EX-13 3 dex13.txt ANNUAL REPORT HOPFED Bancorp, Inc. [LOGO] ANNUAL REPORT 2001 HOPFED BANCORP, INC. -------------------------------------------------------------------------------- HopFed Bancorp, Inc., a Delaware corporation (the "Company"), was organized by Hopkinsville Federal Bank (the "Bank") for the purpose of serving as the holding company of the Bank. On February 6, 1998, the Bank converted from mutual to stock form as a wholly owned subsidiary of the Company. In conjunction with the conversion, the Company issued and sold 4,033,625 shares of its common stock (the "Common Stock") at a price of $10.00 per share (the "Purchase Price"). The Bank adopted its current corporate title in February of 2001. The Company is classified as a unitary savings and loan holding company subject to regulation by the Office of Thrift Supervision ("OTS") of the Department of the Treasury. The primary activity of the Company is overseeing the business of the Bank and investing the portion of the net proceeds retained by it from the sale of Common Stock. The Bank is a federal stock savings bank headquartered in Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz, Elkton and Benton, Kentucky. The Bank was incorporated in 1879 as a Kentucky chartered building and loan association. In 1940, the Bank converted to a federal charter and obtained federal insurance of accounts. In 1983, the Bank became a federal mutual savings bank. The business of the Bank primarily consists of attracting deposits from the general public and investing such deposits in loans secured by one-to-four residential properties. The executive offices of the Company and the Bank are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240. The telephone number is (270) 885-1171. MARKET AND DIVIDEND INFORMATION -------------------------------------------------------------------------------- Since February 1998, the Common Stock has been quoted on the Nasdaq Stock Market under the symbol "HFBC." As of February 28, 2002, there were approximately 1,500 stockholders of record, excluding beneficial owners in nominee or street name. Following are the high and low stock prices of the Common Stock for the periods indicated.
Price Range of Common Stock ------------------------------------------------------------------------------------ Year Ended December 31, 2000 Year Ended December 31, 2001 ---------------------------------------- -------------------------------------- High Low High Low ---- --- ---- --- First Quarter $ 15.875 $ 10.750 $ 12.38 $ 10.60 Second Quarter 12.375 9.375 12.48 11.39 Third Quarter 10.250 8.375 12.86 10.65 Fourth Quarter 12.125 8.813 12.75 11.25
Dividends of $0.11 per share were declared in each of the four quarters of 2001. In 2000, dividends of $0.08 per share were declared in the first quarter and dividends of $0.11 per share were declared in each of the remaining three quarters. Dividends, when and if paid, are subject to determination and declaration by the Board of Directors in 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, 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. TABLE OF CONTENTS -------------------------------------------------------------------------------- HopFed Bancorp, Inc. .......................................................................................... 1 Market and Dividend Information ............................................................................... 1 Selected Financial Information and Other Data ................................................................. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 5 Financial Statements .......................................................................................... 16 Corporate Information .......................................................................... Inside Back Cover
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 Financial Statements and accompanying Notes appearing elsewhere in this Report. Financial Condition and Other Data
At December 31, ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total amount of: (Dollars in thousands) Assets ......................... $285,639 $229,958 $ 207,906 $ 220,032 $ 343,995 Loans receivable, net .......... 170,016 129,154 113,532 108,807 103,470 Loans held for sale ........... 928 --- --- --- --- Cash and due from banks ........ 3,941 2,227 4,537 1,905 1,264 Time deposits and interest-bearing deposits in FHLB .................... 39 50 251 214 5,945 Federal funds sold ............. 690 1,530 4,100 9,685 151,095 Securities available for sale .. 100,519 84,269 71,423 68,139 26,699 Securities held to maturity: FHLB securities.............. -- -- -- 13,998 31,988 Mortgage-backed Securities ............ 4,462 7,796 9,958 13,356 19,578 Deposits ....................... 200,316 165,604 160,905 154,816 320,633 FHLB advances .................. 38,747 17,040 -- -- -- Total equity ................... 43,589 45,362 44,344 61,134 19,936 -------------------------------------------------------------------------------------------------------------------- Number of: Real estate loans outstanding ............... 2,248 2,075 2,143 2,150 2,198 Deposit accounts ............... 18,178 18,778 18,667 19,251 21,277 Offices open ................... 6 5 5 5 5 Year Ended December 31, ----------------------------------------------------------------------------- Operating Data 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In thousands) Interest income ................... $ 17,562 $16,343 $ 14,205 $ 15,052 $ 14,311 Interest expense .................. 9,752 9,112 7,078 8,004 9,350 -------- -------- -------------- ------------- ------------- Net interest income before provision for loan losses ...... 7,810 7,231 7,127 7,048 4,961 Provision for loan losses ......... 222 431 21 21 20 -------- -------- ------------- ------------- ------------- Net interest income ............... 7,588 6,800 7,106 7,027 4,941 Non-interest income ............... 717 509 7,028 547 528 Non-interest expense .............. 5,493 3,270 8,893 2,982 2,408 -------- -------- ------------- ------------- ------------- Income before income taxes ........ 2,812 4,039 5,241 4,592 3,061 Provision for income taxes ........ 973 1,373 2,766 1,641 1,038 -------- -------- ------------- ------------- ------------- Net income ........................ $ 1,839 $ 2,666 $ 2,475 $ 2,951 $ 2,023 ======== ======== ============= ============= =============
2 Selected Quarterly Information (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter --------- -------- -------- ------- (In thousands) 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 Year Ended December 31, 2000: Interest income ....................... $ 3,901 $ 3,981 $ 4,264 $ 4,197 Net interest income after provision for losses on loans .................... 1,813 1,749 1,594 1,644 Noninterest income .................... 127 139 127 116 Noninterest expense ................... 838 894 767 771 Net income ............................ 727 639 652 648
3 Key Operating Ratios
At or for the Year Ended December 31, ------------------------------------- 2001 2000 1999 ---- ---- ---- Performance Ratios Return on average assets (net income divided by average total assets)................................................... 0.72% 1.18% 1.14% Return on average equity (net income divided by average total equity)........................................... 4.26% 5.92% 4.30% Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)...................................................... 2.29% 2.28% 2.11% Ratio of average interest-earning assets to average interest-bearing liabilities.................................... 121.63% 124.25% 137.75% Ratio of non-interest expense to average total assets............. 2.15% 1.44% 4.09% Ratio of net interest income after provision for loan losses to non-interest expense......................... 138.14% 207.95% 79.91% Efficiency ratio (noninterest expense divided by sum of net interest income plus noninterest income)........................ 66.14% 44.74% 62.92% Asset Quality Ratios Nonperforming assets to total assets at end of period............. 0.19% .19% .03% Nonperforming loans to total loans at end of period............... 0.32% .34% .05% Allowance for loan losses to total loans at end of period......... 0.54% .55% .25% Allowance for loan losses to nonperforming loans at end of period................................................... 167.21% 163.13% 479.31% Provision for loan losses to total loans receivable, net.......... .13% .33% .02% Net charge-offs to average loans outstanding...................... .005% .001% N/A(1) Capital Ratios Total equity to total assets at end of period..................... 15.26% 19.73% 21.33% Average total equity to average assets............................ 16.85% 19.86% 26.46%
____________________ (1) Ratio is not applicable because there were no net charge-offs for this period. Regulatory Capital Ratios December 31, 2001 ---------------------- (Dollars in thousands) Tangible capital............................... $ 39,191 13.75% Less: Tangible capital requirement........... 4,275 1.50 -------- ------ Excess....................................... $ 34,916 12.25% ======== ====== Core capital................................... $ 39,191 13.75% Less: Core capital requirement................ 11,401 4.00 -------- ------ Excess....................................... $ 27,790 9.75% ======== ====== Total risk-based capital....................... $ 40,114 27.37% Less: Risk-based capital requirement.......... 11,890 8.00 -------- ------ Excess....................................... $ 28,224 19.37% ======== ====== 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, 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%. For the year ended December 31, 1999 the Company recorded net income of $2.5 million, a return on average assets of 1.14% and a return on average equity of 4.30%. 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. Current Business Strategy In 2000, following a change in senior management and a reexamination of its business plan, the Company revised its strategy to emphasize long-term profitability. . The Company continues to expand its products and services and shifting its focus to commercial bank services. At December 31, 2001, net loans totaled $ 170.9 million, an increase of 32.2% and 50.6% over total net loans at December 31, 2000 and 1999, respectively. At December 31, 2001, commercial loans receivable were $ 14.9 million, compared to $946,000 and $314,000 at December 31, 2000 and 1999, respectively. In 2001, the Company retained additional qualified commercial loan personnel to assist in increasing its commercial loan portfolio. . In 2001, the Company purchased commercial property in Murray, Kentucky with the intent to construct a retail office location. Construction began in February 2002 with an anticipated completion date of January 2003. In the third quarter of 2002, the Company will relocate its office in Benton, Kentucky due to the strong growth in that market. . In March of 2002, the Company signed a definitive agreement to purchase the business assets of Old National Bancorp located in Fulton, Kentucky. The purchase includes two branch offices with approximately $90 million in deposits and $50 million in loans and a local insurance company. The transaction is subject to the approval of the OTS. The Company anticipates that the purchase will to close at or near the end of the second quarter of 2002. 