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, 2003
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
2700 Fort Campbell Boulevard, Hopkinsville, KY | 42240 | |
(Address of principal executive offices) | (Zip Code) |
Registrants 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 registrants 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. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x .
The registrants 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 ($16.00 per share) at which the stock was sold on June 30, 2003, was approximately $52,166,656. 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 registrants Common Stock.
As of the close of business on March 15, 2004, 3,630,396 shares of the registrants Common Stock were outstanding.
Documents
Part II:
Annual Report to Stockholders for the year ended December 31, 2003.
Part III:
Portions of the definitive proxy statement for the 2003 Annual Meeting of Stockholders.
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 Banks 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. In February 2001, the Bank changed its name to Hopkinsville Federal Bank. On May 14, 2002, the Bank changed its name to Heritage Bank.
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 Companys assets primarily consist of the outstanding capital stock of the Bank. The Companys principal business is overseeing the business of the Bank. 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 Companys executive offices are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (270) 885-1171.
Heritage Bank
The Bank is a federally chartered stock savings bank headquartered in Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz, Elkton, Fulton, Calvert City and Benton, 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. On May 14, 2002, the Bank changed its name from Hopkinsville Federal Bank to Heritage Bank. The primary market area of the Bank consists of the adjacent counties of Calloway, Christian, Todd, Trigg, Fulton, and Marshall located in southwestern Kentucky and Obion & Weakley counties located in northwestern Tennessee.
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, other consumer loans and commercial 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.
Growth Opportunities
In 2003, the Bank has relocated retail offices in Calloway and Marshall County as well as opened a new office in Marshall County due to exceptional growth levels in both locations. In less than three years of operation, the loan portfolio in Marshall County has grown to $87 million and deposits have grown to $40 million. The Banks growth in the Calloway County market has been equally impressive. In four years, the loan portfolio has grown from $9 million to $68 million and deposits have increased from $12 million to $67 million. Management believes that these two markets, in addition to Christian County, will continue to provide significant opportunities for growth. Deposit growth in Fulton County has been equally impressive. Since the September 2002 acquisition, deposits in the Fulton market have increased from $96 million to over $115 million.
Christian County is the Companys headquarters and its largest market. Christian County growth has been strong, especially in the growth of core and municipal deposits. The Company believes that long-term growth prospects in Christian County meet or exceed those of its other markets due to the overall size of the market.
2
The following chart outlines the Banks market share in its four largest markets individually and its entire market overall at June 30, 2001, June 30, 2002, and June 30, 2003 according to information provided by the FDIC Market Share Report:
At June 30
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2001
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2002
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2003
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Calloway |
5.6 | % | 8.4 | % | 11.8 | % | |||
Christian |
15.2 | % | 16.1 | % | 19.7 | % | |||
Fulton |
49.7 | %(a) | 49.7 | %(a) | 51.9 | % | |||
Marshall |
1.3 | % | 3.8 | % | 7.5 | % | |||
Overall |
9.0 | %(b) | 10.7 | %(b) | 18.5 | % |
(a) | Represents the market share reported by Old National Bank in Fulton County, Kentucky. These deposits were purchased by Heritage Bank in September 2002. |
(b) | The combined market share of Heritage Bank and Old National Banks Fulton County Office at June 30, 2001 and June 30, 2002 would have been 14.4% and 15.4% respectively. |
The majority of the Banks markets continue to provide growth opportunities for both loans and deposits, as customers are dissatisfied with national and regional banks that have entered the market via acquisitions as well as economic growth in the Banks higher growth markets. The Banks new internet banking web site with free bill pay, www.bankwithheritage.com, has been a huge success with over 1,200 customers participating in the first year of operation. In 2003, the Bank has experienced positive deposit market share growth in each of its markets.
While there is ample opportunities for the Company to grow in its current markets, the Company may have the opportunity to expand into new markets by either branch acquisitions, the purchase of community banks, or new branches. These opportunities may present themselves as larger banks may decide to exit markets in Western Kentucky, Middle Tennessee and Western Tennessee. Management will continue to evaluate these opportunities when they become available and pursue those opportunities that fit into the business plan of the Company. Management anticipates that recent growth trends will continue as the Company seeks opportunities in new markets and improves its market share in existing markets.
In November of 2003, the Bank opened Heritage Solutions, a division of Fall & Fall Insurance in Murray, Kentucky. Heritage Solutions offers property and casualty insurance as well as fixed annuities. Heritage Solutions solicits business across the entire market area of Heritage Bank and is seen as a natural fit as the Bank continues to seek ways to fulfill all the financial services needs of its customers.
In November of 2003, the Company purchased an additional $5.0 million dollars of life insurance on three of its senior management officers. This insurance was purchased from two of the highest rated insurance companies in the United States. This insurance provides key man coverage for the Bank in the event of death and is paid in full. For the year ending December 31, 2003, the Bank reported $94,000 in income from bank owned life insurance. At December 31, 2003, the total cash value of the Companys bank owned life insurance was $6.6 million.
Available Information
The Companys filings with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, are available on the Companys website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. Copies can be obtained free of charge in the Investor Relations section of the Companys website at www.bankwithheritage.com
3
Stock Repurchases
On September 20, 2000, the Company announced that its Board of Directors had approved the repurchase of up to 200,000 shares of its common stock. The stock repurchase program was completed in February 2001. On March 26, 2001, the Company announced that its Board of Directors had approved the repurchase of an additional 300,000 shares. The purchases are being made from time to time on the Nasdaq Stock Market at prices prevailing on that market or in privately negotiated transactions at managements discretion, depending on market conditions, price of the Companys common stock, corporate cash requirements and other factors. As of March 15, 2004, 208,909 shares of common stock had been repurchased.
Lending Activities
General . The total gross loan portfolio totaled $337.3 million at December 31, 2003, representing 62.97% of total assets at that date. Substantially all loans are originated in the Banks market area. At December 31, 2003, $191.0 million, or 56.6% of the loan portfolio, consisted of one-to-four family, residential mortgage loans. Other loans secured by real estate include non-residential real estate loans, which amounted to $ 39.6 million, or 11.7% of the loan portfolio at December 31, 2003, and multi-family residential loans, which were $ 6.3 million, or 1.9% of the loan portfolio at December 31, 2003. At December 31, 2003, construction loans were $ 3.5 million, or 1.1% of the loan portfolio, and total consumer and commercial loans totaled $ 96.9 million, or 28.7% 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, 2003, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below.
2003
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2002
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2001
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2000
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1999
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Amount
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Percent
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Amount
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Percent
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Amount
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Amount
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(Dollars in thousands) | ||||||||||||||||||||||||||||||
Type of Loan : |
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Real estate loans: |
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One-to-four family residential |
$ | 191,015 | 56.6 | % | $ | 171,453 | 58.4 | % | $ | 111,768 | 65.0 | % | $ | 91,960 | 70.8 | % | $ | 86,345 | 75.9 | % | ||||||||||
Multi-family residential |
6,254 | 1.9 | % | 4,547 | 1.6 | % | 2,448 | 1.4 | % | 2,841 | 2.2 | % | 2,165 | 1.9 | % | |||||||||||||||
Construction |
3,544 | 1.1 | % | 1,757 | 0.6 | % | 5,617 | 3.3 | % | 5,729 | 4.4 | % | 5,706 | 5.0 | % | |||||||||||||||
Non-residential (1) |
39,615 | 11.7 | % | 32,368 | 11.0 | % | 18,445 | 10.7 | % | 21,695 | 16.7 | % | 12,399 | 10.9 | % | |||||||||||||||
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Total real estate loans |
240,428 | 71.3 | % | 210,125 | 71.6 | % | 138,278 | 80.4 | % | 122,225 | 94.1 | % | 106,615 | 93.7 | % | |||||||||||||||
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Other loans: |
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Secured by deposits |
3,062 | 0.9 | % | 3,003 | 1.0 | % | 2,191 | 1.3 | % | 2,720 | 2.1 | % | 2,525 | 2.2 | % | |||||||||||||||
Other consumer loans |
43,147 | 12.8 | % | 44,238 | 15.1 | % | 16,455 | 9.6 | % | 3,971 | 3.1 | % | 4,356 | 3.8 | % | |||||||||||||||
Commercial loans |
50,679 | 15.0 | % | 36,184 | 12.3 | % | 14,943 | 8.7 | % | 946 | 0.7 | % | 314 | 0.3 | % | |||||||||||||||
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Total other loans |
96,888 | 28.7 | % | 83,425 | 28.4 | % | 33,589 | 19.6 | % | 7,637 | 5.9 | % | 7,195 | 6.3 | % | |||||||||||||||
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337,316 | 100.0 | % | 293,550 | 100.0 | % | 171,867 | 100.0 | % | 129,862 | 100.0 | % | 113,810 | 100.0 | % | ||||||||||||||||
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Loans held for sale |
| | 928 | | | |||||||||||||||||||||||||
Allowance for loan losses |
2,576 | 1,455 | 923 | 708 | 278 | |||||||||||||||||||||||||
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Total |
$ | 334,740 | $ | 292,095 | $ | 170,016 | $ | 129,154 | $ | 113,532 | ||||||||||||||||||||
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(1) | Consists of loans secured by first liens on residential lots and loans secured by first mortgages on commercial real property and land. |
4
Loan Maturity Schedule. The following table sets forth certain information at December 31, 2003 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.
Due during the year ending
December 31, |
Due after 3 through 5 years after December 31, 2004 |
Due after 5 through 10 years after December 31, 2004 |
Due after 10 through 15 years after December 31, 2004 |
Due after 15 years after December 31, 2004 |
Total
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2004
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2005
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2006
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(In thousands) | ||||||||||||||||||||||||
One-to-four family residential |
$ | 1,871 | $ | 1,180 | $ | 1,172 | $ | 4,807 | $ | 18,627 | $ | 45,048 | $ | 118,310 | $ | 191,015 | ||||||||
Multi-family residential |
220 | | | 165 | 636 | 2,232 | 3,001 | 6,254 | ||||||||||||||||
Construction |
2,997 | 547 | | | | | | 3,544 | ||||||||||||||||
Non-residential |
2,429 | 2,648 | 757 | 2,411 | 6,506 | 13,655 | 11,209 | 39,615 | ||||||||||||||||
Other |
10,333 | 9,030 | 9,142 | 31,336 | 14,130 | 14,995 | 7,922 | 96,888 | ||||||||||||||||
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Total |
$ | 17,850 | $ | 13,405 | $ | 11,071 | $ | 38,719 | $ | 39,899 | $ | 75,930 | $ | 140,442 | $ | 337,316 | ||||||||
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The following table sets forth at December 31, 2003, the dollar amount of all loans due after December 31, 2004 which had predetermined interest rates and have floating or adjustable interest rates.
Predetermined
Rate |
Floating or
Adjustable Rate |
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(In thousands) | ||||||
One-to-four family residential |
$ | 19,602 | $ | 169,542 | ||
Multi-family residential |
388 | 5,646 | ||||
Construction |
63 | 484 | ||||
Non-residential |
9,634 | 27,552 | ||||
Other |
54,675 | 31,880 | ||||
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Total |
$ | 84,362 | $ | 235,104 | ||
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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.
5
The following table sets forth certain information with respect to loan origination activity for the periods indicated.
Year Ended December 31,
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2003
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2002
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2001
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(In thousands) | |||||||||
Loan originations: |
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One-to-four family residential |
$ | 105,892 | $ | 58,024 | $ | 47,440 | |||
Multi-family residential |
2,452 | 4,433 | 368 | ||||||
Construction |
4,120 | 2,590 | 2,627 | ||||||
Non-residential |
13,446 | 32,635 | 9,355 | ||||||
Other |
77,805 | 55,701 | 34,037 | ||||||
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Total loans originated |
203,715 | 153,383 | 93,827 | ||||||
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Loans obtained through acquisition: |
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One-to-four family residential |
| 12,612 | | ||||||
Multi-family residential |
| 2,147 | | ||||||
Construction |
| 518 | | ||||||
Non-residential |
| 12,893 | | ||||||
Other |
| 13,443 | | ||||||
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Total loans purchased |
| 41,613 | | ||||||
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Loan reductions: |
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Change in allowance for loan losses |
1,121 | 532 | 215 | ||||||
Loans sold |
26,774 | 15,368 | 11,235 | ||||||
Loan principal payments |
133,175 | 57,017 | 41,515 | ||||||
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Net increase in loan portfolio |
$ | 42,645 | $ | 122,079 | $ | 40,862 | |||
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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 Banks 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 Banks 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. Loan requests exceeding loan officer limits 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 applicants 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 Banks 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.
6
The majority of real estate loan applications are underwritten and closed in accordance with the Banks 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.
In June of 2001, the Bank began offering a fixed rate loan program with maturities of 15, 20, and 30 years. These loans are underwritten and closed in accordance with FHLMC standards. These loans are originated with the intent to sell them to FHLMC with servicing retained. At December 31, 2003, the Banks loan servicing portfolio was $40.6 million dollars.
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 institutions 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 Banks loans to one borrower were limited to $8.0 million at December 31, 2003. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit. At December 31, 2003, the Banks largest lending relationship was $6.0 million. The loans are to a local grain elevator. The loan proceeds are used in the normal course of business for a grain elevator and are secured by nonresidential real estate, inventory and accounts receivable. All loans within this relationship were current and performing in accordance with their terms at December 31, 2003.
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, 2003, one-to-four family residential mortgage loans totaled approximately $ 191.0 million, or 56.6% of the Banks loan portfolio. The Bank originated $ 26.8 million in loans that were sold or may be sold in the secondary market with servicing retained.
7
The Bank primarily originates residential mortgage loans with adjustable rates. As of December 31, 2003, 89.7% of one-to-four family mortgage loans in the Banks 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. Prior to August 1, 1997, rate adjustments on the Banks 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 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. In previous years, the adjustable rate mortgage loans offered by the Bank also provided for initial rates of interest below the rates that would prevail when the index used for re-pricing 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. For the last two years, declining interest rates have allowed the Bank to price the one year adjustable rate mortgage at or in excess of the fully indexed one year Treasury bill.
The retention of adjustable rate loans in the Banks portfolio helps reduce the Banks 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 Banks 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 Banks adjustable rate loans will fully adjust to compensate for increases in the Banks cost of funds. Finally, adjustable rate loans increase the Banks 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 10 and 15 years. Such loans are secured by first mortgages on one-to-four family, owner-occupied residential real property located in the Banks market area. Because of the Banks 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, 2003, 10.3% of the Banks 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 nor the adjustable rate residential mortgage loans held in the Banks portfolio 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 Banks 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 Banks 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, 2003, the Banks loan portfolio included $3.5 million of loans secured by properties under construction, including construction/permanent loans structured to become permanent loans upon the completion of construction and interim construction loans structured to be repaid in full upon completion of construction and receipt of permanent financing.
8
The Bank also makes loans to qualified builders for the construction of one-to-four family residential housing located in established subdivisions in the Banks 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 Banks 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 Banks 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 propertys 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 Banks 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 Banks multi-family residential loan portfolio consists of adjustable rate loans secured by real estate. At December 31, 2003, the Bank had $6.3 million of multi-family residential loans, which amounted to 1.9% of the Banks loan portfolio at such date. The Banks 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 Banks market area. At December 31, 2003, the Bank had approximately $39.6 million of such loans, which comprised 11.7% 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.
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 Banks 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. At December 31, 2003, there were no non-residential mortgage loans delinquent by 90 days or more.
Consumer Lending . The consumer loans currently in the Banks 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 depositors savings account balance. The interest rate is approximately 2.0% above the rate paid on such deposit account serving as collateral, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. At December 31, 2003, loans on deposit accounts totaled $ 3.1 million, or 0.9% of the Banks 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.
Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of
9
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 borrowers 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, 2003, there was $276,000 in consumer loans delinquent 90 days or more.
Commercial Lending. The Bank originates commercial loans on a secured and, to a lesser extent, unsecured basis. At December 31, 2003, the Banks commercial loans amounted to $ 50.7 million, or 15.0% of the Banks loan portfolio. The Banks commercial loans generally are secured by corporate assets. In addition, the Bank generally obtains guarantees from the principals of the borrower with respect to all commercial loans. At December 31, 2003, there was $32,000 in commercial loans delinquent 90 days or more.
Non-performing Loans and Other Problem Assets
The Banks non-performing loans totaled 0.34% of total loans at December 31, 2003. Loans are placed on a non-accrual status when the loan is past due in excess of 90 days or the 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 Banks management performs quality reviews of problem assets to determine the necessity of establishing additional loss reserves. The Banks total non-performing assets to total asset ratio was 0.27% at December 31, 2003.
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 accounting principles generally accepted in the United States of America, a valuation allowance is established if the carrying value of the property exceeds its fair value net of related selling expenses. At December 31, 2003, the Banks other assets owned totaled $272,000. This amount represents managements best estimate on the fair value of these assets.
The following table sets forth information with respect to the Banks 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.
At December 31,
|
||||||||||||||||||||
2003
|
2002
|
2001
|
2000
|
1999
|
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Accruing loans which are contractually past due 90 days or more: |
||||||||||||||||||||
Residential real estate |
$ | | $ | | $ | 330 | $ | 371 | $ | 51 | ||||||||||
Non-residential real estate |
| | 60 | 63 | | |||||||||||||||
Consumer |
| | 12 | | 7 | |||||||||||||||
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||||||
Total |
| | $ | 402 | $ | 434 | $ | 58 | ||||||||||||
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Non-Accrual Loans: |
||||||||||||||||||||
Residential real estate |
836 | 497 | | | | |||||||||||||||
Non residential real estate |
| 90 | | | | |||||||||||||||
Consumer |
276 | 246 | | | | |||||||||||||||
Commercial |
32 | | 149 | | | |||||||||||||||
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Total non-performing Loans |
$ | 1,144 | $ | 833 | $ | 551 | $ | 434 | $ | 58 | ||||||||||
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Percentage of total loans |
0.34 | % | 0.29 | % | 0.32 | % | 0.34 | % | 0.05 | % | ||||||||||
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10
At December 31, 2003, the Bank had $1,144,000 in loans outstanding which were classified as non-accrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured. At December 31, 2003, the Bank had $272,000 in other assets owned. Also, the Bank had impaired loans, as defined by SFAS 114 and 118, totaling $ 1.1 million at December 31, 2003.
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 managements 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 institutions classifications. If a savings institution does not agree with an examiners 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, 2003, the Bank had $2.5 million in assets classified as special mention, $896,000 in assets classified as substandard and $110,000 in assets classified as doubtful.
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 managements policy to maintain an adequate allowance for loan losses based on, among other things, the Banks and the industrys 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 Banks income.
Management will continue to actively monitor the Banks 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 Banks 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 Banks 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 Banks assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the security. At the date of foreclosure or other repossession, the Bank would transfer the property to real estate acquired in settlement of loans initially at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value less estimated selling costs would be charged off against the allowance for loan losses. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of other real estate would be recorded.
11
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 institutions allowance for loan loss estimate compared to the average loss experience of the industry as a whole. Examiners will review an institutions 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 managements 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 Banks allowance for loan losses for the periods indicated.
Year Ended December 31,
|
||||||||||||||||||||
2003
|
2002
|
2001
|
2000
|
1999
|
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at beginning of period |
$ | 1,455 | $ | 923 | $ | 708 | $ | 278 | $ | 257 | ||||||||||
Loans charged off: |
||||||||||||||||||||
Commercial loans |
(178 | ) | (46 | ) | | | | |||||||||||||
Consumer loans and overdrafts |
(401 | ) | (174 | ) | | | | |||||||||||||
Residential real estate |
(77 | ) | (52 | ) | (7 | ) | (1 | ) | | |||||||||||
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Total charge-offs |
(656 | ) | (272 | ) | (7 | ) | (1 | ) | | |||||||||||
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Recoveries |
27 | 9 | | | | |||||||||||||||
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Net loans charged off |
(629 | ) | (263 | ) | (7 | ) | (1 | ) | | |||||||||||
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Provision for loan losses |
1,750 | 795 | 222 | 431 | 21 | |||||||||||||||
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Balance at end of period |
$ | 2,576 | $ | 1,455 | $ | 923 | $ | 708 | $ | 278 | ||||||||||
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Ratio of net charge-offs to average loans outstanding during the period |
0.20 | % | 0.12 | % | 0.01 | % | 0.00 | % | 0.00 | % | ||||||||||
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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.
