Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 8, 2017)
  • 10-Q (Aug 9, 2017)
  • 10-Q (May 9, 2017)
  • 10-Q (Nov 9, 2016)
  • 10-Q (Aug 9, 2016)
  • 10-Q (May 10, 2016)

 
8-K

 
Other

HopFed Bancorp 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

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.)

4155 Lafayette Road, P.O. Box 537, Hopkinsville, Kentucky   42241
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (270) 889-2999

 


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 whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check One)

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 10, 2006, the Registrant had issued and outstanding 3,640,315 shares of the Registrant’s common stock, par value $0.01 per share.

 



Table of Contents

CONTENTS

 

     PAGE

PART I. FINANCIAL INFORMATION

  

The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:

  

Item 1. Financial Statements

  

Consolidated Condensed Statements of Financial Condition as of September 30, 2006 and December 31, 2005

   2

Consolidated Condensed Statements of Income for the Three-Month and Nine-Month Periods Ended September 30, 2006 and September 30, 2005

   3

Consolidated Condensed Statements of Comprehensive Income for the Three-Month and Nine-Month Periods Ended September 30, 2006 and September 30, 2005

   4

Consolidated Condensed Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2006 and September 30, 2005

   5

Notes to Unaudited Consolidated Condensed Financial Statements

   6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   27

Item 4. Controls and Procedures

   28

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   29

Item 1A. Risk Factors

   29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   30

Item 3. Defaults Upon Senior Securities

   30

Item 4. Submission of Matters to a Vote of Security Holders

   30

Item 5. Other Information

   30

Item 6. Exhibits

   31

SIGNATURES

   31


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Financial Condition

 

    

September 30,

2006

   

December 31,

2005

 
     (Unaudited)        
     (In thousands)  
ASSETS   

Cash and due from banks

   $ 23,408     $ 13,487  

Interest-earning deposits in Federal Home Loan Bank (“FHLB”)

     136       424  

Federal funds sold

     3,500       2,250  
                

Total cash and cash equivalents

     27,044       16,161  

Securities available for sale

     174,742       172,890  

Federal Home Loan Bank stock, at cost

     3,585       3,211  

Securities held to maturity, market value of $17,729 and $17,816 at September 30, 2006 and December 31, 2005, respectively

     18,066       18,183  

Loans receivable, net of allowance for loan losses of $4,349 at September 30, 2006, and $ 4,004 at December 31, 2005, respectively

     487,601       397,310  

Goodwill

     4,989       3,689  

Intangible assets

     3,869       1,377  

Bank owned life insurance

     7,356       7,156  

Real estate owned

     321       228  

Accrued interest receivable

     4,867       3,697  

Premises and equipment, net

     22,060       7,112  

Building construction in process

     1,805       5,388  

Deferred tax asset

     1,715       1,955  

Other assets

     1,052       1,232  
                

Total assets

   $ 759,072     $ 639,589  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities:

    

Non-interest bearing deposits

   $ 52,973     $ 36,918  

Interest bearing accounts:

    

Now accounts

     84,804       96,949  

Savings & money market accounts

     77,955       97,477  

Other time deposits

     336,661       251,384  
                

Total Deposits

     552,393       482,728  

Subordinated debentures

     10,310       10,310  

Securities sold under agreements to repurchase

     23,449       —    

Advances from borrowers for taxes and insurance

     611       295  

Advances from FHLB

     115,217       93,172  

Dividends payable

     447       438  

Interest payable

     1,713       1,021  

Accrued expenses and other liabilities

     2,725       1,783  
                

Total liabilities

     706,865       589,747  
                

Stockholders’ equity:

    

Preferred stock, par value $0.01 per share; authorized 500,000 shares; none issued or outstanding at September 30, 2006 and December 31, 2005.

     —         —    

Common stock, par value $0.01 per share: authorized 7,500,000 shares; 4,068,919 issued and 3,660,315 outstanding at September 30, 2006 and 4,057,987 issued and 3,649,078 outstanding at December 31, 2005, respectively

     40       40  

Additional paid in capital

     25,882       26,019  

Retained earnings, substantially restricted

     33,270       31,525  

Treasury stock (at cost, 408,909 shares at September 30, 2006 and December 31, 2005)

     (4,857 )     (4,857 )

Unearned restricted stock

     —         (230 )

Accumulated other comprehensive loss, net of taxes

     (2,128 )     (2,655 )
                

Total stockholders’ equity

     52,207       49,842  
                

Total liabilities and stockholders’ equity

   $ 759,072     $ 639,589  
                

The balance sheet at December 31, 2005 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

2


Table of Contents

HOPFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Income

(Unaudited)

 

    

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

     2006    2005    2006    2005
     (Dollars in thousands, except share and per share data)

Interest and dividend income:

           

Interest on loans

   $ 8,712    $ 5,634    $ 22,762    $ 15,823

Interest on investments, tax exempt

     127      147      401      517

Interest and dividends on investments, taxable

     2,106      1,772      5,870      4,957

Interest on time deposits

     30      63      103      80
                           

Total interest and dividend income

     10,975      7,616      29,136      21,377
                           

Interest expense:

           

Interest on deposits

     4,465      3,157      11,845      8,425

Interest on subordinated debentures

     194      174      542      507

Interest on repurchase agreements

     236      —        357      —  

Interest on advances from FHLB

     1,420      686      3,631      2,067
                           

Total interest expense

     6,315      4,017      16,375      10,999
                           

Net interest income

     4,660      3,599      12,761      10,378

Provision for loan losses

     312      300      729      900
                           

Net interest income after provision for loan losses

     4,348      3,299      12,032      9,478
                           

Non-interest income:

           

Service charges

     1,052      498      2,326      1,594

Gain on sale of loans

     47      45      110      110

Gain on sale of securities

     —        16      42      379

Bank owned life insurance

     70      62      200      196

Financial services commissions

     189      121      442      419

Other, net

     345      228      891      551
                           

Total non-interest income

     1,703      970      4,011      3,249
                           

Non-interest expenses:

           

