-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPtRacBFqK0l4yPIsBCTfexSpBZE/0N0ppObi8vGXGSgfcvHedS+T/1SapmLtvF9 htcnyVUGmjxb/dcEvr9Guw== 0000928385-99-001299.txt : 19990416 0000928385-99-001299.hdr.sgml : 19990416 ACCESSION NUMBER: 0000928385-99-001299 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOPFED BANCORP INC CENTRAL INDEX KEY: 0001041550 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 561995728 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23667 FILM NUMBER: 99594216 BUSINESS ADDRESS: STREET 1: 2700 FORT CAMPBELL BLVD CITY: HOPKINSVILLE STATE: KY ZIP: 72240 BUSINESS PHONE: 5028851171 MAIL ADDRESS: STREET 1: 2700 FORT CAMPBELL BLVD CITY: HOPKINSVILLE STATE: KY ZIP: 72240 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ________________ Commission file number 000-23667 ---------------------------- HOPFED BANCORP, INC. -------------------- (Exact name of registrant as specified in its charter) Delaware 61-1322555 - ---------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2700 Fort Campbell Boulevard, Hopkinsville, KY 42240 - ----------------------------------------------- ------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 885-1171. Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO_________ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The registrant's voting stock is traded on the Nasdaq Stock Market. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the price ($21.375 per share) at which the stock was sold on March 31, 1999, was approximately $76,514,976. For purposes of this calculation, the term "affiliate" refers to all executive officers and directors of the registrant and all stockholders beneficially owning more than 10% of the registrant's Common Stock. As of the close of business on March 31, 1999, 4,033,625 shares of the registrant's Common Stock were outstanding. Documents Incorporated By Reference Part II: Annual Report to Stockholders for the year ended December 31, 1998. Part III: Portions of the definitive proxy statement for the 1999 Annual Meeting of Stockholders. PART I ITEM 1. BUSINESS On February 6, 1998, HopFed Bancorp, Inc. ( the "Company") issued and sold 4,033,625 shares of common stock, par value $.01 per share (the "Common Stock"), in connection with the conversion of Hopkinsville Federal Savings Bank (the "Bank") from a federal mutual savings bank to a federal stock savings bank and the issuance of the Bank's capital stock to HopFed Bancorp, Inc. (the "Company"). The conversion of the Bank, the acquisition of all of the outstanding capital stock of the Bank by the Company and the issuance and sale of the Common Stock are collectively referred to herein as the "Conversion." HOPFED BANCORP, INC. HopFed Bancorp, Inc. was incorporated under the laws of the State of Delaware in May 1997 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings and loan holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank in the Conversion. The Company's assets consist of the outstanding capital stock of the Bank, a portion of the net proceeds of the Conversion, and a note receivable from the Employee Stock Ownership Plan ("ESOP"). The Company's principal business is overseeing the business of the Bank and investing the portion of the net Conversion proceeds retained by it. The Company has registered with the Office of Thrift Supervision ("OTS") as a savings and loan holding company. See "Regulation - Regulation of the Company." As a holding company, the Company has greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions, although the Company currently does not have any plans, agreements, arrangements or understandings with respect to any such acquisitions or mergers. The Company is classified as a unitary savings and loan holding company and is subject to regulation by the OTS. The Company's executive offices are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (502) 885-1171. HOPKINSVILLE FEDERAL SAVINGS BANK The Bank is a federally chartered stock savings bank headquartered in Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz and Elkton, Kentucky. The Bank was incorporated by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank and adopted its current corporate title. The business of the Bank primarily consists of attracting deposits from the general public and investing such deposits in loans secured by single family residential real estate and investment securities, including U.S. Government and agency securities and mortgage-backed securities. The Bank also originates single-family residential/construction loans and multi-family and commercial real estate loans, as well as loans secured by deposits and other consumer loans. The Bank emphasizes the origination of residential real estate loans with adjustable interest rates and other assets which are responsive to changes in interest rates and allow the Bank to more closely match the interest rate maturation of its assets and liabilities. The primary market area of the Bank consists of the adjacent counties of Calloway, Christian, Todd and Trigg located in southwestern Kentucky. LENDING ACTIVITIES General. The total gross loan portfolio totaled $109.1 million at December 31, 1998, representing 49.6% of total assets at that date. Substantially all loans are originated in the Bank's market area. At December 31, 1998, $88.9 million, or 80.6% of the loan portfolio, consisted of one-to- four family, residential mortgage loans. Other loans secured by real estate include non-residential real estate loans, which amounted to $8.3 million, or 7.5% of the loan portfolio at December 31, 1998, and multi-family residential loans, which were $1.5 million, or 1.4% of the loan portfolio at December 31, 1998. At December 31, 1998, construction loans were $4.6 million, or 4.2% of the loan portfolio, and consumer loans totaled $6.9 million, or 6.3% of the loan portfolio. Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the loan portfolio by type of loan at the dates indicated. At December 31, 1998, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below.
At December 31, ---------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ------------------ ------------------ ----------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent --------- ------- --------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) Type of Loan: - ------------ Real estate loans: One-to-four family residential................. $ 88,954 80.6% $ 83,229 78.7% $77,318 79.6% $70,417 81.5% $66,236 82.3% Multi-family residential..... 1,539 1.4% 2,359 2.2% 1,466 1.5% 492 0.6% 3,475 4.3% Construction................. 4,626 4.2% 5,166 4.9% 5,389 5.6% 4,062 4.7% 3,748 4.7% Non-residential (1).......... 8,260 7.5% 7,593 7.2% 5,467 5.6% 5,107 5.9% 1,626 2.0% -------- ----- -------- ----- ------- ---- ------- ---- ------- ---- Total real estate loans..... 103,379 93.7% 98,347 93.0% 89,640 92.3% 80,078 92.7% 75,085 93.3% ======== ===== ======== ===== ======= ==== ======= ==== ======= ==== Consumer loans: Secured by deposits.......... 2,280 2.1% 3,081 2.9% 3,484 3.6% 3,324 3.8% 3,135 3.9% Other consumer loans......... 4,586 4.2% 4,298 4.1% 4,004 4.1% 3,016 3.5% 2,296 2.8% -------- ----- -------- ----- ------- ---- ------- ---- ------- ---- Total consumer loans........ 6,866 6.3% 7,379 7.0% 7,488 7.7% 6,340 7.3% 5,431 6.7% -------- ----- -------- ----- ------- ---- ------- ---- ------- ---- 110,245 100.0% 105,726 100.0% 97,128 100% 86,418 100% 80,516 100% ===== ===== ==== ==== ==== Less: Loans in process....... 1,180 2,019 1,415 1,541 1,867 Allowance for loan losses..................... 258 237 217(2) 122 122 -------- -------- ------- ------- ------- Total........................ $108,807 $103,470 $95,496 $84,755 $78,527 ======== ======== ======= ======= =======
(1) Consists of loans secured by first liens on residential lots and loans secured by first mortgages on commercial real property. (2) Increase in allowance for loan loss reflects $100,000 provision in 1996 based upon management's assessment of risks associated with increased loan growth and increased emphasis on consumer lending. See "--Nonperforming Loans and Other Assets." Loan Maturity Schedule. The following table sets forth certain information at December 31, 1998 regarding the dollar amount of loans maturing in the portfolio based on their contractual terms to maturity, including scheduled repayments of principal. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
Due after Due after 5 Due after 10 3 through 5 through 10 years through 15 years Due during the year ending years after after December after December December 31, December 31, 31, 31, -------------------------- 1999 2000 2001 1998 1998 1998 -------- ------ ------ ------ ------ ------- (In thousands) One-to-four family residential.. $2,035 $1,018 $ 302 $2,378 $8,792 $18,684 Multi-family residential........ -- -- -- -- -- 790 Construction.................... 3,599 -- -- -- -- -- Non-residential................. -- -- -- -- -- 2,989 Consumer........................ 3,212 547 1,043 1,628 36 109 ------ ------ ------ ------ ------ ------- Total.......................... $8,846 $1,565 $1,345 $4,006 $8,828 $22,572 ====== ====== ====== ====== ====== ======= Due after 15 years after December 31, 1998 Total ------- -------- One-to-four family residential.. $55,401 $ 88,610 Multi-family residential........ 749 1,539 Construction.................... -- 3,599 Non-residential................. 5,204 8,193 Consumer........................ 291 6,866 ------- -------- Total.......................... $61,645 $108,807 ======= ========
2 The following table sets forth at December 31, 1998, the dollar amount of all loans due one year or more after December 31, 1998 which had predetermined interest rates and have floating or adjustable interest rates.
Predetermined Floating or Rate Adjustable Rate --------------------- --------------------- (In thousands) One-to-four family residential.................................... $19,419 $67,156 Multi-family residential.......................................... -- 1,539 Construction...................................................... -- -- Non-residential................................................... -- 8,193 Consumer.......................................................... 3,654 -- ------- ------- Total............................................................ $23,073 $76,888 ======= =======
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the lender the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. Originations, Purchases and Sales of Loans. The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank conducts substantially all of its lending activities in its market area. The following table sets forth certain information with respect to loan origination activity for the periods indicated. The Bank has not purchased or sold any loans in the periods presented.
Year Ended December 31, ---------------------------------------------- 1998 1997 1996 --------------- -------------- ------------- (In thousands) Loan originations: One-to-four family residential....... $24,406 $14,578 $16,209 Multi-family residential............. 204 1,115 1,434 Construction......................... 1,749 6,302 5,340 Non-residential...................... 1,056 372 536 Consumer............................. 5,324 7,472 5,688 ------- ------- ------- Total loans originated.............. 32,739 29,839 29,207 ------- ------- ------- Loan principal reductions: Loan principal repayments............ 27,403 21,865 18,372 ------- ------- ------- Net increase in loan portfolio........ $ 5,336 $ 7,974 $10,835 ======= ======= =======
Loan originations are derived from a number of sources, including existing customers, referrals by real estate agents, depositors and borrowers and advertising, as well as walk-in customers. Solicitation programs consist of advertisements in local media, in addition to occasional participation in various community organizations and events. Real estate loans are originated by the Bank's loan personnel. All of the loan personnel are salaried, and are not compensated on a commission basis for loans originated. Loan applications are accepted at any of the Bank's branches. Loan Underwriting Policies. Lending activities are subject to written, non-discriminatory underwriting standards and to loan origination procedures prescribed by the Board of Directors and its management. Detailed loan applications are obtained to determine the ability of borrowers to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. All loans must be reviewed by the loan committee, which is comprised of lending officers and branch managers. Exceptions to the underwriting standards must be approved by the loan committee. In addition, the full Board of Directors reviews all 3 loans on a monthly basis. Generally, upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to confirm specific information relating to the loan applicant's employment, income and credit standing. If a proposed loan is to be secured by a mortgage on real estate, an appraisal of the real estate is undertaken by an appraiser approved by the Board of Directors and licensed or certified (as necessary) by the Commonwealth of Kentucky. In the case of one-to-four family residential mortgage loans, except when the Bank becomes aware of a particular risk of environmental contamination, the Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made. A formal environmental report may be required in connection with nonresidential real estate loans. It is the Bank's policy to record a lien on the real estate securing a loan and to obtain a title opinion from Kentucky counsel which provides that the property is free of prior encumbrances and other possible title defects. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood hazard area, pay flood insurance policy premiums. Applications for real estate loans are underwritten and closed in accordance with the Bank's own lending guidelines, which generally do not conform to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines. Although such loans may not be readily saleable in the secondary market, management believes that, if necessary, such loans may be sold to private investors. The Bank is permitted to lend up to 100% of the appraised value of the real property securing a mortgage loan. The Bank is required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of any loan that is greater than 90% of the appraised value of the property. Under its lending policies, the Bank will originate a one-to-four family residential mortgage loan for owner-occupied property with a loan-to-value ratio of up to 95%. For residential properties that are not owner-occupied, the Bank generally does not lend more than 80% of the appraised value. For all residential mortgage loans, the Bank may increase its lending level on a case-by-case basis, provided that the excess amount is insured with private mortgage insurance. Under applicable law, with certain limited exceptions, loans and extensions of credit outstanding by a savings institution to a person at one time shall not exceed 15% of the institution's unimpaired capital and surplus. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. Applicable law additionally authorizes savings institutions to make loans to one borrower, for any purpose, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and surplus to develop residential housing, provided certain requirements are satisfied. Under these limits, the Bank's loans to one borrower were limited to $6.2 million at December 31, 1998. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit. At December 31,1998, the Bank's largest lending relationship was $2.5 million. The loans are to a local real estate developer and his business associate and are primarily for the development of apartments, the purchase of lots for residential construction, and construction of one-to-four residential housing. All loans within this relationship were current and performing in accordance with their terms at December 31, 1998. Interest rates charged by the Bank on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters. One-to-four Family Residential Lending. The Bank historically has been and continues to be an originator of one-to-four family residential real estate loans in its market area. At December 31, 1998, one-to-four family residential mortgage loans, totaled approximately $88.9 million, or 80.6% of the Bank's loan portfolio. All loans originated by the Bank are maintained in its portfolio rather than sold in the secondary market. 4 The Bank primarily originates residential mortgage loans with adjustable rates. As of December 31, 1998, 81.0% of one-to-four family mortgage loans in the Bank's loan portfolio carried adjustable rates. Such loans are primarily for terms of 30 years, although the Bank does occasionally originate adjustable rate mortgages for 15 year and 20 year terms, in each case amortized on a monthly basis with principal and interest due each month. The interest rates on these mortgages are adjusted once per year, with a maximum adjustment of 1% per adjustment period and a maximum aggregate adjustment of 5% over the life of the loan. A borrower may also obtain a loan in which the maximum annual adjustment is 0.5% with a higher initial rate. Prior to August 1, 1997, rate adjustments on the Bank's adjustable rate loans were indexed to a rate which adjusted annually based upon changes in an index based on the National Monthly Median Cost of Funds, plus a margin of 2.75%. Because the National Monthly Median Cost of Funds is a lagging index, which results in rates changing at a slower pace than rates generally in the marketplace, the Bank has changed to a one-year Treasury bill constant maturity, which the Bank believes reflects more current market information and thus allows the Bank to react more quickly to changes in the interest rate environment. The adjustable rate mortgage loans offered by the Bank also provide for initial rates of interest below the rates that would prevail when the index used for repricing is applied. Such initial rates, also referred to as "teaser rates," often reflect a discount from the prevailing rate greater than the 1.0% maximum adjustment allowed each year. As a result, the Bank may not be able to restore the interest rate of a loan with a teaser rate to its otherwise initial loan rate until at least the second adjustment period that occurs at the beginning of the third year of the loan. Further, in a rising interest rate environment, the Bank may not be able to adjust the interest rate of the loan to the prevailing market rate until an even later period because of the combination of the teaser discount and the 1% limitation on annual adjustments. The retention of adjustable rate loans in the Bank's portfolio helps reduce the Bank's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable rate loans may increase due to increases in interest costs to borrowers. Further, although adjustable rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the lifetime interest rate adjustment limitations. This risk is heightened by the Bank's practice of offering its adjustable rate mortgages with a discount to its initial interest rate that is greater than the annual increase in interest rates allowed under the terms of the loan. Accordingly, there can be no assurance that yields on the Bank's adjustable rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Finally, adjustable rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although the 1% limitation on annual decreases in the loans' interest rates tend to offset this effect. The Bank also originates, to a limited extent, fixed-rate loans for terms of 15 years. Such loans are secured by first mortgages on one-to-four family, owner-occupied residential real property located in the Bank's market area. Because of the Bank's policy to mitigate its exposure to interest rate risk through the use of adjustable rate rather than fixed rate products, the Bank does not emphasize fixed-rate mortgage loans. At December 31, 1998, only $16.4 million, or 15.1%, of the Bank's loan portfolio, consisted of fixed-rate mortgage loans. To further reduce its interest rate risk associated with such loans, the Bank may rely upon FHLB advances with similar maturities to fund such loans. See "-- Deposit Activity and Other Sources of Funds -- Borrowing." Neither the fixed rate or the adjustable rate residential mortgage loans of the Bank are originated in conformity with secondary market guidelines issued by FHLMC or FNMA. As a result, such loans may not be readily saleable in the secondary market to institutional purchasers. However, such loans may still be sold to private investors whose investment strategies do not depend upon loans that satisfy FHLMC or FNMA criteria. Further, given its high liquidity, the Bank does not currently view loan sales as a necessary funding source. Construction Lending. The Bank engages in construction lending involving loans to individuals for construction of one-to four- family residential housing located within the Bank's market area, with such loans converting to permanent financing upon completion of construction. Such loans are generally made to individuals for construction primarily in established subdivisions within the Bank's market area. The Bank mitigates its risk with construction loans by imposing a maximum loan-to-value ratio of 95% for homes that will be owner- occupied and 80% for homes being built on a speculative basis. At December 31, 1998, the Bank's loan portfolio included $4.6 million of loans secured by properties under construction, including construction/permanent loans structured to become permanent loans upon the completion of construction and interim construction loans structured to be repaid in full upon completion of construction and receipt of permanent financing. 5 The Bank also makes loans to qualified builders for the construction of one-to-four family residential housing located in established subdivisions in the Bank's market area. Because such homes are intended for resale, such loans are generally not converted to permanent financing at the Bank. All construction loans are secured by a first lien on the property under construction. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as the Bank's permanent mortgages. Such loans generally provide for disbursement in stages during a construction period of up to six months, during which period the borrower is required to make payments of interest only. The permanent loans are typically 30-year adjustable rate loans, with the same terms and conditions otherwise offered by the Bank. Monthly payments of principal and interest commence the month following the date the loan is converted to permanent financing. Borrowers must satisfy all credit requirements that would apply to the Bank's permanent mortgage loan financing prior to receiving construction financing for the subject property. Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be confronted at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market area, by requiring the involvement of qualified builders, and by limiting the aggregate amount of outstanding construction loans. Multi-Family Residential and Non-Residential Real Estate Lending. The Bank's multi-family residential loan portfolio consists of adjustable rate loans secured by real estate. At December 31,1998, the Bank had $1.5 million of multi-family residential loans, which amounted to 1.4% of the Bank's loan portfolio at such date. The Bank's non-residential real estate portfolio generally consists of adjustable rate loans secured by first mortgages on residential lots and rental property. In each case, such property is located in the Bank's market area. At December 31,1998, the Bank had approximately $8.3 million of such loans, which comprised 7.5% of its loan portfolio. Multi-family residential real estate loans are underwritten with loan-to-value ratios up to 80% of the appraised value of the property. Non-residential real estate loans are underwritten with loan-to-value ratios up to 65% of the appraised value for raw land and 75% for land development loans. The Bank currently does not intend to significantly expand multi-family residential or non-residential real estate lending, but may do so if opportunities arise in the future. Multi-family residential and non-residential real estate lending entails significant additional risks as compared with one-to-four family residential property lending. Multi-family residential and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for the office, retail and residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It has been the Bank's policy to obtain annual financial statements of the business of the borrower or the project for which multi-family residential real estate or commercial real estate loans are made. Consumer and Other Lending. The consumer loans currently in the Bank's loan portfolio consist of loans secured by savings deposits and other consumer loans. Savings deposit loans are usually made for up to 90% of the depositor's savings account balance. The interest rate is approximately 2.0% above the rate paid on such deposit account serving as collateral, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. At December 31, 1998, loans on deposit accounts totaled $2.3 million, or 2.1% of the Bank's loan portfolio. Other consumer loans include automobile loans, the amount and terms of which are determined by the loan committee, and home equity and home improvement loans, which are made for up to 95% of the value of the property but require private mortgage insurance on 100% of the value of the property. The Bank is 6 focusing its loan portfolio growth activities in this area. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and therefore are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 1998, there were approximately $19,000 of consumer loans delinquent 90 days or more. There can be no assurance that delinquencies will not increase in the future, particularly in light of the Bank's decision to increase its efforts to originate a higher volume and greater variety of consumer loans. NONPERFORMING LOANS AND OTHER PROBLEM ASSETS The Bank's nonperforming loans totaled .13% of total assets at December 31, 1998. Loans are placed on a non-accrual status when the loan is past due in excess of 90 days and collection of principal and interest is doubtful. The Bank places a high priority on contacting customers by telephone as a primary method of determining the status of delinquent loans and the action necessary to resolve any payment problem. The Bank's management performs quality reviews of problem assets to determine the necessity of establishing additional loss reserves. Real estate acquired by the Bank as a result of foreclosure is classified as real estate owned until such time as it is sold. The Bank generally tries to sell the property at a price no less than its net book value, however, it will consider slight discounts to the appraised value to expedite the return of the funds to an earning status. When such property is acquired, it is recorded at its fair value less estimated costs of sale. Any required write-down of the loan to its appraised fair market value upon foreclosure is charged against the allowance for loan losses. Subsequent to foreclosure, in accordance with generally accepted accounting principles, a valuation allowance is established if the carrying value of the property exceeds its fair value net of related selling expenses. The following table sets forth information with respect to the Bank's non- performing assets at the dates indicated. No loans were recorded as restructured loans within the meaning of SFAS No. 15 at the dates indicated.
