SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23667
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HOPFED BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-1322555
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240
- ---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 885-1171
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes x No
As of September 30, 1999, 4,098,162 shares of Common Stock were issued
and outstanding.
<PAGE>
CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 1999
and December 31, 1998........................................... 1
Consolidated Statements of Income for the Three-Month and Nine-Month
Periods Ended September 30, 1999 and 1998....................... 2
Consolidated Statements of Comprehensive Income for the Three-Month
and Nine-Month Periods Ended September 30, 1999 and 1998........ 3
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 1999 and 1998....................... 4
Notes to Unaudited Condensed Financial Statements........................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................................ 12
SIGNATURES................................................................... 13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash and due from banks........................................ $ 2,622 $ 1,905
Interest-bearing deposits in Federal
Home Loan Bank ("FHLB")...................................... 74 214
Federal funds sold............................................. 8,586 9,685
Investment securities available for sale....................... 79,889 68,139
Investment securities held to maturity
(Estimated market values of $10,569 and
$27,634 at September 30, 1999 and
December 31, 1998, respectively)............................ 10,376 27,354
Loans receivable, net.......................................... 113,530 108,807
Accrued interest receivable.................................... 960 1,157
Premises and equipment, net.................................... 2,506 2,546
Other assets................................................... 93 225
--------- ---------
Total assets.......................................... $ 218,636 $ 220,032
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits..................................................... $153,691 $ 154,816
Federal income taxes......................................... 2,064 3,269
Advance payments from borrowers for taxes and insurance..... 319 166
Other liabilities............................................ 2,131 648
--------- ---------
Total liabilities..................................... 158,205 158,899
--------- ---------
Shareholders' equity:
Common stock................................................. 41 40
Additional paid in capital................................... 40,924 39,546
Retained earnings, substantially restricted.................. 22,702 18,984
Unallocated ESOP shares..................................... (2,860) (2,933)
Accumulated other comprehensive income (loss)................ (376) 5,496
--------- ---------
Total shareholders' equity............................ 60,431 61,133
--------- ---------
Total liabilities and shareholders' equity......... $ 218,636 $ 220,032
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
1
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------------- -----------------------------------
1999 1998 1999 1998
----------------- ----------------- --------------- ---------------
(Dollars in thousands, except per share data)
Interest income:
<S> <C> <C> <C> <C>
Interest on loans...................... $ 2,072 $ 2,080 $ 6,244 $ 6,172
Interest and dividends on investments.. 1,308 1,254 3,611 3,470
Time deposit interest income........... 115 245 646 1,846
----------- --------- ----------- -----------
Total interest income..................... 3,495 3,579 10,501 11,488
----------- --------- ----------- -----------
Interest expense:
Interest on deposits................... 1,762 1,864 5,299 6,155
----------- --------- ----------- -----------
Net interest income......................... 1,733 1,715 5,202 5,333
Provision for loan losses................... 5 5 15 15
----------- --------- ----------- -----------
Net interest income after provision
for loan losses........................ 1,728 1,710 5,187 5,318
----------- --------- ----------- -----------
Other income:
Loan and other service fees............ 123 127 342 369
Securities gains....................... 6,524 -- 6,524 --
Other, net............................. 13 12 43 50
----------- --------- ----------- -----------
Total other income..................... 6,660 139 6,909 419
----------- --------- ----------- -----------
Noninterest expense:
Salaries and benefits.................. 1,127 343 4,087 1,049
Federal insurance premium.............. 22 40 68 117
Occupancy expense, net................. 48 43 142 130
Data processing........................ 41 29 106 85
Other operating expenses............... 199 139 577 414
----------- --------- ----------- -----------
Total other expenses................... 1,437 594 4,980 1,795
----------- --------- ----------- -----------
Income before income taxes.................. 6,951 1,255 7,116 3,942
Income tax expense.......................... 2,404 426 2,553 1,351
----------- --------- ----------- -----------
Net income.................................. $ 4,547 $ 829 $ 4,563 $ 2,591
=========== ========= =========== ===========
Basic net income per share.................. $ 1.19 $ 0.22 $ 1.21 $ 0.70
Diluted net income per share................ $ 1.19 $ 0.22 $ 1.21 $ 0.70
Dividends per share......................... $ 0.075 $ 0.075 $ 0.225 $ 0.075
Weighted average:
Common shares.......................... 4,098,162 4,033,625 4,066.957 4,033,625
Less: unallocated ESOP Shares.......... 286,447 322,690 288,896 322,690
----------- ----------- ----------- -----------
3,811,715 3,710,935 3,778,061 3,710,935
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
2
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ----------- --------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Net income $4,547 $ 829 $4,563 $ 2,591
Other comprehensive income, net of tax
Unrealized holding gains (losses) arising
during period net of tax effect of ($219)
and $234 for the three months ended
September 30, 1999 and 1998, respectively,
and ($807) and $458 for the nine months
ended September 30, 1999 and 1998, (425) 455 (1,566) 889
respectively.