Salaries and benefits

     2,346      1,491      5,868      4,371

Occupancy expense, net

     476      236      1,135      720

State tax on deposits

     116      125      346      354

Data processing

     455      302      1,112      821

Intangible amortization

     240      94      430      284

Advertising

     214      151      555      490

Professional services

     375      181      1,109      507

Other operating expenses

     399      218      1,122      771
                           

Total non-interest expenses

     4,621      2,798      11,677      8,318
                           

Income before income taxes

     1,430      1,471      4,366      4,409

Income tax expense

     418      450      1,304      1,330
                           

Net income

   $ 1,012    $ 1,021    $ 3,062    $ 3,079
                           

Basic net earnings per share

   $ 0.28    $ 0.28    $ 0.84    $ 0.85
                           

Diluted net earnings per share

   $ 0.28    $ 0.28    $ 0.84    $ 0.84
                           

Dividends per share

   $ 0.12    $ 0.12    $ 0.36    $ 0.36
                           

Weighted average shares outstanding, basic

     3,637,288      3,647,917      3,634,362      3,642,667
                           

Weighted average shares outstanding, diluted

     3,663,883      3,672,394      3,656,872      3,668,724
                           

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

3


Table of Contents

HOPFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

 

    

For the Three Months

Ended September 30,

   

For the Nine Months

Ended September 30,

 
     2006     2005     2006     2005  
     (In thousands)  

Net Income

   $ 1,012       1,021     $ 3,062     $ 3,079  

Other comprehensive income, net of tax

        

Unrealized holding (loss) gains arising during period net of tax effect of ($1,096) and $574 for the three months ended September 30, 2006 and 2005, respectively, and ($313) and $677 for the nine months ended September 30, 2006 and 2005, respectively

     2,127       (1,114 )     608       (1,315 )

Reclassification for (gain) loss on derivatives, net of tax

     (16 )     94       (66 )     129  

Reclassification adjustment for gains included in net income

     —         —         (15 )     (16 )
                                

Comprehensive income

   $ 3,123     $ 1     $ 3,589     $ 1,877  
                                

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

 

4


Table of Contents

HOPFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 

    

For the Nine Months Ended

September 30,

 
     2006     2005  
     (In thousands)  

Cash flows from operating activities:

    

Net cash provided by operating activities

   $ 5,047     $ 4,559  
                

Cash flows from investing activities:

    

Proceeds from maturity of held-to-maturity securities

     138       4,742  

Proceeds from sale of available-for-sale securities

     25,471       24,220  

Purchases of available-for-sale securities

     (26,768 )     (48,519 )

Purchase of FHLB stock

     (229 )     (41 )

Net increase in loans

     (58,195 )     (18,052 )

Net cash received in acquisition

     22,421       —    

Proceeds from sale of fixed assets

     98       —    

Proceeds from sale of foreclosed assets

     641       —    

Purchases of premises and equipment

     (6,499 )     (3,345 )
                

Net cash used in investing activities

     (42,922 )     (40,995 )
                

Cash flows from financing activities:

    

Net increase (decrease) in demand deposits

     (55,410 )     32,588  

Net increase in time deposits

     59,665       911  

Advances from FHLB

     165,300       83,600  

Payments made to FHLB

     (143,255 )     (81,346 )

Increase in investment sold with intent to repurchase

     23,449       —    

Increase in advance payments by borrowers for taxes and insurance

     316       224  

Net dividends paid

     (1,307 )     (1,312 )
                

Net cash provided by financing activities

     48,758       34,665  
                

Increase (decrease) in cash and cash equivalents

     10,883       (1,771 )

Cash and cash equivalents, beginning of period

     16,161       18,249  
                

Cash and cash equivalents, end of period

   $ 27,044     $ 16,478  
                

Supplemental disclosures of cash flow information

    

Cash paid for income taxes

   $ 1,675     $ 1,390  
                

Cash paid for interest

   $ 12,601     $ 8,392  
                

Loans charged off

   $ 764     $ 437  
                

Loans foreclosed upon, repossessions or transferred to other assets

   $ 734     $ 213  
                

Capitalized interest

   $ 94     $ —    
                

Unrealized gain (loss) on AFS securities

   $ 921     $ (1,992 )
                

Increase (decrease) in deferred tax asset related to unrealized losses on investments

   $ (313 )   $ 677  
                

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

 

5


Table of Contents

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Note (1) BASIS OF PRESENTATION

HopFed Bancorp, Inc. (the “Company”) was formed at the direction of Heritage Bank, formerly known as Hopkinsville Federal Bank (the “Bank”) to become the holding company of the Bank upon the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The conversion was consummated on February 6, 1998. The Company’s primary asset is the outstanding capital stock of the converted Bank, and its sole business is that of the converted Bank. The Bank owns 100% of the stock of Fall and Fall Insurance Agency (Fall & Fall) of Fulton, Kentucky. Fall & Fall sells life and casualty insurance to both individuals and businesses. The majority of Fall and Fall’s customer base lies within the geographic footprint of the Bank. The Bank operates a financial services division in Murray, Kentucky, under the name of Heritage Solutions and a full service mortgage division in Clarksville, Tennessee, under the name Heritage Mortgage Services.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for fair presentation have been included. The results of operations and other data for the three and nine month periods ended September 30, 2006 are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2006.

The accompanying unaudited financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2005 Consolidated Financial Statements.

Note (2) EARNINGS PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations for the three and nine-months ending September 30, 2006 and September 30, 2005. Diluted common shares arise primarily from the potentially dilutive effect of the Company’s stock options outstanding.

 

6


Table of Contents
     For the Three Months Ended
     September 30, 2006    September 30, 2005

Basic EPS:

     

Net income

   $ 1,012,000    $ 1,021,000

Average common shares outstanding

     3,637,288      3,647,917
             

Earnings per share, basic

   $ 0.28    $ 0.28
             

Diluted EPS:

     

Net income

   $ 1,012,000    $ 1,021,000

Average common shares outstanding

     3,637,288      3,647,917

Dilutive effect of share based payments

     26,595      24,477
             

Average diluted shares outstanding

     3,663,883      3,672,394
             

Earnings per share, diluted

   $ 0.28    $ 0.28
             
     For the Nine Months Ended
     September 30, 2006    September 30, 2005

Basic EPS:

     

Net income

   $ 3,062,000    $ 3,079,000

Average common shares outstanding

     3,634,362      3,642,667
             

Earnings per share, basic

   $ 0.84    $ 0.85
             

Diluted EPS:

     

Net income

   $ 3,062,000    $ 3,079,000

Average common shares outstanding

     3,634,362      3,642,667

Dilutive effect of share based payments

     22,510      26,057
             

Average diluted shares outstanding

     3,656,872      3,668,724
             

Earnings per share, diluted

   $ 0.84    $ 0.84
             

 

7


Table of Contents

Note (3) STOCK COMPENSATION

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (as amended). SFAS No. 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on share-based awards to non-employees. SFAS No. 123R eliminates the ability to account for share-based compensation transactions, as the Company did, using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair-value-based method and recognized as an expense in the accompanying consolidated condensed statement of income.