5 . In 2000, the Company announced that it was offering to repurchase up to 200,000 shares of outstanding Common Stock, which was completed in February 2001. In March 2001, the Company announced that the Board of Directors had authorized the purchase of an additional 300,000 shares. As of March 15, 2002, the Company had repurchased a total of 407,767 shares of Common Stock. The Company believes that the repurchase of Common Stock is an effective deployment of excess capital. . The Company is seeking to reduce non-interest expenses. In September 2001, the Company announced that the Board of Directors had directed management to take all actions necessary to terminate the Company's defined benefit pension plan ("Pension Plan"), effective December 31, 2001, and replace it with a Section 401(k) benefit plan. Termination of the Pension Plan is expected to reduce annual pension related expenses by approximately $360,000 for the year ending December 31, 2002, and thereafter. By terminating the Pension Plan, the Company incurred a curtailment expense of approximately $1.4 million. Termination of the Pension Plan and distribution to participants of its assets are contingent on receipt of an Internal Revenue Service determination that the Pension Plan will be tax-qualified upon its termination, as well as compliance with other applicable regulatory requirements. 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, 2001, approximately $105.0 million of the $117.0 million of one-to-four family residential loans originated by the Company (comprising 89.7% of such loans) had adjustable rates. At December 31, 2000, the Company had approximately $51.6 million in agency bonds that had a call option in 2001. As a result of lower market interest rates, all of these bonds were called. The Company reinvested excess funds in U.S. agency securities, municipal bonds and mortgage-backed securities. Such investments have been made in order to manage interest rate risk, as well as to diversify the Company's assets, manage cash flow, obtain yields and maintain the minimum levels of qualified and liquid assets required by regulatory authorities. 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 which provide for interest rates to increase at specified intervals to pre-established rates, and thus improve the spread between the cost of funds and yield on investments. At December 31, 2001, no securities were due within one year, approximately $14.8 million were due in one to five years, approximately $5.1 were due in five to ten years and approximately $1.2 million were due after ten years. However, at December 31, 2001, $13.6 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, 2001, all of these securities are callable and/or due prior to December 31, 2003. The Company purchased approximately $4.2 million in municipal bonds during 2001. 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, 2001, approximately $3.7 million of the Company's municipal bond portfolio is callable with call dates ranging from January 2006 to December 2011. The call dates are staggered to eliminate the excessive cash flows within any one-year period. At December 31, 2001, $105,000 were due within one to five years, $134,000 were due in five to ten years and approximately $3.9 million were due after ten years. Mortgage-backed securities entitle the Company to receive a pro rata portion of the cash flow from an 6 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 back securities provide a monthly stream of both interest and principal, thereby provide the Company will 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 2 of Notes to Consolidated Financial Statements. 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, 2001, as calculated by the OTS, based on information provided to the OTS by the Bank.
Change Net Portfolio Value NPV as % of PV of Assets --------------------------------------------------- ------------------------------------ In Rates $ Amount $ Change % Change NPV Ratio Change -------- --------- -------- ----------- --------- --------- (Dollars in thousands) +400 bp $ $ % % bp +300 bp 33,948 (10,606) (24) % 12.36% 288 bp +200 bp 37,816 (6,737) (15) % 13.47% 176 bp +100 bp 41,416 (3,137) (7) % 14.45% 78 bp 0 bp 44,553 15.23% -100 bp 46,312 1,759 4 % 15.58% 34 bp
Due to the low level of interest rates at December 31, 2001, 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 .................. 15.2 % Exposure Measure: Post-Shock NPV Ratio ......................... 13.4 % Sensitivity Measure: Change in NPV Ratio ....................... 176 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 7 exceeds the amount of interest rate sensitive assets. At December 31, 2001, the Company had a negative one-year or less interest rate sensitivity gap of 12.9% 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. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001 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 .............. $ 52,136 $ 43,499 $ 7,624 $ 7,887 $ 2,754 $ 113,900 Multi-family residential ........ 2,448 2,448 Construction .................... 2,071 491 2,562 Non-residential ................. 11,003 3,461 1,729 1,080 1,172 18,445 Secured by deposits ............. 2,191 2,191 Other loans ..................... 5,241 15,211 6,061 2,586 2,299 31,398 Time deposits and interest- bearing deposits in FHLB .... 39 39 Federal funds sold .............. 690 690 Securities ...................... 2,299 14,953 5,240 3,662 1,418 27,572 Mortgage-backed securities ...... 25,690 28,192 13,471 10,056 77,409 --------- --------- ---------- ----------- --------- ---------- Total ......................... $ 103,808 $ 105,807 $ 34,125 $ 25,271 $ 7,643 $ 276,654 --------- --------- ---------- ----------- --------- ---------- Interest-bearing liabilities: Deposits ........................ $ 134,430 $ 58,670 $ 193,100 Borrowed Funds .................. 5,000 7,906 7,841 18,000 38,747 --------- --------- ---------- ----------- --------- ---------- Total ......................... $ 139,430 66,576 7,841 18,000 --- 231,847 --------- --------- ---------- ----------- --------- ---------- Interest sensitivity gap ........... $ (35,622) $ 39,231 $ 26,284 $ 7,271 $ 7,643 $ 44,847 ========== ========= ========== =========== ========= ========== Cumulative interest sensitivity gap ............................. $ (35,622) $ 3,609 $ 29,893 $ 37,164 $ 44,807 $ 44,847 ========= ========= ========== =========== ========= ========== Ratio of interest-earning assets to interest-bearing liabilities .... 74.45% 158.92% 129.83% 347.55% N/A 119.32% ========= ========= ========== =========== ========= ========== Ratio of cumulative gap to total interest-earning assets ... (12.88)% 1.30% 10.81% 13.43% 16.20% 16.20% ========= ========= ========== =========== ========= ==========
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 repricing date. Further, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and that other deposits are withdrawn or repriced within one year. 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 preceding table does not include the receipt of approximately $35.0 million in short term marketable securities (less than three month final maturity) that will occur in the second or third quarters of 2002 as a result of the Company's purchase of the business assets of Old National Bancorp in Fulton, Kentucky. The Company's analysis of the assets and liabilities purchased in this transaction indicates that the interest rate risk associated with the loans and deposits of the purchased business unit are similar to those of Company's and do not materially alter its interest rate risk. 8 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. 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 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, 2001 ------------------------------------ Weighted Balance Average Yield/Cost --------- ------------------ (Dollars in thousands) Interest-earning assets: Loans receivable, net ................. $ 170,016 7.37% Loans held for sale 928 6.65% Securities available for sale ......... 100,519 5.69% Securities held to maturity ........... 4,462 7.46% Time deposits and other interest- bearing cash deposits .............. 729 1.75% ----------- --------- Total interest-earning assets ....... 276,654 6.75% Non-interest-earning assets .............. 8,985 ----------- Total assets .......................... $ 285,639 =========== Interest-bearing liabilities: Deposits .............................. $ 193,100 3.53% FHLB borrowings ....................... 38,747 4.24% ----------- ---- Total interest-bearing liabilities .... 231,847 3.65% Non-interest-bearing liabilities ......... 10,203 ----------- Total liabilities ................... 242,050 Common stock ............................. 40 Additional paid-in capital ............... 25,714 Retained earnings ........................ 22,110 Treasury stock ........................... (4,845) Accumulated other comprehensive income ................................ 570 ----------- Total liabilities and equity ........ $ 285,639 =========== Interest rate spread ..................... 3.10% --------- Ratio of interest-earning assets to interest-bearing liabilities .......... 119.32% ========= (Continued on following page) 9
