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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________
Commission file number 000-23667
----------------------------
HOPFED BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 61-1322555
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 Fort Campbell Boulevard, Hopkinsville, KY 42240
- ----------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 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 ($11.25 per share) at which the
stock was sold on March 31, 2000, was approximately $41,614,819. 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, 2000, 3,993,592 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, 1999.
Part III:
Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
In February 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 primarily consist of the outstanding capital
stock of the Bank and a portion of the net proceeds of the Conversion. 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 (270)
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 $115.7 million at December
31, 1999, representing 55.7% of total assets at that date. Substantially all
loans are originated in the Bank's market area. At December 31, 1999, $88.2
million, or 76.3% 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 $12.4 million, or 10.7% of
<PAGE>
the loan portfolio at December 31, 1999, and multi-family residential loans,
which were $2.2 million, or 1.9% of the loan portfolio at December 31, 1999. At
December 31, 1999, construction loans were $5.7 million, or 4.9% of the loan
portfolio, and consumer loans totaled $7.2 million, or 6.2% 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, 1999, there were no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loan:
- ------------
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family
residential........ $ 88,248 76.3% $ 88,954 80.6% $ 83,229 78.7% $77,318 79.6% $70,417 81.5%
Multi-family
residential........ 2,165 1.9% 1,539 1.4% 2,359 2.2% 1,466 1.5% 492 0.6%
Construction......... 5,706 4.9% 4,626 4.2% 5,166 4.9% 5,389 5.6% 4,062 4.7%
Non-residential (1).. 12,398 10.7% 8,260 7.5% 7,593 7.2% 5,467 5.6% 5,107 5.9%
--------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Total real estate
loans........... 108,517 93.8% 103,379 93.7% 98,347 93.0% 89,640 92.3% 80,078 92.7%
========= ====== ======== ======= ======== ====== ======= ======= ====== =======
Consumer loans:
Secured by deposits.. 2,525 2.2% 2,280 2.1% 3,081 2.9% 3,484 3.6% 3,324 3.8%
Other consumer loans. 4,670 4.0% 4,586 4.2% 4,298 4.1% 4,004 4.1% 3,016 3.5%
--------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Total consumer loans 7,195 6.2% 6,866 6.3% 7,379 7.0% 7,488 7.7% 6,340 7.3%
--------- ------ -------- ------ -------- ------ ------- ------ ------- ------
115,712 100.0% 110,245 100.0% 105,726 100.0% 97,128 100.0% 86,418 100.0%
====== ====== ====== ====== ======
Less:.Loans in process. 1,902 1,180 2,019 1,415 1,541
Allowance for loan
losses........... 278 258 237 217(2) 122
--------- -------- -------- ------- -------
Total................ $ 113,532 $108,807 $103,470 $95,496 $84,755
========= ======== ======== ======= =======
</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, 1999 regarding the dollar amount of loans maturing in the
portfolio based on their contractual maturity, dates. 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
3 through 5 through 10 10 through Due after
Due during the year ending years after years after 15 years 15 years
December 31, December 31, December 31, after after
------------------------------- ------------ ------------ December 31, December 31,
------------ ------------
2000 2001 2002 1999 1999 1999 1999 Total
---- ---- ---- ---- ---- ---- ---- -----
(In thousands)
One-to-four family
<S> <C> <C> <C> <C> <C> <C> <C> <C>
residential............... $2,705 $1,215 $1,201 $2,124 $ 9,665 $22,495 $48,398 $ 87,803
Multi-family residential.. -- -- -- -- -- 790 1,375 2,165
Construction.............. 4,077 -- -- -- -- -- -- 4,077
Non-residential........... 614 55 -- 649 888 4,250 5,836 12,292
Consumer.................. 2,399 526 1,214 2,615 441 -- -- 7,195
------ ------ ------ ------ -------- ------- ------- ---------
Total.................. $9,795 $1,796 $2,415 $5,388 $ 10,994 $27,535 $55,609 $ 113,532
====== ====== ====== ====== ======== ======= ======= =========
</TABLE>
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<PAGE>
The following table sets forth at December 31, 1999, the dollar amount of
all loans due one year or more after December 31, 1999 which had predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rate
----------------- ----------------
(In thousands)
One-to-four family residential..... $15,579 $69,519
Multi-family residential........... -- 2,165
Construction....................... -- --
Non-residential.................... -- 11,678
Consumer........................... 4,796 --
------- -------
Total........................... $20,375 $83,362
======= =======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the lender the right to declare a loan immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank conducts substantially all of
its lending activities in its market area.
The following table sets forth certain information with respect to loan
origination activity for the periods indicated. The Bank has not purchased or
sold any loans in the periods presented.
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Loan originations:
One-to-four family residential $ 16,474 $ 24,406 $ 14,578
Multi-family residential...... 686 204 1,115
Construction.................. 2,470 1,749 6,302
Non-residential............... 4,970 1,056 372
Consumer...................... 5,922 5,324 7,472
--------- --------- --------
Total loans originated...... 30,522 32,739 29,839
--------- --------- --------
Loan principal reductions:
Loan principal repayments..... 25,797 27,403 21,865
--------- --------- --------
Net increase in loan portfolio... $ 4,725 $ 5,336 $ 7,974
========= ========= ========
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
3
<PAGE>
underwriting standards must be approved by the loan committee. In addition, the
full Board of Directors reviews all 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 $6.6 million at December 31, 1999. At that date, the Bank had no
lending relationships in excess of the loans-to-one-borrower limit. At December
31,1999, the Bank's largest lending relationship was $2.6 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, 1999.
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, 1999, one-to-four family residential
mortgage loans, totaled approximately $88.2 million, or 76.3% 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
<PAGE>
The Bank primarily originates residential mortgage loans with adjustable
rates. As of December 31, 1999, 81.7% of one-to-four family mortgage loans in
the Bank's loan portfolio carried adjustable rates. Such loans are primarily for
terms of 25 years, although the Bank does occasionally originate adjustable rate
mortgages for 15, 20 and 30 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, 1999, only $15.6
million, or 13.7%, 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, 1999, the Bank's loan portfolio included $5.7 million of loans secured by
properties under construction, including construction/permanent loans structured
to
5
<PAGE>
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.
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 31,1999 the Bank had $2.2 million of
multi-family residential loans, which amounted to 1.9% 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, 1999, the Bank had approximately $12.4
million of such loans, which comprised 10.7% 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
6
<PAGE>
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, 1999, loans on deposit accounts totaled $2.5 million, or 2.2% 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 attempting to grow its portfolio of consumer loans.
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, 1999, there were approximately $7,000 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.
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS
The Bank's non-performing loans totaled .05% of total assets at December
31, 1999. 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,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans which are
contractually past due 90
days or more:
<S> <C> <C> <C> <C> <C>
Residential real estate... $ 51 $ 268 $ 140 $ 266 $ 133
Consumer.................. 7 19 23 -- 1
-------- -------- -------- -------- -------
Total................... $ 58 $ 287 $ 163 $ 266 $ 134
-------- -------- -------- -------- -------
Total non-performing
loans................. $ 58 $ 287 $ 163 $ 266 $ 134
======== ======== ======== ======== =======
Percentage of total loans.... 0.05% 0.26% 0.16% 0.28% 0.16%
======== ========= ========= ======== =======
</TABLE>
At December 31, 1999, the Bank had no loans accounted for on a non-accrual
basis, no other non-performing assets and no real estate owned.
7
<PAGE>
At December 31, 1999, 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 nonaccrual, 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 non-performing
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, 1999, the Bank had $9,922 in assets
classified as special mention, $58,026 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
8
<PAGE>
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
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,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .......... $ 258 $ 237 $ 217 $ 122 $ 122
Loans charged off:
Real estate mortgage:
Residential .......................... -- -- -- (5) --
----- ----- ----- ----- -----
Total charge-offs ....................... -- -- -- (5) --
----- ----- ----- ----- -----
Recoveries .............................. -- -- -- -- --
----- ----- ----- ----- -----
Net loans charged off ................... -- -- -- (5) --
----- ----- ----- ----- -----
Provision for loan losses ............... $ 20 $ 21 20 100 --
----- ----- ----- ----- -----
Balance at end of period ................ $ 278 $ 258 $ 237 $ 217 $ 122
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period ........ 0% 0% 0% 0.0053% 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.
9
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
----------------------- ----------------------- ------------------------ -----------------------
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Each Each Each Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family... $ 130 76.3% $ 136 80.6% $ 186 78.7% $ 163 79.6%
Construction......... 5 4.9% 7 4.2% 6 4.9% 11 5.6%
Multi-family residential 8 1.9% 6 1.4% 12 2.2% 3 1.5%
Non-residential...... 85 10.7% 71 7.5% 19 7.2% 23 5.6%
Secured by deposits.. -- 2.2% -- 2.1% -- 2.9% -- 3.6%
Other consumer loans. 50 4.0% 38 4.2% 14 4.1% 17 4.1%
------ ------ ------ ------ ------ ------- ------- ------
Total allowance for
loan losses..... $ 278 100.0% $ 258 100.0% $ 237 100.0% $ 217 100.0%
====== ====== ====== ====== ====== ======= ======= ======
</TABLE>
10
<PAGE>
At December 31, 1995
---------------------------------------
Percent of Loans in Each
Amount Category to Total Loans
------ -----------------------
(In thousands)
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
loan losses............ $ 122 100.0%
======= =====
INVESTMENT ACTIVITIES
The Bank makes investments in order to maintain the levels of liquid assets
required by regulatory authorities and manage cash flow, diversify its assets,
obtain yield and to satisfy certain requirements for favorable tax treatment.
The investment activities of the Company and the Bank consist primarily of
investments in Agency Securities and Mortgage-Backed Securities. Typical
investments include federally sponsored agency mortgage pass-through and
federally sponsored agency and mortgage-related securities. Investment and
aggregate investment limitations and credit quality parameters of each class of
investment are prescribed in the Bank's investment policy. The Company and the
Bank perform analyses on mortgage-related securities prior to purchase and on an
ongoing basis to determine the impact on earnings and market value under various
interest rate and prepayment conditions. Securities purchases must be approved
by the Bank's President. The Board of Directors reviews all securities
transactions on a monthly basis.
The principal objective of the investment policy is to earn as high a rate
of return as possible, but to consider also financial or credit risk, liquidity
risk and interest rate risk.
At December 31, 1999, securities with an amortized cost of $72.8 million
and an approximate market value of $71.4 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 $43.3 million
mortgage-backed security portfolio at December 31, 1999, approximately $22.5
million were originated through GNMA, approximately $11.0 million were
originated through FNMA and approximately $9.8 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.
11
<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 accreted over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
The following table sets forth the carrying value of the investment
securities at the dates indicated.