At December 31,
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||||||||||||||||||||||||
2003
|
2002
|
2001
|
2000
|
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Amount
|
Percent of Loans in Each Category to Total Loans |
Amount
|
Percent of Loans in Each Category to Total Loans |
Amount
|
Percent of Loans in Each Category to Total Loans |
Amount
|
Percent of Loans in Each Category to Total Loans |
|||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
One-to-four family |
$ | 303 | 56.6 | % | $ | 249 | 58.4 | % | $ | 138 | 65.0 | % | $ | 71 | 70.8 | % | ||||||||
Construction |
49 | 1.1 | % | 33 | 0.6 | % | 50 | 3.3 | % | 106 | 4.4 | % | ||||||||||||
Multi-family residential |
127 | 1.9 | % | 51 | 1.6 | % | 60 | 1.4 | % | 106 | 2.2 | % | ||||||||||||
Non-residential |
616 | 11.7 | % | 341 | 11.0 | % | 210 | 10.7 | % | 177 | 16.7 | % | ||||||||||||
Secured by deposits |
| 0.9 | % | | 1.0 | % | | 1.3 | % | | 2.1 | % | ||||||||||||
Other consumer loans |
1,481 | 27.8 | % | 781 | 27.4 | % | 465 | 18.3 | % | 248 | 3.8 | % | ||||||||||||
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Total allowance for loan losses |
$ | 2,576 | 100.0 | % | $ | 1,455 | 100.0 | % | $ | 923 | 100.0 | % | $ | 708 | 100.0 | % | ||||||||
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At December 31, 1999
|
||||||
Amount
|
Percent of Loans in Each Category to Total Loans |
|||||
(In thousands) | ||||||
One-to-four family |
$ | 130 | 75.9 | % | ||
Construction |
5 | 5.0 | % | |||
Multi-family residential |
8 | 1.9 | % | |||
Non-residential |
85 | 10.9 | % | |||
Secured by deposits |
| 2.2 | % | |||
Other consumer loans |
50 | 4.1 | % | |||
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Total allowance for loan losses |
$ | 278 | 100.0 | % | ||
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12
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 U.S. Government 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 Banks 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 Banks 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, 2003, securities with an amortized cost of $ 144.4 million and an approximate market value of $ 143.5 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 Companys or the Banks intent and a sale would only be affected 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 stockholders equity.
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 guarantees the payment of principal and interest to investors. Of the $68.7 million mortgage-backed security portfolio at December 31, 2003, approximately $7.4 million were originated through GNMA, approximately $ 39.5 million were originated through FNMA and approximately $ 21.8 million were originated through FHLMC.
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.
13
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. During the summer of 2003, prepayment speeds on mortgage-backed securities accelerated into unprecedented levels due to declining interest rates and the high rate of mortgage refinancing. These prepayments have sharply reduced the yield of this portion of the portfolio.
The following table sets forth the carrying value of the investment securities at the dates indicated.
At December 31,
|
|||||||||
2003
|
2002
|
2001
|
|||||||
(In thousands) | |||||||||
Securities available for sale: |
|||||||||
FHLB and FHLMC stock |
$ | 2,488 | $ | 2,391 | $ | 2,284 | |||
U. S. government and agency securities |
41,308 | 24,539 | 21,111 | ||||||
Mortgage-backed securities |
66,947 | 58,489 | 72,946 | ||||||
Municipal bonds |
28,523 | 11,803 | 4,162 | ||||||
Corporate bonds |
4,233 | 5,910 | | ||||||
Other |
15 | 15 | 15 | ||||||
Securities held to maturity: |
|||||||||
U.S. government and agency securities |
13,339 | | | ||||||
Mortgage-backed securities |
1,769 | 2,932 | 4,462 | ||||||
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|
|
|
|
||||
Total investment securities |
$ | 158,622 | $ | 106,079 | $ | 104,980 | |||
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|
The following table sets forth information on the scheduled maturities, amortized cost, market values and average yields for U.S. Government agency securities, corporate bonds and municipal securities in the investment portfolio at December 31, 2003. At such date, $44.3 million of the agency securities were callable and/or due on or before January 31, 2005. At December 31, 2003, $14.3 of the callable agency securities are structure notes, where the interest rate paid on the bond increases significantly on a given date, making it more likely that the bond will be called at that date. At December 31, 2003, $14.3 million of municipal securities were callable and/or due between January 2004 and December 2013. All corporate bonds were non callable.
One Year or Less
|
One to Five Years
|
Five to Ten Years
|
After Ten Years
|
Total Investment Portfolio
|
|||||||||||||||||||||||||||||
Carrying
Value |
Average
Yield |
Carrying Value |
Average
Yield |
Carrying
Value |
Average
Yield |
Carrying
Value |
Average
Yield |
Carrying
Value |
Market
Value |
Average
Yield |
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(Dollars in thousands) | |||||||||||||||||||||||||||||||||
U.S. government and agency securities |
$ | | | % | $ | 8,191 | 3.64 | % | $ | 40,102 | 4.81 | % | $ | 6,354 | 5.41 | % | $ | 54,647 | $ | 54,592 | 4.70 | % | |||||||||||
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Corporate bonds |
$ | | | % | $ | 4,233 | 4.24 | % | | | | | $ | 4,233 | $ | 4,233 | 4.24 | % | |||||||||||||||
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Municipal bonds |
$ | 35 | 2.87 | % | $ | 2,893 | 2.64 | % | $ | 12,401 | 3.29 | % | $ | 13,194 | 4.21 | % | $ | 28,523 | $ | 28,523 | 3.64 | % | |||||||||||
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14
Deposit Activity and Other Sources of Funds
General . Deposits are the primary source of the Banks 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 and 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 Banks depositors are Kentucky or Tennessee residents who reside in the Banks market area.
Savings deposits in the Bank at December 31, 2003 were represented by the various types of savings programs described below.
Interest Rate* |
Minimum Term |
Category |
Minimum Amount |
Balance
|
Percentage of Total Deposits |
||||||||
(In thousands) | |||||||||||||
% | None | Non-interest bearing | $ | 100 | $ | 27,348 | 6.6 | % | |||||
0.4 %* | None | Demand/NOW accounts | 1,500 | 61,246 | 14.7 | % | |||||||
0.7 % | None | Passbook accounts | 10 | 9,817 | 2.3 | % | |||||||
1.0 %* | None | Money market deposit accounts | 2,500 | 58,593 | 14.0 | % | |||||||
|
|
|
|
||||||||||
157,004 | 37.6 | % | |||||||||||
|
|
|
|
||||||||||
Certificates of Deposit |
|||||||||||||
0.9 % | 3 months or less | Fixed-term, fixed rate | 500 | 50,483 | 12.1 | % | |||||||
1.4 % | 3 to 12 months | Fixed-term, fixed-rate | 500 | 80,442 | 19.3 | % | |||||||
2.3 % | 12 to 24-months | Fixed-term, fixed-rate | 500 | 42,979 | 10.3 | % | |||||||
2.6 % | 24 to 36-months | Fixed-term, fixed-rate | 500 | 54,796 | 13.1 | % | |||||||
2.9 % | 36 to 48-months | Fixed-term, fixed-rate | 500 | 14,312 | 3.4 | % | |||||||
3.2 % | 48 to 60-months | Fixed-term, fixed rate | 500 | 17,472 | 4.2 | % | |||||||
|
|
|
|
||||||||||
260,484 | 62.4 | % | |||||||||||
|
|
|
|
||||||||||
$ | 417,488 | 100.0 | % | ||||||||||
|
|
|
|
* | Represents weighted average interest rate. |
15
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.
Year Ended December 31,
|
||||||||||||||||||||||||
2003
|
2002
|
2001
|
||||||||||||||||||||||
Interest-bearing demand deposits |
Time deposits |
Interest-bearing demand deposits |
Time deposits |
Interest-bearing demand deposits |
Time deposits |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Average balance |
$ | 117,029 | $ | 260,934 | $ | 63,384 | $ | 181,481 | $ | 44,748 | $ | 135,432 | ||||||||||||
Average Rate |
1.32 | % | 3.56 | % | 2.26 | % | 3.82 | % | 2.57 | % | 5.58 | % |
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.
Balance at December 31, 2003 |
% of Deposits |
Increase (Decrease) from December 31, 2002 |
Balance at December 31, 2002 |
% of Deposits |
Increase (Decrease) from December 31, 2001 |
||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Non-interest bearing |
$ | 27,348 | 6.6 | % | $ | 8,228 | $ | 19,120 | 5.4 | % | $ | 11,904 | |||||||
Demand and NOW Accounts |
61,246 | 14.7 | % | 28,031 | 33,215 | 9.4 | % | 20,796 | |||||||||||
Money market |
58,593 | 14.0 | % | 11,233 | 47,360 | 13.4 | % | 15,187 | |||||||||||
Passbook savings |
9,817 | 2.3 | % | 710 | 9,107 | 2.6 | % | (115 | ) | ||||||||||
Other time deposits |
260,484 | 62.4 | % | 15,631 | 244,853 | 69.2 | % | 105,567 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
417,488 | 100.00 | % | 63,833 | 353,655 | 100.0 | % | 153,339 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001 |
% of Deposits |
Increase (Decrease) from December 31, 2000 |
Balance at December 31, 2000 |
% of Deposits |
||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-interest bearing |
$ | 7,216 | 3.6 | % | $ | 3,388 | $ | 3,828 | 2.3 | % | ||||||
Demand and NOW accounts |
12,419 | 6.2 | % | 2,892 | 9,527 | 5.8 | % | |||||||||
Money market |
32,173 | 16.0 | % | 7,458 | 24,715 | 14.9 | % | |||||||||
Passbook savings |
9,222 | 4.6 | % | (434 | ) | 9,656 | 5.8 | % | ||||||||
Other time deposits |
139,286 | 69.6 | % | 21,408 | 117,878 | 71.2 | % | |||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
$ | 200,316 | 100.0 | % | $ | 34,712 | $ | 165,604 | 100.0 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the time deposits in the Bank classified by rates at the dates indicated.
At December 31,
|
|||||||||
2003
|
2002
|
2001
|
|||||||
(In thousands) | |||||||||
1.00 - 2.00% |
57,772 | 7,406 | 95 | ||||||
2.01 - 4.00% |
143,632 | 130,718 | 51,804 | ||||||
4.01 - 6.00% |
46,309 | 77,765 | 57,821 | ||||||
6.01 - 8.00% |
12,771 | 28,964 | 29,566 | ||||||
|
|
|
|
|
|
||||
Total |
$ | 260,484 | $ | 244,853 | $ | 139,286 | |||
|
|
|
|
|
|
16
The following table sets forth the amount and maturities of time deposits at December 31, 2003.
Amount Due
|
|||||||||||||||
Less Than One Year |
1-2 Years
|
2-3 Years
|
After 3 Years
|
Total
|
|||||||||||
(In thousands) | |||||||||||||||
0.00 - 2.00% |
$ | 45,474 | $ | 10,993 | $ | 1,241 | $ | 64 | $ | 57,772 | |||||
2.01 - 4.00% |
57,979 | 24,485 | 45,572 | 15,596 | 143,632 | ||||||||||
4.01 - 6.00% |
19,467 | 2,945 | 7,773 | 16,124 | 46,309 | ||||||||||
6.01 - 8.00% |
8,005 | 4,556 | 210 | | 12,771 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total |
$ | 130,925 | $ | 42,979 | $ | 54,796 | $ | 31,784 | $ | 260,484 | |||||
|
|
|
|
|
|
|
|
|
|
The following table indicates the amount of the Banks certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2003.
Maturity Period |
Certificates of Deposit
|
||
(In millions) | |||
Three months or less |
$ | 10.7 | |
Over three through six months |
11.5 | ||
Over six through 12 months |
19.3 | ||
Over 12 months |
40.6 | ||
|
|
||
Total |
$ | 82.1 | |
|
|
Certificates of deposit at December 31, 2003 included approximately $82.1 million of deposits with balances of $100,000 or more, compared to $61.7 million and $25.3 million at December 31, 2002 and 2001, 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 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 7 of Notes to Financial Statements.
The following table sets forth the deposit activities of the Bank for the periods indicated.
Year Ended December 31,
|
||||||||||||
2003
|
2002
|
2001
|
||||||||||
(In thousands) | ||||||||||||
Deposits |
$ | 415,711 | $ | 348,196 | $ | 293,038 | ||||||
Obtain through acquisition |
| 96,532 | | |||||||||
Withdrawals |
(359,372 | ) | (300,462 | ) | (267,043 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net increase before interest credited |
56,339 | 144,266 | 25,995 | |||||||||
Interest credited |
7,494 | 9,073 | 8,717 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net increase in deposits |
$ | 63,833 | $ | 153,339 | $ | 34,712 | ||||||
|
|
|
|
|
|
|
|
|
In the unlikely event the Bank is liquidated after the Conversion, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the sole stockholder of the Bank, which is the Company.
Borrowings . Savings deposits historically have been the primary source of funds for the Banks lending, investments and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions.
17
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 8 of Notes to Financial Statements. Advances from the FHLB of Cincinnati were $54.4 million at December 31, 2003 and are secured by a blanket security agreement in which the Bank has pledged its 1-4 family first mortgage loans held in the Banks loan portfolio.
On September 25, 2003, the Company issued $10,310,000 in floating rate junior subordinated debentures with a thirty year maturity and callable at the Companys discretion quarterly after September 25, 2008. The subordinated debentures are priced at a variable rate equal to the three month libor (London Inter Bank Offering Rate) plus 3.10%. The current three-month libor rate is 1.14%. The securities are immediately callable in the event of a change in tax or accounting law that has a significant negative impact to issuing these securities.
The Company invested $8.0 million in the Bank immediately after this transaction. For regulator purposes, subordinated debentures may be treated as Tier I capital. Federal regulations limit the use of subordinated debentures to 25% of total Tier I capital. Discussions among regulatory agencies are underway that may limit the current and future use of subordinated debentures as Tier I capital. The Companys decision to issue subordinated debentures was in part influenced by potential regulatory actions in the future. The Company anticipates above average growth to continue and anticipates a time in the future when capital ratios are lower and additional capital may be need.
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 Banks lone subsidiary is Fall and Fall Insurance Agency (Fall and Fall) of Fulton, Kentucky. Fall & Fall was acquired in the Fulton acquisition on September 5, 2002. The Banks investment in the agency is approximately $380,000. In December of 2003, Fall & Fall opened an office in Murray, Kentucky using the title of Heritage Solutions. Heritage Solutions sells fixed annuities and property and casualty insurance.
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 Banks 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.
At June 30, 2003, the Banks most significant competition across its entire market area was Branch Bank & Trust of North Carolina with a 22.3% deposit market share, US Bank of Minnesota with a 7.21% deposit market share and Union Planters of Tennessee with a 9.4% deposit market share. In addition, each market contains other community banks that provide competitive products and services within individual markets.
The Bank attracts its deposits through its nine 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 Banks 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 Banks competitors have been acquired by
18
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, 2003, the Company and the Bank had 103 full-time and 13 part-time employees, none of whom were represented by a collective bargaining agreement. Management considers the Banks relationships with its employees to be good.
SarbanesOxley Act of 2002
In July 2002, the President of the United States signed the Sarbanes-Oxley Act of 2002 into law. The Sarbanes-Oxley Act provided for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. The Sarbanes-Oxley Act required the SEC to adopt new rules to implement the Acts requirements. These requirements include new financial reporting requirements and rules concerning the chief executive and chief financial officers to certify certain financial and other information included in the companys quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the companys disclosure controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. The certifications by the Companys Chief Executive Officer and Chief Financial Officer of the financial statements and other information included in this Annual Report on Form 10-K have been filed as exhibits to this Form 10-K. See Item 9A (Controls and Procedures) hereof for the Companys evaluation of disclosure controls and procedures.
USA Patriot Act
In 2001, the President of the United States signed the USA Patriot Act into law. The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign shell banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted.
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 Banks required reserves, investments, loans, mergers and consolidations, payment of dividends and other aspects of the Banks operations. The deposits of the Bank are insured by the BIF 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 Banks depositors rather than for holders of the Companys stock or for the Company as the holder of the stock of the Bank.
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.
19
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.
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 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 Note 15 of Notes to Consolidated Financial Statements.
Prompt Corrective Regulatory Action . Under the OTS prompt corrective action regulations, the federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet certain minimum capital requirements, including a leverage limit and a risk-based capital requirement. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. The federal banking regulators, including the OTS, have issued regulations that classify insured depository institutions by capital levels and provide that the applicable agency will take various prompt corrective actions to resolve the problems of any institution that fails to satisfy the capital standards.
Under the joint prompt corrective action regulations, a well-capitalized institution is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets (leverage ratio) of 5%. An adequately capitalized institution is one that does not qualify as well capitalized but meets or exceeds the following capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest composite examination rating. An institution not meeting these criteria is treated as undercapitalized, significantly undercapitalized, or critically undercapitalized depending on the extent to which its capital levels are below these standards. An institution that fails within any of the three undercapitalized categories will be subject to certain severe regulatory sanctions required by OTS regulations. As of December 31, 2003, the Bank was well-capitalized as defined by the regulations.
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. 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, 2003, the Bank qualified as a QTL.
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. 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.
20
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.
Future 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.
Transactions with Affiliates and Insiders . Generally, transactions between a savings bank or its subsidiaries and its affiliates are required to be on terms as favorable to the savings bank as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the savings banks capital. Affiliates of the Bank include the Company and any company that is under common control with the Bank. In addition, a savings bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings banks as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must generally be made on terms that are substantially the same as for loans to unaffiliated individuals.
Reserve Requirements . Pursuant to regulations of the Federal Reserve Board (the FRB), all FDIC-insured depository institutions must maintain average daily reserves at specified levels against their transaction accounts. As of December 31, 2003, the Bank met these reserve requirements.
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, 2003 of $ 2.5 million.
Regulation of the Company
The Company is a unitary savings and loan holding company 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 institutions home state or in a supervisory acquisition of a failing institution.
As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company were to acquire control of another savings institution as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings institution) would become subject to such restrictions unless such other institutions each qualify as a QTL and were acquired in a supervisory acquisition.
21
If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company would be required to register as, and would become subject to, the restrictions applicable to the bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company.
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.
At December 31, 2003, the Company estimates that is has approximately 2,700 shareholders, with 1,217 reported in the name of the shareholder and the remainder recorded in street name.
22
ITEM 2. PROPERTIES
The following table sets forth information regarding the Banks offices at December 31, 2003.
Year Opened
|
Owned or Leased
|
Book Value (1)
|
Approximate
Square Footage of
|
||||||
(In thousands) | |||||||||
Main Office: |
|||||||||
2700 Fort Campbell Boulevard Hopkinsville, Kentucky |
1995 | Owned | $ | 1,790 | 17,625 | ||||
Branch Offices: |
|||||||||
Downtown Branch Office
|
1997 | Owned | $ | 179 | 756 | ||||
Murray Branch Office
|
2003 | Owned | $ | 1,113 | 3,650 | ||||
Cadiz Branch Office
|
1998 | Owned | $ | 365 | 2,200 | ||||
Elkton Branch Office
|
1976 | Owned | $ | 98 | 3,400 | ||||
Benton Branch Office
|
2003 | Owned | $ | 817 | 4,800 | ||||
Calvert City Office
|
2003 | Owned | $ | 472 | 1,100 | ||||
Carr Plaza Office
|
2002 | Owned | $ | 85 | 800 | ||||
Lake Street Office
|
2002 | Owned | $ | 816 | 15,000 | ||||
Fall & Fall Insurance Office
|
2002 | Owned | $ | 271 | 3,200 |
(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, 2003, 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.
23
EXECUTIVE OFFICERS OF THE REGISTRANT
John E. Peck. Mr. Peck, 39, has served as President and Chief Executive Officer of the Company and the Bank since July 2000. Prior to that, he was President and Chief Executive Officer of United Commonwealth Bank and President of Firstar Bank-Calloway County.
Boyd M. Clark. Mr. Clark, 58, 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. From May to July 2000, Mr. Clark served as Acting President of both the Company and the Bank.
Michael L. Woolfolk. Mr. Woolfolk, 50, has served as Executive Vice President and Chief Operations Officer of the Bank since August 2000. Prior to that, he was President of Firststar BankMarshall County, President and Chief Executive Officer of Bank of Marshall County and President of Mercantile Bank.
Billy C. Duvall . Mr. Duvall, 38, has served as Vice President, Chief Financial Officer and Treasurer of the Company and the Bank since June 1, 2001. Prior to that, he was an Auditor with Rayburn, Betts & Bates, P.C., independent public accountants and a Principal Examiner with the National Credit Union Administration.