The Company adopted SFAS No. 123R using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The consolidated condensed financial statement dated March 31, 2006 was the first to reflect the impact of adopting SFAS No. 123R. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. For the three and nine month periods ending September 30, 2006, the Company incurred additional compensation expense related to adopting SFAS No. 123R of $7,400 and $24,000, respectively. At September 30, 2006, the Company has 10,000 unvested stock options, with 5,000 shares vesting in May 2007 and 5,000 shares vesting in May 2008. All other options are fully vested. As a result of adopting SFAS No. 123R, the Company will incur additional after tax expense related to stock option vesting of approximately $3,600 in 2006, approximately $14,400 in 2007 and approximately $6,000 in and 2008. No stock options were issued, forfeited, or exercised in the three and nine month periods ending September 30, 2006 and September 30, 2005.

The Company utilized the Black-Scholes valuation model to determine the fair value of stock options on the date of grant. The model derives the fair value of stock options based on certain assumptions related to the expected stock prices volatility, expected option life, risk-free rate of return and the dividend yield of the stock. The expected lives of options granted are estimated based on historical employee exercise behavior. The risk free rate of return coincides with the expected life of the options and is based on the ten year Treasury note rate at the time the options are issued. The historical volatility levels of the Company’s common stock are used to estimate the expected stock price volatility. The set dividend yield is used to estimate the expected dividend yield of the stock.

SFAS No. 123R requires certain additional disclosures beyond what was included in the Company’s 2005 Annual Report. The value of vested options outstanding at September 30, 2006 was $1.6 million for options issued under the 1999 Plan and $145,000 for options issued under the 2000 Plan. The fair value of options vesting in 2006 is $27,600. Shares issued for option exercises are expected to come from authorized but unissued shares. At September 30, 2006, the Company has stock options totaling 246,723 that are eligible to be awarded. Additional stock option information at September 30, 2006 includes:

 

8


Table of Contents
    

Outstanding

Options

  

Weighted Avg

Exercise Price

  

Weighted Avg

Remaining Term

  

Aggregate

Intrinsic Value

Outstanding, September 30, 2006

   273,752    $ 15.21    3.52 years    $ 480,200

Options exercisable, September 30, 2006

   263,752    $ 15.13    3.36 years    $ 480,200

For the three and nine month periods ended September 30, 2005, the Company’s net income per share would have been adjusted to the pro forma amounts indicated below:

 

    

For the Three Months

Ended Sept. 30, 2005

   

For the Nine Months

Ended Sept. 30, 2005

 
     (Dollars in thousands, except per share amounts)  

Net income as reported

   $ 1,021     $ 3,079  

Deduct: Total stock-based compensation expense determined under fair value based method for all awards granted, net of related taxes

     (5 )     (35 )
                

Pro forma net income

   $ 1,016     $ 3,044  
                

Earnings per share:

    

Basic – as reported

   $ 0.28     $ 0.85  

Basic – pro forma

   $ 0.28     $ 0.84  

Diluted – as reported

   $ 0.28     $ 0.84  

Diluted – pro forma

   $ 0.28     $ 0.83  

The Company’s Compensation Committee granted 305 and 11,237 shares of restricted stock during the three and nine month periods ending September 30, 2006. The Company’s Compensation Committee granted 9,795 shares of restricted stock in 2005 and 8,887 shares of restricted stock in 2004. These shares vest over a four-year period but vesting may be accelerated as a result of factors outlined in the award agreement. For the three and nine month periods ending September 30, 2006, the Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $30,000 and $69,000. For the three and nine month periods ending September 30, 2005, the Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $18,000 and $38,000. The table below outlines the Company’s future compensation expense related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan for the years indicated:

 

Year Ending

  

Approximate Future

Compensation Expense

  

Affect on Income

Net of Taxes

December 31, 2006

   $ 30,000    $ 20,000

December 31, 2007

     119,000      78,000

December 31, 2008

     106,000      70,000

December 31, 2009

     64,000      42,000

December 31, 2010

     32,000      21,000

 

9


Table of Contents

The compensation committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. The early vesting of restricted stock awards due to factors outlined in the award agreement may accelerate future compensation expenses related to the plan but would not change the total amount of future compensation expense. At September 30, 2006, an additional 170,081 shares of the Company’s common stock may be award through the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan.

Effective January 1, 2006, the contra equity account Unearned Restricted Stock with a balance of $230,000 was transferred to Additional Paid in Capital.

NOTE (4) SECURITIES

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2006, the Company has 146 securities classified as available for sale with unrealized losses. Management believes these unrealized losses relate to changes in interest rates and not credit quality with the exception of $5 million (par value) in commercial paper consisting of $2 million in General Motors Acceptance Corporation (GMAC) maturing in August 2007 and $3 million in Ford Motor Credit (FMAC) maturing in increments of $1 million each in January 2007, October 2008 and October 2009. After conducting an analysis of the regulatory filings of both General Motors (parent company of GMAC) and Ford Motor Company (parent company of FMAC), management believes that both companies have adequate levels of liquidity to meet their debt service obligations for the foreseeable future despite a difficult operating environment for the parent companies. Both GMAC and FMAC are profitable subsidiaries of their parent companies and appear to be highly valued in the marketplace in the event that either parent may wish to sell all or part of these subsidiaries. During the first quarter of 2006, General Motors announced that it has agreed to sell a majority interest in GMAC to a group of outside investors.