At December 31,
----------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Securities available for sale:
FHLB and FHLMC stock ........ $ 1,987 $ 9,845 $ 6,895
U. S. government and agency
securities (1) ............ 36,120 23,065 13,000
Mortgage-backed securities .. 33,301 35,214 6,789
Other ....................... 15 15 15
Securities held to maturity:
U.S. government and agency
securities (1) ............ -- 13,997 31,988
Mortgage-backed securities .. 9,958 13,357 19,578
------- ------- -------
Total investment securities $81,381 $95,493 $78,265
======= ======= =======
- ---------------------------
(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, 1999. At such date, all
of these securities were callable and/or due on or before December 15, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years After Ten Years Total Investment Portfolio
---------------- ----------------- ----------------- --------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield value Yield Yield Value Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. government and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
agency securities $ -- --% $ 15,997 6.29% $ 7,206 6.92% $ 14,209 7.96% $37,412 $36,120 7.04%
======== ======= ======== ===== ======== ===== ======== ===== ======= ======= =====
</TABLE>
12
<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, 1999 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Percentage
Interest Minimum Minimum of Total
Rate* Term Category Amount Balance Deposits
- ------------ ------------------- ------------------------------ ------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
-- % None Non-interest bearing $ 100 $2,943 1.8%
2.5%* None Demand/NOW accounts 1.500 9,017 5.6
2.8% None Passbook accounts 10 9,803 6.1
3.9%* None Money market deposit accounts 2,500 30,063 18.7
-------- -----
51,826 32.2
-------- -----
Certificates of Deposit
------------------------------
5.2% 3 months or less Fixed-term, fixed rate 500 19,216 11.9
5.3% Over 3 to 12-months Fixed-term, fixed-rate 500 44,572 27.7
5.7% Over 12 to 24-months Fixed-term, fixed-rate 500 35,294 21.9
5.6% Over 24 to 36-months Fixed-term, fixed-rate 500 4,388 2.8
5.7% Over 36 to 48-months Fixed-term, fixed-rate 500 2,995 1.9
5.6% Over 48 to 60-months Fixed-term, fixed rate 500 2,614 1.6
-------- -----
109,079 67.8
-------- -----
$160,905 100.0%
======== ======
</TABLE>
- -----------------
* Represents weighted average interest rate.
13
<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,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- ---------------------------------
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........ $ 49,365 $103,880 $ 62,414 $ 109,508 $ 71,590 $ 123,429
Average
rate........... 3.14% 5.37% 3.36% 5.39% 3.51% 5.52%
</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,
1999 Deposits 1998 1998 Deposits 1997
---- -------- ---- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing..... $ 2,943 1.8% $ 212 $ 2,731 1.8% $ 768
Demand and NOW
accounts.............. 9,017 5.6% 393 8,624 5.6% (860)
Money market............. 30,063 18.7% (709) 30,772 19.9% (11,292)
Passbook savings......... 9,803 6.1% (391) 10,194 6.6% (137,886)
Other time deposits...... 109,079 67.8% 6,584 102,495 66.1% (16,547)
---------- ------ --------- ---------- -------- ----------
Total................. $ 160,905 100.0% $ 6,089 $ 154,816 100.0% $ (165,817)
========== ====== ========= ========== ======== ==========
</TABLE>
(continued)
<TABLE>
<CAPTION>
Balance at Increase Balance at
December 31, % of (Decrease) from December 31, % of
1997 Deposits December 31, 1996 1996 Deposits
---- -------- ----------------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest bearing..... $ 1,963 0.6% $ 179 $ 1,784 1.0%
Demand and NOW
accounts.............. 9,484 3.0% 1,881 7,603 4.1%
Money market............. 42,064 13.1% 5,124 36,940 20.1%
Passbook savings......... 148,080 46.2% 137,448 10,632 5.8%
Other time deposits...... 119,042 37.1% (7,826) 126,868 69.0%
---------- -------- --------- --------- ------
Total................. $ 320,633 100.0% $ 136,806 $ 183,827 100.0%
========== ======== ========= ========= ======
</TABLE>
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
14
<PAGE>
At December 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
2.01 - 4.00%....... $ 211 $ 212 $ 39
4.01 - 6.00%....... 94,719 92,870 102,474
6.01 - 8.00%....... 14,149 9,413 16,529
--------------- ------------- ---------
Total............. $ 109,079 $ 102,495 $ 119,042
=============== ============= =========
The following table sets forth the amount and maturities of time deposits
at December 31, 1999.
<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%.................. $ 211 $ -- $ -- $ -- $ 211
4.01 - 6.00%.................. 56,911 28,210 3,989 5,609 94,719
6.01 - 8.00%.................. 6,666 7,084 399 -- 14,149
------------- ------------- ----------- ------------- -------------
Total....................... $ 63,788 $ 35,294 $ 4,388 $ 5,609 $ 109,079
============= ============= =========== ============= =============
</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,
1999.
Maturity Period Certificates of Deposit
- ------------------------------------- --------------------------
(In thousands)
Three months or less................. $ 1,166
Over three through six months........ 1,953
Over six through 12 months........... 2,742
Over 12 months....................... 4,518
--------
Total............................. $ 10,379
========
Certificates of deposit at December 31, 1999 included approximately $10.4
million of deposits with balances of $100,000 or more, compared to $7.2 million
and $8.1 million at December 31, 1998 and 1997, 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,
------------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deposits............................... $ 314,635 $ 211,652 $ 430,943
Withdrawals............................ (314,279) (383,743) (301,475)
---------- ---------- -----------
Net increase (decrease) before
interest credited................... 356 (172,091) 129,468
Interest credited...................... 5,733 6,274 7,338
---------- ---------- -----------
Net increase (decrease) in savings
deposits............................ $ 6,089 $ (165,817) $ 136,806
========== =========== ===========
</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.
15
<PAGE>
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
16
<PAGE>
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 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.
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, 1999, the Company and the Bank had 29 full-time and 5
part-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
GENERAL. 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.
17
<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.
FINANCIAL MODERNIZATION LEGISLATION. On November 12, 1999, the
Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was enacted into law. The GLB Act
makes sweeping changes in the authorized activities of banks and their holding
companies. In particular, the GLBA Act repealed the Glass-Steagall Act, which
had generally prevented banks from affiliating with securities firms, and also
permitted bank holding companies for the first time to affiliate with insurance
companies. A new "financial holding company," which owns only well capitalized
and well-managed banks, will be permitted to engage in a variety of financial
activities, including insurance and securities underwriting and insurance agency
activities. The financial holding company provisions of the GLB Act are not
expected to have a material effect on the Company or the Bank.
The GLB Act also places substantial restrictions on the activities of
companies that apply to become savings and loan holding companies after May 4,
1999. However, the GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities that they were permitted to engage in prior to the enactment of the
Act. Under such authority, the Company's business powers are essentially
unlimited, provided that the Bank remains a qualified thrift lender. However,
the GLB Act further provides that a unitary thrift holding company in existence
on May 4, 1999, will lose its exempt status if it or its subsidiary thrift is
sold to any unaffiliated company other than another grandfathered unitary thrift
holding company. The GLB Act is not expected to have a material effect on the
activities in which the Company and the Bank currently engage, except to the
extent that competition with banks and bank holding companies may increase as
they engage in activities not permitted prior to enactment of the GLB Act.
In addition, the GLB Act adopts a number of consumer protections, including
provisions intended to protect privacy of bank customers' financial information
and new requirements for the disclosure of ATM fees imposed by banks on
customers of other banks. Most of the GLB Act's provisions have delayed
effective dates and require the adoption of implementing regulations to
implement the statutory provisions. Accordingly, at this time the Bank is unable
to predict the eventual impact of the Act on its operations.
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' capital adequacy regulations 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
18
<PAGE>
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") and purchased
credit card relationships. 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, 1999, 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 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, 1999.
<TABLE>
<CAPTION>
The Bank's Capital Capital Requirements Excess Capital
----------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. $ 44,971 21.6% $ 3,123 1.5% $ 41,848 20.1%
Core capital.................. $ 44,971 21.6% $ 8,327 4.0% $ 36,644 17.6%
Total risk-based capital...... $ 45,249 58.6% $ 6,177 8.0% $ 39,072 50.6%
</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.
19
<PAGE>
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, 1999, 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, all
FDIC-insured institutions are required to pay assessments to the FDIC 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. The assessment rate for FICO bond servicing is
approximately .0216% of insured deposits for the year 2000.
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 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, 1999, the Bank qualified as a QTL.
20
<PAGE>
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
21
<PAGE>
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 the OTS capital
distribution regulations, 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.
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.
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 $5.0 million of transaction accounts, and reserves
equal to 3% must be maintained on the next $44.3 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, 1999, 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
22
<PAGE>
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, 1999 was 58.0%.
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, 1999 of $2.0 million. Banks and savings
associations generally may obtain long-term FHLB advances only for the purpose
of providing funds for residential housing finance; however, depository
institutions with less than $500 million in assets may also obtain such
financing for use in small business and small farm lending. At December 31,
1999, 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, grandfathered under the GLB
Act, the Company generally is not 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 - Financial Modernization Legislation" and
"-- Regulation and Supervision of the Bank -- Qualified Thrift Lender Test."
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 financial
holding companies under the Bank Holding Company Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
23
<PAGE>
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.
24
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth information regarding the Bank's offices at
December 31, 1999.
<TABLE>
<CAPTION>
Approximate
Year Opened Owned or Leased Book Value (1) Square Footage of Office
----------- --------------- -------------- ------------------------
MAIN OFFICE: (In thousands)
<S> <C> <C> <C> <C>
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240..... 1995 Owned $ 1,764 16,575
BRANCH OFFICES:
Downtown Branch Office
605 South Virginia Street
Hopkinsville, Kentucky ....... 1997 Owned $ 165 756
Murray Branch Office
7th and Main Streets
Murray, Kentucky............... 1969 Owned $ 64 4,800
Cadiz Branch Office
352 Main Street
Cadiz, Kentucky .............. 1998 Owned $ 422 2,200
Elkton Branch Office
West Main Street
Elkton, Kentucky ............ 1976 Owned $ 57 3,400
-----------
$ 2,472
</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, 1999, 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, 62, 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.
Effective May 5, 2000, Mr. Thomas will retire as an officer and director of each
of the Company and the Bank.
PEGGY R. NOEL. Ms. Noel, 61, 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.
25
<PAGE>
BOYD M. CLARK. Mr. Clark, 54, 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. Effective May 5, 2000, Mr. Clark will become Acting President of each
of the Company and the Bank.
26
<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, 1999 (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, 1999 (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, 1999 (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, 1999 (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, 1999 (Exhibit No. 13) are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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
27
<PAGE>
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,
1999, 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, 1999 and 1998.
3. Statements of Income for the Years Ended December 31, 1999, 1998 and
1997.
4. Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.
5. Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997.
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.
(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. Incorporated herein by reference to Exhibit
No. 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
28
<PAGE>
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. Incorporated herein by reference to Exhibit No. 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Exhibit No. 10.4. Employment Agreement Amendments by and between
HopFed Bancorp, Inc. and Bruce Thomas, Peggy R. Noel and Boyd M.
Clark. Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Exhibit No. 10.5. HopFed Bancorp, Inc. Management Recognition Plan.
Incorporated herein by reference to Exhibit 99.1 to Registration
Statement on Form S-8 (File No. 333-79391).
Exhibit No. 10.6. HopFed Bancorp, Inc. 1999 Stock Option Plan.