At December 31, ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ----------- ------------ (Dollars in thousands) Accruing loans which are contractually past due 90 days or more: Residential real estate.... $ 268 $ 140 $ 266 $ 133 $ 20 Consumer................... 19 23 -- 1 17 ----- ----- ----- ----- ----- Total..................... $ 287 $ 163 $ 266 $ 134 $ 37 ----- ----- ----- ----- ----- Total nonperforming loans.................... $ 287 $ 163 $ 266 $ 134 $ 37 ===== ===== ===== ===== ===== Percentage of total loans... 0.26% 0.16% 0.28% 0.16% 0.05% ===== ===== ===== ===== =====
At December 31, 1998, the Bank had no loans accounted for on a nonaccrual basis, no other non-performing assets and no real estate owned. 7 At December 31, 1998, the Bank had no loans outstanding which were classified as nonaccrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured. Also, the Bank had no impaired loans under SFAS 114/118. As such, the impact of adopting these statements was not significant to the Bank. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset meeting one of the classification definitions set forth below may be classified and still be a performing loan. An asset is classified as substandard if it is determined to be inadequately protected by the current retained earnings and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Such assets designated as special mention may include nonperforming loans consistent with the above definition. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish a specific allowance for loss in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re-classification. At December 31, 1998, the Bank had $11,364 in assets classified as special mention, $287,478 in assets classified as substandard, no assets classified as doubtful and no assets classified as loss. Special mention assets consist primarily of residential real estate loans secured by first mortgages. This classification is primarily used by management as a "watch list" to monitor loans that exhibit any potential deviation in performance from the contractual terms of the loan. Allowance for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain an adequate allowance for loan losses based on, among other things, the Bank's and the industry's historical loan loss experience, evaluation of economic conditions, regular reviews of delinquencies and loan portfolio quality and evolving standards imposed by federal bank examiners. The Bank increases its allowance for loan losses by charging provisions for possible loan losses against the Bank's income. Management will continue to actively monitor the Bank's asset quality and allowance for loan losses. Management will charge off loans and properties acquired in settlement of loans against the allowances for losses on such loans and such properties when appropriate and will provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses and believes such allowances are adequate, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. The Bank's methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but can be expected to occur. Management conducts regular reviews of the Bank's assets and evaluates the need to establish allowances on the basis of this review. Allowances are established by the Board of Directors on a quarterly basis based on an assessment of risk in the Bank's assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the security. At the date of foreclosure or other repossession, the Bank would transfer the property to real estate acquired in settlement of loans initially at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value less estimated selling costs would be charged off against the allowance for loan losses. If, upon ultimate 8 disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate would be recorded. Banking regulatory agencies, including the OTS, have adopted a policy statement regarding maintenance of an adequate allowance for loan and lease losses and an effective loan review system. This policy includes an arithmetic formula for determining the reasonableness of an institution's allowance for loan loss estimate compared to the average loss experience of the industry as a whole. Examiners will review an institution's allowance for loan losses and compare it against the sum of: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii) for the portions of the portfolio that have not been classified (including those loans designated as special mention), estimated credit losses over the upcoming 12 months given the facts and circumstances as of the evaluation date. This amount is considered neither a "floor" nor a "safe harbor" of the level of allowance for loan losses an institution should maintain, but examiners will view a shortfall relative to the amount as an indication that they should review management's policy on allocating these allowances to determine whether it is reasonable based on all relevant factors. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated.
Year Ended December 31, ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ------------ ---------- ------------- (Dollars in thousands) Balance at beginning of period........... $ 237 $ 217 $ 122 $ 122 $ 122 Loans charged off: Real estate mortgage: Residential............................. -- -- (5) -- -- ----- ----- ------- ----- ----- Total charge-offs........................ -- -- (5) -- -- ----- ----- ------- ----- ----- Recoveries............................... -- -- -- -- -- ----- ----- ------- ----- ----- Net loans charged off.................... -- -- (5) -- -- ----- ----- ------- ----- ----- Provision for loan losses................ $ 21 20 100 -- -- ----- ----- ------- ----- ----- Balance at end of period................. $ 258 $ 237 $ 217 $ 122 $ 122 ===== ===== ======= ===== ===== Ratio of net charge-offs to average loans outstanding during the period........... 0% 0% 0.0053% 0% 0% ===== ===== ======= ===== =====
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At December 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------------------------------------- Percent of Loans Percent of Loans Percent of Loans in Each Category in Each Category in Each Category Amount to Total Loans Amount to Total Loans Amount to Total Loans ------ -------------- ------ -------------- ------ -------------- (Dollars in thousands) One-to-four family......... $136 80.6% $186 78.7% $163 79.6% Construction............... 7 4.2% 6 4.9% 11 5.6% Multi-family residential... 6 1.4% 12 2.2% 3 1.5% Non-residential............ 71 7.5% 19 7.2% 23 5.6% Secured by deposits........ -- 2.1% -- 2.9% -- 3.6% Other consumer loans....... 38 4.2% 14 4.1% 17 4.1% ---- ----- ---- ----- ---- ----- Total allowance for loan losses.............. $258 100.0% $237 100.0% $217 100.0% ==== ===== ==== ===== ==== ===== ------------------------------ 1995 ------------------------------ Percent of Loans in Each Category Amount to Total Loans ------ ---------------- One-to-four family.........% $ 94 81.5% Construction...............% 5 4.7% Multi-family residential...% 1 0.6% Non-residential............% 14 5.9% Secured by deposits........% -- 3.8% Other consumer loans.......% 8 3.5% ---- ----- Total allowance for % $122 100.0% loan losses.............. ==== =====
9
At December 31, ---------------------------------------- 1994 ---- Percent of Loans in Each Amount Category to Total Loans ----------- ------------------------ (Dollars in thousands) One-to-four family.......... $ 99 82.3% Construction................ 6 4.7% Multi-family residential.... 5 4.3% Non-residential............. 5 2.0% Secured by deposits......... -- 3.9% Other consumer loans........ 7 2.8% ---- ----- Total allowance for loan losses............... $122 100.0% ==== =====
INVESTMENT ACTIVITIES The Bank makes investments in order to maintain the levels of liquid assets required by regulatory authorities and manage cash flow, diversify its assets, obtain yield and to satisfy certain requirements for favorable tax treatment. The investment activities of the Company and the Bank consist primarily of investments in Agency Securities and Mortgage-Backed Securities. Typical investments include federally sponsored agency mortgage pass-through and federally sponsored agency and mortgage-related securities. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Bank's investment policy. The Company and the Bank perform analyses on mortgage-related securities prior to purchase and on an ongoing basis to determine the impact on earnings and market value under various interest rate and prepayment conditions. Securities purchases must be approved by the Bank's President. The Board of Directors reviews all securities transactions on a monthly basis. The principal objective of the investment policy is to earn as high a rate of return as possible, but to consider also financial or credit risk, liquidity risk and interest rate risk. At December 31, 1998, securities with an amortized cost of $59.8 million and an approximate market value of $68.1 million were classified as available for sale. Management presently does not intend to sell such securities and, based on the current liquidity level and the access to borrowings through the FHLB of Cincinnati, management currently does not anticipate that the Company or the Bank will be placed in a position of having to sell securities with material unrealized losses. Securities designated as "held to maturity" are those assets which the Company or the Bank has both the ability and the intent to hold to maturity. Upon acquisition, securities are classified as to the Company's or the Bank's intent, and a sale would only be effected due to deteriorating investment quality. The held to maturity investment portfolio is not used for speculative purposes and is carried at amortized cost. In the event securities are sold from this portfolio for other than credit quality reasons, all securities within the investment portfolio with matching characteristics may be reclassified as assets available for sale. Securities designated as "available for sale" are those assets which the Company or the Bank may not hold to maturity and thus are carried at market value with unrealized gains or losses, net of tax effect, recognized in other comprehensive income. Mortgage-Backed and Related Securities. Mortgage-backed securities represent a participation interest in a pool of one-to-four family or multi- family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries that pool and repackage the participation interest in the form of securities to investors such as the Bank. Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA and the Government National Mortgage Association ("GNMA") which guarantee the payment of principal and interest to investors. Of the $48.6 million mortgage- backed security portfolio at December 31, 1998, approximately $29.0 million were originated through GNMA, approximately $10.0 million were originated through FNMA and approximately $9.6 million were originated through FHLMC. Mortgage- backed securities generally increase the quality of the assets 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 Bank. 10 Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable- rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. The actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage- backed security. The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accredited over the estimated term of the securities using a level yield method. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect the actual prepayment. The actual prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities. The following table sets forth the carrying value of the investment securities at the dates indicated.
At December 31, -------------------------------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Securities available for sale: FHLB and FHLMC stock............................ $ 9,845 $ 6,895 $ 5,110 U. S. government and agency securities (1)................................. 23,065 13,000 -- Mortgage-backed securities...................... 35,214 6,789 -- Other........................................... 15 15 15 Securities held to maturity: U.S. government and agency securities (1)................................. 13,997 31,988 77,962 Mortgage-backed securities...................... 13,357 19,578 17,984 ------- ------- -------- Total investment securities.................... $95,493 $78,265 $101,071 ======= ======= ========
_____________ (1) Primarily reflects debt securities purchased from the FHLB of Cincinnati. The following table sets forth information in the scheduled maturities, amortized cost, market values and average yields for U.S. government and agency securities in the investment portfolio at December 31, 1998. At such date, all of these securities were callable and/or due prior to December 31, 1999.
One Year or Less One to Five Years Total Investment Portfolio --------------------------- -------------------------- ---------------------------------------- Carrying Average Carrying Average Carrying Market Average Value Yield Value Yield Value Value Yield ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) U.S. government and agency securities.......... $20.014 5.52% $17,048 5.35% $37,062 $37,067 5.43% ======= ======= ======= =======
11 DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS GENERAL. Deposits are the primary source of the Bank's funds for lending, investment activities and general operational purposes. In addition to deposits, the Bank derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general corporate purposes. The Bank has access to borrow from the FHLB of Cincinnati, and the Bank will continue to have access to FHLB of Cincinnati advances. The Bank may rely upon retail deposits rather than borrowings as its primary source of funding for future asset growth. DEPOSITS. The Bank attracts deposits principally from within its market area by offering competitive rates on its deposit instruments, including money market accounts, passbook savings accounts, Individual Retirement Accounts, and certificates of deposit which range in maturity from three months to five years. Deposit terms vary according to the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. The Bank reviews its deposit mix and pricing on a weekly basis. In determining the characteristics of its deposit accounts, the Bank considers the rates offered by competing institutions, lending and liquidity requirements, growth goals and federal regulations. The Bank does not accept brokered deposits. The Bank attempts to compete for deposits with other institutions in its market area by offering competitively priced deposit instruments that are tailored to the needs of its customers. Additionally, the Bank seeks to meet customers' needs by providing convenient customer service to the community. Substantially all of the Bank's depositors are Kentucky residents who reside in the Bank's market area. Savings deposits in the Bank at December 31, 1998 were represented by the various types of savings programs described below.
Balance Percentage of Interest Minimum Minimum (In Total Rate* Term Category Amount thousands) Deposits - ----------- --------------------- ------------------------------- ---------------- ----------------- ------------------ - -- % None Non-interest bearing $ 100 $ 2,731 1.8% 2.5%* None Demand/NOW accounts 1.500 8,624 5.6 2.8% None Passbook accounts 10 10,194 6.6 3.9%* None Money market deposit accounts 2,500 30,772 19.9 -------- ----- 52,321 33.9 -------- ----- Certificates of Deposit ------------------------------- 5.2% 3 months or less Fixed-term, fixed rate 500 17,054 11.0 5.3% Over 3 to 12-months Fixed-term, fixed-rate 500 45,854 29.6 5.7% Over 12 to 24-months Fixed-term, fixed-rate 500 31,154 20.1 5.6% Over 24 to 36-months Fixed-term, fixed-rate 500 4,855 3.1 5.7% Over 36 to 48-months Fixed-term, fixed-rate 500 2,934 1.9 5.6% Over 48 to 60-months Fixed-term, fixed rate 500 644 0.4 -------- ----- 102,495 66.1 -------- ----- $154,816 100.0% ======== =====
_____________ * Represents weighted average interest rate. 12 The following table sets forth, for the periods indicated, the average balances and interest rates based on month-end balances for interest-bearing demand deposits and time deposits.
Year Ended December 31, ----------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------- ------------------------------------- ------------------------------------ Interest-bearing Time Interest-bearing Time Interest-bearing Time demand deposits deposits demand deposits deposits demand deposits deposits --------------- -------- --------------- -------- --------------- -------- (Dollars in thousands) Average balance.... $62,414 $109,508 $71,590 $123,429 $56,437 $133,400 Average rate....... 3.36% 5.39% 3.51% 5.52% 3.58% 5.48%
The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by the Bank between the dates indicated.
Increase Increase Balance at (Decrease) from Balance at (Decrease) from December 31, % of December 31, December 31, % of December 31, 1998 Deposits 1997 1997 Deposits 1996 ---- -------- ---- ---- -------- ---- (Dollars in thousands) Non-interest bearing.... $ 2,731 1.8% $ 768 $ 1,963 0.61% $ 179 Demand and NOW accounts............... 8,624 5.6% (860) 9,484 2.96% 1,881 Money market............ 30,772 19.9% (11,292) 42,064 13.12% 5,124 Passbook savings........ 10,194 6.6% (137,886) 148,080 46.18% 137,448 Other time deposits..... 102,495 66.1% (16,547) 119,042 37.13% (7,826) -------- ----- --------- -------- ------ -------- Total.................. $154,816 100.0% $(165,817) $320,633 100.00% $136,806 ======== ===== ========= ======== ====== ========
(continued)
Balance at Increase Balance at December 31, % of (Decrease) from December 31, % of 1996 Deposits December 31, 1995 1995 Deposits ---- -------- ----------------- ---- -------- (Dollars in thousands) Non-interest bearing.... $ 1,784 0.97% $ 548 $ 1,236 0.63% Demand and NOW accounts............... 7,603 4.14% (25) 7,628 3.92% Money market............ 36,940 20.09% 2,158 34,782 17.86% Passbook savings........ 10,632 5.78% (565) 11,197 5.75% Other time deposits..... 126,868 69.02% (13,064) 139,932 71.84% -------- ------ -------- -------- ------ Total.................. $183,827 100.00% $(10,948) $194,775 100.00% ======== ====== ======== ======== ======
The following table sets forth the time deposits in the Bank classified by rates at the dates indicated.
At December 31, ------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) 2.01 - 4.00%....... $ 212 $ 39 $ 38 4.01 - 6.00%....... 92,870 102,474 103,036 6.01 - 8.00%....... 9,413 16,529 23,794 -------- -------- -------- Total.............. $102,495 $119,042 $126,868 ======== ======== ========
The following table sets forth the amount and maturities of time deposits at December 31, 1998.
Amount Due -------------------------------------------------------------------- Less Than One Year 1-2 Years 2-3 Years After 3 Years Total ------------------ --------- --------- ------------- --------- (In thousands) 2.01 - 4.00%.................. $ 212 $ -- $ -- $ -- $ 212 4.01 - 6.00%.................. 59,029 26,408 4,250 3,183 92,870 6.01 - 8.00%.................. 3,667 4,746 605 395 9,413 ------- ------- ------- ------- -------- Total......................... $62,908 $31,154 $ 4,855 $ 3,578 $102,495 ======= ======= ======= ======= ========
The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1998.
Maturity Period Certificates of Deposit - ------------------------------------------------------------ ---------------------------- (In thousands) Three months or less........................................ $ 138 Over three through six months............................... 507 Over six through 12 months.................................. 3,090 Over 12 months.............................................. 3,427 ------------ Total...................................................... $ 7,162 ============
Certificates of deposit at December 31, 1998 included approximately $7.2 million of deposits with balances of $100,000 or more, compared to $8.1 million and $7.4 million at December 31, 1997 and 1996, respectively. Such time deposits may be risky because their continued presence in the Bank is dependent partially upon the rates paid by the Bank rather than any customer relationship and, therefore, may be withdrawn upon maturity if another institution offers higher interest rates. The Bank may be required to resort to other funding sources such as borrowings or sales of its securities held available for sale if the Bank believes that increasing its rates to maintain such deposits would adversely affect its operating results. At this time, the Bank does not believe that it will need to significantly increase its deposit rates to maintain such certificates of deposit and, therefore, does not anticipate resorting to alternative funding sources. See Note 5 of Notes to Financial Statements. The following table sets forth the deposit activities of the Bank for the periods indicated.