This announcement appears to bode well for the future of GMAC and may result in future upgrades by bond rating agencies. During the nine-month period ending September 30, 2006, the overnight Federal Funds rate increased 1.00%. At the same time, the market value of the Company’s commercial bond portfolio increased by approximately $342,000. The Company continues to believe that it has the ability and intent to hold these securities until maturity, or for the foreseeable future and therefore no declines are deemed to be other than temporary. The carrying amount of securities available for sale and their estimated fair values at September 30, 2006, are as follows:

 

10


Table of Contents
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair
Value
     (Dollars in thousands)

Restricted:

          

FHLB stock

   $ 3,585    —      —       3,585
                      

Unrestricted:

          

U.S. government and agency debt securities

   $ 101,752    72    (1,518 )   100,306

Corporate bonds

     5,112    —      (185 )   4,927

Municipal bonds

     15,713    26    (370 )   15,369

Mortgage-backed securities

     40,605    89    (1,340 )   39,354

CMOs

     14,981    35    (230 )   14,786
                      
   $ 178,163    222    (3,643 )   174,742
                      

The carrying amount of securities held to maturity and their estimated fair values at September 30, 2006 is as follows:

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair
Value
     (Dollars in thousands)

U. S. government and agency debt securities

   $ 17,313    —      (343 )   16,970

Mortgage-backed securities

     753    6    —       759
                      
   $ 18,066    6    (343 )   17,729
                      

At September 30, 2006, securities with a book value of approximately $112.6 million and a market value of approximately $110.2 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law. Securities with a market value of approximately $23.4 million were sold to customers under an overnight repurchase agreement.

 

11


Table of Contents

Note (5) INVESTMENT IN AFFILIATED COMPANIES

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust 1 (“Trust”), a wholly-owned statutory business trust. The Trust was formed on September 25, 2003. Summary financial information for the Trust follows (dollars in thousands):

Summary Balance Sheet

 

     At
September 30,
2006
   At
December 31,
2005

Asset - Investment in subordinated debentures issued by Hopfed Bancorp, Inc.

   $ 10,310    $ 10,310
             

Liabilities

     —        —  

Stockholder’s equity – Trust preferred securities

   $ 10,000    $ 10,000

Common Stock (100% owned by Hopfed Bancorp, Inc.)

     310      310
             

Total stockholder’s equity

   $ 10,310    $ 10,310
             

Summary Income Statement

 

     Three months
Ended September 30,
   Nine months
Ended September 30,
     2006    2005    2006    2005

Income – Interest income from subordinated debentures issued by Hopfed Bancorp, Inc.

   $ 226    $ 174    $ 635    $ 507
                           

Net Income

   $ 226    $ 174    $ 635    $ 507
                           

Summary Statement of Stockholder’s Equity

 

     Trust
Preferred
Securities
   Total
Common
Stock
   Retained
Earnings
    Total
Stockholder’s
Equity
 

Beginning Balances, December 31, 2005

   $ 10,000    $ 310    $ —       $ 10,310  

Retained earnings:

          

Net Income

     —        —        635       635  

Dividends

          

Trust preferred securities

     —        —        (616 )     (616 )

Common paid to Hopfed Bancorp, Inc.

     —        —        (19 )     (19 )
                              

Total Retained Earnings

     —        —        —         —    
                              

Ending balances, September 30, 2006

   $ 10,000    $ 310    $ —       $ 10,310  
                              

 

12


Table of Contents

Note (6) ACQUISITION

The Bank completed the acquisition of all the assets and liabilities associated with four offices of AmSouth Bank, a state chartered bank having its principal place of business in Birmingham, Alabama (AmSouth), located in Cheatham and Houston counties in Tennessee (Middle Tennessee Division) on June 29, 2006. The Bank assumed approximately $34.5 million in loans and $65.4 million in deposit liabilities. The Bank also acquired four parcels of real property on which the retail offices are located as well as the majority of personal property used in the daily operation of these offices. After payment of a deposit premium, the Bank received approximately $22.4 million in cash from AmSouth at the closing. The Bank retained all employees, including local retail management associated with each office previously employed by AmSouth with minimal changes in their rate of compensation and benefits.

In accordance with SFAS 141, “Accounting for Business Combinations” and SFAS 142, “Goodwill and Intangible Assets”, HopFed Bancorp, Inc, recorded at fair value assets and liabilities of the offices assumed as of June 29, 2006 and previously reported in the Company’s June 30, 2006 SEC Form 10Q. A pro forma financial statements of the acquisition of the Middle Tennessee Division is not required pursuant to Article 11 of Regulation S-X.

 

     (Dollars in thousands)
(Unaudited)
 

Assets

  

Cash and Cash Equivalents

   $ 22,421  

Loans

  

Home equity line of credit

     16,984  

Closed end home equity

     12,081  

Commercial loans

     3,831  

Personal loans

     1,618  
        

Total loans, gross

     34,514  

Allowance for loan loss

     (185 )

Loan market yield differential

     (210 )

Core deposit intangible

     2,919  

Goodwill

     1,091  

Premises and equipment

     4,865  

Accrued interest receivable

     139  
        

Total assets

   $ 65,554  
        

Liabilities:

  

Deposits

  

Non-interest bearing deposits

   $ 13,780  

Now accounts

     7,380  

Savings and MMDA accounts

     18,638  

Time and other deposits

     25,612  
        

Total deposits

     65,410  

Accrued interest payable

     123  

Other liabilities

     21  
        

Total liabilities

   $ 65,554  
        

 

13


Table of Contents

The amount allocated to the core deposit intangible was determined by a valuation conducted by an independent third party and is being amortized over the estimated useful life of nine years using the sum of the year’s digit method.

An independent third party has completed a valuation analysis of the estimated fair market value of the acquired loan portfolio. This analysis was based on the portfolio balances, yields, and market rates on June 29, 2006. As a result, the Bank will accrete approximately $210,000 in loan yield differential over the estimated average life of the individual portions of the purchased loan portfolios on an accelerated basis.

Management has completed an analysis of the credit quality of the purchased loan portfolio. As a result of this analysis, management has reduced the market value of the purchased loan portfolio by $185,000 for estimated loan losses not specifically identified by current classification.

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2006. The pro forma includes adjustment for interest income on loans, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits assumed, and related income tax affects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been affected on the assumed dates (All dollars are in thousands, except per share data):

 

     2006

Net interest income after provision for loan loss expense

   $ 13,398
      

Net income

   $ 3,357
      

Basic earnings per share

   $ 0.92
      

Diluted earnings per share

   $ 0.92
      

 

14


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The consolidated condensed financial statements as of and for the three and nine-month periods ended September 30, 2006 and September 30, 2005, included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company’s 2005 Annual Report to Stockholders on Form 10-K.

