SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-30215
HOPFED BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware Applied For
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240
- ---------------------------------------------------- ----------
Adddress of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 885-1171
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes No x
------ ------
As of November 24, 1997, the Registrant had not yet completed the initial
public offering of its Common Stock. No shares of Common Stock were issued and
outstanding at such date.
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996................................................ 1
Consolidated Statements of Income for the Three-Month and Nine-Month
Periods Ended September 30, 1997 and 1996............................ 2
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 1997 and 1996............................ 3
Notes to Consolidated Financial Statements........................... 4
All financial statements of HopFed Bancorp, Inc. have been omitted because
HopFed Bancorp, Inc. has not yet issued any stock, has no assets and no
liabilities and has not conducted any business other than of an organizational
nature.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 5
SIGNATURES.............................................................. 10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
ASSETS 1997 1996
-------------- ------------
(Unaudited)
(In thousands)
Cash and due from banks............................... $ 1,012 $ 1,452
Time deposits......................................... 2,000 2,000
Interest-bearing deposits in Federal
Home Loan Bank...................................... 378 0
Federal funds sold.................................... 8,295 500
Investment securities available for sale.............. 14,045 5,125
Investment securities held to maturity
(Estimated market values of $75,099 and
$95,762 at September 30, 1997 and
December 31, 1996, respectively)................... 71,767 95,947
Loans receivable, net................................. 100,675 95,496
Accrued interest receivable........................... 1,032 1,290
Premises and equipment, net........................... 2,418 2,333
Foreclosed real estate................................ -- --
Other assets.......................................... 387 255
-------- --------
Total assets................................ $202,009 $204,398
======== ========
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits............................................ $180,749 $183,827
Deferred Federal income taxes....................... 1,938 1,659
Advances from Federal Home Loan Bank................ 0 1,317
Other liabilities................................... 590 771
-------- --------
Total liabilities........................... 183,277 187,574
-------- --------
Retained earnings:
Retained earnings, substantially restricted......... 15,938 14,591
Net unrealized appreciation on investment
securities available for sale..................... 2,794 2,233
-------- --------
Total retained earnings..................... 18,732 16,824
-------- --------
Total liabilities and retained earnings.. $202,009 $204,398
======== ========
See accompanying Notes to Financial Statements.
1
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- ------
(In thousands)
Interest income:
Interest on loans.............................. 1,915 1,766 $ 5,616 $4,988
Interest and dividends on investments.......... 1,270 1,420 3,910 4,351
Time deposit interest income................... 183 155 485 566
------ ------ ------- ------
Total interest income........................ 3,368 3,341 10,011 9,905
------ ------ ------- ------
Interest expense:
Interest on deposits........................... 2,216 2,421 6,633 7,450
Other Funds.................................... 0 0 9 23
------ ------ ------- ------
Total interest expense....................... 2,216 2,421 6,642 7,473
------ ------ ------- ------
Net interest income............................... 1,152 920 3,369 2,432
Provision for loan losses......................... 5 0 15 0
------ ------ ------- ------
Net interest income after provision
for loan losses................................ 1,147 920 3,354 2,432
------ ------ ------- ------
Other income:
Loan and other service fees.................... 122 137 353 422
Other, net..................................... 12 10 51 43
------ ------ ------- ------
Total other income......................... 134 147 404 465
------ ------ ------- ------
Net expenses:
Salaries and benefits.......................... 342 309 1,064 921
Federal insurance premium...................... 29 1,356 92 1,577
Occupancy expense, net......................... 49 48 148 160
------ ------ ------- ------
Data processing................................ 36 32 85 62
Other operating expenses....................... 106 93 336 281
------ ------ ------- ------
Total other expenses......................... 562 1,838 1,725 3,001
------ ------ ------- ------
Income (loss) before income taxes and cumulative
effect of change in accounting principle.......... 719 (771) 2,033 (104)
Provision for income taxes........................ 242 (265) 686 (43)
------ ------ ------- ------
Net income (loss)................................. $ 477 $ (506) $ 1,347 $ (61)
====== ====== ======= ======
See accompanying Notes to Financial Statements.