Year Ended December 31, ------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Deposits............................. $ 211,652 $ 430,943 $ 149,771 Withdrawals.......................... (383,743) (301,475) (167,560) --------- --------- --------- Net increase (decrease) before interest credited................... (172,091) 129,468 (17,789) Interest credited.................... 6,274 7,338 6,841 --------- --------- --------- Net increase (decrease) in savings deposits............................ $(165,817) $ 136,806 $ (10,948) ========= ========= =========
In the unlikely event the Bank is liquidated after the Conversion, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the sole stockholder of the Bank, which is the Company. BORROWINGS. Savings deposits historically have been the primary source of funds for the Bank's lending, investments and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB System, the Bank is required to own stock in the FHLB of Cincinnati and is authorized to apply for advances. Advances are pursuant to several different programs, each of 14 which has its own interest rate and range of maturities. The Bank has entered into a Cash Management Advance program with FHLB. See Note 6 of Notes to Financial Statements. Advances from the FHLB of Cincinnati are secured by FHLB investment securities. SUBSIDIARY ACTIVITIES As a federally chartered savings bank, the Bank is permitted to invest an amount equal to 2% of its assets in subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. The Bank does not have any subsidiaries. COMPETITION The Bank faces significant competition both in originating mortgage and other loans and in attracting deposits. The Bank competes for loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Bank also competes by offering products which are tailored to the local community. Its competition in originating real estate loans comes primarily from other savings institutions, commercial banks and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions. The Bank attracts its deposits through its five offices primarily from the local community. Consequently, competition for deposits is principally from other savings institutions, commercial banks and brokers in the local community as well as from credit unions. The Bank competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff. The Bank believes it has developed strong relationships with local realtors and the community in general. The Bank is a community and retail-oriented financial institution. Management considers the Bank's branch network and reputation for financial strength and quality customer service as its major competitive advantage in attracting and retaining customers in its market area. A number of the Bank's competitors have been acquired by statewide/nationwide banking organizations, including Firstar Corporation, First City Bank (a wholly owned subsidiary of Area Bancshares Corp.) and Mercantile Bancorp. While the Bank is subject to competition from other financial institutions which may have greater financial and marketing resources, management believes the Bank benefits by its community orientation and its long-standing relationship with many of its customers. EMPLOYEES As of December 31, 1998, the Company and the Bank had 30 full-time employees, none of whom were represented by a collective bargaining agreement. Management considers the Bank's relationships with its employees to be good. REGULATION The Bank is chartered as a federal savings bank under the Home Owners' Loan Act, as amended (the "HOLA"), which is implemented by regulations adopted and administered by the OTS. As a federal savings bank, the Bank is subject to regulation, supervision and regular examination by the OTS. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank and the Company. Federal banking laws and regulations control, among other things, the Bank's required reserves, investments, loans, mergers and consolidations, payment of dividends and other aspects of the Bank's operations. The deposits of the Bank are insured by the SAIF administered by the FDIC to the maximum extent provided by law. In addition, the FDIC has certain regulatory and examination authority over OTS- regulated savings institutions and may recommend enforcement actions against savings institutions to the OTS. The supervision and regulation of the Bank is intended primarily for the protection of the deposit insurance fund and the Bank's depositors rather than for holders of the Company's stock or for the Company as the holder of the stock of the Bank. 15 As a savings and loan holding company, the Company is registered with the OTS and subject to OTS regulation and supervision under the HOLA. The Company also is required to file certain reports with, and otherwise comply with the rules and regulations of, the Commission under the federal securities laws. The following discussion is intended to be a summary of certain statutes, rules and regulations affecting the Bank and the Company. A number of other statutes and regulations have an impact on their operations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations. REGULATION OF THE BANK BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of commercial paper and debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations. BRANCHING. Subject to certain limitations, OTS regulations currently permit a federally chartered savings institution like the Bank to establish branches in any state of the United States, provided that the federal savings institution qualifies as a "domestic building and loan association" under the Internal Revenue Code. See "-- Qualified Thrift Lender Test." The authority for a federal savings institution to establish an interstate branch network would facilitate a geographic diversification of the institution's activities. REGULATORY CAPITAL. The OTS has adopted capital adequacy regulations that require savings institutions such as the Bank to meet three minimum capital standards: a "core" capital requirement of 4% of adjusted total assets (or 3% if the institution is rated Composite 1 under the CAMELS examination rating system), a "tangible" capital requirement of 1.5% of adjusted total assets, and a "risk-based" capital requirement of 8% of total risk-based capital to total risk-weighted assets. In addition, the OTS has adopted regulations imposing certain restrictions on savings institutions that have a total risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total assets of less than 4%. See "-- Prompt Corrective Regulatory Action." The core capital, or "leverage ratio," requirement mandates that most savings institutions maintain core capital equal to at least 3% of adjusted total assets. "Core capital" includes common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries and certain nonwithdrawable accounts and pledged deposits and is generally reduced by the amount of the savings institution's intangible assets, with limited exceptions for permissible mortgage servicing rights ("MSRs"), purchased credit card relationships and certain intangible assets arising from prior regulatory accounting practices. Core capital is further reduced by the amount of a savings institution's investments in and loans to subsidiaries engaged in activities not permissible for national banks. At December 31, 1998, the Bank had no such investments. The risk-based capital standards of the OTS require maintenance of core capital equal to at least 4% of risk-weighted assets and total capital equal to at least 8% of risk-weighted assets. For purposes of the risk-based capital requirement, "total capital" includes core capital plus supplementary capital, provided that the amount of supplementary capital does not exceed the amount of core capital. Supplementary capital includes preferred stock that does not qualify as core capital, nonwithdrawable accounts and pledged deposits to the extent not included in core capital, perpetual and mandatory convertible subordinated debt and maturing capital instruments meeting specified requirements and a portion of the institution's loan and lease loss allowance. The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each asset and the credit-equivalent amount of each off-balance sheet item after being multiplied by an assigned risk weight, which range from 0% to 100% as assigned by the OTS capital regulations based on the risks the OTS believes are inherent in the type of asset. Comparable risk weights are assigned to off-balance sheet assets. The OTS risk-based capital regulation also includes an interest rate risk ("IRR") component that requires 16 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. The following table sets forth the Bank's compliance with its regulatory capital requirements at December 31, 1998.
Capital The Bank's Capital Requirements Excess Capital -------------------------- -------------------------- -------------------------- Amount Percent Amount Percent Amount Percent ------------ ----------- ------------ ----------- ------------ ----------- (Dollars in thousands) Tangible capital.............. $35,886 18.2% $2,965 1.50% $32,921 16.7% Core capital.................. $35,886 18.2% $7,907 4.00% $27,979 14.2% Total risk-based capital...... $36,143 17.8% $5,769 8.00% $30,374 9.8%
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action regulations, the federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet certain minimum capital requirements, including a leverage limit and a risk-based capital requirement. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. The federal banking regulators, including the OTS, have issued regulations that classify insured depository institutions by capital levels and provide that the applicable agency will take various prompt corrective actions to resolve the problems of any institution that fails to satisfy the capital standards. Under the joint prompt corrective action regulations, a "well-capitalized" institution is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets ("leverage ratio") of 5%. An "adequately capitalized" institution is one that does not qualify as "well capitalized" but meets or exceeds the following capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest composite examination rating. An institution not meeting these criteria is treated as "undercapitalized," "significantly undercapitalized," or "critically undercapitalized" depending on the extent to which its capital levels are below these standards. An institution that fails within any of the three "undercapitalized" categories will be subject to certain severe regulatory sanctions required by OTS regulations. As of December 31, 1998, the Bank was "well-capitalized" as defined by the regulations. FEDERAL DEPOSIT INSURANCE. The FDIC has adopted a risk-based insurance assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. Assessment rates for SAIF-member institutions like the Bank depend on the capital category and supervisory category to which they are assigned and currently range from 0 basis points to 27 basis points. In addition, SAIF- insured institutions are required, until December 31, 1999, to pay assessments to the FDIC at an annual rate varying between .06% and .07% of insured deposits to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to recapitalize the predecessor to the SAIF. During this period, BIF member banks will be assessed for payment of the FICO obligations at an annual rate equal to one-fifth of the SAIF rate. After December 31, 1999, BIF and SAIF member institutions will be assessed at the same rate for the FICO obligations. The Federal Deposit Insurance Act also provides that the FDIC may not assess regular insurance assessments for the SAIF unless required to maintain or to achieve the designated reserve ratio of 1.25%, except for 17 such assessments on those institutions that are not classified as "well- capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Bank is classified as "well-capitalized" and has not been found by the OTS to have such supervisory weaknesses. QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests or to suffer a number of sanctions, including restrictions on activities. To qualify as a QTL, a savings institution must either (i) be deemed a "domestic building and loan association" under the Internal Revenue Code (the "Code") by maintaining at least 60% of its total assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property, educational loans, and investments in premises of the institution or (ii) satisfy the HOLA's QTL test by maintaining at least 65% of "portfolio assets" in certain "Qualified Thrift Investments." For purposes of the HOLA's QTL test, portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of (a) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (b) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, and (c) loans to small businesses, student loans and credit card loans. In addition, subject to a 20% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments 200% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small business in "credit needy" areas. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every 12 months. An initial failure to qualify as a QTL results in a number of sanctions, including the imposition of certain operating restrictions and a restriction on obtaining additional advances from its Federal Home Loan Bank. If a savings institution does not requalify under the QTL test within the three-year period after it fails the QTL test, it would be required to terminate any activity not permissible for a national bank and repay as promptly as possible any outstanding advances from its Federal Home Loan Bank. In addition, the holding company of such an institution, such as the Company, would similarly be required to register as a bank holding company with the Federal Reserve Board. At December 31, 1998, the Bank qualified as a QTL. SAFETY AND SOUNDNESS STANDARDS. The FDI Act requires the federal banking agencies, including the OTS, to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality and compensation, fees and benefits and such other operational and managerial standards as the agencies deem appropriate. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to implement safety and soundness standards pursuant to the statute. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. A savings institution must give notice to the OTS at least 30 days before declaration of a proposed capital distribution to its holding company, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. Under OTS regulations effective April 1, 1999, a savings institution that (i) qualifies for expedited treatment of applications by maintaining one of the two highest supervisory examination ratings, (ii) will be at least adequately capitalized after the proposed capital distribution and (iii) and is not otherwise restricted by applicable law in making capital distributions may, without prior approval by the OTS, make capital distributions during a calendar year equal to its net income for such year plus its retained net income for the preceding two years. Capital distributions in excess of such amount would require prior OTS approval. 18 Under OTS regulations, the Bank would not be permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of the Conversion. In addition, under the prompt corrective action regulations of the OTS, the Bank would be prohibited from paying dividends if the Bank were classified as "undercapitalized" under such rules. See "-- Prompt Corrective Regulatory Action." In addition to the foregoing, earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of dividends or other distributions to the Company without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. See "Taxation." TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions imposed by Sections 23A and 23B of the Federal Reserve Act on extensions of credit to, and certain other transactions with, the Company and other affiliates, and on investments in the stock or other securities thereof. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by specified collateral, and require such transactions to have terms comparable to terms of arms-length transactions with third persons. Further, such secured loans and other transactions and investments by the Bank are generally limited in amount as to the Company and as to any other affiliate to 10% of the Bank's capital and surplus and as to the Company and all other affiliates to an aggregate of 20% of the Bank's capital and surplus. These restrictions may limit the Company's ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. The Bank's ability to extend credit to its directors, executive officers, and 10% stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board thereunder. Among other things, these provisions require that an institution's extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the institution's capital. In addition, extensions of credit in excess of certain limits must be approved by the institution's Board of Directors. RESERVE REQUIREMENTS. Pursuant to regulations of the Federal Reserve Board (the "FRB"), all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $4.9 million of transaction accounts, and reserves equal to 3% must be maintained on the next $46.5 million of transaction accounts, plus reserves equal to 10% on the remainder. These percentages are subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of December 31, 1998, the Bank met its reserve requirements. LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, highly rated corporate debt and commercial paper, qualifying mortgage-related securities and mortgage loans, securities of certain mutual funds, and specified United States government, state or federal agency obligations) equal to the monthly average of not less than a specified percentage (currently 4%) of its net withdrawable accounts plus short-term borrowings. The average daily liquidity ratio of the Bank for the month ended December 31, 1998 was 53.9%. FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB, the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement, with an investment in FHLB stock at December 31, 1998 of $1.9 million. Long-term FHLB advances may only be made for the purpose of providing funds for residential housing finance. At 19 December 31, 1998, the Bank had no advances outstanding from the FHLB. REGULATION OF THE COMPANY The Company is a savings and loan holding company under the HOLA and, as such, is subject to OTS regulation, supervision and examination. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries and may restrict or prohibit activities that are determined to represent a serious risk to the safety, soundness or stability of the Bank or any other subsidiary savings institution. Under the HOLA, a savings and loan holding company is required to obtain the prior approval of the OTS before acquiring another savings institution or savings and loan holding company. A savings and loan holding company may not (i) acquire, with certain exceptions, more than 5% of a non-subsidiary savings institution or a non-subsidiary savings and loan holding company; or (ii) acquire or retain control of a depository institution that is not insured by the FDIC. In addition, while the Bank generally may acquire a savings institution by merger in any state without restriction by state law, the Company could acquire control of an additional savings institution in a state other than Kentucky only if such acquisition is permitted under the laws of the target institution's home state. As a unitary savings and loan holding company, the Company generally will not be subject to any restriction as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test. See "-- Regulation and Supervision of the Bank -- Qualified Thrift Lender Test." Legislation currently pending before the United States Congress, if enacted, would have significant effects on the business powers of unitary savings and loan holding companies that have not been established or applied for before a specified date. However, the business activity powers of unitary savings and loan holding companies that, like the Company, were in control of a single savings institution on the date of enactment of the proposed legislation generally would be grandfathered under the current proposal. Accordingly, based upon the provisions of the currently pending legislation, the management of the Company does not believe that the enactment of such legislation would have a material adverse effect on its financial condition or results of operations. Upon any non-supervisory acquisition by the Company of another savings institution that is held as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be subject to limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under the Bank Holding Company Act, subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, including all documents incorporated herein by reference, contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "expect," "seek," and "intend" and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions which may be made to forward- looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 20 ITEM 2. PROPERTIES The following table sets forth information regarding the Bank's offices at December 31, 1998.
