stock 40 40 Additional paid-in capital 21,442 21,443 Retained earnings 8,495 5,497 Treasury stock (4,857) (4,845) Accumulated other comprehensive 875 570 ------------ ------------ Total equity 25,995 22,705 ------------ ------------ Total liabilities and equity $ 26,394 23,104 ============ ============ F-38 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands) (18) Condensed Parent Company Only Financial Statements: (Continued) Condensed Income Statements:
2002 2001 2000 -------- -------- -------- Interest and dividend income Dividend income $ - 8,000 3,880 Time deposits 4 56 34 -------- -------- -------- Total interest and dividend income 4 8,056 3,914 -------- -------- -------- Non-interest expenses 132 133 160 -------- -------- -------- Income (loss) before income taxes and equity in undistributed earnings of Bank (128) 7,923 3,754 Income tax benefit (43) (27) (42) -------- -------- -------- Income (loss) before equity in undistributed earnings of Bank (85) 7,950 3,796 Equity in undistributed earnings of Bank 4,679 (6,111) (1,130) -------- -------- -------- Net income $ 4,594 1,839 2,666 ======== ======== ========
F-39 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands) (18) Condensed Parent Company Only Financial Statements: (Continued) Condensed Statement of Cash Flows:
2002 2001 2000 -------- -------- -------- Cash flows from operating activities: Net income $ 4,594 1,839 2,666 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of Bank (4,679) 6,111 1,130 Increase (decrease) in: Current income taxes payable (42) (27) (50) Accrued expenses - (13) 13 -------- -------- -------- Net cash (used in) provided by operating activities (127) 7,910 3,759 -------- -------- -------- Cash flows for investing activities: (Advance for) payment on receivable from subsidiary 4,000 (4,000) - Net (increase) decrease in federal funds sold (2,250) 940 (930) -------- -------- -------- Net cash provided (used in) by investing activities 1,750 (3,060) (930) -------- -------- -------- Cash flows from financing activities: Recovery of proceeds from issuance of common stock - - 40 Purchase of treasury stock (12) (3,202) (1,643) Dividends paid (1,598) (1,666) (1,626) -------- -------- -------- Net cash used in financing activities (1,610) (4,868) (3,229) -------- -------- -------- Net increase (decrease) in cash 13 (18) (400) Cash at beginning of year 12 30 430 -------- -------- -------- Cash at end of year $ 25 12 30 ======== ======== ========
F-40 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Per Share Amounts) (19) Quarterly Results of Operations: (Unaudited) Summarized unaudited quarterly operating results for the years ended December 31, 2002 and 2001 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ ------------ ------------ December 31, 2002: Interest income $ 4,587 4,679 4,950 5,826 Interest expense 2,049 2,001 2,332 3,038 ------------ ------------ ------------ ------------ Net interest income 2,538 2,678 2,618 2,788 Provision for loan losses 90 90 250 365 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 2,448 2,588 2,368 2,423 Noninterest income 436 402 677 795 Noninterest expense 1,136 1,141 1,144 1,776 ------------ ------------ ------------ ------------ Income before income taxes 1,748 1,849 1,901 1,442 Income taxes 615 624 632 475 ------------ ------------ ------------ ------------ Net income $ 1,133 1,225 1,269 967 ============ ============ ============ ============ Basic earnings per share $ 0.31 0.34 0.35 0.26 ============ ============ ============ ============ Diluted earnings per share $ 0.31 0.34 0.35 0.26 ============ ============ ============ ============ Weighted average shares outstanding: Basic 3,631,499 3,630,396 3,630,396 3,630,396 ============ ============ ============ ============ Diluted 3,631,499 3,636,979 3,637,928 3,639,076 ============ ============ ============ ============ December 31, 2001: Interest income $ 4,302 4,380 4,445 4,435 Interest expense 2,360 2,473 2,437 2,482 ------------ ------------ ------------ ------------ Net interest income 1,942 1,907 2,008 1,953 Provision for loan losses 60 42 60 60 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 1,882 1,865 1,948 1,893 Noninterest income 98 180 279 160 Noninterest expense 934 1,017 2,792 750 ------------ ------------ ------------ ------------
F-41 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands, Except Per Share Amounts) (19) Quarterly Results of Operations: (Unaudited) (Continued)
First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ ------------ ------------ Income (loss) before income taxes $ 1,046 1,028 (565) 1,303 Income tax expense (benefit) 377 367 (171) 400 ------------ ------------ ------------ ------------ Net income (loss) $ 669 661 (394) 903 ============ ============ ============ ============ Basic earnings (loss) per share $ 0.17 0.17 (0.11) 0.25 ============ ============ ============ ============ Diluted earnings (loss) per share $ 0.17 0.17 (0.11) 0.25 ============ ============ ============ ============ Weighted average shares outstanding Basic 3,856,949 3,806,893 3,718,780 3,650,668 ============ ============ ============ ============ Diluted 3,856,949 3,806,893 3,726,347 3,657,307 ============ ============ ============ ============
(20) Comprehensive Income: SFAS 130, Reporting Comprehensive Income, established standards for reporting comprehensive income. Comprehensive income includes net income and other comprehensive net income which is defined as non-owner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect for the years ended December 31, 2002, 2001 and 2000:
Pre-Tax (Expense) Net of Tax Amount Benefit Amount ---------- ---------- ---------- December 31, 2002: Unrealized holding gains for the period $ 1,030 (350) 680 Reclassification adjustments for gains included in net income (568) 193 (375) ---------- ---------- ---------- $ 462 (157) 305 ========== ========== ========== December 31, 2001: Minimum pension liability adjustment $ 336 (114) 222 Unrealized holding gains for the period 856 (291) 565 Reclassification adjustment for gains included in net income (88) 30 (58) ---------- ---------- ---------- $ 1,104 (375) 729 ========== ========== ==========
F-42 HOPFED BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 2002, 2001 AND 2000 (Table Amounts in Thousands) (20) Comprehensive Income: (Continued)
Pre-Tax (Expense) Net of Tax Amount Benefit Amount ---------- ---------- ---------- December 31, 2000: Minimum pension liability adjustment $ (336) 114 (222) Unrealized holding gains for the period 1,458 (496) 962 ---------- ---------- ---------- $ 1,122 (382) 740 ========== ========== ==========
F-43