SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23667
HOPFED BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1322555
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 885-1171
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes [x] No
As of September 30, 1998, 4,033,625 shares of Common Stock were issued and
outstanding.
<PAGE>
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 1998
and December 31, 1997....................................... 1
Consolidated Statements of Income for the Three-Month and Nine-Month
Periods Ended September 30, 1998 and 1997.................... 2
Consolidated Statements of Comprehensive Income for the Three-Month
and Nine-Month Periods Ended September 30, 1998 and 1997.... 3
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 1998 and 1997................... 4
Notes to Unaudited Condensed Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................... 13
PART II. OTHER INFORMATION
Item 5. Other Information.............................................. 13
SIGNATURES.............................................................. 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOPFED BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, December 31,
ASSETS 1998 1997
---- ----
(Unaudited)
(In thousands)
Cash and due from banks ......................... $ 1,163 $ 1,264
Time deposits ................................... -- 2,000
Interest-bearing deposits in Federal
Home Loan Bank ("FHLB") ....................... 47 3,945
Federal funds sold .............................. 11,867 151,095
Investment securities available for sale ........ 60,509 26,699
Investment securities held to maturity
(Estimated market values of $32,271 and
$51,964 at September 30, 1998 and
December 31, 1997, respectively) ............. 31,873 51,566
Loans receivable, net ........................... 107,387 103,470
Accrued interest receivable ..................... 1,098 1,184
Premises and equipment, net ..................... 2,512 2,333
Other assets .................................... 109 439
--------- ---------
Total assets ........................... $ 216,565 $ 343,995
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ...................................... $ 154,025 $ 320,633
Federal income taxes .......................... 2,601 2,324
Advance payments from borrowers for
taxes and insurance ......................... 357 171
Other liabilities ............................. 280 931
--------- ---------
Total liabilities ...................... $ 157,263 $ 324,059
========= =========
Shareholders' Equity:
Common stock .................................. 40 --
Additional paid in capital .................... 39,375 --
Retained earnings, substantially restricted ... 18,902 16,613
Less deferred compensation - ESOP ............. (3,227) --
Net unrealized appreciation on investment
securities available for sale ............... 4,212 3,323
--------- ---------
Total shareholders' equity ................. 59,302 19,936
--------- ---------
Total liabilities and shareholders' equity.. $ 216,565 $ 343,995
========= =========
See accompanying Notes to Unaudited Condensed Financial Statements.
1
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ..................... $ 2,080 $ 1,915 $ 6,172 $ 5,616
Interest and dividends on investments . 1,254 1,270 3,470 3,910
Time deposit interest income .......... 245 183 1,846 485
---------- ---------- ---------- ----------
Total interest income .................... 3,579 3,368 11,488 10,011
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits .................. 1,864 2,216 6,155 6,633
Other borrowed funds .................. -- -- -- 9
---------- ---------- ---------- ----------
Total interest expense ................ 1,864 2,216 6,155 6,642
---------- ---------- ---------- ----------
Net interest income ........................ 1,715 1,152 5,333 3,369
Provision for loan losses .................. 5 5 15 15
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ....................... 1,710 1,147 5,318 3,354
---------- ---------- ---------- ----------
Other income:
Loan and other service fees ........... 127 122 369 353
Other, net ............................ 12 12 50 51
---------- ---------- ---------- ----------
Total other income .................... 139 134 419 404
---------- ---------- ---------- ----------
Net expenses:
Salaries and benefits ................. 343 342 1,049 1,064
Federal insurance premium ............. 40 29 117 92
Occupancy expense, net ................ 43 49 130 148
Data processing ....................... 29 36 85 85
Other operating expenses .............. 139 106 414 336
---------- ---------- ---------- ----------
Total other expenses .................. 594 562 1,795 1,725
---------- ---------- ---------- ----------
Income before income taxes ................. 1,255 719 3,942 2,033
Income tax expense ......................... 426 241 1,351 686
---------- ---------- ---------- ----------
Net income ................................. $ 829 $ 478 $ 2,591 $ 1,347
========== ========== ========== ==========
Earnings (Loss) per share:
Basic ................................. $ 0.22 N/A $ 0.70 N/A