Approximate ----------- Square Footage of ----------------- Year Opened Owned or Leased Book Value (1) Office ----------- --------------- -------------- ------ MAIN OFFICE: (In thousands) 2700 Fort Campbell Boulevard Hopkinsville, Kentucky 42240....... 1995 Owned $1,815 16,575 BRANCH OFFICES: Downtown Branch Office 605 South Virginia Street Hopkinsville, Kentucky.......... 1997 Owned $ 168 756 Murray Branch Office 7th and Main Streets Murray, Kentucky................ 1969 Owned $ 65 4,800 Cadiz Branch Office 352 Main Street Cadiz, Kentucky................. 1998 Owned $ 445 2,200 Elkton Branch Office West Main Street Elkton, Kentucky................ 1976 Owned $ 53 3,400 ------ $2,546 ======
_________________ (1) Represents the book value of land, building, furniture, fixtures and equipment owned by the Bank. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company or the Bank is a party to various legal proceedings incident to its business. At December 31, 1998, there were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company or the Bank. There are no pending regulatory proceedings to which the Company or the Bank is a party or to which any of their properties is subject which are currently expected to result in a material loss. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT BRUCE THOMAS. Mr. Thomas, 61, has served as President and Chief Executive Officer of the Bank since 1992. He has been an employee of the Bank since 1962. Mr. Thomas also serves as President and Chief Executive Officer of the Company. PEGGY R. NOEL. Ms. Noel, 60, has served as Executive Vice President, Chief Financial Officer and Chief Operations Officer of the Bank since 1990. She has been an employee of the Bank since 1966. Ms. Noel also serves as Vice President, Chief Financial Officer and Treasurer of the Company. BOYD M. CLARK. Mr. Clark, 53, has served as Senior Vice President --Loan Administration of the Bank since 1995. Prior to his current position, Mr. Clark served as First Vice President of the Bank. He has been an employee of the Bank since 1973. Mr. Clark also serves as Vice President and Secretary of the Company. 21 All officers serve at the discretion of the boards of directors of the Company or the Bank. There are no known arrangements or understandings between any officer and any other person pursuant to which he or she was or is to be selected as an officer. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information set forth under the caption "Market and Dividend Information" in the Company's Annual Report to Stockholders for the year ended December 31, 1998 (Exhibit No. 13) is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Information and Other Data" in the Company's Annual Report to Stockholders for the year ended December 31, 1998 (Exhibit No. 13) is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Stockholders for the year ended December 31, 1998 (Exhibit No. 13) is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis" in the Company's Annual Report to Stockholders for the year ended December 31, 1998 (Exhibit No. 13) is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Bank's Financial Statements together with the related notes and the report of York, Neel & Co. - Hopkinsville, LLP, independent public accountants, all as set forth in the Company's Annual Report to Stockholders for the year ended December 31, 1998 (Exhibit No. 13) are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company is omitted from this Report as the Company has filed a definitive proxy statement (the "Proxy Statement"), and the information included therein under "Proposal I -- Election of Directors" is incorporated herein by reference. Information regarding the executive officers of the Company is included under separate caption in Part I of this Form 10-K. Item 405 of Regulation S-K disclosure is omitted from this Report as the Company has filed the Proxy Statement and the Item 405 disclosure therein under "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is omitted from this Report as the Company has filed the Proxy Statement, and the information included therein under "Proposal I -- Election of Directors" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is omitted from this Report as the Company has filed the Proxy Statement, and the information included therein under "Voting Securities and Principal Holders Thereof" and "Proposal I - Election of Directors" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is omitted from this Report as the Company has filed the Proxy Statement, and the information included therein under "Proposal I -- Election of Directors" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the Company included in the Annual Report to Stockholders for the year ended December 31, 1998, are incorporated herein by reference in Item 8 of this Report. The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this Report, except as expressly provided herein. 1. Independent Auditor's Report. 2. Statements of Financial Condition - December 31, 1998 and 1997. 3. Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. 4. Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996. 5. Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996. 6. Notes to Financial Statements. (a)(2) All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 23 (a)(3) The following exhibits either are filed as part of this Report or are incorporated herein by reference: Exhibit No. 2. Plan of Conversion of Hopkinsville Federal Savings -------------------------------------------------- Bank. Incorporated herein by reference to Exhibit No. 2 to ---- Registrant's Registration Statement on Form S-1 (File No. 333- 30215). Exhibit No. 3.1. Certificate of Incorporation. Incorporated herein ---------------------------- by reference to Exhibit No. 3.1 to Registrant's Registration Statement on Form S-1 (File No. 333-30215). Exhibit No. 3.2. Bylaws. ------ Exhibit No. 10.1. Employment Agreements by and between Hopkinsville ------------------------------------------------- Federal Savings Bank and Bruce Thomas, Peggy R. Noel and Boyd M. ---------------------------------------------------------------- Clark. Incorporated herein by reference to Exhibit No. 10.1 to ----- Registrant's Registration Statement on Form S-1 (File No. 333- 30215). Exhibit No. 10.2. Employment Agreements by and between HopFed ------------------------------------------- Bancorp, Inc. and Bruce Thomas, Peggy R. Noel and Boyd M. Clark. --------------------------------------------------------------- Incorporated herein by reference to Exhibit No. 10.2 to Registrant's Registration Statement on Form S-1 (File No. 333-30215). Exhibit No. 10.3. Employment Agreement Amendments by and between ---------------------------------------------- Hopkinsville Federal Savings Bank and Bruce Thomas, Peggy R. Noel ----------------------------------------------------------------- and Boyd M. Clark. ----------------- Exhibit No. 10.4. Employment Agreement Amendments by and between ---------------------------------------------- HopFed Bancorp, Inc. and Bruce Thomas, Peggy R. Noel and Boyd M. ---------------------------------------------------------------- Clark. ----- Exhibit No. 13. Annual Report to Stockholders ----------------------------- Except for those portions of the Annual Report to Stockholders for the year ended December 31, 1998, which are expressly incorporated herein by reference, such Annual Report is furnished for the information of the Commission and is not to be deemed "filed" as part of this Report. Exhibit No. 21. Subsidiaries of the Registrant. ------------------------------ Exhibit No. 27. Financial Data Schedule (SEC use only) ----------------------- (b) Not applicable. (c) Exhibits to this Form 10-K are attached or incorporated by reference as stated above. (d) None. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized. HOPFED BANCORP, INC. (Registrant) Date: April 14, 1999 By: /s/ Bruce Thomas ---------------- Bruce Thomas President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated. DATE: SIGNATURE AND TITLE: /s/ Bruce Thomas April 14, 1999 - ---------------- Bruce Thomas Director, President and Chief Executive Officer (Principal Executive Officer) /s/ Peggy R. Noel April 14, 1999 - ----------------- Peggy R. Noel Director, Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ WD Kelley April 14, 1999 - ------------- WD Kelley Chairman of the Board /s/ Boyd M. Clark April 14, 1999 - ----------------- Boyd M. Clark Director, Vice President and Secretary April __, 1999 - ---------------------- Clifton H. Cochran Director /s/ Walton G. Ezell April 14, 1999 - ------------------- Walton G. Ezell Director /s/ John Noble Hall, Jr. April 14, 1999 - ------------------------ John Noble Hall, Jr. Director 2 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF HOPFED BANCORP, INC. ARTICLE I PRINCIPAL EXECUTIVE OFFICE The principal executive office of HopFed Bancorp, Inc. (the "Corporation") shall be at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky. The Corporation may also have offices at such other places within or outside of the Commonwealth of Kentucky as the board of directors shall from time to time determine. ARTICLE II STOCKHOLDERS SECTION 1. Place of Meetings. All annual and special meetings of ----------------- stockholders shall be held at the principal executive office of the Corporation or at such other place within or outside of the State of Delaware as the board of directors may determine and as designated in the notice of such meeting. SECTION 2. Annual Meeting. A meeting of the stockholders of the -------------- Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at such date and time as the board of directors may determine. SECTION 3. Special Meetings. Special meetings of the stockholders ---------------- for any purpose or purposes may be called at any time by the board of directors or by a committee of the board of directors in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 4. Conduct of Meetings. Annual and special meetings shall ------------------- be conducted in accordance with these Bylaws or as otherwise prescribed by the board of directors. The chairman or the chief executive officer of the Corporation shall preside at such meetings. SECTION 5. Notice of Meeting. Except as otherwise requred by law, ----------------- notice to stockholders may be given by public disclosure or mail. If by mail, written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed by the secretary or the officer performing his duties, not less than ten days nor more than fifty days before the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6, with postage thereon prepaid. If a stockholder is present at a meeting, or in writing waives notice thereof before or after the meeting, notice of the meeting to such stockholder shall be unnecessary. When any stockholders' meeting, either annual or special, is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than thirty days or of the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. Fixing of Record Date. For the purpose of determining --------------------- stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than sixty days, and in case of a meeting of stockholders not less than ten days, prior to the date on which the particular action requiring such determination of stockholders, is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 7. Voting Lists. The officer or agent having charge of ------------ the stock transfer books for shares of the Corporation shall make, at least ten days before each meeting of stockholders, a complete record of the stockholders entitled to vote at such meeting or any adjournment thereof, with the address of and the number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Corporation, whether within or outside the State of Florida, and shall be subject to inspection by any stockholder for any purpose germane to the meeting at any time during usual business hours. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder for any purpose germane to the meeting during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such record or transfer books or to vote at any meeting of stockholders. SECTION 8. Quorum. One-third of the outstanding shares of the ------ Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than one-third of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 9. Proxies. At all meetings of stockholders, a ------- stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. SECTION 10. Voting. At each election for directors every ------ stockholder entitled to vote at such election shall be entitled to one vote for each share of stock held. Unless otherwise provided by the Certificate of Incorporation, by statute, or by these Bylaws, a majority of those votes cast by stockholders at a lawful meeting shall be sufficient to pass on a transaction or matter, except in the election of directors, which election shall be determined by a plurality of the votes of the shares present in person or by proxy at the meeting and entitled to vote on the election of directors. SECTION 11. Voting of Shares in the Name of Two or More Persons. --------------------------------------------------- When ownership of stock stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the stockholders of the Corporation any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose name shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 12. Voting of Shares by Certain Holders. Shares standing ----------------------------------- in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. 2 A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Corporation, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 13. Inspectors of Election. In advance of any meeting of ---------------------- stockholders, the chairman of the board or the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the board of directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. SECTION 14. Nominating Committee. The board of directors or a -------------------- committee appointed by the board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 15. New Business. Any new business to be taken up at the ------------ annual meeting shall be stated in writing and filed with the secretary of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as provided in the Corporation's Certificate of Incorporation. ARTICLE III BOARD OF DIRECTORS SECTION 1. General Powers. The business and affairs of the -------------- Corporation shall be under the direction of its board of directors. The chairman shall preside at all meetings of the board of directors. SECTION 2. Term and Election. The board of directors shall be ----------------- divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. The board of directors shall be classified in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 3. Regular Meetings. A regular meeting of the board of ---------------- directors shall be held at such time and place as shall be determined by resolution of the board of directors without other notice than such resolution. 3 SECTION 4. Special Meetings. Special meetings of the board of ---------------- directors may be called by or at the request of the chairman, the chief executive officer or one-third of the directors. The person calling the special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person. SECTION 5. Notice. Written notice of any special meeting shall be ------ given to each director at least two days previous thereto delivered personally or by telegram or at least seven days previous thereto delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 6. Quorum. A majority of the number of directors fixed by ------ Section 2 shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 5 of this Article III. SECTION 7. Manner of Acting. The act of the majority of the ---------------- directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by these Bylaws, the Certificate of Incorporation, or the General Corporation Law of the State of Delaware. SECTION 8. Action Without a Meeting. Any action required or ------------------------ permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 9. Resignation. Any director may resign at any time by ----------- sending a written notice of such resignation to the home office of the Corporation addressed to the chairman. Unless otherwise specified therein such resignation shall take effect upon receipt thereof by the chairman. SECTION 10. Vacancies. Any vacancy occurring in the board of --------- directors shall be filled in accordance with the provisions of the Corporation's Certificate of Incorporation. Any directorship to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of two-thirds of the directors then in office or by election at an annual meeting or at a special meeting of the stockholders held for that purpose. The term of such director shall be in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 11. Removal of Directors. Any director or the entire board -------------------- of directors may be removed only in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 12. Compensation. Directors, as such, may receive ------------ compensation for service on the board of directors. Members of either standing or special committees may be allowed such compensation as the board of directors may determine. 4 ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, as they may determine to be necessary or appropriate for the conduct of the business of the Corporation, and may prescribe the duties, constitution and procedures thereof. Each committee shall consist of one or more directors of the Corporation appointed by a majority of the whole board. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The board shall have power at any time to change the members of, to fill vacancies in, and to discharge any committee of the board. Any member of any such committee may resign at any time by giving notice to the Corporation; provided, however, that notice to the board, the chairman of the board, the chief executive officer, the chairman of such committee, or the secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the board called for that purpose. ARTICLE V Officers SECTION 1. Positions. The officers of the Corporation shall be a --------- chairman, a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. Election and Term of Office. The officers of the --------------------------- Corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The board of directors may authorize the Corporation to enter into an employment contract with any officer in accordance with state law; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. Removal. Any officer may be removed by vote of ------- two-thirds of the board of directors whenever, in its judgment, the best interests of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. SECTION 5. Remuneration. The remuneration of the officers shall be ------------ fixed from time to time by the board of directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. 5 ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. Contracts. To the extent permitted by applicable law, --------- and except as otherwise prescribed by the Corporation's Certificate of Incorporation or these Bylaws with respect to certificates for shares, the board of directors or the executive committee may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. SECTION 2. Loans. No loans shall be contracted on behalf of the ----- Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders ------------------- for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees or agents of the Corporation in such manner, including in facsimile form, as shall from time to time be determined by resolution of the board of directors. SECTION 4. Deposits. All funds of the Corporation not otherwise -------- employed shall be deposited from time to time to the credit of the Corporation in any of its duly authorized depositories as the board of directors may select. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares. The shares of the Corporation ----------------------- shall be represented by certificates signed by the chairman of the board of directors or the president or a vice president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. SECTION 2. Form of Share Certificates. All certificates -------------------------- representing shares issued by the Corporation shall set forth upon the face or back that the Corporation will furnish to any stockholder upon request and without charge a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. Each certificate representing shares shall state upon the face thereof: That the Corporation is incorporated under the laws of the State of Delaware; the name of the person to whom issued; the number and class of shares, the designation of the series, if any, which such certificate represents; the par value of each share represented by such certificate, or a statement that the shares are without par value. Other matters in regard to the form of the certificates shall be determined by the board of directors. SECTION 3. Payment for Shares. No certificate shall be issued for ------------------ any share until such share is fully paid. SECTION 4. Form of Payment for Shares. The consideration for the -------------------------- issuance of shares shall be paid in accordance with the provisions of the Corporation's Certificate of Incorporation. 6 SECTION 5. Transfer of Shares. Transfer of shares of capital stock ------------------ of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only the holder of record thereof or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. SECTION 6. Lost Certificates. The board of directors may direct a ----------------- new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. ARTICLE VIII FISCAL YEAR; ANNUAL AUDIT The fiscal year of the Corporation shall end on the last day of December of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. ARTICLE IX DIVIDENDS Dividends upon the stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in the Corporation's own stock. ARTICLE X CORPORATION SEAL The corporate seal of the Corporation shall be in such form as the board of directors shall prescribe. ARTICLE XI AMENDMENTS In accordance with the Corporation's Certificate of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the stockholders of the Corporation only by vote of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, the board of directors may repeal, alter, amend or rescind these Bylaws by vote of two-thirds of the board of directors at a legal meeting held in accordance with the provisions of these Bylaws. 