2
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
-------------------------
1997 1996
------- --------
Cash flows from operating activities:
Net income (loss)........................................... $ 1,347 $ (61)
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income to....................................... (10) 25
Provision for loan losses................................ 15 100
Gain on sale of equipment................................ 0 (8)
Provision for depreciation............................... 75 86
FHLB stock dividend...................................... (88) (80)
Accretion of investment security discounts............... (28) (4)
(Increase) decrease in
Accrued interest receivable.............................. 258 (101)
Other assets............................................. (132) (520)
Increase (decrease) in other liabilities................. (360) 1,460
------- --------
Net cash provided by operating activities................ 1,077 897
------- --------
Cash flows from investing activities:
Net (increase) decrease in time deposits................. 0 5,000
Net (increase) decrease in interest earning deposits
in FHLB............................................. (378) 5,519
Net (increase) decrease in federal funds sold............ (7,795) 5,077
Proceeds from maturities of held-to-maturity securities.. 30,127 41,614
Purchases of held-to-maturity securities................. (5,933) (41,012)
Purchases of available for sale securities............... (7,967) (15)
Net increase in loans.................................... (5,194) (9,799)
Purchases of premises/equipment.......................... (173) (91)
Proceeds from sale of equipment.......................... 13 14
------- --------
Net cash provided by investing activities................ 2,700 6,307
------- --------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts...................... 542 1,805
Net increase (decrease) in time deposits................. (3,621) (9,107)
Increase (decrease) in advance payments by
borrowers for taxes and insurance...................... 179 237
Net increase (decrease) in other borrowed funds.......... (1,317) 0
------- --------
Net cash used in financing activities.................. (4,217) (7,065)
------- --------
Increase (decrease) in cash and cash equivalents....... (440) 139
Cash and cash equivalents, beginning of period........... 1,452 1,303
------- --------
Cash and cash equivalents, end of period................. $1,012 $1,442
======= ========
Supplemental disclosures of cash flow information.............
Cash paid for income taxes............................... $ 550 $ 282
======= ========
Cash paid for interest................................... $6,903 $7,330
======= ========
See accompanying Notes to Financial Statements.
3
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
HopFed Bancorp, Inc. (the "Company") was formed at the direction of
Hopkinsville Federal Savings Bank (the "Bank") to become the holding
company of the Bank upon the conversion of the Bank from a federally
chartered mutual savings bank to a federally chartered stock savings
bank. After such conversion, the Company's primary assets will be the
outstanding capital stock of the converted Bank, a portion of the net
proceeds of the Conversion, and a note receivable from the Company's
Employee Stock Ownership Plan ("ESOP"), and its sole business will be
that of the converted Bank. As of September 30, 1997, the Company had
not engaged in any material operations. Accordingly, the financial
statements and discussions herein relate to the Bank.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of
only normal recurring accruals) necessary for fair representation have
been included. The results of operations and other data for the three
and nine month periods ended September 30, 1997, are not necessarily
indicative of results that may be expected for the entire fiscal year
ending December 31, 1997.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
The Bank's total assets decreased by $2.4 million, from $204.4 million at
December 31, 1996 to $202.0 million at September 30, 1997. Securities held to
maturity declined $24.2 million due to various issues maturing. Of such funds,
$7.8 million was reinvested in Federal funds sold, which increased from $500,000
at December 31, 1996 to $8.3 million at September 30, 1997. In addition, $1.3
million in maturing securities was utilized to repay Federal Home Loan Bank
advances, resulting in no borrowed funds at September 30, 1997.
The decrease in assets was also due to a decrease in assets funded by
deposits as the Bank continued to price its deposits less aggressively in 1997
in an effort to reduce its overall cost of funds. At September 30, 1997
deposits decreased to $180.7 million, from $183.8 million at December 31, 1996,
a net decrease of $3.1 million. Deposits decreased as depositors sought higher
returns than those available on accounts being offered by the Bank. The Bank's
average cost of deposits for the nine months ended September 30, 1997 was 4.90%,
compared to 5.13% for the year ended December 31, 1996. Management intends to
continually evaluate the investment alternatives available to the Bank's
customers, and adjusts the pricing on its deposit products to more actively
manage its funding costs while remaining competitive in its market area.