Fully diluted ......................... $ 0.22 N/A $ 0.70 N/A
Weighted Average:
Common Shares ......................... 4,033,625 N/A 4,033,625 N/A
Less: unallocated ESOP Shares ......... 322,690 N/A 322,690 N/A
---------- ----------
3,710,935 3,710,935
========== ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
2
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net Income ................................... $ 829 $ 478 $2,591 $1,347
Other comprehensive income, net of tax
Unrealized holding gains (losses) arising
during period .......................... 455 (10) 889 561
Less: reclassification adjustment for gains
included in net income .............. 0 0 0 0
------ ------ ------ ------
Comprehensive income ......................... $1,284 $ 468 $3,480 $1,908
====== ====== ====== ======
</TABLE>
See Accompanying Notes to Unaudited Condensed Financial Statements
3
<PAGE>
HOPFED BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1998 1997
---- ----
(In thousands)
Cash flows from operating activities:
Net income....................................... $ 2,591 $ 1,347
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes............................ 17 (10)
Provision for loan losses........................ 15 15
Provision for depreciation....................... 70 75
FHLB stock dividend.............................. (95) (88)
Amortization of investment security premiums..... 2 --
Accretion of investment security discounts....... (16) (28)
(Increase) decrease in:
Accrued interest receivable...................... 86 258
Other assets..................................... 330 (132)
Increase (decrease) in:
Current income taxes payable..................... (210) 15
Accrued expenses and other liabilities........... (650) (375)
--------- --------
Net cash provided by operating activities........ 2,140 1,077
--------- --------
Cash flows from investing activities:
Net decrease in time deposits.................... 2,000 --
Net (increase) decrease in interest
earning deposits in FHLB......................... 3,898 (378)
Net (increase) decrease in federal funds sold.... 139,228 (7,795)
Proceeds from maturities of
held-to-maturity securities.................... 19,699 30,127
Purchases of held-to-maturity securities......... -- (5,933)
Proceeds from sale of
available-for-sale securities.................. 7,729 --
Purchases of available-for-sale securities....... (40,078) (7,967)
Net increase in loans............................ (3,931) (5,194)
Purchases of premises/equipment.................. (255) (173)
Proceeds from sale of equipment.................. 7 13
--------- --------
Net cash provided by investing activities........ 128,297 2,700
--------- --------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts................ (151,310) 542
Net decrease in time deposits.................... (15,299) (3,621)
Increase in advance payments by
borrowers for taxes and insurance................ 186 179
Net decrease in other borrowed funds............. -- (1,317)
Net proceeds from issuance of stock.............. 36,188 --
Dividends paid................................... (303) --
--------- --------
Net cash used in financing activities............ (130,538) (4,217)
--------- --------
Decrease in cash and cash equivalents................. (101) (440)
Cash and cash equivalents, beginning of period........ 1,264 1,452
--------- --------
Cash and cash equivalents, end of period.............. 1,163 $ 1,012
========= ========
Supplemental disclosures of cash flow information.....
Cash paid for income taxes....................... $ 1,535 $ 550
--------- --------
Cash paid for interest........................... $ 6,656 $ 6,903
========= ========
See accompanying Notes to Unaudited Condensed Financial Statements.
4
<PAGE>
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HopFed Bancorp, Inc. (the "Company") was formed at the direction of
Hopkinsville Federal Savings Bank (the "Bank") to become the holding
company of the Bank upon the conversion of the Bank from a federally
chartered mutual savings bank to a federally chartered stock savings
bank. The conversion was consummated on February 6, 1998. The Company's
primary assets are the outstanding capital stock of the converted Bank,
a portion of the net proceeds of the conversion, and a note receivable
from the Company's Employee Stock Ownership Plan, and its sole business
is that of the converted Bank and the investment of funds held by it.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for fair
presentation have been included. The results of operations and other
data for the nine month period ended September 30, 1998, are not
necessarily indicative of results that may be expected for the entire
fiscal year ending December 31, 1998.
The accompanying unaudited financial statements should be read in
conjunction with the Consolidated Financial Statements and the Notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The accounting policies followed by the
Company are set forth in the Summary of Significant Accounting Policies
in the Company's December 31, 1997 Consolidated Financial Statements.