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 REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information set forth under the caption Market and Dividend Information in the Companys Annual Report to Stockholders for the year ended December 31, 2003 (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 Companys Annual Report to Stockholders for the year ended December 31, 2003 (Exhibit No. 13) is incorporated herein by reference.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual Report to Stockholders for the year ended December 31, 2003 (Exhibit No. 13) is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations Interest Rate Sensitivity Analysis in the Companys Annual Report to Stockholders for the year ended December 31, 2003 (Exhibit No. 13) is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Companys Financial Statements together with the related notes and the report of Rayburn, Betts & Bates, P.C., independent public accountants, all as set forth in the Companys Annual Report to Stockholders for the year ended December 31, 2003 (Exhibit No. 13) are incorporated herein by reference.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the Exchange Act) that are designed to insure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SECs rules and forms and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decision making regarding required disclosure. The Company, under the supervision and participation of its management, including the Companys Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report pursuant to the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in ensuring that all material information required to be disclosed is this annual report has been accumulated and communicated to them in a manner appropriate to allow timely decisions regarding required disclosures. During the quarter ended December 31, 2003, there have been no changes in the Companys internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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 will file a definitive proxy statement (the Proxy Statement) not later than 120 days after December 31, 2003, 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
Information regarding Section 16(a) beneficial ownership reporting compliance is omitted from this Report as the Company will the Proxy Statement not later than 120 days after December 31, 2003, and the information included therein under Section 16(a) Beneficial Ownership Reporting Compliance is incorporated herein by reference.
Information regarding audit committee financial expert compliance is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2003, and the information contained therein under Committees of the Board of Directors is incorporated herein by reference.
The Company has adopted a code of ethics that applies to all directors and employees, including without exception, the principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. The code of
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2003, and the information included therein under Proposal I Election of Directors is incorporated herein by reference.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
Information required by this Item is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2003, and the information included therein under Voting Securities and Principal Holders Thereof and Proposal I Election of
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is omitted from this Report as the Company will file the Proxy Statement, not later than 120 days after December 31, 2003, and the information included therein under Proposal I Election of Directors is
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is omitted from this report as the Company will file the Proxy Statement not later than 120 days after December 31, 2003, and the information included therein under Independent Auditors is incorporated herein by reference.
ITEM 15. 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, 2003, 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.
(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.
26
(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 Registrants 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 Registrants 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 Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
Exhibit No. 10.1. Employment Agreement by and between Hopkinsville Federal Savings Bank and Boyd M. Clark . Incorporated herein by reference to Exhibit No. 10.1 to Registrants Registration Statement on Form S-1 (File No. 333-30215).
Exhibit No. 10.2. Employment Agreement by and between HopFed Bancorp, Inc. and Boyd M. Clark . Incorporated herein by reference to Exhibit No. 10.2 to Registrants Registration Statement on Form S-1 (File No. 333-30215).
Exhibit No. 10.3. Employment Agreement Amendment by and between Hopkinsville Federal Savings Bank and Boyd M. Clark . Incorporated herein by reference to Exhibit No. 10.3 to Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
Exhibit No. 10.4. Employment Agreement Amendment by and between HopFed Bancorp, Inc. and Boyd M. Clark . Incorporated herein by reference to Exhibit 10.4 to Registrants 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. 10.7. Employment Agreement by and between Hopkinsville Federal Savings Bank and John E. Peck . Incorporated herein by reference to Exhibit No. 10.2 to Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
Exhibit No. 10.8. Employment Agreement by and between HopFed Bancorp, Inc. and John E. Peck . Incorporated herein by reference to Exhibit No. 10.1 to Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
Exhibit 10.9. HopFed Bancorp, Inc. 2000 Stock Option Plan . Incorporated herein by reference to Exhibit 10.10 to Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
Exhibit 10.10. Employment Agreement by and between HopFed Bancorp, Inc. and Billy C. Duvall . Incorporated herein by reference to Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.
Exhibit 10.11. Employment Agreement by and between Hopkinsville Federal Bank and Billy C. Duvall . Incorporated herein by reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.
Exhibit 10.12. Employment Agreement by and between HopFed Bancorp, Inc. and Michael L. Woolfolk. Incorporated herein by reference to Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002.
Exhibit 10.13. Employment Agreement by and between Heritage Bank and Michael L. Woolfolk .. Incorporated herein by reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002.
Exhibit 10.14. Fulton Division Acquisition Agreement dated as of March 1, 2002, by and between Old National Bank and Hopkinsville Federal Bank. Incorporated herein by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K dated March 1, 2002.
27
Exhibit No. 13. Annual Report to Stockholders Except for those portions of the Annual Report to Stockholders for the year ended December 31, 2003, 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. 14. Code of Ethics. The Company has adopted a code of ethics that applies to all directors and employees including without exception, the principal executive officer, principal financial officer, principal accounting officer and /or controller, or persons performing similar functions.
Exhibit No. 21. Subsidiaries of the Registrant .
Exhibit No. 23.1. Consent of Rayburn, Betts & Bates, P.C.
Exhibit No. 31.1 Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a 14(a) or 15d 14(a).
Exhibit No. 31.2 Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a 14(a) or 15d 14(a).
Exhibit No 32.1. Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
Exhibit No 32.2. Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
(b) | Reports on Form 8-K. Current Report on Form 8-K, dated October 23, 2003, reporting under Item 12 (Results of Operations and Financial Condition) results of operations for the three and nine months ended September 30, 2003. |
(c) | Exhibits to this Form 10-K are attached or incorporated by reference as stated above. |
(d) | None. |
28
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: March 30, 2004 |
By: |
/s/ John E. Peck |
||
John E. Peck |
||||
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/ John E. Peck |
March 30, 2004 |
|
John E. Peck Director, President and Chief Executive Officer (Principal Executive Officer) |
||
/s/ Billy C. Duvall |
March 30, 2004 |
|
Billy C. Duvall Director, Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
||
/s/ WD Kelley |
March 30, 2004 |
|
WD Kelley Chairman of the Board |
||
/s/ Boyd M. Clark |
March 30, 2004 |
|
Boyd M. Clark Director, Vice President and Secretary |
||
/s/ Walton G. Ezell |
March 30, 2004 |
|
Walton G. Ezell Director |
||
/s/ Gilbert E. Lee |
March 30, 2004 |
|
Gilbert E. Lee Director |
29
/s/ Harry J. Dempsey |
March 30, 2004 |
|
Harry J. Dempsey Director |
||
/s/ Kerry Harvey |
March 30, 2004 |
|
Kerry Harvey Director |
||
/s/ Thomas I. Miller |
March 30, 2004 |
|
Director |
30
Exhibit 13
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 Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report.
Financial Condition and Other Data
At December 31,
|
|||||||||||||||
2003
|
2002
|
2001
|
2000
|
1999
|
|||||||||||
(Dollars in thousands) | |||||||||||||||
Total amount of: |
|||||||||||||||
Assets |
$ | 531,465 | $ | 427,502 | $ | 285,639 | $ | 229,958 | $ | 207,906 | |||||
Loans receivable, net |
334,740 | 292,095 | 170,016 | 129,154 | 113,532 | ||||||||||
Loans held for sale |
| | 928 | | | ||||||||||
Cash and due from banks |
12,958 | 9,288 | 3,941 | 2,227 | 4,537 | ||||||||||
Interest-bearing deposits in Federal Home Loan Bank (FHLB) |
35 | 905 | 39 | 50 | 251 | ||||||||||
Federal funds sold |
2,185 | 3,840 | 690 | 1,530 | 4,100 | ||||||||||
Securities available for sale |
143,514 | 103,147 | 100,519 | 84,269 | 71,423 | ||||||||||
Securities held to maturity: |
|||||||||||||||
U.S. Government agency securities |
13,339 | | | | | ||||||||||
Mortgage-backed Securities |
1,769 | 2,932 | 4,462 | 7,796 | 9,958 | ||||||||||
Deposits |
417,488 | 353,655 | 200,316 | 165,604 | 160,905 | ||||||||||
FHLB advances |
54,353 | 23,623 | 38,747 | 17,040 | | ||||||||||
Subordinated debentures |
10,310 | | | | | ||||||||||
Total stockholders equity |
47,238 | 46,878 | 43,589 | 45,362 | 44,344 | ||||||||||
Number of: |
|||||||||||||||
Real estate loans outstanding |
4,048 | 3,216 | 2,248 | 2,075 | 2,143 | ||||||||||
Deposit accounts |
43,069 | 36,868 | 18,178 | 18,778 | 18,667 | ||||||||||
Offices open |
9 | 8 | 6 | 5 | 5 | ||||||||||
Operating Data | |||||||||||||||
Year Ended December 31,
|
|||||||||||||||
2003
|
2002
|
2001
|
2000
|
1999
|
|||||||||||
(Dollars in thousands) | |||||||||||||||
Interest and dividend income |
$ | 24,743 | $ | 20,042 | $ | 17,562 | $ | 16,343 | $ | 14,205 | |||||
Interest expense |
12,379 | 9,420 | 9,752 | 9,112 | 7,078 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income before provision for loan losses |
12,364 | 10,622 | 7,810 | 7,231 | 7,127 | ||||||||||
Provision for loan losses |
1,750 | 795 | 222 | 431 | 21 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income |
10,614 | 9,827 | 7,588 | 6,800 | 7,106 | ||||||||||
Non-interest income |
3,499 | 2,312 | 717 | 509 | 7,028 | ||||||||||
Non-interest expense |
9,044 | 5,199 | 5,493 | 3,270 | 8,893 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Income before income taxes |
5,069 | 6,940 | 2,812 | 4,039 | 5,241 | ||||||||||
Provision for income taxes |
1,574 | 2,346 | 973 | 1,373 | 2,766 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
$ | 3,495 | $ | 4,594 | $ | 1,839 | $ | 2,666 | $ | 2,475 | |||||
|
|
|
|
|
|
|
|
|
|
Selected Quarterly Information (Unaudited)
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||
( Dollars in thousands) | ||||||||||||
Year Ended December 31, 2003: |
||||||||||||
Interest income |
$ | 5,905 | $ | 6,192 | $ | 6,237 | $ | 6,409 | ||||
Net interest income after provision for losses on loans |
2,472 | 2,646 | 2,695 | 2,801 | ||||||||
Noninterest income |
1,015 | 905 | 883 | 696 | ||||||||
Noninterest expense |
2,023 | 2,812 | 2,032 | 2,177 | ||||||||
Net income |
996 | 505 | 1,046 | 948 | ||||||||
Year Ended December 31, 2002: |
||||||||||||
Interest income |
$ | 4,587 | $ | 4,679 | $ | 4,950 | $ | 5,826 | ||||
Net interest income after provision for losses on loans |
2,448 | 2,588 | 2,368 | 2,423 | ||||||||
Noninterest income |
436 | 402 | 677 | 797 | ||||||||
Noninterest expense |
1,136 | 1,141 | 1,144 | 1,778 | ||||||||
Net income |
1,133 | 1,225 | 1,269 | 967 |
2
Key Operating Ratios
At or for the Year Ended December 31, |
|||||||||
2003
|
2002
|
2001
|
|||||||
Performance Ratios |
|||||||||
Return on average assets (net income divided by average total assets) |
0.72 | % | 1.37 | % | 0.72 | % | |||
Return on average equity (net income divided by average total equity) |
7.40 | % | 9.99 | % | 4.26 | % | |||
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost) |
2.41 | % | 2.81 | % | 2.29 | % | |||
Ratio of average interest-earning assets to average interest-bearing liabilities |
110.48 | % | 116.52 | % | 121.63 | % | |||
Ratio of non-interest expense to average total assets |
1.86 | % | 1.55 | % | 2.15 | % | |||
Ratio of net interest income after provision for loan losses to non-interest expense |
117.36 | % | 189.02 | % | 138.14 | % | |||
Efficiency ratio (noninterest expense divided by sum of net interest income plus noninterest income) |
57.01 | % | 40.20 | % | 66.14 | % | |||
Asset Quality Ratios |
|||||||||
Nonperforming assets to total assets at end of period |
0.27 | % | 0.19 | % | 0.19 | % | |||
Nonperforming loans to total loans at end of period |
0.34 | % | 0.29 | % | 0.32 | % | |||
Allowance for loan losses to total loans at end of period |
0.76 | % | 0.50 | % | 0.54 | % | |||
Allowance for loan losses to nonperforming loans at end of period |
225.17 | % | 174.67 | % | 167.21 | % | |||
Provision for loan losses to total loans receivable, net |
0.52 | % | 0.27 | % | 0.13 | % | |||
Net charge-offs to average loans outstanding |
0.20 | % | 0.12 | % | 0.01 | % | |||
Capital Ratios |
|||||||||
Total equity to total assets at end of period |
8.89 | % | 10.97 | % | 15.26 | % | |||
Average total equity to average assets |
9.72 | % | 13.68 | % | 16.85 | % |
Regulatory Capital
December 31, 2003
|
||||||
(Dollars in thousands)
|
||||||
Bank
|
Company
|
|||||
Tangible capital |
$ | 49,971 | $ | 52,258 | ||
Less: Tangible capital requirement |
7,852 | 7,893 | ||||
|
|
|
|
|||
Excess |
42,119 | 44,365 | ||||
|
|
|
|
|||
Core capital |
$ | 49,971 | $ | 52,258 | ||
Less: Core capital requirement |
20,939 | 21,047 | ||||
|
|
|
|
|||
Excess |
29,032 | 31,211 | ||||
|
|
|
|
|||
Total risk-based capital |
$ | 52,547 | $ | 54,834 | ||
Less: Risk-based capital requirement |
25,489 | 25,664 | ||||
|
|
|
|
|||
Excess |
27,058 | 29,170 | ||||
|
|
|
|
3
MANAGEMENTS 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 Banks loan portfolio consists primarily of loans secured by residential real estate located in its market area.
For the year ended December 31, 2003, the Company recorded net income of $3.5 million, a return on average assets of 0.72% and a return on average equity of 7.40%. For the year ended December 31, 2002, the Company recorded net income of $4.6 million, a return on average assets of 1.37% and a return on average equity of 9.99%. For the year ended December 31, 2001 the Company recorded net income of $1.8 million, a return on average assets of 0.72% and a return on average equity of 4.26%.
The Companys 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 Companys 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 Companys 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 Companys market area.
Aggregate Contractual Obligations
Maturity by Period
|
|||||||||||
December 31, 2003 (In thousands) |
Less than 1 year |
Greater than 1 year to 3 years |
Greater than 3 years to 5 years |
Greater than 5 years |
Total
|
||||||
Deposits |
$ | 287,929 | 97,775 | 31,784 | | 417,488 | |||||
FHLB borrowings |
12,350 | 14,184 | 2,338 | 25,481 | 54,353 | ||||||
Subordinated debentures |
| | | 10,310 | 10,310 | ||||||
Lease commitments |
15 | 30 | 14 | | 59 | ||||||
Purchase obligations |
660 | 1,440 | 1,680 | 900 | 4,680 | ||||||
|
|
|
|
|
|
||||||
Total |
$ | 300,954 | 113,429 | 35,816 | 36,691 | 486,890 | |||||
|
|
|
|
|
|
Deposits represent non interest bearing, money market, savings, NOW, certificates of deposit and all other deposits held by the Company. Amounts that have an indeterminate maturity period are included in the less than one-year category above.
4
FHLB borrowings represent the amounts that are due to FHLB of Cincinnati. All amounts have fixed maturity dates with the exception of $18 million in convertible securities that may be called after the three month LIBOR exceeds 4.60%. The convertible advance has a prepayment penalty of $1.8 million dollars at December 31, 2003. Management does not anticipate calling these advances at this time.
Subordinated debentures represent the amount borrowed in a private pool trust preferred issuance on September 25, 2003. The debentures are priced at the three month LIBOR plus 3.10%, currently 4.24%. The debentures reprice and pay interest quarterly and have a thirty year final maturity. The debentures may be called at the issuers discretion on a quarterly basis after five years.
Lease commitments represent the total minimum lease payments under noncancelable operating leases.
Purchase obligations represent the total anticipated cost for noncancelable
operating contracts. The most significant operating contract is for the Companys data processing services, which reprices monthly based on the number of accounts and other operational factors. Estimates have been made for these cost to include
Off Balance Sheet Arrangements
Maturity by Period
|
|||||||||||
December 31, 2003 (In thousands) |
Less than 1 year |
Greater than 1 year to 3 years |
Greater than 3 years to 5 years |
Greater than 5 years |
Total
|
||||||
Standby letters of credit |
$ | 837 | | | | 837 | |||||
Loans in process |
8,486 | | | | 8,486 | ||||||
Unused lines of credit |
3,427 | 198 | 170 | 6,835 | 10,630 | ||||||
|
|
|
|
|
|
||||||
Total |
$ | 12,750 | 198 | 170 | 6,835 | 19,953 | |||||
|
|
|
|
|
|
Standby letters of credit represent commitments by the Company to repay a third party beneficiary when a customer fails to repay a loan or debt instrument. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with stand by letters of credit because funding for these obligations could be required immediately.
Loans in process represents the undisbursed amount of real estate construction loans in progress. All draw periods are less than one year.
Unused lines of credit represent commercial and residential equity lines of credit with maturities ranging from one to fifteen years.
Quantitative and Qualitative Disclosure about Market Risk
Quantitative Aspects of Market Risk. The principal market risk affecting the Company is risk associated with interest rate volatility (interest rate risk). The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. The Company is not subject to foreign currency exchange rate risk or commodity price risk. Substantially all of the Companys interest rate risk is derived from the Banks lending and deposit taking activities. This risk could result in reduced net income, loss in fair values of assets and/or increases in fair values of liabilities due to upward changes in interest rates.
5
Qualitative Aspects of Market Risk The Companys principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between assets and liabilities maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Companys interest-earning assets by retaining for its portfolio loans with interest rates subject to periodic adjustment to market conditions. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of its interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Bank promotes demand accounts and certificates of deposit with primarily terms of up to five years.
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 Companys 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, 2003, approximately $171.4 million of the $191.0 million of one-to-four family residential loans originated by the Company (comprising 89.7% of such loans) had adjustable rates.
The U.S. government agency securities generally are purchased for a term of fifteen years or less, and are fixed-term, fixed rate securities. Securities may or may not have call options. A security with call options improves the yield on the security but also has little or no positive price convexity. Non-callable securities or securities with one time calls offer less yield but more positive price convexity and an improved predictability of cash flow. Generally, securities with the greater call options (continuous and quarterly) are purchased only during times of extremely low interest rates. The reasons for purchasing these securities generally focus on the fact that a non callable or one time call is of little value if rates are exceptionally low. Due to their lack of positive price convexity, these securities are most likely classified as held to maturity.
At December 31, 2003, no securities were due within one year, approximately $8.2 million were due in one to five years, approximately $40.0 were due in five to ten years and approximately $6.4 million were due after ten years. However, at December 31, 2003, $44.3 million of these securities had call provisions which authorize the issuing agency to prepay the securities at face value at certain pre-established dates. If, prior to their maturity dates, market interest rates decline below the rates paid on the securities, the issuing agency may elect to exercise its right to prepay the securities. At December 31, 2003, all of these securities are callable and/or due prior to January 31, 2005.
The municipal bond portfolio largely consists of local school district bonds with the guarantee of the state of Kentucky or out of state bonds insured by private companies. At December 31, 2003, the Company has $28.5 million in municipal bonds. These bonds were purchased to provide long-term income stability and higher tax equivalent yields to a small portion of the investment portfolio. At December 31, 2003, approximately $14.3 million of the Companys municipal bond portfolio is callable with call dates ranging from January 2006 to December 2013. The call dates are staggered to eliminate the excessive cash flows within any one-year period. At December 31, 2003, $35,000 was due in less than one year, $2.8 were due within one to five years, $12.5 million were due in five to ten years and approximately $13.2 million were due after ten years.
At December 31, 2003, the Company held $4.2 million in corporate bonds. The Company conducts a financial analysis similar to that of a loan customer for each corporate bond purchased. All corporate bonds purchased by the Bank bonds are investment grade and mature by January 31, 2007 while providing yields that are attractive as compared to U.S. Government and agency bonds of similar maturities.
6
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, mortgage-backed securities provide a monthly stream of both interest and principal, thereby providing the Company with a cash flow to reinvest at current market rates and limit the Companys interest rate risk. For more information regarding investment securities, see Note 3 of Notes to Consolidated Financial Statements.
Interest Rate Sensitivity Analysis
The Companys profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Companys earnings to the extent that the interest rates on interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent or on the same basis. As part of its effort to manage interest rate risk, the Bank monitors its net portfolio value (NPV), a methodology adopted by the OTS to assist the Bank in assessing interest rate risk.
Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered.
The following table presents the Banks NPV at December 31, 2003, as calculated by the OTS, based on information provided to the OTS by the Bank.