7 EX-10.3 3 EXHIBIT 10.3 EXHIBIT 10.3 Employment Agreement Amendments by and between Hopkinsville Federal Savings Bank and Bruce Thomas, Peggy R. Noel and Boyd M. Clark AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, as of February 6, 1998, Hopkinsville Federal Savings Bank (the "Bank") and Bruce Thomas (the "Employee") entered into an Employment Agreement employing the Employee as President and Chief Executive Officer of the Bank (the "Employment Agreement"); and WHEREAS, Section 5 of the Employment Agreement provides, among other things, that the term of the Employment Agreement shall be for the period commencing on the effective date of the Federal Stock Charter of the Bank and ending twelve (12) months thereafter; and WHEREAS, the Board of Directors of the Bank has determined to extend the Employee's term of employment for an additional two-year period beyond the first anniversary date of the commencement of the Employment Agreement; and WHEREAS, the Bank and the Employee desire to record such amendment to the Employment Agreement. It is therefore agreed that the first sentence of Section 5 of the Employment Agreement is hereby amended to read as follows: The Bank hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending thirty-six (36) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). IN WITNESS WHEREOF, the parties have executed this Amendment to Employment Agreement as of February 6, 1999. ATTEST: HOPKINSVILLE FEDERAL SAVINGS BANK __________________________ By: ___________________________________ Secretary Chairman of the Board WITNESS: __________________________ _______________________________________ Bruce Thomas ("Employee") AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, as of February 6, 1998, Hopkinsville Federal Savings Bank (the "Bank") and Peggy R. Noel (the "Employee") entered into an Employment Agreement employing the Employee as Executive Vice President, Chief Financial Officer and Chief Operations Officer of the Bank (the "Employment Agreement"); and WHEREAS, Section 5 of the Employment Agreement provides, among other things, that the term of the Employment Agreement shall be for the period commencing on the effective date of the Federal Stock Charter of the Bank and ending twelve (12) months thereafter; and WHEREAS, the Board of Directors of the Bank has determined to extend the Employee's term of employment for an additional two-year period beyond the first anniversary date of the commencement of the Employment Agreement; and WHEREAS, the Bank and the Employee desire to record such amendment to the Employment Agreement. It is therefore agreed that the first sentence of Section 5 of the Employment Agreement is hereby amended to read as follows: The Bank hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending thirty-six (36) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). IN WITNESS WHEREOF, the parties have executed this Amendment to Employment Agreement as of February 6, 1999. ATTEST: HOPKINSVILLE FEDERAL SAVINGS BANK ____________________________ By: _____________________________________ Secretary Chairman of the Board WITNESS: ____________________________ _________________________________________ Peggy R. Noel ("Employee") AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, as of February 6, 1998, Hopkinsville Federal Savings Bank (the "Bank") and Boyd M. Clark (the "Employee") entered into an Employment Agreement employing the Employee as Senior Vice President -- Loan Administration of the Bank (the "Employment Agreement"); and WHEREAS, Section 5 of the Employment Agreement provides, among other things, that the term of the Employment Agreement shall be for the period commencing on the effective date of the Federal Stock Charter of the Bank and ending twelve (12) months thereafter; and WHEREAS, the Board of Directors of the Bank has determined to extend the Employee's term of employment for an additional two-year period beyond the first anniversary date of the commencement of the Employment Agreement; and WHEREAS, the Bank and the Employee desire to record such amendment to the Employment Agreement. It is therefore agreed that the first sentence of Section 5 of the Employment Agreement is hereby amended to read as follows: The Bank hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending thirty-six (36) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). IN WITNESS WHEREOF, the parties have executed this Amendment to Employment Agreement as of February 6, 1999. ATTEST: HOPKINSVILLE FEDERAL SAVINGS BANK _____________________________ By: _______________________________________ Secretary Chairman of the Board WITNESS: _____________________________ ___________________________________________ Boyd M. Clark ("Employee") EX-10.4 4 EXHIBIT 10.4 EXHIBIT 10.4 Employment Agreement Amendments by and between HopFed Bancorp, Inc. and Bruce Thomas, Peggy R. Noel and Boyd M. Clark AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, as of February 6, 1998, HopFed Bancorp, Inc. (the "Company") and Bruce Thomas (the "Employee") entered into an Employment Agreement employing the Employee as President and Chief Executive Officer of the Company (the "Employment Agreement"); and WHEREAS, Section 5 of the Employment Agreement provides, among other things, that the term of the Employment Agreement shall be for the period commencing on the effective date of the Federal Stock Charter of Hopkinsville Federal Savings Bank (the "Bank") and ending twelve (12) months thereafter; and WHEREAS, the Board of Directors of the Company has determined to extend the Employee's term of employment for an additional two-year period beyond the first anniversary date of the commencement of the Employment Agreement; and WHEREAS, the Company and the Employee desire to record such amendment to the Employment Agreement. It is therefore agreed that the first sentence of Section 5 of the Employment Agreement is hereby amended to read as follows: The Company hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending thirty-six (36) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). IN WITNESS WHEREOF, the parties have executed this Amendment to Employment Agreement as of February 6, 1999. ATTEST: HOPFED BANCORP, INC. ___________________________________ By:________________________________ Secretary Chairman of the Board WITNESS: ___________________________________ ___________________________________ Bruce Thomas ("Employee") AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, as of February 6, 1998, HopFed Bancorp, Inc. (the "Company") and Peggy R. Noel (the "Employee") entered into an Employment Agreement employing the Employee as Vice President, Chief Financial Officer and Treasurer of the Company (the "Employment Agreement"); and WHEREAS, Section 5 of the Employment Agreement provides, among other things, that the term of the Employment Agreement shall be for the period commencing on the effective date of the Federal Stock Charter of Hopkinsville Federal Savings Bank (the "Bank") and ending twelve (12) months thereafter; and WHEREAS, the Board of Directors of the Company has determined to extend the Employee's term of employment for an additional two-year period beyond the first anniversary date of the commencement of the Employment Agreement; and WHEREAS, the Company and the Employee desire to record such amendment to the Employment Agreement. It is therefore agreed that the first sentence of Section 5 of the Employment Agreement is hereby amended to read as follows: The Company hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending thirty-six (36) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). IN WITNESS WHEREOF, the parties have executed this Amendment to Employment Agreement as of February 6, 1999. ATTEST: HOPFED BANCORP, INC. ___________________________________ By:________________________________ Secretary Chairman of the Board WITNESS: ___________________________________ ___________________________________ Peggy R. Noel ("Employee") AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, as of February 6, 1998, HopFed Bancorp, Inc. (the "Company") and Boyd M. Clark (the "Employee") entered into an Employment Agreement employing the Employee as Vice President and Secretary of the Company (the "Employment Agreement"); and WHEREAS, Section 5 of the Employment Agreement provides, among other things, that the term of the Employment Agreement shall be for the period commencing on the effective date of the Federal Stock Charter of Hopkinsville Federal Savings Bank (the "Bank") and ending twelve (12) months thereafter; and WHEREAS, the Board of Directors of the Company has determined to extend the Employee's term of employment for an additional two-year period beyond the first anniversary date of the commencement of the Employment Agreement; and WHEREAS, the Company and the Employee desire to record such amendment to the Employment Agreement. It is therefore agreed that the first sentence of Section 5 of the Employment Agreement is hereby amended to read as follows: The Company hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending thirty-six (36) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). IN WITNESS WHEREOF, the parties have executed this Amendment to Employment Agreement as of February 6, 1999. ATTEST: HOPFED BANCORP, INC. ___________________________________ By:________________________________ Secretary Chairman of the Board WITNESS: ___________________________________ ___________________________________ Boyd M. Clark ("Employee") EX-13 5 ANNUAL REPORT HOPFED BANCORP, INC. [LOGO OF HOPFED BANCORP, INC. APPEARS HERE] ANNUAL REPORT ------------- 1998 HOPFED BANCORP, INC. HopFed Bancorp, Inc., a Delaware corporation (the "Company"), was organized by Hopkinsville Federal Savings 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 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 and Elkton, 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 and adopted its current corporate title. 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 (502) 885-1171. MARKET AND DIVIDEND INFORMATION Since February 9, 1998, the Common Stock has been quoted on the Nasdaq Stock Market under the symbol "HFBC." As of March 31, 1999, there were approximately 1,620 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 Common Stock High Low ---- --- Year Ended December 31, 1998 First Quarter $ 17.75 $ 16.00 Second Quarter 22.00 17.75 Third Quarter 19.625 15.25 Fourth Quarter 18.875 16.0625
Dividends of $0.075 per share were declared in each of the third and fourth 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 Company's earnings on the proceeds from the conversion and 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........................................Inside Front Cover Market and Dividend Information............................Inside Front Cover Letter to Stockholders.......................................................1 Selected Financial Information and Other Data................................2 Management's Discussion and Analysis of Financial Condition and Results of Operations..............................5 Financial Statements.........................................................18 Corporate Information......................................Inside Back Cover
LETTER TO STOCKHOLDERS To Our Stockholders, 1998 was an important year in the history of Hopkinsville Federal Savings Bank! After serving the local area for 119 years as a mutual institution, in February 1998 the Bank converted to the stock form of organization as a wholly owned subsidiary of HopFed Bancorp, Inc. A total of 4,033,625 shares of common stock were sold at a purchase price of $10.00 per share. The Company experienced a profitable year in 1998, earning $3.0 million, which was a return on average assets of 1.29% and a return on average equity of 5.76%. In 1998, loans receivable, net increased to $108.8 million, compared to $103.5 million in 1997 and $95.5 million in 1996. Asset quality is important to your Board of Directors and Management. The Company continues to maintain high underwriting and investment standards. No loans were charged off in 1998. The Company's interest rate spread increased to 2.07% for the year ended December 31, 1998, from 1.93% and 1.35% for the years ended December 31, 1997 and 1996, respectively. The Directors, Management and Employees of HopFed Bancorp, Inc. appreciate greatly your trust and support during our first year as a stock company. As a locally owned financial institution, we are committed to serving our community and meeting the challenges of the financial services industry, while continuing our tradition of first class service to our customers. Sincerely, /s/ Bruce Thomas Bruce Thomas President and Chief Executive Officer 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, ------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Total amount of: (Dollars in thousands) Assets.......................... $220,032 $343,995 $204,398 $212,598 $202,128 Loans receivable, net........... 108,807 103,470 95,496 84,755 78,527 Cash and due from banks......... 1,905 1,264 1,452 1,303 1,578 Time deposits and interest-bearing deposits in FHLB................... 214 5,945 2,000 12,550 38,200 Federal funds sold.............. 9,685 151,095 500 7,948 1,330 Securities available for sale... 68,139 26,699 5,125 4,053 2,955 Securities held to maturity:. FHLB securities.............. 13,998 31,988 77,962 80,990 63,002 Mortgage-backed securities... 13,356 19,578 17,984 17,563 13,343 Deposits........................ 154,816 320,633 183,827 194,775 185,699 FHLB advances................... -- -- 1,317 -- -- Total equity.................... 61,134 19,936 16,824 16,002 14,930 - ------------------------------------------------------------------------------------------------------------------------------- Number of: Real estate loans outstanding 2,150 2,198 2,151 2,074 2,026 Deposit accounts................ 19,251 21,277 23,778 25,473 24,648 Offices open.................... 5 5 5 5 5 OPERATING DATA Year Ended December 31, ------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) Interest income.................. $ 15,051 $ 14,311 $ 13,220 $ 12,472 $ 10,434 Interest expense................. 8,004 9,350 9,757 10,009 7,740 -------- -------- -------- -------- -------- Net interest income before provision for loan losses...... 7,047 4,961 3,463 2,463 2,694 Provision for loan losses........ 20 20 100 -- -- -------- -------- -------- -------- -------- Net interest income.............. 7,027 4,941 3,363 2,463 2,694 Non-interest income.............. 547 528 590 398 512 Non-interest expense............. 2,982 2,408 3,674(1) 2,246 2,339 -------- -------- -------- -------- -------- Income before income taxes....... 4,592 3,061 279 615 867 Provision for income taxes....... 1,641 1,038 84 203 287 -------- -------- -------- -------- -------- Net income....................... $ 2,951 $ 2,023 $ 195(1) $ 412 $ 580 ======== ======== ======== ======== ========
________________________ (1) Includes payment to the SAIF of a one-time deposit insurance special assessment of $1.2 million ($812,000 net of tax) pursuant to legislation enacted to recapitalize the Savings Association Insurance Fund ("SAIF"). See Note 13 of Notes to Financial Statements. 2 SELECTED QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ---------- ---------- ----------- (In thousands) YEAR ENDED DECEMBER 31, 1997: Interest income $3,271 $3,372 $3,368 $4,300 Net interest income after provision for losses on loans 1,030 1,177 1,147 1,587 Noninterest income 125 145 134 124 Noninterest expense 616 547 562 683 Net income (loss) 358 512 477 676 YEAR ENDED DECEMBER 31, 1998: Interest income $4,317 $3,592 $3,578 $3,564 Net interest income after provision for losses on loans 1,903 1,705 1,710 1,709 Noninterest income 135 145 138 129 Noninterest expense 578 622 594 1,188 Net income (loss) 968 794 829 360
3 KEY OPERATING RATIOS
At or for the Year Ended December 31, ------------------------------------------ 1998 1997 1996 ---- ---- ---- PERFORMANCE RATIOS Return on average assets (net income divided by average total assets).................................................... 1.29% 0.93% 0.09% (1) Return on average equity (net income divided by average total equity)............................................ 5.76% 11.13% 1.19% (1) Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)........ 2.07% 1.93% 1.35% Ratio of average interest-earning assets to average interest-bearing liabilities..................................... 130.08% 109.17% 107.29% Ratio of non-interest expense to average total assets............. 1.30% 1.10% 1.76% Ratio of net interest income after provision for loan losses to non-interest expense.......................... 235.65% 205.19% 91.54% Efficiency ratio (noninterest expense divided by sum of net interest income plus noninterest income)......................... 39.26% 44.03% 92.94% ASSET QUALITY RATIOS Nonperforming assets to total assets at end of period............. 0.13% 0.05% 0.13% Nonperforming loans to total loans at end of period............... 0.26% 0.16% 0.28% Allowance for loan losses to total loans at end of period......... 0.24% 0.23% 0.23% Allowance for loan losses to nonperforming loans at end of period.................................................... 89.90% 145.40% 81.58% Provision for loan losses to total loans receivable, net.......... 0.02% 0.02% 0.10% Net charge-offs to average loans outstanding...................... N/A(2) N/A(2) 0.005% CAPITAL RATIOS Total equity to total assets at end of period..................... 27.78% 5.80% 8.23% Average total equity to average assets............................ 22.40% 8.33% 7.82%
___________________ (1) Includes the effect of the payment in 1996 of a one-time deposit insurance special assessment of $1.2 million to the SAIF. Excluding the effect of the SAIF assessment, the return on average assets would have been 0.48% and its return on average equity would have been 6.15%. (2) Ratio is not applicable because there was no provision for loan losses or net charge-offs for this period.
REGULATORY CAPITAL RATIOS December 31, 1998 ------------------------------ (Dollars in thousands) Tangible capital.............................................. $35,886 18.15% Less: Tangible capital requirement.......................... 2,965 1.50 ------- ------- Excess....................................................... $32,921 16.65% ======= ======= Core capital.................................................. $35,886 18.15% Less: Core capital requirement............................... 7,907 4.00 ------- ------- Excess....................................................... $27,979 14.15% ======= ======= Total risk-based capital...................................... $36,143 17.80% Less: Risk-based capital requirement......................... 5,769 8.00 ------- ------- Excess....................................................... $30,374 9.80% ======= =======
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, 1998, the Company recorded net income of $3.0 million, a return on average assets of 1.29% and a return on average equity of 5.76%. For the year ended December 31, 1997, the Company recorded net income of $2.0 million, a return on average assets of 0.93% and a return on average equity of 11.13%. For the year ended December 31, 1996, the Company recorded net income of $195,000, a return on average assets of 0.09% and a return on average equity of 1.19%. In 1996, the Federal Deposit Insurance Corporation ("FDIC") was paid a special assessment of $1.2 million before taxes ($812,000 net of tax) to recapitalize the SAIF. Excluding the effect of this one-time assessment in 1996, the Company would have recorded net income of $1,007,000, a return on average assets of 0.48% and a return on average equity of 6.15%. 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 Until 1996, the Company's primary focus was on asset growth by attracting deposits. The Company determined that deposits were the most suitable source of funding for the Bank because of their relative stability and the opportunity for the Bank to offer other income-producing products to its depositors. To attract deposits, the Company offered rates on accounts that were at or above then- prevailing rates in its market area. As a result of this practice, the Company's total assets increased each year until it reached $212.6 million at December 31, 1995. This strategy substantially increased the Company's interest expense and reduced profitability. The Company, however, was unable to deploy the significant amount of funds generated by this strategy solely through loan originations in its market area, as reflected in the loan-to-deposit ratio of 43.5% at December 31, 1995. As a result, the Company invested these funds in securities, primarily U.S. government and agency securities and mortgage-backed securities. See "-- Asset/Liability Management." The yields on these investments were significantly less than the yields obtained by the Company on its loan portfolio. The combined lower weighted average yield on the Company's interest-earning assets, when reduced by the relatively high cost of the Company's deposits due to the Company's former deposit pricing strategy, tended to depress the Company's overall profitability. In 1996, the Company revised its business strategy to emphasize increased profitability over asset growth by attracting deposits on a less aggressive basis through a reduction in overall deposit rates. This reduction caused a deposit run-off during 1996 of approximately $10.9 million in higher-costing deposits. This run-off contributed to a reduction in the Company's total assets to $204.4 million at December 31, 1996 from $212.6 million at December 31, 1995. Deposits as a percentage of average assets decreased from 92.4% at December 31, 1995, to 87.8% at December 31, 1996. Deposits as a percentage of average assets were 147.0% at December 31, 1997, primarily as a result of subscriptions for Common Stock in the conversion. At December 31, 1998, deposits as a percentage of average assets were 67.7%. In addition, the Company 5 has continued its emphasis on the origination of adjustable rate loans in its market area. In 1996, average loans increased $9.9 million, or 12.0%, from the 1995 average. In 1997, average loans increased $7.1 million, or 7.7%, from the 1996 average. And in 1998, average loans increased $6.7 million, or 6.8%, from the 1997 average. Despite the Company's reduced emphasis on deposit-gathering, the Company remains well positioned to meet its liquidity needs. As a result of the Company's revised business strategy, the Company's interest rate spread increased to 2.07% for the year ended December 31, 1998 and 1.93% for the year ended December 31, 1997, compared to 1.35% for the year ended December 31, 1996. During 1996, the Bank was required to pay a one-time deposit insurance assessment of $1.2 million ($812,000 net of taxes) to the FDIC`. See Note 13 of Notes to Financial Statements. This special assessment was imposed on all SAIF-insured financial institutions in September 1996. Including this special SAIF assessment, the Company's net income, return on average assets and return on average equity for 1996 were $195,000, 0.09%, and 1.19%, respectively. Excluding the after-tax effect of this one-time assessment, the Company's 1996 net income, return on average assets and return on average equity would have been $1,007,000, 0.48% and 6.15%, respectively. The Company's profitability in the year ended December 31, 1998 also was primarily attributable to its current business strategy. The Company's net income, return on average assets and return on average equity were $3.0 million, 1.29% and 5.76%, respectively, for the year ended December 31, 1998. See "Selected Financial Information and Other Data." The results to date which are attributable to the Company's current business strategy are not necessarily indicative of future results. The Company and the Bank are in the process of preparing an updated Business Plan which will, among other things, evaluate their current business strategy and financial condition, as well as post-conversion operating results. Strategies to be considered include, but are not limited to, diversification of business, dividend policy and repurchases of shares of Common Stock. It is expected that the revised Business Plan will be completed in the second quarter of 1999. 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, 1998, approximately $15.8 million of the one-to-four family residential loans originated by the Company (comprising 64.73% of such loans) had adjustable rates. The Company used excess funds to invest in U.S. government and agency securities 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. government and agency securities consist of notes issued by the FHLB System and other government agencies. These securities generally are purchased for a term of five years or less, and are fixed-term, fixed rate securities, 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, 1998, approximately $20.0 million of the securities were due in one year or less and approximately $17.0 million were due in one to five years. However, at December 31, 1998, approximately $17.0 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, 1998, all of these securities are callable and/or due prior to December 31, 1999. It is currently anticipated that any funds available from a prepayment would be reinvested into those U.S. government and agency securities or mortgage-backed securities which the Company believes to be the most appropriate investments at that time, assuming lending opportunities are not then available. Notwithstanding their call feature, it is believed that investments in callable securities, which have improved the portfolio yield over alternative fixed yield, fixed maturity investments, have been beneficial. 6 Mortgage-backed securities entitle the Company to receive a pro rata portion of the cash flow from an identified pool of mortgages. Although mortgage-backed securities generally offer lesser yields than the loans for which they are exchanged, mortgage-backed securities present lower credit risk by virtue of the guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company. Further, since they are primarily adjustable rate, mortgage- backed securities are helpful in limiting the Company's interest rate risk. For more information regarding investment securities, see Note 2 of Notes to Financial Statements. INTEREST RATE SENSITIVITY ANALYSIS The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase 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, 1998, 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 $39,643 $-5,630 -12% 20.21% -182bp +300 bp 41,926 -3,347 -7% 20.03% -100bp +200 bp 43,598 -1,675 -4% 21.59% -44bp +100 bp 44,602 -671 -1% 21.87% -15bp 0 bp 45,273 22.03% -100 bp 46,192 919 +2% 22.27% +24bp -200 bp 47,519 2,245 +5% 22.66% +63bp -300 bp 49,049 3,776 +8% 23.11% +108bp -400 bp 50,368 5,094 +11% 23.47% +144bp
Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets............. 22.03% Exposure Measure: Post-Shock NPV Ratio.................... 21.59% Sensitivity Measure: Change in NPV Ratio.................. 44bp 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. 7 The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At December 31, 1998, the Company had a positive one-year interest rate sensitivity gap of 22.59% 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, 1998 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................ $ 72,974 $ 1,673 $ 2,855 $ 8,803 $ 2,305 $ 88,610 Multi-family residential.......... 1,539 -- -- -- -- 1,539 Construction...................... 3,599 -- -- -- -- 3,599 Non-residential................... 8,193 -- -- -- -- 8,193 Secured by deposits............... 2,280 -- -- -- -- 2,280 Other consumer.................... 1,340 3,213 33 -- -- 4,586 Time deposits and interest bearing deposits in FHLB........... 214 -- -- -- -- 214 Federal funds sold................. 9,686 -- -- -- -- 9,686 Securities......................... 29,875 17,048 -- -- -- 46,923 Mortgage-backed securities......... 31,192 13,665 895 54 2,764 48,570 -------- -------- ------- ------- ------- -------- Total............................ $160,892 $ 35,599 $ 3,783 $ 8,857 $ 5,069 $214,200 -------- -------- ------- ------- ------- -------- Interest-bearing liabilities: Deposits........................... $112,498 $ 39,588 -- -- -- $152,086 -------- -------- ------- ------- ------- -------- Interest sensitivity gap............. $ 48,394 $ (3,989) $ 3,783 $ 8,857 $ 5,069 $ 62,114 ======== ======== ======= ======= ======= ======== Cumulative interest sensitivity gap................................ $ 48,394 $ 44,405 $48,188 $57,045 $62,114 $ 62,114 ======== ======== ======= ======= ======= ======== Ratio of interest-earning assets to interest-bearing liabilities.... 143.02% 89.92% N/A N/A N/A 140.84% ======== ======== ======= ======= ======= ======== Ratio of cumulative gap to total interest-earning assets...... 22.59% 20.73% 22.50% 26.63% 29.00% 29.00% ======== ======== ======= ======= ======= ========
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 retention of adjustable-rate mortgage loans in the Company's portfolio helps reduce the Company's exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to borrowers as a result of repricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrowers. 8 AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to the Company's average interest-earning assets and 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, 1998 --------------------------------- Weighted Balance Average Yield/Cost ------- ------------------ (Dollars in thousands) Interest-earning assets: Loans receivable, net................... $108,807 7.62% Securities available for sale........... 68,139 3.73% Securities held to maturity............. 27,354 6.31% Time deposits and other interest- bearing cash deposits................. 9,900 4.68% -------- ------ Total interest-earning assets......... 214,200 6.08% Non-interest-earning assets.............. 5,832 -------- Total assets............................ $220,032 ======== Interest-bearing liabilities: Deposits................................ $152,085 4.70% Non-interest-bearing liabilities......... 6,814 -------- Total liabilities..................... 158,899 Common stock............................. 40 Additional paid-in capital............... 39,546 Retained earnings........................ 18,984 Unallocated ESOP shares.................. (2,933) Accumulated other comprehensive income.................................. $ 5,496 -------- Total liabilities and equity.......... $220,032 ======== Interest rate spread..................... 1.38% ------ Ratio of interest-earning assets interest-bearing liabilities............ 144.59% ======
(Continued on following page) 9
Year Ended December 31, ------------------------------------------------------------------------------ 1998 1997 ------------------------------------- ------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable, net................. $105,837 $ 8,279 7.82% $ 99,126 $ 7,607 7.67% Securities available for sale......... 48,539 2,418 4.98% 11,405 412 3.61% Securities held to maturity........... 36,777 2,360 6.42% 75,307 4,706 6.25% Time deposits and other interest-bearing cash deposits............................. 32,480 1,994 6.13% 27,233 1,586 5.82% -------- ------- -------- ------- Total interest-earning assets.............................. 223,633 15,051 6.73% 213,071 14,311 6.72% ------- ------ ------- ------ Non-interest-earning assets............ 5,143 5,119 -------- -------- Total assets.......................... $228,776 $218,190 ======== ======== Interest-bearing liabilities: Deposits.............................. $171,922 8,004 4.65% $195,019 $ 9,341 4.79% Borrowings............................ -- -- --% 161 9 5.59% -------- ------- ------ -------- ------- Total interest-bearing liabilities......................... 171,922 8,004 4.65% 195,180 9,350 4.79% ------- ------ ------- ------ Non-interest-bearing liabilities....... 5,629 4,829 -------- -------- Total liabilities.................... 177,551 200,009 Common stock........................... 32 -- Additional paid-in capital............. 31,492 -- Retained earnings...................... 18,174 15,510 Unallocated ESOP shares................ (2,582) -- Accumulated other comprehensive income.................. 4,109 2,671 -------- -------- Total liabilities and equity.............................. $228,776 $218,190 ======== ======== Net interest income.................... $ 7,047 $ 4,961 ======= ======= Interest rate spread................... 2.07% 1.93% ====== ====== Net yield on interest-earning Assets................................ 3.15% 2.33% ====== ====== Ratio of average interest-earning assets to average interest- bearing liabilities................... 130.08% 109.17% ====== ====== -------------------------------------- 1996 -------------------------------------- Average Average Balance Interest Yield/Cost ------- -------- ---------- Interest-earning assets: Loans receivable, net................. $ 92,066 $ 6,824 7.41% Securities available for sale......... 4,372 151 3.45% Securities held to maturity........... 98,139 5,624 5.73% Time deposits and other interest-bearing cash deposits............................. 9,459 621 6.75% -------- ------- Total interest-earning assets.............................. 204,036 13,220 6.48% ------- ------ Non-interest-earning assets............ 5,310 -------- Total assets.......................... $209,346 ======== Interest-bearing liabilities: Deposits.............................. $189,837 $ 9,732 5.13% Borrowings............................ 329 25 7.59% -------- ------- Total interest-bearing liabilities......................... 190,166 9,757 5.13% ------- ------ Non-interest-bearing liabilities....... 2,816 -------- Total liabilities.................... 192,982 Common stock........................... -- Additional paid-in capital............. -- Retained earnings...................... 14,578 Unallocated ESOP shares................ -- Accumulated other comprehensive income.................. 1,786 -------- Total liabilities and equity.............................. $209,346 ======== Net interest income.................... $ 3,463 ======= Interest rate spread................... 1.35% ====== Net yield on interest-earning Assets................................ 1.70% ====== Ratio of average interest-earning assets to average interest- bearing liabilities................... 107.29% ======
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, ----------------------------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 --------------------------------------------- ---------------------------------------------- Increase Increase (Decrease) due to (Decrease) due to --------------------------- ------------------------------ Total Increase Total Increased Rate Volume (Decrease) Rate Volume (Decrease) ----------- ------------- ------------- ------------- ------------ --------- (Dollars in thousands) Interest-earning assets: Loans receivable............. $ 157 $ 515 $ 672 $ 260 $ 523 $ 783 Securities available for sale........................ 665 1,341 2,006 18 243 261 Securities held to maturity.................... 62 (2,408) (2,346) 390 (1,308) (918) Other interest-earning assets...................... 102 306 408 (203) 1,168 965 ------ ------- ------- ------ ------- ------ Total interest- earning assets............. $ 986 $ (246) $ 740 $ 465 $ 626 $1,091 ------ ------- ------- ------ ------- ------ Interest-bearing liabilities: Deposits..................... $ (231) $(1,106) $(1,337) $ (657) $ 266 $ (391) Borrowings................... -- (9) (9) -- (16) (16) ------ ------- ------- ------ ------- ------ Total interest- bearing liabilities........ $ (231) $(1,115) $(1,346) $ (657) $ 250 $ (407) ------ ------- ------- ------ ------- ------ Increase in net interest income.............. $1,217 $ 869 $ 2,086 $1,122 $ 376 $1,498 ====== ======= ======= ====== ======= ======
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997 The Company's total assets decreased by $124.0 million, or 36.1%, from $344.0 million at December 31, 1997 to $220.0 million at December 31, 1998, primarily as a result of a reduction in federal funds sold from $151.1 million at December 31, 1997 to $9.7 million at December 31, 1998, primarily due to the expenditure of funds received in the conversion. At December 31, 1998, deposits decreased to $154.8 million from $320.6 million at December 31, 1997, a net decrease of $165.8 million, or 51.7%. This reduction reflected two factors: primarily the use of deposits to purchase stock in the conversion and continuation of the Company's strategy to price deposits less aggressively. The Company's average cost of deposits for the year ended December 31, 1998 was 4.65%, compared to 4.79% for the year ended December 31, 1997. The loan portfolio increased by $5.3 million, or 5.2%, during the year ended December 31, 1998. Net loans totaled $108.8 million and $103.5 million at December 31, 1998 and 1997, respectively. The increase in the loan activity during the year ended December 31, 1998 was primarily due to the Company's efforts to expand its loan originations and reduce the proportion of its interest-earning assets not invested in loans. For the year ended December 31, 1998, the Company's average yield on loans was 7.82%, compared to 7.67% for the year ended December 31, 1997. At December 31, 1998, the investment portfolio included securities classified as "held to maturity" carried at amortized cost of $27.4 million and an estimated fair market value of $27.6 million and securities classified as "available for sale" with an estimated fair market value of $68.1 million, including Federal Home Loan Mortgage Corporation ("FHLMC") stock with a fair market value of $8.0 million. The allowance for loan losses totaled $258,000 at December 31, 1998, compared to $237,000 at December 31, 1997. As of those dates, the Company's non- performing loans were $287,000 and $163,000, respectively, or 0.26% and 0.16% of total loans, respectively. At December 31, 1998, the ratio of the allowance for loan losses to loans was 89.90%, compared to 145.50% at December 31, 1997. The determination of the allowance for loan losses is based on management's analysis, performed on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical 11 loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred. The Company has had minimal losses on loans in prior years. See Note 3 of Notes to Financial Statements. Premises and equipment, net, increased by $208,000 from December 31, 1997 to December 31, 1998. Land increased from $538,000 at December 31, 1997 to $543,000 at December 31, 1998. These increases were due to the relocation of the Cadiz branch to a new facility constructed during the year. See Note 4 of Notes to Financial Statements. The Company's other assets decreased $214,000, to $225,000 at December 31, 1998, from $439,000 at December 31, 1997, principally due to prepaid conversion expenses in the prior year. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996 The Company's total assets increased by $139.6 million, from $204.4 million at December 31, 1996 to $344.0 million at December 31,1997. Federal funds sold increased from $500,000 at December 31, 1996 to $151.1 million at December 31, 1997, primarily due to funds received in connection with the conversion. Securities held to maturity declined $44.4 million due to various issues maturing. A portion of such funds was reinvested in securities available for sale, which increased $21.6 million. In 1997, the Company continued to price its deposits less aggressively in an effort to reduce its overall cost of funds. At December 31, 1997 deposits increased to $320.6 million from $183.8 million at December 31, 1996, a net increase of $136.8 million, primarily as a result of subscriptions for the Common Stock in the conversion. The Company's average cost of deposits for the year ended December 31, 1997 was 4.79%, compared to 5.13% for the year ended December 31, 1996. The Company's loan portfolio increased by $8.0 million during the year ended December 31, 1997. Net loans totaled $103.5 million and $95.5 million at December 31, 1997 and December 31, 1996, respectively. The increase in the loan activity during the year ended December 31, 1997 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, 1997, the Company's average yield on loans was 7.67%, compared to 7.41% for the year ended December 31, 1996. At December 31, 1997, the Company's investments classified as "held to maturity" were carried at amortized cost of $51.6 million and had an estimated fair market value of $52.0 million, and its securities classified as "available for sale" had an estimated fair market value of $26.7 million, including FHLMC stock with an estimated fair market value of $5.2 million. See Note 2 of Notes to Financial Statements. The allowance for loan losses totaled $237,000 at December 31, 1997, an increase of $20,000 from the allowance of $217,000 at December 31, 1996. The ratio of the allowance for loan losses to loans was 0.23% at each of December 31, 1997 and 1996. Also at December 31, 1997, the Company's non-performing loans were $163,000, or 0.16% of total loans, compared to $266,000, or 0.28% of total loans, at December 31, 1996, and the Company's ratio of allowance for loan losses to non-performing loans at December 31, 1997 and December 31, 1996 was 145.50% and 81.58%, respectively. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 NET INCOME. The Company's net income for the year ended December 31, 1998 was $3.0 million, compared to $2.0 million for the year ended December 31, 1997. The increase in net income for the year resulted primarily from the Company's repositioning funds into higher yielding assets as well as a decline in the cost of funds. NET INTEREST INCOME. Net interest income for the year ended December 31, 1998 was $7.0 million, compared to $5.0 million for the year ended December 31, 1997. The increase in net interest income for the year ended December 31, 1998 was primarily due to a lower cost of funds and a higher yield on interest- earning assets. For the year ended December 31, 1998, the average yield on total interest-earning assets was 6.73%, compared to 6.72% for the year ended December 31, 1997, and its average cost of interest-bearing liabilities was 4.65%, compared to 4.79% for the year ended December 31, 1997. As a result, the interest rate spread for the year ended December 31, 1998 was 2.07%, compared to 1.93% for the year ended December 31, 1997, and its net yield on interest- earning assets was 3.15% for the year ended December 31, 1998, compared to 2.33% for the year ended December 31, 1997. INTEREST INCOME. Interest income increased by $740,000 from $14.3 million to $15.1 million, or by 5.2%, during 1998 compared to 1997. This increase primarily resulted from an increase in the average yield on the loan portfolio, which was 7.82% for 1998 compared to 7.67% for 1997, as well as an increase in the average balance of loans to $105.8 million in 12 1998 compared to $99.1 million in 1997. INTEREST EXPENSE. Interest expense decreased $1.3 million, or 14.4%, to $8.0 million for the year ended December 31, 1998 from $9.4 million for the year ended December 31, 1997. The Company's strategy of less aggressively pricing its deposit products resulted in a decrease in its cost of funds as well as a reduction in the level of interest-bearing liabilities due to an outflow of higher cost deposits. At December 31, 1998, total deposits were $154.8 million, compared to $320.6 million at December 31, 1997, a decrease of 51.7%. 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 $20,000 was appropriate for the year ended December 31, 1998. The Company determined not to increase the level of the provision for loan losses, which was $20,000 in 1997. INCOME TAXES. The Company's effective tax rate for the year ended December 31, 1998 was 34.9%, compared to 33.9% for 1997. The increase in income tax expense of $602,000 in 1998 compared to 1997 was due to an increase in income. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 NET INCOME. The Company's net income for the year ended December 31, 1997 was $2.0 million compared to $195,000 for the year ended December 31, 1996. The increase in net earnings for the year resulted primarily from an improvement in the Company's net yield on interest-earning assets and a decrease in SAIF insurance premiums, offset in part by an increase in income taxes. NET INTEREST INCOME. Net interest income for the year ended December 31, 1997 was $5.0 million, compared to $3.5 million for the year ended December 31, 1996. The increase in net interest income for the year ended December 31, 1997 was primarily due to a lower cost of funds and a higher yield on interest- earning assets. For the year ended December 31, 1997, the Company's average yield on total interest-earning assets was 6.72%, compared to 6.48% for the year ended December 31, 1996, and its average cost of interest-bearing liabilities was 4.79%, compared to 5.13% for the year ended December 31, 1996. As a result, the Company's interest rate spread for the year ended December 31, 1997 was 1.93%, compared to 1.35% for the year ended December 31, 1996, and its net yield on interest-earning assets was 2.33% for the year ended December 31, 1997, compared to 1.70% for the year ended December 31, 1996. INTEREST INCOME. Interest income increased by $1.1 million from $13.2 million to $14.3 million, or by 8.3%, during the year ended December, 1997 compared to 1996. This increase primarily resulted from a continued strategic shift from investment securities to higher-yielding loans. The average balance of securities held to maturity declined $22.8 million, from $98.1 million at December 31, 1996, to $75.3 million at December 31, 1997. Average time deposits and other interest-bearing cash deposits increased $17.7 million, from $9.5 million at December 31, 1996 to $27.2 million at December 31, 1997. Overall, average total interest-earning assets increased $8.9 million from December 31, 1996 to December 31, 1997. The strategic repositioning of the balance sheet into higher-yielding assets resulted in an increase in the average yield on interest-earning assets from 6.48% at December 31, 1996, to 6.72% at December 31, 1997. In addition, the ratio of interest-earning assets to interest-bearing liabilities increased from 107.29% for the year ended December 31, 1996 to 109.17% for the year ended December 31, 1997. INTEREST EXPENSE. Interest expense decreased to $9.4 million for the year ended December 31, 1997, compared to $9.8 million for 1996. The decrease was primarily attributable to a lower cost of funds. The average cost of average interest bearing liabilities declined from 5.13% for the year ended December 31, 1996 to 4.79% for the year ended December 31, 1997. Over the same period, the average balance of deposits increased from $189.8 million for the year ended December 31, 1996 to $195.0 million at December 31, 1997. PROVISION FOR LOAN LOSSES. The Company determined that an additional $20,000 provision for loan loss was required for the year ended December 31, 1997. For the year ended December 31, 1996, the Company determined that a $100,000 provision was warranted. 13 NON-INTEREST EXPENSE. Total non-interest expense in the year ended December 31, 1997 was $2.4 million, compared to $3.7 million in 1996. A decrease in FDIC deposit insurance premiums of $1.6 million offset increases in other non- interest expenses. INCOME TAXES. The effective tax rate for the year ended December 31, 1997 was 33.9%, compared to 30.3% for 1996. The increase in income tax expense of $954,000 in 1997 compared to 1996 was due to an increase in income. LIQUIDITY AND CAPITAL RESOURCES The Company has no business other than that of the Bank and investing the net conversion proceeds retained by it. Management believes that the net proceeds retained by the Company, earnings on such proceeds, principal and interest payments on the ESOP loan, together with dividends that may be paid from the Bank to the Company, will provide sufficient funds for its initial operations and liquidity 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, 1998, 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 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, 1998, the Bank had no outstanding advances from the FHLB. See Note 6 of Notes to Financial Statements. The Company'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 Company 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 Company'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, 1998, 1997 and 1996 were 53.87%, 65.36% and 45.63%, respectively. A portion of the Company's liquidity consists of cash and cash equivalents. At December 31, 1998, cash and cash equivalents totaled $1.9 million. The level of these assets depends upon the Bank's operating, investing and financing activities during any given period. Although operating activities have historically generated a declining amount of cash flows, cash flows from operating activities increased during the years ended December, 1997 and 1998. For the years ended December 31, 1996, 1997 and 1998, such cash flows were $112,000, $2.4 million and $2.9 million, respectively. The results for 1996 were primarily attributable to lower net income as the Company pursued a strategy of increasing its deposit base through the payment of above-market interest rates. This higher interest expense was not offset by the Company's adjustable rate mortgage loans, which were offered at then-lower market rates. Further, interest rates on the loans were adjusted based upon a lagging interest rate index, while deposit rates were subject to adjustment on a weekly basis. The Company discontinued its deposit pricing strategy in 1996, which contributed to the increase in the Company's interest rate spread to 2.07% for 1998, from 1.93% for 1997 and 1.35% for 1996. Cash flows from operating activities for 1996 were more than offset by a decrease in net income as a result of the required payment of the one-time SAIF assessment of $1.2 million. See Note 13 of Notes to Financial Statements. Cash flows from investing activities increased and became a net source of funds due to the emphasis on the investment of available funds in loans rather than in securities held-to-maturity. The 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 $44.0 million for 1996, 14 $50.3 million for 1997 and $24.2 million for 1998. At the same time, the investment of cash in loans was $5.4 million in 1998, $8.0 million in 1997 and $10.8 million in 1996, while purchases of held-to-maturity securities were $5.9 million in 1997 and $41.4 million in 1996. There were no purchases of held-to- maturity securities in 1998. Further, the Company has re-positioned the investment of its excess funds to enhance their availability. Funds not immediately invested in loans are sold on the federal funds market, which permits the Company to earn a favorable rate of interest while maintaining daily access to such funds. Although the Company continues to acquire held-to- maturity securities using funds from loan repayments and proceeds from maturities of similar securities, the liquidity position avoids the need to consider the sale of such securities prior to maturity to satisfy lending or other operational commitments. At December 31, 1998, in addition to the liquidity of its federal funds sold and other assets, which were 53.87% of deposits and short-term borrowings, the Bank had available an unused $10.1 million line of credit with the FHLB of Cincinnati. The Company's financing activities have changed from a provider of cash to a user of cash due to the removal of the emphasis on the growth of its deposit base. As part of this strategy, which began during 1996, the Company 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. As a result of the current strategy, cash was required to fund net withdrawals of time deposits in amounts of $13.1 million in 1996, $7.8 million in 1997 and $16.5 million in 1998. Because of the Company's ability to generate cash flows from its financing activities and the availability of its other liquid assets, the Company does not anticipate any difficulty in funding future withdrawals of such time deposits as they come due. At December 31, 1998, the Bank had $464,789 in outstanding commitments to originate loans. The Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit which are scheduled to mature in one year or less totaled $62.9 million at December 31, 1998. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank. Another source of liquidity is net proceeds from the conversion. Following the completion of the conversion, the Bank received 50% of the net proceeds from the conversion or approximately $19.7 million, which are being used for the Bank's business activities. 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. THE YEAR 2000 PROBLEM The Company is aware of the current concerns throughout the business community of reliance upon computer software that does not properly recognize the Year 2000 in date formats, often referred to as the "Year 2000 Problem." The Year 2000 Problem is the result of software being written using two digits rather than four digits to define the applicable year (i.e., "98" rather than "1998"). A failure by a business to properly identify and correct a Year 2000 Problem in its operations could result in system failures or miscalculations. In turn, this could result in disruptions of operations, including among other things a temporary inability to process transactions, or otherwise engage in routine business transactions on a day-to-day basis. Operations of the Company depend on the successful operation on a daily basis of its computer systems and a third party service bureau's equipment and software. In its analysis of these systems, equipment and software, a plan of action has been put in place by the Bank to minimize its risk exposure to the Year 2000 Problem. As part of the plan, an oversight committee has been set up to monitor Year 2000 compliance. The Company's service provider has successfully completed the renovation of its equipment as well as Phase One and Phase Two of its proxy tests involving the participation of member institutions transmitting within a test institution created for this purpose. Phase Three of these tests is due to be completed April 30, 1999. Institution transmission tests were held in November 1998 with satisfactory results. The service provider has contracted with a recovery site in Philadelphia to cover Year 2000 contingencies and will conduct Business Recovery Tests on April 25, 1999 to ensure proper transmission with member institutions. The service provider believes its systems and equipment will be well prepared for the Year 2000 Problem. 15 The Company has completed its renovation of computer equipment, assessment of mission-critical systems, review of tests, and contingency planning. Due to its preparations and the preparations of its service provider, a high level of confidence exists within the management of the Company that disruptions to normal business operations due to the Year 2000 Problem will be minimal. However, the risk of system failures cannot be eliminated. Also, the Company cannot guarantee the performance of third parties as to which it has material relationships. As of March 31, 1999, the Company had incurred approximately $42,000 in direct compliance costs associated with the Year 2000 Problem. The Company estimates that $45,000 will approximate total direct compliance costs through the Year 2000. The Company does not separately track internal costs incurred for Year 2000 compliance, such costs are principally related to payroll expenditures. Funding for such costs has been and will be derived from normal operating cash flow. IMPACT OF NEW ACCOUNTING STANDARDS Pensions and Other Postretirement Benefits. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"), which changes current financial-statement disclosure requirements from those that were required under SFAS 87 "Employers' Accounting for Pensions," SFAS 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Some of the more significant effects of SFAS 132 are that it: (i) standardizes the disclosure requirements for pensions and other postretirement benefits and presents them on one footnote; (ii) requires that additional information be disclosed regarding changes in the benefit obligation and fair values of plan assets; (iii) eliminates certain disclosures that are no longer considered useful, including general descriptions of the plans; (iv) permits the aggregation of information about certain plans; and (v) provides reduced disclosure requirements for nonpublic entities. SFAS 132 does not change the existing measurement or recognition provisions of the above standards and is effective for fiscal years beginning after December 15, 1997, though early application is permitted. The Company adopted SFAS 132 with no material impact on the Company's financial statements. Accounting for Derivatives and Hedging Activities. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and establishes accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It also establishes the conditions under which a derivative should be designated as hedging a specific type of exposure and requires the Company to establish at the inception of the hedge the method and measurement approach used to assess its effectiveness. The Company does not believe the adoption of SFAS 133 will have a significant impact on its financial statements and disclosures. Mortgage-Backed Securities. In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"), an amendment of FASB Statement No. 65. SFAS 134 requires that after an entity securitizes mortgage loans held for sale, it must classify the resulting retained mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. However, a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process. SFAS 134 conforms (1) the accounting for securities that have been retained after the securitization of mortgage loans by a mortgage banking enterprise with (2) the accounting for securities that have been retained after the securitization of other types of assets by a non-mortgage banking enterprise. This statement is effective for the first fiscal quarter after December 15, 1998. However, since the Company and the Bank do not securitize mortgage loans, the Company does not anticipate any financial statement impact from adopting this statement. PROPOSED BENEFIT PLANS The Board of Directors of the Company has adopted the HopFed Bancorp, Inc. 1999 Stock Option Plan (the "Option Plan") and the HopFed Bancorp, Inc. Management Recognition Plan (the "MRP"), both of which are subject to stockholder approval. 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 reserves 403,362 shares of Common Stock for issuance upon the exercise of options or stock appreciation rights. Under the 16 MRP, up to 161,345 shares of Common Stock may be awarded to selected directors, advisory directors and employees. Neither the Company nor the Bank will receive any monetary consideration for the granting of awards under the Option Plan and the MRP. The Company will receive the exercise price for shares of Common Stock issued to Option Plan participants upon the exercise of their options, and will receive no monetary consideration upon the exercise of stock appreciation rights. Under applicable accounting standards, if the MRP is approved by the Company's stockholders, the Company must recognize compensation expense based on the fair market value of the Common Stock on the date the MRP awards are granted, with such amount being amortized over the expected vesting period for the award. In February 1999, subject to stockholder approval of the plans, 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 and awarded 161,342 shares of Common Stock under the MRP based on a fair market value of $20.75 per share. 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. 17 [LETTERHEAD APPEARS HERE] INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Hopfed Bancorp, Inc. We have audited the accompanying consolidated statements of financial condition of Hopfed Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. 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. 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 Hopfed Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ YORK, NEAL & CO. HOPKINSVILLE, LLP Hopkinsville, Kentucky March 30, 1999 18 HOPFED BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1998 AND 1997
1998 1997 ------ ------ ASSETS Cash and due from banks $ 1,904,620 $ 1,263,868 Time deposits - 2,000,000 Interest-earning deposits in Federal Home Loan Bank 214,166 3,944,621 Federal funds sold 9,685,000 151,095,000 Securities available for sale 68,139,383 26,698,853 Securities held to maturity, market value of $27,633,452 and $51,963,937 for 1998 and 1997, respectively 27,354,099 51,566,329 Loans receivable, net of allowance for loan losses of $257,744 and $237,444 for 1998 and 1997, respectively 108,806,634 103,470,161 Accrued interest receivable 1,157,252 1,183,808 Premises and equipment, net 2,546,349 2,333,475 Other assets 224,711 438,913 ------------ ------------ Total assets $220,032,214 $343,995,028 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing accounts $ 2,730,676 $ 1,963,073 Interest-bearing accounts: Demand / NOW accounts 8,624,089 9,483,478 Money market accounts 30,771,443 42,064,189 Passbook savings 10,194,223 148,080,134 Other time deposits 102,495,354 119,041,727 ------------ ------------ Total deposits 154,815,785 320,632,601 Advances from borrowers for taxes and insurance 165,799 171,519 Federal income taxes payable: Current - 360,231 Deferred 3,268,965 1,963,852 Dividends payable 302,524 - Accrued expenses and other liabilities 345,195 930,748 ------------ ------------ Total liabilities 158,898,268 324,058,951 ------------ ------------ Stockholders' Equity: Common stock par value $.01 per share; 7,500,000 shares authorized; 4,033,625 issued and outstanding 40,336 - Additional paid in capital 39,546,434 - Retained earnings-substantially restricted 18,983,884 16,613,308 Unallocated ESOP shares (2,932,666) - Accumulated other comprehensive income 5,495,958 3,322,769 ------------ ------------ Total stockholders' equity 61,133,946 19,936,077 ------------ ------------ Total liabilities and stockholders' equity $220,032,214 $343,995,028 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 19 HOPFED BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- Interest income: Loans receivable $ 8,279,744 $ 7,606,685 $ 6,823,842 Securities available for sale 2,418,597 412,355 150,814 Securities held to maturity 2,359,611 4,705,678 5,623,854 Time deposits 1,993,546 1,586,451 621,041 ----------- ----------- ----------- Total interest income 15,051,498 14,311,169 13,219,551 ----------- ----------- ----------- Interest expense: Deposits 8,003,911 9,340,884 9,731,511 Other borrowed funds - 9,336 25,022 ----------- ----------- ----------- Total interest expense 8,003,911 9,350,220 9,756,533 ----------- ----------- ----------- Net interest income 7,047,587 4,960,949 3,463,018 Provision for loan losses 20,300 20,000 100,000 ----------- ----------- ----------- Net interest income after provision for loan losses 7,027,287 4,940,949 3,363,018 ----------- ----------- ----------- Noninterest income: NOW account fees 168,153 150,640 156,584 Loan fees 228,949 207,706 259,665 Service charges 84,852 82,807 112,251 Other 65,300 86,566 61,363 ----------- ----------- ----------- Total noninterest income 547,254 527,719 589,863 ----------- ----------- ----------- Noninterest expenses: Salaries and benefits 1,959,406 1,479,118 1,261,090 Deposit insurance premium 151,701 120,084 1,701,758 Occupancy expense 188,093 211,986 215,101 Data processing 117,368 113,941 86,674 Other 565,844 482,716 409,043 ----------- ----------- ----------- Total noninterest expense 2,982,412 2,407,845 3,673,666 ----------- ----------- ----------- Income before income taxes 4,592,129 3,060,823 279,215 Income tax expense 1,640,707 1,038,254 84,681 ----------- ----------- ----------- Net income $ 2,951,422 $ 2,022,569 $ 194,534 =========== =========== =========== Earnings per share since conversion: Basic .80 Fully diluted .80
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 20 HOPFED BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY For the years ended December 31, 1998 and 1997
Additional Unallocated Accumulated Other Common Paid-in Retained Common Stock Comprehensive Total Stock Capital Earnings Held by ESOP Income Equity ----------- ----------- ----------- ------------ ---------------- ------------ BALANCE, JANUARY 1, 1996 $ - $ - $14,396,205 $ - $1,605,936 $16,002,141 Comprehensive income: Net income 194,534 Net change in unrealized gains on securities available-for-sale, net of taxes of $339,986 626,873 Total comprehensive income 821,407 ----------- ----------- ----------- ------------ ---------------- ------------ BALANCE, DECEMBER 31, 1996 - - 14,590,739 - 2,232,809 16,823,548 Comprehensive income: Net income 2,022,569 Net change in unrealized gains on securities available-for-sale, net of taxes of $561,495 1,089,960 Total comprehensive income 3,112,529 ----------- ----------- ----------- ------------ ---------------- ------------ BALANCE, DECEMBER 31, 1997 - - 16,613,308 - 3,322,769 19,936,077 Comprehensive income: Net income 2,951,422 Net change in unrealized gains on securities available-for-sale, net of taxes of $1,119,410 2,173,189 Total comprehensive income 5,124,611 Issuance of common stock 40,336 39,334,954 39,375,290 Purchase of common stock by ESOP (3,226,900) (3,226,900) Release and allocation of common stock held by ESOP 211,480 294,234 505,714 Cash dividends paid $.075 per share net of dividends on ESOP shares applied to ESOP debt (580,846) (580,846) ----------- ----------- ----------- ------------ ---------------- ------------ BALANCE, DECEMBER 31, 1998 $ 40,336 $39,546,434 $18,983,884 $ (2,932,666) $5,495,958 $61,133,946 =========== =========== =========== ============= ================ ============
The accompanying notes are an integral part of these consolidated financial statements. 21 HOPFED BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,951,422 $ 2,022,569 $ 194,534 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 20,300 20,000 100,000 Depreciation 110,518 130,337 117,094 Accretion of investment security discounts (40,113) (48,539) (5,499) Provision (benefit) for deferred income taxes 182,541 (244,697) 49,864 Stock dividend (127,200) (118,500) (107,500) Gain on sale of equipment (6,527) (4,741) (8,265) Earned ESOP shares 211,480 (Increase) decrease in: Accrued interest receivable 26,556 106,600 (229,434) Other assets 214,202 (142,190) (227,470) Increase (decrease) in: Current income taxes payable (360,231) 360,231 -- Dividends payable 302,524 -- -- Accrued expenses and other liabilities (555,551) 343,814 228,752 ------------- ------------- ---------- Net cash provided by operating activities 2,929,921 2,424,884 112,076 ------------- ------------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in time deposits 2,000,000 -- 5,000,000 Net (increase) decrease in interest- bearing deposits in FHLB 3,730,455 (3,944,621) 5,550,000 Net (increase) decrease in federal funds sold 141,410,000 (150,595,000) 7,448,000 Proceeds from maturities of held-to-maturity securities 24,229,625 50,336,539 44,010,074 Purchases of held-to-maturity securities -- (5,909,005) (41,398,090) Proceeds from maturities of available-for-sale securities 12,565,393 81,009 -- Purchases of available-for- sale securities (50,590,246) (19,895,099) (15,000) Net increase in loans (5,356,773) (8,036,005) (10,840,515) Purchases of premises/equipment (327,565) (258,961) (108,724) Proceeds from sale of premises/equipment 10,700 132,766 14,132 ------------- ------------- ---------- Net cash provided by (used in) investing activities 127,671,589 (138,088,377) 9,659,877 ------------- ------------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, savings and NOW deposits (149,270,443) 144,631,967 2,115,765 Net increase (decrease) in time deposits (16,546,373) (7,826,732) (13,063,588) Increase (decrease) in advance payments by borrowers for taxes and insurance (5,720) (12,601) 7,567 Net increase (decrease) in other borrowed funds -- (1,317,000) 1,317,000 Issuance of common stock 36,148,390 -- -- Net dividends paid (580,846) -- -- Payments on loan to ESOP 294,234 -- -- ------------- ------------- ---------- Net cash provided by (used in) financing activities (129,960,758) 135,475,634 (9,623,256) ------------- ------------- ---------- Increase (decrease) in cash and cash equivalents 640,752 (187,859) 148,697 Cash and cash equivalents, beginning of period 1,263,868 1,451,727 1,303,030 ------------- ------------- ---------- Cash and cash equivalents, end of period $ 1,904,620 $ 1,263,868 $ 1,451,727 ============= ============= ============= Interest paid $ 8,503,476 $ 9,128,049 $ 9,557,312 ============= ============= ============= Income taxes paid $ 1,600,231 $ 670,074 $ 285,991 ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 22 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Hopfed Bancorp, Inc. (the "Company") and subsidiary conform with generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. A. BASIS OF PRESENTATION The accompanying consolidated financial statements include the amounts of the Company and its wholly-owned subsidiary, Hopkinsville Federal Savings Bank (the "Bank"). All significant intercompany transactions and balances are eliminated in consolidation. As more fully discussed in Note 1.b., the Company, a Delaware corporation, was organized by the Bank for the purpose of acquiring all 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. B. ORGANIZATION/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 on February 6, 1998 and issued 4,033,625 shares of common stock resulting in proceeds of $39,375,290, net of expenses totaling $960,960. The Company loaned $3,226,900 to the ESOP which purchased 322,690 shares of the Company's 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 $18,732,503, 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. The Bank may not declare or pay a cash dividend on or repurchase any of its capital stock if the effect thereof would cause the Bank's net worth to be reduced below the capital requirements imposed by the OTS. 23 HOPFED BANCORP, INC. AND SUBSIDAIRY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. CASH AND CASH EQUIVALENTS For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated statements of financial condition "cash and due from banks". D. SECURITIES HELD TO MATURITY Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income over the period to maturity using the level yield method. Declines in the fair value of individual held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The write-downs are included in earnings as realized losses. E. SECURITIES AVAILABLE FOR SALE Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The write-downs are included in earnings as realized losses. Premiums and discounts are recognized in interest income over the period to maturity using the level yield method. F. 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. Statement of Financial Accounting Standard ("SFAS") No. 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 financial statements. 24 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. 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 generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment. G. FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less cost to sell. 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. H. 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. I. 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: 25 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. PREMISES AND EQUIPMENT (CONTINUED) Land improvements 5-15 years Buildings 40 years Furniture and equipment 5-15 years J. FINANCIAL INSTRUMENTS In the ordinary course of business the Bank has entered into off- balance-sheet financial instruments consisting of commitments to extend credit, etc. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. K. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: CASH AND SHORT TERM INSTRUMENTS. The carrying amounts of cash and short term instruments approximate their fair value. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES. Fair values for securities are based on quoted market prices. 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. DEPOSIT LIABILITIES. 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 (CD's) 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 LICENSES. The carrying amounts of advances from borrowers approximate their fair value. OTHER BORROWED FUNDS. 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. 26 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. M. 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, adjusted for the unallocated portion of shares held by the Employee Stock Ownership Plan (ESOP). Since the conversion, basic and fully diluted weighted average common stock outstanding was 3,711,025 shares, (adjusted for unallocated ESOP shares). 2. SECURITIES Securities, which consist of debt and equity investments, have been classified in the consolidated statements of financial condition according to management's intent. The carrying amount of securities and their approximate fair values follow:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- AVAILABLE-FOR-SALE SECURITIES December 31, 1998: Restricted: FHLB stock $ 1,852,600 $ - $ - $ 1,852,600 Intrieve stock 15,000 - - 15,000 ----------- ---------- -------- ----------- 1,867,600 - - 1,867,600 ----------- ---------- -------- ----------- Unrestricted: FHLMC stock 120,508 7,871,480 - 7,991,988 U.S. government and agency securities: FHLB investment securities 7,000,000 50,310 - 7,050,310 FFCB 15,995,265 20,000 - 16,015,265 Mortgage-backed securities: GNMA 16,800,955 205,697 - 17,006,652 FNMA 8,575,909 57,131 - 8,633,040 FHLMC 9,451,937 132,567 (9,976) 9,574,528 ----------- ---------- -------- ----------- 57,944,574 8,337,185 (9,976) 66,271,783 ----------- ---------- -------- ----------- $59,812,174 $8,337,185 $ (9,976) $68,139,383 =========== ========== ======== =========== December 31, 1997: Restricted: FHLB stock $ 1,725,400 $ - $ - $ 1,725,400 Intrieve stock 15,000 - - 15,000 ----------- ---------- -------- ----------- 1,740,400 - - 1,740,400 ----------- ---------- -------- ----------- Unrestricted: FHLMC stock 120,508 5,048,516 - 5,169,024 U.S. government and agency securities: FHLB investment securities 13,000,000 13,590 (13,140) 13,000,450 Mortgage-backed securities: GNMA 2,941,488 18,518 - 2,960,006 FNMA 1,888,484 - (18,489) 1,869,995 FHLMC 1,973,954 - (14,976) 1,958,978 ----------- ---------- -------- ----------- 19,924,434 5,080,624 (46,605) 24,958,453 ----------- ---------- -------- ----------- $21,664,834 $5,080,624 $(46,605) $26,698,853 =========== ========== ======== ===========
27 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 2. SECURITIES (CONTINUED) The scheduled maturities of securities available-for-sale at December 31, 1998 were as follows:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $15,995,265 $16,015,265 Due in one to five years 7,000,000 7,050,310 ----------- ----------- 22,995,265 23,065,575 Mortgage-backed securities 34,828,801 35,214,220 ----------- ----------- $57,824,066 $58,279,795 =========== ===========
FHLB stock is an equity interest in the Federal Home Loan Bank. Intrieve stock is an equity interest in Intrieve, Incorporated, the Bank's data processing service center. These stocks do not have readily determinable fair values because ownership is restricted and a market is lacking. FHLB stock and Intrieve stock are classified as restricted investment securities, carried at cost and evaluated for impairment.