2. EARNINGS AND DIVIDENDS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." This Statement established
standards for computing and presenting earnings per share ("EPS"). This
Statement simplified the standards for computing EPS previously found
in APB Opinion No. 15, "Earnings per Share," and made them comparable
to international EPS standards. It replaced the presentation of primary
EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement and
disclosure of a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. For the three months and nine months ended September
30, 1998, the Company's weighted average common shares are the same for
the basic and diluted EPS computations.
5
<PAGE>
3. REPORTING COMPREHENSIVE INCOME
The Company has adopted FASB Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
income.
The Company holds securities classified as available-for-sale, which
have unrealized gains. The before tax and after tax amounts, as well as
the tax (expense) benefit is summarized below.
<TABLE>
<CAPTION>
Tax (Expense)/
Before Tax Benefit After Tax
------------- ------------------ -------------
(In thousands)
For the three months ended September 30, 1998:
<S> <C> <C> <C>
Unrealized holding gains........ $ 688 $ (233) $ 455
For the three months ended September 30,
1997:
Unrealized holding gains........ (15) 5 (10)
For the nine months ended September 30,
1998:
Unrealized holding gains........ 1,347 (458) 889
For the nine months ended September 30,
1997:
Unrealized holding gains........ 850 (289) 561
</TABLE>
4. PENDING ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." The Statement requires
derivatives to be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also requires that
changes in the derivatives' fair values be recognized currently in
earnings unless specific hedge accounting criteria are met. This
Statement is effective for fiscal years beginning after June 15, 1999
(prospectively) and is not expected to have a material effect on the
Consolidated Financial Statements.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at September 30, 1998 and December 31, 1997
Total assets decreased by $127.4 million, from $344.0 million at December
31, 1997 to $216.6 million at September 30, 1998. Federal funds sold decreased
from $151.1 million at December 31, 1997, to $11.9 million at September 30,
1998, primarily due to funds returned in connection with the conversion.
Securities held to maturity declined $19.7 million due to various issues
maturing. These funds were reinvested in securities available for sale, which
increased $33.8 million.
The Bank continued to price its deposits less aggressively in an effort to
reduce its overall cost of funds. At September 30, 1998, deposits decreased to
$154.0 million from $320.6 million at December 31, 1997, a net decrease of
$166.6 million, primarily as a result of completion of the conversion process
and the refunding of excess subscriptions. The Bank's average cost of deposits
for the three and nine months ended September 30, 1998 was 4.87% and 4.19%,
respectively, compared to 4.79% for the year ended December 31, 1997. Management
continually evaluates the investment alternatives available to the Bank's
customers and adjusts the pricing on its deposit products to more actively
manage its funding costs while remaining competitive in its market area.
The Bank's loan portfolio increased by $2.5 million and $3.9 million during
the three and nine months ended September 30, 1998, respectively. Net loans
totaled $107.4 million and $103.5 million at September 30, 1998 and December 31,
1997, respectively. The increase in the loan activity during the three and nine
months ended September 30, 1998 was primarily due to the Bank's continued
efforts to increase its loan originations using funds currently held in
investment securities. For the three and nine months ended September 30, 1998,
the Bank's average yield on loans was 7.84% and 7.83%, respectively, compared to
7.67% for the year ended December 31, 1997.
At September 30, 1998, the Bank's investments classified as "held to
maturity" were carried at amortized cost of $31.9 million and had an estimated
fair market value of $32.3 million, and its securities classified as "available
for sale" had an estimated fair market value of $60.5 million, including Federal
Home Loan Mortgage Corporation stock with an estimated fair market value of $6.1
million.
The allowance for loan losses totaled $253,000 at September 30, 1998, an
increase of $16,000 from the allowance of $237,000 at December 31, 1997. The
ratio of the allowance for loan losses to loans was 0.24% and 0.23% at September
30, 1998 and December 31, 1997, respectively. Also at September 30, 1998, the
Bank's non-performing loans were $233,000, or 0.22% of total loans, compared to
$163,000, or 0.16% of total loans, at December 31, 1997, and the Bank's ratio of
allowance for loan losses to non-performing loans at September 30, 1998 and
December 31, 1997 was 108.58% and 145.50%, respectively. The determination of
the allowance for loan losses is based on management's analysis, performed on a
quarterly basis. Various factors are considered, including the market value of
the underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, historical
7
<PAGE>
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 Bank has had minimal losses on loans in prior
years.