Less:reclassification adjustment for gains
included in net income net of tax effect
of $2,218 for each of the three months
and nine months ended September 30,
1999. (4,306) 0 (4,306) 0
------- ------- ------- --------
Comprehensive income (loss) $ (184) $ 1,284 $(1,309) $ 3,480
======= ======= ======= ========
</TABLE>
See Accompanying Notes to Unaudited Condensed Financial Statements
3
<PAGE>
HOPFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
1999 1998
-------------- ------------
(In thousands)
Cash flows from operating activities:
<S> <C> <C>
Net income........................................... $ 4,563 $ 2,591
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes................................ 34 17
Provision for loan losses............................ 15 15
Provision for depreciation........................... 84 70
FHLB stock dividend.................................. (100) (95)
Amortization of investment security premiums......... 27 2
Accretion of investment security discounts........... (260) (16)
Gain on sale of investments.......................... (6,524) --
Unallocated ESOP shares.............................. 87 --
MRP shares........................................... 1,291 --
(Increase) decrease in:
Accrued interest receivable.......................... 197 86
Other assets......................................... 131 330
Increase (decrease) in:
Current income taxes payable......................... 1,786 (210)
Accrued expenses and other liabilities............... 1,483 (650)
---------- ---------
Net cash provided by operating activities............ 2,814 2,140
--------- ---------
Cash flows from investing activities:
Net decrease in time deposits........................ -- 2,000
Net decrease in interest earning deposits in FHLB.... 140 3,898
Net decrease in federal funds sold................... 1,099 139,228
Proceeds from maturities of held-to-maturity securities 16,986 19,699
Proceeds from sale of available-for-sale securities.. 37,200 7,729
Purchases of available-for-sale securities........... (50,998) (40,078)
Net increase in loans................................ (4,738) (3,931)
Purchases of premises/equipment...................... (43) (255)
Proceeds from sale of equipment...................... -- 7
--------- ---------
Net cash (used) provided by investing activities..... (354) 128,297
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand deposits........... 1,739 (151,310)
Net decrease in time deposits........................ (2,863) (15,299)
Increase in advance payments by
borrowers for taxes and insurance.................. 153 186
Net proceeds from issuance of stock.................. -- 36,188
Net dividends paid................................... (845) (303)
Payment on loan to ESOP.............................. 73 --
--------- ---------
Net cash used in financing activities................ (1,743) (130,538)
--------- ---------
Increase (decrease) in cash and cash equivalents.......... 717 (101)
Cash and cash equivalents, beginning of period............ 1,905 1,264
--------- ---------
Cash and cash equivalents, end of period.................. 2,622 1,163
========= =========
Supplemental disclosures of cash flow information:
Cash paid for income taxes........................... $ 600 $ 1,535
========= =========
Cash paid for interest............................... $ 5,298 $ 6,656
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
4
<PAGE>
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HopFed Bancorp, Inc. (the "Company") was formed at the direction of
Hopkinsville Federal Savings Bank (the "Bank") to become the holding
company of the Bank upon the conversion of the Bank from a federally
chartered mutual savings bank to a federally chartered stock savings
bank. The conversion was consummated on February 6, 1998. The Company's
primary assets are the outstanding capital stock of the converted Bank,
a portion of the net proceeds of the conversion, and a note receivable
from the Company's Employee Stock Ownership Plan, and its sole business
is that of the converted Bank and the investment of funds held by it.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for fair
presentation have been included. The results of operations and other
data for the nine month period ended September 30, 1999, are not
necessarily indicative of results that may be expected for the entire
fiscal year ending December 31, 1999.