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ---------- ----------- ----------- HELD-TO-MATURITY SECURITIES December 31, 1998: U.S. government and agency securities: FHLB investment Securities $13,997,542 $ 5,098 $ (1,410) $14,001,230 ----------- -------- --------- ----------- Mortgage-backed securities: GNMA 11,900,966 242,338 (30) 12,143,274 FNMA 1,455,591 33,357 - 1,488,948 ----------- -------- --------- ----------- 13,356,557 275,695 (30) 13,632,222 ----------- -------- --------- ----------- $27,354,099 $280,793 $ (1,440) $27,633,452 =========== ======== ========= =========== December 31, 1997: U.S. government and agency securities: FHLB investment securities $31,988,246 $ 620 $(149,486) $31,839,380 ----------- -------- --------- ----------- Mortgage-backed securities: GNMA 17,814,021 520,959 (1,014) 18,333,966 FNMA 1,764,062 34,932 (8,403) 1,790,591 ----------- -------- --------- ----------- 19,578,083 555,891 (9,417) 20,124,557 ----------- -------- --------- ----------- $51,566,329 $556,511 $(158,903) $51,963,937 =========== ======== ========= ===========
28 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 2. SECURITIES (CONTINUED) The scheduled maturities of securities held-to-maturity at December 31, 1998, were as follows:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 3,999,938 $ 4,001,880 Due in one to five years 9,997,604 9,999,350 ----------- ----------- 13,997,542 14,001,230 Mortgage-backed securities 13,356,557 13,632,222 ----------- ----------- $27,354,099 $27,633,452 =========== ===========
3. LOANS RECEIVABLE The components of loans in the consolidated statements of financial condition as of December 31, 1998 and 1997 were as follows:
1998 1997 ------------- ------------- Real estate loans: One-to-four family $ 88,954,630 $ 83,228,850 Multi-family 1,538,864 2,359,742 Construction 4,625,527 5,165,962 Non-residential 8,260,156 7,593,053 ------------ ------------ Total mortgage loans 103,379,177 98,347,607 ------------ ------------ Consumer loans: Loans secured by deposits 2,279,709 3,080,749 Other consumer loans 4,586,487 4,298,236 ------------ ------------ Total consumer loans 6,866,196 7,378,985 ------------ ------------ 110,245,373 105,726,592 Less: Undisbursed portion of mortgage loans (1,180,995) (2,018,987) ------------ ------------ Total loans 109,064,378 103,707,605 Less allowance for loan losses (257,744) (237,444) ------------ ------------ $108,806,634 $103,470,161 ============ ============
29 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOILDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 3. LOANS RECEIVABLE (CONTINUED) An analysis of the change in the allowance for loan losses for the years ended December 31, 1998 and 1997 follows:
1998 1997 -------- -------- Balance at beginning of year $237,444 $217,444 Loans charged off - - Recoveries - - -------- -------- Net loans charged off - - Provision for loan losses 20,300 20,000 -------- -------- Balance at end of year $257,744 $237,444 ======== ========
4. PREMISES AND EQUIPMENT Components of properties and equipment included in the consolidated statements of financial condition as of December 31, 1998 and 1997 consisted of the following:
1998 1997 ----------- ----------- Land $ 543,013 $ 537,870 Land improvements 74,861 73,661 Buildings 2,061,675 1,760,092 Furniture and equipment 583,189 500,152 Construction in progress - 83,325 ---------- ---------- 3,262,738 2,955,100 Less accumulated depreciation (716,389) (621,625) ---------- ---------- $2,546,349 $2,333,475 ========== ==========
Depreciation expense was $110,518, $130,337 and $117,094 for the years ended December 31, 1998, 1997 and 1996, respectively. 30 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 5. DEPOSITS At December 31, 1998, the scheduled maturities of other time deposits were as follows: 1999 $ 62,907,960 2000 31,154,359 2001 4,854,787 2002 2,933,853 2003 644,395 ------------ $102,495,354 ============
The amount of other time deposits with a minimum denomination of $100,000 was $7,161,825 and $8,118,952 at December 31, 1998 and 1997, respectively. Deposits in excess of $100,000 are not federally insured. Interest expense on deposits for the years ended December 31, 1998, 1997, and 1996 is summarized as follows:
1998 1997 1996 ---------- ---------- ---------- Demand / NOW accounts $ 222,674 $ 212,759 $ 207,088 Money market accounts 1,346,675 1,619,467 1,625,405 Passbook savings 673,383 794,300 302,052 Other time deposits 5,761,179 6,714,358 7,596,966 ---------- ---------- ---------- $8,003,911 $9,340,884 $9,731,511 ========== ========== ==========
The Bank maintains clearing arrangements for its demand, NOW and money market accounts with the Federal Home Loan Bank of Cincinnati. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 1998, average daily clearings were approximately $523,741. 6. OTHER BORROWED FUNDS During 1996, the Bank entered into a Cash Management Advance (CMA) program with the Federal Home Loan Bank. This program is a source of overnight liquidity to address day-to-day cash needs. The program has a term of up to 90 days and bears interest at a variable rate equal to the FHLB cost of funds (7.15% at December 31, 1996). At December 31, 1996, the Bank could have borrowed up to $25,000,000 under this program and the amount was collateralized by a FHLB investment security. As of December 31, 1996, the amount owed on the advance was $1,317,000. The amount was repaid in full during 1997. At December 31, 1998 and 1997, the Bank could borrow up to $10,100,000 under the CMA program and the amount would be collateralized by FHLB investment securities. The balance owed at December 31, 1998 and 1997 was zero. 31 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 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 statements of financial condition. 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. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that most loan commitments are drawn upon by customers. The Bank has offered standby letters of credit on a limited basis. As of December 31, 1998, 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, 1998:
Carrying Fair Amount Value ------------ ------------ Financial assets: Cash and due from banks $ 1,904,620 $ 1,904,620 Interest-earning deposits in FHLB 214,166 214,166 Federal funds sold 9,685,000 9,685,000 Securities available for sale 68,139,383 68,139,383 Securities held to maturity 27,354,099 27,633,452 Loans receivable 108,806,634 108,646,609 Accrued interest receivable 1,157,252 1,157,252 Financial liabilities: Deposit liabilities 154,815,785 154,987,013 Advances from borrowers for taxes and insurance 165,799 165,799 Off-balance-sheet assets (liabilities): Commitments to extend credit (464,789) Commercial letters of credit (679,744)
32 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOILDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 7. FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of financial instruments were as follows at December 31, 1997:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,263,868 $ 1,263,868 Time deposits 2,000,000 2,000,000 Interest-earning deposits in FHLB 3,944,621 3,944,621 Federal funds sold 151,095,000 151,095,000 Securities available for sale 26,698,853 26,698,853 Securities held to maturity 51,566,329 51,963,937 Loans receivable 103,470,161 103,386,125 Accrued interest receivable 1,183,808 1,183,808 Financial liabilities: Deposit liabilities (320,632,601) (320,581,341) Advances from borrowers for taxes and insurance (171,519) (171,519) Off-balance-sheet assets (liabilities): Commitments to extend credit (856,810) Commercial letters of credit (350,194)
8. SIGNIFICANT GROUP 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 on deposit with financial institutions and federal funds sold exceeded the insurance coverage as of December 31, 1998 and 1997. The carrying amount and bank balance of such items as of December 31, 1998 and 1997 was as follows:
1998 1997 ------------ ------------- Carrying amount $10,655,165 $157,805,353 =========== ============ Bank balance 9,783,412 157,270,109 Amount covered by insurance (422,374) (366,906) ----------- ------------ Amount not collateralized $ 9,361,038 $156,903,203 =========== ============
33 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 9. ACCOUNTING FOR PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS9. PENSION PLAN The Bank maintains a contributory, 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. Hopkinsville Federal's funding policy is to contribute annually, actuarially determined amounts to finance the plan benefits. The following table sets forth the plan's funded status and amounts recognized in the consolidated statements of financial condition at December 31:
1998 1997 ----------- ----------- Change in benefit obligation Benefit obligation at beginning of year $2,176,248 $1,908,695 Service cost 74,924 67,026 Interest cost 151,986 142,868 Actuarial loss 86,252 297,851 Benefits paid - (240,192) ---------- ---------- Benefit obligation at end of year 2,489,410 2,176,248 ---------- ---------- Change in plan assets Fair value of plan assets at beginning of year 1,421,158 1,414,661 Actual return on plan assets 93,803 58,357 Employer contributions 151,115 188,332 Benefits paid - (240,192) ---------- ---------- Fair value of plan assets at end of year 1,666,076 1,421,158 ---------- ---------- Funded status (823,334) (755,090) Unrecognized net asset (49,002) (56,262) Unrecognized prior service cost 102,281 120,514 Unrecognized net loss 643,762 572,126 ---------- ---------- Accrued pension cost $ (126,293) $ (118,712) ========== ==========
Weighted average assumptions used to develop the net periodic pension cost were:
1998 1997 1996 ---------- ---------- --------- Discount rate 7.00% 7.00% 7.50% Expected long-term rate of return on assets 7.25% 8.00% 8.00% 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:
1998 1997 1996 ---------- ---------- --------- Service cost $ 74,924 $ 67,026 $ 79,562 Interest cost on projected benefit obligation 151,986 142,868 131,247 Expected return on plan assets (112,256) (120,164) (105,231) Amortization of transitional asset (7,260) (7,995) (7,995) Amortization of prior service cost 18,233 18,233 18,233 Amortization of net loss 33,069 9,388 7,335 ---------- ---------- --------- Net periodic pension cost $ 158,696 $ 109,356 $ 123,151 ========== ========== =========
34 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 9. ACCOUNTING FOR PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) EMPLOYEE STOCK OWNERSHIP PLAN The Company has a noncontributory employee stock ownership plan (ESOP) for those employees who meet the eligibility requirements of the plan. Eligible employees are those who have attained the age of 21 and completed one year of service. The ESOP trust borrowed $3,226,900 in 1998 through a ten-year 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. Note principal payments are a sum equal to at least one eighth of the original loan principal amount annually plus interest paid semiannually at prime rate. The note balance outstanding at December 31, 1998 was $2,932,666. Shares purchased are held in a suspense account for allocation among the participants as the loan is paid. Contributions to the ESOP and shares released from the loan collateral will be in an amount proportional to repayment of the ESOP loan. The ESOP is to be 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 will be 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 must be employed at least 500 hours in a calendar year in order to receive an allocation. A participant becomes vested in his or her right to ESOP benefits upon his or her completion of three years of service. Dividends paid on allocated shares are expected to be paid to participants or used to repay the ESOP loan, and dividends on unallocated shares are expected to be used to repay the ESOP loan. At December 31, 1998, shares allocated and remaining in suspense were as follows: Number of Shares Released and allocated 29,423 Suspense 293,267 Fair Value Released and allocated $ 505,714 Suspense 5,040,520
The expense recorded by the Company is based on cash contributed to the ESOP during the year in amounts determined by the Board of Directors, ($270,032) plus divideds applied to the ESOP debt ($41,597), plus the excess of fair value of shares released and allocated over the ESOP's cost of those shares ($194,085). The Company's ESOP compensation costs exclude interest which is eliminated in consolidation. 35 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 9. ACCOUNTING FOR PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) MANAGEMENT RECOGNITION PLAN AND 1999 STOCK OPTION PLAN On February 24, 1999, the board of directors of Hopfed Bancorp, Inc. approved the Management Recognition Plan (MRP) and the 1999 Stock Option Plan, both of which are subject to approval by the stockholders. The purpose of the MRP is to enable the Company and the Bank to retain personnel of experience and ability in key positions of responsibility. The MRP committee shall make plan share awards only to employees and directors. The MRP committee will determine which employees will be granted discretionary plan share awards and the number of shares covered by each plan share award. On the effective date, 161,345 shares will be subject to automatic plan share awards to directors and employees as provided in the MRP document. One-third of plan share awards become vested on the plan's effective date, one-third on January 1, 2000 and one-third on January 1, 2001. The purpose of the 1999 Stock Option Plan is to advance the interests of the Company through providing key employees and directors of the Company and the Bank with the opportunity to acquire shares of stock. The 1999 Stock Option Plan reserves 403,362 shares of common stock for issuance upon exercise of options or stock appreciation rights. The stock option committee shall have the discretion to make grants of options and stock appreciation rights to employees and directors. 10. INCOME TAXES The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996 ---------- ----------- -------- Current: Federal $1,421,164 $1,282,951 $34,817 State 37,002 - - ---------- ---------- ------- 1,458,166 1,282,951 34,817 Deferred 182,541 (244,697) 49,864 ---------- ---------- ------- $1,640,707 $1,038,254 $84,681 ========== ========== =======
Total income tax expense for the years ended December 31, 1998, 1997 and 1996 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to income before income taxes as follows:
1998 1997 1996 ---------- ---------- -------- Expected federal income tax expense at statutory tax rate $1,561,324 $1,040,680 $ 94,933 State income taxes (12,581) Dividends received (14,077) (11,716) (10,284) Fair market value difference of allocated ESOP shares 71,903 - - Other (2,864) 9,290 32 ---------- ---------- -------- Total federal income tax expense $1,603,705 $1,038,254 $ 84,681 ========== ========== ======== Effective rate 34.9% 33.9% 30.3% ========== ========== ========
36 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 10. INCOME TAXES (CONTINUED) The components of deferred taxes as of December 31, 1998 and 1997 are summarized as follows:
1998 1997 ----------- ----------- Deferred tax liabilities: FHLB stock dividends $ (357,283) $ (327,352) Bad debt reserves (162,238) (218,939) Unrealized appreciation on securities available for sale (2,831,251) (1,699,721) ----------- ----------- (3,350,772) (2,246,012) ----------- ----------- Deferred tax assets: Pension cost 42,940 67,418 Accrued interest expense 23,006 192,947 Accrued professional fees 15,861 21,795 ----------- ----------- 81,807 282,160 ----------- ----------- Net deferred tax liability $(3,268,965) $(1,963,852) =========== ===========
Thrift institutions, in determining taxable income, were previously allowed special bad debt deductions based on specified experience formulae or on a percentage of taxable income before such deductions. In August 1996, the President signed the Small Business Protection Act of 1996 that, 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 the year ended December 31, 1998, the Bank recaptured $146,467 of the $878,800 total recapture of tax bad debt reserves into taxable income. A similar amount will be recaptured in each of the years 1999 through 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 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. 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, 1998 and 1997 includes approximately $4,027,400 which represents such bad debt deductions for which no deferred income taxes have been provided. 37 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 and 1996 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, 1998 and December 31, 1997, was $302,259 and $263,792, respectively. During 1998, new loans to such related parties amounted to $69,914 and repayments amounted to $31,447. During 1997, new loans to such related parties amounted to $55,760 and repayments amounted to $22,458. 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 financial statements. The Bank had open loan commitments at December 31, 1998 and 1997 of $464,789 and $856,810 respectively. Of these amounts $267,252 and $147,000 as of December 31, 1998 and 1997, respectively, were for fixed rate loans. The interest rates for the fixed rate loan commitments ranged from 7.375% to 8.50% and 7.88% to 9.00% for December 31, 1998 and 1997, respectively. 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 3.00% 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. 38 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 13. REGULATORY MATTERS (CONTINUED) The following chart delineates the categories as defined in the FDICIA legislation:
Tier 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%
At December 31, 1998, the Bank's core, tier I risk-based, and total risk- based capital ratios were 20.36%, 49.76%, and 50.11%, respectively. The following is a calculation of the Bank's regulatory capital (in thousands) at December 31, 1998:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $41,369 $41,369 $41,369 $41,369 $41,369 ======= Unrealized gains on certain available-for- sale securities - (5,483) (5,483) (5,483) General valuation allowance - - - 257 ------- ------- ------- ------- Regulatory capital $41,369 $35,886 $35,886 $36,143 ======= Minimum capital requirement % 1.50% 4.00% 8.00% Minimum capital requirement $ 2,965 7,907 5,769 ------- ------- ------- Regulatory capital excess $32,921 $27,979 $30,374 ======= ======= =======
At December 31, 1997, the Bank's core, tier I risk-based, and total risk- based risk-based capital ratios were 4.9%, 19.5%, and 16.5%, respectively. The following is a calculation of the Bank's regulatory capital (in thousands) at December 31, 1997:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- --------- --------- GAAP capital, as reported $19,936 $19,936 $19,936 $19,936 $19,936 ======= Unrealized gains on certain available-for- sale securities - (3,323) (3,323) (3,323) General valuation allowance - - - 237 ------- ------- ------- -------- Regulatory capital $19,936 16,613 16,613 16,850 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 5,110 10,221 8,172 ------- ------- -------- Regulatory capital excess $11,503 $ 6,392 $ 8,678 ======= ======= ========
39 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 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. The United States Congress passed legislation that resulted in an assessment on all Savings Association Insurance Fund ("SAIF") insured deposits in order to recapitalize the SAIF Fund. This one-time assessment amounted to approximately 66 basis points on SAIF assessable deposits held as of March 31, 1995. The assessment was payable no later than November 30, 1996 and amounted to approximately $1.23 million for the Bank. Such amount was charged to earnings at September 30, 1996. 14. YEAR 2000 ISSUES The approach of the year 2000 presents potential problems to entities such as the Bank, which utilize computers. Many computer systems in use today, particularly older computers and computer programs, may not be able to properly interpret dates after December 31, 1999 because they use only two digits to indicate the year in a date. For example, the year 2000 could be interpreted as the year 1900 by such systems. As a result, the systems could produce inaccurate data, or not function at all. The Bank has begun assessment of the ability of each system to properly perform, and is implementing corrective measures when deficiencies are found. The Bank is also exposed to potential risk if customers, third party payors and vendors suffer year 2000-related difficulties and are unable to fulfill obligations to the Bank. 15. HOPFED BANCORP, INC. The following condensed statements of financial condition as of December 31, 1998 and condensed statements of income and cash flows for the period February 6, 1998 through December 31, 1998 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto. 40 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 15. HOPFED BANCORP, INC. (CONTINUED) CONDENSED STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1998
ASSETS Cash and due from banks $ 112,094 Federal funds sold 485,000 Securities available for sale 16,015,265 Accrued interest receivable 220,503 Other assets 14,770 Investment in subsidiary 19,707,645 Note receivable-ESOP 3,226,900 ----------- Total assets $39,782,177 =========== LIABILITIES AND EQUITY Liabilities: Federal income taxes payable: Deferred $ 6,800 Dividends payable 302,524 ----------- Total liabilities 309,324 ----------- Equity: Common stock 40,336 Additional paid in capital 39,382,349 Retained earnings 36,968 Accumulated other comprehensive income 13,200 ----------- Total equity 39,472,853 ----------- Total liabilities and equity $39,782,177 ===========
CONDENSED STATEMENT OF INCOME FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998 Interest income Loans receivable $ 246,482 Securities available for sale 502,884 Time deposits 320,040 ---------- Total interest income 1,069,406 ---------- Noninterest expenses Salaries and benefits 41,597 Other 45,765 ---------- Total noninterest expenses 87,362 ---------- Income before income taxes 982,044 Income tax expense 364,230 ---------- Net income $ 617,814 ==========
41 HOPFED BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 15. HOPFED BANCORP, INC. (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998 Cash flows from operating activities Net income $ 617,814 Adjustments to reconcile net income to net cash provided by operating activities Accretion of investment security discounts (11,048) Earned ESOP shares 17,395 (Increase) decrease in: Accrued interest receivable (220,503) Other assets (14,770) Increase (decrease) in: Deferred income taxes payable 6,800 Dividends payable 302,524 ------------ Net cash provided by operating activities 698,212 ------------ Cash flows for investing activities Investment in subsidiary (19,707,645) Purchase of available for sale securities (15,991,017) Federal funds sold (485,000) ------------ Net cash used in investing activities (36,183,662) ------------ Cash flows from financing activities Issuance of common stock 36,178,390 Dividends paid (580,846) ------------ Net cash provided by financing activities 35,597,544 ------------ Net increase in cash 112,094 Cash at beginning of year - ------------ Cash at end of year $ 112,094 ============
42 CORPORATE INFORMATION ================================================================================ DIRECTORS AND EXECUTIVE OFFICERS WD KELLEY BOYD M. CLARK Chairman of the Board Vice President and Secretary of Retired the Company and Senior Vice President - Loan Administration the Bank BRUCE THOMAS CLIFTON H. COCHRAN President and Chief Executive Retired Officer of the Company and the Bank PEGGY R. NOEL WALTON G. EZELL Vice President, Chief Financial Officer Farmer and Treasurer of the Company and Executive Vice President, Chief Financial JOHN NOBLE HALL, JR. Officer and Chief Operations Officer of Retired the Bank - -------------------------------------------------------------------------------- MAIN OFFICE 2700 Fort Campbell Boulevard Hopkinsville, KY 42240 (502/885-1171) BRANCH OFFICES Downtown Branch Office Murray Branch Office 605 South Virginia Street 7th and Main Streets Hopkinsville, KY 42240 (502/885-1171) Murray, KY 42071 (502/753-7921) Cadiz Branch Office Elkton Branch Office 352 Main Street West Main Street Cadiz, KY 42211 (502/522-6638) Elkton, KY 42220 (502/265-5628) - --------------------------------------------------------------------------------
GENERAL INFORMATION INDEPENDENT ACCOUNTANTS ANNUAL MEETING ANNUAL REPORT ON FORM 10-K A COPY York, Neel & Co.-- The 1999 Annual Meeting of Stockholders OF THE COMPANY'S 1998 ANNUAL REPORT Hopkinsville, LLP will be held on May 12, 1999 at 3:00 ON FORM 10-K WILL BE FURNISHED WITHOUT 1113 Bethel Street p.m. at Hopkinsville Federal Savings CHARGE TO STOCKHOLDERS AS OF THE RECORD Hopkinsville, KY 42240 Bank, 2700 Fort Campbell Boulevard, DATE FOR THE 1999 ANNUAL MEETING UPON Hopkinsville, KY WRITTEN REQUEST TO THE SECRETARY, HOPFED BANCORP, INC., 2700 FORT CAMPBELL GENERAL COUNSEL TRANSFER AGENT BOULEVARD, HOPKINSVILLE, KY 42240 Deatherage, Myers, Self & Lackey Registrar and Transfer Company 701 South Main Street 10 Commerce Drive Hopkinsville, KY 42241 Cranford, NJ 07016 SPECIAL COUNSEL Kutak Rock 1101 Connecticut Avenue, N.W. Washington, D.C. 20036
HOPFED [LOGO APPEARS HERE] HOPFED BANCORP, INC. ------------------- 2700 Fort Campbell Blvd - Hopkinsville, KY 42240 502-885-1171 EX-21 6 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------
Jurisdiction of Percentage Owned Incorporation -------------------- -------------------- Hopkinsville Federal Savings Bank 100% United States
EX-27 7 EXHIBIT 27
9 1,000 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 1,905 1,264 214 5,945 9,685 151,095 0 0 68,139 26,699 27,354 51,566 27,633 51,964 108,807 103,708 258 237 220,032 343,995 154,816 320,633 0 0 4,082 3,426 0 0 0 0 0 0 40 0 61,094 19,936 220,032 343,995 8,280 7,607 4,778 5,118 1,994 1,586 15,052 14,311 8,004 9,341 0 9,350 7,048 4,961 20 20 0 0 2,982 2,408 4,592 3,061 2,951 3,061 0 0 0 0 2,951 2,023 .80 0 .80 0 3.15 2.33 0 0 287 163 0 0 0 866 258 217 0 0 0 0 258 237 258 237 0 0 0 0
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