Year Ended December 31, ----------------------------------------------------------------------- 2001 2000 --------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- Interest-earning assets: Loans receivable, net ............ $ 149,804 $ 11,531 7.69% $ 120,308 $ 9,299 7.73% Securities available for sale .... 83,220 5,108 6.13% 89,935 6,349 7.06% Securities held to maturity ...... 5,986 456 7.61% 8,894 637 7.16% Time deposits and other interest-bearing cash deposits ....................... 9,998 467 4.67% 1,007 58 5.76% --------- -------- --------- -------- Total interest-earning assets ....................... 249,008 17,562 7.05% 220,144 16,343 7.42% -------- ------- -------- -------- Non-interest-earning assets 7,099 6,622 --------- --------- Total assets ..................... $ 256,107 $ 226,766 ========= ========= Interest-bearing liabilities: Deposits ......................... 180,180 8,706 4.83% $ 159,268 7,931 4.98% Borrowings ....................... 24,541 1,046 4.26% 17,905 1,181 6.60% --------- -------- --------- -------- Total interest-bearing liabilities .................. 204,721 9,752 4.76% 177,173 9,112 5.14% -------- ------- -------- -------- Non-interest-bearing liabilities 8,223 4,549 --------- --------- Total liabilities .............. 212,944 181,722 Common stock ........................ 40 40 Additional paid-in capital .......... 24,586 24,586 Retained earnings ................... 21,273 21,738 Unallocated ESOP shares ............. -- Treasury stock ...................... (3,266) (210) Accumulated other comprehensive income (loss) ...... 530 (1,110) --------- --------- Total liabilities and equity ....................... $ 256,107 $ 226,766 ========= ========= Net interest income ................. $ 7,810 $ 7,231 ======== ======= Interest rate spread ................ 2.29% 2.28% ======= ======== Net yield on interest earning assets .................. 3.13% 3.28% ======= ======== Ratio of average interest-earning assets to average interest- bearing liabilities ............. 121.63% 124.25% ======= ======== Year Ended December 31, --------------------------------- 1999 ------------------------------- Average Average Balance Interest Yield/Cost ------- ------------------- Interest-earning assets: Loans receivable, net ............ $ 111,469 $ 8,436 7.57% Securities available for sale .... 73,863 4,204 5.69% Securities held to maturity ...... 14,220 814 5.72% Time deposits and other interest-bearing cash deposits ....................... 11,536 751 6.51% --------- ------- Total interest-earning assets ....................... 211,088 14,205 6.73% ------- ------- Non-interest-earning assets 6,324 --------- Total assets ..................... $ 217,412 ========= Interest-bearing liabilities: Deposits ......................... $ 153,245 7,078 4.62% Borrowings ....................... -- -- --% --------- ------- Total interest-bearing liabilities .................. 153,245 7,078 4.62% ------- ------- Non-interest-bearing liabilities 6,641 --------- Total liabilities .............. 159,886 Common stock ........................ 40 Additional paid-in capital .......... 40,442 Retained earnings ................... 16,670 Unallocated ESOP shares ............. (2,318) Treasury stock ...................... -- Accumulated other ................... comprehensive income (loss) 2,692 --------- Total liabilities and equity ....................... $217,412 ========= Net interest income ................. $ 7,127 ======= Interest rate spread ................ 2.11% ======= Net yield on interest earning assets .................. 3.38% ======= Ratio of average interest-earning assets to average interest- bearing liabilities ............. 137.75% =======
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, -------------------------------------------------------------------- 2001 vs. 2000 2000 vs. 1999 ------------------------------ ---------------------------------- 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 ......... $ (47) $2,279 $2,232 $ 194 $ 669 $ 863 Securities available for sale ................ (767) (474) (1,241) 1,230 915 2,145 Securities held to maturity ................. (65) (116) (181) 128 (305) (177) Other interest- earning assets .......... (11) 420 409 (8) (685) (693) ----- ------ ------ ------- ------ --------- Total interest- earning assets ......... (890) $2,109 $1,219 $ 1,544 $ 594 $ 2,138 ----- ------ ------ ------- ------ --------- Interest-bearing liabilities: Deposits ................. (235) 1,010 $ 775 $ 575 $ 278 $ 853 Borrowings ............... (503) 368 (135) 1,181 -- 1,181 ----- ------ ------ ------- ------ --------- Total interest- bearing liabilities .... (738) $1,378 $ 640 $ 1,756 $ 278 $ 2,034 ----- ------ ------ ------- ------ --------- Increase (decrease) in net interest income ...... (152) $ 731 $ 579 $ (212) $ 316 $ 104 ===== ====== ====== ======= ====== =========
Comparison of Financial Condition at December 31, 2001 and December 31, 2000 The Company's total assets increased by $55.6 million, from $230.0 million at December 31, 2000 to $285.6 million at December 31, 2001. Federal funds sold decreased from $1.5 million at December 31, 2000 to $690,000 at December 31, 2001. Securities held to maturity declined $3.3 million due to various issues maturing. A portion of such funds was reinvested in securities available for sale, which increased $ 16.3 million. The Company's net loan portfolio increased by $41.5 million during the year ended December 31, 2001. Net loans totaled $170.9 million and $129.2 million at December 31, 2001 and December 31, 2000, respectively. The increase in the loan activity during the year ended December 31, 2001 was due to the Company's efforts to increase its loan originations using funds currently held in investment securities. For the year ended December 31, 2001, the Company's average yield on loans was 7.69%, compared to 7.73% for the year ended December 31, 2000. At December 31, 2001, the Company's investments classified as "held to maturity" were carried at amortized cost of $4.5 million and had an estimated fair market value of $4.7 million, and its securities classified as "available for sale" had an estimated fair market value of $100.5 million. See Note 2 of Notes to Consolidated Financial Statements. 11 The allowance for loan losses totaled $923,000 at December 31, 2001, an increase of $215,000 from the allowance of $708,000 at December 31, 2000. The ratio of the allowance for loan losses to loans was .54% and .55% at December 31, 2001 and 2000, respectively. Also at December 31, 2001, the Company's non-performing loans were $551,000, or .32% of total loans, compared to $434,000, or .34% of total loans, at December 31, 2000, and the Company's ratio of allowance for loan losses to non-performing loans at December 31, 2001 and December 31, 2000 was 167.2% and 163.1%, respectively. 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 7.1%, 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 yield on interest-earning assets 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 $180.1 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 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. Comparison of Operating Results for the Years Ended December 31, 2000 and 1999 Net Income. The Company's net income for the year ended December 31, 2000 was $2.7 million, compared to $2.5 million for the year ended December 31, 1999. The increase in net income for the year resulted primarily from a reduction in non-interest expense and reduced income tax expense. 12 Net Interest Income. Net interest income for the year ended December 31, 2000 was $7.2 million, compared to $7.1 million for the year ended December 31, 1999. The increase in net interest income for the year ended December 31, 2000 was primarily due to a higher yield on interest-earning assets. For the year ended December 31, 2000, the average yield on total interest-earning assets was 7.42%, compared to 6.73% for the year ended December 31, 1999, and the average cost of interest-bearing liabilities was 5.14%, compared to 4.62% for the year ended December 31, 1999. As a result, the interest rate spread for the year ended December 31, 2000 was 2.28%, compared to 2.11% for the year ended December 31, 1999, and the net yield on interest-earning assets was 3.28% for the year ended December 31, 2000, compared to 3.38% for the year ended December 31, 1999. Interest Income. Interest income increased by $2.1 million from $14.2 million to $16.3 million, or by 14.8%, during 2000 compared to 1999. This increase primarily resulted from an increase in the average yield on securities available for sale, which was 7.06% for 2000 compared to 5.69% for 1999, as well as an increase in the average investments in securities available for sale to $89.9 million in 2000, compared to $73.9 million in 1999. Also contributing to the increase in interest income was an increase in the average yield on the loan portfolio which was 7.73% for 2000 compared to 7.57% for 1999, as well as an increase in the average balance of loans to $120.3 million in 2000, compared to $111.5 million in 1999. Interest Expense. Interest expense increased $2.0 million, or 28.2%, to $9.1 million for the year ended December 31, 2000 from $7.1 million for the year ended December 31, 1999. The Company priced its deposit products more aggressively which resulted in an increase in its cost of funds as well as an increase in the level of interest-bearing liabilities due to an inflow of higher cost deposits. At December 31, 2000, total interest expense on deposits was $7.9 million, compared to $7.1 million at December 31, 1999, an increase of 11.3%. Also during 2000, the Company utilized funds borrowed from the Federal Home Loan Bank to increase its investments in securities. The average balance of borrowed funds was $17.9 million at an average interest rate of 6.60% resulting in interest expense of $1.2 million. There were no borrowings in 1999. Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors, including general economic conditions, loan portfolio composition, prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition. The Company determined that a provision for loan loss of $431,000 was appropriate for the year ended December 31, 2000. The Company determined to increase the level of the provision for loan losses, which was $21,000 in 1999, primarily due to changes in the composition of the loan portfolio. Non-Interest Income. Total non-interest income in the year ended December 31, 2000 was $509,000, compared to $7.0 million in 1999. This decrease was attributable to a $6.5 million realized gain from the sale of securities available for sale during 1999. In August 1999, the Bank sold 100% of its Federal Home Loan Mortgage Corporation ("FHLMC") stock portfolio (123,072 shares) in open market transactions and realized an after-tax gain on such sales of approximately $4.3 million. The FHLMC stock had been recorded at its fair market value with the associated unrealized gains recorded in the Company's consolidated net worth. The sales were undertaken in recognition that the FHLMC stock had appreciated significantly over the prior several years. Although the FHLMC had benefited from higher levels of mortgage loans fostered by lower interest rates in recent years, as a result of an uncertainty over the direction of interest rates and an apparent slowing of mortgage loan originations in general, the Company believed that the FHLMC stock would be subject to future adverse market pressures. Additionally, the FHLMC was under increasing pressure to expand its role in promoting low income housing, which the Company believed may also depress the market value of the FHLMC stock. From December 31, 1998 to the date of sale, the Bank's FHLMC stock portfolio declined in value approximately 17%. Proceeds of these sales were invested in higher yielding investments. See Note 2 of Notes to Consolidated Financial Statements. Non-Interest Expense. Total non-interest expense in the year ended December 31, 2000 was $3.3 million, compared to $8.9 million in 1999. This decrease was primarily attributable to a decrease of approximately $5.5 million in salaries and benefits. In December 1999, the Board of Directors approved a benefit plan restructuring on the basis of its belief that a reduction of the expenses associated with the Company's Employee Stock Ownership Plan ("ESOP") would improve the Company's profitability. For the year ended December 31, 1999, the maintenance expenses for the ESOP were approximately $408,000, and the Company's one-time termination expense was approximately $2.5 million. The Company subsequently received an Internal Revenue Service determination that the ESOP would be tax-qualified upon its termination. 