The accompanying unaudited financial statements should be read in
conjunction with the Consolidated Financial Statements and the Notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. The accounting policies followed by the
Company are set forth in the Summary of Significant Accounting Policies
in the Company's December 31, 1998 Consolidated Financial Statements.
2. PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities." The Statement requires derivatives to be
recorded in the balance sheet as either an asset or liability measured
at its fair value. The Statement also requires that changes in the
derivatives' fair values be recognized currently in earnings unless
specific hedge accounting criteria are met. As amended by Statement of
Financial Standards No. 137, this statement is effective for fiscal
years beginning after June 15, 2000 (prospectively) and is not expected
to have a material effect on the Company's financial statements.
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,
5
<PAGE>
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets decreased by $1.4 million, from $220.0 million at December 31,
1998 to $218.6 million at September 30, 1999. Securities held to maturity
declined $17.0 million due to various issues maturing. At September 30, 1999, a
substantial portion of these funds were reinvested in securities available for
sale, which increased $11.8 million, and net loans receivable, which increased
by $4.7 million.
At September 30, 1999, deposits decreased to $153.7 million from $154.8
million at December 31, 1998, a net decrease of $1.1 million. The average cost
of deposits for each of the three and nine months ended September 30, 1999 was
4.65%, compared to 4.65% for the year ended December 31, 1998. Management
continually evaluates the investment alternatives available to customers and
adjusts the pricing on its deposit products to more actively manage its funding
costs while remaining competitive in the Bank's market area.
The loan portfolio increased by $1.7 million and $4.7 million during the
three and nine months ended September 30, 1999, respectively. Net loans totaled
$113.5 million and $108.8 million at September 30, 1999 and December 31, 1998,
respectively. The increase in the loan activity during the three and nine months
ended September 30, 1999 was primarily due to efforts to increase loan
originations using funds currently held in investment securities. For the three
and nine months ended September 30, 1999, the average yield on loans was 7.35%
and 7.50%, respectively, compared to 7.82% for the year ended December 31, 1998.
At September 30, 1999, investments classified as "held to maturity" were
carried at amortized cost of $10.4 million and had an estimated fair market
value of $10.6 million, and securities classified as "available for sale" had an
estimated fair market value of $79.9 million.
In August 1999, the Bank sold 100% of its Federal Home Loan Mortgage
Corporation ("FHLMC") stock portfolio (123,072 shares) in open market
transactions and realized an after-tax gain on such sales of approximately $4.3
million. The FHLMC stock had been recorded at its fair market value with the
associated unrealized gains recorded in the Company's consolidated net worth.
The sales were undertaken in recognition that the FHLMC stock had appreciated
significantly over the last several years. Although the FHLMC has benefited from
higher levels of mortgage loans fostered by lower interest rates in recent
years,
6
<PAGE>
as a result of an uncertainty over the direction of interest rates and an
apparent slowing of mortgage loan originations in general, the Company believed
that the FHLMC stock would be subject to future adverse market pressures.
Additionally, the FHLMC is under increasing pressure to expand its role in
promoting low income housing, which the Company believed may also depress the
market value of the FHLMC stock. From December 31, 1998 to the date of sale, the
Bank's FHLMC stock portfolio declined in value approximately 17%. Proceeds of
these sales were invested in higher yielding investments.