Change In Rates |
Net Portfolio Value
|
NPV as % of PV of Assets |
||||||||||||
$ Amount
|
$ Change
|
% Change
|
NPV Ratio
|
Change
|
||||||||||
(Dollars in thousands) | ||||||||||||||
+300 bp |
$ | 49,122 | (18,042 | ) | (27 | )% | 9.56 | % | (272) bp | |||||
+200 bp |
56,244 | (10,920 | ) | (16 | )% | 10.70 | % | (158) bp | ||||||
+100 bp |
62,645 | (4,520 | ) | (7 | )% | 11.67 | % | (62) bp | ||||||
0 bp |
67,164 | 12.28 | % | |||||||||||
-100 bp |
68,549 | 1,385 | 2 | % | 12.38 | % | 9 bp |
Due to the low level of interest rates at December 31, 2003, the OTS did not measure outputs associated with an interest rate decline of less than 100 basis points.
Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets |
12.28 | % | |
Exposure Measure: Post-Shock NPV Ratio |
10.70 | % | |
Sensitivity Measure: Change in NPV Ratio |
158 bp |
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 institutions 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
7
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, 2003, the Company had a negative one-year or less interest rate sensitivity gap of 15.92% of total interest-earning assets. Generally, during a period of rising interest rates, a negative gap position would be expected to adversely affect net interest income while a positive gap position would be expected to result in an increase in net interest income. Conversely during a period of falling interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003, which are expected to mature or reprice in each of the time periods shown.
One Year
or Less |
Over One
Through Five Years |
Over Five Through Ten Years |
Over Ten Through Fifteen Years |
Over Fifteen Years |
Total
|
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||
One-to-four family |
$ | 116,551 | $ | 52,165 | $ | 6,351 | $ | 7,872 | $ | 7,773 | $ | 190,712 | ||||||||||||
Multi-family residential |
2,013 | 1,038 | 1,408 | 274 | 1,394 | 6,127 | ||||||||||||||||||
Construction |
2,997 | 498 | | | | 3,495 | ||||||||||||||||||
Non-residential |
16,463 | 11,295 | 4,064 | 4,811 | 2,366 | 38,999 | ||||||||||||||||||
Secured by deposits |
2,317 | 745 | | | | 3,062 | ||||||||||||||||||
Other loans |
32,452 | 55,619 | 2,377 | 1,226 | 671 | 92,345 | ||||||||||||||||||
Time deposits and interest- bearing deposits in FHLB |
35 | | | | | 35 | ||||||||||||||||||
Federal funds sold |
2,185 | | | | | 2,185 | ||||||||||||||||||
Securities |
7,789 | 34,307 | 39,106 | 6,247 | 2,457 | 89,906 | ||||||||||||||||||
Mortgage-backed securities |
21,531 | 23,350 | 16,570 | 6,124 | 1,141 | 68,716 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
204,333 | 179,017 | 69,876 | 26,554 | 15,802 | 495,582 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
260,581 | 129,559 | | | | 390,140 | ||||||||||||||||||
Borrowed funds |
22,660 | 16,522 | 7,481 | 18,000 | | 64,663 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
283,241 | 146,081 | 7,481 | 18,000 | | 454,803 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest sensitivity gap |
$ | (78,908 | ) | $ | 32,936 | $ | 62,395 | $ | 8,554 | $ | 15,802 | $ | 40,779 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cumulative interest sensitivity Gap |
$ | (78,908 | ) | $ | (45,972 | ) | $ | 16,423 | $ | 24,977 | $ | 40,779 | $ | 40,779 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Ratio of interest-earning assets to Interest-bearing liabilities |
72.14 | % | 122.55 | % | 934.05 | % | 147.52 | % | N/A | 108.97 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Ratio of cumulative gap to total interest-earning assets |
(15.92 | )% | (9.28 | )% | 3.31 | % | 5.04 | % | 8.23 | % | 8.23 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 re-pricing date. Further, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and other deposits are withdrawn or repriced within one year. Mortgage-backed securities are classified based on their lifetime prepayment speeds. Current prepayments speeds are much faster than lifetime averages and shorten the maturity and yields of mortgage-backed securities. Management of the Company does not believe that these assumptions will be materially different from the Companys actual experience. However, the actual interest rate sensitivity of the Companys 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 Companys portfolio helps reduce the Companys exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential
8
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.
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to the Companys average interest-earning assets and average 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 institutions 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, 2003
|
|||||||
Balance
|
Weighted Average Yield/Cost |
||||||
(Dollars in thousands) | |||||||
Interest-earning assets: |
|||||||
Loans receivable, net |
$ | 334,740 | 5.62 | % | |||
Non taxable securities available for sale |
28,523 | 3.49 | % | ||||
Taxable securities available for sale |
114,991 | 4.02 | % | ||||
Securities held to maturity |
15,108 | 4.78 | % | ||||
Time deposits and other interest-bearing cash deposits |
2,220 | 0.90 | % | ||||
|
|
|
|
|
|||
Total interest-earning assets |
495,582 | 5.08 | % | ||||
Non-interest-earning assets |
35,883 | ||||||
|
|
|
|||||
Total assets |
$ | 531,465 | |||||
|
|
|
|||||
Interest-bearing liabilities: |
|||||||
Deposits |
$ | 390,140 | 2.60 | % | |||
FHLB borrowings |
54,353 | 3.19 | % | ||||
Subordinated debentures |
10,310 | 4.24 | % | ||||
|
|
|
|
|
|||
Total interest-bearing liabilities |
454,803 | 2.71 | % | ||||
Non-interest-bearing liabilities |
29,424 | ||||||
|
|
|
|||||
Total liabilities |
484,227 | ||||||
Common stock |
40 | ||||||
Additional paid-in capital |
25,714 | ||||||
Retained earnings |
26,897 | ||||||
Treasury stock |
(4,857 | ) | |||||
Accumulated other comprehensive loss |
(556 | ) | |||||
|
|
|
|||||
Total liabilities and equity |
$ | 531,465 | |||||
|
|
|
|||||
Interest rate spread |
2.37 | % | |||||
|
|
||||||
Ratio of interest-earning assets to interest-bearing liabilities |
108.97 | % | |||||
|
|
(Continued on following page)
9
Year Ended December 31,
|
||||||||||||||||||||||||||||||
2003
|
2002
|
2001
|
||||||||||||||||||||||||||||
(Dollars in Thousands)
|
||||||||||||||||||||||||||||||
Average Balance |
Interest
|
Average Yield/Cost |
Average Balance |
Interest
|
Average Yield/Cost |
Average Balance |
Interest
|
Average
Yield/Cost |
||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||
Loans receivable, net |
$ | 315,126 | $ | 19,332 | 6.14 | % | $ | 223,733 | $ | 15,200 | 6.79 | % | $ | 149,804 | $ | 11,531 | 7.69 | % | ||||||||||||
Taxable securities AFS |
108,440 | 4,196 | 3.87 | % | 80,288 | 4,145 | 5.16 | % | 82,328 | 5,068 | 6.16 | % | ||||||||||||||||||
Non taxable securities AFS |
19,539 | 674 | 3.45 | % | 6,853 | 279 | 4.07 | % | 892 | 40 | 4.48 | % | ||||||||||||||||||
Securities held to maturity |
10,308 | 467 | 4.53 | % | 3,641 | 291 | 7.99 | % | 5,986 | 456 | 7.61 | % | ||||||||||||||||||
Time deposits and other interest-bearing cash deposits |
6,751 | 74 | 1.10 | % | 8,075 | 127 | 1.57 | % | 9,998 | 467 | 4.67 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total interest-earning assets |
460,164 | 24,743 | 5.38 | % | 322,590 | 20,042 | 6.21 | % | 249,008 | 17,562 | 7.05 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Non-interest-earning assets |
25,588 | 13,595 | 7,099 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
Total assets |
$ | 485,752 | $ | 336,185 | $ | 256,107 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||
Deposits |
$ | 377,963 | 10,896 | 2.88 | % | $ | 244,865 | 8,090 | 3.30 | % | $ | 180,180 | 8,706 | 4.83 | % | |||||||||||||||
Borrowings |
38,558 | 1,483 | 3.85 | % | 31,997 | 1,330 | 4.16 | % | 24,541 | 1,046 | 4.26 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total interest-bearing liabilities |
416,521 | 12,379 | 2.97 | % | 276,862 | 9,420 | 3.40 | % | 204,721 | 9,752 | 4.76 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Non-interest-bearing liabilities |
22,001 | 13,326 | 8,223 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
Total liabilities |
438,522 | 290,188 | 212,944 | |||||||||||||||||||||||||||
Common stock |
40 | 40 | 40 | |||||||||||||||||||||||||||
Additional paid-in capital |
25,714 | 25,714 | 24,586 | |||||||||||||||||||||||||||
Retained earnings |
26,411 | 24,552 | 21,273 | |||||||||||||||||||||||||||
Treasury stock |
(4,857 | ) | (4,854 | ) | (3,266 | ) | ||||||||||||||||||||||||
Accumulated other comprehensive income (loss) |
(78 | ) | 545 | 530 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
Total liabilities and equity |
$ | 485,752 | $ | 336,185 | $ | 256,107 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
Net interest income |
$ | 12,364 | $ | 10,622 | $ | 7,810 | ||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||
Interest rate spread |
2.41 | % | 2.81 | % | 2.29 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||
Net interest margin |
2.69 | % | 3.29 | % | 3.13 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest- bearing liabilities |
110.48 | % | 116.52 | % | 121.63 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
10
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 years volume).
Year Ended December 31,
|
||||||||||||||||||||||||
2003 vs. 2002
|
2002 vs. 2001
|
|||||||||||||||||||||||
Increase (Decrease) due to |
Increase (Decrease) due to |
|||||||||||||||||||||||
Rate
|
Volume
|
Total Increase (Decrease) |
Rate
|
Volume
|
Total Increase (Decrease) |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable |
$ | (2,074 | ) | $ | 6,206 | $ | 4,132 | $ | (2,016 | ) | $ | 5,685 | $ | 3,669 | ||||||||||
Securities available for sale, taxable |
(1,402 | ) | 1,453 | 51 | (797 | ) | (126 | ) | (923 | ) | ||||||||||||||
Securities available for sale, non taxable |
(122 | ) | 517 | 395 | (29 | ) | 268 | 239 | ||||||||||||||||
Securities held to maturity |
(357 | ) | 533 | 176 | 13 | (178 | ) | (165 | ) | |||||||||||||||
Other interest-earning assets |
(32 | ) | (21 | ) | (53 | ) | (250 | ) | (90 | ) | (340 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total interest-earning assets |
(3,987 | ) | 8,688 | 4,701 | (3,079 | ) | 5,559 | 2,480 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
(1,586 | ) | 4,392 | 2,806 | (3,740 | ) | 3,124 | (616 | ) | |||||||||||||||
Borrowings |
(120 | ) | 273 | 153 | (34 | ) | 318 | 284 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
(1,706 | ) | 4,665 | 2,959 | (3,774 | ) | 3,442 | (332 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Increase (decrease) in net interest income |
$ | (2,281 | ) | $ | 4,023 | $ | 1,742 | $ | 695 | 2,117 | $ | 2,812 | ||||||||||||
|
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|
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|
|
|
|
|
Critical Accounting Policies and Estimates
The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on appropriate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involved the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Companys allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors included the Companys historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers sensitivity to economic conditions throughout the southeast and particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of the loan portfolio, its methodology accordingly may change. In addition, it may report materially different amounts for the provision for loan losses in the statement of operations if managements assessment of the above factors change in future periods. This discussion and analysis should be read in conjunction with the Companys financial statements and the accompanying notes presented elsewhere herein. Although management believes the levels of the allowance for loan losses as of both December 31, 2003 and 2002 were adequate to absorb inherent losses in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
11
The Company also considers it policy on non-accrual loans as a critical accounting policy. Loan are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 91 days or more. Any unpaid interest previously accrued on these loans is reserved for as part of managements evaluation of the allowance for loan loss account.
Comparison of Financial Condition at December 31, 2003 and December 31, 2002
The Companys total assets increased by $104.0 million, from $427.5 million at December 31, 2002 to $531.5 million at December 31, 2003. Federal funds sold decreased from $3.8 million at December 31, 2002 to $2.2 million at December 31, 2003. Securities held to maturity increased $12.2 million due to certain new purchases being classified as held to maturity. The available for sale portfolio increased $40.4 million.
The Companys net loan portfolio increased by $42.6 million during the year ended December 31, 2003. Net loans totaled $334.7 and $292.1 at December 31, 2003 and December 31, 2002, respectively. The increase in the loan activity during the year ended December 31, 2003 was due to industry consolidation in key market areas and continued aggressive marketing efforts. For the year ended December 31, 2003, the Companys average yield on loans was 6.14%, compared with 6.79% for the year ended December 31, 2002.
At December 31, 2003, the Companys investments classified as held to maturity were carried at an amortized cost of $15.1 million and had an estimated fair market value of $15.1 million, and its securities classified as available for sale had an estimated fair market value of $143.5 million. See Note 3 of Notes to Consolidated Financial Statements.
The allowance for loan losses totaled $2.6 million at December 31, 2003, an increase of $1.1 million from the allowance for loan losses of $1.5 million at December 31, 2002. The ratio of the allowance for loan losses to loans was 0.76% and 0.50% at December 31, 2003 and 2002, respectively. Also, at December 31, 2003, the Companys non-accrual loans were $1.1 million, or 0.34% of total loans, compared to $833,000, or 0.29% of total loans, at December 31, 2002. The Companys ratio of allowance for loan losses to non-performing loans at December 31, 2003 and 2002 was 225.2% and 174.7%, respectively.
Comparison of Operating Results for the Years Ended December 31, 2003 and 2002
Net Income . The Companys net income for the year ended December 31, 2003 was $3.5 million compared to $4.6 million for the year ended December 31, 2002.
Net Interest Income . Net interest income for the year ended December 31, 2003 was $12.4 million, compared to $10.6 million for the year ended December 31, 2002. The increase in net interest income for the year ended December 31, 2003 was the result of loan and investment portfolio growth and a decline in the Companys cost of funds. For the year ended December 31, 2003, the Companys average yield on total interest-earning assets was 5.38%, compared to 6.21% for the year ended December 31, 2002, and its average cost of interest-bearing liabilities was 2.97%, compared to 3.40% for the year ended December 31, 2002. As a result, the Companys interest rate spread for the year ended December 31, 2003 was 2.41%, compared to 2.81% for the year ended December 31, 2002 and its net interest margin was 2.69% for the year ended December 31, 2003, compared to 3.29% for the year ended December 31, 2002.
Interest Income . Interest income increased $4.7 million from $20.0 million to $24.7 million, or by 23.5% during the year ended December 31, 2003 compared to 2002. The increase was attributable to an increase in loan volume as funded by growth in deposit volume and an increase in FHLB borrowings which offset a declining yield on such interest-earning assets. The average balance on securities held to maturity increased $6.7 million, from $3.6 million at December 31, 2002 to $10.3 million at December 31, 2003. The average balance on taxable securities available for sale increased $28.1 million, from $80.3 million at December 31, 2002 to $108.4 million at December 31, 2003. The average balance of non-taxable securities available for sale increased $12.6 million, from $6.9 million at December 31, 2002 to $19.5 million at December 31, 2003. Average time deposits and other interest-bearing cash deposits declined $1.3 million, from $8.1 million at December 31, 2002 to $6.8 million at December 31, 2003. Overall, average total interest-earning assets increased $137.6 million from December 31, 2002 to December 31, 2003.
Interest Expense . Interest expense increased to $12.4 million for the year ended December 31, 2003 compared to $9.4 million for 2002. The increase in interest expense was attributable to a increased level of deposits, FHLB borrowings and the issuance of trust preferred securities. The average cost of average interest-bearing liabilities declined from 3.40% for the year ended December 31, 2002 to 2.97% for the year ended December 31, 2003. Over the same period, the average balance of deposits increased from $244.9 million for the year ended December 31, 2002 to $378.0 million at December 31, 2003.
12
Provision for Loan Losses . The Company determined that an additional $1,750,000 in provision for loan losses was required for the year ended December 31, 2003. For the year ended December 31, 2002, the Company determined that a provision for loan losses of $795,000 was required.
Non-Interest Income . Non-interest income for the year ended December 31, 2003 was $3.5 million, compared to $2.3 million for the year ended December 31, 2002. At December 31, 2003, fee income from service charges increased $451,000 to $1.2 million from $711,000 for the year ended December 31, 2002. At December 31, 2003, gains from the sale of loans increased $394,000 to $552,000, from $158,000 at December 31, 2002. This increase was the result of lower mortgage rates and a surge of refinancing activity.
Non-Interest Expense . Total non-interest expense for the year ended December 31, 2003 was $9.0 million, compared to $5.2 million in 2002. The increase was the result of the Companys acquisition of two retail banking branches and Fall & Fall Insurance Agency in Fulton, Kentucky in September of 2002. The Company relocated banking facilities in Murray, Kentucky and Benton, Kentucky and opened a new location in Calvert City, Kentucky. The Company also incurred a $990,000 settlement expense to close its defined benefit pension plan. See Notes 2 and 12 of Notes to Consolidated Financial Statements.
Income Taxes. The effective tax rate for the year ended December 31, 2003 was 31.2%, compared to 33.8% for 2002. The decline in the effective tax rate is the result of an increase in average holdings of municipal bonds.
Comparison of Operating Results for the Years Ended December 31, 2002 and 2001
Net Income. The Companys net income for the year ended December 31, 2002 was $4.6 million compared to $1.8 million for the year ended December 31, 2001.
Net Interest Income. Net interest income for the year ended December 31, 2002 was $10.6 million, compared to $7.8 million for the year ended December 31, 2001. The increase in net interest income for the year ended December 31, 2002 was the result of loan growth and a decline in the Companys cost of funds. For the year ended December 31, 2002, the Companys average yield on total interest-earning assets was 6.21%, compared to 7.05% for the year ended December 31, 2001, and its average cost of interest-bearing liabilities was 3.40%, compared to 4.76% for the year ended December 31, 2001. As a result, the Companys interest rate spread for the year ended December 31, 2002 was 2.81%, compared to 2.29% for the year ended December 31, 2001 and its net interest margin was 3.29% for the year ended December 31, 2002, compared to 3.13% for the year ended December 31, 2001.
Interest Income. Interest income increased $2.4 million from $17.6 million to $20.0 million, or by 13.6% during the year ended December 31, 2002 compared to 2001. The increase was attributable to an increase in loan volume which offset a declining yield on such interest-earning assets. The average balance on securities held to maturity declined $2.4 million, from $6.0 million at December 31, 2001 to $3.6 million at December 31, 2002. The average balance on taxable securities available for sale declined $2.0 million, from $82.3 million at December 31, 2001 to $80.3 million at December 31, 2002. The average balance of non-taxable securities available for sale increased $6.0 million, from $892,000 at December 31, 2001 to $6.9 million at December 31, 2002. Average time deposits and other interest-bearing cash deposits declined $1.9 million, from $10.0 million at December 31, 2001 to $8.1 million at December 31, 2002. Overall, average total interest-earning assets increased $73.6 million from December 31, 2001 to December 31, 2002.
Interest Expense. Interest expense decreased to $9.4 million for the year ended December 31, 2002 compared to $9.8 million for 2001. The decline in interest expense was attributable to a sharp decline in the interest rates paid on deposit accounts. The average cost of average interest-bearing liabilities declined from 4.76% for the year ended December 31, 2001 to 3.40% for the year ended December 31, 2002. Over the same period, the average balance of deposits increased from $180.2 million for the year ended December 31, 2001 to $244.9 million at December 31, 2002.
Provision for Loan Losses. The Company determined that an additional $795,000 in provision for loan losses was required for the year ended December 31, 2002. For the year ended December 31, 2001, the Company determined that a provision for loan losses of $222,000 was required.
13
Non-Interest Income. Non-interest income increased $1.6 million for the year ended December 31, 2002 to $2.3 million, compared to $717,000 for the year ended December 31, 2001. The increase was the result of $568,000 in gains on the sale of available for sale securities and a $431,000 increase in service charge income for the year ended December 31, 2002 as compared to the year ended December 31, 2001. Also, the Company realized a $112,000 gain on the sale of a fixed asset in 2002.
Non-Interest Expense. Total non-interest expense for the year ended December 31, 2002 was $5.2 million, compared to $5.5 million in 2001. The decline was the result of the Company incurring a $1.4 million curtailment expense in 2001 to terminate its defined benefit pension plan. Other increases in non-interest expense are the result of additional staffing and the acquisition of two branches in Fulton, Kentucky. See Notes 2 and 12 of Notes to Consolidated Financial Statements.
Income Taxes. The effective tax rate for the year ended December 31, 2002 was 33.8%, compared to 34.6% for 2001.