Comparison of Operating Results for the Nine Months Ended September 30, 1998
and 1997
Net Income. Net income for the nine months ended September 30, 1998 was
$2.6 million, compared to net income of $1.3 million for the nine months ended
September 30, 1997. The increase in net earnings for the nine months resulted
primarily from net earnings on subscription funds and earnings on equity capital
received in the conversion.
Net Interest Income. Net interest income for the nine months ended
September 30, 1998 was $5.3 million, compared to $3.4 million for the nine
months ended September 30, 1997. The increase in net interest income for the
nine months ended September 30, 1998 was primarily due to net earnings on
subscription funds and earnings on equity capital received in the conversion.
For the nine months ended September 30, 1998, the Bank's average yield on total
interest-earning assets was 6.25%, compared to 6.74% for the nine months ended
September 30, 1997, and its average cost of interest-bearing liabilities was
4.19% for the nine months ended September 30, 1998, compared to 4.90% for the
nine months ended September 30, 1997. As a result, the Bank's interest rate
spread for the nine months ended September 30, 1998 was 2.06% compared to 1.84%
for the nine months ended September 30, 1997, and its net yield on
interest-earning assets was 2.90% for the nine months ended September 30, 1998,
compared to 2.27% for the nine months ended September 30, 1997.
Interest Income. Interest income increased by $1.5 million, from $10.0
million to $11.5 million, or by 14.75%, during the nine months ended September
30, 1998 compared to the same period in 1997. This increase resulted from
investment of subscription funds and equity capital received in the conversion,
as well as the continued strategic shift from investment securities to
higher-yielding loans. The average balance of securities held to maturity
declined $42.1 million, from $81.2 million at September 30, 1997 to $39.1
million at September 30, 1998. Overall, average total interest-earning assets
increased $47.1 million, or 23.78%, from September 30, 1997 to September 30,
1998. The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 109.53% for the nine months ended September 30, 1997
to 125.08% for the nine months ended September 30, 1998.
Interest Expense. Interest expense decreased $487,000, or 7.33%, to $6.2
million for the nine months ended September 30, 1998, compared to $6.6 million
for the same period in 1997. The decrease was attributable to the combined
effect of a lower cost of funds and a decline in interest-bearing liabilities.
The average cost of interest-bearing deposits declined from 4.90% at September
30, 1997 to 4.19% at September 30, 1998. Over the same period, the balance of
deposits decreased $26.9 million, from $178.8 million at September 30, 1997 to
$151.9 million at September 30, 1998, or 15.04%.
8
<PAGE>
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 in providing
for an adequate loan loss allowance. The Bank determined that an additional
$15,000 provision for loan loss was required for the nine months ended September
30, 1998, compared to an additional $15,000 provision for the nine months ended
September 30, 1997.
Non-Interest Expense. There was a $71,000 increase in total non-interest
expense in the nine months ended September 30, 1998 compared to the same period
in 1997.
Income Taxes. The Bank's effective tax rate for the nine months ended
September 30, 1998 was 34.3%, compared to 33.7% for the same period in 1997. The
increase in income tax expense of $665,000 in the nine months ended September
30, 1998 compared to the same period in 1997 was primarily due to a significant
increase in income.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and 1997
Net Income. Net income for the three months ended September 30, 1998 was
$829,000, compared to net income of $478,000 for the three months ended
September 30, 1997. The increase in net earnings for the three months resulted
primarily from lower cost of funds and earnings on equity capital received in
the conversion.