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances, which could affect these material judgments, include, but without limitation, changes in interest rates, changes in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the proper funding level of the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

Comparison of Financial Condition at September 30, 2006 and December 31, 2005

Total assets increased by $119.5 million, from $639.6 million at December 31, 2005, to $759.1 million at September 30, 2006. Securities available for sale increased from $172.9 million at December 31, 2005, to $174.7 million at September 30, 2006. Federal funds sold increased from $2.3 million at December 31, 2005, to $3.5 million at September 30, 2006. In the second quarter of 2006, the Company began offering business customer’s the opportunity to sell overnight funds to the Bank. At September 30, 2006, the Company sold securities with a market value of $23.4 million under a repurchase agreement.

At September 30, 2006, investments classified as “held to maturity” were carried at an amortized cost of $18.1 million and had an estimated fair market value of $17.7 million, and securities classified as “available for sale” had an estimated fair market value of $174.7 million. As a member of the Federal Home Loan Bank of Cincinnati (FHLB), the Company is required to purchase stock based on the Company’s usage of FHLB services. At September 30, 2006, the Company owned $3.6 million (at cost) of FHLB stock.

 

15


Table of Contents

The loan portfolio increased $90.3 million during the nine months ended September 30, 2006. Net loans totaled $487.6 million and $397.3 million at September 30, 2006 and December 31, 2005, respectively. For the three and nine month periods ended September 30, 2006 and the year ended December 31, 2005, the average yield on loans was 7.27%, 6.94%, and 5.96% respectively.

Set forth below is selected data relating to the composition of the loan portfolio by type of loans at the dates indicated. At September 30, 2006, December 31, 2005, and September 30, 2005, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

 

     9/30/2006     12/31/2005     9/30/2005  
     Amount    Percent     Amount    Percent     Amount    Percent  
     (Dollars in thousands)  

Real estate loans:

               

One to four family residential

   $ 230,707    46.9 %   $ 211,564    52.7 %   $ 215,892    57.2 %

Multi-family residential

     12,030    2.4 %     6,613    1.7 %     6,550    1.7 %

Construction

     43,692    8.9 %     16,592    4.1 %     10,198    2.7 %

Non-residential

     132,454    26.9 %     102,676    25.6 %     91,187    24.2 %
                                       

Total real estate loans

     418,883    85.1 %     337,445    84.1 %     323,827    85.8 %
                                       

Other loans:

               

Secured by deposits

     3,516    0.8 %     3,282    0.8 %     3,319    0.9 %

Other consumer loans

     22,609    4.6 %     23,642    5.9 %     25,462    6.7 %

Commercial loans

     46,942    9.5 %     36,945    9.2 %     24,847    6.6 %
                                       

Total other loans

     73,067    14.9 %     63,869    15.9 %     53,628    14.2 %
                                       

Total loans, gross

     491,950    100.0 %     401,314    100.0 %     377,455    100.0 %
                           

Allowance for loan losses

     4,349        4,004        3,817   
                           

Total net loans

   $ 487,601      $ 397,310      $ 373,638   
                           

The allowance for loan losses totaled $4.3 million at September 30, 2006, $4.0 million at December 31, 2005, and $3.8 million at September 30, 2005. The ratio of the allowance for loan losses to loans was 0.88%, 1.00%, and 1.01% at September 30, 2006, December 31, 2005, and September 30, 2005, respectively. Also at September 30, 2006, non-performing loans were $797,000, or 0.16% of total loans, compared to $996,000, or 0.25% of total loans, at December 31, 2005, and $1.2 million, or 0.32% of total loans, at September 30, 2005, respectively. Non-performing assets, which include other real estate owned and other assets owned, were $1,118,000, or 0.15% of total assets at September 30, 2006, compared to $1,224,000, or 0.19% of total assets, at December 31, 2005 and $1.4 million, or 0.23% of total assets, at September 30, 2005.

 

16


Table of Contents

The Company’s annualized net charge off ratio for the nine-month periods ended September 30, 2006, September 30, 2005, and the year ended December 31, 2005, was 0.17%, 0.13%, and 0.14%, respectively. The ratio of allowance for loan losses to non-performing loans at September 30, 2006, December 31, 2005, and September 30, 2005, was 545.7%, 402.0% and 317.0%, respectively. The following table sets forth an analysis of the Company’s allowance for loan losses for the nine-month periods ended:

 

     9/30/2006     9/30/2005  
     (Dollars in thousands)  

Beginning balance, allowance for loan loss

   $ 4,004     $ 3,273  

Loans charged off:

    

Commercial loans

     (93 )     (19 )

Consumer loans and overdrafts

     (420 )     (345 )

Residential loans

     (251 )     (73 )
                

Total charge offs

     (764 )     (437 )

Recoveries

     195       81  
                

Net charge offs

     (569 )     (356 )
                

Provision for loan loss

     729       900  

Credit quality devaluation of purchased loans

     185       —    

Balance at end of period

   $ 4,349     $ 3,817  
                

Ratio of net charge offs to average outstanding loans during the period

     0.17 %     0.13 %
                

Various factors are considered in determining the necessary allowance for loan losses, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions.

Although management believes the allowance for loan losses is adequate, there can be no assurance that additional provisions for loan losses will not be required or that losses on loans will not be incurred. The Company had $296,650 in real estate owned and $24,600 of other assets owned at September 30, 2006.

At September 30, 2006, the Company had $893,000 in loans classified as special mention, $1.3 million classified as substandard and $547,000 classified as doubtful. At September 30, 2005, the Company had no loans classified as special mention, $3.0 million classified as substandard and $448,000 classified as doubtful.

 

17


Table of Contents

At September 30, 2006, deposits increased to $552.4 million from $482.7 million at December 31, 2005, an increase of $69.7 million. The cost of total average deposits during the three and nine-month periods ended September 30, 2006 and the year ended December 31, 2005 was 3.34%, 3.16%, and 2.60%, respectively.

Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding cost while remaining competitive in its market area. Management’s current business plan focuses on growing the Company’s deposit base for non-interest bearing and demand deposit accounts and maintaining a lesser dependence on higher cost time deposit accounts.

Comparison of Operating Results for the Nine-Months Ended September 30, 2006 and 2005

Net Income. Net income for the nine months ended September 30, 2006 was $3,062,000, compared to net income of $3,079,000 for the nine months ended September 30, 2005.