Liquidity and Capital Resources
The Companys primary business is that of the Bank. Management believes dividends that may be paid from the Bank to the Company will provide sufficient funds for the Companys 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, 2003, 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 Banks compliance with such requirements, see Note 15 of Notes to Consolidated 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, 2003, the Bank had outstanding advances of $54.4 million from the FHLB. The Bank can immediately borrow an additional $38.1 million from the FHLB and can borrow an additional $86.5 million with the purchase of additional capital stock. See Note 8 of Notes to Consolidated Financial Statements.
Trust Preferred Issuance . On September 25, 2003, the Company issued $10,310,000 of trust preferred securities in a private placement offering. The securities have a thirty-year maturity and are callable at the issuers discretion on a quarterly basis beginning five years after issuance. The securities are priced at a variable rate equal to the three-month libor (London Interbank Offering Rate) plus 3.10%. Interest is paid and the rate of interest may change on a quarterly basis. The Companys subsidiary, a federal chartered thrift supervised by the Office of Thrift Supervision (OTS) may recognize the proceeds of trust preferred securities as capital. OTS regulations provide that 25% of Tier I capital may consist of trust preferred proceeds. See Note 10 of Notes to Consolidated Financial Statements.
The Banks 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 Banks liquidity needs for the immediate future.
A portion of the Banks liquidity consists of cash and cash equivalents. At December 31, 2003, cash and cash equivalents totaled $15.2 million. The level of these assets depends upon the Banks operating, investing and financing activities during any given period.
14
Cash flows from operating activities for the years ended December 31, 2001, 2002 and 2003 were $4.3 million, $4.4 million, and $3.5 million, respectively.
Cash flows from investing activities were a net use of funds of $105.5 million, $34.9 million and $55.0 million in 2003, 2002 and 2001, respectively. A principal use of cash in this area has been purchases of securities available for sale of $156.1 million offset by proceeds from sales, calls and maturities of securities available for sale of $114.0 million during 2003. Also, management classified certain investment purchases as held-to maturity in 2003, resulting in a $18.5 million use of funds. At the same time, the investment of cash in loans was $44.7 million in 2003, $80.1 million in 2002 and $42.0 in 2001. Purchases of securities available for sale exceeded maturities and sales by $42.1 million in 2003 and $15.3 million in 2001. Maturities and sales of securities available for sale exceeded purchases of such securities by $43.1 in 2002.
At December 31, 2003, the Bank had $8.5 million in outstanding commitments to originate loans and unused lines of credit of $ 10.6 million. The Bank anticipates that it will have sufficient funds available to meet its current loan origination and lines of credit commitments. Certificates of deposit which are scheduled to mature in one year or less totaled $ 130.9 million at December 31, 2003. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, 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 Banks 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 Companys 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.
Forward-Looking Statements
Managements discussion and analysis includes certain forward-looking statements addressing, among other things, the Banks 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. Managements expectations for the Banks 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 Banks 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
The Board of Directors
HopFed Bancorp, Inc.
Hopkinsville, Kentucky
We have audited the accompanying consolidated balance sheets of HopFed Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
Brentwood, Tennessee
January 30, 2004
F-1
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002
(Dollars in Thousands)
2003
|
2002
|
||||
Assets |
|||||
Cash and due from banks (note 7 and 11) |
$ | 12,958 | 9,288 | ||
Interest-earning deposits in Federal Home Loan Bank |
35 | 905 | |||
Federal funds sold |
2,185 | 3,840 | |||
|
|
|
|||
Cash and cash equivalents |
15,178 | 14,033 | |||
Securities available for sale (note 3) |
143,514 | 103,147 | |||
Securities held to maturity, market value of $15,104 for 2003 and $3,032 for 2002, respectively (note 3) |
15,108 | 2,932 | |||
Loans receivable, net of allowance for loan losses of $2,576 for 2003 and $1,455 for 2002, respectively (note 4) |
334,740 | 292,095 | |||
Accrued interest receivable |
2,849 | 2,329 | |||
Premises and equipment, net (note 5) |
6,006 | 4,959 | |||
Deferred tax assets (note 13) |
652 | | |||
Intangible asset (notes 2 and 6) |
2,133 | 2,511 | |||
Goodwill (note 6) |
3,689 | 3,689 | |||
Bank owned life insurance |
6,628 | 1,547 | |||
Other assets |
968 | 260 | |||
|
|
|
|||
Total assets |
$ | 531,465 | 427,502 | ||
|
|
|
|||
Liabilities and Stockholders Equity |
|||||
Liabilities: |
|||||
Deposits: (note 7) |
|||||
Non-interest-bearing accounts |
$ | 27,348 | 19,120 | ||
Interest-bearing accounts: |
|||||
NOW accounts |
61,246 | 33,215 | |||
Money market accounts |
58,593 | 47,360 | |||
Savings |
9,817 | 9,107 | |||
Other time deposits |
260,484 | 244,853 | |||
|
|
|
|||
Total deposits |
417,488 | 353,655 | |||
Subordinated debentures (note 10) |
10,310 | | |||
Advances from borrowers for taxes and insurance |
199 | 211 | |||
Advances from Federal Home Loan Bank (note 8) |
54,353 | 23,623 | |||
Dividends payable |
435 | 399 | |||
Deferred tax liability (note 13) |
| 47 | |||
Accrued expenses and other liabilities (note 12) |
1,442 | 2,689 | |||
|
|
|
|||
Total liabilities |
484,227 | 380,624 | |||
|
|
|
See accompanying notes to consolidated financial statements.
F-2
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
December 31, 2003 and 2002
(Dollars in Thousands)
2003
|
2002
|
||||||
Stockholders equity (notes 12, 16 and 17): |
|||||||
Preferred stock, par value $.01 per share; authorized - 500,000 shares; none issued or outstanding at December 31, 2003 and 2002 |
$ | | | ||||
Common stock, par value $.01 per share; authorized - 7,500,000 shares; 4,039,305 issued and 3,630,396 outstanding at December 31, 2003 and December 31, 2002 |
40 | 40 | |||||
Additional paid-in capital |
25,714 | 25,714 | |||||
Retained earnings-substantially restricted |
26,897 | 25,106 | |||||
Treasury stock (at cost, 408,909 shares at December 31, 2003 and December 31, 2002) |
(4,857 | ) | (4,857 | ) | |||
Accumulated other comprehensive income (loss), net of taxes |
(556 | ) | 875 | ||||
|
|
|
|
|
|||
Total stockholders equity |
47,238 | 46,878 | |||||
|
|
|
|
|
|||
Total liabilities and stockholders equity |
$ | 531,465 | 427,502 | ||||
|
|
|
|
|
|||
Commitments and contingencies (notes 9, 11, and 14) |
See accompanying notes to consolidated financial statements.
F-3
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003
|
2002
|
2001
|
|||||
Interest and dividend income: |
|||||||
Loans receivable |
$ | 19,332 | 15,200 | 11,531 | |||
Securities available for sale |
4,196 | 4,145 | 5,068 | ||||
Securities held to maturity |
467 | 291 | 456 | ||||
Nontaxable securities available for sale |
674 | 279 | 40 | ||||
Interest-earning deposits in Federal Home Loan Bank |
74 | 127 | 467 | ||||
|
|
|
|
||||
Total interest and dividend income |
24,743 | 20,042 | 17,562 | ||||
|
|
|
|
||||
Interest expense: |
|||||||
Deposits (note 7) |
10,896 | 8,090 | 8,706 | ||||
Advances from Federal Home Loan Bank |
1,364 | 1,330 | 1,046 | ||||
Subordinated debentures |
119 | | | ||||
|
|
|
|
||||
Total interest expense |
12,379 | 9,420 | 9,752 | ||||
|
|
|
|
||||
Net interest income |
12,364 | 10,622 | 7,810 | ||||
Provision for loan losses (note 4) |
1,750 | 795 | 222 | ||||
|
|
|
|
||||
Net interest income after provision for loan losses |
10,614 | 9,827 | 7,588 | ||||
|
|
|
|
||||
Non-interest income: |
|||||||
Service charges |
1,162 | 711 | 280 | ||||
Gain on sale of loans |
552 | 158 | 40 | ||||
Realized gain on sale of premises and equipment, net |
| 112 | | ||||
Realized gain from sale of securities available for sale |
634 | 568 | 88 | ||||
Other operating income |
1,151 | 763 | 309 | ||||
|
|
|
|
||||
Total non-interest income |
3,499 | 2,312 | 717 | ||||
|
|
|
|
||||
Non-interest expenses: |
|||||||
Salaries and benefits (note 12) |
5,241 | 2,806 | 3,344 | ||||
Deposit insurance premium |
61 | 36 | 32 | ||||
Occupancy expense (note 5) |
652 | 436 | 421 | ||||
Data processing |
639 | 418 | 197 | ||||
State tax |
383 | 132 | 130 | ||||
Other operating expenses |
2,068 | 1,371 | 1,369 | ||||
|
|
|
|
||||
Total non-interest expense |
9,044 | 5,199 | 5,493 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income, Continued
December 31, 2003, 2002 and 2001
(Dollars in Thousands, Except Per Share and Share Amounts)
2003
|
2002
|
2001
|
|||||
Income before income tax expense |
$ | 5,069 | 6,940 | 2,812 | |||
Income tax expense (note 13) |
1,574 | 2,346 | 973 | ||||
|
|
|
|
||||
Net income |
$ | 3,495 | 4,594 | 1,839 | |||
|
|
|
|
||||
Earnings per share (note 17): |
|||||||
Basic |
$ | 0.96 | 1.26 | 0.49 | |||
|
|
|
|
||||
Fully diluted |
$ | 0.96 | 1.26 | 0.49 | |||
|
|
|
|
||||
Weighted average shares outstanding - basic |
3,630,396 | 3,630,668 | 3,758,053 | ||||
|
|
|
|
||||
Weighted average shares outstanding - diluted |
3,653,974 | 3,636,480 | 3,764,692 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003
|
2002
|
2001
|
||||||||
Net income |
$ | 3,495 | 4,594 | 1,839 | ||||||
Other comprehensive income, net of tax (note 21): |
||||||||||
Unrealized gain (loss) on investment securities available for sale |
(1,013 | ) | 680 | 565 | ||||||
Minimum pension liability adjustment |
| | 222 | |||||||
Reclassification adjustment for gains included in net income |
(418 | ) | (375 | ) | (58 | ) | ||||
|
|
|
|
|
|
|
||||
Comprehensive income |
$ | 2,064 | 4,899 | 2,568 | ||||||
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
For the Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands, Except Per Share and Share Amounts)
Common Shares |
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Equity |
||||||||||||||
Balance, December 31, 2000 |
3,854,995 | $ | 40 | 25,228 | 21,896 | (1,643 | ) | (159 | ) | 45,362 | ||||||||||
Net income |
| | | 1,839 | | | 1,839 | |||||||||||||
Minimum pension liability adjustment, net of income tax of $114 |
| | | | | 222 | 222 | |||||||||||||
Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $261 |
| | | | | 507 | 507 | |||||||||||||
Issuance of common stock Management Recognition Plan |
34,956 | | 486 | | | | 486 | |||||||||||||
Purchase of treasury stock |
(258,413 | ) | | | | (3,202 | ) | | (3,202 | ) | ||||||||||
Dividends ($0.44 per share) |
| | | (1,625 | ) | | | (1,625 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2001 |
3,631,538 | 40 | 25,714 | 22,110 | (4,845 | ) | 570 | 43,589 | ||||||||||||
Net income |
| | | 4,594 | | | 4,594 | |||||||||||||
Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $157 |
| | | | | 305 | 305 | |||||||||||||
Purchase of treasury stock |
(1,142 | ) | | | | (12 | ) | | (12 | ) | ||||||||||
Dividends ($0.44 per share) |
| | | (1,598 | ) | | | (1,598 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2002 |
3,630,396 | 40 | 25,714 | 25,106 | (4,857 | ) | 875 | 46,878 | ||||||||||||
Net income |
| | | 3,495 | | | 3,495 | |||||||||||||
Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $737 |
| | | | | (1,431 | ) | (1,431 | ) | |||||||||||
Dividends ($0.47 per share) |
| | | (1,704 | ) | | | (1,704 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2003 |
3,630,396 | $ | 40 | 25,714 | 26,897 | (4,857 | ) | (556 | ) | 47,238 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003
|
2002
|
2001
|
||||||||
Cash flows from operating activities: |
||||||||||
Net income |
$ | 3,495 | 4,594 | 1,839 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Provision for loan losses |
1,750 | 795 | 222 | |||||||
Depreciation |
319 | 236 | 157 | |||||||
Amortization of intangible assets |
378 | 126 | | |||||||
Amortization (accretion) of investment premiums and discounts, net |
238 | 399 | (7 | ) | ||||||
Provision (benefit) for deferred income taxes |
38 | (28 | ) | (463 | ) | |||||
Stock dividends on Federal Home Loan Bank stock |
(97 | ) | (107 | ) | (148 | ) | ||||
Increase in cash surrender value of bank owned life insurance |
(94 | ) | | | ||||||
Gain on sale of securities available for sale |
(634 | ) | (568 | ) | (88 | ) | ||||
Gain on sales of loans |
(552 | ) | (158 | ) | (40 | ) | ||||
Proceeds from sales of loans |
27,326 | 15,526 | 11,275 | |||||||
Originations of loans sold |
(26,774 | ) | (15,368 | ) | (11,235 | ) | ||||
Curtailment loss |
| | 1,400 | |||||||
(Increase) decrease in: |
||||||||||
Accrued interest receivable |
(520 | ) | (924 | ) | 880 | |||||
Other assets |
(126 | ) | 638 | (81 | ) | |||||
Increase (decrease) in: |
||||||||||
Accrued expenses and other liabilities |
(1,247 | ) | (747 | ) | 593 | |||||
|
|
|
|
|
|
|
||||
Net cash provided by operating activities |
3,500 | 4,414 | 4,304 | |||||||
|
|
|
|
|
|
|
||||
Cash flows from investing activities: |
||||||||||
Proceeds from calls and maturities of securities held to maturity |
6,365 | 1,585 | 3,341 | |||||||
Proceeds from sales, calls and maturities of securities available for sale |
113,986 | 78,533 | 82,751 | |||||||
Purchases of securities held to maturity |
(18,512 | ) | | | ||||||
Purchase of securities available for sale |
(156,057 | ) | (35,477 | ) | (98,085 | ) | ||||
Net increase in loans |
(44,667 | ) | (80,109 | ) | (42,012 | ) | ||||
Proceeds from sale of foreclosed asset |
| 42 | | |||||||
Proceeds from sales of premises and equipment |
63 | | | |||||||
Purchases of premises and equipment |
(1,429 | ) | (795 | ) | (1,030 | ) | ||||
Purchase of bank owned life insurance |
(4,987 | ) | | | ||||||
Purchases of capital securities of unconsolidated subsidiary |
(310 | ) | | | ||||||
Purchase of branch location, net of funds received |
| 1,304 | | |||||||
|
|
|
|
|
|
|
||||
Net cash used in investing activities |
(105,548 | ) | (34,917 | ) | (55,035 | ) | ||||
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
HopFed Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
For the Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003
|
2002
|
2001
|
||||||||
Cash flows from financing activities: |
||||||||||
Net increase in demand deposits, savings, money market, NOW accounts and time deposits |
$ | 63,833 | 56,590 | 34,712 | ||||||
(Decrease) increase in advance payments by borrowers for taxes and insurance |
(12 | ) | 10 | 43 | ||||||
Advances from Federal Home Loan Bank |
36,850 | 21,000 | 21,707 | |||||||
Repayment of advances from Federal Home Loan Bank |
(6,120 | ) | (36,124 | ) | | |||||
Purchase of treasury stock |
| (12 | ) | (3,202 | ) | |||||
Proceeds from issuance of subordinated debentures |
10,310 | | | |||||||
Dividends paid |
(1,668 | ) | (1,598 | ) | (1,666 | ) | ||||
|
|
|
|
|
|
|
||||
Net cash provided by financing activities |
103,193 | 39,866 | 51,594 | |||||||
|
|
|
|
|
|
|
||||
Increase (decrease) in cash and cash equivalents |
1,145 | 9,363 | 863 | |||||||
Cash and cash equivalents, beginning of period |
14,033 | 4,670 | 3,807 | |||||||
|
|
|
|
|
|
|
||||
Cash and cash equivalents, end of period |
$ | 15,178 | 14,033 | 4,670 | ||||||
|
|
|
|
|
|
|
||||
Supplemental disclosures of Cash Flow Information: |
||||||||||
Interest paid |
$ | 12,370 | 9,023 | 8,690 | ||||||
|
|
|
|
|
|
|
||||
Income taxes paid |
$ | 1,610 | 2,545 | 1,499 | ||||||
|
|
|
|
|
|
|
||||
Supplemental Disclosures of Non-cash Investing and Financing Activities: |
||||||||||
Foreclosures and in substance foreclosures of loans during year |
$ | 272 | 42 | | ||||||
|
|
|
|
|
|
|
||||
Net unrealized gains on investment securities classified as available for sale |
$ | (2,168 | ) | 462 | 768 | |||||
|
|
|
|
|
|
|
||||
Increase in deferred tax liability related to unrealized gains on investments |
$ | 737 | (157 | ) | (261 | ) | ||||
|
|
|
|
|
|
|
||||
Dividends declared and payable |
$ | 435 | 399 | 399 | ||||||
|
|
|
|
|
|
|
||||
Issue of common stock to MRP |
$ | | | 486 | ||||||
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-9
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : |
Nature of Operations and Customer Concentration
HopFed Bancorp, Inc. (the Corporation) is a bank holding company incorporated in the state of Delaware. The Companys principal business activities are conducted through its wholly-owned subsidiary, Heritage Bank (the Bank), which is a federally chartered savings bank engaged in the business of accepting deposits and providing mortgage, consumer, construction and commercial loans to the general public through its retail banking offices. The Banks business activities are primarily limited to western Kentucky. The Bank is subject to competition from other financial institutions. Deposits at the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC). The Bank is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (OTS) and the FDIC.
A substantial portion of the Banks loans are secured by real estate in the West Kentucky market. In addition, foreclosed real estate is located in this same market. Accordingly, the ultimate collectibility of a substantial portion of the Banks loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate is susceptible to changes in local market conditions.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation, the Bank and its wholly-owned subsidiary Fall & Fall Insurance (collectively the Company) for the years ended December 31, 2003 and 2002. The consolidated financial statements included the accounts of the Corporation, and the Bank (collectively the Company) for the year ended December 31, 2001. Significant intercompany balances and transactions have been eliminated in consolidation under the equity method.
Accounting
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices in the banking industry.
F-10
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the year. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand, amounts due on demand from banks, interest-earning deposits in the Federal Home Loan Bank and federal funds sold with maturities of three months or less.
Securities
The Company reports debt, readily-marketable equity, mortgage-backed and mortgage related securities in one of the following categories: (i) held to maturity (management has a positive intent and ability to hold to maturity) which are to be reported at cost, adjusted for premiums and discounts that are recognized in interest income; (ii) trading (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (iii) available for sale (all other debt, equity, mortgage-backed and mortgage related securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax as a separate component of stockholders equity. At the time of new security purchases, a determination is made as to the appropriate classification. Realized and unrealized gains and losses on trading securities are included in net income. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders equity, net of any tax effect. Cost of securities sold is recognized using the specific identification method.
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 Standards (SFAS) 91, Nonrefundable Fees & Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, 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 consolidated financial statements.
F-11
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
Loans Receivable (Continued)
Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on managements periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received while the loan is classified as nonaccrual. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.
The Bank provides an allowance for loan losses and includes in operating expenses a provision for loan losses determined by management. Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment.
Loans are considered to be impaired when, in managements judgement, principal or interest is not collectible according to the contractual terms of the loan agreement. When conducting loan evaluations, management considers various factors such as historical loan performance, the financial condition of the borrower and adequacy of collateral to determine if a loan is impaired.
The measurement of impaired loans generally is based on the present value of future cash flows discounted at the historical effective interest rate, except that collateral-dependent loans generally are measured for impairment based on the fair value of the collateral. When the measured amount of an impaired loan is less than the recorded investment in the loan, the impairment is recorded as a charge to income and a valuation allowance which is included as a component of the allowance for loan losses.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less selling expenses. Costs of improving the assets are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management, and any adjustments to value are recognized in the current periods operations.
F-12
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
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. The Company files its federal income tax return on a consolidated basis with its subsidiaries. All taxes are accrued on a separate entity basis.
Premises and Equipment
Land, 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:
Land improvements |
5-15 years | |||
Buildings |
40 years | |||
Furniture and equipment |
5-15 years |
Goodwill
Beginning January 1, 2002 with the adoption of SFAS 142, Goodwill and Other Intangible Assets , goodwill is no longer amortized, but instead tested for impairment at least annually.