13 In 2000 and 1999, the net periodic pension costs of the Company's defined benefit pension plan were $152,000 and $174,000, respectively. See Note 9 of Notes to Consolidated Financial Statements. Income Taxes. The Company's effective tax rate for the year ended December 31, 2000 was 34.0%, compared to 52.8% for 1999. The income tax expense was $1.4 million in 2000 compared to $2.8 million in 1999. 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, 2001, 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 13 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, 2001, the Bank had outstanding advances of $38.7 million from the FHLB. See Note 6 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. In addition, the Bank is required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum ratio is currently 4%. The Bank has historically maintained a level of liquid assets in excess of regulatory requirements. The Bank's liquidity ratios at December 31, 2001, 2000, and 1999 were 54.65%, 58.8%, and 58.02%, respectively. A portion of the Bank's liquidity consists of cash and cash equivalents. At December 31, 2001, cash and cash equivalents totaled $4.7 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, 1999, 2000 and 2001 were $1.1 million, $1.9 million, and $4.3 million, respectively. Cash flows from investing activities were a net use of funds of $55.0 million and $25.5 million in 2001 and 2000, respectively, and were a net source of funds of $6.7 million in 1999. 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 $17.4 million for 1999, $2.2 million for 2000 and $3.4 million for 2001. At the same time, the investment of cash in loans was $42.1 million in 2001, $16.2 million in 2000 and $4.7 million in 1999. There were no purchases of held-to-maturity securities in 1999, 2000 and 2001. Purchases of securities available for sale exceeded maturities of such securities by $7.3 million, $11.4 million and $12.6 million in 2001, 2000, and 1999, respectively. The Bank continues to acquire securities using funds from loan repayments, proceeds from maturities of other securities, and borrowed funds. At December 31, 2001, additional advances available from the FHLB of Cincinnati amounted to $6.8 million. 14 Beginning in 1996, the Bank permitted the run-off of higher-costing time deposits by offering only market rates of interest on maturing deposits rather than above-market rates under its previous pricing strategy. Cash was required to fund net withdrawals of time deposits in the amount of $16.5 million in 1998. The Bank modified this strategy in 1999, and had net increases in deposits of $6.1 million, $4.7 million, and $34.7 million in 1999, 2000, and 2001, respectively. The Bank's current strategy is to remain competitively priced in each of its markets. Because of the Bank's ability to generate cash flows from its financing activities and the availability of its other liquid assets, the Bank does not anticipate any difficulty in funding future withdrawals of such time deposits as they come due. At December 31, 2001, the Bank had $10.6 million in outstanding commitments to originate loans and unused lines of credit of $7.0 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 $80.6 million at December 31, 2001. 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 financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, 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. Change in Certifying Accountant York, Neel & Co. - Hopkinsville, LLP ("York, Neel"), the Company's former independent certified public accountants, resigned effective September 20, 2000. During the Company's two most recent fiscal years ended December 31, 1999 and the interim quarters preceding such resignation, there were no disagreements with York, Neel on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. The report of York, Neel for the two fiscal years ended December 31, 1999 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. The decision to accept York, Neel's resignation and change accountants was recommended and approved by the Audit Committee of the Board of Directors and approved by the Board of Directors. On September 20, 2000, Rayburn, Betts & Bates, P.C. was engaged as the principal accountant to audit the Company's financial statements for the fiscal year ended December 31, 2000. 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 subsidiary (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity, and cash flows for the years then ended. 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 audit. The consolidated financial statements of the Company for the year ending December 31, 1999, were audited by other auditors whose report dated February 4, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/Rayburn, Betts & Bates, P.C. Nashville, Tennessee March 12, 2002 16 HopFed Bancorp, Inc. and Subsidiary Consolidated Balance Sheets December 31, 2001 and 2000 (Dollars in Thousands)
Assets 2001 2000 ------ ---- ---- Cash and due from banks (note 8) $ 3,941 2,227 Interest-earning deposits in Federal Home Loan Bank 39 50 Federal funds sold 690 1,530 --------- -------- Cash and cash equivalents 4,670 3,807 Securities available for sale (note 2) 100,519 84,269 Securities held to maturity, market value of $4,664 for 2001 and $7,930 for 2000, respectively (note 2) 4,462 7,796 Loans held for sale at estimated fair value (note 3) 928 - Loans receivable, net of allowance for loan losses of $923 for 2001 and $708 for 2000, respectively (note 3) 170,016 129,154 Accrued interest receivable 1,405 2,285 Premises and equipment, net (note 4) 3,315 2,442 Deferred tax assets (note 10) 82 44 Other assets 242 161 --------- -------- Total assets $ 285,639 229,958 ========= ======== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits: (note 5) Non-interest-bearing accounts $ 7,216 3,828 Interest-bearing accounts: NOW accounts 12,419 9,527 Money market accounts 32,173 24,715 Savings 9,222 9,656 Other time deposits 139,286 117,878 --------- -------- Total deposits 200,316 165,604 Advances from borrowers for taxes and insurance 201 158 Advances from Federal Home Loan Bank (note 6) 38,747 17,040 Dividends payable 399 441 Accrued expenses and other liabilities (note 9) 2,387 1,353 --------- -------- Total liabilities 242,050 184,596 --------- --------
See notes to consolidated financial statements. 17 HopFed Bancorp, Inc. and Subsidiary Consolidated Balance Sheets, Continued December 31, 2001 and 2000 (Dollars in Thousands)
2001 2000 ---- ---- Stockholders' equity (notes 9, 13 and 14): Common stock, par value $.01 per share; authorized - 7,500,000 shares; 4,039,305 issued and 3,631,538 outstanding at December 31, 2001 and 4,004,349 issued and 3,854,995 outstanding at December 31, 2000 $ 40 40 Additional paid-in capital 25,714 25,228 Retained earnings-substantially restricted 22,110 21,896 Treasury stock (at cost, 407,767 shares at December 31, 2001 and 149,354 at December 31, 2000) (4,845) (1,643) Accumulated other comprehensive income (loss), net of taxes 570 (159) --------- -------- Total stockholders' equity 43,589 45,362 --------- -------- Total liabilities and stockholders' equity $ 285,639 229,958 ========= ========
Commitments and contingencies (notes 8, 9 and 12) See notes to consolidated financial statements. 18 HopFed Bancorp, Inc. and Subsidiary Consolidated Statements of Income Years ended December 31, 2001, 2000 and 1999 (Dollars in Thousands, Except Per Share Amounts)
2001 2000 1999 ---- ---- ---- Interest income: Loans receivable $ 11,531 9,299 8,436 Securities available for sale 5,108 6,349 4,204 Securities held to maturity 456 637 814 Interest-earning deposits in Federal Home Loan Bank 467 58 751 ----------- ----------- ----------- Total interest income 17,562 16,343 14,205 ----------- ----------- ----------- Interest expense: Deposits (note 5) 8,706 7,931 7,078 Advances from Federal Home Loan Bank 1,046 1,181 - ----------- ----------- ----------- Total interest expense 9,752 9,112 7,078 ----------- ----------- ----------- Net interest income 7,810 7,231 7,127 Provision for loan losses (note 3) 222 431 21 ----------- ----------- ----------- Net interest income after provision for loan losses 7,588 6,800 7,106 ----------- ----------- ----------- Non-interest income: NOW account fees 252 213 196 Loan fees 238 171 177 Service charges 28 55 67 Realized gain from sale of securities available for sale 88 - 6,523 Other operating income 111 70 65 ----------- ----------- ----------- Total non-interest income 717 509 7,028 ----------- ----------- ----------- Non-interest expenses: Salaries and benefits (note 9) 3,344 2,089 7,626 Deposit insurance premium 32 35 91 Occupancy expense 421 205 197 Data processing 197 163 143 Other operating expenses 1,499 778 836 ----------- ----------- ----------- Total non-interest expense 5,493 3,270 8,893 ----------- ----------- ----------- Income before income tax expense 2,812 4,039 5,241 Income tax expense (note 10) 973 1,373 2,766 ----------- ----------- ----------- Net income $ 1,839 2,666 2,475 =========== =========== =========== Earnings per share: Basic $ 0.49 0.67 0.65 =========== =========== =========== Fully diluted $ 0.49 0.67 0.65 =========== =========== =========== Weighted average shares outstanding - Basic 3,758,053 3,979,664 3,800,971 =========== =========== =========== Weighted average shares outstanding - Diluted 3,764,692 3,979,664 3,800,971 =========== =========== ===========
See notes to consolidated financial statements. 19 HopFed Bancorp, Inc. and Subsidiary Consolidated Statements of Comprehensive Income (Loss) Years ended December 31, 2001, 2000 and 1999 (Dollars in Thousands)
2001 2000 1999 ---- ---- ---- Net income $ 1,839 2,666 2,475 Other comprehensive income, net of tax (note 17) - Unrealized gain (loss) on investment securities available for sale 565 962 (2,089) Minimum pension liability adjustment 222 (222) - Less reclassification adjustment for gains included in net income (58) - (4,306) -------- -------- -------- Comprehensive income (loss) $ 2,568 3,406 (3,920) ======== ======== ========
See notes to consolidated financial statements. 20 HopFed Bancorp, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 2001, 2000 and 1999 (Dollars in Thousands, Except Per Share Amounts)