The allowance for loan losses totaled $273,000 at September 30, 1999, an
increase of $15,000 from the allowance of $258,000 at December 31, 1998. The
ratio of the allowance for loan losses to loans was 0.24% at each of September
30, 1999 and December 31, 1998. Also at September 30, 1999, non-performing loans
were $557,000, or 0.49% of total loans, compared to non-performing loans of
$287,000, or 0.26% of total loans, at December 31, 1998, and the ratio of
allowance for loan losses to non-performing loans at September 30, 1999 and
December 31, 1998 was 49.0% and 90.0%, respectively. The determination of the
allowance for loan losses is based on management's analysis, performed on a
quarterly basis. Various factors are considered, including the market value of
the underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, historical
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. Minimal losses on loans have been incurred in prior
years.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
NET INCOME. Net income for the nine months ended September 30, 1999 was
$4.6 million, compared to net income of $2.6 million for the nine months ended
September 30, 1998. Excluding the gain on sale of FHLMC stock, net income for
the nine months ended September 30, 1999, would have been approximately
$257,000. During the nine months ended September 30, 1999, the Company incurred
additional compensation expense of $2.1 million attributable to additional
employee benefits which were approved at the 1999 Annual Meeting of
Stockholders. The Company also incurred a decrease in time deposit interest
income due to the elimination of net earnings on subscription funds received in
the conversion to stock form.
NET INTEREST INCOME. Net interest income for the nine months ended
September 30, 1999 was $5.2 million, compared to $5.3 million for the nine
months ended September 30, 1998. The decrease in net interest income for the
nine months ended September 30, 1999 was primarily due to the elimination of net
earnings on subscription funds received in the conversion. For the nine months
ended September 30, 1999, the average yield on total interest-earning assets was
6.54%, compared to 6.25% for the nine months ended September 30, 1998, and the
average cost of interest-bearing liabilities was 4.65% for the nine months ended
September 30, 1999, compared to 4.19% for the nine months ended September 30,
1998. As a result, the interest rate spread for the nine months ended September
30, 1999 was 1.89%, compared to 2.06% for the nine months ended September 30,
1998, and net yield on interest-earning assets was 3.24% for the nine months
ended September 30, 1999, compared to 2.90% for the nine months ended September
30, 1998.
7
<PAGE>
INTEREST INCOME. Interest income decreased by $987,000, from $11.5 million
to $10.5 million, or by 8.6%, during the nine months ended September 30, 1999
compared to the same period in 1998. This decrease primarily resulted from
elimination of subscription funds received in the conversion. The average
balance of securities held to maturity declined $23.8 million, from $39.1
million during the nine months ended September 30, 1998 to $15.3 million during
the nine months ended September 30, 1999. Overall, average total
interest-earning assets decreased $31.0 million, or 12.7%, from September 30,
1998 to September 30, 1999. The ratio of average interest-earning assets to
average interest-bearing liabilities increased from 125.08% for the nine months
ended September 30, 1998 to 140.76% for the nine months ended September 30,
1999.
INTEREST EXPENSE. Interest expense decreased $856,000, or 13.9%, to $5.3
million for the nine months ended September 30, 1999, compared to $6.2 million
for the same period in 1998. The decrease was attributable to interest expense
of approximately $400,000 which was paid in 1998 on subscriptions for common
stock in the conversion. The average cost of interest-bearing deposits increased
from 4.19% during the nine months ended September 30, 1998 to 4.65% during the
nine months ended September 30, 1999. Over the same period, the balance of
deposits decreased $803,000, from $151.9 million at September 30, 1998 to $151.1
million at September 30, 1999, or 0.53%.
OTHER INCOME. Other income increased $6.5 million to $6.9 million for the
nine months ended September 30, 1999, compared to $419,000 for the nine months
ended September 30,1998. The increase was attributable to a $6.5 million gain on
the sale of FHLMC stock.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance. The Bank determined that an additional
$15,000 provision for loan loss was required for the nine months ended September
30, 1999, compared to an additional $15,000 provision for the nine months ended
September 30, 1998.