Net Interest Income. Net interest income for the three months ended
September 30, 1998 was $1.7 million, compared to $1.2 million for the three
months ended September 30, 1997. The increase in net interest income for the
three months ended September 30, 1998 was primarily due to lower cost of funds
and earnings on equity capital received in the conversion. For the three months
ended September 30, 1998, the Bank's average yield on total interest-earning
assets was 6.84%, compared to 6.84% for the three months ended September 30,
1997, and its average cost of interest-bearing liabilities was 4.87% for the
three months ended September 30, 1998, compared to 4.95% for the three months
ended September 30, 1997. As a result, the Bank's interest rate spread for the
three months ended September 30, 1998 was 1.97%, compared to 1.89% for the three
months ended September 30, 1997, and its net yield on interest-earning assets
was 3.33% for the three months ended September 30, 1998, compared to 2.34% for
the three months ended September 30, 1997.
Interest Income. Interest income increased by $200,000, from $3.4 million
to $3.6 million, or by 6.26%, during the three months ended September 30, 1998
compared to the same period in 1997. This increase resulted from investment of
equity capital received in the conversion, as well as the continued strategic
shift from investment securities to higher-yielding loans. The average balance
of securities held to maturity declined $42.1 million, from $75.7 million at
September 30, 1997 to $33.6 million at September 30, 1998. In addition, average
time deposits and other interest-earning cash deposits increased $5.6 million,
from $11.9 million at September 30, 1997 to $17.5 million at September 30, 1998.
Overall, average total interest-earning assets increased $14.9 million, or
7.57%, from September 30, 1997 to September 30, 1998. The ratio of
9
<PAGE>
average interest-earning assets to average interest-bearing liabilities
increased from 110.04% for the three months ended September 30, 1997 to 138.54%
for the three months ended September 30, 1998.
Interest Expense. Interest expense decreased $352,000, or 15.88%, to $1.9
million for the three months ended September 30, 1998, compared to $2.2 million
for the same period in 1997. The decrease was primarily attributable to the
decline in average balances of deposits. The average cost of average
interest-bearing deposits declined from 4.95% at September 30, 1997 to 4.87% at
September 30, 1998. Over the same period, the average balance of deposits
decreased $26.1 million, from $179.2 million at September 30, 1997 to $153.1
million at September 30, 1998, or 14.56%.
Provision for Loan Losses. The Bank determined that an additional $5,000
provision for loan loss was required for the three months ended September 30,
1998, compared to an additional $5,000 provision for the three months ended
September 30, 1997.
Non-Interest Expense. There was a $32,000 increase in total non-interest
expense in the three months ended September 30, 1998 compared to the same period
in 1997.
Income Taxes. The Bank's effective tax rate for the three months ended
September 30, 1998 was 33.9%, compared to 33.5% for the same period in 1997. The
increase in income tax expense of $185,000 in the three months ended September
30, 1998 compared to the same period in 1997 was primarily due to a significant
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
conversion proceeds retained by the Company (approximately $16.7 million at
September 30, 1998), earnings on such proceeds and principal and interest
payments on the ESOP loan, together with dividends that may be paid by 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.
The Bank's principal sources of funds for operations are deposits from its
primary market areas, principal and interest payments on loans, proceeds from
maturing investment securities and the net conversion proceeds received by it.
The principal uses of funds by the Bank include the origination of mortgage and
consumer loans and the purchase of investment securities.
The Bank is required by current federal regulations to maintain specified
liquid assets of at least 5% of its net withdrawable accounts plus short-term
borrowings. Short-term liquid assets (those maturing in one year or less) may
not be less than 1% of the Bank's liquidity base. At September 30, 1998, the
Bank met all regulatory liquidity requirements, and management believes that the
liquidity levels maintained are adequate to meet potential deposit outflows,
loan demand and normal operations.
10
<PAGE>
The Bank must satisfy three capital standards: a ratio of core capital to
adjusted total assets of 3.0%, a tangible capital standard expressed as 1.5% of
total adjusted assets, and a combination of core and "supplementary" capital
equal to 8.0% of risk-weighted assets. At September 30, 1998, the Bank exceeded
all regulatory capital requirements. The table below presents certain
information relating to the Bank's capital compliance at September 30, 1998 and
December 31, 1997.
