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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
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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.
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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
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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.
<TABLE>
<CAPTION>
At December 31,
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1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======= ======= =======
</TABLE>
(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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ====== =======
<CAPTION>
Due after 15
years after
December 31,
1998 Total
------- --------
<S> <C> <C>
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
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Total.......................... $61,645 $108,807
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</TABLE>
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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.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rate
--------------------- ---------------------
(In thousands)
<S> <C> <C>
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
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</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
--------------- -------------- -------------
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
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
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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
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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
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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
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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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
===== ===== ===== ===== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
(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%
===== ===== ======= ===== =====
</TABLE>
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.
<TABLE>
<CAPTION>
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
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
(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%
==== ===== ==== ===== ==== =====
<CAPTION>
------------------------------
1995
------------------------------
Percent of Loans
in Each Category
Amount to Total Loans
------ ----------------
<S> <C> <C>
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.............. ==== =====
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------
1994
----
Percent of Loans in Each
Amount Category to Total Loans
----------- ------------------------
<S> <C> <C>
(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%
==== =====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
_____________
(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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities.......... $20.014 5.52% $17,048 5.35% $37,062 $37,067 5.43%
======= ======= ======= =======
</TABLE>
11
<PAGE>
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.
<TABLE>
<CAPTION>
Balance Percentage of
Interest Minimum Minimum (In Total
Rate* Term Category Amount thousands) Deposits
- ----------- --------------------- ------------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
- -- % 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%
======== =====
</TABLE>
_____________
* Represents weighted average interest rate.
12
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
======== ===== ========= ======== ====== ========
</TABLE>
(continued)
<TABLE>
<CAPTION>
Balance at Increase Balance at
December 31, % of (Decrease) from December 31, % of
1996 Deposits December 31, 1995 1995 Deposits
---- -------- ----------------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
======== ====== ======== ======== ======
</TABLE>
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
<PAGE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------
Less Than One Year 1-2 Years 2-3 Years After 3 Years Total
------------------ --------- --------- ------------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ========
</TABLE>
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.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
- ------------------------------------------------------------ ----------------------------
(In thousands)
<S> <C>
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
============
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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)
========= ========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Capital
The Bank's Capital Requirements Excess Capital
-------------------------- -------------------------- --------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ------------ ----------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth information regarding the Bank's offices at
December 31, 1998.
<TABLE>
<CAPTION>
Approximate
-----------
Square Footage of
-----------------
Year Opened Owned or Leased Book Value (1) Office
----------- --------------- -------------- ------
MAIN OFFICE: (In thousands)
<S> <C> <C> <C> <C>
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
======
</TABLE>
_________________
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
/s/ John Noble Hall, Jr. April 14, 1999
- ------------------------
John Noble Hall, Jr.
Director
2
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT 10.3
Employment Agreement Amendments by and between Hopkinsville Federal
Savings Bank and Bruce Thomas, Peggy R. Noel and Boyd M. Clark
<PAGE>
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")
<PAGE>
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")
<PAGE>
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")
<PAGE>
EXHIBIT 10.4
Employment Agreement Amendments by and between HopFed Bancorp, Inc.
and Bruce Thomas, Peggy R. Noel and Boyd M. Clark
<PAGE>
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")
<PAGE>
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")
<PAGE>
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")
<PAGE>
HOPFED BANCORP, INC.
[LOGO OF HOPFED BANCORP, INC. APPEARS HERE]
ANNUAL REPORT
-------------
1998
<PAGE>
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.
<TABLE>
<CAPTION>
Price Range Common Stock
High Low
---- ---
<S> <C> <C>
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
</TABLE>
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
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FINANCIAL CONDITION AND
OTHER DATA At December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
OPERATING DATA Year Ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
________________________
(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
<PAGE>
SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
3
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
___________________
(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.
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS December 31, 1998
------------------------------
(Dollars in thousands)
<S> <C> <C>
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%
======= =======
</TABLE>
4
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV of Assets
---------------------------------- --------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
======== ======== ======= ======= ======= ========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------
Weighted
Balance Average Yield/Cost
------- ------------------
(Dollars in thousands)
<S> <C> <C>
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%
======
</TABLE>
(Continued on following page)
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
====== ======
<CAPTION>
--------------------------------------
1996
--------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
<S> <C> <C> <C>
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%
======
</TABLE>
10
<PAGE>
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).