Accumulated Additional Unallocated Other Common Common Paid-in Retained ESOP Treasury Comprehensive Total Shares Stock Capital Earnings Shares Stock Income (Loss) Equity ------ ----- ------- -------- ------ ----- ------------- ------ Balance, January 1, 1999 4,033,625 $ 40 39,546 18,983 (2,933) - 5,496 61,132 Net income - - - 2,475 - - - 2,475 Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $3,294 - - - - - - (6,395) (6,395) Issuance of common stock- MRP 64,537 1 1,290 - - - - 1,291 Retirement of common stock (from ESOP) (155,662) (2) (1,555) - 1,557 - - - Release and allocation of common stock held by ESOP - - 994 - 1,376 - - 2,370 Dividends (includes special dividend of $4.00 per share in fourth quarter and four quarterly dividends totaling $0.30 per share) - - (16,061) (468) - - - (16,529) --------- ----- ------- -------- -------- -------- -------- -------- Balance, December 31, 1999 3,942,500 39 24,214 20,990 - - (899) 44,344 Net income - - - 2,666 - - - 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 61,849 1 974 - - - - 975 Recovery of proceeds on issuance of common stock - - 40 - - - - 40 Repurchase of common stock (149,354) - - - - (1,643) - (1,643) Dividends ($0.41 per share) - - - (1,760) - - - (1,760) --------- ----- ------ -------- -------- -------- -------- -------- Balance, December 31, 2000 3,854,995 40 25,228 21,896 - (1,643) (159) 45,362 Net income - - - 1,839 - - - 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 34,956 - 486 - - - - 486 Repurchase of common stock (258,413) - - - - (3,202) - (3,202) Dividends ($0.44 per share) - - - (1,625) - - - (1,625) --------- ----- -------- -------- -------- -------- -------- -------- Balance, December 31, 2001 3,631,538 $ 40 25,714 22,110 - (4,845) 570 43,589 ========= ===== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements. 21 HopFed Bancorp, Inc. and Subsidiary Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999 (Dollars in Thousands)
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 1,839 2,666 2,475 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 222 431 21 Depreciation 157 119 121 Amortization (accretion) of investment premiums and discounts, net (7) 144 (387) Provision (benefit) for deferred income taxes (463) 91 (491) Stock dividends on Federal Home Loan Bank stock (148) (150) (134) (Gain) loss on sale of premises and equipment (9) 1 Earned ESOP shares - - 2,900 Compensation expense recognized on MRP shares - 549 1,291 Gain on sale of securities available for sale (88) - - Gain on sale of FHLMC stock - - (6,523) Curtailment loss 1,400 - - (Increase) decrease in: Accrued interest receivable 880 (1,190) 62 Other assets (81) (233) 202 Increase (decrease) in: Federal income taxes payable - (369) 369 ESOP contribution payable - - (294) Accrued expenses and other liabilities 593 (146) 1,479 --------- --------- --------- Net cash provided by operating activities 4,304 1,903 1,092 --------- --------- --------- Cash flows from investing activities: Proceeds from maturities of securities held to maturity 3,341 2,170 17,407 Proceeds from sales, calls and maturities of securities available for sale 82,751 12,507 56,226 Purchase of securities available for sale (98,085) (23,898) (68,810) Proceeds from sale of FHLMC stock - - 6,644 Net increase in loans (42,012) (16,195) (4,746) Purchases of premises and equipment (1,030) (96) (48) Proceeds from sale of premises and equipment - 16 - --------- --------- --------- Net cash provided by (used in) investing activities (55,035) (25,496) 6,673 --------- --------- ---------
See notes to consolidated financial statements. 22 HopFed Bancorp, Inc. and Subsidiary Consolidated Statements of Cash Flows, Continued Years ended December 31, 2001, 2000 and 1999 (Dollars in Thousands)
2001 2000 1999 ---- ---- ---- Cash flows from financing activities: Net increase (decrease) in demand deposits, savings, money market and NOW accounts $ 13,304 (4,100) (495) Net increase in time deposits 21,408 8,799 6,584 Increase (decrease) in advance payments by borrowers for taxes and insurance 43 2 (10) Advances from Federal Home Loan Bank 21,707 17,040 - Purchase of treasury stock (3,202) (1,643) - Dividends paid (1,666) (1,626) (17,516) Recovery of proceeds from issuance of common stock - 40 - Payments on loan to ESOP - - 756 -------- -------- -------- Net cash provided by (used in) financing activities 51,594 18,512 (10,681) -------- -------- -------- Increase (decrease) in cash and cash equivalents 863 (5,081) (2,916) Cash and cash equivalents, beginning of period 3,807 8,888 11,804 -------- -------- -------- Cash and cash equivalents, end of period $ 4,670 3,807 8,888 ======== ======== ======== Supplemental disclosures of Cash Flow Information: Interest paid $ 8,690 9,112 7,068 ======== ======== ======== Income taxes paid $ 1,499 1,600 2,735 ======== ======== ======== Supplemental Disclosures of Non-cash Investing and Financing Activities: Non-cash transaction - ESOP loan redeemed with stock $ - - 2,471 ======== ======== ======== Foreclosures and in substance foreclosures of loans during year $ - 142 - ======== ======== ======== Net unrealized gains (losses) on investment securities classified as available for sale $ 768 1,458 (9,689) ======== ======== ======== Increase (decrease) in deferred tax asset (liability) related to unrealized gain (loss) on investments $ (261) (496) 3,294 ======== ======== ======== Dividends declared and payable $ 399 441 307 ======== ======== ======== Issue of common stock to MRP $ 486 975 1,291 ======== ======== ========
See notes to consolidated financial statements. 23 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (1) Summary of Significant Accounting Policies: ------------------------------------------ The accounting and reporting policies of HopFed Bancorp, Inc. (the "Company") and subsidiary 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 accompanying consolidated financial statements include the amounts of the Company and its wholly-owned subsidiary, Hopkinsville Federal Bank (the "Bank"). All significant intercompany transactions and balances are eliminated in consolidation. As more fully discussed below, 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 Company completed its initial public offering (IPO) on February 6, 1998 and issued 4,033,625 shares of common stock resulting in proceeds of approximately $39,375,000 net of expenses totaling approximately $961,000. The Company loaned approximately $3,227,000 to the ESOP which purchased 322,690 shares of the Company's common stock in the initial public offering. 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 will be maintained 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. 24 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (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. 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 demand, interest-earning deposits in the Federal Home Loan Bank and federal funds sold with maturities of three months or less. Securities ---------- In accordance with Statement of Financial Accounting Standards No (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities, the Company is required to report 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. 25 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (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 ---------------------- Realestate 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. 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. 26 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (1) Summary of Significant Accounting Policies: (Continued) ------------------------------------------ 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 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. 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. 27 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (1) Summary of Significant Accounting Policies: (Continued) ------------------------------------------ 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. Earnings Per Share ------------------ Earnings per share is computed by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Effect of New Accounting Pronouncements --------------------------------------- Business Combinations --------------------- In June 2001, the FASB issued Statement No. 141, "Business Combinations" ("SFAS No. 141"). The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. There is no expected impact on earnings, financial condition, or equity upon adoption of SFAS No. 141. Goodwill and Other Intangible Assets ------------------------------------ In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addressed financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 117, "Intangible Assets". It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of the SFAS No. 142. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. SFAS No. 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. There is no expected impact on earnings, financial condition, or equity upon adoption of SFAS No. 142. 28 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (2) 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 approximate fair values follow:
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 17,422 132 (131) 17,423 FNMA 19,394 151 (102) 19,443 FHLMC 21,568 131 (132) 21,567 CMO 14,713 9 (208) 14,514 --------- -------- -------- --------- 98,202 825 (807) 98,220 --------- -------- -------- --------- $ 100,501 825 (807) 100,519 ========== ======== ======== ========= December 31, 2000 ---------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- --------- --------- ------------ Available for sale securities ----------------------------- Restricted: FHLB stock $ 2,137 - - 2,137 Intrieve stock 15 - - 15 ------ -------- -------- --------- 2,152 - - 2,152 ------ -------- -------- ---------
29 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (2) Securities: (Continued) ----------
December 31, 2000 ---------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Unrestricted: U.S. government and agency securities: FHLB debt securities $ 54,244 35 (80) 54,199 FFCB 2,000 - (33) 1,967 Mortgage-backed securities: GNMA 10,482 85 - 10,567 FNMA 8,109 68 (19) 8,158 FHLMC 7,186 59 (19) 7,226 -------- -------- -------- --------- 82,021 247 (151) 82,117 -------- -------- -------- --------- $ 84,173 247 (151) 84,269 ======== ======== ======== =========
The scheduled maturities of debt securities available for sale at December 31, 2001 and 2000 were as follows: Amortized Fair Cost Value ------ ------- 2001 ---- 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 73,097 72,947 ---------- --------- Total unrestricted securities available for sale $ 98,202 98,220 ========== ========= 2000 ---- Due within one year $ 2,000 1,992 Due in one to five years 16,998 16,947 Due in five to ten years 4,418 4,168 Due after ten years 32,828 33,059 ---------- --------- 56,244 56,166 Mortgage-backed securities 25,777 25,951 ---------- --------- Total unrestricted securities available for sale $ 82,021 82,117 ========== ========= 30 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (2) Securities: (Continued) ---------- At December 31, 2001 and 2000, investment securities with amortized cost values of approximately $0 and $32,608,000 respectively, were pledged as collateral as permitted or required by law. FHLBstock 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.