Incorporated herein by reference to Exhibit 99.2 to Registration
Statement on Form S-8 (File No. 333-79391).
Exhibit No. 13. Annual Report to Stockholders
Except for those portions of the Annual Report to Stockholders for the
year ended December 31, 1999, 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) Current Report on Form 8-K dated November 17, 1999, reporting under
Item 5 the approval of a special cash dividend of $4.00 per share.
Current Report on Form 8-K dated December 15, 1999, reporting under
Item 5 the approval of the termination of the Employee Stock Ownership
Plan, effective December 31, 1999.
(c) Exhibits to this Form 10-K are attached or incorporated by reference
as stated above.
(d) None.
29
<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, 2000 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, 2000
- --------------------------------------------
Bruce Thomas
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Peggy R. Noel April 14, 2000
- --------------------------------------------
Peggy R. Noel
Director, Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ WD Kelley April 14, 2000
- --------------------------------------------
WD Kelley
Chairman of the Board
/s/ Boyd M. Clark April 14, 2000
- --------------------------------------------
Boyd M. Clark
Director, Vice President and Secretary
/s/ Clifton H. Cochran April 14, 2000
- --------------------------------------------
Clifton H. Cochran
Director
/s/ Walton G. Ezell April 14, 2000
- --------------------------------------------
Walton G. Ezell
Director
30
<PAGE>
/s/ Gilbert E. Lee April 14, 2000
- --------------------------------------------
Gilbert E. Lee
Director
/s/ Harry J. Dempsey April 14, 2000
- --------------------------------------------
Harry J. Dempsey
Director
31
HOPFED BANCORP, INC.
[LOGO]
ANNUAL REPORT
1999
<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 (270)
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 February 29, 2000, there were
approximately 1,500 stockholders of record, excluding beneficial owners in
nominee or street name.
Following are the high and low stock prices of the Common Stock for the
periods indicated.
Price Range of Common Stock
------------------------------------------------------------
Year Ended December 31, 1998 Year Ended December 31, 1999
----------------------------- ----------------------------
High Low High Low
---- --- ---- ---
First Quarter $17.75 $16.00 $23.50 $17.00
Second Quarter 22.00 17.75 22.00 19.00
Third Quarter 19.625 15.25 22.875 19.00
Fourth Quarter 18.875 16.0625 21.9375 15.50
Dividends of $0.075 per share were declared in each of the third and fourth
quarters of 1998 and in each of the four quarters of 1999. In December 1999, the
Company declared a $4.00 per share special cash dividend in the form of a
nontaxable return of capital.
Dividends, when and if paid, are subject to determination and declaration
by the Board of Directors in its discretion, which will take into account the
Company's consolidated financial condition and results of operations, the Bank's
regulatory capital requirements, tax considerations, economic conditions,
regulatory restrictions, other factors, and there can be no assurance that
dividends will be paid, or if paid, will continue to be paid in the future. The
payment of future dividends by the Company will depend in large part upon the
receipt of dividends from the Bank, which is subject to various tax and
regulatory restrictions on the payment of dividends.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
HopFed Bancorp, Inc. ..................................... Inside Front Cover
Market and Dividend Information........................... Inside Front Cover
Selected Financial Information and Other Data............................. 1
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 4
Financial Statements...................................................... 16
Corporate Information...................................... Inside Back Cover
<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,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total amount of: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets ...................... $207,906 $220,032 $343,995 $204,398 $212,598
Loans receivable, net ....... 113,532 108,807 103,470 95,496 84,755
Cash and due from banks ..... 4,537 1,905 1,264 1,452 1,303
Time deposits and
interest-bearing deposits
in FHLB .................... 251 214 5,945 2,000 12,550
Federal funds sold .......... 4,100 9,685 151,095 500 7,948
Securities available for sale 71,423 68,139 26,699 5,125 4,053
Securities held to maturity:
FHLB securities .......... -- 13,998 31,988 77,962 80,990
Mortgage-backed securities .. 9,958 13,356 19,578 17,984 17,563
Deposits .................... 160,905 154,816 320,633 183,827 194,775
FHLB advances ............... -- -- -- 1,317 --
Total equity ................ 44,346 61,134 19,936 16,824 16,002
-------- -------- -------- -------- --------
Number of:
Real estate loans outstanding 2,143 2,150 2,198 2,151 2,074
Deposit accounts ............ 18,667 19,251 21,277 23,778 25,473
Offices open ................ 5 5 5 5 5
OPERATING DATA Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Interest income ................ $14,205 $ 15,051 $14,311 $13,220 $12,472
Interest expense ............... 7,078 8,004 9,350 9,757 10,009
------- -------- ------- ------- -------
Net interest income before
provision for loan losses .. 7,127 7,047 4,961 3,463 2,463
Provision for loan losses ...... 20 20 20 100 --
------- -------- ------- ------- -------
Net interest income ............ 7,107 7,027 4,941 3,363 2,463
Non-interest income ............ 7,028 547 528 590 398
Non-interest expense ........... 8,894 2,982 2,408 3,674(1) 2,246
------- -------- ------- ------- -------
Income before income taxes ..... 5,241 4,592 3,061 279 615
Provision for income taxes ..... 2,766 1,641 1,038 84 203
------- -------- ------- ------- -------
Net income ..................... $ 2,475 $ 2,951 $ 2,023 $ 195(1) $ 412
======= ======== ======= ======= =======
</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").
<PAGE>
SELECTED QUARTERLY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands)
YEAR ENDED DECEMBER 31, 1998:
<S> <C> <C> <C> <C>
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 ............................ 968 794 829 360
YEAR ENDED DECEMBER 31, 1999:
Interest income ....................... $ 3,500 $ 3,505 $ 3,495 $ 3,705
Net interest income after provision for
losses on loans .................... 1,727 1,737 1,727 1,916
Noninterest income .................... 112 136 6,660 120
Noninterest expense ................... 880 2,662 1,437 3,915
Net income (loss) ..................... 592 (577) 4,547 (2,087)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS
At or for the Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
PERFORMANCE RATIOS
<S> <C> <C> <C>
Return on average assets (net income divided by average
total assets) ........................................... 1.14% 1.29% 0.93%
Return on average equity (net income divided by
average total equity) ................................... 4.30% 5.76% 11.13%
Interest rate spread (combined weighted average interest
rate earned less combined weighted average interest
rate cost) .............................................. 2.11% 2.07% 1.93%
Ratio of average interest-earning assets to average
interest-bearing liabilities ............................ 137.75% 130.08% 109.17%
Ratio of non-interest expense to average total assets ..... 4.09% 1.30% 1.10%
Ratio of net interest income after provision
for loan losses to non-interest expense ................. 79.91% 235.65% 205.19%
Efficiency ratio (noninterest expense divided by sum of
net interest income plus noninterest income) ............ 62.92% 39.26% 44.03%
ASSET QUALITY RATIOS
Nonperforming assets to total assets at end of period ..... .03% 0.13% 0.05%
Nonperforming loans to total loans at end of period ....... .05% 0.26% 0.16%
Allowance for loan losses to total loans at end of period . .25% 0.24% 0.23%
Allowance for loan losses to nonperforming loans at
end of period ........................................... 479.31% 89.90% 145.40%
Provision for loan losses to total loans receivable, net .. .02% 0.02% 0.02%
Net charge-offs to average loans outstanding .............. N/A(1) N/A(1) N/A(1)
CAPITAL RATIOS
Total equity to total assets at end of period ............. 21.33% 27.78% 5.80%
Average total equity to average assets .................... 26.46% 22.40% 8.33%
</TABLE>
- -------------------
(1) Ratio is not applicable because there were no net charge-offs for this
period.
REGULATORY CAPITAL RATIOS December 31, 1999
----------------------
(Dollars in thousands)
Tangible capital .................... $44,971 21.60%
Less: Tangible capital requirement 3,123 1.50
------- -----
Excess ............................ $41,848 20.10%
======= =====
Core capital ........................ $44,971 21.60%
Less: Core capital requirement ..... 8,327 4.00
------- -----
Excess ............................ $36,644 17.60%
======= =====
Total risk-based capital ............ $45,249 58.60%
Less: Risk-based capital requirement 6,177 8.00
------- -----
Excess ............................ $39,072 50.60%
======= =====
3
<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, 1999, the Company recorded net income of
$2.5 million, a return on average assets of 1.14% and a return on average equity
of 4.30%. 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%.
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.
BENEFIT PLAN RESTRUCTURING
In December 1999, the Board of Directors approved a benefit plan
restructuring on the basis of its belief that a reduction of the expenses
associated with the Company's Employee Stock Ownership Plan ("ESOP") would
improve the Company's profitability and, therefore, the Company's long-term
prospects for independence. For the year ended December 31, 1999, the
maintenance expenses for the ESOP were approximately $408,000, and the Company's
one-time termination expense was approximately $2.5 million. Termination of the
ESOP, effective December 31, 1999, and distribution to participants of its
assets are contingent on receipt of an Internal Revenue Service determination
that the ESOP will be tax-qualified upon its termination, as well as compliance
with other applicable regulatory requirements. See Note 9 of Notes to Financial
Statements.
TAX FREE SPECIAL DIVIDEND
In November 1999, the Company announced a special cash dividend of $4.00
per share, which totaled approximately $16.4 million. The special dividend
represented a return to stockholders of a portion of the proceeds raised when
the Company went public in February 1998. As a nontaxable return of capital, the
special dividend reduced the tax cost basis of each outstanding share. The Board
of Directors took this action because it believed that the Company's
equity-to-assets ratio was excessive and would prove to be a deterrent to
generating acceptable returns on equity over the long term.
SALE OF FHLMC STOCK
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 had benefited from
higher levels of mortgage loans fostered by lower interest rates in recent
years, as a result of an uncertainty over the direction of interest rates and an
apparent slowing of mortgage loan originations in general, the Company believed
that the FHLMC stock would be subject to future adverse market pressures.
4
<PAGE>
Additionally, the FHLMC was under increasing pressure to expand its role in
promoting low income housing, which the Company believed may also depress the
market value of the FHLMC stock. From December 31, 1998 to the date of sale, the
Bank's FHLMC stock portfolio declined in value approximately 17%. Proceeds of
these sales were invested in higher yielding investments.
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 1999, the Company modified its policy to retain
its deposit base through an increase in overall deposit rates. At December 31,
1999, deposits as a percentage of average assets were 74.0%.
In addition, the Company 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 and 1999, average loans
increased $6.7 million and $5.6 million, respectively, or 6.8% and 5.3%,
respectively, from the prior year's average. The Company's interest rate spread
was 2.11%, 2.07% and 1.93% for each of the three years ended December 31, 1999.
The Company's profitability in the years ended December 31, 1998 and 1999
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.
The Company's net income, return on average assets and return on average equity
were $2.5 million, 1.14% and 4.30%, for the year ended December 31, 1999. 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.
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, 1999, approximately $11.8 million of the one-to-four family residential
loans originated by the Company (comprising 73.85% of such loans) had adjustable
rates.