Net Interest Income. The most significant source of earnings is net interest income, which is the difference between interest income on interest earning assets and interest expense paid on interest bearing liabilities. Factors influencing net interest income include both the volume and changes in volume of interest earning assets and interest bearing liabilities, the amount of non-interest earning assets and non-interest bearing liabilities, and the level and changes of market interest rates. For the nine months ended September 30, 2006 and September 30, 2005, the average interest bearing assets to average interest-bearing liabilities was 107.3% and 108.1%. In general, a financial services company with higher ratio of interest bearing assets as compared to interest bearing liabilities is more likely to have a higher level of net interest income. For the nine-month period ending September 30, 2006, the Company’s net interest margin and net yield on earning assets improved 0.11% and 0.14%, respectively, as compared to the same period in 2005.

Average Balances, Yields and Interest Expenses. The following table sets forth certain information relating to the Company’s consolidated average interest-earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the nine month periods ended September 30, 2006, and September 30, 2005. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and cost for the periods presented. During the periods indicated, non-accruing loans are included in the loan category. For the nine months ended September 30, 2006, and September 30, 2005, the table adjusts tax-free investment income by $168 and $232 respectively, for a tax equivalent rate. All dollars are in thousands.

 

18


Table of Contents
     Average
Balance
9/30/2006
   Income &
Expense
9/30/2006
    Average
Rates
9/30/2006
    Average
Balance
9/30/2005
   Income &
Expense
9/30/2005
    Average
Rates
9/30/2005
 

Loans

   $ 437,388    $ 22,762     6.94 %   $ 362,889    $ 15,823     5.81 %

Investments AFS taxable

     155,857      5,283     4.52 %     137,133      4,180     4.06 %

Investment AFS Tax Free

     15,809      569     4.80 %     19,909      749     5.02 %

Investments HTM

     18,540      587     4.22 %     22,539      777     4.60 %

Fed Funds

     2,807      103     4.89 %     3,258      80     3.27 %
                                          

Total Interest Earning Assets

     630,401      29,304     6.20 %     545,728      21,609     5.28 %

Other Assets

     52,930          42,422     
                      

Total Assets

   $ 683,331        $ 588,150     
                      

Interest Bearing Deposits

   $ 458,027      11,845     3.45 %   $ 416,272      8,425     2.70 %

Subordinated Debentures

     10,310      542     7.01 %     10,310      507     6.56 %

Securities sold under repurchase agreements

     9,629      357     4.94 %     —        —       —    

FHLB Borrowings

     109,672      3,631     4.41 %     78,159      2,067     3.53 %
                                          

Total Interest Bearing Liabilities

     587,638      16,375     3.72 %     504,741      10,999     2.91 %

Non Interest Bearing Deposits

     41,180          32,356     

Other Liabilities

     3,753          2,054     

Stockholders’ Equity

     50,760          48,999     
                      

Total Liabilities & Stockholders’ Equity

   $ 683,331        $ 588,150     
                      

Net Change In Interest

              

Earning Assets and Interest Bearing Liabilities

      $ 12,929     2.48 %      $ 10,610     2.37 %
                                  

Net Yield on Interest Earning Assets

        2.73 %          2.59 %  
                          

Interest Income. Increases in interest income were driven by both increases in market interest rates and the increase in the volume of loans outstanding. In the last twelve months, the Federal Reserve Bank has increased Fed Funds a total of six times, or 1.5%. A large percentage of the Company’s assets are variable rate and tied to either One Year Constant Maturity Treasury (One Year CMT) or the Prime Rate as published in The Wall Street Journal.

 

19


Table of Contents

While the yield on these assets may change, all loans do not re-price at the same time and many may not adjust for up to five years.

Interest Expense. Interest expense has also increased as a result of increases in both the volume of interest bearing liabilities and market rates. In the last nine months, the Company has increased its borrowings from the FHLB to fund loan growth. In general, these borrowings are more expensive as compared to time deposits. The benefit of borrowing from the FHLB is that access to capital is more easily available and the maturities of borrowed funds are more easily managed as compared to time deposits. Other factors influencing the level of borrowings include the competitive nature of the Company’s deposit market and the limited amount of non-interest bearing deposits currently on hand.

The Company remains focused on growing its level of non-interest bearing deposits, both organically and through acquisition. The Company’s June 29, 2006 acquisition of four retail offices in Tennessee was attractive to management due to the high percentage of non-interest bearing checking accounts and demand deposit accounts. An additional benefit to growth in this area is that non-interest income typically increases along with growth in the number of demand deposit accounts. The Company’s focus on growing demand deposit balances is a significant factor in the decisions to construct additional retail offices, increasing the number of ATM locations, and acquiring new locations through acquisition.

Non-Interest Income. For the nine-month period ending September 30, 2006, non-interest income increased by $760,000 as compared to the same period last year. The increase was achieved despite a $328,800 gain on the sale on Intrieve, Inc. stock realized in April 2005. Income from both deposit and other income have increased due to the increased volume of transaction accounts and the Company’s strong loan demand. Income from the Company’s financial services division is up only slightly despite the addition of a mortgage origination division in 2006 as fee income from insurance and brokerage services is down significantly.

Non-Interest Expenses. There was an increase in total non-interest expenses of approximately $3.4 million for the nine months ended September 30, 2006 compared to the same period in 2005. Compensation expense increased approximately $1.5 million due to increases in staffing levels required by the addition of retail offices. The Company’s professional expense increased by approximately $600,000 during the same time frame, largely the result of a $300,000 charge to fund expenses related to the Company’s recent acquisition. For the nine months ended September 30, 2006, data processing expenses have increased approximately $300,000 and occupancy expenses have increased approximately $400,000 as compared to the same period in 2005 as a result of more retail locations and an increased number of customer accounts and transactions.

Provision for Loan Losses. The Company determined that $729,000 of provision for loan loss expense was necessary for the nine month period ending September 30, 2006 as compared to $900,000 for the same period in 2005.

Income Taxes. The effective tax rate for the nine months ended September 30, 2006, was 29.9%, compared to 30.2% for the same period in 2005.

 

20


Table of Contents

Comparison of Operating Results for the Three-Months Ended September 30, 2006 and 2005

Net Income. Net income for the three months ended September 30, 2006, was $1,012,000 compared to net income of $1,021,000 for the three months ended September 30, 2005.

Net Interest Income. Net interest income increased by approximately $1.1 million for the three-month period ending September 30, 2006 as compared to September 30, 2005. This increase was the result of higher loan and deposit balances. For the three months ended September 30, 2006 and September 30, 2005, the average interest bearing assets to average interest-bearing liabilities was 107.2% and 107.9%. For the three-month period ending September 30, 2006, the Company’s net interest margin and net yield on earning assets improved 0.13% and 0.17%, as compared to the same period in 2005.