Intangible Assets
The intangible assets for insurance contracts and core deposits are amortized using the straight-line method over the estimated period of benefit of seven years. The Company periodically evaluates the recoverability of the intangible assets and takes into account events or circumstances that warrant a revised estimate of the useful lives or indicates that an impairment exists.
Advertising
The Company expenses the production cost of advertising as incurred.
Financial Instruments
The Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.
F-13
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
Fair Values of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. Accordingly, such estimates involve uncertainties and matters of judgment and therefore cannot be determined with precision. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following are the more significant methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets fair values, because they mature within 90 days or less and do not present credit risk concerns.
Available-for-sale and held-to-maturity securities
Fair values for investment securities available-for-sale and held-to-maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable
The fair values for loans receivable are estimated using discounted cash flow analysis which considers future repricing dates and estimated repayment dates, and further using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.
Accrued interest receivable
Fair value is estimated to approximate the carrying amount because such amounts are expected to be received within 90 days or less and any credit concerns have been previously considered in the carrying value.
F-14
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
Fair Values of Financial Instruments (Continued)
Deposits
The fair values disclosed for deposits with no stated maturity such as demand deposits, interest-bearing checking accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and other fixed maturity time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such type accounts to a schedule of aggregated contractual maturities on such time deposits.
Advances from the Federal Home Loan Bank
The fair value of these advances is estimated by discounting the future cash flows of these advances using the current rates at which similar advances could be obtained.
Off-Balance-Sheet Instruments
Off-balance-sheet lending commitments approximate their fair values due to the short period of time before the commitment expires.
Earnings Per Share
Earnings per share (EPS) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (CSE). CSE consists of dilutive stock options granted through the Companys stock option plan. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation.
Stock Options
The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations, as permitted by SFAS 123, Accounting for Stock-Based Compensation . As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS 123 requires entities which continue to apply the provisions of APB Opinion No. 25 to provide pro-forma earnings per share disclosure for stock option grants made in 1995 and subsequent years as if the fair value based method defined in SFAS 123 had been applied. SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB No. 123 , provides that an entity that has transitioned to the accounting treatment prescribed by SFAS 123 may use the intrinsic value method in lieu of the fair value based method for determining the fair value of stock options at the date of grant. SFAS 148 requires disclosure in addition to SFAS 123 if APB opinion No. 25 is currently being applied (see Effect of New Accounting Pronouncements).
F-15
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Per Share Amounts)
(1) | Summary of Significant Accounting Policies : (Continued) |
Stock Options (Continued)
The Company applies APB Opinion No. 25 and related interpretations in accounting for the plan. No compensation cost has been recognized for the plan because the stock option price is equal to or greater than the fair value at the grant date. Following is a reconciliation of reported and pro forma net income and earnings per share had compensation cost for the plan been determined based on the fair value of SFAS 123, Accounting for Stock-Based Compensation , as amended:
Year Ended December 31, |
||||||||||
2003
|
2002
|
2001
|
||||||||
Net income as reported |
$ | 3,495 | 4,594 | 1,839 | ||||||
Total stock-based employee compensation expense determined under fair value based method for all awards granted, net of related tax effects |
(105 | ) | (62 | ) | (46 | ) | ||||
|
|
|
|
|
|
|
||||
Pro forma net income |
$ | 3,390 | 4,532 | 1,793 | ||||||
|
|
|
|
|
|
|
||||
Year Ended December 31, |
||||||||||
2003
|
2002
|
2001
|
||||||||
Earnings per share: |
||||||||||
Basic - as reported |
$ | 0.96 | 1.26 | 0.49 | ||||||
|
|
|
|
|
|
|
||||
Basic - pro forma |
0.93 | 1.25 | 0.49 | |||||||
|
|
|
|
|
|
|
||||
Diluted - as reported |
$ | 0.96 | 1.26 | 0.49 | ||||||
|
|
|
|
|
|
|
||||
Diluted - pro forma |
0.93 | 1.25 | 0.48 | |||||||
|
|
|
|
|
|
|
Effect of New Accounting Pronouncements
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities . SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Companys financial position, results of operations and cash flow.
F-16
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
Effect of New Accounting Pronouncements (Continued)
In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 . SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions , and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method , provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS 141, Business Combinations , and SFAS 142, Goodwill and Other Intangible Assets . Thus, the requirement in paragraph 5 of SFAS 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of intangible and identifiable intangible assets acquired as an identifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets , to include in its scope a long-term customer-relationship intangible assets of financial institutions such as depositor-and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS 144 requires for other long-lived assets that are held and used. Paragraph 5 of this Statement, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets are effective on October 1, 2002. The adoption of SFAS 147 did not have a material impact on the Companys financial position, results of operations and cash flow.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of the Statement are effective for financial statements of fiscal years ending after December 15, 2002. Interim disclosures are required for reports containing condensed financial statements for periods beginning after December 15, 2002. The adoption of SFAS 148 did not have a material impact on the Companys financial position, results of operations and cash flow.
F-17
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(1) | Summary of Significant Accounting Policies : (Continued) |
Effect of New Accounting Pronouncements (Continued)
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Companys financial position, results of operations or cash flow.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Companys financial position, results of operations or cash flow.
In November 2002, the FASB issued Interpretation (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others, which elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The interpretation also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This adoption of FIN 45 did not have a material impact on the consolidated financial statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinate financial support from other parties. The effects of FIN 46 did not have a material impact on the consolidated financial statements.
Reclassification
Certain 2002 and 2001 amounts have been reclassified to conform to the December 31, 2003 presentation.
F-18
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(2) | Acquisition : |
The Bank completed the purchase of the operating assets and assumed the deposits and certain liabilities of the Fulton, Kentucky division of Old National Bank (Fulton Division) and Fall and Fall Insurance (Fall and Fall), a full service insurance agency on September 5 and 6, 2002. The Company believes that this acquisition enhances its position in the markets of northwestern Tennessee and southwestern Kentucky.
The consolidated statement of income of the Company for the year ended December 31, 2002, includes the results of operations for the Fulton Division and Fall and Fall from the September 5, 2002 acquisition date. The acquisition resulted in approximately $3.7 million of goodwill, $2.5 million of core deposit intangible assets and $128,000 of other intangible assets, all of which are deductible for tax purposes. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over the estimated useful life of seven years using the straight-line method. The amount allocated to other intangibles represents the identified intangible asset for insurance contracts from Fall and Fall. This intangible asset is being amortized over the estimated useful life of seven years using the straight-line method.
The following condensed balance sheet discloses amounts assigned to each major asset and liability caption at the date of acquisition:
Assets: |
|||
Cash and due from banks |
$ | 1,304 | |
Securities available for sale |
45,002 | ||
Loans |
41,879 | ||
Premises and equipment |
1,085 | ||
Goodwill |
3,689 | ||
Intangible assets |
2,637 | ||
Bank owned life insurance |
1,547 | ||
Other assets |
657 | ||
|
|
||
Total assets |
$ | 97,800 | |
|
|
||
Liabilities: |
|||
Deposits |
$ | 96,750 | |
Accrued expenses and other liabilities |
1,050 | ||
|
|
||
Total liabilities |
$ | 97,800 | |
|
|
F-19
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(2) | Acquisition : (Continued) |
The following represents supplemental pro forma disclosure required by SFAS 141, Business Combinations , for the year ended December 31, 2002, of interest income, non-interest income, net income and earnings per share as though the business combination had been completed as of January 1, 2002.
For the Year Ended
2002 |
|||
Interest income |
$ | 22,877 | |
Non-interest income |
2,868 | ||
Net income |
4,615 | ||
Earnings per share: |
|||
Basic |
1.27 | ||
Diluted |
1.27 |
F-20
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(3) | Securities : |
Securities, which consist of debt and equity investments, have been classified in the consolidated balance sheets according to managements intent. The carrying amount of securities available for sale and their estimated fair values follow:
December 31, 2003
|
||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
|||||||
Available for sale securities |
||||||||||
Restricted: |
||||||||||
FHLB and FHCMC stock |
$ | 2,488 | | | 2,488 | |||||
Intrieve stock |
15 | | | 15 | ||||||
|
|
|
|
|
|
|||||
2,503 | | | 2,503 | |||||||
|
|
|
|
|
|
|||||
Unrestricted: |
||||||||||
U.S. government and agency securities: |
||||||||||
FHLB debt securities |
41,634 | 273 | (599 | ) | 41,308 | |||||
Corporate bonds |
4,164 | 69 | | 4,233 | ||||||
Municipal bonds |
28,453 | 402 | (332 | ) | 28,523 | |||||
Mortgage-backed securities: |
||||||||||
GNMA |
3,709 | 5 | (20 | ) | 3,694 | |||||
FNMA |
35,225 | 61 | (475 | ) | 34,811 | |||||
FHLMC |
12,244 | 53 | (129 | ) | 12,168 | |||||
CMOs |
16,424 | 94 | (244 | ) | 16,274 | |||||
|
|
|
|
|
|
|||||
141,853 | 957 | (1,799 | ) | 141,011 | ||||||
|
|
|
|
|
|
|||||
$ | 144,356 | 957 | (1,799 | ) | 143,514 | |||||
|
|
|
|
|
|
F-21
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(3) | Securities : (Continued) |
December 31, 2002
|
||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
|||||||
Available for sale securities |
||||||||||
Restricted: |
||||||||||
FHLB stock |
$ | 2,391 | | | 2,391 | |||||
Intrieve stock |
15 | | | 15 | ||||||
|
|
|
|
|
|
|||||
2,406 | | | 2,406 | |||||||
|
|
|
|
|
|
|||||
Unrestricted: | ||||||||||
U.S. government and agency securities: |
||||||||||
FHLB debt securities |
$ | 24,294 | 245 | | 24,539 | |||||
Corporate bonds |
5,913 | 17 | (20 | ) | 5,910 | |||||
Municipal bonds |
11,827 | 95 | (119 | ) | 11,803 | |||||
Mortgage-backed securities: |
||||||||||
GNMA |
10,886 | 210 | | 11,096 | ||||||
FNMA |
14,764 | 309 | | 15,073 | ||||||
FHLMC |
16,592 | 391 | | 16,983 | ||||||
CMOs |
15,140 | 197 | | 15,337 | ||||||
|
|
|
|
|
|
|||||
99,416 | 1,464 | (139 | ) | 100,741 | ||||||
|
|
|
|
|
|
|||||
$ | 101,822 | 1,464 | (139 | ) | 103,147 | |||||
|
|
|
|
|
|
The scheduled maturities of debt securities available for sale at December 31, 2003 and 2002 were as follows:
Amortized
Cost |
Estimated
Fair Value |
||||
2003 |
|||||
Due within one year |
$ | 35 | 35 | ||
Due in one to five years |
13,133 | 13,317 | |||
Due in five to ten years |
43,875 | 43,588 | |||
Due after ten years |
17,208 | 17,124 | |||
|
|
|
|||
74,251 | 74,064 | ||||
Mortgage-backed securities |
67,602 | 66,947 | |||
|
|
|
|||
Total unrestricted securities available for sale |
$ | 141,853 | 141,011 | ||
|
|
|
F-22
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(3) | Securities : (Continued) |
Amortized
Cost |
Estimated
Fair Value |
||||
2002 |
|||||
Due within one year |
$ | 1,004 | 1,013 | ||
Due in one to five years |
17,850 | 17,908 | |||
Due in five to ten years |
15,287 | 15,402 | |||
Due after ten years |
7,893 | 7,929 | |||
|
|
|
|||
42,034 | 42,252 | ||||
Mortgage-backed securities |
57,382 | 58,489 | |||
|
|
|
|||
Total unrestricted securities available for sale |
$ | 99,416 | 100,741 | ||
|
|
|
FHLB stock is an equity interest in the Federal Home Loan Bank. Intrieve stock is an equity interest in Intrieve, Incorporated, the Banks 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.
The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2003 are as follows:
Less than 12 months
|
12 months or longer
|
Total
|
|||||||||||||
Estimated
Fair Value |
Unrealized
Losses |
Estimated
Fair Value |
Unrealized
Losses |
Estimated
Fair Value |
Unrealized
Losses |
||||||||||
Held to maturity |
|||||||||||||||
U.S. government and agency securities: |
|||||||||||||||
FHLB debt securities |
$ | 8,270 | (74 | ) | | | 8,270 | (74 | ) | ||||||
Available for sale |
|||||||||||||||
U.S. government and agency securities: |
|||||||||||||||
FHLB debt securities |
20,361 | (599 | ) | | | 20,361 | (599 | ) | |||||||
Municipal bonds |
12,422 | (332 | ) | | | 12,422 | (332 | ) | |||||||
Mortgage-backed securities: |
|||||||||||||||
GNMA |
2,891 | (20 | ) | | | 2,891 | (20 | ) | |||||||
FNMA |
27,336 | (475 | ) | | | 27,336 | (475 | ) | |||||||
FHLMC |
9,002 | (129 | ) | | | 9,002 | (129 | ) | |||||||
CMOs |
8,832 | (244 | ) | | | 8,832 | (244 | ) |
F-23
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(3) | Securities : (Continued) |
Certain securities, with amortized cost of $65.0 million and estimated fair value of $64.6 million at December 31, 2003 were pledged as collateral as permitted or required by law.
During 2003, the Company sold investment securities classified as available-for-sale for proceeds of $61.2 million resulting in gross gains of $735,000 and gross losses of $101,000. The Company sold investments securities classified as available-for-sale for proceeds of $56.8 million resulting in gross gains of $584,000 and gross losses of $16,000 during 2002. The Company sold investment securities classified as available-for-sale for proceeds of $16.1 million resulting in gross gains of $98,000 and gross losses of $10,000 during 2001.
The carrying amount of securities held to maturity and their estimated fair values follow:
December 31, 2003
|
||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
|||||||
Held to maturity securities |
||||||||||
U.S. government and agency securities: |
||||||||||
FHLB debt securities |
$ | 13,339 | 19 | (74 | ) | 13,284 | ||||
Mortgage-backed securities: |
||||||||||
GNMA |
1,632 | 50 | | 1,682 | ||||||
FNMA |
137 | 1 | | 138 | ||||||
|
|
|
|
|
|
|||||
1,769 | 51 | | 1,820 | |||||||
|
|
|
|
|
|
|||||
$ | 15,108 | 70 | (74 | ) | 15,104 | |||||
|
|
|
|
|
|
December 31, 2002
|
|||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
||||||
Held to maturity securities |
|||||||||
Mortgage-backed securities: |
|||||||||
GNMA |
$ | 2,675 | 94 | | 2,769 | ||||
FNMA |
257 | 6 | | 263 | |||||
|
|
|
|
|
|||||
$ | 2,932 | 100 | | 3,032 | |||||
|
|
|
|
|
F-24
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(3) | Securities : (Continued) |
The scheduled maturities of debt securities held to maturity at December 31, 2003 were as follows:
Amortized
Cost |
Estimated Fair Value |
||||
Due within one year |
$ | | | ||
Due in one to five years |
2,000 | 2,013 | |||
Due in five to ten years |
8,915 | 8,891 | |||
Due after ten years |
2,424 | 2,380 | |||
|
|
|
|||
13,339 | 13,284 | ||||
Mortgage-backed securities |
1,769 | 1,820 | |||
|
|
|
|||
Total unrestricted securities held to maturity |
$ | 15,108 | 15,104 | ||
|
|
|
(4) | Loans Receivable, Net : |
The Company originates most fixed rate loans for immediate sale to the Federal Home Loan Mortgage Corporation (FHLMC) or other investors. Generally, the sale of such loans is arranged at the time the loan application is received through commitments.
The components of loans receivable in the consolidated balance sheets as of December 31, 2003 and 2002 were as follows:
2003
|
2002
|
||||
Real estate loans: |
|||||
One-to-four family |
$ | 191,015 | 171,453 | ||
Multi-family |
6,254 | 4,547 | |||
Construction |
3,544 | 1,757 | |||
Non-residential |
39,615 | 32,368 | |||
|
|
|
|||
Total mortgage loans |
240,428 | 210,125 | |||
Loans secured by deposits |
3,062 | 3,003 | |||
Other consumer loans |
43,147 | 44,238 | |||
Commercial loans |
50,679 | 36,184 | |||
|
|
|
|||
337,316 | 293,550 | ||||
Less: |
|||||
Less allowance for loan losses |
2,576 | 1,455 | |||
|
|
|
|||
$ | 334,740 | 292,095 | |||
|
|
|
Loans serviced for the benefit of others totaled approximately $40.6 million, $16.7 million and $3.7 million at December 31, 2003, 2002 and 2001, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow amounts, disbursing payments to investors and foreclosure processing.
F-25
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(4) | Loans Receivable, Net : (Continued) |
Qualified one-to-four family first mortgage loans are pledged to the Federal Home Loan Bank of Cincinnati as discussed in note 8.
Impaired loans and related valuation allowance amounts at December 31, 2003 and 2002 were as follows:
2003
|
2002
|
||||
Recorded investment |
$ | 1,144 | 833 | ||
|
|
|
|||
Valuation allowance |
$ | 227 | 177 | ||
|
|
|
The average recorded investment in impaired loans for the years ended December 31, 2003, 2002 and 2001 was $789,000, $869,000, and $810,000, respectively. Interest income recognized on impaired loans was not significant during the years ended December 31, 2003, 2002 and 2001.
An analysis of the change in the allowance for loan losses for the years ended December 31, 2003, 2002 and 2001 follows:
2003
|
2002
|
2001
|
||||||||
Balance at beginning of year |
$ | 1,455 | 923 | 708 | ||||||
Loans charged off |
(656 | ) | (272 | ) | (7 | ) | ||||
Recoveries |
27 | 9 | | |||||||
Provision for loan losses |
1,750 | 795 | 222 | |||||||
|
|
|
|
|
|
|
||||
Balance at end of year |
$ | 2,576 | 1,455 | 923 | ||||||
|
|
|
|
|
|
|
Nonaccrual loans totaled $1,144,000 and $833,000 at December 31, 2003 and 2002, respectively. Interest income foregone on such loans was not significant during 2003, 2002 and 2001. The Company is not committed to lend additional funds to borrowers whose loans have been placed on a non-accrual basis.
There were no loans three months or more past due still accruing interest as of December 31, 2003 and 2002.
The Company originates loans to officers and directors at terms substantially identical to those available to other borrowers. Loans to officers and directors at December 31, 2003 and 2002 were approximately $4,868,000 and $5,049,000, respectively. At December 31, 2003 funds committed that were undisbursed to officers and directors approximated $770,000.
F-26
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(4) | Loans Receivable, Net : (Continued) |
The following summarizes activity of loans to officers and directors for the year ended December 31, 2003 and 2002:
2003
|
2002
|
|||||||
Balance at beginning of period |
$ | 5,049 | $ | 3,482 | ||||
New loans |
1,850 | 1,907 | ||||||
Principal repayments |
(2,031 | ) | (340 | ) | ||||
|
|
|
|
|
|
|||
Balance at end of period |
$ | 4,868 | $ | 5,049 | ||||
|
|
|
|
|
|
(5) | Premises and Equipment : |
Components of premises and equipment included in the consolidated balance sheets as of December 31, 2003 and 2002 consisted of the following:
2003
|
2002
|
||||
Land |
$ | 1,101 | 904 | ||
Land improvements |
107 | 84 | |||
Buildings |
4,574 | 3,852 | |||
Furniture and equipment |
1,684 | 1,284 | |||
|
|
|
|||
7,466 | 6,124 | ||||
Less accumulated depreciation |
1,460 | 1,165 | |||
|
|
|
|||
$ | 6,006 | 4,959 | |||
|
|
|
Depreciation expense was approximately $319,000, $236,000, and $157,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
(6) | Intangible Assets: |
Goodwill is tested for impairment on an annual basis and as events or circumstances change that would more likely than not reduce fair value below its carrying amount. The Company completed its review and determined there was no impairment of goodwill as of December 31, 2003.