The Bank's loan portfolio increased by $5.2 million during the nine months
ended September 30, 1997. Net loans totaled $100.7 million and $95.5 million at
September 30, 1997 and December 31, 1996, respectively. The increase in the
loan activity during the nine months ended September 30, 1997 was primarily due
to the Bank's efforts to increase its loan originations using funds currently
held in investment securities. For the nine months ended September 30, 1997,
the Bank's average yield on loans was 7.64%, compared to 7.41% for the year
ended December 31, 1996.
At September 30, 1997, the Bank's investments classified as "held to
maturity" were carried at amortized cost of $71.8 million and had an estimated
fair market value of $75.1 million, and its equity securities classified as
"available for sale" had an estimated fair market value of $14.0 million,
including Federal Home Loan Mortgage Corporation stock with an estimated fair
market value of $4.4 million.
The allowance for loan losses totaled $232,000 at September 30, 1997, an
increase of $15,000 from the allowance of $217,000 at December 31, 1996. At
each September 30, 1997 and December 31, 1997, the ratio of the allowance for
loan losses to loans was 0.23%. Also at September 30, 1997, the Bank's non-
performing loans were $247,000, or 0.25% of total loans, compared to $266,000,
or 0.28% of total loans, at December 31, 1996, and the Bank's ratio of allowance
for loan losses to non-performing loans at September 30, 1997 and December 31,
1996 was 93.93% and 81.58%, respectively. The determination of the allowance
for loan
5
losses is based on management's analysis, performed on a quarterly basis.
Various factors are considered, including the market value of the underlying
collateral, growth and composition of the loan portfolio, the relationship of
the allowance for loan losses to outstanding loans, historical loss experience,
delinquency trends and prevailing economic conditions. Although management
believes its allowance for loan losses is adequate, there can be no assurance
that additional allowances will not be required or that losses on loans will not
be incurred. The Bank has had minimal losses on loans in prior years.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
NET INCOME. The Bank's net income for the nine months ended September 30,
1997 was $1,347,000, compared to a net loss of $(61,000) for the nine months
ended September 30, 1996. The increase in net earnings for the nine months
resulted primarily from an improvement in the Bank's net yield on interest-
earning assets, offset in part by a slight increase in non-interest expense and
income taxes. In addition, in 1996 the Bank paid the Federal Deposit Insurance
Corporation a special assessment of $1.2 million before taxes ($812,000 net of
tax) to recapitalize the Savings Association Insurance Fund.
NET INTEREST INCOME. Net interest income for the nine months ended
September 30, 1997 was $3.4 million, compared to $2.4 million for the nine
months ended September 30, 1996. The increase in net interest income for the
nine months ended September 30, 1997 was primarily due to a lower cost of funds
and a higher yield on interest-earning assets. For the nine months ended
September 30, 1997, the Bank's average yield on total interest-earning assets
was 6.74%, compared to 6.40% for the nine months ended September 30, 1996, and
its average cost of interest-bearing liabilities was 4.90% for the nine months
ended September 30, 1997, compared to 5.19% for the nine months ended September
30, 1996. As a result, the Bank's interest rate spread for the nine months
ended September 30, 1997 was 1.84%, compared to 1.21% for the nine months ended
September 30, 1996, and its net yield on interest-earning assets was 2.27% for
the nine months ended September 30, 1997, compared to 1.57% for the nine months
ended September 30, 1996.
INTEREST INCOME. Interest income increased by $100,000, from $9.9 million
to $10.0 million, or by 1.0%, during the nine months ended September 30, 1997
compared to the same period in 1996. This increase primarily resulted from a
continued strategic shift from investment securities to higher-yielding loans.