<TABLE>
<CAPTION>
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)
----------- ------------- ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
(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
====== ======= ======= ====== ======= ======
</TABLE>
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
<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 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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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
<PAGE>
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
<PAGE>
[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
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
<C> <C>
<S> 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:
<S> <C> <C>
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
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Unallocated Accumulated Other
Common Paid-in Retained Common Stock Comprehensive Total
Stock Capital Earnings Held by ESOP Income Equity
----------- ----------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== ============= ================ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
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
============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== ========== ======== ===========
</TABLE>
27
<PAGE>
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:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== ======== ========= ===========
</TABLE>
28
<PAGE>
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:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C>
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
=========== ===========
</TABLE>
3. LOANS RECEIVABLE
The components of loans in the consolidated statements of financial
condition as of December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
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
============ ============
</TABLE>
29
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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
========== ==========
</TABLE>
Depreciation expense was $110,518, $130,337 and $117,094 for the years
ended December 31, 1998, 1997 and 1996, respectively.
30
<PAGE>
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:
<TABLE>
<S> <C>
1999 $ 62,907,960
2000 31,154,359
2001 4,854,787
2002 2,933,853
2003 644,395
------------
$102,495,354
============
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
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)
</TABLE>
32
<PAGE>
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:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------------- --------------
<S> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
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
=========== ============
</TABLE>
33
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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)
========== ==========
</TABLE>
Weighted average assumptions used to develop the net periodic pension cost
were:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
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%
</TABLE>
The components of net periodic pension cost for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
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
========== ========== =========
</TABLE>
34
<PAGE>
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:
<TABLE>
<S> <C>
Number of Shares
Released and allocated 29,423
Suspense 293,267
Fair Value
Released and allocated $ 505,714
Suspense 5,040,520
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- --------
<S> <C> <C> <C>
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
========== ========== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
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%
========== ========== ========
</TABLE>
36
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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)
=========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Tier I Risk- Total Risk-
Core Capital Based Capital Based Capital
-------------- -------------- --------------
<S> <C> <C> <C>
"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%
</TABLE>
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:
<TABLE>
<CAPTION>
Tier I Total
Risk- Risk-
GAAP Based Tangible Core Based
Capital Capital Capital Capital Capital
------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
Tier I Total
Risk- Risk-
GAAP Based Tangible Core Based
Capital Capital Capital Capital Capital
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
======= ======= ========
</TABLE>
39
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
ASSETS
<S> <C>
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
===========
</TABLE>
CONDENSED STATEMENT OF INCOME
FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
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
==========
</TABLE>
41
<PAGE>
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
<TABLE>
<S> <C>
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
============
</TABLE>
42
<PAGE>
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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL INFORMATION
<S> <C> <C>
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
</TABLE>
<PAGE>
HOPFED
[LOGO APPEARS HERE]
HOPFED BANCORP, INC.
-------------------
2700 Fort Campbell Blvd - Hopkinsville, KY 42240
502-885-1171
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
<TABLE>
<CAPTION>
Jurisdiction of
Percentage Owned Incorporation
-------------------- --------------------
<S> <C> <C>
Hopkinsville Federal Savings Bank 100% United States
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,905 1,264
<INT-BEARING-DEPOSITS> 214 5,945
<FED-FUNDS-SOLD> 9,685 151,095
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 68,139 26,699
<INVESTMENTS-CARRYING> 27,354 51,566
<INVESTMENTS-MARKET> 27,633 51,964
<LOANS> 108,807 103,708
<ALLOWANCE> 258 237
<TOTAL-ASSETS> 220,032 343,995
<DEPOSITS> 154,816 320,633
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 4,082 3,426
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 40 0
<OTHER-SE> 61,094 19,936
<TOTAL-LIABILITIES-AND-EQUITY> 220,032 343,995
<INTEREST-LOAN> 8,280 7,607
<INTEREST-INVEST> 4,778 5,118
<INTEREST-OTHER> 1,994 1,586
<INTEREST-TOTAL> 15,052 14,311
<INTEREST-DEPOSIT> 8,004 9,341
<INTEREST-EXPENSE> 0 9,350
<INTEREST-INCOME-NET> 7,048 4,961
<LOAN-LOSSES> 20 20
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 2,982 2,408
<INCOME-PRETAX> 4,592 3,061
<INCOME-PRE-EXTRAORDINARY> 2,951 3,061
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,951 2,023
<EPS-PRIMARY> .80 0
<EPS-DILUTED> .80 0
<YIELD-ACTUAL> 3.15 2.33
<LOANS-NON> 0 0
<LOANS-PAST> 287 163
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 866
<ALLOWANCE-OPEN> 258 217
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 258 237
<ALLOWANCE-DOMESTIC> 258 237
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