NON-INTEREST EXPENSE. There was a $3.2 million increase in total
non-interest expense in the nine months ended September 30, 1999 compared to the
same period in 1998, primarily due to a $3.0 million increase in salaries and
benefits.
INCOME TAXES. The Bank's effective tax rate for the nine months ended
September 30, 1999 was 35.9%, compared to 34.3% for the same period in 1998. The
abnormally high effective tax rate for the nine months ended September 30, 1999,
was attributable to $398,000 of expenses being non-deductible for tax purposes.
The increase in income tax expense of $1.2 million in the nine months ended
September 30, 1999, compared to the same period in 1998 was primarily due to an
increase of $3.2 million in income before income taxes.
8
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
NET INCOME. Net income for the three months ended September 30, 1999 was
$4.5 million, compared to net income of $829,000 for the three months ended
September 30, 1998. Excluding the gain on sale of FHLMC stock, net income for
the three months ended September 30, 1999, would have been approximately
$241,000. During the three months ended September 30, 1999, the Company incurred
additional compensation expense resulting from additional employee benefits
which were approved at the 1999 Annual Meeting of Stockholders.
NET INTEREST INCOME. Net interest income was $1.7 million for each of the
three months ended September 30, 1999 and 1998. For the three months ended
September 30, 1999, the average yield on total interest-earning assets was
6.55%, compared to 6.84% for the three months ended September 30, 1998, and its
average cost of interest-bearing liabilities was 4.65% for the three months
ended September 30, 1999, compared to 4.87% for the three months ended September
30, 1998. As a result, the interest rate spread for the three months ended
September 30, 1999 was 1.90%, compared to 1.97% for the three months ended
September 30, 1998, and the net yield on interest-earning assets was 3.25% for
the three months ended September 30, 1999, compared to 3.33% for the three
months ended September 30, 1998.
INTEREST INCOME. Interest income decreased slightly, from $3.6 million to
$3.5 million, during the three months ended September 30, 1999, compared to the
same period in 1998. The average balance of securities held to maturity declined
$22.8 million, from $33.6 million during the three months ended September 30,
1998 to $10.8 million during the three months ended September 30, 1999. In
addition, average time deposits and other interest-earning cash deposits
decreased $7.9 million, from $17.5 million at September 30, 1998 to $9.6 million
at September 30, 1999. Overall, average total interest-earning assets increased
$1.3 million, or 0.62%, from September 30, 1998 to September 30, 1999. The ratio
of average interest-earning assets to average interest-bearing liabilities
increased from 138.54% for the three months ended September 30, 1998 to 140.66%
for the three months ended September 30, 1999.
INTEREST EXPENSE. Interest expense decreased slightly, to $1.8 million for
the three months ended September 30, 1999, compared to $1.9 million for the same
period in 1998. The average cost of average interest-bearing deposits decreased
from 4.87% during the three months ended September 30, 1998 to 4.65% during the
three months ended September 30, 1999. Over the same period, the average balance
of deposits decreased $1.4 million, from $153.1 million at September 30, 1998 to
$151.7 million at September 30, 1999, or 0.90%.
PROVISION FOR LOAN LOSSES. The Bank determined that an additional $5,000
provision for loan loss was required for the three months ended September 30,
1999, compared to an additional $5,000 provision for the three months ended
September 30, 1998.
OTHER INCOME. Other income increased $6.5 million to $6.7 million for the
three months ended September 30,1999, compared to $139,000 for the three months
ended September 30, 1998. The increase was attributable to a $6.5 million gain
on the sale of FHLMC stock.
9
<PAGE>
NON-INTEREST EXPENSE. There was a $843,000 increase in total non-interest
expense in the three months ended September 30, 1999 compared to the same period
in 1998, primarily due to a $784,000 increase in salaries and benefits.