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 ======= ====== ====== =======
December 31, 2000 ---------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- --------- --------- ---------- Held to maturity securities --------------------------- Mortgage-backed securities: GNMA $ 7,036 134 - 7,170 FNMA 760 5 (5) 760 -------- ------ ------ ------- $ 7,796 139 (5) 7,930 ======== ====== ====== =======
(3) Loans Held for Sale, Net and Loans Receivable, Net: -------------------------------------------------- Loans held for sale, net are summarized as follows: 2001 2000 ---- ---- One-to-four family loans $ 928 - Total loans held for sale, net $ 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. 31 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (3) Loans Held for Sale, Net and Loans Receivable, Net: (Continued) -------------------------------------------------- The components of loans receivable in the consolidated balance sheets as of December 31, 2001 and 2000 were as follows: 2001 2000 ---- ---- Real estate loans: One-to-four family $116,998 93,147 Multi-family 2,448 2,841 Construction 5,617 5,729 Non-residential 18,445 21,695 -------- --------- Total mortgage loans 143,508 123,412 Loans secured by deposits 2,191 2,720 Other consumer loans 16,455 3,971 Commercial loans 14,943 946 -------- --------- 177,097 131,049 Less: Undisbursed portion of mortgage loans 5,230 1,187 Loans held for sale 928 - Less allowance for loan losses 923 708 -------- --------- $170,016 129,154 ======== ========= Impaired loans and related valuation allowance amounts at December 31, 2001 and 2000 were as follows: 2001 2000 ---- ---- Recorded investment $ 766 $ 434 ====== ====== Valuation allowance $ 163 $ 65 ====== ====== The average recorded investment in impaired loans for the years ended December 31, 2001, 2000 and 1999 was $810,000, $253,000 and $451,000, respectively. Interest income recognized on impaired loans was not significant during the years ended December 31, 2001, 2000 and 1999. An analysis of the change in the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of year $ 708 278 257 Loans charged off 7 1 - Recoveries - - - Provision for loan losses 222 431 21 ----- ---- ---- Balance at end of year $ 923 708 278 ===== ==== ==== There were no nonaccrual loans as of December 31, 2000 and $149,000 at December 31, 2001. Loans three months or more past due still accruing interest totaled approximately $402,000 and $434,000 as of December 31, 2001 and 2000, respectively. 32 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (4) Premises and Equipment: ---------------------- Components of premises and equipment included in the consolidated balance sheets as of December 31, 2001 and 2000 consisted of the following: 2001 2000 ---- ---- Land $ 838 548 Land improvements 87 75 Buildings 2,478 2,099 Furniture and equipment 882 542 ------- ------- 4,285 3,264 Less accumulated depreciation 970 822 ------- ------- $ 3,315 2,442 ======= ======= Depreciation expense was approximately $157,000, $119,000 and $121,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (5) Deposits: -------- At December 31, 2001, the scheduled maturities of other time deposits were as follows: 2002 $ 80,616 2003 40,082 2004 8,911 2005 3,973 2006 5,704 -------- $139,286 ======== The amount of other time deposits with a minimum denomination of $100,000 was approximately $25,350,000 and $14,432,000 at December 31, 2001 and 2000, respectively. Interest expense on deposits for the years ended December 31, 2001, 2000 and 1999 are summarized as follows: 2001 2000 1999 ---- ---- ---- Demand and NOW accounts $ 213 222 216 Money market accounts 829 1,051 1,320 Savings 141 194 274 Other time deposits 7,523 6,464 5,268 ------- ------- ------- $ 8,706 7,931 7,078 ======= ======= ======= The Bank maintains clearing arrangements for its demand, NOW and money market accounts with the Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 2001, average daily clearings were approximately $1,433,000. 33 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (6) Advances from Federal Home Loan Bank: ------------------------------------ FHLB advances are summarized as follows:
December 31, -------------------------------------------------------------- 2001 2000 --------------------------- --------------------------- Weighted Weighted Type of Advances Amount Average Rate Amount Average Rate ---------------- ------ ------------ ------ ------------ Fixed-rate $38,747 4.24% $17,040 6.90%
Scheduled maturities of FHLB advances as of December 31, 2001 are as follows: Amount at Year Ended Stated December 31, Maturity ------------ -------- 2002 $ 5,000 2003-2007 7,906 2008-2012 7,841 Thereafter 18,000 ---------- $ 38,747 ========== The Bank has an approved line of credit of $20,000,000 at December 31, 2001 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 $45,682,000 at December 31, 2001. (7) 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 34 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (7) Financial Instruments: (Continued) --------------------- most loan commitments are drawn upon by customers. The Bank has offered standby letters of credit on a limited basis. As of December 31, 2001, the Bank has not been requested to advance funds on any of the standby 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 - -
The estimated fair values of financial instruments were as follows at December 31, 2000:
Estimated Carrying Fair Amount Value ------ ----- Financial assets: Cash and due from banks $ 2,227 2,227 Interest-earning deposits in Federal Home Loan Bank 50 50 Federal funds sold 1,530 1,530 Securities available for sale 84,269 84,269 Securities held to maturity 7,796 7,930 Loans receivable 129,154 129,493 Accrued interest receivable 2,285 2,285 Financial liabilities: Deposits 165,604 167,737 Advances from borrowers for taxes and insurance 158 158 Advances from Federal Home Loan Bank 17,040 17,040 Off-balance-sheet liabilities: Commitments to extend credit - - Commercial letters of credit - -
35 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (8) 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, 2001 and 2000. The excess balance of such items as of December 31, 2001 and 2000 was $567,000 and $1,448,000, respectively. (9) Employee Benefit Plans: ---------------------- Pension Plan ------------ The Bank has maintained a defined benefit pension plan covering substantially all of its employees who satisfy certain age and service requirements. The benefits are based on years of service and the employee's average earnings which are computed using the five consecutive years prior to retirement that yield the highest average. The Bank's funding policy is 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:
2001 2000 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $ 3,630 2,383 Service cost 92 101 Interest costs 266 184 Actuarial loss 204 1,106 Benefits paid (60) (144) Settlements (830) - Curtailment (669) - ------ ------- Benefit obligation at end of year 2,633 3,630 ------ ------- Change in plan assets Fair value of plan assets at beginning of year 2,011 1,941 Actual return on plan assets 106 32 Employers contributions 109 182 Benefits paid (60) (144) Settlements (922) - ------ ------- Fair value of plan assets at end of year 1,244 2,011 ------ -------
36 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (9) Employee Benefit Plans: (Continued) ---------------------- Pension Plan (Continued) ------------ 2001 2000 ---- ---- Funded status (1,389) (1,619) Unrecognized net asset (21) (34) Unrecognized prior service cost - 65 Unrecognized net loss - 1,487 -------- -------- Accrued pension cost $ (1,410) (101) ======== ======== Weighted average assumptions used to develop the net periodic pension cost were:
2001 2000 1999 ------ ------ ------ Discount rate 7.70% 7.75% 7.75% Expected long-term rate of return on assets 7.00% 7.00% 7.00% Rate of increase in compensation levels 4.50% 4.50% 4.50%
The components of net periodic pension cost for the years ended December 31, were as follows:
2001 2000 1999 ---- ---- ---- Service cost $ 92 101 81 Interest cost on projected benefit obligation 266 184 171 Expected return on plan assets (132) (147) (125) Amortization of transitional asset (7) (7) (7) Amortization of prior service cost 15 18 18 Amortization of net loss 85 3 36 -------- -------- -------- Net periodic pension cost $ 319 152 174 ======== ======== ========
Employee Stock Ownership Plan ----------------------------- The Company had a noncontributory employee stock ownership plan (ESOP) for those employees who met the eligibility requirements of the plan. Eligible employees were those who had attained the age of 21 and completed one year of service. This plan was terminated effective December 31, 1999. The ESOP trust borrowed approximately $3,227,000 in 1998 through a loan from the Company and used the proceeds to purchase 322,690 shares of the common stock at a price of $10.00 per share. Shares purchased were held in a suspense account for allocation among the participants as the loan was paid. Contributions to the ESOP and shares released from the loan collateral were in amounts proportional to repayment of the ESOP loan. 37 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (9) Employee Benefit Plans: (Continued) ---------------------- Employee Stock Ownership Plan (Continued) ----------------------------- The ESOP was funded by contributions made by the Company or the Bank in cash or shares of common stock with no cost to participants. Contributions to the ESOP and shares released from the suspense account were allocated among participants on the basis of their annual wages subject to federal income tax withholding, plus any amounts withheld under a plan qualified under Sections 125 or 401(k) of the Code and sponsored by the Company or the Bank. Participants had to be employed at least 500 hours in a calendar year in order to receive an allocation. A participant became vested in his or her right to ESOP benefits upon his or her completion of three years of service. With the exception of a special dividend of $4.00 per share paid on December 17, 1999, all dividends paid on ESOP shares in 1999 and 1998 were applied to the ESOP loan. In order to terminate the plan and to repay the ESOP loan, the ESOP surrendered 155,662 shares valued at approximately $2,471,000 on December 31, 1999. This released all remaining shares from encumbrance for allocation to participants. At December 31, 1999, shares allocated, and shares remaining in suspense were as follows: 1999 ---- Number of Shares Released and allocated 167 ======== Suspense - ======== Fair Value Released and allocated $ 2,652 ======== Suspense $ - ======== The expenses recorded by the Company during 1999 were as follows: 1999 ---- Contributions $ 363 Dividends applied to ESOP debt 97 Excess of fair value of shares released and allocated over ESOP's cost 1,900 Special dividend paid December 17, 1999 on unallocated and uncommitted shares 1,001 -------- Total ESOP compensation costs $ 3,361 ======== The Company's ESOP compensation costs exclude interest which was eliminated in consolidation. 38 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (9) 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 $0, $549,000 and $2,678,000 in 2001, 2000 and 1999, respectively. 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. 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). 39 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands, Except Per Share Amounts) (9) Employee Benefit Plans: (Continued) ---------------------- Stock Option Plan ----------------- The following summary represents the activity under the stock option plans:
Exercise Number of Price Per Shares Share ------ ----- Options outstanding, January 1, 2000 480,475 $ 17.42 ======== Granted 40,000 10.00 ======== Exercised - Forfeited - -------- Options outstanding, December 31, 2000 520,475 Granted 50,000 12.33 ======== Exercised - Forfeited (168,166) -------- Options outstanding, December 31, 2001 402,309 ======== Weighted average exercise price of options outstanding $ 16.05 ========
The weighted average fair value of options granted during December 31, 2001, 2000 and 1999 was $7.68, $8.13 and $8.51 per share, respectively. The weighted average remaining contractual life, in years, was 6.70, 7.35 and 9.15 at December 31, 2001, 2000 and 1999, respectively. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion 25. Since each option was granted at a price equal to the fair market value of one share of the Company's common stock on the date of the grant, no compensation cost has been recognized. The following table compares reported net income and earnings per share to net income and earnings per share on a pro forma basis assuming that the Company accounted for stock-based compensation under SFAS 123, Accounting for Stock-Based Compensation. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. 2001 2000 ---- ---- Net income As reported $ 1,839 2,666 ======== ======== Pro forma $ 1,793 2,652 ======== ======== Earnings per share As reported Basic $ 0.49 0.67 ======== ======== Diluted $ 0.49 0.67 ======== ======== Pro forma Basic $ 0.49 0.67 ======== ======== Diluted $ 0.48 0.67 ======== ======== 40 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands, Except Percentages) (9) Employee Benefit Plans: (Continued) ---------------------- 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% and 35.00%, expected dividend yield of 3.67% and 3.96% and expected life of six years for the years ended December 31, 2001 and 2000, respectively. (10) Income Taxes: ------------ The provision for income taxes for the years ended December 31, 2001, 2000 and 1999 consisted of the following: 2001 2000 1999 ---- ---- ---- Current Federal $ 1,436 1,282 3,247 State - - 10 ------- ------- ------- 1,436 1,282 3,257 Deferred (463) 91 (491) ------- ------- ------- $ 973 1,373 2,766 ======= ======= ======= Total income tax expense for the years ended December 31, 2001, 2000 and 1999 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to income before income taxes as follows: 2001 2000 1999 ---- ---- ---- Expected federal income tax expense at statutory tax rate $ 953 1,373 1,782 State income taxes - - 7 Dividends received - - (9) Fair market value difference of allocated ESOP shares - - 986 Other 20 - - ------- ------- ------- Total federal income tax expense $ 973 1,373 2,766 ======= ======= ======= Effective rate 34.6% 34.0% 52.8% ======= ======= ======= 41 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (10) Income Taxes: (Continued) ------------ The components of deferred taxes as of December 31, 2001 and 2000 are summarized as follows: 2001 2000 ---- ---- Deferred tax liabilities: FHLB stock dividends $ (504) (454) Post 1987 bad debt reserves (100) (149) Unrealized appreciation on securities available for sale (294) (33) ------ ------ (898) (636) ------ ------ Deferred tax assets: Bad debt reserves 314 241 Pension cost 462 159 Accrued interest expense 13 26 Accrued expenses 191 18 Provision for MRP - 236 ------ ------ 980 680 ------ ------ Net deferred tax asset $ 82 44 ====== ====== 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, 2001 and 2000, the Bank recaptured approximately $146,000 of the $878,000 total recapture of tax bad debt reserves into taxable income. A similar amount will be recaptured in each of the years 2002 and 2003. The recapture does not have any effect on the Bank's financial statements because the related tax expense has already been accrued. 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). The Bank expects to continue to use the reserve method. 42 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (10) 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, 2001 and 2000 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided. (11) 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, 2001 and 2000, was $3,481,532 and $2,851,000, respectively. During 2001, new loans to such related parties amounted to $3,317,651 and repayments amounted to $2,687,031. During 2000, new loans to such related parties amounted to $2,502,000 and repayments amounted to $1,369,000. (12) 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, 2001 and 2000 of approximately $10,638,000 and $1,683,000, respectively. Of these amounts, approximately $123,000 and $108,000 as of December 31, 2001 and 2000, respectively, were for fixed rate loans. The interest rates for the fixed rate loan commitments ranged from 5.5% to 6.25% and 8.50% to 9.75% for December 31, 2001 and 2000, respectively. Unused lines of credit were approximately $6,986,000 and $1,757,000 as of December 31, 2001 and December 31, 2000, 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. 43 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (13) Regulatory Matters: ------------------ The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), which instituted major reforms in the operation and supervision of the savings and loan industry, contains provisions for capital standards. These standards require savings institutions to have a minimum regulatory tangible capital (as defined in the regulation ) equal to 1.50% of adjusted total assets and a minimum 4.00% core capital (as defined) of adjusted total assets. Additionally, savings institutions are required to meet a total risk-based capital requirement of 8.00%. The Bank is also subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the Federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning reporting on internal controls, accounting and operations. FDICIA's prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with OTS, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by the OTS or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. The following chart delineates the categories as defined in the FDICIA legislation:
Tied I Risk- Total Risk- Core Capital Based Capital Based Capital ------------ ------------- ------------- "Well capitalized" 5.0% 6.0% 10.0% "Adequately capitalized" 4.0% 4.0% 8.0% "Undercapitalized" Less than 4.0% Less than 4.0% Less than 8.0% "Significantly undercapitalized" Less than 3.0% Less than 3.0% Less than 6.0%
44 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands, Except Percentages) (13) Regulatory Matters: (Continued) ------------------ At December 31, 2001, the Bank's core, tier I risk-based, and total risk-based capital ratios were 13.75%, 26.37% and 27.37%, respectively. The following is a calculation of the Bank's regulatory capital at December 31, 2001:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- ------- ------- ------- GAAP capital, as reported $ 39,761 39,761 39,761 39,761 39,761 ======== Unrealized gains on certain available for sale securities - (570) (570) (570) General valuation allowance - - - 923 ------- -------- ------- ------- Regulatory capital $39,761 39,191 39,191 40,114 ======= Minimum capital requirement % 1.50% 4.00% 8.00% Minimum capital requirement $ 4,275 11,401 11,890 -------- ------- ------- Regulatory capital excess $ 34,916 27,790 28,224 ======== ======= =======
At December 31, 2000, the Bank's core, tier I risk-based, and total risk-based capital ratios were 19.49%, 47.30% and 48.05%, respectively. The following is a calculation of the Bank's regulatory capital at December 31, 2000:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- ------- ------- ------- GAAP capital, as reported $ 44,657 44,657 44,657 44,657 44,657 ========= Unrealized gains on certain available for sale securities - (63) (63) (63) General valuation allowance - - - 708 ------- -------- ------- ------- Regulatory capital $44,657 44,594 44,594 45,302 ======= Minimum capital requirement % 1.50% 4.00% 8.00% Minimum capital requirement $ 3,433 9,152 7,542 -------- ------- ------- Regulatory capital excess $ 41,161 35,442 37,760 ======== ======= =======