5
<PAGE>
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,
1999, approximately $16.0 million of the securities were due in one year or
less, approximately $7.2 million were due in one to five years and approximately
$14.2 million were due after ten years. However, at December 31, 1999, all 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, 1999, all of these securities are callable and/or
due prior to December 31, 2000. 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.
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.
6
<PAGE>
The following table presents the Bank's NPV at December 31, 1999, as
calculated by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of PV of Assets
------------------------------------------------------- ---------------------------------------
CHANGE $ Amount $ Change % Change
IN RATES -------- -------- -------- NPV RATIO CHANGE
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $-- $0 0% 0.00% 0bp
+300 bp 38,320 -10,466 -21% 19.34% -373bp
+200 bp 42,209 -6,577 -13% 20.79% -227bp
+100 bp 45,763 -3,023 -6% 22.06% -101bp
0 bp 48,786 23.07%
-100 bp 51,272 2,486 +5% 23.85% +78bp
-200 bp 53,938 5,152 +11% 24.66% +160bp
-300 bp 57,241 8,454 +17% 25.66% +260bp
-400 bp -- 0 0% 0.00% 0bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets................. 23.07%
Exposure Measure: Post-Shock NPV Ratio........................ 20.79%
Sensitivity Measure: Change in NPV Ratio...................... 22bp
The computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay rates, and should not be
relied upon as indicative of actual results. The computations do not contemplate
any actions the Bank could undertake in response to changes in interest rates.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. At December 31, 1999, 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.
7
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 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)
Interest-earning assets:
Loans:
<S> <C> <C> <C> <C> <C> <C>
One-to-four family......... $68,411 $3,014 $2,536 $13,844 $ -- $87,805
Multi-family residential... 2,165 -- -- -- -- 2,165
Construction............... 4,077 -- -- -- -- 4,077
Non-residential............ 12,291 -- -- -- -- 12,291
Secured by deposits........ 2,525 -- -- -- -- 2,525
Other consumer............. 270 4,400 -- -- -- 4,670
Time deposits and interest
bearing deposits in FHLB...... 251 -- -- -- -- 251
Federal funds sold............ 4,100 -- -- -- -- 4,100
Securities.................... 17,540 6,985 13,597 -- -- 38,122
Mortgage-backed securities.... 26,485 13,707 747 53 2,267 43,259
-------- ------- ------- ------- ------- --------
Total....................... $138,115 $28,106 $16,880 $13,897 $2,267 $199,265
-------- ------- ------- ------- ------- --------
Interest-bearing liabilities:
Deposits...................... $113,876 $44,085 -- -- -- $157,961
-------- ------- ------- ------- ------ --------
Interest sensitivity gap......... $25,445 $(17,185) $16,880 $13,897 $2,267 $41,304
======= ========= ======= ======= ======= =======
Cumulative interest sensitivity
gap........................... $25,445 $8,260 $25,140 $39,037 $41,304 $41,304
======= ========= ======= ======= ======= =======
Ratio of interest-earning assets to
interest-bearing liabilities.. 122.58% 62.06% N/A N/A N/A 137.75%
======= ========= ======= ======= ======= =======
Ratio of cumulative gap to
total interest-earning assets. 12.77% 4.15% 12.62% 19.59% 20.73% 20.73%
======= ========= ======= ======= ======= =======
</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.
At December 31, 1999
-------------------------------
Weighted
Average
Balance Yield/Cost
------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net................ $113,532 7.55%
Securities available for sale........ 71,423 6.70%
Securities held to maturity.......... 9,958 6.12%
Time deposits and other interest-
bearing cash deposits............. 4,351 5.27%
-------- -------
Total interest-earning assets...... 199,264 7.12%
Non-interest-earning assets............. 8,642
--------
Total assets......................... $207,906
========
Interest-bearing liabilities:
Deposits............................. $157,961 4.65%
Non-interest-bearing liabilities........ 5,599
--------
Total liabilities.................. 163,560
Common stock............................ 39
Additional paid-in capital.............. 24,215
Retained earnings....................... 20,991
Unallocated ESOP shares................. --
Accumulated other comprehensive
income............................... (899)
--------
Total liabilities and equity....... $207,906
========
Interest rate spread.................... 2.47%
------
Ratio of interest-earning assets
interest-bearing liabilities......... 126.15%
======
(Continued on following page)
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net... $111,469 $8,435 7.57% $105,837 $8,279 7.82% $99,126 $7,607 7.67%
Securities available for
sale.................. 73,863 4,204 5.69% 48,539 2,418 4.98% 11,405 412 3.61%
Securities held to .....
maturity ........... 14,220 814 5.72% 36,777 2,360 6.42% 75,307 4,706 6.25%
Time deposits and other
interest-bearing cash
deposits.............. 11,536 751 6.51% 32,480 1,994 6.13% 27,233 1,586 5.82%
-------- ------ -------- ------ -------- ------
Total interest-earning
assets.............. 211,088 14,204 6.73% 223,633 15,051 6.73% 213,071 14,311 6.72%
------ ------ ------ ------ ------ ----
Non-interest-earning assets 6,324 5,143 5,119
-------- -------- --------
Total assets............ $217,412 $228,776 $218,190
======== ======== ========
Interest-bearing liabilities:
Deposits............... $153,245 7,078 4.62% $171,922 8,004 4.65% $195,019 $9,341 4.79%
Borrowings............. -- -- --% -- -- --% 161 9 5.59%
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total interest-bearing
liabilities........ 153,245 7,078 4.62% 171,922 8,004 4.65% 195,180 9,350 4.79%
------ ------ ------ ------ ------ ----
Non-interest-bearing
liabilities............ 6,641 5,629 4,829
-------- -------- --------
Total liabilities.... 159,886 177,551 200,009
Common stock.............. 40 32 --
Additional paid-in capital 40,442 31,492 --
Retained earnings......... 16,670 18,174 15,510
Unallocated ESOP shares... (2,318) (2,582) --
Accumulated other
comprehensive income... 2,692 4,109 2,671
-------- -------- --------
Total liabilities and
equity............. $217,412 $228,776 $218,190
======== ======== ========
Net interest income....... $7,126 $7,047 $4,961
======= ======= =======
Interest rate spread...... 2.11% 2.07% 1.93%
====== ====== ======
Net yield on interest-earning
Assets................. 3.38% 3.15% 2.33%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities............ 137.75% 130.08% 109.17%
====== ====== ======
</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,
--------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------- -------------------------------
Increase Increase
(Decrease) due to (Decrease) due to
----------------- -----------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable .... $ (279) $ 440 $ 161 $ 157 $ 515 $ 672
Securities available
for sale .......... 525 1,261 1,786 665 1,341 2,006
Securities held to
maturity ............ (100) (1,448) (1,548) 62 (2,408) (2,346)
Other interest-
earning assets ..... 43 (1,286) (1,243) 102 306 408
------- ------- ------- ------- ------- -------
Total interest-
earning assets .... $ 189 $(1,033) $ (844) $ 986 $ (246) $ 740
------- ------- ------- ------- ------- -------
Interest-bearing
liabilities:
Deposits ............ $ (61) $ (871) $ (932) $ (231) $(1,106) $(1,337)
Borrowings .......... -- -- -- -- (9) (9)
------- ------- ------- ------- ------- -------
Total interest-
bearing liabilities $ (61) $ (871) $ (932) $ (231) $(1,115) $(1,346)
------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income .. $ 250 $ (162) $ 88 $ 1,217 $ 869 $ 2,086
======= ======= ======= ======= ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
The Company's total assets decreased by $12.1 million, from $220.0 million
at December 31, 1998 to $207.9 million at December 31, 1999. Federal funds sold
decreased from $9.7 million at December 31, 1998 to $4.1 million at December 31,
1999. Securities held to maturity declined $17.4 million due to various issues
maturing. A portion of such funds was reinvested in securities available for
sale, which increased $3.3 million. The special dividend of $4.00 per share paid
in December 1999 utilized $16.4 million.
The Company's loan portfolio increased by $4.6 million during the year
ended December 31, 1999. Net loans totaled $113.5 million and $108.8 million at
December 31, 1999 and December 31, 1998, respectively. The increase in the loan
activity during the year ended December 31, 1999 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, 1999, the Company's
average yield on loans was 7.57%, compared to 7.82% for the year ended December
31, 1998.
At December 31, 1999, the Company's investments classified as "held to
maturity" were carried at amortized cost of $9.9 million and had an estimated
fair market value of $10.1 million, and its securities classified as "available
for sale" had an estimated fair market value of $71.4 million. See Note 2 of
Notes to Financial Statements.
11
<PAGE>
The allowance for loan losses totaled $278,000 at December 31, 1999, an
increase of $20,000 from the allowance of $258,000 at December 31, 1998. The
ratio of the allowance for loan losses to loans was .24% at each of December 31,
1999 and 1998. Also at December 31, 1999, the Company's non-performing loans
were $58,000, or .05% of total loans, compared to $287,000, or .26% of total
loans, at December 31, 1998, and the Company's ratio of allowance for loan
losses to non-performing loans at December 31, 1999 and December 31, 1998 was
479.3% and 89.9%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NET INCOME. The Company's net income for the year ended December 31, 1999
was $2.5 million compared to $3.0 million for the year ended December 31, 1998.
NET INTEREST INCOME. Net interest income for the year ended December 31,
1999 was $7.1 million, compared to $7.0 million for the year ended December 31,
1998. The increase in net interest income for the year ended December 31, 1999
was primarily due to a slightly lower cost of funds. For the year ended December
31, 1998, the Company's average yield on total interest-earning assets was
6.73%, compared to 6.73% for the year ended December 31, 1998, and its average
cost of interest-bearing liabilities was 4.62%, compared to 4.65% for the year
ended December 31, 1998. As a result, the Company's interest rate spread for the
year ended December 31, 1999 was 2.11%, compared to 2.07% for the year ended
December 31, 1998, and its net yield on interest-earning assets was 3.38% for
the year ended December 31, 1999, compared to 3.15% for the year ended December
31, 1998.
INTEREST INCOME. Interest income decreased by $926,000 from $15.1 million
to $14.2 million, or by 6.15%, during the year ended December, 1999 compared to
1998. This decrease was due to a decline in interest earning assets. The average
balance of securities held to maturity declined $22.6 million, from $36.8
million at December 31, 1998, to $14.2 million at December 31, 1999. Average
time deposits and other interest-bearing cash deposits decreased $21.0 million,
from $32.5 million at December 31, 1998 to $11.5 million at December 31, 1999.
Overall, average total interest-earning assets decreased $12.5 million from
December 31, 1998 to December 31, 1999. The ratio of interest-earning assets to
interest-bearing liabilities increased from 130.1% for the year ended December
31, 1998 to 137.8% for the year ended December 31, 1999.
INTEREST EXPENSE. Interest expense decreased to $7.1 million for the year
ended December 31, 1999, compared to $8.0 million for 1998. The decrease was
primarily attributable to a decrease in deposits. The average cost of average
interest bearing liabilities declined from 4.65% for the year ended December 31,
1998 to 4.62% for the year ended December 31, 1999. Over the same period, the
average balance of deposits decreased from $171.9 million for the year ended
December 31, 1998 to $153.2 million at December 31, 1999.