INCOME TAXES. The effective tax rate for the three months ended September
30, 1999 was 34.6%, compared to 33.9% for the same period in 1998. The increase
in income tax expense of $2.0 million in the three months ended September 30,
1999 compared to the same period in 1998 was primarily due to a $5.7 million
increase in income.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has no business other than that of the Bank and investing funds
held by it. Management of the Company believes that dividends that may be paid
by the Bank to the Company will provide sufficient funds for its operations and
liquidity needs . However, no assurance can be given that the Company will not
have a need for additional funds in the future. The Bank is subject to certain
regulatory limitations with respect to the payment of dividends to the Company.
The Bank's principal sources of funds for operations are deposits from its
primary market areas, principal and interest payments on loans, earnings on
investment securities, and proceeds from maturing investment securities. The
principal uses of funds by the Bank include the origination of mortgage and
consumer loans and the purchase of investment securities.
The Bank is required by current federal regulations to maintain specified
liquid assets of at least 5% of its net withdrawable accounts plus short-term
borrowings. Short-term liquid assets (those maturing in one year or less) may
not be less than 1% of the Bank's liquidity base. At September 30, 1999, the
Bank met all regulatory liquidity requirements, and management believes that the
liquidity levels maintained are adequate to meet potential deposit outflows,
loan demand and normal operations.
The Bank must satisfy three capital standards: a ratio of core capital to
adjusted total assets of 3.0%, a tangible capital standard expressed as 1.5% of
total adjusted assets, and a combination of core and "supplementary" capital
equal to 8.0% of risk-weighted assets. At September 30, 1999, the Bank exceeded
all regulatory capital requirements. The table below presents certain
information relating to the Bank's capital compliance at September 30, 1999.
Amount Percent
------ -------
(Dollars in thousands)
Tangible Capital . . . . . . . . . . $41,143 20.37%
Core Capital . . . . . . . . . . . . 41,143 20.37
Risk-Based Capital . . . . . . . . . 41,416 54.33
At September 30, 1999, the Bank had outstanding commitments to originate
loans totaling $1.4 million. Management believes that the Bank's sources of
funds are sufficient to fund all of its outstanding commitments. Certificates of
deposits which are scheduled to mature in one year or
10
<PAGE>
less from September 30, 1999 totaled $71.3 million. Management believes that a
significant percentage of such deposits will remain with the Bank.
During the three month period ended September 30, 1999, the Company
declared and paid a dividend of $.075 per share of Common Stock, or a total
dividend of $307,000.
THE YEAR 2000 PROBLEM
The Company is aware of the current concerns throughout the business
community of reliance upon computer software that does not properly recognize
the Year 2000 in date formats, often referred to as the "Year 2000 Problem." The
Year 2000 Problem is the result of software being written using two digits
rather than four digits to define the applicable year (i.e., "98" rather than
"1998"). A failure by a business to properly identify and correct a Year 2000
Problem in its operations could result in system failures or miscalculations. In
turn, this could result in disruptions of operations, including among other
things a temporary inability to process transactions, or otherwise engage in
routine business transactions on a day-to-day basis.
Operations of the 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 was completed in April
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 conducted Business Recovery
Tests in April to ensure proper transmission with member institutions. The
service provider believes its systems and equipment will be well prepared for
the Year 2000 Problem.
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 September 30, 1999, the Company had incurred approximately $41,000 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.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "expect," "seek," and "intend" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of income or loss, expenditures,
acquisitions, plans for future operations, financing needs or plans relating to
services of the Company, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by or
underlying the forward-looking statements.
The Company does not undertake, and specifically disclaims, any obligation
to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company monitors whether material changes in market risk have occurred
since year-end. The Company does not believe that material changes in market
risk exposures occurred during the nine months ended September 30, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOPFED BANCORP, INC.
Date: November 15, 1999 /s/ Bruce Thomas
-----------------------------------------
Bruce Thomas
President and Chief Executive Officer
Date: November 15, 1999 /s/ Peggy R. Noel
-----------------------------------------
Peggy R. Noel
Executive Vice President, Chief Financial
Officer and Chief Operations Officer
13
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