45 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (13) Regulatory Matters: (Continued) ------------------ The OTS risk-based capital regulation also includes an interest rate risk (IRR) component that requires savings institutions with greater than normal IRR, when determining compliance with the risk-based capital requirements, to maintain additional total capital. The OTS has, however, indefinitely deferred enforcement of its IRR requirements. Under the regulation, a savings institution's IRR is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. A savings institution is considered to have a "normal" level of IRR exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates is less than 2% of the current estimated economic value of its assets. If the OTS determines in the future to enforce the regulation's IRR requirements, a savings institution with a greater than normal IRR would be required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount equal to one half the difference between the institution's measured IRR and 2%, multiplied by the economic value of the institution's total assets. Management does not believe that this regulation, when enforced, will have a material impact on the Bank. (14) 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 a capital distribution 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. On December 1, 1999, the Company paid a cash distribution of $4.00 per share to its stockholders in the form of a return of capital. OTSregulations 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, 2001, 407,767 shares had been repurchased at an average price of $11.88 per share. 46 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amount in Thousands) (15) Condensed Parent Company Only Financial Statements: -------------------------------------------------- The following condensed balance sheets as of December 31, 2001 and 2000 and condensed statements of income and cash flows for the years ended December 31, 2001, 2000 and 1999 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto. Consolidated Balance Sheets:
2001 2000 ---- ---- Assets: Cash and due from banks $ 12 30 Receivable from subsidiary 4,026 - Federal funds sold 190 1,130 Investment in subsidiary 18,876 23,771 -------- -------- Total assets $ 23,104 24,931 ======== ======== Liabilities and equity Liabilities: Accrued expenses $ - 13 Dividends payable 399 441 -------- -------- Total liabilities 399 454 -------- -------- Equity: Common stock 40 40 Additional paid-in capital 21,442 20,956 Retained earnings 5,497 5,283 Treasury stock (4,845) (1,643) Accumulated other comprehensive (loss) 571 (159) -------- -------- Total equity 22,705 24,477 -------- -------- Total liabilities and equity $ 23,104 24,931 ======== ========
47 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (15) Condensed Parent Company Only Financial Statements: (Continued) -------------------------------------------------- Condensed Income Statements:
2001 2000 1999 ---- ---- ---- Interest income Dividend income $ 8,000 3,880 - Loans receivable - - 230 Securities available for sale - - 620 Time deposits 56 34 193 ------- ------- ------- Total interest income 8,056 3,914 1,043 ------- ------- ------- Non-interest expenses Salaries and benefits - - 179 Other 133 160 159 ------- ------- ------- Total non-interest expenses 133 160 338 ------- ------- ------- Income before income taxes and equity in undistributed earnings of Bank 7,923 3,754 705 Income tax expense (benefit) (27) (42) 274 ------- ------- ------- Income before equity in undistributed earnings of Bank 7,950 3,796 431 Equity in undistributed earnings of Bank (6,111) (1,130) 2,044 ------- ------- ------- Net income $ 1,839 2,666 2,475 ======= ======= =======
48 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands) (15) Condensed Parent Company Only Financial Statements: (Continued) -------------------------------------------------- Condensed Statement of Cash Flows:
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 1,839 2,666 2,475 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of Bank 6,111 1,130 (2,044) Accretion of investment security discounts - - (403) Earned ESOP shares - - 82 (Increase) decrease in: Accrued interest receivable - - 221 Other assets - - 15 Increase (decrease) in: Current income taxes payable (27) (50) 48 Accrued expenses (13) 13 - ------- ------- ------- Net cash provided by operating activities 7,910 3,759 394 ------- ------- ------- Cash flows for investing activities: Receivable from subsidiary (4,000) - - Proceeds from sale of available for sale securities - - 32,899 Purchase of available for sale securities - - (16,500) Net (increase) decrease in federal funds sold 940 (930) 285 Repayment of note receivable-ESOP - - 755 ------- ------- ------- Net cash provided (used) by investing activities (3,060) (930) 17,439 ------- ------- ------- Cash flows from financing activities: Recovery of proceeds from issuance of common stock - 40 - Repurchase of common stock (3,202) (1,643) - Dividends paid (1,666) (1,626) (17,516) ------- ------- ------- Net cash used by financing activities (4,868) (3,229) (17,516) ------- ------- ------- Net increase (decrease) in cash (18) (400) 317 Cash at beginning of year 30 430 113 ------- ------- ------- Cash at end of year $ 12 30 430 ======= ======= =======
49 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands, Except Per Share Amounts) (16) Quarterly Results of Operations: (Unaudited) ------------------------------- Summarized unaudited quarterly operating results for the years ended December 31, 2001 and 2000 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 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 ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== December 31, 2000: Interest income $ 3,901 3,981 4,264 4,197 Interest expense 2,078 2,222 2,359 2,453 ---------- ---------- ---------- ---------- Net interest income 1,823 1,759 1,905 1,744 Provision for loan losses 10 10 311 100 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 1,813 1,749 1,594 1,644
50 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (Table Amounts in Thousands, Except Per Share Amounts) (16) Quarterly Results of Operations: (Unaudited) (Continued) -------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Noninterest income 127 139 127 116 Noninterest expense 838 894 767 771 ---------- --------- ---------- ------------ Income before income taxes 1,102 994 954 989 Income taxes 375 355 302 341 ---------- --------- ---------- ------------ Net income $ 727 639 652 648 =========== ========= ========== ============ Basic earnings per share $ 0.18 0.16 0.16 0.17 =========== ========= ========== =========== Weighted average shares outstanding 3,993,592 3,999,807 4,004,138 3,921,439 =========== ========= ========== ============
(17) Comprehensive Income: -------------------- SFAS 130, Reporting Comprehensive Income, was adopted by the Company on January 1, 1998. SFAS 130 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, 2001, 2000 and 1999:
Pre-Tax (Expense) Net of Tax Amount Benefit Amount ------ ------- ------ 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 ======== ====== ======= December 31, 2000: Minimum pension liability adjustment $ (336) 114 (222) Unrealized holding gains for the period 1,458 (496) 962 ------- ------ ------- $ 1,122 (382) 740 ======== ====== ======= December 31, 1999: Unrealized holding losses for the period $ (3,165) 1,076 (2,089) Reclassification adjustment for gains included in net income (6,524) 2,218 (4,306) -------- ------ ------- $ (9,689) 3,294 (6,395) ======== ====== =======
51 HopFed Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements, Continued December 31, 2001, 2000 and 1999 (18) Subsequent Event: ---------------- On March 5, 2002 the Bank announced an agreement to acquire certain assets and assume certain liabilities from Old National Bancorp. The assets and liabilities amounting to approximately $90 million each relate to banking operations in Fulton, Kentucky. 52 ================================================================================ DIRECTORS AND EXECUTIVE OFFICERS John E. Peck WD Kelley President and Chief Executive Chairman of the Board Officer of the Company and the Bank Retired Michael L. Woolfolk Harry J. Dempsey, MD Chief Operating Officer and Executive Vice Anesthesiologist President of the Bank Billy C. Duvall Walton G. Ezell Vice President, Chief Financial Officer Farmer and Treasurer of the Company and the Bank Kerry B. Harvey Attorney Owen, Harvey and Carter Boyd M. Clark Gilbert E. Lee Vice President and Secretary of the Company Co-owner, C & L Rentals, L.L.C. and Senior Vice President - Loan Administration of the Bank Thomas I. Miller, CPA Professor Murray State University ================================================================================ MAIN OFFICE 2700 Fort Campbell Boulevard Hopkinsville, KY 42240 (270/885-1171) BRANCH OFFICES Downtown Branch Office Murray Branch Office 605 South Virginia Street 7th and Main Streets Hopkinsville, KY 42240 (270/885-1171) Murray, KY 42071 (270/753-7921) Cadiz Branch Office Elkton Branch Office Benton Branch Office 352 Main Street West Main Street 59 Main Street Cadiz, KY 42211 Elkton, KY 42220 Benton, KY 42025 (270/522-6638) (270/265-5628) (270/527-4353) ================================================================================ GENERAL INFORMATION Independent Accountants Annual Meeting Annual Report on Form 10-K Rayburn, Betts & Bates, P.C. The 2002 Annual Meeting of Stockholders A COPY OF THE COMPANY'S 2001 ANNUAL 3310 West End Avenue will be held on May 15, 2002 at 3:00 REPORT ON FORM 10-K WILL BE FURNISHED Nashville, Tennessee 37203 p.m. at Hopkinsville Federal Bank, 2700 WITHOUT CHARGE TO STOCKHOLDERS AS OF THE Fort Campbell Boulevard, Hopkinsville, RECORD DATE FOR THE 2002 ANNUAL MEETING General Counsel KY UPON WRITTEN REQUEST TO THE SECRETARY, Deatherage, Myers, Self & Lackey HOPFED BANCORP, INC., 2700 FORT 701 South Main Street Transfer Agent CAMPBELL BOULEVARD, HOPKINSVILLE, KY Hopkinsville, KY 42241 Registrar and Transfer Company 42240 10 Commerce Drive Cranford, NJ 07016
Independent Auditor's Report To the Board of Directors and Stockholders of Hopfed Bancorp, Inc. We have audited the accompanying consolidated statements of income, comprehensive income (loss), changes in stockholders' equity and cash flows of HopFed Bancorp, Inc. and subsidiary (the "Company") for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards of the United States of America. Those standards require that we plan and perform the audit 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 results of the Company's operations and its cash flows for the year ended December 31, 1999 in conformity with generally accepted accounting principles of the United States of America. /s/ York, Neel & Co., Hopkinsville, LLP Hopkinsville, Kentucky March 29, 2002