The average balance of securities held to maturity declined $17.6 million, from
$98.8 million at September 30, 1996 to $81.2 million at September 30, 1997. In
addition, average time deposits and other interest-earning cash deposits
declined $3.0 million, from $14.0 million at September 30, 1996 to $11.0 million
at September 30, 1997. Overall, average total interest-earning assets declined
$8.3 million, or 4.0%, from September 30, 1996 to September 30, 1997. However,
the strategic repositioning of the balance sheet into higher-yielding assets
resulted in an increase in the average yield on interest-earning assets from
6.40% at September 30, 1996 to 6.74% at September 30, 1997. In addition, the
ratio of average interest-earning assets to average interest-bearing liabilities
increased from 107.47% for the nine months ended September 30, 1996 to 109.59%
for the nine months ended September 30, 1997.
6
INTEREST EXPENSE. Interest expense decreased $831,000, or 11.0%, to $6.6
million for the nine months ended September 30, 1997, compared to $7.5 million
for the same period in 1996. The decrease was attributable to the combined
effect of a lower cost of funds and a $6.7 million decline in the average
balance of interest-bearing liabilities. The average cost of average interest-
bearing deposits declined from 5.19% at September 30, 1996 to 4.90% at September
30, 1997. Over the same period, the average balance of deposits decreased $10.9
million, from $191.3 million at September 30, 1996 to $180.4 million at
September 30, 1997, or 5.7%.
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 in providing
for an adequate loan loss allowance. The Bank determined that an additional
$15,000 provision for loan loss was required for the nine months ended September
30, 1997.
NON-INTEREST EXPENSE. There was a $1.3 million decline in total non-
interest expense in the nine months ended September 30, 1997 compared to the
same period in 1996. This was primarily attributable to an approximately $1.5
million decrease in deposit insurance premiums. In addition, most other non-
interest expenses were also slightly higher.
INCOME TAXES. The Bank's effective tax rate for the nine months ended
September 30, 1997 was 33.7%, compared to 41.3% for the same period in 1996.
The increase in income tax expense of $729,000 in the nine month period compared
to the same period in 1996 was due to a significant increase in income and a
year to date loss at the same time last year.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996
NET INCOME. The Bank's net income for the three months ended September 30,
1997 was $477,000, compared to a net loss $(506,000) for the three months ended
September 30, 1996. The increase in net earnings for the three months resulted
primarily from an improvement in the Bank's net yield on interest-earning
assets, as well as a significantly lower deposit insurance premium.
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 1997 was $1.1 million, compared to $920,000 for the three months
ended September 30, 1996. The increase in net interest income for the three
months ended September 30, 1997 was primarily due to a lower cost of funds and a
higher yield on interest-earning assets. For the three months ended September
30, 1997, the Bank's average yield on total interest-earning assets was 6.83%,
compared to 6.56% for the three months ended September 30, 1996 and its average
cost of interest-bearing liabilities was 4.95% for the three months ended
September 30, 1997, compared to 5.14% for the three months ended September 30,
1996. As a result, the Bank's interest rate spread for the three months ended
September 30, 1997 was 1.88%, compared to 1.42% for the
7
three months ended September 30, 1996 and its net yield on interest-earning
assets was 2.34% for the three months ended September 30, 1997, compared to
1.81% for the three months ended September 30, 1996.
INTEREST INCOME. Interest income increased by $27,000, from $3.34 million
to $3.37 million, or by .8%, during the three months ended September 30, 1997
compared to the same period in 1996. This increase primarily resulted from a
continued strategic shift from investment securities to higher-yielding loans.
The average balance of securities held to maturity declined $19.6 million, from
$95.3 million at September 30, 1996, to $75.7 million at September 30, 1997.
Overall, average total interest-earning assets declined $6.7 million, or 3.3%,
from September 30, 1996 to September 30, 1997. However, the strategic
repositioning of the balance sheet into higher-yielding assets resulted in an
increase in the average yield on interest-earning assets from 6.56% at September
30, 1996 to 6.83% at September 30, 1997. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities increased from
108.14% for the three months ended September 30, 1996 to 110.04% for the three
months ended September 30, 1997.