PROVISION FOR LOAN LOSSES. The Company determined that an additional
$20,000 provision for loan loss was required for the year ended December 31,
1999. For the year ended December 31, 1998, the Company determined that a
$20,000 provision was warranted.
NON-INTEREST EXPENSE. Total non-interest expense in the year ended December
31, 1999 was $8.9 million, compared to $3.0 million in 1998. This increase was
primarily attributable to approximately $5.5 million of employee benefits. See
Note 9 of Notes to Financial Statements.
INCOME TAXES. The effective tax rate for the year ended December 31, 1999
was 52.6%, compared to 34.9% for 1998. This increase in the effective tax rate
resulted from $2.9 million of employee benefits which were not deductible for
income tax purposes.
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.
12
<PAGE>
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no business other than that of the Bank. Management
believes dividends that may be paid from the Bank to the Company will provide
sufficient funds for the Company's current and anticipated needs; however, no
assurance can be given that the Company will not have a need for additional
funds in the future. The Bank is subject to certain regulatory limitations with
respect to the payment of dividends to the Company.
Capital Resources. At December 31, 1999, 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, 1999, the Bank had no outstanding advances from the FHLB. See Note
6 of Notes to Financial Statements.
The Bank's primary sources of funds consist of deposits, repayment of loans
and mortgage-backed securities, maturities of investments and interest-bearing
deposits, and funds provided from operations. While scheduled repayments of
loans and mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. The Bank uses its liquidity resources principally to fund existing
and future loan commitments, to fund maturing certificates of deposit and demand
deposit withdrawals, to invest in other interest-earning assets, to maintain
liquidity, and to meet operating expenses. Management believes that loan
repayments and other sources of funds will be adequate to meet the Bank's
liquidity needs for the immediate future.
In addition, the Bank is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 4%. The Bank has historically maintained a level of
liquid assets in excess of regulatory requirements. The Bank's liquidity ratios
at December 31, 1999, 1998 and 1997 were 58.02%, 53.87% and 65.36%,
respectively.
13
<PAGE>
A portion of the Bank's liquidity consists of cash and cash equivalents. At
December 31, 1999, cash and cash equivalents totaled $4.5 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
year ended December, 1998 and decreased during the year ended December 1999. For
the years ended December 31, 1997, 1998 and 1999, such cash flows were $2.4
million, $2.6 million and $1.4 million, respectively.
Cash flows from investing activities were a net source of funds of $12.2
million and $127.7 million in 1999 and 1998 respectively. A principal source of
cash flows in this area has been proceeds from the maturities of
held-to-maturity securities, the volume of which reflects the prior emphasis on
investments in such securities over loans. These proceeds were a source of cash
flows of $50.3 million for 1997, $24.2 million for 1998 and $17.4 million for
1999. At the same time, the investment of cash in loans was $4.7 million in
1999, $5.4 million in 1998 and $8.0 million in 1997, while purchases of
held-to-maturity securities were $5.9 million in 1997. There were no purchases
of held-to-maturity securities in 1998 and 1999. Further, the Bank 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 Bank to earn a favorable rate of interest while maintaining
daily access to such funds. Although the Bank continues to acquire securities
using funds from loan repayments and proceeds from maturities of other
securities, the liquidity position avoids the need to consider the sale of
securities prior to maturity to satisfy lending or other operational
commitments. At December 31, 1999, in addition to its federal funds sold and
other liquid assets, which were 58.02% of deposits and short-term borrowings,
the Bank had available an unused $10.1 million line of credit with the FHLB of
Cincinnati.
Beginning in 1996, the Bank permitted the run-off of higher-costing time
deposits by offering only market rates of interest on maturing deposits rather
than above-market rates under its previous pricing strategy. Cash was required
to fund net withdrawals of time deposits in amounts of $7.8 million in 1997 and
$16.5 million in 1998. The Bank modified this strategy in 1999, and had a net
increase in deposits of $6.6 million. Because of the Bank's ability to generate
cash flows from its financing activities and the availability of its other
liquid assets, the Bank does not anticipate any difficulty in funding future
withdrawals of such time deposits as they come due.
At December 31, 1999, the Bank had $1.2 million 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 $63.8 million
at December 31, 1999. 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.
YEAR 2000
Prior to January 1, 2000, the Company was aware of concerns throughout the
business community of reliance upon computer software that did not properly
recognize the Year 2000 in date formats, often referred to as the "Year 2000
Problem." The Year 2000 Problem was 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 have resulted in system failures or
miscalculations. In turn, this could have resulted 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.
14
<PAGE>
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 was put in place by the Bank to minimize its risk exposure to the Year
2000 Problem. As part of the plan, an oversight committee was set up to monitor
Year 2000 compliance.
The Company's service provider successfully completed the renovation of its
equipment as well as proxy tests involving the participation of member
institutions transmitting within a test institution created for this purpose.
The service provider contracted with a recovery site in Philadelphia to cover
Year 2000 contingencies and conducted Business Recovery Tests to ensure proper
transmission with member institutions. The service provider's systems and
equipment were well prepared for the Year 2000 Problem.
The Company also renovated computer equipment, assessed mission-critical
systems, reviewed tests and made contingency plans. The Company experienced no
disruptions to normal business operations due to the Year 2000 Problem.
As of December 31, 1999, the Company had incurred approximately $47,000 in
direct compliance costs associated with the Year 2000 Problem. The Company
estimates that $47,000 will approximate total direct compliance costs through
the Year 2000. The Company does not separately track internal costs incurred for
Year 2000 compliance, such costs are principally related to payroll
expenditures. Funding for such costs has been and will be derived from normal
operating cash flow.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis includes certain forward-looking
statements addressing, among other things, the Bank's prospects for earnings,
asset growth and net interest margin. Forward-looking statements are accompanied
by, and identified with, such terms as "anticipates," "believes," "expects,"
"intends," and similar phrases. Management's expectations for the Bank's future
involve a number of assumptions and estimates. Factors that could cause actual
results to differ from the expectations expressed herein include: substantial
changes in interest rates, and changes in the general economy; changes in the
Bank's strategies for credit-risk management, interest-rate risk management and
investment activities. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or circumstances and
may not be realized.
15
<PAGE>
LETTERHEAD OF
YORK, NEEL & CO.-HOPKINSVILLE, LLP
1113 BETHEL STREET
HOPKINSVILLE, KY 42240
(270)886-0206/FAX (270)886-0875
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, 1999
and 1998, 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, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/: York, Neel & Co.-Hopkinsville, LLP
Hopkinsville, Kentucky
February 4, 2000
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $ 4,537,222 $ 1,904,620
Interest-earning deposits in Federal Home Loan Bank 250,750 214,166
Federal funds sold 4,100,000 9,685,000
Securities available for sale 71,423,331 68,139,383
Securities held to maturity, market value of
$10,078,157 for 1999 and $27,633,452 for 1998, respectively 9,958,147 27,354,099
Loans receivable, net of allowance for loan losses of
$278,144 for 1999 and $257,744 for 1998, respectively 113,532,380 108,806,634
Accrued interest receivable 1,094,810 1,157,252
Premises and equipment, net 2,471,523 2,546,349
Deferred tax assets 514,744 --
Other assets 23,252 224,711
------------- -------------
Total assets $ 207,906,159 $ 220,032,214
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing accounts $ 2,943,337 $ 2,730,676
Interest-bearing accounts:
Demand/NOW accounts 9,017,284 8,624,089
Money market accounts 30,062,939 30,771,443
Passbook savings 9,802,140 10,194,223
Other time deposits 109,079,053 102,495,354
------------- -------------
Total deposits 160,904,753 154,815,785
Advances from borrowers for taxes and insurance 155,861 165,799
Federal income taxes payable:
Current 369,242 --
Deferred -- 3,268,965
Dividends payable 307,364 302,524
Accrued expenses and other liabilities 1,822,514 345,195
------------- -------------
Total liabilities 163,559,734 158,898,268
------------- -------------
Stockholders' Equity:
Common stock par value $.01 per share; 7,500,000
shares authorized; 3,942,500 shares issued and outstanding 39,425 40,336
Additional paid in capital 24,214,409 39,546,434
Retained earnings-substantially restricted 20,991,195 18,983,884
Unallocated ESOP shares -- (2,932,666)
Accumulated other comprehensive income (loss) (898,604) 5,495,958
------------- -------------
Total stockholders' equity 44,346,425 61,133,946
------------- -------------
Total liabilities and stockholders' equity $ 207,906,159 $ 220,032,214
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Interest income:
<S> <C> <C> <C>
Loans receivable $ 8,435,464 $ 8,279,744 $ 7,606,685
Securities available for sale 4,204,268 2,418,597 412,355
Securities held to maturity 814,048 2,359,611 4,705,678
Time deposits 751,108 1,993,546 1,586,451
----------- ----------- -----------
Total interest income 14,204,888 15,051,498 14,311,169
----------- ----------- -----------
Interest expense:
Deposits 7,078,126 8,003,911 9,340,884
Other borrowed funds -- -- 9,336
----------- ----------- -----------
Total interest expense 7,078,126 8,003,911 9,350,220
----------- ----------- -----------
Net interest income 7,126,762 7,047,587 4,960,949
Provision for loan losses 20,400 20,300 20,000
----------- ----------- -----------
Net interest income after
provision for loan losses 7,106,362 7,027,287 4,940,949
----------- ----------- -----------
Noninterest income:
NOW account fees 196,309 168,153 150,640
Loan fees 177,111 228,949 207,706
Service charges 67,095 84,852 82,807
Realized gain from sale of securities
available for sale 6,523,526 -- --
Other 64,289 65,300 86,566
----------- ----------- -----------
Total noninterest income 7,028,330 547,254 527,719
----------- ----------- -----------
Noninterest expenses:
Salaries and benefits 7,625,889 1,959,406 1,479,118
Deposit insurance premium 90,767 151,701 120,084
Occupancy expense 197,249 188,093 211,986
Data processing 143,266 117,368 113,941
Other 836,548 565,844 482,716
----------- ----------- -----------
Total noninterest expense 8,893,719 2,982,412 2,407,845
----------- ----------- -----------
Income before income taxes 5,240,973 4,592,129 3,060,823
Income tax expense 2,765,704 1,640,707 1,038,254
----------- ----------- -----------
Net income $ 2,475,269 $ 2,951,422 $ 2,022,569
=========== =========== ===========
Earnings per share:
Basic $ 0.65 $ 0.80 N/A
Fully diluted 0.65 0.80 N/A
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional Unallocated Accumulated Other
Common Paid-in Retained Common Stock Comprehensive Total
Stock Capital Earnings Held by ESOP Income (Loss) Equity
--------- ----------- ------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ - $ - $ 16,613,308 $ - $ 3,322,769 $ 19,936,077
Comprehensive income:
Net income 2,951,422
Unrealized holding gains
arising during the period
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 net of dividends
on ESOP shares (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
Comprehensive income (loss):
Net income 2,475,269
Other comprehensive
income (loss)
Unrealized holding losses
arising during the period
net of tax effect of
($1,076,170) (2,089,035)
Less: reclassification
adjustment for gains
included in net income net
of tax effect of
($2,217,999) (4,305,527)
-----------
Net change in unrealized
gains (losses) on
securities available-for-
sale (6,394,562)
-----------
Total comprehensive loss (3,919,293)
Issuance of common stock - MRP 646 1,290,094 1,290,740
Retirement of common stock (from ESOP) (1,557) (1,555,063) 1,556,620 -
Release and allocation of common stock
held by ESOP 993,643 1,376,046 2,369,689
Cash dividends paid net of dividends
on ESOP shares (16,060,699) (467,958) (16,528,657)
-------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1999 $ 39,425 $24,214,409 $ 20,991,195 $ - $ (898,604) $44,346,425
======== =========== ============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
4
</TABLE>
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,475,269 $ 2,951,422 $ 2,022,569
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 20,400 20,300 20,000
Depreciation 121,291 110,518 130,337
Accretion of investment security discounts (424,431) (40,113) (48,539)
Amortization of investment security premiums 37,287 -- --
Provision (benefit) for deferred income taxes (489,541) 182,541 (244,697)
Stock dividend (134,100) (127,200) (118,500)
(Gain) loss on sale of equipment 1,100 (6,527) (4,741)
Earned ESOP shares 2,899,941 211,480
MRP shares 1,290,740 -- --
Gain on sale of FHLMC stock (6,523,526) -- --
(Increase) decrease in:
Accrued interest receivable 62,442 26,556 106,600
Other assets 201,459 214,202 (142,190)
Increase (decrease) in:
Current income taxes payable 369,242 (360,231) 360,231
ESOP contribution payable (294,234) 294,234 --
Accrued expenses and other liabilities 1,477,337 (555,551) 343,814
------------- ------------- -------------
Net cash provided by operating activities 1,090,676 2,921,631 2,424,884
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in time deposits -- 2,000,000 --
Net (increase) decrease in interest-bearing deposits in FHLB (36,584) 3,730,455 (3,944,621)
Net (increase) decrease in federal funds sold 5,585,000 141,410,000 (150,595,000)
Proceeds from maturities of held-to-maturity securities 17,407,471 24,229,625 50,336,539
Purchases of held-to-maturity securities -- -- (5,909,005)
Proceeds from maturities of available-for-sale securities 56,226,497 12,565,393 81,009
Purchases of available-for-sale securities (68,809,959) (50,590,246) (19,895,099)
Proceeds from sale of FHLMC stock 6,644,034 -- --
Net increase in loans (4,746,146) (5,356,773) (8,036,005)
Purchase of premises/equipment (47,565) (327,565) (258,961)
Proceeds from sale of premises/equipment -- 10,700 132,766
------------- ------------- -------------
Net cash provided by (used in) investing activities 12,222,748 127,671,589 (138,088,377)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, savings
and NOW deposits (494,731) (149,270,443) 144,631,967
Net increase (decrease) in time deposits 6,583,699 (16,546,373) (7,826,732)
Increase (decrease) in advance payments
by borrowers for taxes and insurance (9,938) (5,720) (12,601)
Net increase (decrease) in other borrowed funds -- -- (1,317,000)
Issuance of common stock -- 36,148,390 --
Dividends paid (17,515,618) (278,322) --
Payments on loan to ESOP 755,766 -- --
------------- ------------- -------------
Net cash provided by (used in) financing activities (10,680,822) (129,952,468) 135,475,634
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 2,632,602 640,752 (187,859)
Cash and cash equivalents, beginning of period 1,904,620 1,263,868 1,451,727
------------- ------------- -------------
Cash and cash equivalents, end of period $ 4,537,222 $ 1,904,620 $ 1,263,868
============= ============= =============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 7,068,469 $ 8,503,476 $ 9,128,049
============= ============= =============
Income taxes paid $ 2,735,164 $ 1,969,233 $ 670,074
============= ============= =============
Non-cash transaction - ESOP loan redeemed with stock $ 2,471,134 $ -- $ --
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
Continued
6
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. ORGANIZATION/FORM OF OWNERSHIP, (CONTINUED)
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.
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.
Continued
7
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITIES AVAILABLE FOR SALE, CONTINUED
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.
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.
Continued
8
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. LOANS RECEIVABLE (CONTINUED)
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:
Continued
9
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
Continued
10
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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). For the year
ended December 31, 1999, basic and fully diluted weighted average
common stock outstanding was 3,800,971 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:
Continued
11
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
2. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-For-Sale Securities
December 31, 1999:
Restricted:
FHLB stock $ 1,986,700 $ -- $ -- $ 1,986,700
Intrieve stock 15,000 -- -- 15,000
------------ ------------ ------------ ------------
2,001,700 -- -- 2,001,700
------------ ------------ ------------ ------------
Unrestricted:
U.S. government and agency securities:
FHLB investment securities 33,411,633 180 (1,103,991) 32,307,822
FFCB 4,000,000 -- (187,500) 3,812,500
Mortgage-backed securities:
GNMA 13,634,537 141,473 -- 13,776,010
FNMA 9,943,909 29,931 (115,733) 9,858,107
FHLMC 9,793,075 40,071 (165,954) 9,667,192
------------ ------------ ------------ ------------
70,783,154 211,655 (1,573,178) 69,421,631
------------ ------------ ------------ ------------
$ 72,784,854 $ 211,655 $ (1,573,178) $ 71,423,331
============ ============ ============ ============
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
============ ============ ============ ============
</TABLE>
The scheduled maturities of securities available-for-sale at December 31,
1999 were as follows:
Amortized Fair
Cost Value
---- -----
Due in one to five years $15,996,875 $15,538,300
Due in five to ten years 7,205,856 6,984,576
Due after ten years 14,208,902 13,597,446
----------- -----------
37,411,633 36,120,322
Mortgage-backed securities 33,371,521 33,301,309
----------- -----------
$70,783,154 $69,421,631
=========== ===========
Continued
12
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
2. SECURITIES (CONTINUED)
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
---- ----- ------ -----
HELD-TO-MATURITY SECURITIES
December 31, 1999:
Mortgage-backed securities:
<S> <C> <C> <C> <C>
GNMA $ 8,898,170 $ 137,006 $ (1,764) $ 9,033,412
FNMA 1,059,977 -- (15,232) 1,044,745
------------ ------------ ------------ ------------
$ 9,958,147 $ 137,006 $ (16,996) $ 10,078,157
============ ============ ============ ============
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
============ ============ ============ ============
</TABLE>
Continued
13
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
3. LOANS RECEIVABLE
The components of loans in the consolidated statements of financial
condition as of December 31, 1999 and 1998 were as follows:
1999 1998
---- ----
Real estate loans:
One-to-four family $ 88,248,441 $ 88,954,630
Multi-family 2,165,271 1,538,864
Construction 5,706,152 4,625,527
Non-residential 12,398,156 8,260,156
------------- -------------
Total mortgage loans 108,518,020 103,379,177
------------- -------------
Consumer loans:
Loans secured by deposits 2,525,120 2,279,709
Other consumer loans 4,670,123 4,586,487
------------- -------------
Total consumer loans 7,195,243 6,866,196
------------- -------------
115,713,263 110,245,373
Less:
Undisbursed portion of mortgage loans (1,902,739) (1,180,995)
------------- -------------
Total loans 113,810,524 109,064,378
Less allowance for loan losses (278,144) (257,744)
------------- -------------
$ 113,532,380 $ 108,806,634
============= =============
An analysis of the change in the allowance for loan losses for the years
ended December 31, 1999 and 1998 follows:
1999 1998
---- ----
Balance at beginning of year $257,744 $237,444
Loans charged off - -
Recoveries - -
-------- --------
Net loans charged off - -
Provision for loan
losses 20,400 20,300
-------- --------
Balance at end of year $278,144 $257,744
======== ========
Continued
14
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
4. PREMISES AND EQUIPMENT
Components of properties and equipment included in the consolidated
statements of financial condition as of December 31, 1999 and 1998
consisted of the following:
1999 1998
---- ----
Land $ 543,013 $ 543,013
Land improvements 74,861 74,861
Buildings 2,069,632 2,061,675
Furniture and equipment 507,435 583,189
----------- -----------
3,194,941 3,262,738
Less accumulated
depreciation (723,418) (716,389)
----------- -----------
$ 2,471,523 $ 2,546,349
=========== ===========
Depreciation expense was $121,291, $110,518 and $130,337 for the years
ended December 31, 1999, 1998 and 1997, respectively.
5. DEPOSITS
At December 31, 1999, the scheduled maturities of other time deposits were
as follows:
2000 $ 63,788,091
2001 35,293,973
2002 4,388,233
2003 2,994,782
2004 2,613,974
-------------
$ 109,079,053
=============
The amount of other time deposits with a minimum denomination of $100,000
was $10,379,000, and $7,161,825 at December 31, 1999 and 1998,
respectively. Deposits in excess of $100,000 are not federally insured.
Continued
15
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
5. DEPOSITS (CONTINUED)
Interest expense on deposits for the years ended December 31, 1999, 1998,
and 1997 is summarized as follows:
1999 1998 1997
------------ ------------- ------------
Demand / NOW accounts $ 215,736 $ 222,674 $ 212,759
Money market accounts 1,320,265 1,346,675 1,619,467
Passbook savings 274,064 673,383 794,300
Other time deposits 5,268,061 5,761,179 6,714,358
----------- ----------- ------------
$ 7,078,126 $ 8,003,911 $ 9,340,884
=========== =========== ============
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, 1999, average daily clearings were
approximately $565,081.
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 (approximately 5.6% at December 31, 1999). At December 31, 1999, the
Bank could borrow up to $10,170,300 under the CMA program and the amount
would be collateralized by $9,204,088 of FHLB investment securities. The
balance owed at December 31, 1999 and 1998 was zero. Subsequent to year
end, the bank increased its limit to $20,000,000 and increased the
collateral pledged. On February 4, 2000, the bank had borrowed $15,550,000
at a rate of 5.82%.
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.
Continued
16
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
7. FINANCIAL INSTRUMENTS (CONTINUED)
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and commercial letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank's
experience has been that most loan commitments are drawn upon by customers.
The Bank has offered standby letters of credit on a limited basis. As of
December 31, 1999, 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, 1999:
Carrying Fair
Amount Value
------ -----
Financial assets:
Cash and due from banks $ 4,537,222 $ 4,537,222
Interest-earning deposits in FHLB 250,750 250,750
Federal funds sold 4,100,000 4,100,000
Securities available for sale 71,423,331 71,423,331
Securities held to maturity 9,958,147 10,078,157
Loans receivable 113,532,380 113,825,355
Accrued interest receivable 1,094,810 1,094,810
Financial liabilities:
Deposit liabilities 160,904,753 160,802,661
Advances from borrowers for
taxes and insurance 155,861 155,861
Off-balance-sheet liabilities:
Commitments to extend credit 1,208,900
Commercial letters of credit 382,119
Continued
17
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
7. FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of financial instruments were as follows at
December 31, 1998:
Carrying Fair
Amount Value
------ -----
Financial assets:
Cash and due from banks $ 1,904,620 $ 1,904,620
Interest-earning deposits in FHLB 214,166 214,166
Federal funds sold 9,685,000 9,685,000
Securities available for sale 68,139,383 68,139,383
Securities held to maturity 27,354,099 27,633,452
Loans receivable 108,806,634 108,966,659
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 liabilities:
Commitments to extend credit 464,789
Commercial letters of credit 679,744
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, 1999 and 1998. The carrying
amount and bank balance of such items as of December 31, 1999 and 1998 was
as follows:
Continued
18
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
8. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (CONTINUED)
1999 1998
---- ----
Carrying amount $5,794,889 $10,655,165
========== ===========
Bank balance 4,811,533 9,783,412
Amount covered by insurance (446,260) (422,374)
---------- -----------
Amount not collateralized $4,365,273 $ 9,361,038
========== ===========
9. EMPLOYEE BENEFITS
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:
1999 1998
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 2,489,410 $ 2,176,248
Service cost 80,542 74,924
Interest cost 171,417 151,986
Actuarial loss (252,951) 86,252
Benefits paid (105,259) --
----------- -----------
Benefit obligation at end of year 2,383,159 2,489,410
----------- -----------
Change in plan assets
Fair value of plan assets at beginning of year 1,666,076 1,421,158
Actual return on plan assets 211,876 93,803
Employer contributions 168,357 151,115
Benefits paid (105,259) --
----------- -----------
Fair value of plan assets at end of year 1,941,050 1,666,076
----------- -----------
Funded status (442,109) (823,334)
Unrecognized net asset (41,742) (49,002)
Unrecognized prior service cost 84,048 102,281
Unrecognized net loss 267,857 643,762
----------- -----------
Accrued pension cost $ (131,946) $ (126,293)
=========== ===========
Continued
19
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
9. EMPLOYEE BENEFITS (CONTINUED)
PENSION PLAN (CONTINUED)
Weighted average assumptions used to develop the net periodic pension cost
were:
1999 1998 1997
---- ---- ----
Discount rate 7.75% 7.00% 7.00%
Expected long-term rate of
return on assets 7.00% 7.25% 8.00%
Rate of increase in
compensation levels 4.50% 4.50% 4.50%
The components of net periodic pension cost for the years ended December
31, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 80,542 $ 74,924 $ 67,026
Interest cost on projected benefit
obligation 171,417 151,986 142,868
Expected return on plan assets (125,078) (112,256) (120,164)
Amortization of transitional asset (7,260) (7,260) (7,995)
Amortization of prior service cost 18,233 18,233 18,233
Amortization of net loss 36,156 33,069 9,388
--------- --------- ---------
Net periodic pension cost $ 174,010 $ 158,696 $ 109,356
========= ========= =========
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
The Company had a noncontributory employee stock ownership plan (ESOP) for
those employees who met the eligibility requirements of the plan. Eligible
employees were those who had attained the age of 21 and completed one year
of service. This plan was terminated effective December 31, 1999, subject
to approval by the Internal Revenue Service.
The ESOP trust borrowed $3,226,900 in 1998 through a loan from the Company
and used the proceeds to purchase 322,690 shares of the common stock at a
price of $10.00 per share. Shares purchased were held in a suspense account
for allocation among the participants as the loan was paid. Contributions
to the ESOP and shares released from the loan collateral were in amounts
proportional to repayment of the ESOP loan.
Continued
20
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
9. EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
The ESOP was funded by contributions made by the Company or the Bank in
cash or shares of Common Stock with no cost to participants. Contributions
to the ESOP and shares released from the suspense account were allocated
among participants on the basis of their annual wages subject to federal
income tax withholding, plus any amounts withheld under a plan qualified
under Sections 125 or 401(k) of the Code and sponsored by the Company or
the Bank. Participants had to be employed at least 500 hours in a calendar
year in order to receive an allocation. A participant became vested in his
or her right to ESOP benefits upon his or her completion of three years of
service. Dividends paid on allocated shares were expected to be paid to
participants or used to repay the ESOP loan, and dividends on unallocated
shares were expected to be used to repay the ESOP loan. With the exception
of a special dividend of $4.00 per share paid on December 17, 1999, all
dividends paid on ESOP shares in 1999 and 1998 were applied to the ESOP
loan.
In order to terminate the plan and to repay the ESOP loan, the ESOP
surrendered 155,662 shares valued at $2,471,134 on December 31, 1999. This
released all remaining shares from encumbrance for allocation to
participants.
At December 31, 1999 and 1998, shares allocated, and shares remaining in
suspense were as follows:
1999 1998
---- ----
Number of Shares
Released and allocated 167,028 29,423
Suspense - 293,267
Fair Value
Released and allocated $2,651,570 $ 505,714
Suspense - 5,040,520
The expenses recorded by the Company during 1999 and 1998 were as follows:
1999 1998
---- ----
Contributions $ 364,726 $ 270,032
Dividends applied to ESOP debt 96,807 41,597
Excess of fair value of shares released
and allocated over ESOP's cost 1,899,330 194,085
Special dividend paid 12/17/99 on
unallocated and uncommitted shares 1,000,611 -
----------- ------------
Total ESOP compensation costs $ 3,361,474 $ 505,714
=========== ============
The Company's ESOP compensation costs exclude interest which is eliminated
in consolidation.
Continued
21
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
9. EMPLOYEE BENEFITS (CONTINUED)
MANAGEMENT RECOGNITION PLAN
On February 24, 1999, the Board of Directors of the Company adopted the
HopFed Bancorp, Inc. Management Recognition Plan (the "MRP") which was
subsequently approved at the 1999 Annual Meeting of Stockholders. Under the
MRP, up to 161,345 shares of Common Stock may be awarded to selected
directors and employees. On the effective date the Board of Directors
awarded 161,342 shares of Common Stock which were subject to automatic plan
share awards as provided in the MRP document. Under applicable accounting
standards, the Company recognizes compensation expense of $20.00 per share
which was the fair market value of the Common Stock on the effective date,
with such amount being amortized over the expected vesting period for the
awards. The MRP provides for the following vesting schedule: 33 1/3% at
date of awards; 33 1/3% on January 1, 2000 and 33 1/3% on January 1, 2001
(subject to immediate vesting upon certain events, including death or
normal retirement of recipient). The total compensation expense of the MRP
will be $3,226,840 of which $2,678,284 is recognized in 1999.
STOCK OPTION PLAN
On February 24, 1999, the Board of Directors of the Company adopted the
HopFed Bancorp, Inc. 1999 Stock Option Plan (the "Option Plan") which was
subsequently approved at the 1999 Annual Meeting of Stockholders. Under the
Option Plan, the option committee has discretionary authority to grant
stock options and stock appreciation rights to such employees, directors
and advisory directors as the committee shall designate. The Option Plan
reserves 403,362 shares of Common Stock for issuance upon the exercise of
options or stock appreciation rights. The Company will receive the exercise
price for shares of Common Stock issued to Option Plan participants upon
the exercise of their option, and will receive no monetary consideration
upon the exercise of stock appreciation rights. The Board of Directors has
granted options to purchase 403,360 shares of Common Stock under the Option
Plan at an exercise price of $20.75 per share, which was the fair market
value on the date of the grant. As a result of the special dividend of
$4.00 per share paid in December, 1999, and in accordance with plan
provisions, the number of options and the exercise price have been adjusted
to 480,475 and $17.42 respectively. The options granted to participants
became vested and exercisable as follows: 50% on date of grant and 50% on
January 1, 2000 (subject to immediate vesting upon certain events,
including death or normal retirement of participant).
Continued
22
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
9. EMPLOYEE BENEFITS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in APB No. 25. Since each option was
granted at a price equal to the fair market value of one share of the
Company's stock on the date of the grant, no compensation cost has been
recognized. The following table compares reported net income and earnings
per share to net income and earnings per share on a pro forma basis
assuming that the Company accounted for stock-based compensation under SFAS
No. 123. The effects of applying SFAS No. 123 in this pro forma disclosure
are not indicative of future amounts.
1999 1998 1997
---- ---- ----
Net Income
As reported $2,475,269 N/A N/A
Pro forma 211,088
Earnings per share
As reported
Basic $0.65
Diluted 0.65
Pro forma
Basic 0.06
Diluted 0.06
STOCK OPTION ACTIVITY
The following table sets forth stock option activity and the weighted
average fair value of options granted.
Year Ended
December 31, 1999
Shares Exercise Price
------ --------------
Outstanding, beginning of year -
Granted 403,360 $20.75
Adjustment due to special
dividend 77,115 (3.33)
Exercised - -
Forfeited - -
Outstanding, end of year 480,475 $17.42
======= ======
Options exercisable as of
December 31, 1999 240,238
Weighted average fair value
of options granted $8.51
Continued
23
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
9. EMPLOYEE BENEFITS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using the following weighted average
assumptions: risk free interest rate of 6.70%, volatility of 37.06%,
expected dividend yield of 1.5% and expected life of six years.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consisted of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $3,246,851 $1,421,164 $1,282,951
State 9,970 37,002 -
---------- ---------- ----------
3,256,821 1,458,166 1,282,951
Deferred (491,117) 182,541 (244,697)
---------- ---------- ----------
$2,765,704 $1,640,707 $1,038,254
========== ========== ==========
Total income tax expense for the years ended December 31, 1999, 1998 and
1997 differed from the amounts computed by applying the U.S. federal income
tax rate of 34 percent to income before income taxes as follows:
1999 1998 1997
---- ---- ----
Expected federal income tax
expense at statutory tax rate $1,781,931 $1,561,324 $1,040,680
State income taxes (3,390) (12,581) -
Dividends received (8,838) (14,077) (11,716)
Fair market value difference
of allocated ESOP shares 985,980 71,903 -
Other 51 (2,864) 9,290
---------- ---------- ----------
Total federal income tax expense $2,755,734 $1,603,705 $1,038,254
========== ========== ==========
Effective rate 52.6% 34.9% 33.9%
========== ========== ==========
Continued
24
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
10. INCOME TAXES (CONTINUED)
The components of deferred taxes as of December 31, 1999 and 1998 are
summarized as follows:
1999 1998
--------------- ----------
Deferred tax liabilities:
FHLB stock dividends $ (402,961) $ (357,283)
Post 1987 bad debt reserves (199,194) (248,993)
Unrealized appreciation
on securities available for sale - (2,831,251)
------------ ------------
(602,155) (3,437,527)
------------ ------------
Deferred tax assets:
Bad debt reserves 93,691 86,755
Pension cost 44,862 42,940
Accrued interest expense 26,213 23,006
Accrued professional fees 17,451 15,861
Unrealized depreciation on
securities available for sale 462,917 -
Provision for MRP 471,765 -
------------ ------------
1,116,899 168,562
------------ ------------
Net deferred tax asset (liability) $ 514,744 $ (3,268,965)
============ ============
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 each of the years ended December 31, 1999 and 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
2000 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.
Continued
25
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
10. INCOME TAXES (CONTINUED)
The portion of a thrift's tax bad debt reserve that is not recaptured
(generally pre-1988 bad debt reserves) under the 1996 law is only subject
to recapture at a later date under certain circumstances. These include
stock repurchase redemptions by the thrift or if the thrift converts to a
type of institution (such as a credit union) that is not considered a bank
for tax purposes. However, no further recapture would be required if the
thrift converted to a commercial bank charter or was acquired by a bank.