F-27
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(6) | Intangible Assets : (Continued) |
The changes in the carrying amounts of other intangible assets for the years ended December 31, 2003 and 2002, are as follows:
Core Deposit Intangible |
Insurance Contracts Intangible |
Total
|
||||||||
Balance, January 1, 2002 |
$ | | | | ||||||
Fulton Division acquisition |
2,509 | | 2,509 | |||||||
Fall and Fall acquisition |
| 128 | 128 | |||||||
Amortization |
(120 | ) | (6 | ) | (126 | ) | ||||
|
|
|
|
|
|
|
||||
Balance, December 31, 2002 |
2,389 | 122 | 2,511 | |||||||
Amortization |
(360 | ) | (18 | ) | (378 | ) | ||||
|
|
|
|
|
|
|
||||
Balance, December 31, 2003 |
$ | 2,029 | 104 | 2,133 | ||||||
|
|
|
|
|
|
|
The estimated amortization expense for intangible assets for the subsequent five years is as follows:
Core Deposit Intangible |
Insurance Contracts Intangible |
Total
|
|||||
2004 |
$ | 358 | 18 | 376 | |||
2005 |
358 | 18 | 376 | ||||
2006 |
358 | 18 | 376 | ||||
2007 |
358 | 18 | 376 | ||||
2008 |
358 | 18 | 376 | ||||
Thereafter |
239 | 14 | 253 | ||||
|
|
|
|
||||
$ | 2,029 | 104 | 2,133 | ||||
|
|
|
|
(7) | Deposits : |
At December 31, 2003, the scheduled maturities of other time deposits were as follows:
2004 |
$ | 130,925 | |
2005 |
42,979 | ||
2006 |
54,796 | ||
2007 |
14,312 | ||
2008 |
17,472 | ||
|
|
||
$ | 260,484 | ||
|
|
F-28
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(7) | Deposits : (Continued) |
The amount of other time deposits with a minimum denomination of $100,000 was approximately $82,135,000 and $61,740,000 at December 31, 2003 and 2002, respectively.
Interest expense on deposits for the years ended December 31, 2003, 2002 and 2001 are summarized as follows:
2003
|
2002
|
2001
|
|||||
Demand and NOW accounts |
$ | 655 | 385 | 213 | |||
Money market accounts |
460 | 187 | 829 | ||||
Savings |
459 | 920 | 141 | ||||
Other time deposits |
9,322 | 6,598 | 7,523 | ||||
|
|
|
|
||||
$ | 10,896 | 8,090 | 8,706 | ||||
|
|
|
|
The Bank maintains clearing arrangements for its demand, NOW and money market accounts with Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 2003, average daily clearings were approximately $1,447,000.
(8) | Advances from Federal Home Loan Bank : |
FHLB advances are summarized as follows:
December 31,
|
||||||||||||
2003
|
2002
|
|||||||||||
Type of Advances |
Amount
|
Weighted
Average Rate |
Amount
|
Weighted
Average Rate |
||||||||
Fixed-rate |
$ | 54,353 | 3.19 | % | $ | 23,623 | 4.57 | % | ||||
|
|
|
|
|
|
|
|
Scheduled maturities of FHLB advances as of December 31, 2003 are as follows:
Years Ended December 31, |
|||
2004 |
$ | 12,350 | |
2005-2008 |
16,522 | ||
2009-2013 |
25,481 | ||
|
|
||
$ | 54,353 | ||
|
|
The Bank has an approved line of credit of $30,000,000 at December 31, 2003 which is secured by a blanket agreement to maintain residential first mortgage loans with a principal value of 125% of the outstanding advances and has a variable interest rate. The Company can increase its borrowings from the FHLB by $38,068,000 at December 31, 2003.
F-29
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(9) | Financial Instruments : |
The Company 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, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.
December 31
|
|||||
2003
|
2002
|
||||
Commitments to extend credit |
$ | 19,116 | 23,421 | ||
Standby letters of credit |
837 | 1,224 |
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 many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the counter-party. Collateral held varies but may include property, plant, and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The fair value of standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the present creditworthiness of such
F-30
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(9) | Financial Instruments : (Continued) |
counterparties. Such commitments have been made on terms which are competitive in the markets in which the Company operates, thus, the fair value of standby letters of credit equals the carrying value for the purposes of this disclosure. The maximum potential amount of future payments that the Company could be required to make under the guarantees totaled $837,000 at December 31, 2003.
The estimated fair values of financial instruments were as follows at December 31, 2003:
Carrying
Amount |
Estimated
Fair Value |
||||
Financial assets: |
|||||
Cash and due from banks |
$ | 12,958 | 12,958 | ||
Interest-earning deposits in Federal Home Loan Bank |
35 | 35 | |||
Federal funds sold |
2,185 | 2,185 | |||
Securities available for sale |
143,514 | 143,514 | |||
Securities held to maturity |
15,108 | 15,104 | |||
Loans receivable |
334,740 | 337,666 | |||
Accrued interest receivable |
2,849 | 2,849 | |||
Bank owned life insurance |
6,628 | 6,628 | |||
Financial liabilities: |
|||||
Deposits |
417,488 | 423,832 | |||
Advances from borrowers for taxes and insurance |
199 | 199 | |||
Advances from Federal Home Loan Bank |
54,353 | 53,382 | |||
Subordinated debentures |
10,310 | 10,310 | |||
Off-balance-sheet liabilities: |
|||||
Commitments to extend credit |
| | |||
Commercial letters of credit |
| |
F-31
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(9) | Financial Instruments : (Continued) |
The estimated fair values of financial instruments were as follows at December 31, 2002:
Carrying
Amount |
Estimated
Fair Value |
||||
Financial assets: |
|||||
Cash and due from banks |
$ | 9,288 | 9,288 | ||
Interest-earning deposits in Federal Home Loan Bank |
905 | 905 | |||
Federal funds sold |
3,840 | 3,840 | |||
Securities available for sale |
103,147 | 103,147 | |||
Securities held to maturity |
2,932 | 3,032 | |||
Loans receivable |
292,095 | 294,724 | |||
Accrued interest receivable |
2,329 | 2,329 | |||
Bank owned life insurance |
1,547 | 1,547 | |||
Financial liabilities: |
|||||
Deposits |
353,655 | 365,710 | |||
Advances from borrowers for taxes and insurance |
211 | 211 | |||
Advances from Federal Home Loan Bank |
23,623 | 24,890 | |||
Off-balance-sheet liabilities: |
|||||
Commitments to extend credit |
| | |||
Commercial letters of credit |
| |
(10) | Trust Preferred Securities : |
On September 25, 2003, the Company formed HopFed Capital Trust I (the Trust). The Trust is a statutory trust formed under the laws of the state of Delaware. In September 2003, the Trust issued variable rate capital securities with an aggregate liquidation amount of $10,000,000 ($1,000 per preferred security) to a third-party investor. The Company then issued floating rate junior subordinated debentures aggregating $10,310,000 to the Trust. The junior subordinated debentures are the sole assets of the Trust. The junior subordinated debentures and the capital securities pay interest and dividends, respectively, on a quarterly basis. The variable interest rate is the three-month LIBOR plus 3.10% adjusted quarterly (4.24% at December 31, 2003). These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities can be redeemed contemporaneously, in whole or in part, beginning October 8, 2008 at a redemption price of $1,000 per capital security.
The Company has provided a full-irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the Trust under the capital securities in the event of the occurrence of an event of default, as defined in such guarantee. Debt issuance cost and underwriting fees of $190,000 were capitalized related to the offering and are being amortized over the estimated life of the junior subordinated debentures. The trust agreement contains provisions that enable the Company to defer making interest payments for a period of up to five years.
F-32
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(11) | Concentrations of Credit Risk : |
Most of the Banks 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 and cash equivalents with financial institutions exceeded the insurance coverage as of December 31, 2003 and 2002. The excess balance of such items as of December 31, 2003 and 2002 was $1.5 million and 3.9 million, respectively.
(12) | Employee Benefit Plans : |
Pension Plan
The Bank had maintained a defined benefit pension plan covering substantially all of its employees who satisfy certain age and service requirements. The benefits were based on years of service and the employees average earnings which were computed using the five consecutive years prior to retirement that yield the highest average. The Banks funding policy was to contribute annually, actuarially determined amounts to finance the plan benefits.
During September 2001, the Bank Board of Directors authorized management to terminate the plan effective December 31, 2001. This action resulted in the Company recognizing a pretax curtailment loss of approximately $1.4 million. During 2003, termination of the plan was completed with distribution of all plan assets. A settlement loss of $990,000 was incurred during 2003.
The following table sets forth the plans funded status and amounts recognized in the consolidated balance sheets at December 31:
2003
|
2002
|
|||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 2,643 | $ | 2,633 | ||||
Service cost |
| | ||||||
Interest costs |
52 | 195 | ||||||
Actuarial loss |
| 10 | ||||||
Benefits paid |
(3,685 | ) | (195 | ) | ||||
Settlements |
990 | | ||||||
|
|
|
|
|
|
|||
Benefit obligation at end of year |
| 2,643 | ||||||
|
|
|
|
|
|
F-33
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Percentages)
(12) | Employee Benefit Plans : (Continued) |
Pension Plan (Continued)
2003
|
2002
|
|||||||
Change in plan assets |
||||||||
Fair value of plan assets at beginning of year |
$ | 1,415 | 1,244 | |||||
Actual return on plan assets |
52 | 55 | ||||||
Employers contributions |
2,218 | 311 | ||||||
Benefits paid |
(3,685 | ) | (195 | ) | ||||
|
|
|
|
|
|
|||
Fair value of plan assets at end of year |
| 1,415 | ||||||
|
|
|
|
|
|
|||
Funded status |
(1,228 | ) | ||||||
Unrecognized net asset |
| (16 | ) | |||||
|
|
|
|
|
|
|||
Accrued pension cost |
$ | | $ | (1,244 | ) | |||
|
|
|
|
|
|
Weighted average assumptions used to develop the net periodic pension cost were:
2002
|
2001
|
|||||
Discount rate |
6.75 | % | 7.70 | % | ||
Expected long-term rate of return on assets |
7.00 | % | 7.00 | % | ||
Rate of increase in compensation levels |
N/A | 4.50 | % |
The components of net periodic pension cost for the years ended December 31, were as follows:
2003
|
2002
|
2001
|
||||||||
Service cost |
$ | | $ | | 92 | |||||
Interest cost on projected benefit obligation |
52 | 195 | 266 | |||||||
Expected return on plan assets |
| (85 | ) | (132 | ) | |||||
Amortization of transitional asset |
| (6 | ) | (7 | ) | |||||
Amortization of prior service cost |
| | 15 | |||||||
Amortization of net loss |
| 42 | 85 | |||||||
|
|
|
|
|
|
|
||||
Net periodic pension cost |
$ | 52 | $ | 146 | 319 | |||||
|
|
|
|
|
|
|
F-34
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(12) | Employee Benefit Plans : (Continued) |
Stock Option Plan
On February 24, 1999, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 1999 Stock Option Plan (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 reserved 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 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).
On May 31, 2000, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2000 Stock Option Plan (the 2000 Option Plan). Under the 2000 Option Plan, the option committee has discretionary authority to grant stock options to such employees as the committee shall designate. The 2000 Option Plan reserves 40,000 shares of common stock for issuance upon the exercise of options. The Company will receive the exercise price for shares of common stock issued to 2000 Option Plan participants upon the exercise of their option. The Board of Directors has granted options to purchase 40,000 shares of common stock under the 2000 Option Plan at an exercise price of $10.00 per share, which was the fair market value on the date of the grant.
The options granted become vested and exercisable as follows: 25% on May 31, 2001, 25% on May 31, 2002, 25% on May 31, 2003 and 25% on May 31, 2004 (subject to immediate vesting upon certain events, including death or normal retirement of participant).
F-35
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(12) | Employee Benefit Plans : (Continued) |
Stock Option Plan (Continued)
The following summary represents the activity under the stock option plans:
Number
of Shares |
Weighted
Average Exercise Price |
|||||
Options outstanding, January 1, 2002 |
402,309 | $ | 16.05 | |||
Granted |
| |||||
Exercised |
| |||||
Forfeited |
| |||||
|
|
|||||
Options outstanding, December 31, 2002 |
402,309 | 16.05 | ||||
Granted |
| |||||
Exercised |
| |||||
Forfeited |
(148,557 | ) | 17.42 | |||
|
|
|||||
Options outstanding, December 31, 2003 |
253,752 | 15.05 | ||||
|
|
The following is a summary of stock options outstanding at December 31, 2003:
Exercise Price |
Weighted
Average Remaining Contractual Life (Years) |
Options
Outstanding |
Options
Exercisable |
|||
$ 17.42 |
4.2 | 153,752 | 153,752 | |||
12.33 |
6.8 | 60,000 | 27,500 | |||
10.00 |
6.4 | 40,000 | 30,000 | |||
|
|
|||||
15.05 |
5.3 | 253,752 | 211,252 | |||
|
|
The weighted average fair value of options granted during December 31, 2001 was $7.68 per share. 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 3.44%, volatility of 32.00%, expected dividend yield of 3.67% and expected life of six years for options granted during the year ended December 31, 2001.
F-36
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Percentages)
(12) | Employee Benefit Plans : (Continued) |
401(K) Plan
During 2002, the Bank initiated a 401(k) retirement program. The plan is available to all employees who meet minimum eligibility requirements. Participants may generally contribute up to 15% of earnings, and in addition, management will match employee contributions up to 4%. Expense related to Company contributions amounted to $208,000 and $135,000 in 2003 and 2002, respectively.
Deferred Compensation Plan
During the third quarter of 2002, the Company purchased assets and assumed the liabilities relating to a nonqualified deferred compensation plan for certain employees of the Fulton division. The Company owns single premium life insurance policies on the life of each participant and is the beneficiary of the policy value. When a participant retires, the benefits accrued for each participant will be distributed to the participant in equal installments for 15 years. The Company expense for 2003 amounted to $19,000.
The Deferred Compensation Plan also provides the participant with life insurance coverage, which is a percentage of the net death proceeds for the policy, if any, applicable to the participant.
(13) | Income Taxes : |
The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consisted of the following:
2003
|
2002
|
2001
|
||||||||
Current |
||||||||||
Federal |
$ | 1,536 | $ | 2,374 | 1,436 | |||||
State |
| | | |||||||
|
|
|
|
|
|
|
||||
1,536 | 2,374 | 1,436 | ||||||||
Deferred |
38 | (28 | ) | (463 | ) | |||||
|
|
|
|
|
|
|
||||
$ | 1,574 | $ | 2,346 | 973 | ||||||
|
|
|
|
|
|
|
Total income tax expense for the years ended December 31, 2003, 2002 and 2001 differed from the amounts computed by applying the federal income tax rate of 34 percent to income before income taxes as follows:
2003
|
2002
|
2001
|
|||||||||
Expected federal income tax expense at statutory tax rate |
$ | 1,723 | $ | 2,360 | 953 | ||||||
Effect of nontaxable interest income |
(213 | ) | (94 | ) | (14 | ) | |||||
Other |
64 | 80 | 34 | ||||||||
|
|
|
|
|
|
|
|
||||
Total federal income tax expense |
$ | 1,574 | 2,346 | 973 | |||||||
|
|
|
|
|
|
|
|
||||
Effective rate |
31.2 | % | 33.8 | % | 34.6 | % | |||||
|
|
|
|
|
|
|
|
F-37
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(13) | Income Taxes : (Continued) |
The components of deferred taxes as of December 31, 2003 and 2002 are summarized as follows:
2003
|
2002
|
||||||
Deferred tax liabilities: |
|||||||
FHLB stock dividends |
$ | (573 | ) | (541 | ) | ||
Post 1987 bad debt reserves |
| (50 | ) | ||||
Unrealized appreciation on securities available for sale |
| (451 | ) | ||||
|
|
|
|
|
|||
(573 | ) | (1,042 | ) | ||||
|
|
|
|
|
|||
Deferred tax assets: |
|||||||
Bad debt reserves |
876 | 495 | |||||
Pension cost |
| 473 | |||||
Accrued interest expense |
4 | 5 | |||||
Accrued expenses |
59 | 22 | |||||
Unrealized depreciation on securities available for sale |
286 | | |||||
|
|
|
|
|
|||
1,225 | 995 | ||||||
|
|
|
|
|
|||
Net deferred tax asset (liability) |
$ | 652 | (47 | ) | |||
|
|
|
|
|
The Small Business Protection Act of 1996, among other things, repealed the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. For each of the years ended December 31, 2003 and 2002, the Bank recaptured approximately $146,000 of tax bad debt reserves into taxable income. Thrifts such as the Bank may now only use the same tax bad debt reserve method that is allowed for commercial banks. 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 portion of a thrifts 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, 2003 and 2002 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided.
F-38
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(14) | 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 consolidated financial statements.
The Bank had open loan commitments at December 31, 2003 and 2002 of approximately $8,486,000 and $6,346,000, respectively. Of these amounts, approximately $2,012,000 and $930,000 as of December 31, 2003 and 2002, respectively, were for fixed rate loans. The interest rates for the fixed rate loan commitments ranged from 4.25% to 5.75% and 5.13% to 6.25% for December 31, 2003 and 2002, respectively. Unused lines of credit were approximately $10,630,000 and $17,075,000 as of December 31, 2003 and 2002, respectively.
The Company and the Bank have agreed to enter into employment agreements with certain officers, which provide certain benefits in the event of their termination following a change in control of the Company or the Bank. The employment agreements provide for an initial term of three years. On each anniversary of the commencement date of the employment agreements, the term of each agreement may be extended for an additional year at the discretion of the Board. In the event of a change in control of the Company or the Bank, as defined in the agreement, the officers shall be paid an amount equal to two times the officers base salary as defined in the employment agreement.
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.
(15) | Regulatory Matters : |
The Company is a unitary thrift holding company and, as such, is subject to regulation, examination and supervision by the Office of Thrift Supervision (OTS).
The Bank is also subject to various regulatory requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). Management believes, as of December 31, 2003 and 2002, that the Bank meets all capital adequacy requirements to which it is subject.
F-39
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Percentages)
(15) | Regulatory Matters : (Continued) |
The most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total, tangible and core capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institutions category.
The Companys and the Banks actual capital amounts and ratios as of December 31, 2003 and 2002 are presented below (dollars in thousands):
Company Actual |
Bank Actual |
Required for
Capital Adequacy Purposes |
Required to be
Categorized as Well Capitalized Under Prompt Corrective Action Provisions |
|||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||
As of December 31, 2003 |
||||||||||||||||||||||||
Tangible capital to adjusted total assets |
$ | 52,258 | 9.9 | % | $ | 49,971 | 9.6 | % | $ | 7,852 | 1.50 | % | N/A | N/A | ||||||||||
Core capital to adjusted total assets |
$ | 52,258 | 9.9 | % | $ | 49,971 | 9.6 | % | $ | 20,939 | 4.00 | % | $ | 26,174 | 5.00 | % | ||||||||
Total capital to risk weighted assessment |
$ | 54,834 | 17.1 | % | $ | 52,547 | 16.5 | % | $ | 25,489 | 8.00 | % | $ | 31,862 | 10.00 | % | ||||||||
Tier I capital to risk weighted assets |
$ | 52,258 | 16.3 | % | $ | 49,971 | 15.7 | % | N/A | N/A | $ | 19,117 | 6.00 | % | ||||||||||
As of December 31, 2002 |
||||||||||||||||||||||||
Tangible capital to adjusted total assets |
$ | 39,803 | 9.5 | % | $ | 37,705 | 9.0 | % | $ | 6,265 | 1.50 | % | N/A | N/A | ||||||||||
Core capital to adjusted total assets |
$ | 39,803 | 9.5 | % | $ | 37,705 | 9.0 | % | $ | 16,708 | 4.00 | % | $ | 20,884 | 5.00 | % | ||||||||
Total capital to risk weighted assets |
$ | 41,258 | 15.5 | % | $ | 39,160 | 14.8 | % | $ | 21,129 | 8.00 | % | $ | 26,411 | 10.00 | % | ||||||||
Tier I capital to risk weighted assets |
$ | 39,803 | 14.9 | % | $ | 37,705 | 14.3 | % | N/A | N/A | $ | 15,847 | 6.00 | % |
(16) | Stockholders Equity : |
The Companys sources of income and funds for dividends to its stockholders are earnings on its investments and dividends from the Bank. The Banks primary regulator, the OTS, has regulations that impose certain restrictions on payment of dividends to the Company. Current regulations of the OTS allow the Bank (based upon its current capital level and supervisory status assigned by the OTS) to pay a dividend of up to 100% of net income to date during the calendar year plus the retained income for the preceding two years.
F-40
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(16) | Stockholders Equity : (Continued) |
Supervisory approval is not required, but 30 days prior notice to the OTS is required. Any capital distribution in excess of this amount would require supervisory approval. Capital distributions are further restricted should the Banks capital level fall below the fully phased-in capital requirements of the OTS. In no case will the Bank be allowed to make capital distributions reducing equity below the required balance of the liquidation account. No dividends were paid by the Bank to the Company during the years ended December 31, 2003 and 2002. The Bank paid dividends to the Company totaling $8,000,000 during the year ended December 31, 2001.
OTS regulations also place restrictions after the conversion on the Company with respect to repurchases of its common stock. With prior notice to the OTS, the Company is allowed to repurchase its outstanding shares. During 2001 and 2000, the Company requested and received regulatory approval to acquire a total of 500,000 shares of its outstanding common stock. As of December 31, 2003, 408,909 shares had been repurchased at an average price of $11.88 per share.