INTEREST EXPENSE. Interest expense decreased $205,000, or 8.5%, to $2.2
million for the three months ended September 30, 1997, compared to $2.4 million
for the same period in 1996. The decrease was attributable to the combined
effect of a lower cost of funds and a $9.3 million decline in the average
balance of interest-bearing liabilities. The average cost of average interest-
bearing deposits declined from 5.14% at September 30, 1996 to 4.95% at September
30, 1997. Over the same period, the average balance of deposits decreased $9.3
million, from $188.5 million at September 30, 1996 to $179.2 million at
September 30, 1997, or 4.9%.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance. The Bank determined that an additional
$5,000 provision for loan loss was required for the three months ended September
30, 1997.
NON-INTEREST EXPENSE. There was a $1.3 million decline in total non-
interest expense in the three months ended September 30, 1997 compared to the
same period in 1996. This was primarily attributable to a $1.3 million decrease
in deposit insurance premiums. In addition, most other non-interest expenses
were also slightly higher.
INCOME TAXES. The Bank's effective tax rate for the three months ended
September 30, 1997 was 33.7%, compared to 34.4% for the same period in 1996.
The increase in income tax expense of $506,320 in the three month period
compared to the same period in 1996 was due to a significant increase in income
and a year to date loss at the same time last year.
8
LIQUIDITY AND CAPITAL RESOURCES. The Bank's principal sources of funds for
operations are deposits from its primary market areas, principal and interest
payments on loans and proceeds from maturing investment securities. The
principal uses of funds by the Bank include the origination of mortgage and
consumer loans and the purchase of investment securities.
The Bank is required by current OTS regulations to maintain specified
liquid assets of at least 5% of its net withdrawable accounts plus short-term
borrowings. Short-term liquid assets (those maturing in one year or less) may
not be less than 1% of the Bank's liquidity base. At September 30, 1997, the
Bank met all regulatory liquidity requirements, and management believes that the
liquidity levels maintained are adequate to meet potential deposit outflows,
loan demand and normal operations.
The Bank must satisfy three capital standards, as set by the Office of
Thrift Supervision (the "OTS"). These standards include a ratio of core capital
to adjusted total assets of 3.0%, a tangible capital standard expressed as 1.5%
of total adjusted assets, and a combination of core and "supplementary" capital
equal to 8.0% of risk-weighted assets. The risk-based capital standard
currently addresses only the credit risk inherent in the assets in a thrift's
portfolio and does not address other risks that thrifts face, such as operating,
liquidity and interest rate risks. The OTS recently finalized regulations that
add an interest rate risk component to capital requirements under certain
circumstances. The Bank does not believe that this new regulation will require
additional capital. In addition, the OTS has recently adopted regulations that
impose certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital (or core
capital) to risk-weighted assets of less than 4.0%, or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (or 3.0% if the institution has the
highest rating ("1") under the OTS examination rating system).
At September 30, 1997, the Bank exceeded all regulatory capital
requirements. The table below presents certain information relating to the
Bank's capital compliance at September 30, 1997 and December 31, 1996.
At September 30, 1997 At December 31, 1996
---------------------- ---------------------
Amount Percent Amount Percent
---------- --------- --------- ---------
(Dollars in thousands)
Tangible Capital......... $15,938 8.0% $14,591 7.2%
Core Capital............. 15,938 8.0 14,591 7.2
Risk-Based Capital....... 16,170 22.0 14,808 20.3
At September 30, 1997, the Bank had outstanding commitments to originate
loans totaling $1.3 million. Management believes that the Bank's sources of
funds are sufficient to fund all of its outstanding commitments. Certificates
of deposits which are scheduled to mature in one year or less from September 30,
1997 totaled $83.6 million. Management believes that a significant percentage
of such deposits will remain with the Bank.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOP FED BANCORP, INC.
Date: November 24, 1997 /s/ Bruce Thomas
------------------------------------------
Bruce Thomas
President and Chief Executive Officer
Date: November 24, 1997 /s/ Peggy R. Noel
----------------------------------------------
Peggy R. Noel
Executive Vice President, Chief Financial
Officer and Chief Operations Officer
10