The Bank does not anticipate engaging in any transactions at this time that
would require the recapture of its remaining tax bad debt reserves.
Therefore, retained earnings at December 31, 1999 and 1998 includes
approximately $4,027,400 which represents such bad debt deductions for
which no deferred income taxes have been provided.
11. RELATED PARTIES
The Bank has entered into transactions with its directors and their
affiliates (related parties). The aggregate amount of loans to such related
parties at December 31, 1999 and 1998, was $283,602 and $302,259,
respectively. During 1999, new loans to such related parties amounted to
$12,155 and repayments amounted to $30,812. During 1998, new loans to such
related parties amounted to $69,914 and repayments amounted to $31,447.
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, 1999 and 1998 of
$1,208,900 and $464,789 respectively. Of these amounts, $72,150 and
$267,252 as of December 31, 1999 and 1998, respectively, were for fixed
rate loans. The interest rates for the fixed rate loan commitments ranged
from 7.875% to 9.00% and 7.375% to 8.50% for December 31, 1999 and 1998,
respectively.
In addition, the Bank is a defendant in legal proceedings arising in
connection with its business. It is the best judgment of management that
neither the financial position nor results of operations of the bank will
be materially affected by the final outcome of these legal proceedings.
Continued
26
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
13. REGULATORY MATTERS
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA"), which instituted major reforms in the operation and supervision
of the savings and loan industry, contains provisions for capital
standards. These standards require savings institutions to have a minimum
regulatory tangible capital (as defined in the regulation) equal to 1.50%
of adjusted total assets and a minimum 4.00% core capital (as defined) of
adjusted total assets. Additionally, savings institutions are required to
meet a total risk-based capital requirement of 8.00%.
The Bank is also subject to the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA includes significant
changes to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds
of deposits, increased supervision by the Federal regulatory agencies,
increased reporting requirements for insured institutions, and new
regulations concerning reporting on internal controls, accounting and
operations.
FDICIA's prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized." Institutions categorized as
"undercapitalized" or worse are subject to certain restrictions, including
the requirement to file a capital plan with OTS, and increased supervisory
monitoring, among other things. Other restrictions may be imposed on the
institution either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire institution.
The following chart delineates the categories as defined in the FDICIA
legislation:
Tier I Risk- Total Risk-
Core Capital Based Capital Based Capital
------------ ------------- -------------
"Well capitalized" 5.0% 6.0% 10.0%
"Adequately
capitalized" 4.0% 4.0% 8.0%
"Undercapitalized" Less than 4.0% Less than 4.0% Less than 8.0%
"Significantly
undercapitalized" Less than 3.0%
Less than 3.0% Less than 6.0%
Continued
27
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
13. REGULATORY MATTERS (CONTINUED)
At December 31, 1999, the Bank's core, tier I risk-based, and total
risk-based capital ratios were 21.60%, 58.24%, and 58.60%, respectively.
The following is a calculation of the Bank's regulatory capital (in
thousands) at December 31, 1999:
<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 $44,072 $44,072 $44,072 $44,072 $44,072
=======
Unrealized losses on certain
available-for- sale securities - 899 899 899
General valuation allowance - - - 278
-------------------------------------------------
Regulatory capital $44,072 44,971 44,971 45,249
=======
Minimum capital requirement % 1.50% 4.00% 8.00%
Minimum capital requirement $ 3,123 8,327 6,177
------- ------- -------
Regulatory capital excess $41,848 $36,644 $39,072
======= ======= =======
</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 1 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>
Continued
28
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
13. REGULATORY MATTERS (CONTINUED)
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than
normal IRR, when determining compliance with the risk-based capital
requirements, to maintain additional total capital. The OTS has, however,
indefinitely deferred enforcement of its IRR requirements. Under the
regulation, a savings institution's IRR is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. A
savings institution is considered to have a "normal" level of IRR exposure
if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates is less than 2% of the
current estimated economic value of its assets. If the OTS determines in
the future to enforce the regulation's IRR requirements, a savings
institution with a greater than normal IRR would be required to deduct from
total capital, for purposes of calculating its risk-based capital
requirement, an amount equal to one half the difference between the
institution's measured IRR and 2%, multiplied by the economic value of the
institution's total assets. Management does not believe that this
regulation, when enforced, will have a material impact on the Bank.
14. HOPFED BANCORP, INC.
The following condensed statements of financial condition as of December
31, 1999 and 1998 and condensed statements of income and cash flows for the
year ended December 31, 1999 and 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.
Continued
29
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
14. HOPFED BANCORP, INC. (CONTINUED)
CONDENSED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 429,509 $ 112,094
Federal funds sold 200,000 485,000
Securities available for sale - 16,015,265
Accrued interest receivable - 220,503
Other assets - 14,770
Investment in subsidiary 19,708,291 19,707,645
Note receivable-ESOP - 3,226,900
------------ -------------
Total assets $ 20,337,800 $ 39,782,177
============ =============
LIABILITIES AND EQUITY
Liabilities:
Federal income taxes payable:
Current $ 48,408 $ -
Deferred - 6,800
Dividends payable 307,364 302,524
------------ -------------
Total liabilities 355,772 309,324
------------ -------------
Equity:
Common stock 39,425 40,336
Additional paid in capital 19,942,603 39,382,349
Retained earnings - 36,968
Accumulated other comprehensive income - 13,200
------------ -------------
Total equity 19,982,028 39,472,853
------------ -------------
Total liabilities and equity $ 20,337,800 $ 39,782,177
============ =============
CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31,1999 AND
FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998
Interest income
Loans receivable $ 230,203 $ 246,482
Securities available for sale 620,306 502,884
Time deposits 192,819 320,040
------------ -------------
Total interest income 1,043,328 1,069,406
------------ -------------
Noninterest expenses
Salaries and benefits 179,122 41,597
Other 158,792 45,765
------------ -------------
Total noninterest expenses 337,914 87,362
------------ -------------
Income before income taxes 705,414 982,044
Income tax expense 274,408 364,230
------------ -------------
Net income $ 431,006 $ 617,814
============ ==============
</TABLE>
Continued
30
<PAGE>
HOPFED BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
14. HOPFED BANCORP, INC. (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 431,006 $ 617,814
Adjustments to reconcile net income to
net cash provided by operating activities
Accretion of investment security discounts (403,320) (11,048)
Earned ESOP shares 82,315 17,395
(Increase) decrease in:
Accrued interest receivable 220,503 (220,503)
Other assets 14,770 (14,770)
Increase (decrease) in:
Current income taxes payable 48,408 -
------------ ------------
Net cash provided by operating activities 393,682 388,888
------------ ------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Investment in subsidiary - (19,707,645)
Proceeds from sale of available-for-sale
securities 32,898,585 -
Purchase of available-for-sale securities (16,500,000) (15,984,217)
Net (increase) decrease in federal funds sold 285,000 (485,000)
Repayment of note receivable-ESOP 755,766 -
------------ ------------
Net cash provided (used) by investing
activities 17,439,351 (36,176,862)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 36,178,390
Dividends paid (17,515,618) (278,322)
------------ ------------
Net cash provided (used) by financing
activities (17,515,618) 35,900,068
------------ ------------
Net increase in cash 317,415 112,094
Cash at beginning of year 112,094 -
------------ ------------
Cash at end of year $ 429,509 $ 112,094
============ ============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 221,228 $ 369,002
============ ============
Non-cash transaction-ESOP
loan redeemed with stock $ 2,471,134 -
============ ============
</TABLE>
31
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
WD Kelley Clifton H. Cochran
Chairman of the Board Retired
Retired
Bruce Thomas Walton G. Ezell
President and Chief Executive
Officer of the Company and the Bank FARMER
HARRY J. DEMPSEY, MD
Peggy R. Noel Anesthesiologist
Vice President, Chief Financial Officer and
Treasurer of the Company and Executive Vice
President, Chief Financial Officer and Chief
Operations Officer of the Bank
Boyd M. Clark Gilbert E. Lee
Vice President and Secretary of the Company
and Senior Vice President - Loan CO-OWNER, RELIABLE
Administration of the Bank FINANCE INC.
- --------------------------------------------------------------------------------
MAIN OFFICE
2700 Fort Campbell Boulevard
Hopkinsville, KY 42240 (270/885-1171)
BRANCH OFFICES
Downtown Branch Office Murray Branch Office
605 South Virginia Street 7th and Main Streets
Hopkinsville, KY 42240 (270/885-1171) Murray, KY 42071 (270/753-7921)
1
<PAGE>
Cadiz Branch Office Elkton Branch Office
352 Main Street West Main Street
Cadiz, KY 42211 (270/522-6638) Elkton, KY 42220 (270/265-5628)
- --------------------------------------------------------------------------------
GENERAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
INDEPENDENT ACCOUNTANTS ANNUAL MEETING ANNUAL REPORT ON FORM 10-K
York, Neel & Co.-- The 2000 Annual Meeting of Stockholders A COPY OF THE COMPANY'S 1999 ANNUAL
Hopkinsville, LLP will be held on May 10, 2000 at 3:00 REPORT ON FORM 10-K WILL BE FURNISHED
1113 Bethel Street p.m. at Hopkinsville Federal Savings WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
Hopkinsville, KY 42240 Bank, 2700 Fort Campbell Boulevard, RECORD DATE FOR THE 2000 ANNUAL MEETING
Hopkinsville, KY UPON WRITTEN REQUEST TO THE SECRETARY,
HOPFED BANCORP, INC., 2700 FORT
GENERAL COUNSEL TRANSFER AGENT CAMPBELL BOULEVARD, HOPKINSVILLE, KY
Deatherage, Myers, Self & Lackey Registrar and Transfer Company 42240
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>
2
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Percentage Owned Incorporation
---------------- ---------------
Hopkinsville Federal Savings Bank 100% United States
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,537
<INT-BEARING-DEPOSITS> 251
<FED-FUNDS-SOLD> 4,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,423
<INVESTMENTS-CARRYING> 9,958
<INVESTMENTS-MARKET> 10,078
<LOANS> 113,532
<ALLOWANCE> 278
<TOTAL-ASSETS> 207,906
<DEPOSITS> 106,905
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,655
<LONG-TERM> 0
0
0
<COMMON> 39
<OTHER-SE> 44,307
<TOTAL-LIABILITIES-AND-EQUITY> 207,906
<INTEREST-LOAN> 8,436
<INTEREST-INVEST> 5,018
<INTEREST-OTHER> 751
<INTEREST-TOTAL> 14,205
<INTEREST-DEPOSIT> 7,078
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 7,127
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 6,524
<EXPENSE-OTHER> 8,893
<INCOME-PRETAX> 5,241
<INCOME-PRE-EXTRAORDINARY> 2,475
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,475
<EPS-BASIC> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 3.38
<LOANS-NON> 0
<LOANS-PAST> 58
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 278
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 278
<ALLOWANCE-DOMESTIC> 278
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