Average Balances, Yields and Interest Expenses. The following table sets forth certain information relating to the Company’s consolidated average interest-earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the three month periods ended September 30, 2006 and September 30, 2005. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the periods presented. During the periods indicated, non-accruing loans are included in the loan category. For the three months ended September 30, 2006 and September 30, 2005, the table adjusts tax-free investment income by $56 and $66, respectively, for a tax equivalent rate. All dollars are in thousands.

 

21


Table of Contents
     Average
Balance
9/30/2006
   Income &
Expense
9/30/2006
    Average
Rates
9/30/2006
    Average
Balance
9/30/2005
   Income &
Expense
9/30/2005
    Average
Rates
9/30/2005
 

Loans

   $ 479,663    $ 8,712     7.27 %   $ 366,811    $ 5,634     6.14 %

Investments AFS taxable

     163,450      1,909     4.67 %     148,674      1,519     4.09 %

Investment AFS Tax Free

     15,171      183     4.82 %     17,188      213     4.96 %

Investments HTM

     18,082      197     4.36 %     22,139      253     4.57 %

Fed Funds

     2,542      30     4.72 %     7,469      63     3.37 %
                                          

Total Interest Earning Assets

     678,908      11,031     6.50 %     562,281      7,682     5.46 %

Other Assets

     60,369          43,382     
                      

Total Assets

   $ 739,277        $ 605,663     
                      

Interest Bearing Deposits

   $ 484,492      4,465     3.69 %   $ 435,641      3,157     2.90 %

Subordinated Debentures

     10,310      194     7.53 %     10,310      174     6.75 %

Securities sold under agreement to repurchase

     18,938      236     4.98 %     —        —       —    

FHLB Borrowings

     119,412      1,420     4.76 %     75,330      686     3.64 %
                                          

Total Interest Bearing Liabilities

     633,152      6,315     3.99 %     521,281      4,017     3.08 %

Non Interest Bearing Deposits

     50,342          32,985     

Other Liabilities

     4,300          1,211     

Stockholders’ Equity

     51,483          50,186     
                      

Total Liabilities & Stockholders’Equity

   $ 739,277        $ 605,663     
                      

Net Change in Interest

              

Earning Assets and Interest Bearing Liabilities

      $ 4,716     2.51 %      $ 3,665     2.38 %
                                  

Net Yield on Interest Earning Assets

        2.78 %          2.61 %  
                          

 

22


Table of Contents

Interest Expense. Interest expense increased approximately $2.3 million, to $6.3 million for the three months ended September 30, 2006, as compared to the same period in 2005. The increase was attributable to a higher cost of funding interest-bearing deposits and borrowings as well as higher balances of interest bearing deposits. The Company’s market for deposits remains competitive and additional increases are possible despite the additional deposits acquired on June 29, 2006.

Non-Interest Income. For the three-month period ending September 30, 2006, non-interest income increased by approximately $730,000 as compared to the same period last year. The increase is the result of increased fee income on deposit accounts resulting from a higher volume of demand deposit accounts. Fee income generated from loan originations has increased due to commercial loan demand. Income from subsidiary activities was higher due to the addition of a mortgage origination division. Income from brokerage and insurance services continues to perform below September 2005 levels.

Non-Interest Expenses. There was an increase in total non-interest expenses of approximately $1.8 million for the three months ended September 30, 2006 compared to the same period in 2005. Compensation expense increased approximately $850,000 due to increases in staffing levels required by the addition of retail offices. The Company’s professional services expense, data processing expense and occupancy expenses increased by approximately $190,000, $150,000 and $240,000, respectively over the same period last year as a result of additional retail locations, additional ATM locations and a higher number of transactions.

Provision for Loan Losses. The Bank determined that an additional $312,000 and $300,000 of provision for loan losses was required for the three months ended September 30, 2006 and September 30, 2005, respectively.

Income Taxes. The effective tax rate for the three months ended September 30, 2006 was 29.2%, compared to 30.6% for the same period in 2005.

Liquidity and Capital Resources

The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its initial operations and liquidity needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company. The primary regulators of the Bank and the Company are the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

The Bank’s principal sources of funds for operations are deposits from its primary market areas, principal and interest payments on loans, proceeds from maturing investment securities, and FHLB borrowings. The principal uses of funds by the Bank include the origination of mortgage and consumer loans and the purchase of investment securities.

 

23


Table of Contents

The Bank must satisfy three capital standards: a ratio of core capital to adjusted total assets of 4.0%, a tangible capital standard expressed as 1.5% of total adjusted assets, and a combination of core and “supplementary” capital equal to 8.0% of risk-weighted assets. At September 30, 2006, the Bank exceeded all regulatory capital requirements. The table below presents certain information relating to the Bank’s capital compliance at September 30, 2006.

 

     At September 30, 2006  
     Company     Bank  
     Amount    Percent     Amount    Percent  
     (Dollars in thousands)  

Tangible capital

   $ 55,787    7.41 %   $ 51,662    6.90 %

Core capital

   $ 55,787    7.41 %   $ 51,662    6.90 %

Risk-based capital

   $ 60,136    11.91 %   $ 56,011    11.12 %

At September 30, 2006, the Bank had the following outstanding commitments related to its loan portfolio:

 

     Amount

Commercial letters of credit

   $ 3,614,000

Standby letters of credit

   $ 420,000

Home equity lines of credit

   $ 34,644,000

Commercial lines of credit

   $ 11,401,000

Approved but unfunded loans

   $ 13,917,000

Management believes that the Bank’s sources of funds are sufficient to fund all of its outstanding commitments. At September 30, 2006, time deposits, which are scheduled to mature in one year or less from September 30, 2006, totaled $199.1 million. Management believes that a significant percentage of such deposits will remain with the Bank. At September 30, 2006, the Bank had non-cancelable purchase obligations incurred in connection with the construction and purchase of new retail locations of approximately $2.4 million.

At September 30, 2006, the Company has outstanding borrowings of $115.2 million from the Federal Home Loan Bank of Cincinnati with maturities ranging from three months to ten years. These borrowings are secured by a blanket security agreement pledging the Company’s 1-4 family first mortgages and non-residential real estate. At September 30, 2006, the Company has approximately $230.7 million in 1-4 family first mortgages and $132.5 million in non-residential real estate that may be pledged under this agreement. At September 30, 2006, these borrowing have a weighted average maturity of 3.2 years and a weighted average cost of 4.73%.