(17) | Earnings Per Share : |
Earnings per share of common stock are based on the weighted average number of basic shares and dilutive shares outstanding during the year.
The following is a reconciliation of weighted average common shares for the basic and dilutive earnings per share computations:
Years Ended December 31,
|
||||||
2003
|
2002
|
2001
|
||||
Basic earnings per share: |
||||||
Weighted average common shares |
3,630,396 | 3,630,668 | 3,758,053 | |||
|
|
|
||||
Diluted earnings per share: |
||||||
Weighted average common shares |
3,630,396 | 3,630,668 | 3,758,053 | |||
Diluted effect of stock options |
23,578 | 5,812 | 6,639 | |||
|
|
|
||||
Weighted average common and incremental shares |
3,653,974 | 3,636,480 | 3,764,692 | |||
|
|
|
F-41
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(18) | Condensed Parent Company Only Financial Statements : |
The following condensed balance sheets as of December 31, 2003 and 2002 and condensed statements of income and cash flows for the years ended December 31, 2003, 2002 and 2001 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto.
Consolidated Balance Sheets:
2003
|
2002
|
||||||
Assets: |
|||||||
Cash and due from banks |
$ | 21 | 25 | ||||
Receivable from subsidiary |
138 | 69 | |||||
Federal funds sold |
2,185 | 2,440 | |||||
Investment in subsidiary |
34,375 | 23,860 | |||||
Prepaid expenses and other assets |
499 | | |||||
|
|
|
|
|
|||
Total assets |
$ | 37,218 | 26,394 | ||||
|
|
|
|
|
|||
Liabilities and equity |
|||||||
Liabilities: |
|||||||
Dividends payable |
435 | 399 | |||||
Interest payable |
120 | | |||||
Subordinated debentures |
10,310 | | |||||
|
|
|
|
|
|||
Total liabilities |
10,865 | 399 | |||||
|
|
|
|
|
|||
Equity: |
|||||||
Common stock |
40 | 40 | |||||
Additional paid-in capital |
21,442 | 21,442 | |||||
Retained earnings |
10,284 | 8,495 | |||||
Treasury stock |
(4,857 | ) | (4,857 | ) | |||
Accumulated other comprehensive |
(556 | ) | 875 | ||||
|
|
|
|
|
|||
Total equity |
26,353 | 25,995 | |||||
|
|
|
|
|
|||
Total liabilities and equity |
$ | 37,218 | 26,394 | ||||
|
|
|
|
|
F-42
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(18) | Condensed Parent Company Only Financial Statements : (Continued) |
Condensed Income Statements:
2003
|
2002
|
2001
|
||||||||
Interest and dividend income |
||||||||||
Dividend income |
$ | | | 8,000 | ||||||
Time deposits |
22 | 4 | 56 | |||||||
|
|
|
|
|
|
|
||||
Total interest and dividend income |
22 | 4 | 8,056 | |||||||
|
|
|
|
|
|
|
||||
Interest expense |
119 | | | |||||||
Non-interest expenses |
117 | 132 | 133 | |||||||
|
|
|
|
|
|
|
||||
Total expenses |
236 | 132 | 133 | |||||||
|
|
|
|
|
|
|
||||
Income (loss) before income taxes and equity in undistributed earnings of subsidiary |
(214 | ) | (128 | ) | 7,923 | |||||
Income tax benefit |
(73 | ) | (43 | ) | (27 | ) | ||||
|
|
|
|
|
|
|
||||
Income (loss) before equity in undistributed earnings of subsidiary |
(141 | ) | (85 | ) | 7,950 | |||||
Equity in undistributed earnings of subsidiary |
3,636 | 4,679 | (6,111 | ) | ||||||
|
|
|
|
|
|
|
||||
Net income |
$ | 3,495 | 4,594 | 1,839 | ||||||
|
|
|
|
|
|
|
F-43
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands)
(18) | Condensed Parent Company Only Financial Statements : (Continued) |
Condensed Statement of Cash Flows:
2003
|
2002
|
2001
|
||||||||
Cash flows from operating activities: |
||||||||||
Net income |
$ | 3,495 | 4,594 | 1,839 | ||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||||
Equity in undistributed earnings of subsidiary |
(3,636 | ) | (4,679 | ) | 6,111 | |||||
Increase (decrease) in: |
||||||||||
Current income taxes payable |
(69 | ) | (42 | ) | (27 | ) | ||||
Accrued expenses |
118 | | (13 | ) | ||||||
|
|
|
|
|
|
|
||||
Net cash (used in) provided by operating activities |
(92 | ) | (127 | ) | 7,910 | |||||
|
|
|
|
|
|
|
||||
Cash flows for investing activities: |
||||||||||
Prepaid and other assets |
(499 | ) | | | ||||||
Investment in subsidiary |
(8,000 | ) | | | ||||||
Investment in Trust |
(310 | ) | | | ||||||
(Advance for) payment on receivable from subsidiary |
| 4,000 | (4,000 | ) | ||||||
Net (increase) decrease in federal funds sold |
255 | (2,250 | ) | 940 | ||||||
|
|
|
|
|
|
|
||||
Net cash provided by (used in) investing activities |
(8,554 | ) | 1,750 | (3,060 | ) | |||||
|
|
|
|
|
|
|
||||
Cash flows from financing activities: |
||||||||||
Subordinated debenture issue |
10,310 | | | |||||||
Purchase of treasury stock |
| (12 | ) | (3,202 | ) | |||||
Dividends paid |
(1,668 | ) | (1,598 | ) | (1,666 | ) | ||||
|
|
|
|
|
|
|
||||
Net cash used in financing activities |
8,642 | (1,610 | ) | (4,868 | ) | |||||
|
|
|
|
|
|
|
||||
Net increase (decrease) in cash |
(4 | ) | 13 | (18 | ) | |||||
Cash at beginning of year |
25 | 12 | 30 | |||||||
|
|
|
|
|
|
|
||||
Cash at end of year |
$ | 21 | 25 | 12 | ||||||
|
|
|
|
|
|
|
F-44
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Per Share and Share Amounts)
(19) | Investments in Affiliated Companies : (Unaudited) |
Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust I (Trust), a wholly-owned statutory business trust. The Trust was formed on September 25, 2003. Summary unaudited financial information for the Trust as of December 31, 2003 follows (dollars in thousands):
Asset - Investment in subordinated debentures issued by the Company |
$ | 10,310 | |
|
|
||
Liabilities - Trust preferred securities |
$ | 10,000 | |
Equity - Common stock (100% owned by the Company) |
310 | ||
|
|
||
Total liabilities and equity |
$ | 10,310 | |
|
|
(20) | Quarterly Results of Operations : (Unaudited) |
Summarized unaudited quarterly operating results for the years ended December 31, 2003 and 2002 are as follows:
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
||||||
December 31, 2003: |
|||||||||
Interest income |
$ | 5,905 | 6,192 | 6,237 | 6,409 | ||||
Interest expense |
3,033 | 3,096 | 3,092 | 3,158 | |||||
|
|
|
|
|
|||||
Net interest income |
2,872 | 3,096 | 3,145 | 3,251 | |||||
Provision for loan losses |
400 | 450 | 450 | 450 | |||||
|
|
|
|
|
|||||
Net interest income after provision for loan losses |
2,472 | 2,646 | 2,695 | 2,801 | |||||
Noninterest income |
1,015 | 905 | 883 | 696 | |||||
Noninterest expense |
2,023 | 2,812 | 2,032 | 2,177 | |||||
|
|
|
|
|
|||||
Income before income taxes |
1,464 | 739 | 1,546 | 1,320 | |||||
Income taxes |
468 | 234 | 500 | 372 | |||||
|
|
|
|
|
|||||
Net income |
$ | 996 | 505 | 1,046 | 948 | ||||
|
|
|
|
|
|||||
Basic earnings per share |
$ | 0.27 | 0.14 | 0.29 | 0.26 | ||||
|
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.27 | 0.14 | 0.29 | 0.26 | ||||
|
|
|
|
|
|||||
Weighted average shares outstanding: |
|||||||||
Basic |
3,630,396 | 3,630,396 | 3,630,396 | 3,630,396 | |||||
|
|
|
|
|
|||||
Diluted |
3,646,737 | 3,654,347 | 3,657,996 | 3,653,974 | |||||
|
|
|
|
|
F-45
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Per Share and Share Amounts)
(20) | Quarterly Results of Operations : (Unaudited) (Continued) |
December 31, 2002: |
|||||||||
Interest income |
$ | 4,587 | 4,679 | 4,950 | 5,826 | ||||
Interest expense |
2,049 | 2,001 | 2,332 | 3,038 | |||||
|
|
|
|
|
|||||
Net interest income |
2,538 | 2,678 | 2,618 | 2,788 | |||||
Provision for loan losses |
90 | 90 | 250 | 365 | |||||
|
|
|
|
|
|||||
Net interest income after provision for loan losses |
2,448 | 2,588 | 2,368 | 2,423 | |||||
Noninterest income |
436 | 402 | 677 | 797 | |||||
Noninterest expense |
1,136 | 1,141 | 1,144 | 1,778 | |||||
|
|
|
|
|
|||||
Income before income taxes |
1,748 | 1,849 | 1,901 | 1,442 | |||||
Income taxes |
615 | 624 | 632 | 475 | |||||
|
|
|
|
|
|||||
Net income |
$ | 1,133 | 1,225 | 1,269 | 967 | ||||
|
|
|
|
|
|||||
Basic earnings per share |
$ | 0.31 | 0.34 | 0.35 | 0.26 | ||||
|
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.31 | 0.34 | 0.35 | 0.26 | ||||
|
|
|
|
|
|||||
Weighted average shares outstanding: |
|||||||||
Basic |
3,631,499 | 3,630,396 | 3,630,396 | 3,630,396 | |||||
|
|
|
|
|
|||||
Diluted |
3,631,499 | 3,636,979 | 3,637,928 | 3,639,076 | |||||
|
|
|
|
|
(21) | Comprehensive Income : |
SFAS 130, Reporting Comprehensive Income , established standards for reporting comprehensive income. Comprehensive income includes net income and other comprehensive net income which is defined as non-owner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect for the years ended December 31, 2003, 2002 and 2001:
Pre-Tax
Amount |
(Expense)
Benefit |
Net of Tax
Amount |
||||||||
December 31, 2003: |
||||||||||
Unrealized holding losses for the period |
$ | (1,534 | ) | 521 | (1,013 | ) | ||||
Reclassification adjustments for gains included in net income |
634 | (216 | ) | 418 | ||||||
|
|
|
|
|
|
|
||||
$ | (2,168 | ) | 737 | (1,431 | ) | |||||
|
|
|
|
|
|
|
F-46
HopFed Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
December 31, 2003, 2002 and 2001
(Table Amounts in Thousands, Except Per Share and Share Amounts)
(21) | Comprehensive Income : (Continued) |
Pre-Tax
Amount |
(Expense)
Benefit |
Net of Tax
Amount |
||||||||
December 31, 2002: |
||||||||||
Unrealized holding gains for the period |
$ | 1,030 | (350 | ) | 680 | |||||
Reclassification adjustments for gains included in net income |
(568 | ) | 193 | (375 | ) | |||||
|
|
|
|
|
|
|
||||
$ | 462 | (157 | ) | 305 | ||||||
|
|
|
|
|
|
|
||||
December 31, 2001: |
||||||||||
Minimum pension liability adjustment |
$ | 336 | (114 | ) | 222 | |||||
Unrealized holding gains for the period |
856 | (291 | ) | 565 | ||||||
Reclassification adjustment for gains included in net income |
(88 | ) | 30 | (58 | ) | |||||
|
|
|
|
|
|
|
||||
$ | 1,104 | (375 | ) | 729 | ||||||
|
|
|
|
|
|
|
F-47
INDEPENDENT AUDITORS Rayburn, Betts & Bates, P.C. 5200 Maryland Way, Suite 300 Brentwood, Tennessee 37027 |
Annual Report on Form 10-K A copy of the Companys 2003 Annual Report on Form 10-k will be furnished without charge to stockholders as of the record date for the 2003 Annual Meeting upon written request to the Secretary, HopFed Bancorp, Inc., 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240. |
|
GENERAL COUNSEL Deatherage, Myers, Self & Lackey 701 South Main Street Hopkinsville, Kentucky 42241 |
Market and Dividend Information Since February 9, 1998, the Common Stock has been quoted on the NASDAQ Stock Exchange under the symbol HFBC. As of March 20, 2004, there were approximately 2,700 shareholders of the Companys Common Stock, with 1,217 held in the name of the owner and the remainder held in street name. Following are the high and low stock prices of the Common Stock for the periods indicated. |
|
SPECIAL COUNSEL Cozen OConner 1667 K Street NW Suite 500 Washington, DC 20006 |
||
TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 |
Dividends of $0.11 per share were declared in each of the four quarters of 2002 and the first quarter in 2003. Dividends of $0.12 per share were declared in the second, third and fourth quarters of 2003.
Dividends, when and if paid, are subject to determination and declaration by the Board of Directors at its discretion, which will take into account the Companys consolidated financial condition and results of operations, regulatory restrictions, and other factors, and there can be no assurances 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. |
|
ANNUAL MEETING The 2003 Annual Meeting of Stockholders will be held on May 19, 2004, at 3:00 p.m. at the Hopkinsville Christian County Conference and Convention Center, 303 Conference Center Drive, Hopkinsville, Kentucky 42240. |
PRICE RANGE OF COMMON STOCK
Year Ended December 31, 2002
|
Year Ended December 31, 2003
|
|||||||||||
High
|
Low
|
High
|
Low
|
|||||||||
First Quarter |
$ | 11.57 | $ | 9.78 | $ | 15.82 | $ | 13.00 | ||||
Second Quarter |
$ | 12.42 | $ | 10.46 | $ | 16.49 | $ | 14.07 | ||||
Third Quarter |
$ | 12.53 | $ | 12.02 | $ | 17.25 | $ | 15.91 | ||||
Fourth Quarter |
$ | 13.37 | $ | 11.82 | $ | 17.90 | $ | 16.00 |
Exhibit 14
HOPFED BANCORP, INC.
CODE OF ETHICS
This Code of Ethics of HopFed Bancorp, Inc. and its subsidiaries (collectively, the Company) sets forth principles for maintaining high ethical standards. It is the obligation of all directors, officers and other employees to understand and adhere to this Code of Ethics and the Companys other policies and procedures, and to consider how their actions may be interpreted by others. Failure to abide by these standards can be grounds for disciplinary action up to and including dismissal.
Principles
The Board of Directors endorses the following principles, as a matter of the Companys corporate policy:
| Applicable laws, regulations, policies and procedures shall be complied with. |
| Directors, officers and other employees shall be honest and fair in all of their actions and relationships, and shall appropriately document all material actions. |
| Books and records shall be accurate, and in accordance with acceptable accounting practices. |
| Directors, officers and other employees shall scrupulously avoid any action or interest that conflicts, or may appear to conflict, with the interests of the Company or its customers. |
| Directors, officers and other employees shall maintain the confidentiality of information pertaining to customers, suppliers, employees or the Company itself, except when disclosure is required by law, regulation or legal proceeding. |
Conflicts of Interest
Conflicts of interest, or potential conflicts of interest, must be identified and addressed. A conflict of interest will arise whenever personal interests interfere or conflict (or appear to interfere or conflict) with the Companys interests. Conflicts of interest may not always be apparent, and officers and other employees should consult with senior management who will determine if particular situations are acceptable.
Confidentiality
The Company shall protect the confidentiality and integrity of data and information entrusted to it by customers, stockholders and employees. Directors, officers and other employees must maintain the confidentiality of this information even after leaving the Company. Directors, officers and other employees must also prevent misuse of confidential information. Confidential information includes all non-public information that, if publicly disclosed, might
benefit the Companys competition or harm the Company, or its customers, stockholders or employees.
SEC and Other Reporting
As a public company, the Companys filings with the Securities and Exchange Commission and other regulatory agencies must be accurate and timely.
Financial Statements and Other Records
The Companys books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Companys transactions and must conform both to applicable legal requirements and to the Companys system of internal controls. Unrecorded or off the books funds or assets should not be maintained unless permitted by applicable law or regulation.
Records should always be retained or destroyed according to the Companys record retention policies.
Fair Dealing
All dealings with customers, prospects, suppliers, competitors, and employees must be conducted in accordance with applicable laws and regulations and on terms that are fair and in the best interests of the Company. No director, officer or other employee should take unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation or other unfair dealings. Applicable laws and regulations pertaining to anti-money laundering, record keeping, antitrust, fair competition, anti-racketeering, and anti-bribery laws shall be complied with.
Directors, officers and other employees shall deal with current and prospective customers, prospects, suppliers, and employees without any discrimination because of race, color, creed, religion, sex, national origin, ancestry, citizenship status, age, marital status, sexual orientation, physical or mental disability, veteran status, liability for service in the Armed Forces of the United States, or any other classification prohibited by applicable laws and regulations. The Company shall maintain an environment free of harassment, discrimination, or intimidation.
Compliance with the Laws, Regulations, Policies and Procedures
All directors, officers and other employees are expected to understand and comply with all laws, regulations, policies and procedures that apply to them in their respective positions with the Company.
Directors, officers and other employees shall not participate in any illegal or criminal activity. Any employee who has been convicted of or pleaded guilty to a felony or who has been sanctioned by a regulatory agency must immediately report such information in writing to senior management. Directors, officers and other employees shall also respond to specific inquiries of the Companys independent public accounting firm.
2
Every possible situation cannot be anticipated. If a director, officer or other employee is uncertain about any aspect of this Code of Ethics and how it should be applied or interpreted, he or she is encouraged to discuss it with senior management.
Accounting Complaints
If any director, officer or other employee has unresolved concerns or complaints regarding accounting or auditing matters of the Company, then he or she is encouraged to submit those concerns or complaints (anonymously, confidentially or otherwise) to the Audit Committee. Submissions may be directed to the attention of the Audit Committee or any director who is a member of the Audit Committee, at the principal executive offices of the Company.
Non-Retaliation
The Company prohibits retaliation of any kind against any individual who has made a good faith reports or complaints of an observed or suspected of this Code or other known or suspected illegal or unethical conduct.
All directors, officers and other employees in supervisory, managerial, or other sensitive positions are required annually to certify that they have read, understand, and comply with the Code of Ethics.
The Code of Ethics shall be revised periodically to ensure that it addresses new statutes and contemporary legal issues, as appropriate.
3
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percentage Owned
|
Jurisdiction of Incorporation |
|||
Heritage Bank |
100% | United States | ||
HopFed Capital Trust I |
100% | Delaware |
SUBSIDIARIES OF HERITAGE BANK
Percentage Owned
|
Jurisdiction of
Incorporation |
|||
Fall & Fall Insurance, Inc. |
100% | Kentucky |
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement No. 333-79391 of HopFed Bancorp, Inc. on Form S-8, of our report dated January 30, 2004, appearing in the Annual Report to Shareholders of HopFed Bancorp, Inc. for the year ended December 31, 2003 incorporated by reference in this Form 10-K.
Brentwood, Tennessee Date: March 30, 2004 |
/s/ Rayburn, Betts & Bates, P.C. |
EXHIBIT 31.1
CERTIFICATIONS
I, John E. Peck, certify that:
(1) | I have reviewed this annual report on Form 10-K of HopFed Bancorp, Inc.; |
(2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
(3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
(4) | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrants internal control over financial reporting; and |
(5) | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 30, 2004 |
/s/ John. E. Peck |
|
John E. Peck, Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Billy C. Duvall, certify that:
(1) | I have reviewed this annual report on Form 10-K of HopFed Bancorp, Inc.; |
(2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
(3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
(4) | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrants internal control over financial reporting; and |
(5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrants ability to record, process, summarize and report financial information ; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 30, 2004 |
/s/ Billy C. Duvall |
|
Billy C. Duvall, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HopFed Bancorp, Inc. (the Company) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John E. Peck, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) | The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and |
2) | The information contained in the Report fairly presents, in all material respects, the financial condition and the result of operations of the Company. |
Date: March 30, 2004
/s/ John E. Peck |
John E. Peck, Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to HopFed Bancorp, Inc. and will be retained by HopFed Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HopFed Bancorp, Inc. (the Company) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Billy C. Duvall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) | The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and |
2) | The information contained in the Report fairly presents, in all material respects, the financial condition and the result of operations of the Company. |
Date: March 30, 2004
/s/ Billy C. Duvall |
Billy C. Duvall, Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to HopFed Bancorp, Inc. and will be retained by HopFed Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.