At September 30, 1998 At December 31, 1997
--------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Tangible Capital . . . . . $35,227 18.0% $16,613 4.9%
Core Capital . . . . . . . 35,227 18.0 16,613 4.9
Risk-Based Capital . . . . 35,479 49.2 16,850 16.5
At September 30, 1998, the Bank had outstanding commitments to originate
loans totaling $1.5 million. Management believes that the Bank's sources of
funds are sufficient to fund all of its outstanding commitments. Certificates of
deposits which are scheduled to mature in one year or less from September 30,
1998 totaled $63.2 million. Management believes that a significant percentage of
such deposits will remain with the Bank.
During the three month period ended September 30, 1998, the Company
declared and paid a dividend of $.075 per share of Common Stock, or a total
dividend of $303,000.
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 Bank 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 Bank's service bureau, which processes all
customer related data, has represented to the Bank that it has completed its
first and second rounds of Year 2000 testing and that final testing is expected
to be completed prior to the end of 1998. The service bureau has advised the
Bank that, upon completion of the final testing phase, it believes its systems
and equipment will be Year 2000 compliant. A failure to remediate by the service
bureau would have a material adverse effect on the Bank.
11
<PAGE>
The Bank has modified its credit risk assessment to include consideration
of incremental risk that may be posed by the inability of customers to address
the Year 2000 Problem. The Bank has developed policies and procedures to help
identify potential customer related risks to the Bank and to gain a better
understanding of how its customers are managing their own risks associated with
the Year 2000 Problem. The Bank believes its customer related risks are minimal
due to the small number of commercial loan originations.
Although the Company believes that the Year 2000 Problem will be
substantially corrected prior to the Year 2000, the risk of system failures
cannot be eliminated. Therefore, the Company will assess the worst case scenario
caused by the Year 2000 Problem and address the possible effects thereof by
December 31, 1998. The Company will assess the types and nature of contingency
plans that will be required to maintain the Company's operational capacity after
January 1, 2000. This assessment will cover all critical areas of the Company,
including the Bank's service bureau.
As of September 30, 1998, the Company and the Bank have incurred
approximately $5,000 in direct compliance costs associated with the Year 2000
Problem. The Company estimates that $40,000 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.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "expect," "seek," and "intend" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of income or loss, expenditures,
acquisitions, plans for future operations, financing needs or plans relating to
services of the Company, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by or
underlying the forward-looking statements.
The Company does not undertake, and specifically disclaims, any obligation
to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company monitors whether material changes in market risk have occurred
since year-end. The Company does not believe that material changes in market
risk exposures occurred during the nine months ended September 30, 1998.
PART II. OTHER INFORMATION
Item 5. Other Information
Effective June 29, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4 under the Securities Exchange Act of 1934. As amended,
Rule 14a-4(c)(1) relates to the Company's use of its discretionary proxy voting
authority with respect to a stockholder proposal which the stockholder has not
sought to include in the Company's proxy statement. If the proponent of the
proposal fails to notify the Company by the date established by the notice
provision in the Company's Certificate of Incorporation, management proxies will
be allowed to use their discretionary voting authority if the proposal is raised
at the meeting, without any discussion of the matter in the proxy statement.
The Certificate of Incorporation of the Company provides an advance notice
procedure for certain business to be brought before an annual meeting of
stockholders. In order for a stockholder to properly bring business before an
annual meeting, the stockholder must give written notice to the Secretary of the
Company not less than 30 nor more than 60 days prior to the date of such
meeting; provided, however, that if less than 40 days' notice of the meeting is
given to stockholders, written notice by the stockholder to be timely must be
delivered or mailed to the Secretary of the Company not later than the close of
business on the tenth day following the day on which notice of the meeting was
mailed to stockholders.
With respect to the Company's 1999 Annual Meeting of Stockholders, which
will be held at the main office of Hopkinsville Federal Savings Bank on or about
April 28, 1999, if the Company is not provided notice of a stockholder proposal,
which the stockholder has not previously sought to include in the Company's
proxy statement, by March 29, 1999, management proxies will be allowed to use
their discretionary authority as outlined above.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOPFED BANCORP, INC.
Date: November 13, 1998 /s/ Bruce Thomas
------------------------------------------
Bruce Thomas
President and Chief Executive Officer
Date: November 13, 1998 /s/ Peggy R. Noel
------------------------------------------
Peggy R. Noel
Executive Vice President, Chief Financial
Officer and Chief Operations Officer
14
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