 

24


Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words “believe,” “expect,” “seek,” and “intend” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Effect of New Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from the host) if the holder elects to account for the whole instrument on a fair value basis. At its October 2006 meeting, the FASB Board agreed to include a narrow scope exception for securitized interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets. The Company is required to adopt the provisions of SFAS No. 155, as applicable, beginning in 2007. Management does not believe that the adoption of SFAS No. 155 will have a material impact on the Company’s consolidated financial position and results of operations.

In March 2006, SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, was issued by the FASB. SFAS No. 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset; (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured a fair value; (3) if practicable, it permits an entity to chose either the amortization or fair value method following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities;

 

25


Table of Contents

(4) and at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, provided that the servicing assets or servicing liabilities that a servicing Company elects to subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.

SFAS No. 156 is effective for the fiscal year beginning after September 15, 2006. The Company will adopt SFAS No. 156 beginning in the first quarter of 2007. The impact of adopting SFAS No. 156 is not anticipated to have a material impact on the Company’s consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires companies to recognize in their financial statements the impact of a tax position, taken or expected to be taken, if that position is more likely than not of being sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective for the Company as of January 1, 2007. The Company does not anticipate FIN 48 having a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158. Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans”, which amends SFAS No. 87 and SFAS No. 106 to require recognition of the over funded or under funded status of pension and other postretirement benefit plans on the balance sheet. The Company terminated its defined benefit plan in 2001. Therefore, SFAS No. 158 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (EITF) relating to EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods and should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, or APB Opinion No. 12, “Omnibus Opinion—1967”. EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company does not believe the adoption of EITF 06-4 will have a material impact on its consolidated financial position, results of operations and cash flows.

 

26


Table of Contents

In September 2006, the SEC issued Staff Accounting Bulleting No. 108 (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatements present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB 108 and determined that upon adoption it will have no impact on the reported consolidated results of operations or consolidated financial conditions.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company monitors whether material changes in market risk have occurred since year-end. The Company is unable to predict future changes in market rates and their impact on the Company’s profitability. However, the Company models its balance sheet and income statement in an effort to manage its interest rate risk.

The Company’s analysis of interest rate risk assumes parallel shifts in interest rates (rates rising uniformly over the entire spectrum of the interest rate curve). At September 30, 2006, the Company’s analysis of the change in net interest income over the next twelve months resulting from changes in interest rates is as follows:

 

     Down 2%     Down 1%    Up 1%    Up 2%

Net Interest Income

   $ (650 )   $ 249    $ 85    $ 150

Changes in net interest income may not be uniform during the twelve-month period due to the uneven nature of loan repricings and time deposit maturities.

During the first nine months of 2006, short-term market interest rates increased significantly while longer-term rates (identified by the five and ten year treasury bills) have declined, resulting in an inverted yield curve.

 

27


Table of Contents

As a result, the Company has experienced a substantial shift in customer demand for fixed rate first mortgages sold on the secondary market and away from adjustable rate 1-4 family mortgages. Given the current yield curve, long term fixed rate mortgages are substantially less expensive than the Company’s current adjustable rate loan offerings. The inverted yield curve has increased the competition for short-term deposits and made many customers more rate sensitive, resulting in an outflow of funds from transaction accounts into higher costing time deposits.

The Company’s goal is for the Bank’s net interest expense to increase at a rate much slower than that of its peer group and competitors in a rising interest rate environment due to a decreasing reliance on time deposits. Management believes that the Bank’s June 29, 2006, acquisition of the Middle Tennessee Division allowed it to increase its percentage of lower cost deposits.

However, the Company remains highly dependent on time deposits for funding. To significantly reduce its cost of funds, the Company is seeking to increase its percentage of non-interest bearing deposits to total deposits, currently at 9.59%. The Company’s intermediate goal of non-interest bearing deposits to total deposits is 12%, with a long-term goal of 17.50%. The Company is investing in new products, locations, and automated teller machines. However, non-interest deposit growth completed without the assistance of an acquisition generally is slow, may take several years, may never reach the goals set forth by management and is likely to result in higher non-interest expenses.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended September 30, 2006.

Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the three and nine month periods ended September 30, 2006 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period for which this quarterly report on Form 10-Q was being prepared.

Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud will be detected.

 

28


Table of Contents

Changes in Internal Control Over Financial Reporting

The Company has expanded its internal control system over financial reporting to incorporate specific financial and operational procedures and policies necessary to evaluate the Middle Tennessee division that was acquired on June 29, 2006, as well as the internal expansion of the Bank’s retail branch network in Hopkinsville and Murray in Kentucky and Clarksville, Tennessee. The Company will continue to evaluate current processes and procedures based on current and future developments that will enhance the Company’s internal controls over financial reporting.

Effective in 2007, the Company will become subject to Section 404 of The Sarbanes-Oxley Act of 2002. Section 404 requires management to assess and report on the effectiveness of the Company’s internal control over financial reporting. Additionally, it requires the Company’s independent registered public accounting firm to report on management’s assessment as well as report on its own assessment of the effectiveness of the Company’s internal controls over financial reporting.

Management is currently establishing policies and procedures to assess and report on internal control over financial reporting, and has retained an outside firm to assist it in determining the effectiveness of the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors as previously discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 in reference to Item 1A and the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2006.

 

29


Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

  (a) None

 

  (b) None

 

  (c) The Company did not repurchase any shares of the Company’s common stock during the quarter ended September 30, 2006.

On August 25, 2006, the Company announced that its Board of Directors had approved the repurchase of 125,000 shares of Common Stock, replacing a previously announced repurchase program approved in 2001. 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 management’s discretion, depending on market conditions, prices of the Company’s Common Stock, corporate cash requirements and other factors. The repurchase plan will expire on September 30, 2008.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

 

30


Table of Contents

Item 6. Exhibits

 

31.1    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer
31.2    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer
32.1    Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer
32.2    Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

        HOPFED BANCORP, INC.
Date: November 14, 2006    

/s/ John E. Peck

    John E. Peck
    President and Chief Executive Officer
Date: November 14, 2006    

/s/ Billy C. Duvall

    Billy C. Duvall
    Vice President, Chief Financial
    Officer and Treasurer

 

31

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki